Joint Industry Plan; Notice of Filing of the National Market System Plan Governing the Consolidated Audit Trail, 30613-31124 [2016-10461]
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Vol. 81
Tuesday,
No. 95
May 17, 2016
Part II
Securities and Exchange Commission
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Joint Industry Plan; Notice of Filing of the National Market System Plan
Governing the Consolidated Audit Trail; Notices
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Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77724; File No. 4–698]
Joint Industry Plan; Notice of Filing of
the National Market System Plan
Governing the Consolidated Audit Trail
April 27, 2016.
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Table of Contents
I. Introduction
II. Background
III. Description of the Plan
A. Statement of Purpose and Request for
Comment
1. Background
2. Request for Exemption from Certain
Requirements under Rule 613
3. Requirements Pursuant to Rule 608(a)
B. Summary of Additional CAT NMS Plan
Provisions and Request for Comment
1. Reporting Procedures
2. Timeliness of Data Reporting
3. Uniform Format
4. Clock Synchronization
5. Time Stamp Granularity
6. CAT-Reporter-ID
7. Customer-ID
8. Order Allocation Information
9. Options Market Maker Quotes
10. Error Rates
11. Regulatory Access
12. Security, Confidentiality, and Use of
Data
IV. Economic Analysis
A. Introduction
B. Summary of Expected Economic Effects
C. Framework for Economic Analysis
1. Economic Framework
2. Existing Uncertainties
3. Request for Comment on the Framework
D. Baseline
1. Current State of Regulatory Activities
2. Current State of Trade and Order Data
3. Request for Comment on the Baseline
E. Benefits
1. Improvements in Data Qualities
2. Improvements to Regulatory Activities
3. Other Provisions of the CAT NMS Plan
4. Request for Comment on the Benefits
F. Costs
1. Analysis of Expected Costs
2. Aggregate Costs to Industry
3. Further Analysis of Costs
4. Second-Order Effects and Other
Security-related Costs
5. Request for Comment on the Costs
G. Efficiency, Competition, and Capital
Formation
1. Competition
2. Efficiency
3. Capital Formation
4. Related Considerations Affecting
Competition, Efficiency and Capital
Formation
5. Request for Comment on Efficiency,
Competition, and Capital Formation
H. Alternatives
1. Alternatives to the Approaches the
Exemption Order Permitted to be
Included in the Plan
2. Alternatives to Certain Specific
Approaches in the CAT NMS Plan
3. Alternatives to the Scope of Certain
Specific Elements in the CAT NMS Plan
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4. Alternatives to the CAT NMS Plan
5. Request for Comment on the
Alternatives
I. Request for Comment on the Economic
Analysis
V. Paperwork Reduction Act
A. Summary of Collection of Information
under Rule 613
1. Central Repository
2. Data Collection and Reporting
3. Collection and Retention of NBBO, Last
Sale Data and Transaction Reports
4. Surveillance
5. Participant Rule Filings
6. Written Assessment of Operation of the
Consolidated Audit Trail
7. Document on Expansion to Other
Securities
B. Proposed Use of Information
1. Central Repository
2. Data Collection and Reporting
3. Collection and Retention of NBBO, Last
Sale Data and Transaction Reports
4. Surveillance
5. Written Assessment of Operation of the
Consolidated Audit Trail
6. Document on Expansion to Other
Securities
C. Respondents
1. National Securities Exchanges and
National Securities Associations
2. Members of National Securities
Exchanges and National Securities
Association
D. Total Initial and Annual Reporting and
Recordkeeping Burden
1. Burden on National Securities
Exchanges and National Securities
Associations
2. Burden on Members of National
Securities Exchanges and National
Securities Associations
E. Collection of Information is Mandatory
F. Confidentiality
G. Recordkeeping Requirements
H. Request for Comments
VI. Solicitation of Comments
I. Introduction
Pursuant to Section 11A of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 608 thereunder,2
notice is hereby given that on February
27, 2015, BATS Exchange, Inc., BATS–
Y Exchange, Inc., BOX Options
Exchange LLC, C2 Options Exchange,
Incorporated, Chicago Board Options
Exchange, Incorporated, Chicago Stock
Exchange, Inc., EDGA Exchange, Inc.,
EDGX Exchange, Inc., Financial
Industry Regulatory Authority, Inc.,
International Securities Exchange, LLC,
ISE Gemini, LLC, Miami International
Securities Exchange LLC, NASDAQ
OMX BX, Inc., NASDAQ OMX PHLX
LLC, The NASDAQ Stock Market LLC,
National Stock Exchange, Inc., New
York Stock Exchange LLC, NYSE MKT
LLC, and NYSE Arca, Inc. (collectively,
‘‘SROs’’ or ‘‘Participants’’), filed with
the Securities and Exchange
1 15
2 17
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Commission (the ‘‘Commission’’ or
‘‘SEC’’) a National Market System Plan
Governing the Consolidated Audit Trail
(the ‘‘CAT NMS Plan’’ or ‘‘Plan’’).3 On
December 24, 2015, the SROs submitted
an Amendment to the CAT NMS Plan.4
A copy of the CAT NMS Plan, as
modified by the Amendment, is
attached as Exhibit A hereto. The
Commission is publishing this Notice to
solicit comments on the CAT NMS Plan.
The Commission also is publishing
notice of, and soliciting comment on, an
analysis of the potential economic
effects of implementing the CAT NMS
Plan, as set forth in Section IV of this
Notice, and the collection of
information requirements in the CAT
NMS Plan as required by the Paperwork
Reduction Act, as set forth in Section V
of this Notice.
II. Background
The Commission believes that the
regulatory data infrastructure on which
the SROs and the Commission currently
must rely generally is outdated and
inadequate to effectively oversee a
complex, dispersed, and highly
automated national market system. In
performing their oversight
responsibilities, regulators today must
3 See Letter from Participants to Brent J. Fields,
Secretary, Commission, dated February 27, 2015.
Pursuant to Rule 613, the SROs were required to file
the CAT NMS Plan on or before April 28, 2013. At
the SROs’ request, the Commission granted
exemptions to extend the deadline for filing the
CAT NMS Plan to December 6, 2013, and then to
September 30, 2014. See Securities Exchange Act
Release Nos. 69060 (March 7, 2013), 78 FR 15771
(March 12, 2013); 71018 (December 6, 2013), 78 FR
75669 (December 12, 2013). The SROs filed the
CAT NMS Plan on September 30, 2014 (the ‘‘Initial
CAT NMS Plan’’). See Letter from the SROs, to
Brent J. Fields, Secretary, Commission, dated
September 30, 2014. The CAT NMS Plan filed on
February 27, 2015, was an amendment to and
replacement of the Initial CAT NMS Plan (the
‘‘Amended and Restated CAT NMS Plan’’). On
December 24, 2015, the SROs submitted an
Amendment to the Amended and Restated CAT
NMS Plan. See Letter from Participants to Brent J.
Fields, Secretary, Commission, dated December 23,
2015 (the ‘‘Amendment’’). On February 9, 2016, the
Participants filed with the Commission an identical,
but unmarked, version of the Amended and
Restated CAT NMS Plan, dated February 27, 2015,
as modified by the Amendment, as well as a copy
of the request for proposal issued by the
Participants to solicit Bids from parties interested
in serving as the Plan Processor for the consolidated
audit trail. See Exhibit A and infra note 29. Unless
the context otherwise requires, the ‘‘CAT NMS
Plan’’ shall refer to the Amended and Restated CAT
NMS Plan, as modified by the Amendment. The
Commission notes that the application of ISE
Mercury, LLC for registration as a national
securities exchange was granted on January 29,
2016. See Securities Exchange Act Release No.
76998 (January 29, 2016), 81 FR 6066 (February 4,
2016). The Commission understands that ISE
Mercury, LLC will become a Participant in the CAT
NMS Plan and thus is accounted for as a Participant
for purposes of this Notice.
4 See Amendment, supra note 3.
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attempt to cobble together disparate data
from a variety of existing information
systems lacking in completeness,
accuracy, accessibility, and/or
timeliness—a model that neither
supports the efficient aggregation of data
from multiple trading venues nor yields
the type of complete and accurate
market activity data needed for robust
market oversight.
Currently, FINRA and some of the
exchanges maintain their own separate
audit trail systems for certain segments
of this trading activity, which vary in
scope, required data elements and
format. In performing their market
oversight responsibilities, SRO and
Commission Staffs today must rely
heavily on data from these various SRO
audit trails. However, as noted in
Section IV.D below, there are
shortcomings in the completeness,
accuracy, accessibility, and timeliness
of these existing audit trail systems.
Some of these shortcomings are a result
of the disparate nature of the systems,
which make it impractical, for example,
to follow orders through their entire
lifecycle as they may be routed,
aggregated, re-routed, and disaggregated
across multiple markets. The lack of key
information in the audit trails that
would be useful for regulatory oversight,
such as the identity of the customers
who originate orders, or even the fact
that two sets of orders may have been
originated by the same customer, is
another shortcoming.5
Though SRO and Commission Staff
also have access to sources of market
activity data other than SRO audit trails,
these systems each suffer their own
drawbacks. For example, data obtained
from the electronic blue sheet (‘‘EBS’’) 6
system and equity cleared reports 7
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5 The
Commission notes that the SROs have taken
steps in recent years to update their audit trail
requirements. For example, NYSE, NYSE Amex
LLC (n/k/a ‘‘NYSE MKT LLC’’) (‘‘NYSE Amex’’),
and NYSE ARCA, Inc. (‘‘NYSE Arca’’) have adopted
audit trail rules that coordinate with FINRA’s OATS
requirements. See Securities Exchange Act Release
No. 65523 (October 7, 2011), 76 FR 64154 (October
17, 2011) (concerning NYSE); Securities Exchange
Act Release No. 65524 (October 7, 2011), 76 FR
64151 (October 17, 2011) (concerning NYSE Amex);
Securities Exchange Act Release No. 65544 (October
12, 2011), 76 FR 64406 (October 18, 2011)
(concerning NYSE Arca). This allows the SROs to
submit their data to FINRA pursuant to a Regulatory
Service Agreement (‘‘RSA’’), which FINRA can then
reformat and combine with OATS data. Despite
these efforts, however, significant deficiencies
remain. See Section IV.D.2, infra.
6 EBSs are trading records requested by the
Commission and SROs from broker-dealers that are
used in regulatory investigations to identify buyers
and sellers of specific securities.
7 The Commission uses the National Securities
Clearing Corporation’s (‘‘NSCC’’) equity cleared
report for initial regulatory inquiries. This report is
generated on a daily basis by the SROs and is
provided to the NSCC in a database accessible by
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comprise only trade executions, and not
orders or quotes. In addition, like data
from existing audit trails, data from
these sources lacks key elements
important to regulators, such as the
identity of the customer in the case of
equity cleared reports. Furthermore,
recent experience with implementing
incremental improvements to the EBS
system has illustrated some of the
overall limitations of the current
technologies and mechanisms used by
the industry to collect, record, and make
available market activity data for
regulatory purposes.8
Recognizing these shortcomings, on
July 11, 2012, the Commission adopted
Rule 613 of Regulation NMS under the
Act.9 Rule 613 required the SROs to
submit a national market system
(‘‘NMS’’) plan to create, implement, and
maintain a consolidated audit trail
(‘‘CAT’’) that would capture customer
and order event information for orders
in NMS securities, across all markets,
from the time of order inception through
routing, cancellation, modification, or
execution in a single, consolidated data
source.10 On February 27, 2015, the
SROs submitted the CAT NMS Plan.11
The SROs also submitted a separate
NMS plan and an exemptive request
letter related to the CAT NMS Plan.
Specifically, on September 3, 2013, the
SROs filed an NMS Plan pursuant to
Rule 608 governing the SROs’ review,
evaluation, and ultimate selection of the
Plan Processor 12 for the consolidated
audit trail (the ‘‘Selection Plan’’).13 The
Selection Plan was published for
comment in the Federal Register on
November 21, 2013 and approved by the
Commission on February 21, 2014.14
Subsequently, the SROs filed three
the Commission, and shows the number of trades
and daily volume of all equity securities in which
transactions took place, sorted by clearing member.
The information provided is end-of-day data and is
searchable by security name and CUSIP number.
8 See Securities Exchange Act Release No. 64976
(July 27, 2011), 76 FR 46960 (August 3, 2011)
(‘‘Large Trader Release’’).
9 See Securities Exchange Act Release No. 67457
(July 18, 2012), 77 FR 45722 (August 1, 2012)
(‘‘Adopting Release’’); see also Securities Exchange
Act Release No. 62174 (May 26, 2010), 75 FR 32556
(June 8, 2010) (‘‘Proposing Release’’).
10 See 17 CFR 242.613(a)(1), (c)(1), (c)(7).
11 See supra note 3.
12 As set forth in Section 1.1 of the CAT NMS
Plan, the Plan Processor ‘‘means the Initial Plan
Processor or any other Person selected by the
Operating Committee pursuant to SEC Rule 613 and
Sections 4.3(b)(i) and 6.1, and with regard to the
Initial Plan Processor, the Selection Plan, to
perform the CAT processing functions required by
SEC Rule 613 and set forth in [the CAT NMS Plan].’’
13 See Securities Exchange Act Release No. 70892
(November 15, 2013), 78 FR 69910 (November 21,
2013) (‘‘Selection Plan Notice’’).
14 See id.; see also Securities Exchange Act
Release No. 71596, 79 FR 11152 (February 27, 2014)
(‘‘Selection Plan Approval Order’’).
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amendments to the Selection Plan, two
of which were approved by the
Commission on June 17, 2015 and
September 24, 2015 15 The CAT NMS
Plan reflects the process approved by
the Commission for reviewing,
evaluating and ultimately selecting the
Plan Processor, as set forth in the
Selection Plan, as amended. Second, on
January 30, 2015, the SROs filed an
application,16 pursuant to Rule 0–12
under the Act,17 requesting that the
Commission grant exemptions from
certain requirements of Rule 613. The
Commission granted the exemptions on
March 1, 2016.18 The CAT NMS Plan
15 See Securities Exchange Act Release Nos.
75192 (June 17, 2015), 80 FR 36028 (June 23, 2015)
(Order Approving Amendment No. 1 to the
Selection Plan); 75980 (September 24, 2015), 80 FR
58796 (September 30, 2015) (Order Approving
Amendment No. 2 to the Selection Plan); Letter
from SROs to Brent J. Fields, Secretary,
Commission, dated March 29, 2016; see also
Securities Exchange Act Release Nos. 74223
(February 6, 2015), 80 FR 7654 (February 11, 2015)
(Notice of Amendment No. 1 to the Selection Plan);
75193 (June 17, 2015), 80 FR 36006 (June 23, 2015)
(Notice of Amendment No. 2 to the Selection Plan).
16 See Letter from Participants to Brent J. Fields,
Secretary, Commission, dated January 30, 2015
(‘‘Exemptive Request Letter’’). Specifically, the
SROs request exemptive relief from the Rule’s
requirements related to: (1) The reporting of
Options Market Maker quotations, as required
under Rule 613(c)(7)(ii) and (iv); (2) the reporting
and use of the Customer-ID under Rule
613(c)(7)(i)(A), (iv)(F), (viii)(B) and 613(c)(8); (3) the
reporting of the CAT-Reporter-ID, as required under
Rule 613(c)(7)(i)(C), (ii)(D), (ii)(E), (iii)(D), (iii)(E),
(iv)(F), (v)(F), (vi)(B), and (c)(8); (4) the linking of
executions to specific subaccount allocations, as
required under Rule 613(c)(7)(vi)(A); and (5) the
time stamp granularity requirement of Rule
613(d)(3) for certain manual order events subject to
reporting under Rule 613(c)(7)(i)(E), (ii)(C), (iii)(C)
and (iv)(C). On April 3, 2015, the SROs filed a
supplement related to the requested exemption for
Rule 613(c)(7)(vi)(A). See Letter from Robert Colby,
FINRA, on behalf of the SROs, to Brent J. Fields,
Secretary, Commission, dated April 3, 2015 (‘‘April
2015 Supplement’’). This supplement provided
examples of how the proposed relief related to
allocations would operate. On September 2, 2015,
the SROs filed a second supplement to the
Exemptive Request Letter. See Letter from the SROs
to Brent J. Fields, Secretary, Commission, dated
September 2, 2015 (‘‘September 2015
Supplement’’). This supplement to the Exemptive
Request Letter further addressed the use of an
‘‘effective date’’ in lieu of a ‘‘date account opened.’’
Unless the context otherwise requires, the
‘‘Exemption Request’’ shall refer to the Exemptive
Request Letter, as supplemented by the April 2015
Supplement and the September 2015 Supplement.
17 17 CFR 240.0–12.
18 See Securities Exchange Act Release No. 77265
(March 1, 2016), 81 FR 11856 (March 7, 2016)
(‘‘Exemption Order’’). The Commission requests
comment specifically on the advantages and
disadvantages of each aspect of the relief granted in
the Exemption Order and whether the approaches
permitted by the Exemption Order to be included
in the CAT NMS Plan are preferable to those
originally permitted by Rule 613. See Request for
Comment Nos. 168–170 (Options Market Maker
Quotes), 135–161 (Customer ID), 128–134 (CATReporter-ID), 162–167 (Linking Order Executions to
Allocations) and 114–127 (Time Stamp
Granularity), infra.
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published for comment in this Notice
reflects the exemptive relief granted by
the Commission.
III. Description of the Plan
As described further in this Section III
of this Notice, the SROs propose to
conduct the activities of the CAT
through CAT NMS, LLC, a jointly
owned limited liability company formed
under Delaware state law; and to that
end, the SROs submitted the CAT NMS,
LLC’s limited liability company
agreement (the ‘‘LLC Agreement’’),
including exhibits and appendices
attached thereto, to the Commission as
the CAT NMS Plan. The SROs also
submitted a cover letter that included a
description of the CAT NMS Plan, along
with the information required by Rule
608(a)(4) and (5) under the Act,19 which
is set forth below in Section III.A of this
Notice as substantially prepared and
submitted by the SROs. Set forth in
Section III.B is a summary of additional
CAT NMS Plan provisions and requests
for comment.20
The LLC Agreement, attached hereto
as Exhibit A, sets forth a governing
structure, whereby the Operating
Committee will manage the CAT NMS,
LLC, and each SRO will be a member of,
and have one vote within, the Operating
Committee.21 The LLC Agreement
details the Operating Committee’s
procedures for selecting the Plan
Processor,22 who will be contracted to
build the CAT, as well as the functions
and activities of the Plan Processor. The
LLC Agreement also sets forth the
responsibilities of the Central
Repository which, under the oversight
of the Plan Processor, will receive,
consolidate and retain the CAT Data.23
The LLC Agreement also lists the
requirements regarding the recording
and reporting of CAT Data by the SROs
as well as by broker-dealers, the security
and confidentiality safeguards for CAT
Data, surveillance requirements, fees
and costs associated with operating the
CAT, as well as other reporting and
Technical Specifications and
requirements.24
In Appendix C to the LLC Agreement,
the SROs address the considerations
listed in Rule 613(a)(1), providing
information and analysis regarding the
19 17
CFR 242.608(a)(4) and (a)(5).
capitalized terms not otherwise defined
herein shall have the meaning ascribed to them in
Rule 613, the Adopting Release, or the CAT NMS
Plan, as applicable.
21 See CAT NMS Plan, supra note 3, at Article IV.
22 See id. at Article V; see also Order Approving
Amendment No. 1 to the Selection Plan and Order
Approving Amendment No. 2 to the Selection Plan,
supra note 15.
23 See CAT NMS Plan, supra note 3, at Article VI.
24 See id.
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specific features, details, costs, and
processes related to the CAT NMS Plan.
Appendix D to the LLC Agreement
provides an outline of the CAT’s
minimum functional and technical
requirements for the Plan Processor.
A. Statement of Purpose and Request for
Comment
The following statement of purpose
provided herein is substantially as
prepared and submitted by the SROs to
the Commission.25 Throughout the
statement of purpose, the Commission
has inserted requests for comment. The
portion of this Notice prepared by the
Commission will re-commence in
Section III.B.
*
*
*
*
*
1. Background
On July 11, 2012, the Commission
adopted Rule 613 26 to require the
national securities exchanges and
national securities association to jointly
submit a national market system plan to
create, implement, and maintain a
consolidated audit trail and central
repository.27 Rule 613 outlines a broad
framework for the creation,
implementation, and maintenance of the
consolidated audit trail, including the
minimum elements the Commission
believes are necessary for an effective
consolidated audit trail.28
Since the adoption of Rule 613, the
Participants have worked to formulate
an effective Plan. To this end, the
Participants have, among other things,
developed a plan for selecting the Plan
Processor, solicited and evaluated Bids,
and engaged diverse industry
participants in the development of the
Plan. Throughout, the Participants have
sought to implement a process that is
fair, transparent, and consistent with the
standards and considerations in Rule
613.
a. The Request for Proposal and
Selection Plan
On February 26, 2013, the
Participants published a request for
proposal (‘‘RFP’’) soliciting Bids from
parties interested in serving as the Plan
Processor.29 The Participants concluded
that publication of an RFP was
necessary to ensure that potential
alternative solutions to creating the Plan
25 See
CAT NMS Plan, supra note 3.
CFR 242.613.
27 17 CFR 242.613(a)(1).
28 See Adopting Release, supra note 9, at 45743.
29 See Appendix A of the CAT NMS Plan for the
Consolidated Audit Trail National Market System
Plan Request for Proposal (issued February 26,
2013, version 3.0 updated March 4, 2014). Other
materials related to the RFP are available at https://
catnmsplan.com/process/.
26 17
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and the CAT could be presented and
considered, and that a detailed and
meaningful cost-benefit analysis could
be performed. The Participants asked
any potential bidders to notify the
Participants of their intent to bid by
March 5, 2013. Initially, 31 firms
submitted intentions to bid, four of
which were Participants or affiliates of
Participants. In the following weeks and
months, the Participants engaged with
potential bidders with respect to, among
other things, the selection process,
selection criteria, and potential bidders’
questions and concerns.30
On September 4, 2013, the
Participants filed with the Commission
a national market system plan to govern
the process for Participant review of the
Bids submitted in response to the RFP,
the procedure for evaluating the Bids,
and, ultimately, selection of the Plan
Processor (the ‘‘Selection Plan’’).31 The
Commission approved the Selection
Plan as filed on February 21, 2014.32 On
March 21, 2014, the Participants
received ten Bids in response to the
RFP.
The Selection Plan divides the review
and evaluation of Bids, and the
selection of the Plan Processor, into
various stages, certain of which have
been completed to date.33 Specifically,
pursuant to the Selection Plan, the
Selection Committee reviewed all Bids
and determined which Bids contained
sufficient information to allow the
Participants to meaningfully assess and
evaluate the Bids. The ten submitted
Bids were deemed ‘‘Qualified Bids,’’ 34
and so passed to the next stage, in
which each Bidder presented its Bids in
person to the Participants on a
confidential basis. On July 1, 2014, after
conducting careful analysis and
comparison of the Bids, the Selection
Committee voted and selected six
Shortlisted Bidders, thus eliminating
four Bidders from continuing in the
process.35 The Selection Committee,
30 In an effort to ensure Bidders were aware of all
information provided in response to Bidders’
questions related to the RFP, the Participants
published answers to questions received from
Bidders available at https://catnmsplan.com/
process/.
31 See Selection Plan Notice, supra note 13.
32 See Selection Plan Approval Order, supra note
14.
33 See, e.g., id. at 11154.
34 A list of Qualified Bidders is available at
https://catnmsplan.com/web/groups/catnms/@
catnms/documents/appsupportdocs/p493591.pdf.
The Commission notes that this Web site address
has been updated to https://www.catnmsplan.com/
process/p493591.pdf.
35 The announcement and list of the Shortlisted
Bidders is available at https://catnmsplan.com/web/
groups/catnms/@catnms/documents/
appsupportdocs/p542077.pdf. The Commission
notes that this Web site address has been updated
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subject to applicable recusal provisions
in the Selection Plan, will determine
whether Shortlisted Bidders will be
provided the opportunity to revise their
Bids. After the Selection Committee
further assesses and evaluates the
Shortlisted Bids, including any
permitted revisions to the Bids, the
Selection Committee will select the Plan
Processor via two rounds of voting by
the Senior Voting Officers as specified
in the Plan.36
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b. Selection Plan Governance and
Operations
The Selection Plan established an
Operating Committee responsible for
formulating, drafting, and filing with the
Commission the Plan and for ensuring
that the Participants’ joint obligations
under Rule 613 were met in a timely
and efficient manner.37 Each Participant
selected one individual and one
substitute to serve on the Operating
Committee, with other representatives
of each Participant permitted to attend
Operating Committee meetings.38 In
formulating the Plan, the Participants
also engaged multiple persons across a
wide range of roles and expertise,
engaged the consulting firm Deloitte &
Touche LLP as a project manager, and
engaged the law firm Wilmer Cutler
Pickering Hale and Dorr LLP to serve as
legal counsel in drafting the Plan.
to https://www.catnmsplan.com/pastevents/
p542077.pdf. Additionally, the Commission notes
that the Selection Committee further narrowed the
list of Shortlisted Bidders to three Shortlisted
Bidders. See Participants, SROs Reduce Short List
Bids from Six to Three for Consolidated Audit Trail
(November 16, 2015), available at https://
www.catnmsplan.com/pastevents/catnms_release_
downselect_111615.pdf.
36 See Selection Plan Approval Order, supra note
14, at 11154. The SEC published a notice of an
amendment to the Selection Plan, which proposed
to amend the Selection Plan in two ways. First, the
Participants proposed to provide opportunities to
accept revised Bids prior to approval of the CAT
NMS Plan, and second, to allow the list of
Shortlisted Bids to be narrowed prior to
Commission approval of the CAT NMS Plan. See
Notice of Amendment No. 1 to the Selection Plan,
supra note 15. In addition, the Participants filed a
second amendment to the Selection Plan, which
would require the recusal of a Bidding Participant
in a vote in any round by the Selection Committee
to select the Plan Processor from among the
Shortlisted Bidders if such Bidding Participant’s
Bid, a Bid submitted by an Affiliate of such Bidding
Participant, or a Bid including such Bidding
Participant or its Affiliate is also considered in that
round. See Notice of Amendment No. 2 to the
Selection Plan, supra note 15. The prior Selection
Plan required recusal of a Bidding Participant under
such circumstances in the vote in only the second
round by the Selection Committee to select the Plan
Processor from among the Shortlisted Bidders. The
Commission notes that Amendment Nos. 1 and 2
have been approved. See Order Approving
Amendment No. 1 to the Selection Plan and Order
Approving Amendment No. 2 to the Selection Plan,
supra note 15.
37 Id.
38 Id.
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Within this structure, the Participants
focused on, among other things,
comparative analyses of the proposed
technologies and operating models,
development of funding models to
support the building and operation of
the CAT, and detailed review of
governance considerations. Since July
2012, the Participants have held
approximately 608 meetings related to
the CAT.39 These governance and
organizational structures will continue
to be in effect until the Commission’s
final approval of the Plan.40
c. Engagement With Industry
Participants
Throughout the process of developing
the Plan, the Participants consistently
have been engaged in meaningful
dialogue with industry participants with
respect to the development of the CAT.
From the outset of this process, the
Participants have recognized that
industry input is a critical component in
the creation of the Plan. To this end, the
Participants created a Web site 41 to
update the public on the progress of the
Plan, published requests for comment
on multiple issues related to the Plan,
held multiple public events to inform
the industry of the progress of the CAT
and to address inquiries, and formed,
and later expanded, a Development
Advisory Group (the ‘‘DAG’’) to solicit
more input from a representative
industry group.
The DAG conducted 43 meetings 42 to
discuss, among other things, technical
and operational aspects the Participants
were considering for the Plan. The
Participants twice issued press releases
soliciting participants for the DAG, and
a wide spectrum of firms was
deliberately chosen to provide insight
from various industry segments affected
by the CAT.43 The DAG currently
consists of the Participants, and 27
diverse firms and organizations
(including broker-dealers of varying
39 Additional information regarding these
meetings can be found at https://catnmsplan.com/.
The Commission notes that the number of meetings
in the SROs’ statement is as of February 27, 2015.
See CAT NMS Plan, supra note 3.
40 See Selection Plan Approval Order, supra note
14, at 11155.
41 The Web site is available at https://
catnmsplan.com/.
42 In addition to these meetings, DAG
subcommittee meetings also were held. The
Commission notes that the number of meetings in
the SROs’ statement is as of February 27, 2015. See
CAT NMS Plan, supra note 3.
43 For a list of DAG members, see Summary of the
Consolidated Audit Trail Initiative at 13 (Jan. 2015),
available at https://catnmsplan.com/web/groups/
catnms/@catnms/documents/appsupportdocs/
p571933.pdf. The Commission notes that the list of
DAG members appears on page 6 of the linked
document, which is dated May 2015.
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30617
sizes, the Options Clearing Corporation,
a service bureau and three industry
trade associations) with a variety of
subject matter expertise.44 The DAG
meetings have included discussions of
topics such as Options Market Maker
quote reporting, requirements for
capturing Customer-IDs, time stamps
and clock synchronization, reporting
requirements for order handling
scenarios, cost and funding, error
handling and corrections, and potential
elimination of Rules made redundant by
the CAT.45
In addition, the CAT Web site
includes a variety of resources for the
public with respect to the development
of the CAT. The site contains an
overview of the process, an expression
of the guiding principles behind the
Plan development, links to relevant
regulatory actions, gap analyses
comparing the requirements of Rule 613
with current reporting systems, the CAT
implementation timeline, a summary of
the RFP process, a set of frequentlyasked questions (updated on an ongoing
basis), questions for comment from the
industry, industry feedback on the
development of the Plan, and
announcements and notices of
upcoming events. This Web site, along
with the requests for comments and
many public events (announced on the
site), have been a venue for public
communication with respect to the
development of the Plan.
2. Request for Exemption From Certain
Requirements Under Rule 613
Following multiple discussions
between the Participants and both the
DAG and the Bidders, as well as among
the Participants themselves, the
Participants recognized that some
provisions of Rule 613 would not permit
certain solutions to be included in the
Plan that the Participants determined
advisable to effectuate the most efficient
and cost-effective CAT. Consequently,
on January 30, 2015, the Participants
submitted to the Commission a request
for exemptive relief from certain
provisions of Rule 613 regarding: (1)
Options Market Maker quotes; (2)
Customer-IDs; (3) CAT-Reporter-IDs; (4)
linking of executions to specific
subaccount allocations on Allocation
Reports; and (5) time stamp granularity
for manual order events.46 Specifically,
the Participants requested that the
Commission grant an exemption from:
44 The list of current DAG members is available
at https://catnmsplan.com/PastEvents/.
45 See, e.g., Summary of the Consolidated Audit
Trail Initiative, supra note 43, at 14.
46 See Exemptive Request Letter, supra note 16.
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Rule 613(c)(7)(ii) and (iv) for Options
Market Makers with regard to their options
quotes;
Rule 613(c)(7)(i)(A), (c)(7)(iv)(F),
(c)(7)(viii)(B) and (c)(8) which relate to the
requirements for Customer-IDs;
Rule 613(c)(7)(i)(C), (c)(7)(ii)(D),
(c)(7)(ii)(E), (c)(7)(iii)(D), (c)(7)(iii)(E),
(c)(7)(iv)(F), (c)(7)(v)(F), (c)(7)(vi)(B) and
(c)(8) which relate to the requirements for
CAT-Reporter-IDs;
Rule 613(c)(7)(vi)(A), which requires CAT
Reporters to record and report the account
number of any subaccounts to which the
execution is allocated; and
The millisecond time stamp granularity
requirement in Rule 613(d)(3) for certain
manual order events subject to time stamp
reporting under Rules 613(c)(7)(i)(E),
613(c)(7)(ii)(C), 613(c)(7)(iii)(C), and
613(c)(7)(iv)(C).
The Participants believe that the
requested relief is critical to the
development of a cost-effective
approach to the CAT.47
3. Requirements Pursuant to Rule 608(a)
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a. Description of Plan
Rule 613 requires the Participants to
‘‘jointly file . . . a national market
system plan to govern the creation,
implementation, and maintenance of a
consolidated audit trail and Central
Repository.’’ 48 The purpose of the Plan,
and the creation, implementation and
maintenance of a comprehensive audit
trail for the U.S. securities market
described therein, is to ‘‘substantially
enhance the ability of the SROs and the
Commission to oversee today’s
securities markets and fulfill their
responsibilities under the federal
securities laws.’’ 49 It ‘‘will allow for the
prompt and accurate recording of
material information about all orders in
NMS securities, including the identity
of customers, as these orders are
generated and then routed throughout
the U.S. markets until execution,
cancellation, or modification. This
information will be consolidated and
made readily available to regulators in
a uniform electronic format.’’ 50 The
SROs note that the following
summarizes various provisions of the
Plan, which is set forth in full as Exhibit
A to this Notice.
(1) LLC Agreement
The Participants propose to conduct
the activities related to the CAT in a
Delaware limited liability company
47 The Commission notes the Participants’ request
for exemptive relief was granted on March 1, 2016.
See Exemption Order, supra note 18.
48 17 CFR 242.613(a)(1).
49 See Adopting Release, supra note 9, at 45726.
50 Id. Note that the Plan also includes certain
recording and reporting obligations for OTC Equity
Securities.
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pursuant to a limited liability company
agreement, entitled the Limited Liability
Company Agreement of CAT NMS, LLC
(‘‘Company’’). The Participants will
jointly own on an equal basis the
Company. The Company will create,
implement and maintain the CAT. The
limited liability company agreement
(‘‘LLC Agreement’’) itself, including its
appendices, is the proposed Plan, which
would be a national market system plan
as defined in Rule 600(b)(43) of NMS.
(2) Participants
Each national securities exchange and
national securities association currently
registered with the Commission would
be a Participant in the Plan. The names
and addresses of each Participant are set
forth in Exhibit A to the Plan. Article III
of the Plan provides that any entity
approved by the Commission as a
national securities exchange or national
securities association under the
Exchange Act after the Effective Date
may become a Participant by submitting
to the Company a completed application
in the form provided by the Company
and satisfying each of the following
requirements: (1) Executing a
counterpart of the LLC Agreement as
then in effect; and (2) paying a fee to the
Company in an amount determined by
a Majority Vote of the Operating
Committee as fairly and reasonably
compensating the Company and the
Participants for costs incurred in
creating, implementing and maintaining
the CAT (including such costs incurred
in evaluating and selecting the Initial
Plan Processor and any subsequent Plan
Processor) and for costs the Company
incurs in providing for the prospective
Participant’s participation in the
Company, including after consideration
of certain factors identified in Section
3.3(b) of the Agreement (‘‘Participation
Fee’’). The amendment of the Plan
reflecting the admission of a new
Participant will be effective only when:
(1) It is approved by the SEC in
accordance with Rule 608 or otherwise
becomes effective pursuant to Rule 608;
and (2) the prospective Participant pays
the Participation Fee.
A number of factors are relevant to the
determination of a Participation Fee.
Such factors include: (1) The portion of
costs previously paid by the Company
for the development, expansion and
maintenance of the CAT which, under
GAAP, would have been treated as
capital expenditures and would have
been amortized over the five years
preceding the admission of the
prospective Participant; (2) an
assessment of costs incurred and to be
incurred by the Company for modifying
the CAT or any part thereof to
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accommodate the prospective
Participant, which costs are not
otherwise required to be paid or
reimbursed by the prospective
Participant; (3) Participation Fees paid
by other Participants admitted as such
after the Effective Date; (4) elapsed time
from the Effective Date to the
anticipated date of admittance of the
prospective Participant; and (5) such
other factors, if any, as may be
determined to be appropriate by the
Operating Committee and approved by
the Commission. In the event that the
Company and a prospective Participant
do not agree on the amount of the
Participation Fee, such amount will be
subject to review by the SEC pursuant
to Section 11A(b)(5) of the Exchange
Act.
An applicant for participation in the
Company may apply for limited access
to the CAT System for planning and
testing purposes pending its admission
as a Participant by submitting to the
Company a completed Application for
Limited Access to the CAT System in a
form provided by the Company,
accompanied by payment of a deposit in
the amount established by the
Company, which will be applied or
refunded as described in such
application. To be eligible to apply for
such limited access, the applicant must
have been approved by the SEC as a
national securities exchange or national
securities association under the
Exchange Act but the applicant has not
yet become a Participant of the Plan, or
the SEC must have published such
applicant’s Form 1 Application or From
[sic] X–15AA–1 Application to become
a national securities exchange or a
national securities association,
respectively.
All Company Interests will have the
same rights, powers, preferences and
privileges and be subject to the same
restrictions, qualifications and
limitations. Once admitted, each
Participant will be entitled to one vote
on any matter presented to Participants
for their consideration and to participate
equally in any distribution made by the
Company (other than a distribution
made pursuant to Section 10.2 of the
Plan). Each Participant will have a
Company Interest equal to that of each
other Participant.
Article III also describes a
Participant’s ability to Transfer a
Company Interest. A Participant may
only Transfer any Company Interest to
a national securities exchange or
national securities association that
succeeds to the business of such
Participant as a result of a merger or
consolidation with such Participant or
the Transfer of all or substantially all of
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the assets or equity of such Participant
(‘‘Permitted Transferee’’). A Participant
may not Transfer any Company Interest
to a Permitted Transferee unless: (1)
Such Permitted Transferee executes a
counterpart of the Plan; and (2) the
amendment to the Plan reflecting the
Transfer is approved by the SEC in
accordance with Rule 608 or otherwise
becomes effective pursuant to Rule 608.
In addition, Article III addresses the
voluntary resignation and termination of
participation in the Plan. Any
Participant may voluntarily resign from
the Company, and thereby withdraw
from and terminate its right to any
Company Interest, only if: (1) A
Permitted Legal Basis for such action
exists; and (2) such Participant provides
to the Company and each other
Participant no less than thirty days prior
to the effective date of such action
written notice specifying such Permitted
Legal Basis, including appropriate
documentation evidencing the existence
of such Permitted Legal Basis, and, to
the extent applicable, evidence
reasonably satisfactory to the Company
and other Participants that any orders or
approvals required from the SEC in
connection with such action have been
obtained. A validly withdrawing
Participant will have the rights and
obligations discussed below with regard
to termination of participation.
A Participant’s participation in the
Company, and its right to any Company
Interest, will terminate as of the earliest
of: (1) The effective date specified in a
valid resignation notice; (2) such time as
such Participant is no longer registered
as a national securities exchange or
national securities association; or (3) the
date of termination for failure to pay
fees. With regard to the payment of fees,
each Participant is required to pay all
fees or other amounts required to be
paid under the Plan within thirty days
after receipt of an invoice or other
notice indicating payment is due (unless
a longer payment period is otherwise
indicated) (the ‘‘Payment Date’’). If a
Participant fails to make such a required
payment by the Payment Date, any
balance in the Participant’s Capital
Account will be applied to the
outstanding balance. If a balance still
remains with respect to any such
required payment, the Participant will
pay interest on the outstanding balance
from the Payment Date until such fee or
amount is paid at a per annum rate
equal to the lesser of: (1) The Prime Rate
plus 300 basis points; or (2) the
maximum rate permitted by applicable
law. If any such remaining outstanding
balance is not paid within thirty days
after the Payment Date, the Participants
will file an amendment to the Plan
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requesting the termination of the
participation in the Company of such
Participant, and its right to any
Company Interest, with the SEC. Such
amendment will be effective only when
it is approved by the SEC in accordance
with Rule 608 or otherwise becomes
effective pursuant to Rule 608.
From and after the effective date of
termination of a Participant’s
participation in the Company, profits
and losses of the Company will cease to
be allocated to the Capital Account of
the Participant. A terminated
Participant will be entitled to receive
the balance in its Capital Account as of
the effective date of termination
adjusted for profits and losses through
that date, payable within ninety days of
the effective date of termination, and
will remain liable for its proportionate
share of costs and expenses allocated to
it for the period during which it was a
Participant, for obligations under
Section 3.8(c) regarding the return of
amounts previously distributed (if
required by a court of competent
jurisdiction), for its indemnification
obligations pursuant to Section 4.1, and
for obligations under Section 9.6
regarding confidentiality, but it will
have no other obligations under the Plan
following the effective date of
termination. The Plan will be amended
to reflect any termination of
participation in the Company of a
Participant, provided that such
amendment will be effective only when
it is approved by the SEC in accordance
with Rule 608 or otherwise becomes
effective pursuant to Rule 608.
Request for Comment
1. Do Commenters believe that the
process for a national securities
exchange and national securities
association to become a Participant
pursuant to and under the CAT NMS
Plan is clearly and adequately set forth
in the CAT NMS Plan? Do Commenters
believe that the process for, and the
circumstances under which a
Participant could voluntarily terminate
its participation as a Participant to the
CAT NMS Plan is clearly and
adequately set forth in the CAT NMS
Plan? If not, what additional details
should be provided? Do Commenters
believe that these two processes are
appropriate and reasonable?
2. Do Commenters believe that the
process and enumerated factors for
determining the Participation Fee are
clear and reasonable under the CAT
NMS Plan? If not, what additional
modifications, if any, should be
considered in the Participation Fee
determination process?
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30619
3. Are restrictions on the transfer of a
Company Interest appropriate and
reasonable? If not, why not? What
additional limitations or factors, if any,
should be imposed on such transfers?
Please explain.
4. Do Commenters believe that
permitting the termination of a
Participant that continues to be a
registered national securities exchange
or national securities association from
participation in the Company is an
appropriate recourse for failure to pay
Participant fees? If not, can Commenters
recommend an alternative remedy?
Please explain.
5. Are there other circumstances that
should trigger termination of
participation in the Company? If yes,
what are they?
(3) Management
Article IV of the Plan establishes the
overall governance structure for the
management of the Company.
Specifically, the Participants propose
that the Company be managed by an
Operating Committee.51
The Operating Committee will consist
of one voting member representing each
Participant and one alternate voting
member representing each Participant
who will have a right to vote only in the
absence of the Participant’s voting
member of the Operating Committee.
Each of the voting and alternate voting
members of the Operating Committee
will be appointed by the Participant that
he or she represents, will serve at the
will of the Participant appointing such
member and will be subject to the
confidentiality obligations of the
Participant that he or she represents as
set forth in Section 9.6. One individual
may serve as the voting member of the
Operating Committee for multiple
Affiliated Participants, and such
individual will have the right to vote on
behalf of each such Affiliated
Participant.
The Operating Committee will elect,
by Majority Vote, one of its members to
act as Chair for a term of two years. No
Person may serve as Chair for more than
two successive full terms, and no Person
then appointed to the Operating
Committee by a Participant that then
serves, or whose Affiliate then serves, as
the Plan Processor will be eligible to
serve as the Chair. The Chair will
preside at all meetings of the Operating
Committee, designate a Person to act as
Secretary, and perform such other
duties and possess such other powers as
the Operating Committee may from time
51 The Operating Committee will manage the
Company except for situations in which the
approval of the Participants is required by the Plan
or by non-waivable provisions of applicable law.
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to time prescribe. The Chair will not be
entitled to a tie-breaking vote at any
meeting of the Operating Committee.
Each of the members of the Operating
Committee, including the Chair, will be
authorized to cast one vote for each
Participant that he or she represents on
all matters voted upon by the Operating
Committee. Action of the Operating
Committee will be authorized by
Majority Vote (except under certain
designated circumstances), subject to
the approval of the SEC whenever such
approval is required under the Exchange
Act and the rules thereunder. For
example, the Plan specifically notes that
a Majority Vote of the Operating
Committee is required to: (1) Select the
Chair; (2) select the members of the
Advisory Committee (as described
below); (3) interpret the Plan (unless
otherwise noted therein); (4) approve
any recommendation by the Chief
Compliance Officer pursuant to Section
6.2(a)(v)(A); (5) determine to hold an
Executive Session of the Operating
Committee; (6) determine the
appropriate funding-related policies,
procedures and practices consistent
with Article XI; and (7) any other matter
specified elsewhere in the Plan (which
includes the Appendices to the Plan) as
requiring a vote, approval or other
action of the Operating Committee
(other than those matters expressly
requiring a Supermajority Vote or a
different vote of the Operating
Committee).
Article IV requires a Supermajority
Vote of the Operating Committee,
subject to the approval of the SEC when
required, for the following: (1) Selecting
a Plan Processor, other than the Initial
Plan Processor selected in accordance
with Article V of the Plan; (2)
terminating the Plan Processor without
cause in accordance with Section 6.1(p);
(3) approving the Plan Processor’s
appointment or removal of the Chief
Information Security Officer, Chief
Compliance Officer, or any Independent
Auditor in accordance with Section
6.1(b); (4) entering into, modifying or
terminating any Material Contract (if the
Material Contract is with a Participant
or an Affiliate of a Participant, such
Participant and Affiliated Participant
will be recused from any vote); (5)
making any Material Systems Change;
(6) approving the initial Technical
Specifications or any Material
Amendment to the Technical
Specifications proposed by the Plan
Processor; (7) amending the Technical
Specifications on its own motion; and
(8) any other matter specified elsewhere
in the Plan (which includes the
Appendices to the Plan) as requiring a
vote, approval or other action of the
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Operating Committee by a
Supermajority Vote.
A member of the Operating
Committee or any Subcommittee thereof
(as discussed below) shall recuse
himself or herself from voting on any
matter under consideration by the
Operating Committee or such
Subcommittee if such member
determines that voting on such matter
raises a Conflict of Interest. In addition,
if the members of the Operating
Committee or any Subcommittee
(excluding the member thereof proposed
to be recused) determine by
Supermajority Vote that any member
voting on a matter under consideration
by the Operating Committee or such
Subcommittee raises a Conflict of
Interest, such member shall be recused
from voting on such matter. No member
of the Operating Committee or any
Subcommittee will be automatically
recused from voting on any matter
except matters involving Material
Contracts as discussed in the prior
paragraph, as otherwise specified in the
Plan, and as follows: (1) If a Participant
is a Bidding Participant whose Bid
remains under consideration, members
appointed to the Operating Committee
or any Subcommittee by such
Participant or any of its Affiliated
Participants will be recused from any
vote concerning: (a) Whether another
Bidder may revise its Bid; (b) the
selection of a Bidder; or (c) any contract
to which such Participant or any of its
Affiliates would be a party in its
capacity as Plan Processor; and (2) if a
Participant is then serving as Plan
Processor, is an Affiliate of the Person
then serving as Plan Processor, or is an
Affiliate of an entity that is a Material
Subcontractor to the Plan Processor,
then in each case members appointed to
the Operating Committee or any
Subcommittee by such Participant or
any of its Affiliated Participants shall be
recused from any vote concerning: (a)
The proposed removal of such Plan
Processor; or (b) any contract between
the Company and such Plan Processor.
Article IV also addresses meetings of
the Operating Committee.52 Meetings of
the Operating Committee may be
attended by each Participant’s voting
Representative and its alternate voting
Representative and by a maximum of
two nonvoting Representatives of each
Participant, by members of the Advisory
Committee, by the Chief Compliance
Officer, by other Representatives of the
52 Article IV also addresses, among other things,
different types of Operating Committee meetings
(regular, special and emergency), frequency of such
meetings, how to call such meetings, the location
of the meetings, the role of the Chair, and notice
regarding such meetings.
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Company and the Plan Processor, by
Representatives of the SEC and by such
other Persons that the Operating
Committee may invite to attend. The
Operating Committee, however, may,
where appropriate, determine to meet in
Executive Session during which only
voting members of the Operating
Committee will be present. The
Operating Committee, however, may
invite other Representatives of the
Participants, of the Company, of the
Plan Processor (including the Chief
Compliance Officer and the Chief
Information Security Officer) or the
SEC, or such other Persons that the
Operating Committee may invite to
attend, to be present during an
Executive Session. Any determination
of the Operating Committee to meet in
an Executive Session will be made upon
a Majority Vote and will be reflected in
the minutes of the meeting. In addition,
any Person that is not a Participant but
for which the SEC has published a Form
1 Application or Form X–15AA–1 to
become a national securities exchange
or national securities association,
respectively, will be permitted to
appoint one primary Representative and
one alternate Representative to attend
regularly scheduled Operating
Committee meetings in the capacity of
a non-voting observer, but will not be
permitted to have any Representative
attend a special meeting, emergency
meeting or meeting held in Executive
Session of the Operating Committee.
The Operating Committee may, by
Majority Vote, designate by resolution
one or more Subcommittees it deems
necessary or desirable in furtherance of
the management of the business and
affairs of the Company. For any
Subcommittee, any member of the
Operating Committee who wants to
serve thereon may so serve. If Affiliated
Participants have collectively appointed
one member to the Operating Committee
to represent them, then such Affiliated
Participants may have only that member
serve on the Subcommittee or may
decide not to have only that collectively
appointed member serve on the
Subcommittee. Such member may
designate an individual other than
himself or herself who is also an
employee of the Participant or Affiliated
Participants that appointed such
member to serve on a Subcommittee in
lieu of the particular member. Subject to
the requirements of the Plan and nonwaivable provisions of Delaware law, a
Subcommittee may exercise all the
powers and authority of the Operating
Committee in the management of the
business and affairs of the Company as
so specified in the resolution of the
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Operating Committee designating such
Subcommittee.
Article IV requires that the Operating
Committee maintain a Compliance
Subcommittee for the purpose of aiding
the Chief Compliance Officer as
necessary, including with respect to
issues involving: (1) The maintenance of
the confidentiality of information
submitted to the Plan Processor or
Central Repository pursuant to Rule
613, applicable law, or the Plan by
Participants and Industry Members; (2)
the timeliness, accuracy, and
completeness of information submitted
pursuant to Rule 613, applicable law or
the Plan by Participants and Industry
Members; and (3) the manner and extent
to which each Participant is meeting its
obligations under Rule 613, Section
3.11, and as set forth elsewhere in the
Plan and ensuring the consistency of the
Plan’s enforcement as to all Participants.
Article IV also sets forth the
requirements for the formation and
functioning of an Advisory Committee,
which will advise the Participants on
the implementation, operation and
administration of the Central
Repository, including possible
expansion of the Central Repository to
other securities and other types of
transactions.
Article IV describes the composition
of the Advisory Committee. No member
of the Advisory Committee may be
employed by or affiliated with any
Participant or any of its Affiliates or
facilities. The Operating Committee will
select one member from representatives
of each of the following categories to
serve on the Advisory Committee on
behalf of himself or herself individually
and not on behalf of the entity for which
the individual is then currently
employed: (1) A broker-dealer with no
more than 150 Registered Persons; (2) a
broker-dealer with at least 151 and no
more than 499 Registered Persons; (3) a
broker-dealer with 500 or more
Registered Persons; (4) a broker-dealer
with a substantial wholesale customer
base; (5) a broker-dealer that is approved
by a national securities exchange: (a) To
effect transactions on an exchange as a
specialist, market maker or floor broker;
or (b) to act as an institutional broker on
an exchange; (6) a proprietary-trading
broker-dealer; (7) a clearing firm; (8) an
individual who maintains a securities
account with a registered broker or
dealer but who otherwise has no
material business relationship with a
broker or dealer or with a Participant;
(9) a member of academia with expertise
in the securities industry or any other
industry relevant to the operation of the
CAT System; (10) an institutional
investor trading on behalf of a public
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entity or entities; (11) an institutional
investor trading on behalf of a private
entity or entities; and (12) an individual
with significant and reputable
regulatory expertise. The members
selected to represent categories (1)
through (12) above must include, in the
aggregate, representatives of no fewer
than three broker-dealers that are active
in the options business and
representatives of no fewer than three
broker-dealers that are active in the
equities business. In addition, upon a
change in employment of any such
selected member, a Majority Vote of the
Operating Committee will be required
for such member to be eligible to
continue to serve on the Advisory
Committee. Furthermore, the SEC’s
Chief Technology Officer (or the
individual then currently employed in a
comparable position providing
equivalent services) will serve as an
observer of the Advisory Committee (but
not be a member). The members of the
Advisory Committee will have a term of
three years.53
Members of the Advisory Committee
will have the right to attend meetings of
the Operating Committee or any
Subcommittee, to receive information
concerning the operation of the Central
Repository, and to submit their views to
the Operating Committee or any
Subcommittee on matters pursuant to
the Plan prior to a decision by the
Operating Committee on such matters.
A member of the Advisory Committee
will not have a right to vote on any
matter considered by the Operating
Committee or any Subcommittee. In
addition, the Operating Committee or
any Subcommittee may meet in
Executive Session if the Operating
Committee or Subcommittee determines
by Majority Vote that such an Executive
Session is advisable.54 Although
members of the Advisory Committee
will have the right to receive
information concerning the operation of
the Central Repository, the Operating
Committee retains the authority to
determine the scope and content of
information supplied to the Advisory
Committee, which will be limited to
that information that is necessary and
appropriate for the Advisory Committee
to fulfill its functions. Any information
received by members of the Advisory
Committee will remain confidential
53 Four of the initial twelve members of the
Advisory Committee will have an initial term of one
year, and another four of the initial twelve members
of the Advisory Committee will have an initial term
of two years.
54 The Operating Committee may solicit and
consider views on the operation of the Central
Repository in addition to those of the Advisory
Committee.
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30621
unless otherwise specified by the
Operating Committee.
Article IV also describes the
appointment of Officers for the
Company. Specifically, the Chief
Compliance Officer and the Chief
Information Security Officer, each of
whom will be employed solely by the
Plan Processor and neither of whom
will be deemed or construed in any way
to be an employee of the Company, will
be Officers of the Company. Neither
such Officer will receive or be entitled
to any compensation from the Company
or any Participant by virtue of his or her
service in such capacity (other than if a
Participant is then serving as the Plan
Processor, compensation paid to such
Officer as an employee of such
Participant). Each such Officer will
report directly to the Operating
Committee. The Chief Compliance
Officer will work on a regular and
frequent basis with the Compliance
Subcommittee and/or other
Subcommittees as may be determined
by the Operating Committee. Except to
the extent otherwise provided in the
Plan, including Section 6.2, each such
Officer will have such fiduciary and
other duties with regard to the Plan
Processor as imposed by the Plan
Processor on such individual by virtue
of his or her employment by the Plan
Processor.
In addition, the Plan Processor will
inform the Operating Committee of the
individual who has direct management
responsibility for the Plan Processor’s
performance of its obligations with
respect to the CAT. Subject to approval
by the Operating Committee of such
individual, the Operating Committee
will appoint such individual as an
Officer. In addition, the Operating
Committee by Supermajority Vote may
appoint other Officers as it shall from
time to time deem necessary. Any
Officer appointed pursuant to Section
4.6(b) will have only such duties and
responsibilities as set forth in the Plan,
or as the Operating Committee shall
from time to time expressly determine.
No such Officer shall have any authority
to bind the Company (which authority
is vested solely in the Operating
Committee) or be an employee of the
Company, unless in each case the
Operating Committee, by Supermajority
Vote, expressly determines otherwise.
No person subject to a ‘‘statutory
disqualification’’ (as defined in Section
3(a)(39) of the Exchange Act) may serve
as an Officer. It is the intent of the
Participants that the Company have no
employees.
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Request for Comment
6. Do Commenters believe that the
organizational, governance and/or
managerial structure of CAT NMS, LLC
is in the public interest? Why or why
not?
7. Do Commenters believe that the
organizational, governance, and/or
managerial structure set forth in the
CAT NMS Plan, including the role of
the Operating Committee, is appropriate
and reasonable? If not, please explain.
8. The CAT NMS Plan specifies the
corporate actions that require a Majority
Vote and the corporate actions that
require a Supermajority Vote. Do
Commenters believe that such voting
procedures are appropriate and
reasonable? Should any corporate
actions require a higher or lower voting
threshold than specified in the Plan?
Are there any corporate actions that
should require a Supermajority Vote?
Please explain.
9. Do Commenters believe that the
CAT NMS Plan should explicitly or
more clearly specify who should
determine whether a systems change or
amendment is ‘‘material’’? If so, who?
Please explain.
10. Do Commenters believe that two
successive full terms is an appropriate
and reasonable term limit for a Person
to serve as chair of the Operating
Committee? If not, please explain.
11. Section 1.1 defines Conflict of
Interest to mean that the interest of a
Participant (e.g., commercial,
reputational, regulatory, or otherwise) in
the matter that is subject to the vote; (a)
interferes, or would be reasonably likely
to interfere with that Participant’s
objective consideration of the matter;
and (b) is, or is reasonably likely to be,
inconsistent with the purpose and
objectives of the Company, and the
CAT, taking into account all relevant
considerations, including whether a
Participant that may otherwise have a
conflict of interest has established
appropriate safeguards to eliminate such
conflicts of interest and taking into
account the other guiding principles set
forth in the LLC Agreement. Do
Commenters believe this definition of
‘‘Conflict of Interest’’ is appropriate and
reasonable? Please explain.
12. Do Commenters believe that the
definition of Conflict of Interest of the
CAT NMS Plan properly reflects the
business interests of each Participant
and the Operating Committee? If not,
please explain. Do Commenters believe
that the CAT NMS Plan governing
procedures on Conflicts of Interest and
recusals contained in Section 4.3(d) of
the CAT NMS Plan, reasonably and
adequately address Conflicts of Interest?
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If not, please explain. Are there other
conflicts of interest that may arise for
any Participant that are not addressed in
the CAT NMS Plan definitions or
governing procedures? If so, what?
13. Is the CAT NMS Plan clear and
reasonable regarding whether it permits
the Operating Committee to delegate the
authority to vote on matters to a
Subcommittee? If so, in what
circumstances? Are there any
circumstances in which a Subcommittee
would or should be prohibited from
voting in place of the Operating
Committee? Please explain.
14. Do Commenters believe that the
Advisory Committee structure and
provisions set forth in the CAT NMS
Plan are appropriate and reasonable? Is
the size of the Advisory Committee as
contemplated by the Plan appropriate
and reasonable? Are the Advisory
Committee member categories
reasonable and adequately
representative of entities impacted by
the CAT NMS Plan? Would expanding
membership on the Advisory Committee
to any additional types of entities
enhance the quality of the input it
would provide to the Operating
Committee? Please explain.
15. Is the mechanism for determining
who serves on the Advisory Committee
(i.e., selection by the Operating
Committee) appropriate and reasonable?
Should Participants be required to
publicly solicit Advisory Committee
membership interest? Should the
Advisory Committee be able to selfnominate replacement candidates?
Please explain.
16. Do Commenters believe that the
CAT NMS Plan’s requirement that
Advisory Committee members serve on
the Advisory Committee in their
personal capacities, and that the
Operating Committee members serve on
the Operating Committee as
representatives of their employers who
are the Plan Participants create different
incentives for members of the Advisory
Committee and members of the
Operating Committee? If so, in what
ways? Do Commenters believe that these
differing incentives would impact the
regulatory objective of the CAT? If so, in
what ways?
17. The CAT NMS Plan outlines the
size, tenure and membership categories
of the Advisory Committee members. Do
Commenters believe there are any
additional or alternative factors that
should be taken into consideration in
structuring the Advisory Committee that
would benefit the operation of the CAT?
If so, what are those additional or
alternative factors? How would these
factors benefit the operation of the CAT?
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18. Are the roles and responsibilities
of the Advisory Committee clearly and
adequately set forth in the CAT NMS
Plan? If not, why not? Should additional
details on these roles and
responsibilities be provided? If so, what
additional details should be provided?
19. Are there any alternatives for
involvement by the Advisory Committee
that could increase the effectiveness of
the Advisory Committee? For example,
should the Advisory Committee be
given a vote in connection with
decisions regarding the CAT NMS Plan,
equivalent to the vote each Participant
has? If so, please specifically identify
the alternatives for involvement and
how those alternatives could increase
the effectiveness of the CAT.
20. Do Commenters believe that the
Advisory Committee is structured in a
way that would allow industry to
provide meaningful input on the
implementation, operation, and
administration of the CAT? If not, please
explain and/or provide specific
suggestions for improving the Advisory
Committee structure. Should additional
authority be given to the Advisory
Committee, for example allowing it to
initiate its own recommendations?
Should additional mechanisms through
which the industry or others could
provide input be included in the CAT
NMS Plan? 55 Should the Operating
Committee be required to respond to the
Advisory Committee’s views, formally
or informally, in advance of or following
a decision by the Operating Committee?
Should the Operating Committee be
required to include Advisory Committee
views in filings with the Commission?
Please explain.
21. Do Commenters believe that the
Plan’s provision that prohibits the
Advisory Committee from attending any
Executive Session of the Operating
Committee is appropriate and
reasonable?
22. Do Commenters believe that the
CAT NMS Plan adequately sets forth
provisions regarding the scope,
authority, and duties of the Officers of
the CAT, as well as the scope and
authority of the Plan Processor
generally? If not, what further
provisions should the CAT NMS Plan
set forth with respect to Officers and the
Plan Processor and why?
23. Do Commenters believe that the
Operating Committee and the proposed
CAT NMS Plan governance structure
would ensure effective corporate
governance, process and action? Why or
why not?
55 See Section IV.E.4, infra, for additional
requests for comment on the Advisory Committee.
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24. The CAT NMS Plan provides that
emergency meetings of the Operating
Committee may be called at the request
of two or more Participants, and may be
held as soon as practical after such a
meeting is called. Do Commenters
believe that there should be a different
method for the Operating Committee to
meet and take action in the event of an
emergency? Should the CAT NMS Plan
denote certain emergency situations in
which the Operating Committee must be
required to take action on an expedited
basis? If so, what time period would be
reasonable to require action by the
Operating Committee and what
mechanisms or processes should the
Operating Committee be required to
follow?
25. What, if any, impact on the
Operating Committee’s governance and
voting do Affiliated Participant groups
have? Do Commenters believe that the
Operating Committee’s governance and
voting provisions set forth in the CAT
NMS Plan, including the definitions of
Supermajority Vote and Majority Vote,
are appropriate and reasonable in light
of these Affiliated Participant groups?
What, if any, additional governance and
voting provisions or protections should
be included? Is there an alternative
model for voting rights that would be
more appropriate and reasonable, for
example distributing votes using a
measure other than exchange licenses?
26. Do Commenters believe the use of
Executive Session is appropriate and
reasonable? Is a Majority Vote the
appropriate mechanism for the
Operating Committee to go into
Executive Session? Should the CAT
NMS Plan specify particular scenarios
for which an Executive Session is or is
not appropriate?
27. Do Commenters believe that the
provisions in the CAT NMS Plan
regarding the mechanics of voting by the
Operating Committee, the Selection
Committee, or other entities are
appropriate and reasonable? Does the
CAT NMS Plan include sufficient detail
on when voting should be carried out
openly (e.g., in the presence of other
attendees at a committee meeting) as
opposed to when voting may be
conducted by secret ballot or by some
other confidential method? What are the
advantages and disadvantages of
different voting methodologies? Would
particular actions or decisions regarding
CAT be better suited to one voting
methodology over others? Please
explain.
28. Are there any other matters
relating to the operation and
administration of the Plan that should
be included in the Plan for the
Commission’s consideration? If so,
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please identify such matters and explain
why and how they should be addressed
in the Plan.
(4) Initial Plan Processor Selection
Article V of the Plan sets forth the
process for the Participants’ evaluation
of Bids and the selection process for
narrowing down the Bids and choosing
the Initial Plan Processor. The initial
steps in the evaluation and selection
process were and will be performed
pursuant to the Selection Plan; the final
two rounds of evaluation and voting, as
well as the final selection of the Initial
Plan Processor, will be performed
pursuant to the Plan.56
As discussed above, the Selection
Committee has selected the Shortlisted
Bids pursuant to the Selection Plan.
After reviewing the Shortlisted Bids, the
Participants have identified the optimal
proposed solutions for the CAT and, to
the extent possible, included such
solutions in the Plan.57 The Selection
Committee will determine, by majority
vote, whether Shortlisted Bidders will
have the opportunity to revise their
Bids. To reduce potential conflicts of
interest, no Bidding Participant may
vote on whether a Shortlisted Bidder
will be permitted to revise its Bid if a
Bid submitted by or including the
Participant or an Affiliate of the
Participant is a Shortlisted Bid. The
Selection Committee will review and
evaluate all Shortlisted Bids, including
any permitted revisions submitted by
Shortlisted Bidders. In performing this
review and evaluation, the Selection
Committee may consult with the
Advisory Committee and such other
Persons as the Selection Committee
deems appropriate, which may include
the DAG until the Advisory Committee
is formed.
After receipt of any permitted
revisions, the Selection Committee will
select the Initial Plan Processor from the
Shortlisted Bids in two rounds of voting
where each Participant has one vote via
its Voting Senior Officer in each
round.58 No Bidding Participant,
however, will be entitled to vote in any
round if the Participant’s Bid, a Bid
submitted by an Affiliate of the
Participant, or a Bid including the
56 By its terms, the Selection Plan will terminate
upon Commission approval of the Plan.
57 As noted above, the Participants stated their
belief that certain exemptive relief is necessary to
include in the Plan all of the provisions the
Participants believe are part of the optimal solution
for the CAT. The Commission notes that the request
for exemptive relief was granted on March 1, 2016.
See Exemption Order, supra note 18.
58 If the proposed amendment to the Selection
Plan is approved, the Selection Committee may
determine to narrow the number of Shortlisted Bids
prior to the two rounds of voting.
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30623
Participant or an Affiliate of the
Participant is considered in such
round.59 In the first round, each Voting
Senior Officer, subject to the recusal
provision in Section 5.2(e)(ii), will
select a first and second choice, with the
first choice receiving two points and the
second choice receiving one point. The
two Shortlisted Bids receiving the
highest cumulative scores in the first
round will advance to the second
round.60 In the event of a tie, the tie will
be broken by assigning one point per
vote to the tied Shortlisted Bids, and the
Shortlisted Bid with the most votes will
advance. If this procedure fails to break
the tie, a revote will be taken on the tied
Bids with each vote receiving one point.
If the tie persists, the Participants will
identify areas for discussion, and
revotes will be taken until the tie is
broken.
Once two Shortlisted Bids have been
chosen, the Voting Senior Officers of the
Participants (other than those subject to
recusal) will vote for a single Shortlisted
Bid from the final two to determine the
Initial Plan Processor. If the tie persists,
the Participants will identify areas for
discussion and, following these
discussions, revotes will be taken until
the tie is broken. As set forth in Article
VI of the Plan, following the selection of
the Initial Plan Processor, the
Participants will file with the
Commission a statement identifying the
Initial Plan Processor and including the
information required by Rule 608.
(5) Functions and Activities of CAT
System
A. Plan Processor
Article VI describes the
responsibilities of the selected Plan
Processor. The Company, under the
direction of the Operating Committee,
will enter into one or more agreements
with the Plan Processor obligating the
Plan Processor to perform the functions
and duties contemplated by the Plan to
be performed by the Plan Processor, as
well as such other functions and duties
the Operating Committee deems
necessary or appropriate.
As set forth in the Plan, the Plan
Processor is required to develop and,
with the prior approval of the Operating
Committee, implement policies,
procedures, and control structures
related to the CAT System that are
consistent with Rule 613(e)(4),
Appendix C and Appendix D. The Plan
59 This recusal provision is included in the Plan,
as well as in an amendment to the Selection Plan.
See Order Approving Amendment No. 2 to the
Selection Plan, supra note 15.
60 Each round of voting throughout the Plan is
independent of other rounds.
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Processor will: (1) Comply with
applicable provisions of 15 U.S. Code
§ 78u–6 (Securities Whistleblower
Incentives and Protection) and the
recordkeeping requirements of Rule
613(e)(8); (2) consistent with Appendix
D, Central Repository Requirements,
ensure the effective management and
operation of the Central Repository; (3)
consistent with Appendix D, Data
Management, ensure the accuracy of the
consolidation of the CAT Data reported
to the Central Repository; and (4)
consistent with Appendix D, Upgrade
Process and Development of New
Functionality, design and implement
appropriate policies and procedures
governing the determination to develop
new functionality for the CAT
including, among other requirements, a
mechanism by which changes can be
suggested by Advisory Committee
members, Participants, or the SEC. Such
policies and procedures also shall: (1)
Provide for the escalation of reviews of
proposed technological changes and
upgrades to the Operating Committee;
and (2) address the handling of
surveillance, including coordinated,
Rule 17d–2 under the Exchange Act or
Regulatory Surveillance Agreement(s)
(RSA) surveillance queries and requests
for data. Any policy, procedure or
standard (and any material modification
or amendment thereto) applicable
primarily to the performance of the Plan
Processor’s duties as the Plan Processor
(excluding any policies, procedures or
standards generally applicable to the
Plan Processor’s operations and
employees) will become effective only
upon approval by the Operating
Committee. The Plan Processor also
will, subject to the prior approval of the
Operating Committee, establish
appropriate procedures for escalation of
matters to the Operating Committee. In
addition to other policies, procedures
and standards generally applicable to
the Plan Processor’s employees and
contractors, the Plan Processor will have
hiring standards and will conduct and
enforce background checks (e.g.,
fingerprint-based) for all of its
employees and contractors to ensure the
protection, safeguarding and security of
the facilities, systems, networks,
equipment and data of the CAT System,
and will have an insider and external
threat policy to detect, monitor and
remedy cyber and other threats.
The Plan Processor will enter into
appropriate Service Level Agreements
(‘‘SLAs’’) governing the performance of
the Central Repository, as generally
described in Appendix D, Functionality
of the CAT System, with the prior
approval of the Operating Committee.
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The Plan Processor in conjunction with
the Operating Committee will regularly
review and, as necessary, update the
SLAs, in accordance with the terms of
the SLAs. As further contemplated in
Appendix C, System Service Level
Agreements (SLAs), and in Appendix D,
System SLAs, the Plan Processor may
enter into appropriate service level
agreements with third parties applicable
to the Plan Processor’s functions related
to the CAT System (‘‘Other SLAs’’), with
the prior approval of the Operating
Committee. The Chief Compliance
Officer and/or the Independent Auditor
will, in conjunction with the Plan
Processor and as necessary the
Operating Committee, regularly review
and, as necessary, update the Other
SLAs, in accordance with the terms of
the applicable Other SLA. In addition,
the Plan Processor: (1) Will, on an
ongoing basis and consistent with any
applicable policies and procedures,
evaluate and implement potential
system changes and upgrades to
maintain and improve the normal dayto-day operating function of the CAT
System; (2) in consultation with the
Operating Committee, will, on an as
needed basis and consistent with any
applicable operational and escalation
policies and procedures, implement
such material system changes and
upgrades as may be required to ensure
effective functioning of the CAT System;
and (3) in consultation with the
Operating Committee, will, on an as
needed basis, implement system
changes and upgrades to the CAT
System to ensure compliance with
applicable laws, regulations or rules
(including those promulgated by the
SEC or any Participant). Furthermore,
the Plan Processor will develop and,
with the prior approval of the Operating
Committee, implement a securities
trading policy, as well as necessary
procedures, control structures and tools
to enforce this policy.
In addition, the Plan Processor will
provide the Operating Committee
regular reports on the CAT System’s
operation and maintenance.
Furthermore, upon request of the
Operating Committee or any
Subcommittee, the Plan Processor will
attend any meetings of the Operating
Committee or such Subcommittee.
The Plan Processor may appoint such
officers of the Plan Processor as it deems
necessary and appropriate to perform its
functions under the Plan and Rule 613.
The Plan Processor, however, will be
required to appoint, at a minimum, the
Chief Compliance Officer, the Chief
Information Security Officer, and the
Independent Auditor. The Operating
Committee, by Supermajority Vote, will
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approve any appointment or removal of
the Chief Compliance Officer, Chief
Information Security Officer, or the
Independent Auditor.
The Plan Processor will designate an
employee of the Plan Processor to serve,
subject to the approval of the Operating
Committee by Supermajority Vote, as
the Chief Compliance Officer. The Plan
Processor will also designate at least one
other employee (in addition to the
person then serving as Chief
Compliance Officer), which employee
the Operating Committee has previously
approved, to serve temporarily as the
Chief Compliance Officer if the
employee then serving as the Chief
Compliance Officer becomes
unavailable or unable to serve in such
capacity (including by reason of injury
or illness). Any person designated to
serve as the Chief Compliance Officer
(including to serve temporarily) will be
appropriately qualified to serve in such
capacity based on the duties and
responsibilities assigned to the Chief
Compliance Officer and will dedicate
such person’s entire working time to
such service (or temporary service)
(except for any time required to attend
to any incidental administrative matters
related to such person’s employment
with the Plan Processor that do not
detract in any material respect from
such person’s service as the Chief
Compliance Officer). Article VI sets
forth various responsibilities of the
Chief Compliance Officer. With respect
to all of his or her duties and
responsibilities in such capacity
(including those as set forth in the Plan),
the Chief Compliance Officer will be
directly responsible and will directly
report to the Operating Committee,
notwithstanding that she or he is
employed by the Plan Processor. The
Plan Processor, subject to the oversight
of the Operating Committee, will ensure
that the Chief Compliance Officer has
appropriate resources to fulfill his or her
obligations under the Plan and Rule
613. The compensation (including base
salary and bonus) of the Chief
Compliance Officer will be payable by
the Plan Processor, but be subject to
review and approval by the Operating
Committee. The Operating Committee
will render the Chief Compliance
Officer’s annual performance review.
The Plan Processor also will designate
an employee of the Plan Processor to
serve, subject to the approval of the
Operating Committee by Supermajority
Vote, as the Chief Information Security
Officer. The Plan Processor will also
designate at least one other employee
(in addition to the person then serving
as Chief Information Security Officer),
which employee the Operating
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Committee has previously approved, to
serve temporarily as the Chief
Information Security Officer if the
employee then serving as the Chief
Information Security Officer becomes
unavailable or unable to serve in such
capacity (including by reason of injury
or illness). Any person designated to
serve as the Chief Information Security
Officer (including to serve temporarily)
will be appropriately qualified to serve
in such capacity based on the duties and
responsibilities assigned to the Chief
Information Security Officer under the
Plan and will dedicate such person’s
entire working time to such service (or
temporary service) (except for any time
required to attend to any incidental
administrative matters related to such
person’s employment with the Plan
Processor that do not detract in any
material respect from such person’s
service as the Chief Information
Security Officer).
The Plan Processor, subject to the
oversight of the Operating Committee,
will ensure that the Chief Information
Security Officer has appropriate
resources to fulfill the obligations of the
Chief Information Security Officer set
forth in Rule 613 and in the Plan,
including providing appropriate
responses to questions posed by the
Participants and the SEC. In performing
such obligations, the Chief Information
Security Officer will be directly
responsible and directly report to the
Operating Committee, notwithstanding
that he or she is employed by the Plan
Processor. The compensation (including
base salary and bonus) of the Chief
Information Security Officer will be
payable by the Plan Processor, but be
subject to review and approval by the
Operating Committee, and the Operating
Committee will render the Chief
Information Security Officer’s annual
performance review. Consistent with
Appendices C and D, the Chief
Information Security Officer will be
responsible for creating and enforcing
appropriate policies, procedures,
standards, control structures and real
time tools to monitor and address data
security issues for the Plan Processor
and the Central Repository, as described
in the Plan. At regular intervals, to the
extent that such information is available
to the Company, the Chief Information
Security Officer will report to the
Operating Committee the activities of
the Financial Services Information
Sharing and Analysis Center (‘‘FS–
ISAC’’) or comparable bodies to the
extent that the Company has joined FS–
ISAC or other comparable body.
The Plan Processor will afford to
Participants and the Commission such
access to the Representatives of the Plan
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Processor as any Participant or the
Commission may reasonably request
solely for the purpose of performing
such Person’s regulatory and oversight
responsibilities pursuant to the federal
securities laws, rules, and regulations or
any contractual obligations. The Plan
Processor will direct such
Representatives to reasonably cooperate
with any inquiry, investigation, or
proceeding conducted by or on behalf of
any Participant or the Commission
related to such purpose.
The Operating Committee will review
the Plan Processor’s performance under
the Plan at least once each year, or more
often than once each year upon the
request of two Participants that are not
Affiliated Participants. The Operating
Committee will notify the SEC of any
determination made by the Operating
Committee concerning the continuing
engagement of the Plan Processor as a
result of the Operating Committee’s
review of the Plan Processor and will
provide the SEC with a copy of any
reports that may be prepared in
connection therewith.
The Operating Committee, by
Supermajority Vote, may remove the
Plan Processor from such position at
any time. However, the Operating
Committee, by Majority Vote, may
remove the Plan Processor from such
position at any time if it determines that
the Plan Processor has failed to perform
its functions in a reasonably acceptable
manner in accordance with the
provisions of the Plan or that the Plan
Processor’s expenses have become
excessive and are not justified. In
making such a determination, the
Operating Committee will consider,
among other factors: (1) The
reasonableness of the Plan Processor’s
response to requests from Participants
or the Company for technological
changes or enhancements; (2) results of
any assessments performed pursuant to
Section 6.6; (3) the timeliness of
conducting preventative and corrective
information technology system
maintenance for reliable and secure
operations; (4) compliance with
requirements of Appendix D; and (5)
such other factors related to experience,
technological capability, quality and
reliability of service, costs, back-up
facilities, failure to meet service level
agreement(s) and regulatory
considerations as the Operating
Committee may determine to be
appropriate.
In addition, the Plan Processor may
resign upon two year’s (or such other
shorter period as may be determined by
the Operating Committee by
Supermajority Vote) prior written
notice. The Operating Committee will
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fill any vacancy in the Plan Processor
position by Supermajority Vote, and
will establish a Plan Processor Selection
Subcommittee to evaluate and review
Bids and make a recommendation to the
Operating Committee with respect to the
selection of the successor Plan
Processor.
Request for Comment
29. The CAT NMS Plan, Section 6.1
(Plan Processor) sets forth details
regarding the Plan Processor’s
responsibilities. Do Commenters believe
that the enumerated responsibilities of
the Plan Processor are appropriate and
reasonable? Please explain.
30. Do Commenters believe that the
CAT NMS Plan provides the Operating
Committee with sufficient authority to
maintain oversight of the Plan
Processor? Is the Plan Processor given
too much discretion? Too little? Please
explain.
31. The CAT NMS Plan provides in
Section 6.1(s) that a Plan Processor may
resign upon giving two years notice of
such resignation. Do Commenters
believe that two years is a sufficient
amount of notice to ensure a
replacement Plan Processor could be
selected? Is two years too long a period
to require notice of resignation? Why or
why not?
32. The CAT NMS Plan includes two
provisions governing removal of the
Plan Processor. Section 6.1(q) allows the
Operating Committee to remove the
Plan Processor at any time by a
Supermajority Vote. Do Commenters
believe it is appropriate for the
Operating Committee to have authority
to remove the Plan Processor without
cause upon a Supermajority Vote? Why
or why not?
33. Section 6.1(r) of the CAT NMS
Plan allows the Operating Committee to
remove the Plan Processor by a Majority
Vote if it determines that the Plan
Processor has failed to perform its
functions in a reasonably acceptable
manner in accordance with the
provisions of the CAT LLC Agreement
or that the Plan Processor’s expenses
have become excessive and are not
justified. Do Commenters believe it is
appropriate and reasonable for the
Operating Committee to have the
authority to remove the Plan Processor
on these bases using a Majority Vote?
Why or why not, and with respect to
which of these bases? Do Commenters
believe there are other grounds upon
which the Operating Committee should
have the ability to remove the Plan
Processor upon a Majority Vote?
34. The CAT NMS Plan states that the
Plan Processor must implement policies
and procedures consistent with Rule
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613(e)(4). Further, Rule 613(e)(4)
requires that the CAT NMS Plan include
policies and procedures to be used by
the Plan Processor to ensure: (1) The
security and confidentiality of all
information reported to the Central
Repository; (2) the timeliness, accuracy,
integrity, and completeness of the data
provided to the Central Repository; and
(3) the accuracy of the consolidation by
the Plan Processor of the data provided
to the Central Repository. Do
Commenters believe that such policies
and procedures are adequately
described in Appendix D of the CAT
NMS Plan? Do Commenters believe
such policies and procedures are
appropriate and reasonable? Do
Commenters believe that additions or
deletions should be made to the policies
and procedures? If so, please describe.
35. The CAT NMS Plan provides that
the CCO and CISO, while Officers of
CAT NMS, LLC, would be employees of
the Plan Processor. Do Commenters
believe that this arrangement creates
any conflicts of interest that could
undermine the ability of the CCO and
CISO to effectively carry out their
responsibilities under the CAT NMS
Plan? Please describe any such conflicts
of interest and explain how they could
affect the performance of the CCO or
CISO’s CAT-related duties.
36. The CAT NMS Plan provides that
the Operating Committee must approve
the CCO and CISO selected by the Plan
Processor by Supermajority Vote, that
the CCO and CISO shall dedicate their
entire working time to their service as
CCO or CISO, that the Operating
Committee shall have oversight over the
Plan Processor’s compensation of and
provision of resources to the CCO and
CISO, and that the CCO and CISO shall
report directly to and receive annual
performance reviews from the Operating
Committee.61 Do Commenters believe
that these provisions adequately address
any conflicts of interest resulting from
the CCO and CISO being employees of
the Plan Processor? Are there additional
steps that could be taken to insulate the
CCO and CISO from being unduly
influenced by the Plan Processor?
37. The CAT NMS Plan provides that
the CCO and CISO would not, to the
extent permitted under applicable law,
have fiduciary or similar duties to CAT
NMS, LLC, but that they may have
fiduciary or similar duties to the Plan
Processor to the extent that their
employment with the Plan Processor
entails such duties.62 Do Commenters
believe that these provisions could
61 See CAT NMS Plan, supra note 3, at Sections
6.2(a)(i)–(iv), b(i)–(iv).
62 See id. at Section 4.6(a), 4.7(c).
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affect the ability of the CCO and CISO
to carry out their CAT-related duties?
Would any alternative provisions be
preferable? For example, should the
Plan remain silent regarding the CCO
and CISO’s fiduciary or other duties to
the Plan Processor and CAT NMS, LLC?
Should the Plan require the CCO and
CISO to affirmatively undertake
fiduciary or similar duties to CAT NMS,
LLC? Should the Plan Processor be
required to select individuals who do
not have fiduciary or similar duties to
the Plan Processor to be the CCO or
CISO? What are the advantages and
disadvantages to each approach?
38. Is the mechanism by which
changes to CAT functionality can be
suggested to the Plan Processor by the
Advisory Committee members,
Participants, or the SEC appropriate and
reasonable? Why or why not?
39. Is the Operating Committee’s role
in the hiring of the CCO, CISO, and
Independent Auditor appropriate and
reasonable? Should the Advisory
Committee be consulted on these
decisions? Why or why not?
six years. Such data when available to
the Participant regulatory Staff and the
SEC will be linked. In addition, the Plan
Processor will implement and comply
with the records retention policy
contemplated by Section 6.1(d)(i).
Consistent with Appendix D, Data
Access, the Plan Processor will provide
Participants and the SEC access to the
Central Repository (including all
systems operated by the Central
Repository), and access to and use of the
CAT Data stored in the Central
Repository, solely for the purpose of
performing their respective regulatory
and oversight responsibilities pursuant
to the federal securities laws, rules and
regulations or any contractual
obligations. The Plan Processor will
create and maintain a method of access
to the CAT Data stored in the Central
Repository that includes the ability to
run searches and generate reports. The
method in which the CAT Data is stored
in the Central Repository will allow the
ability to return results of queries that
are complex in nature including market
reconstruction and the status of order
books at varying time intervals. The
Plan Processor will, at least annually
and at such earlier time promptly
following a request by the Operating
Committee, certify to the Operating
Committee that only the Participants
and the SEC have access to the Central
Repository (other than access provided
to any Industry Member for the purpose
of correcting CAT Data previously
reported to the Central Repository by
such Industry Member).64
B. Central Repository
The Central Repository, under the
oversight of the Plan Processor, and
consistent with Appendix D, Central
Repository Requirements, will receive,
consolidate, and retain all CAT Data.
The Central Repository will collect
(from a SIP or pursuant to an NMS Plan)
and retain on a current and continuing
basis, in a format compatible with the
Participant Data and Industry Member
Data, all data, including the following:
(1) Information, including the size and
quote condition, on quotes, including
the National Best Bid and National Best
Offer for each NMS Security; (2) Last
Sale Reports and transaction reports
reported pursuant to an effective
transaction reporting plan filed with the
SEC pursuant to, and meeting the
requirements of, Rules 601 and 608; (3)
trading halts, LULD price bands and
LULD indicators; and (4) summary
data.63
Consistent with Appendix D, Data
Retention Requirements, the Central
Repository will retain the information
collected pursuant to paragraphs (c)(7)
and (e)(7) of Rule 613 in a convenient
and usable standard electronic data
format that is directly available and
searchable electronically without any
manual intervention by the Plan
Processor for a period of not less than
Request for Comment
40. Do Commenters believe that the
requirements presented in Appendix D,
Central Repository Requirements, are
sufficiently detailed to guide the Plan
Processor in how to build and operate
the Central Repository with regard to
receiving, consolidating, and retaining
data? If not, what additional information
should the requirements contain? Are
there any requirements that should be
eliminated? Will such provisions give
the Plan Processor too much discretion
or flexibility in how to build and
operate the Central Repository with
regard to receiving, consolidating, and
retaining data? Please identify and
explain why such requirements are not
necessary or appropriate.
41. Do Commenters believe that the
information provided in Appendix D,
Data Access, is sufficiently detailed to
63 In the CAT NMS Plan as attached hereto as
Exhibit A, Section 6.5(a)(ii)(D) was amended to
clarify that ‘‘summary data’’ refers to ‘‘summary
data or reports described in the specifications for
each of the SIPs and disseminated by the respective
SIP.’’
64 See CAT NMS Plan, supra note 3, at Appendix
C, The Security and Confidentiality of Information
Reported to the Central Repository, and Appendix
D, Data Security, describe the security and
confidentiality of the CAT Data, including how
access to the Central Repository is controlled.
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inform the Plan Processor and regulators
how access to data will be granted? Are
the controls and security provisions
related to regulatory access to data
appropriate and reasonable? Should
additional provisions be included? If so,
please identify and explain why such
provisions are necessary. Should any
provisions be modified or eliminated?
Will such provisions give the Plan
Processor too much discretion or
flexibility in how to build and operate
the Central Repository with regard to
regulator access to the data? If so, please
identify and explain why such
provisions should be modified or not
included in the CAT NMS Plan.
42. The CAT NMS Plan does not
mandate a specific method for primary
data storage of CAT Data, but does
require that the storage solution would
meet the security, reliability, and
accessibility requirements for the CAT,
including storage of personally
identifiable information (‘‘PII’’) data,
separately. The CAT NMS Plan also
indicates several considerations in the
selection of a storage solution including
maturity, cost, complexity, and
reliability of the storage method. The
Commission requests comment on
whether the CAT NMS Plan should
mandate a particular data storage
method. Why or why not? What are the
advantages and disadvantages for CAT
of the various storage methods?
C. Data Recording and Reporting by
Participants
The Plan also sets forth the
requirements regarding the data
recording and reporting by
Participants.65 Each Participant will
record and electronically report to the
Central Repository the following details
for each order and each Reportable
Event,66 as applicable (‘‘Participant
Data’’; also referred to as ‘‘Recorded
Industry Member Data’’, as discussed in
the next Section):
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for original receipt or origination of an order:
(1) Firm Designated ID(s) (FDIs) for each
customer; (2) CAT-Order-ID; (3) SROAssigned Market Participant Identifier of the
Industry Member receiving or originating the
order; (4) date of order receipt or origination;
(5) time of order receipt or origination (using
time stamps pursuant to Section 6.8); (6) the
65 Participants may, but are not required to,
coordinate compliance with the recording and
reporting efforts through the use of regulatory
services agreements and/or agreements adopted
pursuant to Rule 17d–2 under the Exchange Act.
66 The CAT NMS Plan defines ‘‘Reportable Event’’
as ‘‘includ[ing], but . . . not limited to, the original
receipt or origination, modification, cancellation,
routing, execution (in whole or in part) and
allocation of an order, and receipt of a routed
order.’’ See CAT NMS Plan, supra note 3, at Section
1.1.
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Material Terms of the Order; 67 and (7) other
information as may be determined by the
Operating Committee.68
for the routing of an order: (1) CAT-Order-ID;
(2) date on which the order is routed; (3) time
at which the order is routed (using time
stamps pursuant to Section 6.8); (4) SROAssigned Market Participant Identifier of the
Industry Member or Participant routing the
order; (5) SRO-Assigned Market Participant
Identifier of the Industry Member or
Participant to which the order is being
routed; (6) if routed internally at the Industry
Member, the identity and nature of the
department or desk to which the order is
routed; (7) the Material Terms of the Order;
and (8) other information as may be
determined by the Operating Committee.69
for the receipt of an order that has been
routed, the following information: (1) CATOrder-ID; (2) date on which the order is
received; (3) time at which the order is
received (using time stamps pursuant to
Section 6.8); (4) SRO-Assigned Market
Participant Identifier of the Industry Member
or Participant receiving the order; (5) SROAssigned Market Participant Identifier of the
Industry Member or Participant routing the
order; (6) the Material Terms of the Order;
and (7) other information as may be
determined by the Operating Committee.70
if the order is modified or cancelled: (1) CATOrder-ID; (2) date the modification or
cancellation is received or originated; (3)
time at which the modification or
cancellation is received or originated (using
time stamps pursuant to Section 6.8); (4)
price and remaining size of the order, if
modified; (5) other changes in Material
Terms, if modified; (6) whether the
modification or cancellation instruction was
given by the Customer, or was initiated by
the Industry Member or Participant; and (7)
other information as may be determined by
the Operating Committee.71
if the order is executed, in whole or in part:
(1) CAT-Order-ID; (2) date of execution; (3)
time of execution (using time stamps
pursuant to Section 6.8); (4) execution
capacity (principal, agency or riskless
principal); (5) execution price and size; (6)
the SRO-Assigned Market Participant
Identifier of the Participant or Industry
Member executing the order; and (7) whether
the execution was reported pursuant to an
effective transaction reporting plan or the
Plan for Reporting of Consolidated Options
Last Sale Reports and Quotation Information;
and
67 For a discussion of the Material Terms of the
Order required by Rule 613, see Adopting Release,
supra note 9, at 45750–52. The Commission notes
that the Participants include in the Plan a
requirement for the reporting of the OTC equity
security symbol as one of the ‘‘Material Terms of
the Order.’’ See CAT NMS Plan, supra note 3, at
Section 1.1.
68 In the CAT NMS Plan as attached hereto as
Exhibit A, the provisions of Section 6.3 enabling the
Operating Committee to require Participants to
record and report ‘‘other information’’ were
removed.
69 Id.
70 Id.
71 Id.
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other information or additional events as may
be determined by the Operating Committee 72
or otherwise prescribed in Appendix D,
Reporting and Linkage Requirements.
As contemplated in Appendix D, Data
Types and Sources, each Participant
will report Participant Data to the
Central Repository for consolidation and
storage in a format specified by the Plan
Processor, approved by the Operating
Committee and compliant with Rule
613. As further described in Appendix
D, Reporting and Linkage Requirements,
each Participant is required to record
the Participant Data contemporaneously
with the Reportable Event. In addition,
each Participant must report the
Participant Data to the Central
Repository by 8:00 a.m. Eastern Time on
the Trading Day following the day that
the Participant recorded the Participant
Data. Participants may voluntarily
report the Participant Data prior to the
8:00 a.m. Eastern Time deadline.
Each Participant that is a national
securities exchange is required to
comply with the above recording and
reporting requirements for each NMS
Security registered or listed for trading
on such exchange or admitted to
unlisted trading privileges on such
exchange. Each Participant that is a
national securities association is
required to comply with the above
recording and reporting requirements
for each Eligible Security for which
transaction reports are required to be
submitted to the association.
D. Data Reporting and Recording by
Industry Members
The Plan also sets forth the data
reporting and recording requirements
for Industry Members. Specifically,
subject to Section 6.4(c), and Section
6.4(d)(iii) with respect to Options
Market Makers, and consistent with
Appendix D, Reporting and Linkage
Requirements, each Participant, through
its Compliance Rule, will require its
Industry Members to record and
electronically report to the Central
Repository for each order and each
Reportable Event the information
referred to in Section 6.3(d), as
applicable (‘‘Recorded Industry Member
Data’’)—that is, Participant Data
discussed above. In addition, subject to
Section 6.4(c), and Section 6.4(d)(iii)
with respect to Options Market Makers,
and consistent with Appendix D,
Reporting and Linkage Requirements,
each Participant, through its
Compliance Rule, will require its
Industry Members to record and report
to the Central Repository the following
(‘‘Received Industry Member Data’’ and,
72 Id.
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collectively with the Recorded Industry
Member Data, ‘‘Industry Member Data’’):
(1) If the order is executed, in whole or
in part: (a) An Allocation Report that
includes the Firm Designated ID when
an execution is allocated (in whole or in
part); 73 (b) SRO-Assigned Market
Participant Identifier of the clearing
broker or prime broker, if applicable;
and (c) CAT-Order-ID of any contra-side
order(s); (2) if the trade is cancelled, a
cancelled trade indicator; and (3) for
original receipt or origination of an
order, information of sufficient detail to
identify the Customer.
With respect to the reporting
obligations of an Options Market Maker
with regard to its quotes in Listed
Options, Reportable Events required
pursuant to Section 6.3(d)(ii) and (iv)
will be reported to the Central
Repository by an Options Exchange in
lieu of the reporting of such information
by the Options Market Maker. Each
Participant that is an Options Exchange
will, through its Compliance Rule,
require its Industry Members that are
Options Market Makers to report to the
Options Exchange the time at which a
quote in a Listed Option is sent to the
Options Exchange (and, if applicable,
any subsequent quote modifications
and/or cancellation time when such
modification or cancellation is
originated by the Options Market
Maker). Such time information also will
be reported to the Central Repository by
the Options Exchange in lieu of
reporting by the Options Market
Maker.74
Each Participant will, through its
Compliance Rule, require its Industry
Members to record and report to the
Central Repository other information or
additional events as prescribed in
Appendix D, Reporting and Linkage
Requirements.
As contemplated in Appendix D, Data
Types and Sources, each Participant
will require its Industry Members to
report Industry Member Data to the
Central Repository for consolidation and
storage in a format(s) specified by the
Plan Processor, approved by the
Operating Committee and compliant
with Rule 613. As further described in
Appendix D, Reporting and Linkage
Requirements, each Participant will
require its Industry Members to record
Recorded Industry Member Data
contemporaneously with the applicable
73 In the Amendment to the CAT NMS Plan,
language in Section 6.4(d) that read, ‘‘that includes
the Firm Designated ID when an execution is
allocated (in whole or in part)’’ was removed
because the definition of ‘‘Allocation Report’’
includes this information.
74 See Section III.B.9, infra, and accompanying
requests for comment.
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Reportable Event. In addition,
consistent with Appendix D, Reporting
and Linkage Requirements, each
Participant will require its Industry
Members to report: (1) Recorded
Industry Member Data to the Central
Repository by 8:00 a.m. Eastern Time on
the Trading Day following the day the
Industry Member records such Recorded
Industry Member Data; and (2) Received
Industry Member Data to the Central
Repository by 8:00 a.m. Eastern Time on
the Trading Day following the day the
Industry Member receives such
Received Industry Member Data. Each
Participant will permit its Industry
Members to voluntarily report Industry
Member Data prior to the applicable
8:00 a.m. Eastern Time deadline.75
Each Participant that is a national
securities exchange must require its
Industry Members to report Industry
Member Data for each NMS Security
registered or listed for trading on such
exchange or admitted to unlisted trading
privileges on such exchange. Each
Participant that is a national securities
association must require its Industry
Members to report Industry Member
Data for each Eligible Security for which
transaction reports are required to be
submitted to the association.
Request for Comment
43. Sections 6.3(d) and 6.4(d) of the
CAT NMS Plan set forth the details that
Participants and Industry Members
must report to the Central Repository.
Do Commenters believe that these
details will be sufficient to allow the
Central Repository to link information
to accurately reflect the lifecycle of an
order? If not, what additional
information should be required to be
reported for this purpose?
44. Sections 6.3 and 6.4 of the CAT
NMS Plan require Participants and
Industry Members to record and report
to the Central Repository other
information or additional events as may
be prescribed in Appendix D, Reporting
and Linkage Requirements. Do
Commenters believe that the CAT NMS
Plan is sufficiently clear regarding the
‘‘other information or additional events
as may be prescribed in Appendix D’’
that may be required? Please explain.
Are these ‘‘other information or
additional events prescribed in
Appendix D’’ appropriate and
reasonable? Please explain.
45. The CAT NMS Plan does not
specify the format in which CAT
Reporters must submit data, and states
the Plan Processor will specify the
format. Do Commenters believe that the
75 See Section III.B.2, infra, and accompanying
requests for comment.
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CAT NMS Plan should specify a
particular format? If so, what format?
Please explain.
E. Regular Written Assessment
As described in Article VI, the
Participants are required to provide the
Commission with a written assessment
of the operation of the CAT that meets
the requirements set forth in Rule 613,
Appendix D, and the Plan at least every
two years or more frequently in
connection with any review of the Plan
Processor’s performance under the Plan
pursuant to Section 6.1(m).76 The Chief
Compliance Officer will oversee this
assessment and will provide the
Participants a reasonable time to review
and comment upon the written
assessment prior to its submission to the
SEC. In no case will the written
assessment be changed or amended in
response to a comment from a
Participant; rather any comment by a
Participant will be provided to the SEC
at the same time as the written
assessment.
Request for Comment
46. Do Commenters believe that the
details and requirements regarding the
regular written assessment of the
operation of the CAT provided in
Section 6.6 of the CAT NMS Plan are
appropriate and reasonable? Would
additional details or requirements for
this assessment be beneficial?
47. Do Commenters believe that the
Chief Compliance Officer should
oversee the regular written assessment,
as is required by Section 6.6? If not,
would another party be better suited to
this role?
F. Time Stamps and Synchronization of
Business Clocks
Section 6.8 of the Plan discusses time
stamps and the synchronization of
Business Clocks. Each Participant is
required to synchronize its Business
Clocks (other than such Business Clocks
used solely for Manual Order Events) at
a minimum to within 50 milliseconds of
the time maintained by the National
Institute of Standards and Technology,
consistent with industry standards. In
addition, each Participant must, through
its Compliance Rule, require its Industry
Members to: (1) Synchronize their
respective Business Clocks (other than
such Business Clocks used solely for
Manual Order Events) at a minimum to
within 50 milliseconds of the time
maintained by the National Institute of
Standards and Technology, and
maintain such a synchronization; (2)
76 The Commission notes that the applicable
provision in the Amendment is Section 6.1(n).
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certify periodically that their Business
Clocks meet the requirements of the
Compliance Rule; and (3) report to the
Plan Processor and the Participant any
violation of the Compliance Rule
pursuant to the thresholds set by the
Operating Committee. Furthermore,
each Participant is required to
synchronize its Business Clocks and,
through its Compliance Rule, require its
Industry Members to synchronize their
Business Clocks used solely for Manual
Order Events at a minimum to within
one second of the time maintained by
the National Institute of Standards and
Technology, consistent with industry
standards, and maintain such
synchronization. Each Participant will
require its Industry Members to certify
periodically (according to a schedule
defined by the Operating Committee)
that their Business Clocks used solely
for Manual Order Events meet the
requirements of the Compliance Rule.
The Compliance Rule of a Participant
shall require its Industry Members using
Business Clocks solely for Manual Order
Events to report to the Plan Processor
any violation of the Compliance Rule
pursuant to the thresholds set by the
Operating Committee. The Participants
stated their belief that pursuant to Rule
613(d)(1) that these synchronization
standards are consistent with current
industry standards.
Each Participant shall, and through its
Compliance Rule require its Industry
Members to, report information required
by Rule 613 and this Agreement to the
Central Repository in milliseconds. To
the extent that any Participant utilizes
time stamps in increments finer than the
minimum required by the Plan, the
Participant is required to make reports
to the Central Repository utilizing such
finer increment when reporting CAT
Data to the Central Repository so that all
Reportable Events reported to the
Central Repository could be adequately
sequenced. Each Participant will,
through its Compliance Rule: (1)
Require that, to the extent that its
Industry Members utilize time stamps in
increments finer than the minimum
required in the Plan, such Industry
Members will utilize such finer
increment when reporting CAT Data to
the Central Repository; and (2) provide
that a pattern or practice of reporting
events outside of the required clock
synchronization time period without
reasonable justification or exceptional
circumstances may be considered a
violation of SEC Rule 613 and the Plan.
Notwithstanding the preceding
sentences, each Participant and Industry
Member will be permitted to record and
report Manual Order Events to the
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Central Repository in increments up to
and including one second, provided that
Participants and Industry Members will
be required to record and report the
time when a Manual Order Event has
been captured electronically in an order
handling and execution system of such
Participant or Industry Member in
milliseconds. In conjunction with
Participants’ and other appropriate
Industry Member advisory groups, the
Chief Compliance Officer will annually
evaluate and make a recommendation to
the Operating Committee as to whether
industry standards have evolved such
that the required synchronization
should be shortened or the required
time stamp should be in finer
increments. The Operating Committee
will make determinations regarding the
need to revise the synchronization and
time stamp requirements.
Request for Comment 77
48. Do Commenters believe that the
CAT NMS Plan’s requirement that
Participants and Industry Members
synchronize their Business Clocks to
within 50 milliseconds of the time
maintained by the National Institute of
Standards and Technology (‘‘NIST’’) is
appropriate and reasonable? Do
Commenters agree with the Participants
that this clock offset tolerance
represents current industry standards?
Would a tighter clock offset tolerance be
feasible?
49. Do Commenters believe that the
CAT NMS Plan’s requirement that
Participants and Industry Members
report information to the Central
Repository in milliseconds is
appropriate and reasonable? Would a
more granular time stamp requirement
be feasible? Do Commenters agree with
the Participants that time stamp
granularity to the millisecond represents
current industry standards?
50. How should ‘‘industry standard,’’
for purposes of the CAT NMS Plan’s
clock synchronization and time
stamping requirements, be determined?
Do Commenters believe that ‘‘industry
standard’’ should be based on current
industry practice? If not, how should
‘‘industry standard’’ be defined? What
other factors, if any, should be
considered in defining such ‘‘industry
standards’’?
G. Technical Specifications
Section 6.9 of the Plan establishes the
requirements involving the Plan
Processor’s Technical Specifications.
The Plan Processor will publish
77 See Sections III.B.4 and III.B.5, infra, for
additional requests for comment on clock
synchronization and time stamp granularity.
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Technical Specifications that are at a
minimum consistent with Appendices C
and D, and updates thereto as needed,
providing detailed instructions
regarding the submission of CAT Data
by Participants and Industry Members
to the Plan Processor for entry into the
Central Repository. The Technical
Specifications will be made available on
a publicly available Web site to be
developed and maintained by the Plan
Processor. The initial Technical
Specifications and any Material
Amendments thereto will require the
approval of the Operating Committee by
Supermajority Vote.
The Technical Specifications will
include a detailed description of the
following: (1) The specifications for the
layout of files and records submitted to
the Central Repository; (2) the process
for the release of new data format
specification changes; (3) the process for
industry testing for any changes to data
format specifications; (4) the procedures
for obtaining feedback about and
submitting corrections to information
submitted to the Central Repository; (5)
each data element, including permitted
values, in any type of report submitted
to the Central Repository; (6) any error
messages generated by the Plan
Processor in the course of validating the
data; (7) the process for file submissions
(and re-submissions for corrected files);
(8) the storage and access requirements
for all files submitted; (9) metadata
requirements for all files submitted to
the CAT System; (10) any required
secure network connectivity; (11) data
security standards, which will, at a
minimum: (a) Satisfy all applicable
regulations regarding database security,
including provisions of Regulation
Systems Compliance and Integrity
under the Exchange Act (‘‘Reg SCI’’); (b)
to the extent not otherwise provided for
under the Plan (including Appendix C
thereto), set forth such provisions as
may be necessary or appropriate to
comply with Rule 613(e)(4); and (c)
comply with industry best practices;
and (12) any other items reasonably
deemed appropriate by the Plan
Processor and approved by the
Operating Committee.
Amendments to the Technical
Specifications may be made only in
accordance with Section 6.9(c). The
process for amending the Technical
Specifications varies depending on
whether the change is material. An
amendment will be deemed ‘‘material’’
if it would require a Participant or an
Industry Member to engage in
significant changes to the coding
necessary to submit information to the
Central Repository pursuant to the Plan,
or if it is required to safeguard the
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security or confidentiality of the CAT
Data. Except for Material Amendments
to the Technical Specifications, the Plan
Processor will have the sole discretion
to amend and publish interpretations
regarding the Technical Specifications;
however, all non-Material Amendments
made to the Technical Specifications
and all published interpretations will be
provided to the Operating Committee in
writing at least ten days before being
published. Such non-Material
Amendments and published
interpretations will be deemed
approved ten days following provision
to the Operating Committee unless two
unaffiliated Participants call for a vote
to be taken on the proposed amendment
or interpretation. If an amendment or
interpretation is called for a vote by two
or more unaffiliated Participants, the
proposed amendment must be approved
by Majority Vote of the Operating
Committee. Once a non-Material
Amendment has been approved or
deemed approved by the Operating
Committee, the Plan Processor will be
responsible for determining the specific
changes to the Central Repository and
providing technical documentation of
those changes, including an
implementation timeline.
Material Amendments to the
Technical Specifications require
approval of the Operating Committee by
Supermajority Vote. The Operating
Committee, by Supermajority Vote, may
amend the Technical Specifications on
its own motion.
Request for Comment
51. Do Commenters believe that the
list of items to be included in the
Technical Specifications, as set forth in
Section 6.9(b) of the CAT NMS Plan, is
appropriate and reasonable? Do
Commenters believe that detailed
descriptions of any of the listed items
should be included in the CAT NMS
Plan rather than in the Technical
Specifications? Do Commenters believe
that the list addresses all of the areas
that should be included in the
Technical Specifications? Are there
other aspects of the CAT that require
Technical Specifications? If so, please
identify and explain why the additional
Technical Specifications are needed.
52. Do Commenters believe the Plan
Processor should have sole discretion to
amend and publish interpretations
regarding the Technical Specifications,
except for Material Amendments? Why
or why not? What discretion or input, if
any, should the Operating Committee or
other parties, including the Advisory
Committee, have in amending and
publishing Technical Specifications
interpretations?
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53. How should Technical
Specifications be communicated to the
industry? Why?
54. What are the incentives for the
Operating Committee to review the Plan
Processor’s interpretation of Technical
Specifications and verify that the
interpretation is consistent with the
regulatory objectives of the Plan? What
are the best practices to ensure
sufficient review by the Operating
Committee? What provisions of the Plan
are in place to ensure that the Operating
Committee follows these practices?
What provisions, if any, could be
strengthened? Please explain and
provide supporting examples and
evidence, if available.
55. The CAT NMS Plan provides that
non-Material Amendments and
published interpretations will be
deemed approved ten days following
provision to the Operating Committee,
unless two unaffiliated Participants call
for a vote to be taken on the proposed
amendment or interpretation. Do
Commenters have any views on this
process? If so, please explain.
56. Do Commenters have any views
regarding the definition of Material
Amendments? Is the definition too
broad? Too narrow? Please explain. Do
Commenters have any views on who
should be responsible for determining
whether an amendment to the Technical
Specifications is a Material
Amendment? Do Commenters believe
the CAT NMS Plan clearly states who
shall have the responsibility to make the
determination? Do Commenters have
any views on how the determination
should be made? Please explain.
57. The CAT NMS Plan requires that
Material Amendments be approved by
the Operating Committee by
Supermajority Vote and allows the
Operating Committee to amend the
Technical Specifications on its own
motion by Supermajority Vote. Do
Commenters have any views on these
processes? If so, please explain.
58. The CAT NMS Plan provides that
the Plan Processor’s business continuity
planning must include a secondary site
for critical staff, capable of recovery and
restoration of services within 48 hours,
with the goal of next day recovery.
Should the CAT NMS Plan provide
additional details regarding ‘‘the goal of
next day recovery’’? Do Commenters
believe a 48-hour recovery and
restoration period is too long? Too
short? Please explain. Should the CAT
NMS Plan impose any other
requirements on the Plan Processor to
better assure the Plan Processor is able
to transition to the secondary site within
the specified time frames? If so, what?
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H. Surveillance
Surveillance issues are described in
Section 6.10. Using the tools provided
for in Appendix D, Functionality of the
CAT System, each Participant will
develop and implement a surveillance
system, or enhance existing surveillance
systems, reasonably designed to make
use of the consolidated information
contained in the Central Repository.
Unless otherwise ordered by the SEC,
within fourteen months after the
Effective Date, each Participant must
initially implement a new or enhanced
surveillance system(s) as required by
Rule 613 and Section 6.10(a) of the Plan.
Participants may, but are not required
to, coordinate surveillance efforts
through the use of regulatory services
agreements and agreements adopted
pursuant to Rule 17d–2 under the
Exchange Act.
Consistent with Appendix D,
Functionality of the CAT System, the
Plan Processor will provide Participants
and the SEC with access to all CAT Data
stored in the Central Repository.
Regulators will have access to processed
CAT Data through two different
methods: (1) An online targeted query
tool; and (2) user-defined direct queries
and bulk extracts. The online targeted
query tool will provide authorized users
with the ability to retrieve CAT Data via
an online query screen that includes the
ability to choose from a variety of predefined selection criteria. Targeted
queries must include date(s) and/or time
range(s), as well as one or more of a
variety of fields. The user-defined direct
queries and bulk extracts will provide
authorized users with the ability to
retrieve CAT Data via a query tool or
language that allows users to query all
available attributes and data sources.
Extraction of CAT Data will be
consistent with all permission rights
granted by the Plan Processor. All CAT
Data returned will be encrypted, and PII
data will be masked unless users have
permission to view the PII contained in
the CAT Data that has been requested.
The Plan Processor will implement an
automated mechanism to monitor direct
query usage. Such monitoring will
include automated alerts to notify the
Plan Processor of potential issues with
bottlenecks or excessively long queues
for queries or CAT Data extractions. The
Plan Processor will provide the
Operating Committee or its designee(s)
details as to how the monitoring will be
accomplished and the metrics that will
be used to trigger alerts.
The Plan Processor will reasonably
assist regulatory Staff (including those
of Participants) with creating queries.
Without limiting the manner in which
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regulatory Staff (including those of
Participants) may submit queries, the
Plan Processor will submit queries on
behalf of regulatory Staff (including
those of Participants) as reasonably
requested. The Plan Processor will staff
a CAT help desk, as described in
Appendix D, CAT Help Desk, to provide
technical expertise to assist regulatory
Staff (including those of Participants)
with questions about the content and
structure of the CAT Data.
Request for Comment
59. What features of the CAT NMS
Plan will facilitate the creation of
enhanced surveillance systems? Are the
minimum functional and technical
requirements for the Plan Processor set
forth in Appendix D consistent with the
creation of enhanced surveillance
systems? What, if any, additional
requirements or details should be
provided in the CAT NMS Plan to
ensure that the Plan facilitates the
creation of enhanced surveillance
systems?
60. Under the CAT NMS Plan, will
regulatory Staff have appropriate access
to the Central Repository? Specifically,
do Commenters believe that the online
targeted query tool and user-defined
direct queries and bulk extracts
described in Sections 8.1 and 8.2 of
Appendix D will enable regulatory Staff
to use the data in the Central Repository
to carry out their surveillance, analysis,
and other regulatory functions? If not,
why not and what should be added?
Does the CAT NMS Plan provide
sufficient detail to determine if
regulators will have appropriate access?
If not, what additional details should be
provided?
61. Do Commenters believe that the
provisions in Section 6.10(c)(ii) of the
CAT NMS Plan regarding permission
rights granted by the Plan Processor,
encryption, and masking of PII are
appropriate and reasonable? Would
these provisions affect the ability of
Commission or SRO regulatory Staff to
access and use the data in the Central
Repository? If so, what additional or
different provisions would mitigate the
impact on regulatory access to and use
of the data?
62. Do Commenters believe that the
query monitoring mechanism to be
implemented by the Plan Processor, as
described in Section 6.10(c)(iii) of the
CAT NMS Plan, is appropriately
designed to help enable regulators to
carry out their regulatory functions? If
not, what additional details or
functionality should be provided? Will
the provisions regarding Plan Processor
assistance of regulatory Staff and
submission of regulatory Staff queries
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(Sections 6.10(c)(iv)–(v) of the CAT
NMS Plan) and the CAT user support
functionality (as described in Section
10.2 of Appendix D) provide sufficient
assistance to regulators in carrying out
their regulatory functions?
I. Information Security Program
As set forth in Section 6.12, the Plan
Processor is required to develop and
maintain a comprehensive information
security program for the Central
Repository that contains, at a minimum,
the specific requirements detailed in
Appendix D, Data Security. The
information security program must be
approved and reviewed at least annually
by the Operating Committee.
Request for Comment
63. Do Commenters believe the CAT
NMS Plan should include a discussion
of policies and procedures applicable to
members of the Advisory Committee to
ensure the security and confidentiality
of the operation of the CAT (for
example, requiring members of the
Advisory Committee to enter into a nondisclosure agreement with the
Company)? If so, what additional
measures should be considered?
64. Do Commenters believe the CAT
NMS Plan should detail the policies and
procedures applicable to regulatory
users of the CAT that would ensure the
security and confidentiality of the CAT
Data and the operation of the CAT? If so,
what measures should be considered?
Do Commenters have any views on how
such policies and procedures should be
enforced? Please explain.
(6) Financial Matters
Articles VII and VIII of the Plan
address certain financial matters related
to the Company. In particular, the Plan
states that, subject to certain special
allocations provided for in Section 8.2,
any net profit or net loss will be
allocated among the Participants
equally. In addition, subject to Section
10.2, cash and property of the Company
will not be distributed to the
Participants unless the Operating
Committee approves by Supermajority
Vote a distribution after fully
considering the reason that such
distribution must or should be made to
the Participants, including the
circumstances contemplated under
Section 8.3, Section 8.6, and Section
9.3. To the extent a distribution is made,
all Participants will participate equally
in any such distribution except as
otherwise provided in Section 10.2.
Article XI addresses the funding of
the Company. On an annual basis the
Operating Committee will approve an
operating budget for the Company. The
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30631
budget will include the projected costs
of the Company, including the costs of
developing and operating the CAT
System for the upcoming year, and the
sources of all revenues to cover such
costs, as well as the funding of any
reserve that the Operating Committee
reasonably deems appropriate for
prudent operation of the Company.
Subject to certain funding principles
set forth in Article XI, the Operating
Committee will have discretion to
establish funding for the Company,
including: (1) Establishing fees that the
Participants will pay; and (2)
establishing fees for Industry Members
that will be implemented by
Participants. In establishing the funding
of the Company, the Operating
Committee will seek to: (1) Create
transparent, predictable revenue streams
for the Company that are aligned with
the anticipated costs to build, operate
and administer the CAT and the other
costs of the Company; (2) establish an
allocation of the Company’s related
costs among Participants and Industry
Members that is consistent with the
Exchange Act, taking into account the
timeline for implementation of the CAT
and distinctions in the securities trading
operations of Participants and Industry
Members and their relative impact upon
Company resources and operations; (3)
establish a tiered fee structure in which
the fees charged to: (a) CAT Reporters
that are Execution Venues, including
ATSs, are based upon the level of
market share, (b) Industry Members’
non-ATS activities are based upon
message traffic, and (c) the CAT
Reporters with the most CAT-related
activity (measured by market share and/
or message traffic, as applicable) are
generally comparable (where, for these
comparability purposes, the tiered fee
structure takes into consideration
affiliations between or among CAT
Reporters, whether Execution Venues
and/or Industry Members); (4) provide
for ease of billing and other
administrative functions; (5) avoid any
disincentives such as placing an
inappropriate burden on competition
and a reduction in market quality; and
(6) build financial stability to support
the Company as a going concern. The
Participants will file with the SEC under
Section 19(b) of the Exchange Act any
such fees on Industry Members that the
Operating Committee approves, and
such fees will be labeled as
‘‘Consolidated Audit Trail Funding
Fees.’’
To fund the development and
implementation of the CAT, the
Company will time the imposition and
collection of all fees on Participants and
Industry Members in a manner
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reasonably related to the timing when
the Company expects to incur such
development and implementation costs.
In determining fees for Participants and
Industry Members, the Operating
Committee shall take into account fees,
costs and expenses (including legal and
consulting fees and expenses) incurred
by the Participants on behalf of the
Company prior to the Effective Date in
connection with the creation and
implementation of the CAT, and such
fees, costs and expenses shall be fairly
and reasonably shared among the
Participants and Industry Members.
Consistent with Article XI, the
Operating Committee will adopt
policies, procedures, and practices
regarding the budget and budgeting
process, assignment of tiers, resolution
of disputes, billing and collection of
fees, and other related matters. As a part
of its regular review of fees for the CAT,
the Operating Committee will have the
right to change the tier assigned to any
particular Person pursuant to this
Article XI.78 Any such changes will be
effective upon reasonable notice to such
Person.
The Operating Committee will
establish fixed fees to be payable by
Execution Venues as follows. Each
Execution Venue that executes
transactions, or, in the case of a national
securities association, has trades
reported by its members to its trade
reporting facility or facilities for
reporting transactions effected
otherwise than on an exchange, in NMS
Stocks or OTC Equity Securities will
pay a fixed fee depending on the market
share of that Execution Venue in NMS
Stocks and OTC Equity Securities. The
Operating Committee will establish at
least two and no more than five tiers of
fixed fees, based on an Execution
Venue’s NMS Stocks and OTC Equity
Securities market share. For these
purposes, market share will be
calculated by share volume. In addition,
each Execution Venue that executes
transactions in Listed Options will pay
a fixed fee depending on the Listed
Options market share of that Execution
Venue. The Operating Committee will
establish at least two and no more than
five tiers of fixed fees, based on an
Execution Venue’s Listed Options
market share, with market share
calculated by contract volume. Changes
to the number of tiers after approval of
the Plan would require a Supermajority
78 The Commission notes that Section 11.1(b) of
the CAT NMS Plan states that the Participants
would file fees for Industry Members approved by
the Operating Committee with the Commission. The
Operating Committee may only change the tier to
which a Person is assigned in accordance with a fee
schedule filed with the Commission.
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Vote of the Operating Committee and
Commission approval under Section
19(b) of the Exchange Act, as would the
establishment of the initial fee schedule
and any changes to the fee schedule
within the tier structure.79
The Operating Committee also will
establish fixed fees payable by Industry
Members, based on the message traffic
generated by such Industry Member.
The Operating Committee will establish
at least five and no more than nine tiers
of fixed fees, based on message traffic.
For the avoidance of doubt, the fixed
fees payable by Industry Members
pursuant to this paragraph will, in
addition to any other applicable
message traffic, include message traffic
generated by: (1) An ATS that does not
execute orders that is sponsored by such
Industry Member; and (2) routing orders
to and from any ATS system sponsored
by such Industry Member.
Furthermore, the Operating
Committee may establish any other fees
ancillary to the operation of the CAT
that it reasonably determines
appropriate, including: Fees for the late
or inaccurate reporting of information to
the CAT; fees for correcting submitted
information; and fees based on access
and use of the CAT for regulatory and
oversight purposes (and not including
any reporting obligations).80
The Company will make publicly
available a schedule of effective fees and
charges adopted pursuant to the Plan as
in effect from time to time. Such
schedule will be developed after the
Plan Processor is selected. The
Operating Committee will review the fee
schedule on at least an annual basis and
will make any changes to such fee
schedule that it deems appropriate. The
Operating Committee is authorized to
review the fee schedule on a more
regular basis, but will not make any
changes on more than a semi-annual
basis unless, pursuant to a
Supermajority Vote, the Operating
Committee concludes that such change
79 The Commission notes that the Participants
could choose to submit the proposed fee schedule
to the Commission as individual SROs pursuant to
Rule 19b–4 or jointly as Participants to an NMS
plan pursuant to Rule 608 of Regulation NMS.
Because the proposed fee schedule would establish
fees, whether the Participants individually file it
pursuant to Section 19(b)(3)(A)(ii) of the Act, or
jointly file it pursuant to Rule 608(b)(3)(i) of
Regulation NMS, the proposed fee schedule could
take effect upon filing with the Commission. See 15
U.S.C. 78s(b)(3)(A)(ii); 17 CFR 242.608(b)(3)(i).
80 As it relates to any fees that the Operating
Committee may impose for access and use of the
CAT for regulatory and oversight purposes, the
Commission interprets the provisions in the Plan
relating to the collection of fees as applying only
to Participants and Industry Members, and thus the
Commission would not be subject to such fees.
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is necessary for the adequate funding of
the Company.
The Operating Committee will
establish a system for the collection of
fees authorized under the Plan. The
Operating Committee may include such
collection responsibility as a function of
the Plan Processor or another
administrator. Alternatively, the
Operating Committee may use the
facilities of a clearing agency registered
under Section 17A of the Exchange Act
to provide for the collection of such
fees.
Each Participant will require each
Industry Member to pay all applicable
fees authorized under Article XI within
thirty days after receipt of an invoice or
other notice indicating payment is due
(unless a longer payment period is
otherwise indicated). If an Industry
Member fails to pay any such fee when
due, such Industry Member will pay
interest on the outstanding balance from
such due date until such fee is paid at
a per annum rate equal to the lesser of:
(1) The Prime Rate plus 300 basis
points; or (2) the maximum rate
permitted by applicable law. Each
Participant will pay all applicable fees
authorized under Article XI as required
by Section 3.7(b).
Disputes with respect to fees the
Company charges Participants pursuant
to Article XI will be determined by the
Operating Committee or a
Subcommittee designated by the
Operating Committee. Decisions by the
Operating Committee on such matters
shall be binding on Participants,
without prejudice to the rights of any
Participant to seek redress from the SEC
pursuant to SEC Rule 608 or in any
other appropriate forum. The
Participants will adopt rules requiring
that disputes with respect to fees
charged to Industry Members pursuant
to Article XI be determined by the
Operating Committee or a
Subcommittee. Decisions by the
Operating Committee or Subcommittee
on such matters will be binding on
Industry Members, without prejudice to
the rights of any Industry Member to
seek redress from the SEC pursuant to
SEC Rule 608 or in any other
appropriate forum.
Request for Comment
65. Do Commenters believe that the
provisions in the CAT NMS Plan
regarding the funding and budget of the
Company to operate the CAT (as
described in Article XI) are appropriate
and reasonable? Specifically, do
Commenters believe that the tiered
funding model described in Section
11.2(c) of the CAT NMS Plan and the
fixed-tier funding model described in
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Section 11.3 of the CAT NMS Plan are
appropriate and reasonable?
66. What are Commenters’ views
regarding the methodology in the CAT
NMS Plan to establish and impose fees
on Participants and the industry? Do
Commenters believe that the fee system
described in Sections 11.2 and 11.3 of
the CAT NMS Plan will result in an
equitable and fair allocation of CATrelated fees between Participants, other
types of Execution Venues, and Industry
Members? Will the fee system in the
Plan, including consideration of the
distinctions in securities trading
operations, impose higher costs upon or
result in any competitive advantage to
some types of Execution Venues or
Industry Members as opposed to others?
If yes, are those differences in fees
appropriate and reasonable? Will this
proposed fee system create incentives to
execute orders in certain Execution
Venues over others? What alternative
fee systems, if any, would be more
appropriate?
67. Do Commenters believe that
assessing fees based on market share
and message traffic, as described in
Sections 11.2 and 11.3 of the CAT NMS
Plan, is appropriate and reasonable?
Specifically, is it appropriate and
reasonable to base Industry Member fees
on message traffic and Execution Venue
fees on market share? Will this method
of calculating fees impose higher costs
upon or result in any competitive
advantage to some types of Execution
Venues or Industry Members as opposed
to others? What fee calculation method,
if any, would be more appropriate?
68. Are the tier levels appropriate and
reasonable? Why or why not? Is the
number of tiers contemplated (2–5 for
Execution Venues and 5–9 for Industry
Members) appropriate and reasonable?
Why or why not?
69. Do Commenters believe that
giving the right to the Operating
Committee to change the fee tier
assigned to any particular Person as set
forth in Section 11.1(d) of the CAT NMS
Plan is appropriate and reasonable? If
not, why not? What alternative process,
if any, would be more appropriate?
70. Do Commenters believe that
giving the right to the Operating
Committee to change the fee tier
assigned to any particular Person as set
forth in Section 11.1(d) of the CAT NMS
Plan conflicts with the tier structure of
fees as set forth in Section 11.2(c) of the
CAT NMS Plan, which will be based on
the market share for Execution Venues,
and message traffic for Industry
Members? Why or why not?
71. Section 11.1(d) of the CAT NMS
Plan also provides that any change to a
Person’s fee tier will be effective upon
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reasonable notice to such Person. Do
Commenters believe that a notice to any
such Person is necessary, given that the
CAT NMS Plan provides that a Person
will change fee tiers based on market
share or message traffic, as applicable?
Why or why not? What should
constitute reasonable notice?
72. Do Commenters believe the
Operating Committee’s ability to
establish additional fees for ‘‘access and
use of the CAT for regulatory and
oversight purposes’’ (as described in
Section 11.3(c) of the CAT NMS Plan)
is appropriate and reasonable? Would
this provision affect the ability of
regulatory Staff to access and use the
data in the Central Repository? If so,
what additional or different provisions
would mitigate the impact upon
regulatory access to and use of the data?
73. Do Commenters believe that the
funding provisions in Section 11.1 of
the CAT NMS Plan provide sufficient
authority and guidance to the Operating
Committee to establish and maintain
such reserves as are reasonably deemed
appropriate by the Operating Committee
for the prudent operation of the
Company? If not, why not?
74. Do Commenters believe that the
provisions in the CAT NMS Plan
regarding the collection of fees (Section
11.4 of the CAT NMS Plan) and fee
disputes (Section 11.5 of the CAT NMS
Plan) are appropriate and reasonable? If
not, what alternatives do Commenters
suggest?
75. Do Commenters believe the CAT
NMS Plan provides sufficient detail
regarding the proposed cost allocation
among the Plan Processor and regulators
with respect to hardware and software
costs that may be required in order to
use CAT Data? If not, what are the risks
of not providing sufficient detail and
what requirements should be set forth in
the CAT NMS Plan? For example, since
there will only be one Plan Processor,
what are the risks of significant costs for
regulators to the extent regulators will
need to contract with the Plan Processor
for additional computing resources,
storage costs and data transfer costs?
76. Should the Operating Committee
be required to consult the Advisory
Committee when setting fees and
performing regular reviews of fees?
Please explain.
(7) Amendments
Section 12.3 of the CAT NMS Plan,
which governs amendments to the Plan,
states that, except with respect to the
addition of new Participants (Section
3.3), the transfer of Company Interest
(Section 3.4), the termination of a
Participant’s participation in the Plan
(Section 3.7), amendments to the
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Selection Plan (Section 5.3 [sic]) and
special allocations (Section 8.2), any
change to the Plan requires a written
amendment authorized by the
affirmative vote of not less than twothirds of all of the Participants, or with
respect to Section 3.8 by the affirmative
vote of all the Participants. Such
proposed amendment must be approved
by the Commission pursuant to Rule
608 or otherwise becomes effective
under Rule 608. Notwithstanding the
foregoing, to the extent that the SEC
grants exemptive relief applicable to any
provision of this Agreement,
Participants and Industry Members will
be entitled to comply with such
provision pursuant to the terms of the
exemptive relief so granted at the time
such relief is granted irrespective of
whether the LLC Agreement has been
amended.
(8) Compliance Rule Applicable to
Industry Members
Under Article III, each Participant
agrees to comply with and enforce
compliance by its Industry Members
with the provisions of Rule 613 and the
Plan, as applicable, to the Participant
and its Industry Members. Accordingly,
the Participants will endeavor to
promulgate consistent rules (after taking
into account circumstances and
considerations that may impact
Participants differently) requiring
compliance by their respective Industry
Members with the provisions of Rule
613 and the Plan.
(9) Plan Appendices
The Plan includes three appendices.81
Appendix A provides the Consolidated
Audit Trail National Market System
Plan Request for Proposal, as issued
February 26, 2013 and subsequently
updated. In addition, Rule 613(a)(1)
requires that the Plan discuss twelve
considerations that explain the choices
made by the Participants to meet the
requirements specified in Rule 613 for
the CAT. In accordance with this
requirement, the Participants have
addressed each of the twelve
considerations in Appendix C. Finally,
Appendix D describes the technical
requirements for the Plan Processor.
b. Governing or Constituent Documents
Rule 608 requires copies of all
governing or constituent documents
relating to any person (other than a selfregulatory organization) authorized to
implement or administer such plan on
behalf of its sponsors. The Participants
will submit to the Commission such
81 Appendix
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documents related to the Plan Processor
when the Plan Processor is selected.
c. Development and Implementation
Phases
The terms of the Plan will be effective
immediately upon approval of the Plan
by the Commission (the ‘‘Effective
Date’’). The Plan sets forth each of the
significant phases of development and
implementation contemplated by the
Plan, together with the projected date of
completion of each phase. These
include the following, each of which is
subject to orders otherwise by the
Commission:
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Within two months after the Effective Date,
the Participants will jointly select the
winning Shortlisted Bid and the Plan
Processor pursuant to the process set forth in
Article V. Following the selection of the
Initial Plan Processor, the Participants will
file with the Commission a statement
identifying the Plan Processor and including
the information required by Rule 608;
Within four months after the Effective
Date, each Participant will, and, through its
Compliance Rule, will require its Industry
Members to, synchronize its or their Business
Clocks and certify to the Chief Compliance
Officer (in the case of Participants) or the
applicable Participant (in the case of Industry
Members) that it has met this requirement;
Within six months after the Effective Date,
the Participants must jointly provide to the
SEC a document outlining how the
Participants could incorporate into the CAT
information with respect to equity securities
that are not NMS Securities,82 including
Primary Market Transactions in securities
that are not NMS Securities, which document
will include details for each order and
Reportable Event that may be required to be
provided, which market participants may be
required to provide the data, the
implementation timeline, and a cost estimate;
Within one year after the Effective Date,
each Participant must report Participant Data
to the Central Repository;
Within fourteen months after the Effective
Date, each Participant must implement a new
or enhanced surveillance system(s);
Within two years after the Effective Date,
each Participant must, through its
Compliance Rule, require its Industry
Members (other than Small Industry
Members) to report Industry Member Data to
the Central Repository; and
Within three years after the Effective Date,
each Participant must, through its
Compliance Rule, require its Small Industry
Members to provide Industry Member Data to
the Central Repository.
In addition, Industry Members and
Participants will be required to
participate in industry testing with the
Central Repository on a schedule to be
82 In the Amendment to the CAT NMS Plan,
Section 6.11 excludes OTC Equity Securities from
the document the Participants would submit to the
Commission, since the Participants plan to include
OTC Equity Securities as well as NMS Securities in
the initial phase in of CAT.
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determined by the Operating
Committee. Furthermore, Appendix C,
A Plan to Eliminate Existing Rules and
Systems (SEC Rule 613(a)(1)(ix)), and
Appendix D, Data Types and Sources,
set forth additional implementation
details concerning the elimination of
rules and systems.
The Chief Compliance Officer will
appropriately document objective
milestones to assess progress toward the
implementation of this Agreement.
finalized document detailing methods of
access to the Central Repository one (1)
month before Participants are required
to begin reporting. Do Commenters
believe this allows sufficient time for
Participants to build applications to
access the Central Repository when CAT
goes live? If not, please explain and
describe any related modifications to
this Section.
Request for Comment
77. Under the CAT NMS Plan, the
SROs’ rules would require that their
members become CAT Reporters. What
mechanism should there be to ensure
that all CAT Reporters would
participate in all pre-implementation
activities, including connectivity and
testing? Please explain.
78. Do Commenters believe that the
CAT NMS Plan allows for sufficient preimplementation testing support for CAT
Reporters, including providing CAT
Reporter feedback and accuracy reports?
If not, what requirements should be
added to the CAT NMS Plan?
79. Do Commenters believe that full
implementation of the CAT would allow
for the retirement of OATS? Please
explain. Are any identified gaps with
respect to OATS’ data elements not
addressed in the CAT NMS Plan? If yes,
what are they?
80. The CAT NMS Plan provides for
a single Plan Processor. As such, do
Commenters believe there are adequate
and appropriate incentives for
continuous CAT innovation and cost
reductions by the Plan Processor and
the Participants? If not, explain and
describe what additional incentives may
be implemented in the CAT NMS Plan
or related documentation. What
competition might be encouraged to
lead to further innovations and reduced
costs for future CAT technologies?
81. Do Commenters believe that the
proposed CAT NMS Plan sets forth
acceptable milestones to measure the
progress of developing and
implementing the CAT? Why or why
not?
82. The CAT NMS Plan sets forth
significant phases of development and
implementation and a projected
timetable for each stage. Are these
projections appropriate and reasonable?
If not, why not, and what is a more
appropriate and reasonable timeline?
83. The CAT NMS Plan’s ‘‘Access to
the Central Repository for Regulators’’
Section 83 sets forth a milestone
requiring the publication of the
The Plan states that it does not
impose any burden on competition that
is not necessary or appropriate in
furtherance of the purposes of the
Exchange Act. Section 8 of Appendix C,
An Analysis of the Impact on
Competition, Efficiency and Capital
Formation, discusses the competition
impact of the Plan in detail.85 In
addition, the Participants do not believe
that the Plan introduces terms that are
unreasonably discriminatory for the
purposes of Section 11A(c)(1)(D) of the
Exchange Act.86 As noted in Section
III.A.3.a, supra, the Participants are
aware that potential conflicts of interest
are raised because a Participant, or an
Affiliate of a Participant, may be both
submitting a Bid (or participating in a
Bid (e.g., as a subcontractor)) and
participating in the evaluation of Bids to
select the Plan Processor. As described
in Section III.A.3.a, the Selection Plan
previously approved by the Commission
and incorporated in the Plan includes
multiple provisions designed to mitigate
the potential impact of these conflicts
by imposing restrictions on the Voting
Senior Officers and by requiring the
recusal of Bidding Participants for
83 See CAT NMS Plan, supra note 3, at Appendix
C, Section C.10(d).
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d. Analysis of Impact on Competition 84
84 The Commission reiterates that Section III.A of
this Notice, including this subsection III.A.3.d, is
substantially as prepared and submitted by the
SROs to the Commission. The Commission’s
Economic Analysis in respect of the Plan’s impact
on competition is set forth in Section IV of this
Notice.
85 The Commission notes that as required under
Rule 613(a)(1)(viii), the SROs set forth in the CAT
NMS Plan a discussion of their analysis of the
impact on competition, efficiency and capital
formation of creating, implementing, and
maintaining the CAT NMS Plan. See 17 CFR
242.613(a)(1)(viii) and CAT NMS Plan, supra note
3, at Appendix C, Section B.8. The SROs’ analysis
in Section B.8 of Appendix C to the CAT NMS Plan,
which is more detailed than as set forth in this
Section III of this Notice, is organized as follows:
(a) Impact on Competition—both for Participants
and Broker-Dealers, (b) Impact on Efficiency, (c)
Impact on Capital Formation, and (d) Impacts of the
CAT NMS Plan Governance on Efficiency,
Competition, and Capital Formation. See CAT NMS
Plan, supra note 3, at Appendix C, Section B.8. The
Commission’s analysis in respect of the Plan’s
impact on competition, efficiency and capital
formation includes discussions of the SROs’
analysis regarding the same and is in Section IV of
this Notice. See Section IV.G, infra.
86 15 U.S.C. 78k–1(c)(1)(D).
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certain votes taken by the Selection
Committee.
e. Written Understanding or Agreements
Relating to Interpretation of, or
Participation in, the Plan
The Participants have no written
understandings or agreements relating
to interpretations of, or participation in,
the Plan other than those set forth in the
Plan itself. For example, Section
4.3(a)(iii) states that the Operating
Committee only may authorize the
interpretation of the Plan by Majority
Vote, Section 6.9(c)(i) addresses
interpretations of the Technical
Specifications, and Section 8.2
addresses the interpretation of Sections
8.1 and 8.2. In addition, Section 3.3 sets
forth how any entity registered as a
national securities exchange or national
securities association under the
Exchange Act may become a Participant.
mstockstill on DSK3G9T082PROD with NOTICES2
f. Dispute Resolution
The Plan does not include a general
provision addressing the method by
which disputes arising in connection
with the operation of the Plan will be
resolved. The Plan does, however,
provide the means for resolving
disputes regarding the Participation Fee.
Specifically, Article III states that, in the
event that the Company and a
prospective Participant do not agree on
the amount of the Participation Fee,
such amount will be subject to the
review by the SEC pursuant to Section
11A(b)(5) of the Exchange Act.87 In
addition, the Plan addresses disputes
with respect to fees charged to
Participants and Industry Members
pursuant to Article XI. Specifically,
such disputes will be determined by the
Operating Committee or a
Subcommittee designated by the
Operating Committee. Decisions by the
Operating Committee or such
designated Subcommittee on such
matters will be binding on Participants
and Industry Members, without
prejudice to the rights of any Participant
or Industry Member to seek redress from
the SEC pursuant to Rule 608 or in any
other appropriate forum.
*
*
*
*
*
This marks the end of the statement
of purpose as set forth above and as
substantially prepared and submitted by
the SROs.
B. Summary of Additional CAT NMS
Plan Provisions and Request for
Comment
The Commission requests and
encourages any interested person to
comment generally on the proposed
87 15
U.S.C. 78k–1(b)(5).
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CAT NMS Plan. In addition to the
specific requests for comment
throughout the release, the Commission
requests general comment on all aspects
of the proposed CAT NMS Plan. The
Commission encourages Commenters to
provide information regarding the
advantages and disadvantages of each
aspect of the proposed CAT NMS Plan.
The Commission invites Commenters to
provide views and data as to the costs
and benefits associated with the
proposed CAT NMS Plan. The
Commission also seeks comment
regarding other matters that may have
an effect on the proposed CAT NMS
Plan.
1. Reporting Procedures
The CAT NMS Plan requires CAT
Reporters to comply with specific
reporting procedures when reporting
CAT Data to the Central Repository.88
Specifically, CAT Reporters must format
CAT Data to comply with the format
specifications approved by the
Operating Committee.89 CAT Reporters
must record CAT Data
contemporaneously with the applicable
Reportable Event 90 and report such data
to the Central Repository by 8:00 a.m.
Eastern Time on the next Trading Day.91
The obligation to report CAT Data
applies to ‘‘each NMS Security
registered or listed for trading on [a
national securities] exchange or
admitted to unlisted trading privileges
on such exchange,’’ and ‘‘each Eligible
Security for which transaction reports
are required to be submitted to such
[national securities] association.’’ 92
Further, the Participants are required to
adopt Compliance Rules 93 that require
88 See CAT NMS Plan, supra note 3, at Sections
6.3–6.4; Appendix D, at Section 2.1.
89 See id. at Sections 6.3(a), 6.4(a). The CAT NMS
Plan also requires that the Operating Committeeapproved format must be a format specified by the
Plan Processor and Rule 613 compliant.
90 See id. at Section 6.3(b)(i) and Section 6.4(b)(i).
91 See id. at Section 6.3(b)(ii), Section 6.4(b)(ii),
and Appendix C, Section A.1(a)(ii). Participants
may voluntarily report CAT Data prior to the 8:00
a.m. Eastern Time deadline. Id. The CAT NMS Plan
defines ‘‘Trading Day’’ as the date ‘‘as is determined
by the Operating Committee.’’ The CAT NMS Plan
also provides that ‘‘the Operating Committee may
establish different Trading Days for NMS Stocks (as
defined in SEC Rule 600(b)(47), Listed Options,
OTC Equity Securities, and any other securities that
are included as Eligible Securities from time to
time.’’ Id. at Section 1.1.
92 See id. at Section 6.3(c)(i)–(ii) and Section
6.4(c)(i)–(ii).
93 The CAT NMS Plan defines the ‘‘Compliance
Rule’’ to mean ‘‘with respect to a Participant, the
rules promulgated by such Participant as
contemplated by Section 3.11.’’ Id. at Section 1.1.
Section 3.11 of the CAT NMS Plan provides that
‘‘each Participant shall comply with and enforce
compliance, as required by SEC Rule 608(c), by its
Industry Members with the provisions of SEC Rule
613 and of [the LLC Agreement], as applicable, to
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30635
Industry Members, subject to their SRO
jurisdiction, to report CAT Data.94
The CAT NMS Plan requires specific
data elements of CAT Data that must be
recorded and reported to the Central
Repository upon: (i) ‘‘original receipt or
origination of an order,’’ 95 (ii) ‘‘routing
of an order,’’ 96 and (iii) ‘‘receipt of an
order that has been routed.’’ 97
Additionally, the CAT NMS Plan
requires that a CAT Reporter must
record and report data related to an
‘‘order [that] is modified or
cancelled,’’ 98 and an ‘‘order [that] is
executed, in whole or in part,’’ 99 as well
the Participant and its Industry Members. The
Participants shall endeavor to promulgate
consistent rules (after taking into account
circumstances and considerations that may impact
Participants differently) requiring compliance by
their respective Industry Members with the
provisions of SEC Rule 613 and [the LLC
Agreement].’’ Id. at Section 3.11.
94 See id. at Section 6.4(c)(i)–(ii).
95 For ‘‘original receipt or origination of an
order,’’ the CAT NMS Plan specifies the following
data elements: (i) Firm Designated ID(s) for each
Customer; (ii) CAT-Order-ID; (iii) SRO-Assigned
Market Participant Identifier of the Industry
Member receiving or originating the order; (iv) date
of order receipt or origination; (v) time of order
receipt or origination (using time stamps pursuant
to Section 6.8 of the CAT NMS Plan); and (vi)
Material Terms of the Order. Id. at Section 6.3(d)(i).
96 For ‘‘routing of an order,’’ the CAT NMS Plan
specifies the following data elements: (i) CATOrder-ID; (ii) date on which the order is routed; (iii)
time at which the order is routed (using time
stamps pursuant to Section 6.8 of the CAT NMS
Plan); (iv) SRO-Assigned Market Participant
Identifier of the Industry Member or Participant
routing the order; (v) SRO-Assigned Market
Participant Identifier of the Industry Member or
Participant to which the order is being routed; (vi)
if routed internally at the Industry Member, the
identity and nature of the department or desk to
which the order is routed; and (vii) Material Terms
of the Order. Id. at Section 6.3(d)(ii).
97 For ‘‘receipt of an order that has been routed,’’
the CAT NMS Plan specifies the following data
elements: (i) CAT-Order-ID; (ii) date on which the
order is received; (iii) time at which the order is
received (using time stamps pursuant to Section
6.8); (iv) SRO-Assigned Market Participant
Identifier of the Industry Member or Participant
receiving the order; (v) SRO-Assigned Market
Participant Identifier of the Industry Member or
Participant routing the order; and (vi) Material
Terms of the Order. Id. at Section 6.3(d)(iii).
98 For an ‘‘order [that] is modified or cancelled,’’
the CAT NMS Plan specifies the following data
elements: (i) CAT-Order-ID; (ii) date the
modification or cancellation is received or
originated; (iii) time at which the modification or
cancellation is received or originated (using time
stamps pursuant to Section 6.8 of the CAT NMS
Plan); (iv) price and remaining size of the order, if
modified; (v) other changes in the Material Terms
of the Order, if modified; and (vi) whether the
modification or cancellation instruction was given
by the Customer or was initiated by the Industry
Member or Participant. Id. at Section 6.3(d)(iv).
99 For an ‘‘order [that] is executed, in whole or in
part,’’ the CAT NMS Plan specifies the following
data elements: (i) CAT-Order-ID; (ii) date of
execution; (iii) time of execution (using time stamps
pursuant to Section 6.8 of the CAT NMS Plan); (iv)
execution capacity (principal, agency or riskless
principal); (v) execution price and size; (vi) SRO-
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as ‘‘other information or additional
events as may be prescribed in
Appendix D, Reporting and Linkage
Requirements.’’ 100 The CAT NMS Plan
also requires Industry Member CAT
Reporters to report additional data
elements for (i) an ‘‘order [that] is
executed, in whole or in part,’’ 101 (ii) a
‘‘trade [that] is cancelled,’’ 102 or (iii)
‘‘original receipt or origination of an
order.’’ 103 Further, each Participant
shall, through Compliance Rules,
require Industry Members to record and
report to the Central Repository
information or additional events as may
be prescribed to accurately reflect the
complete lifecycle of each Reportable
Event.104
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Request for Comment
84. Do Commenters believe that the
data recording, reporting, and
formatting procedures described in the
CAT NMS Plan are appropriate and
reasonable? Would providing additional
details or requirements on these
procedures enhance the quality of CAT
Data reported to the Central Repository
or the efficiency and cost-effectiveness
of the CAT?
85. Do Commenters believe that the
CAT NMS Plan, including Appendix D
thereto, requires sufficient outreach,
support, training, guidance and/or
documentation to ensure that CAT
Reporters are able to make data
transmissions to the Central Repository
that are complete and timely? If not,
please explain. Describe what, if any,
further requirements may be needed.
86. Do Commenters believe that the
CAT NMS Plan should have a formal
communications plan, other than the
public Web site, to provide CAT
Reporters the information they would
need in order to set-up or configure
Assigned Market Participant Identifier of the
Participant or Industry Member executing the order;
and (vii) whether the execution was reported
pursuant to an effective transaction reporting plan
or the Plan for Reporting of Consolidated Options
Last Sale Reports and Quotation Information. Id. at
Section 6.3(d)(v).
100 See id. at Section 6.3(d)(vi).
101 For an ‘‘order [that] is executed, in whole or
in part,’’ the CAT NMS Plan specifies the following
additional data elements: (i) An Allocation Report;
(ii) SRO-Assigned Market Participant Identifier of
the clearing broker or prime broker, if applicable;
and (iii) CAT-Order-ID of any contra-side order(s).
Id. at Section 6.4(d)(ii)(A).
102 For a ‘‘trade [that] is cancelled,’’ the CAT NMS
Plan specifies the following additional data
element: A cancelled trade indicator. Id. at Section
6.4(d)(ii)(B).
103 For ‘‘original receipt or origination of an
order,’’ the CAT NMS Plan specifies the following
additional data element(s): The Firm Designated ID,
Customer Account Information, and Customer
Identifying Information for the relevant Customer.
Id. at Section 6.4(d)(ii)(C).
104 Id. at Appendix D, Section 3.
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their systems to record and report CAT
Data to the Central Repository? If so,
how, when, and by whom should such
information be disseminated to CAT
Reporters?
87. Do Commenters believe the Plan
should require a specific method for
entering CAT Data upon each CAT
Reportable Event or upon updates and
corrections to CAT Reportable Events? If
so, what method? Please explain.
88. Do Commenters believe that the
CAT NMS Plan should include a
requirement that the Participants and
the Plan Processor set forth a more
detailed schedule, with milestones, for
CAT Reporters to adhere to in settingup or configuring their systems to
become CAT Data reporting compliant?
If so, please explain and describe what
details and milestones should be
included in the schedule (e.g.,
publication of Technical Specifications
and announcements of CAT Reporterfacing technology changes).
2. Timeliness of Data Reporting
Section 6.3(b)(ii) of the CAT NMS
Plan requires each Participant to report
Participant Data to the Central
Repository by 8:00 a.m. Eastern Time on
the Trading Day following the day the
Participant records such data.105
Additionally, a Participant may
voluntarily report such data prior to this
deadline.106 Section 6.4(b)(ii) states that
each Participant shall, through its
Compliance Rule, require its Industry
Members to report Recorded Industry
Member Data to the Central Repository
by 8:00 a.m. Eastern Time on the
Trading Day following the day the
Industry member records such data, and
Received Industry Member Data to the
Central Repository by 8:00 a.m. Eastern
Time on the Trading Day following the
day the Industry Member receives such
data.107 Section 6.4(b)(ii) of the CAT
NMS Plan also states that each
Participant shall, through its
Compliance Rule, permit its Industry
Members to voluntarily report such data
prior to the applicable 8:00 a.m. Eastern
Time deadline.108
Request for Comment
89. The CAT NMS Plan requires that
all Participants report Participant Data
to the Central Repository by 8:00 a.m.
Eastern Time on the Trading Day
following the day the Participant
records such data,109 and that Industry
105 See CAT NMS Plan, supra note 3, at Section
6.3(b)(ii); see also id. at Appendix C, Section
A.1(a)(ii); Appendix D, Sections 3.1, 6.1.
106 Id. at Section 6.3(b)(ii).
107 Id. at Section 6.4(b)(ii).
108 Id.
109 Id. at Section 6.3(b)(ii).
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Members report Recorded Industry
Member Data to the Central Repository
by 8:00 a.m. Eastern Time on the
Trading Day following the day the
Industry Member records such data 110
and Received Industry Member Data to
the Central Repository by 8:00 a.m.
Eastern Time on the Trading Day
following the day the Industry Member
receives such data.111 Do Commenters
believe that the CAT NMS Plan provides
sufficient detail and information to
determine whether the applicable 8:00
a.m. Eastern Time data reporting
deadlines provided in the CAT NMS
Plan are achievable? If not, why not?
90. Do Commenters believe that CAT
Reporters will submit their reports at or
about the same time? If all or most of the
CAT Reporters would report at or just
before 8:00 a.m. Eastern Time, what, if
any, impact would there be on the
necessary CAT infrastructure? Would
this place an excessive burden on the
Plan Processor? Do Commenters believe
this would increase operational risk
and/or increase costs? If so, please
explain. Are there alternative reporting
mechanisms that could reduce such
risks?
91. The CAT NMS Plan provides that
the Plan Processor must be able to
handle two times the historical peak
data to ensure that, if a significant
number of CAT Reporters choose to
submit data at or around the same time,
the Plan Processor could handle the
influx of data.112 Do Commenters
believe that the SROs’ estimate of
capacity is sufficient? If not, why not
and what capacity should be required?
92. Do Commenters believe that the
CAT NMS Plan allocates, or requires the
Plan Processor to have, sufficient
resources to work with the
approximately 1,800 CAT Reporters that
would, under the CAT NMS Plan, have
to establish secure connections over
which CAT Data will flow from their
systems to the Central Repository? Do
Commenters believe that the Plan
Processor could implement the CAT
Reporters’ Central Repository
connections nearly simultaneously
without compromising testing periods
and implementation timelines?
3. Uniform Format
The CAT NMS Plan does not mandate
the format in which data must be
reported to the Central Repository.113
Appendix D states that the Plan
110 Id.
at Section 6.4(b)(ii).
111 Id.
112 Id. at Appendix C, Section A.1(a)(ii); see also
id. at Section IV.H.2.g., infra.
113 See CAT NMS Plan, supra note 3, at Appendix
C, Section D.12(f); see also id. at Appendix C,
Section A.1(a).
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Processor will determine the electronic
format in which data must be reported,
and that the format will be described in
the Technical Specifications.114
Appendix C specifies that CAT
Reporters could be required to report
data either in a uniform electronic
format, or in a manner that would allow
the Central Repository to convert the
data to a uniform electronic format, for
consolidation and storage.115 Similarly,
Sections 6.3(a) and 6.4(a) of the CAT
NMS Plan require that CAT Reporters
report data to the Central Repository in
a format or formats specified by the Plan
Processor, approved by the Operating
Committee, and compliant with Rule
613.116
The CAT NMS Plan requires that data
reported to the Central Repository be
stored in an electronic standard
format.117 Specifically, Section 6.5(b)(i)
of the CAT NMS Plan requires the
Central Repository to retain the
information collected pursuant to Rule
613(c)(7) and (e)(7) in a convenient and
usable standard electronic data format
that is directly available and searchable
electronically without any manual
intervention by the Plan Processor for a
period of not less than six (6) years.118
Such data must be linked when it is
made available to the Participant’s
regulatory Staff and the Commission.119
Request for Comment
93. The CAT NMS Plan provides that
CAT Reporters could be required to
report data either in a uniform
electronic format, or in a manner that
would allow the Central Repository to
convert the data to a uniform electronic
format, for consolidation and storage.
Do Commenters believe that if data is
reported to the Central Repository in a
non-uniform format, the proposed CAT
NMS Plan includes sufficient
requirements or details to determine
whether the Central Repository could
reliably and accurately convert such
data to a uniform electronic format, for
consolidation and storage, without
affecting the quality of the data? If not,
what additional requirements or details
should be provided in the CAT NMS
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114 Id.
at Appendix D, Section 2.1. Appendix D
states that more than one format may be allowed to
support the various market participants that would
report information to the Central Repository. Id.; see
also id. at Section 6.9.
115 Id. at Appendix C, Section A.1(b).
116 Id. at Section 6.3(a) and Section 6.4(a).
117 Pursuant to the Plan, for data consolidation
and storage, as noted above, such data must be
reported in a uniform electronic format or in a
manner that would allow the Central Repository to
convert the data to a uniform electronic format. Id.
at Appendix C, Section A.1(b).
118 Id. at Section 6.5(b)(i).
119 Id.
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Plan prior to the Commission’s approval
of such plan?
94. If Commenters believe that it is
not necessary to provide additional
requirements or details, if any, in the
CAT NMS Plan, what additional
requirements or details should be
included in the Technical Specifications
to determine whether the Central
Repository could reliably and accurately
convert such data to a uniform
electronic format, for consolidation and
storage?
95. Do Commenters believe the CAT
NMS Plan’s lack of a mandated uniform
format in which data must be reported
to the Central Repository would affect
the accuracy of CAT Data collected and
maintained under the CAT? If so, how?
Would reporting data in a uniform
format result in greater accuracy? If so,
please explain.
96. Do Commenters believe the CAT
NMS Plan’s lack of a mandated uniform
format in which data must be reported
to the Central Repository would affect
the completeness of CAT Data collected
and maintained under the CAT? If so,
how? Would reporting data in a uniform
format result in more complete CAT
Data? If so, please explain.
97. Do Commenters believe the CAT
NMS Plan’s lack of a mandated uniform
format in which data must be reported
to the Central Repository would affect
the accessibility of CAT Data collected
and maintained under the CAT? If so,
how? Would reporting data in a uniform
format result in a different level of
accessibility? If so, please explain.
98. Do Commenters believe allowing
CAT Reporters to report data to the
Central Repository in a non-uniform
format would affect the timeliness of
data collected and maintained under the
CAT? How would the requirement that
the Central Repository convert nonuniform data to a uniform format affect
the timeliness of the data collected and
maintained under the CAT? Would
reporting data in a uniform format result
in a different level of timeliness of data
reporting? If so, please explain.
99. Do Commenters believe that
allowing CAT Reporters to report data to
the Central Repository in a non-uniform
format is more efficient and costeffective than requiring data to be
reported in a uniform format? Would
allowing CAT Reporters to report data to
the Central Repository in a non-uniform
format merely transfer the costs from
individual CAT Reporters to the Central
Repository? Would centralization of the
costs of converting data to a uniform
format reduce costs? Please explain.
100. Do Commenters believe that
allowing CAT Reporters to report data to
the Central Repository in a non-uniform
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30637
format would affect the security and
confidentiality of CAT Data? If so, how?
Would reporting data in a uniform
format create different security or
confidentiality concerns? If so, please
explain.
4. Clock Synchronization
Pursuant to Section 6.8(a) of the CAT
NMS Plan, each Participant and
Industry Member, (through the
Compliance Rule adopted by every
Participant), must synchronize its
Business Clocks,120 at a minimum, to
within 50 milliseconds of the time
maintained by the NIST, consistent with
industry standards.121 The Participants
believe that a 50-millisecond clock
offset tolerance represents the current
industry clock synchronization
standard.122 Industry Members must
maintain such a clock synchronization
standard; certify periodically (according
to a schedule to be defined by the
Operating Committee) that their
Business Clocks meet the requirements
of the Compliance Rule; and report to
the Plan Processor and the Participant
any violation of the Compliance Rule
pursuant to the thresholds set by the
Operating Committee.123 Pursuant to
Section 6.8(c) of the CAT NMS Plan, the
Chief Compliance Officer, in
conjunction with the Participants and
other appropriate Industry Member
advisory groups, annually must evaluate
and make a recommendation to the
Operating Committee as to whether the
industry standard has evolved such that
the clock synchronization standard
should be tightened.124
Appendix C describes the process by
which Participants determined that a
50-millisecond clock offset tolerance
was consistent with industry
standards.125 To that end, the
Participants and Industry Members
reviewed their respective internal clock
synchronization technology
practices,126 and reviewed the results of
The Financial Information Forum
(‘‘FIF’’) Clock Offset Survey, a clock
synchronization survey conducted by
FIF.127 In light of their internal reviews
120 The CAT NMS Plan defines a ‘‘Business
Clock’’ to mean ‘‘a clock used to record the date and
time of any Reportable Event required to be
reported under SEC Rule 613.’’ Id. at Section 1.1.
121 Id. at Section 6.8(a)(i)–(ii).
122 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.3(c).
123 Id. at Section 6.8(a)(ii).
124 Id. at Section 6.8(c).
125 Id. at Appendix C, Section D.12(p).
126 Id.
127 Id. at Appendix C, n.236. See Financial
Information Forum, FIF Clock Offset Survey
Preliminary Report (February 17, 2015), available at
https://www.catnmsplan.com/industryfeedback/
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and the FIF Clock Offset Survey, the
Participants concluded that a clock
offset tolerance of 50 milliseconds
represented an aggressive but achievable
standard.128
Appendix C discusses mechanisms to
ensure compliance with the 50millisecond clock offset tolerance.129
The Participants anticipate that they
and Industry Members will adopt
policies and procedures to verify the
required clock synchronization each
trading day before the market opens, as
well as periodically throughout the
trading day.130 The Participants also
anticipate that they and Industry
Members will document their clock
synchronization procedures and
maintain a log recording the time of
each clock synchronization performed,
and the result of such synchronization,
specifically identifying any
synchronization revealing any clock
offset between the Participant’s or
Industry Member’s Business Clock and
the time maintained by the NIST
exceeding 50 milliseconds.131 The CAT
NMS Plan states that once both large
and small broker-dealers begin reporting
to the Central Repository, and as clock
synchronization technology matures
further, the Participants will assess, in
accordance with Rule 613, tightening
CAT’s clock synchronization standards
to reflect changes in industry
standards.132
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Request for Comment 133
101. Do Commenters believe that a
clock offset tolerance of 50 milliseconds
is appropriate and reasonable, in light of
the increase in the speed of trading over
the last several years? If not, what
would an appropriate and reasonable
standard be?
102. What are current clock
synchronization practices? Do
Commenters believe that current
industry clock synchronization
practices are sufficiently rigorous in
p602479.pdf and https://catnmsplan.com/web/
groups/catnms/@catnms/documents/appsupport
docs/p602479.pdf. (‘‘FIF Clock Offset Study’’).
128 Id. The Participants note in Appendix C that
according to the FIF Clock Offset Survey, annual
maintenance costs would escalate to 102%, 123%
and 242% if clock synchronization standards
moved to 5 milliseconds, 1 millisecond and 100
microseconds, respectively, indicating that
maintenance costs rapidly escalate as clock
synchronization standards increase beyond 50
milliseconds. Id.
129 See id. at Appendix C, Section A.3(c).
130 See id.
131 See id. It was noted that such a log would
include results for a period of not less than five
years ending on the then current date. Id.
132 See id. at Appendix C, Section D.12(p).
133 See Sections IV.D.3, IV.E.4 and IV.H.5, infra,
for further clock synchronization related requests
for comment.
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light of current trading speeds? If not,
please explain.
103. Would a smaller clock offset
tolerance be reasonably achievable? If
so, please identify such tolerance and
any incremental additional costs that
achieving that smaller clock offset
tolerance might entail.
104. If Commenters believe that, in
light of the current speed of trading, the
clock offset tolerance should be more
rigorous, what, if any transition period
would be reasonable and appropriate for
reducing the clock offset tolerance
standards of CAT?
105. What is the range of clock
synchronization practices across the
industry?
106. Do Commenters believe the range
of clock synchronization practices
should be considered when considering
the appropriate clock synchronization
standard?
107. If an SRO or broker-dealer can or
does synchronize its clocks to an offset
tolerance more rigorous than 50
milliseconds, do Commenters believe
that that SRO or broker-dealer should be
required to synchronize its clocks to
that standard? Why or why not? If so,
how, if at all, would that affect
sequencing of Reportable Events in
CAT?
108. Do Commenters believe that
certain categories of market participants
should be held to a smaller or larger
clock offset tolerance? If so, what
category of market participant and why?
How, if at all, would that affect
sequencing of Reportable Events in
CAT?
109. Do Commenters believe a 50millisecond clock offset tolerance would
materially impair the quality and
accuracy of CAT Data? If so, please
explain. Would such a standard
undermine the ability of the Central
Repository to accurately and reliably
link order and sequence event data
across venues, or combine it with other
sources of trade and order data? If so,
please explain. Is there a benefit from
applying the same uniform clock offset
tolerance to all market participants, or
would a variable clock offset tolerance
approach be preferable? For example,
should a high-volume market
participant trading on multiple
exchanges and ATSs have the same
clock offset tolerance as a small retailfocused regional office? Would the
benefits of a smaller clock offset
tolerance for service bureaus that report
but do not record order events be lower
than for other types of CAT Reporters?
Would the benefits of a smaller clock
offset tolerance for clearing brokers that
record and report information available
only after an execution be lower than for
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other types of CAT Reporters? Please
explain.
110. The CAT NMS Plan provides that
as time synchronization standards
evolve, the Participants would assess,
on an annual basis, the ability to tighten
the clock synchronization standards for
CAT to reflect changes in industry
standards. Do Commenters believe that
this would establish an appropriately
rigorous process and schedule for the
Participants to evaluate whether the
clock synchronization standard should
be tightened? Are there any other factors
that should affect when and how to
tighten the clock synchronization
standard?
111. Do Commenters believe the CAT
NMS Plan provides adequate
enforcement provisions to ensure CAT
Reporters synchronize Business Clocks
within the proposed 50-millisecond
clock offset tolerance? If not, what
additional enforcement provisions
should the CAT NMS Plan provide?
112. Do Commenters believe that
sufficient detail has been provided in
the CAT NMS Plan concerning the
reasonable justification or exceptional
circumstances that would permit a
pattern or practice of reporting events
outside of the specified clock
synchronization standard?
113. The CAT NMS Plan generally
requires CAT Reporters to record and
report Reportable Events with a time
stamp of at least to the millisecond but
provides for a 50 millisecond clock
offset tolerance. Do Commenters believe
the time stamp granularity requirement
and the clock offset tolerance should
correspond more closely or even
identically? If so, please explain,
including what such time stamp
granularity requirement and clock offset
tolerance should be.
5. Time Stamp Granularity
The CAT NMS Plan requires CAT
Reporters to record and report the time
of each Reportable Event using time
stamps reflecting current industry
standards, which should be at least to
the millisecond, except with respect to
events that involve non-electronic
communication of information
(‘‘Manual Order Events’’).134
Furthermore, the Plan requires
134 See CAT NMS Plan, supra note 3, at Section
1.1. The SROs requested exemptive relief from Rule
613 so that the CAT NMS Plan may permit CAT
Reporters to report Manual Order Events with a
time stamp granularity of one second, in lieu of a
time stamp granularity of one millisecond. See
Exemptive Request Letter, supra note 16, at 34. The
Commission granted exemptive relief on March 1,
2016 in order to allow this alternative to be
included in the CAT NMS Plan and subject to
notice and comment. See Exemption Order, supra
note 18.
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Participants to adopt rules requiring that
CAT Reporters that use time stamps in
increments finer than milliseconds use
those finer increments when reporting
to the Central Repository.135 For Manual
Order Events, the Participants
determined that time stamp granularity
at the level of a millisecond is not
practical.136 Accordingly, the CAT NMS
Plan provides that each Participant and
Industry Member shall be permitted to
record and report Manual Order Events
to the Central Repository in increments
up to and including one second,
provided that Participants and Industry
Members shall be required to record and
report the time when a Manual Order
Event has been captured electronically
in an order handling and execution
system of such Participant or Industry
Member (‘‘Electronic Capture Time’’) in
milliseconds.137
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Request for Comment 138
114. Are the time stamp granularity
standards for both electronic and nonelectronic reportable events appropriate
and reasonable? If not, why not and
what would be a better alternative?
115. Do Commenters believe the CAT
NMS Plan’s time stamp granularity
requirement is precise enough to
reliably and accurately sequence
Reportable Events? If not, why not? Is
there a better time stamp approach and
what should the requirement(s) be?
116. To what degree does the
millisecond or less time stamp
granularity requirement enable or
prevent regulators’ ability to sequence
events that occur in different execution
venues? Please explain.
117. Are certain CAT Reportable
Events more time-sensitive than other
CAT Reportable Events? If so, what
events are more time-sensitive and why?
What systems are more likely to process
these more sensitive events and to what
level of time stamp granularity are such
events processed? Where are those
systems located (i.e., within broker135 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.3(c).
136 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.3(c). The Participants state that they
received industry feedback through the DAG that
suggests that the established business practice with
respect to Manual Order Events is to manually
capture time stamps with granularity at the level of
a second because finer increments cannot be
accurately captured when dealing with manual
processes which, by their nature, take longer to
perform than a time increment of under one second.
Id. The Participants agree that, due to the nature of
transactions originated over the phone, it is not
practical to attempt granularity finer than one
second, as any such finer increment would be
inherently unreliable. Id.
137 See CAT NMS Plan, supra note 3, at Section
6.8(b).
138 See Section IV.D.3, infra, for further time
stamp granularity related requests for comment.
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dealers, service bureaus, execution
venues)? Please explain.
118. What market participant systems,
if any, should have less granular time
stamp requirements? Why? What time
stamp granularity standard should these
systems have? Why?
119. What market participant systems,
if any, should have more granular time
stamp requirements? Why? What time
stamp granularity standard should these
systems have? Why?
120. The Commission granted an
exemption from Rule 613 in order to
allow the alternative of permitting CAT
Reporters to report Manual Order Events
with a time stamp granularity of one
second, in lieu of the Rule 613
requirement that the CAT NMS Plan
require CAT Reporters to report with a
time stamp granularity of one
millisecond, to be included in the CAT
NMS Plan and subject to notice and
comment.139 Do Commenters believe
that the CAT NMS Plan’s one-second
time stamp granularity standard for
Manual Order Events is appropriate and
reasonable? If not, why not? Would a
more granular time stamp requirement
for Manual Order Events be feasible?
121. What alternative approach with
respect to Manual Order Events may be
preferable? Could the provisions in the
CAT NMS Plan related to Manual Order
Events be more narrowly tailored to, for
example, only apply to CAT Reporters
who are unable to record and report
Manual Order Events with a time stamp
granularity of one millisecond?
122. The SROs note in the Exemption
Request that recording and reporting
Manual Order Events with a time stamp
granularity of at least one second would
result in little additional benefit, and, in
fact, could result in adverse
consequences such as creating a false
sense of precision for data that is
inherently imprecise, while imposing
additional costs on CAT Reporters. Do
Commenters agree? Why or why not?
123. If Manual Order Events are
recorded and reported with a time
stamp granularity of one second, what,
if any, challenges do Commenters
believe would arise with respect to the
sequencing of order events (for the same
order) and orders (for a series of orders)?
Would the one millisecond standard
originally provided for in Rule 613 be
preferable? Please explain.
124. Do Commenters believe the CAT
NMS Plan’s requirement that time
stamp granularity (other than for
Manual Order Events) should be to at
least the millisecond is granular enough
in light of current practices? If not, why
not?
139 See
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30639
125. The CAT NMS Plan provides that
as time stamp standards evolve, the
Participants would assess, on an annual
basis, the ability to require more precise
time stamp granularity standards for
CAT to reflect changes in industry
standards. Do Commenters believe that
this establishes an appropriately
rigorous schedule for the Participants to
evaluate whether time stamp granularity
requirements could potentially be set to
finer increments? Are there any other
factors that should affect when and how
the requirements for time stamp
granularity increments could be made
more precise?
126. Do Commenters believe the CAT
NMS Plan provides adequate
enforcement provisions to ensure CAT
Reporters time stamp Reportable Events
to a granularity of one millisecond (and
for Manual Order Events to a granularity
of one second)? If not, what additional
enforcement provisions should the CAT
NMS Plan provide?
127. Do Commenters believe that the
CAT NMS Plan’s requirement that
Participants and Industry Members
synchronize Business Clocks used
solely for Manual Order Events to
within one second of the time
maintained by the NIST is appropriate
and reasonable? Would a tighter clock
synchronization standard for Business
Clocks used solely for Manual Order
Events be feasible?
6. CAT-Reporter-ID
Sections 6.3 and 6.4 of the CAT NMS
Plan require CAT Reporters to record
and report to the Central Repository an
SRO-Assigned Market Participant
Identifier 140 for orders and certain
Reportable Events to be used by the
Central Repository to assign a unique
CAT-Reporter-ID 141 for purposes of
identifying each CAT Reporter
associated with an order or Reportable
Event (the ‘‘Existing Identifier
Approach’’).142 The CAT NMS Plan
140 The CAT NMS Plan defines an ‘‘SRO-Assigned
Market Participant Identifier’’ as ‘‘an identifier
assigned to an Industry Member by an SRO or an
identifier used by a Participant.’’ See CAT NMS
Plan, supra note 3, at Section 1.1.
141 Rule 613 defines a CAT-Reporter-ID as ‘‘a code
that uniquely and consistently identifies [a CAT
Reporter] for purposes of providing data to the
central repository.’’ 17 CFR 242.613(j)(2).
142 The SROs requested exemptive relief from
Rule 613 so that the CAT NMS Plan may permit the
Existing Identifier Approach, which would allow a
CAT Reporter to report an existing SRO-Assigned
Market Participant Identifier in lieu of requiring the
reporting of a universal CAT-Reporter-ID. See
Exemptive Request Letter, supra note 16, at 19. The
Commission granted exemptive relief on March 1,
2016 in order to allow this alternative to be
included in the CAT NMS Plan and subject to
notice and comment. See Exemption Order, supra
note 18.
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mstockstill on DSK3G9T082PROD with NOTICES2
requires the reporting of SRO-Assigned
Market Participant Identifiers of: The
Industry Member receiving or
originating an order; 143 the Industry
Member or Participant from which (and
to which) an order is being routed; 144
the Industry Member or Participant
receiving (and routing) a routed
order; 145 the Industry Member or
Participant executing an order, if an
order is executed; 146 and the clearing
broker or prime broker, if applicable, if
an order is executed.147 An Industry
Member would report to the Central
Repository its existing SRO-Assigned
Market Participant Identifier used by the
relevant SRO specifically for
transactions occurring at that SRO.148
Similarly, an exchange reporting CAT
Reporter information would report data
using the SRO-Assigned Market
Participant Identifier used by the
Industry Member on that exchange or its
systems.149 Over-the-counter (‘‘OTC’’)
orders and Reportable Events would be
reported with an Industry Member’s
FINRA SRO-Assigned Market
Participant Identifier.150
The CAT NMS Plan requires the Plan
Processor to develop and maintain the
mechanism to assign (and to change, if
necessary) CAT-Reporter-IDs.151 For the
Central Repository to link the SROAssigned Participant Identifier to the
CAT-Reporter-ID, each SRO must
submit, on a daily basis, all SROAssigned Market Participant Identifiers
used by its Industry Members (or itself),
as well as information to identify the
corresponding market participant (for
example, a CRD number or Legal Entity
Identifier (‘‘LEI’’)) to the Central
Repository.152 Additionally, each
Industry Member shall be required to
submit to the Central Repository
143 See CAT NMS Plan, supra note 3, at Section
6.3(d)(i) and Section 6.4(d)(i).
144 Id. at Section 6.3(d)(ii) and Section 6.4(d)(i).
145 Id. at Section 6.3(d)(iii) and Section 6.4(d)(i).
146 Id. at Section 6.3(d)(v) and Section 6.4(d)(i).
147 Id. at Section 6.4(d)(ii)(A)(2). Industry
Members are required by the CAT NMS Plan to
record and report this information. See CAT NMS
Plan, supra note 3, at Section 6.4(d)(ii).
148 See Exemption Order, supra note 18, at 31–41.
149 See id. at 20.
150 Id.
151 See CAT NMS Plan, supra note 3, at Appendix
D, Section 10.1. Changes to CAT-Reporter-IDs must
be reviewed and approved by the Plan Processor.
Id. The CAT NMS Plan also requires the Central
Repository to generate and assign a unique CATReporter-ID to all reports submitted to the system
based on sub-identifiers that are currently used by
CAT Reporters in their order handling and trading
processes (described in the Exemption Request as
SRO-assigned market participant identifiers). See
CAT NMS Plan, supra note 3, at Appendix D,
Section 3; see also Exemption Order, supra note 18,
at 31–41.
152 See CAT NMS Plan, supra note 3, at Section
6.3(e)(i).
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information sufficient to identify such
Industry Member (e.g., CRD number or
LEI, as noted above).153 The Plan
Processor would use the SRO-Assigned
Market Participant Identifiers and
identifying information (i.e., CRD
number or LEI) to assign a CATReporter-ID to each Industry Member
and SRO for internal use across all data
within the Central Repository.154 The
Plan Processor would create and
maintain a database in the Central
Repository that would map the SROAssigned Market Participant Identifiers
to the appropriate CAT-Reporter-ID.155
The consolidated audit trail must be
able to capture, store, and maintain
current and historical SRO-Assigned
Market Participant Identifiers.156 The
SRO-Assigned Market Participant
Identifier must also be included on the
Plan Processor’s acknowledgment of its
receipt of data files from a CAT Reporter
or Data Submitter,157 on daily statistics
provided by the Plan Processor after the
Central Repository has processed
data,158 and on a secure Web site that
the Plan Processor would maintain that
would contain each CAT Reporter’s
daily reporting statistics.159 In addition,
data validations by the Plan Processor
must include confirmation of a valid
SRO-Assigned Market Participant
Identifier.160
Request for Comment
128. The Commission granted an
exemption from Rule 613 in order to
allow the Existing Identifier Approach
to be included in the CAT NMS Plan
and subject to notice and comment. The
Existing Identifier Approach would
allow a CAT Reporter to report an
existing SRO-Assigned Market
Participant Identifier in lieu of Rule
613’s requirement that a CAT Reporter
must report a universal CAT-ReporterID.161 Do Commenters believe that
allowing the Existing Identifier
Approach would be more efficient and
cost-effective than the Rule 613
approach of requiring a CAT-Reporter153 Id.
at Section 6.4(d)(vi).
Exemption Order, supra note 18, at 31–41.
155 Id. at 20.
156 See CAT NMS Plan, supra note 3, at Appendix
D, Section 2.
157 See id. at Appendix D, Section 7.1.
158 See id. at Appendix D, Section 7.2.
159 See id. at Appendix D, Section 10.1.
160 See id. at Appendix D, Section 7.2. The CAT
NMS Plan also notes that both the CAT-ReporterID and the SRO-Assigned Market Participant
Identifier would be data fields for the online
targeted query tool described in the CAT NMS Plan
as providing authorized users with the ability to
retrieve processed and/or validated (unlinked) data
via an online query screen. See id. at Appendix D,
Section 8.1.1.
161 See Exemption Order, supra note 18.
154 See
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ID to be reported for each order and
reportable event in accordance with
Rule 613(c)(7)? 162 Why or why not? Or
do Commenters believe that the Rule
613 approach is preferable? Why or why
not? Would implementation of the
Existing Identifier Approach merely
transfer costs from CAT Reporters to the
Central Repository?
129. Do Commenters believe that the
Existing Identifier Approach would
affect the accuracy of CAT Data? Would
the Rule 613 approach result in greater
accuracy? If so, please explain.
130. Do Commenters believe that the
CAT NMS Plan’s proposed Existing
Identifier Approach would affect the
accessibility of CAT Data? If so, how?
Would the Rule 613 approach result in
a different level of accessibility? If so,
please explain.
131. Do Commenters believe that the
CAT NMS Plan’s proposed Existing
Identifier Approach would affect the
timeliness of CAT Data? If so, how?
Would the Rule 613 approach result in
greater timeliness? If so, please explain.
132. Do Commenters believe the
Existing Identifier Approach would
affect the security and confidentiality of
CAT Data? If so, how? Would the Rule
613 approach result in a different level
of security and confidentiality? If so,
please explain.
133. What challenges or risks do
Commenters believe the Plan Processor
would face in linking all SRO-Assigned
Market Participant Identifiers to the
appropriate CAT-Reporter-IDs? What, if
anything, could be done to mitigate
those challenges and risks?
134. The CAT NMS Plan does not
require that an Industry Member
provide its LEI to the Plan Processor as
part of the identifying information used
to assign a CAT-Reporter-ID. The CAT
NMS Plan permits an Industry Member
to report its CRD number in lieu of its
LEI for this purpose. Do Commenters
believe that the CAT NMS Plan should
mandate that Industry Members provide
their LEIs, along with their SROAssigned Market Participant Identifiers,
to the Plan Processor for purposes of
developing a unique CAT-Reporter-ID?
Why or why not?
7. Customer-ID
a. Customer Information Approach
Rule 613(c)(7)(i)(A) requires that for
the original receipt or origination of an
order, a CAT Reporter report the
‘‘Customer-ID(s) for each Customer.’’ 163
‘‘Customer-ID’’ is defined in Rule
613(j)(5) to mean ‘‘with respect to a
customer, a code that uniquely and
162 See
163 See
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consistently identifies such customer for
purposes of providing data to the
Central Repository.’’ 164 Rule 613(c)(8)
requires that ‘‘[a]ll plan sponsors and
their members shall use the same
Customer-ID and CAT-Reporter-ID for
each customer and broker-dealer.’’ 165
In Appendix C, the Participants
describe the ‘‘Customer Information
Approach,’’ 166 an alternative approach
to the requirement that a broker-dealer
report a Customer-ID for every Customer
upon original receipt or origination of
an order.167 Under the Customer
Information Approach, the CAT NMS
Plan would require each broker-dealer
to assign a unique Firm Designated ID
to each Customer.168 As the Firm
Designated ID, broker-dealers would be
permitted to use an account number or
any other identifier defined by the firm,
provided each identifier is unique
across the firm for each business date
(i.e., a single firm may not have multiple
separate customers with the same
identifier on any given date).169
According to the CAT NMS Plan,
broker-dealers would submit an initial
set of Customer information to the
Central Repository, including, as
applicable, the Firm Designated ID, the
Customer’s name, address, date of birth,
individual tax payer identifier number
(‘‘ITIN’’)/social security number
(‘‘SSN’’), individual’s role in the
account (e.g., primary holder, joint
holder, guardian, trustee, person with
power of attorney) and LEI,170 and/or
Large Trader ID (‘‘LTID’’), if applicable,
164 See
17 CFR 242.613(j)(5).
17 CFR 242.613(c)(8).
166 The SROs requested exemptive relief from
Rule 613 so that the CAT NMS Plan may permit the
Customer Information Approach, which would
require each broker-dealer to assign a unique Firm
Designated ID to each trading account and to submit
an initial set of information identifying the
Customer to the Central Repository, in lieu of
requiring each broker-dealer to report a CustomerID for each Customer upon the original receipt or
origination of an order. See Exemptive Request
Letter, supra note 16, at 12. The Commission
granted exemptive relief on March 1, 2016 in order
to allow this alternative to be included in the CAT
NMS Plan and subject to notice and comment. See
Exemption Order, supra note 18.
167 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.1(a)(iii).
168 Id. at Appendix C, Section A.1(a)(iii). The
CAT NMS Plan defines a ‘‘Firm Designated ID’’ as
‘‘a unique identifier for each trading account
designated by Industry Members for purposes of
providing data to the Central Repository, where
each such identifier is unique among all identifiers
from any given Industry Member for each business
date.’’ See id. at Section 1.1.
169 Id. at Appendix C, Section A.1(a)(iii).
170 The CAT NMS Plan provides that where a
validated LEI is available for a Customer or entity,
this may obviate a need to report other identifier
information (e.g., Customer name, address, EIN). Id.
at Appendix C, Section A.1(a)(iii) n.31.
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165 See
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which would be updated as set forth in
the CAT NMS Plan.171
Under the Customer Information
Approach, broker-dealers would be
required to report only the Firm
Designated ID for each new order
submitted to the Central Repository,
rather than the ‘‘Customer-ID’’ as
defined by Rule 613(c)(j)(5) and as
required by Rule 613(c)(7)(i)(A), and the
Plan Processor would associate specific
Customers and their Customer-IDs with
individual order events based on the
reported Firm Designated IDs.172 Within
the Central Repository, each Customer
would be uniquely identified by
identifiers or a combination of
identifiers such as an ITIN/SSN, date of
birth, and, as applicable, LEI and
LTID.173 The Plan Processor would be
required to use these unique identifiers
to map orders to specific Customers
across all broker-dealers.174 To ensure
information identifying a Customer is
updated, broker-dealers would be
required to submit to the Central
Repository daily updates for reactivated
accounts, newly established or revised
Firm Designated IDs, or associated
reportable Customer information.175
Appendix C provides additional
requirements that the Plan Processor
must meet under the Customer
Information Approach.176 The Plan
Processor must maintain information of
sufficient detail to uniquely and
consistently identify each Customer
across all CAT Reporters, and associated
171 The CAT NMS Plan states that the Participants
anticipate that Customer information that is
initially reported to the CAT could be limited to
Customer accounts that have, or are expected to
have, CAT Reportable Event activity. For example,
the CAT NMS Plan notes accounts that are
considered open, but have not traded Eligible
Securities in a given time frame, may not need to
be pre-established in the CAT, but rather could be
reported as part of daily updates after they have
CAT Reportable Event activity. Id. at Appendix C,
Section A.1(a)(iii) n.32.
172 See id. at Appendix C, Section A.1(a)(iii). The
CAT NMS Plan also requires broker-dealers to
report ‘‘Customer Account Information’’ upon the
original receipt of origination of an order. See CAT
NMS Plan, supra note 3, at Section 1.1, Section
6.4(d)(ii)(C).
173 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.1(a)(iii).
174 Id.
175 The CAT NMS Plan notes that because
reporting to the CAT is on an end-of-day basis,
intra-day changes to information could be captured
as part of the daily updates to the information. To
ensure the completeness and accuracy of Customer
information and associations, in addition to daily
updates, broker-dealers would be required to
submit periodic full refreshes of Customer
information to the CAT. The scope of the ‘‘full’’
Customer information refresh would need to be
further defined, with the assistance of the Plan
Processor, to determine the extent to which inactive
or otherwise terminated accounts would need to be
reported. Id. at Appendix C, Section A.1(a)(iii) n.33.
176 See id. at Appendix C, Section A.1(a)(iii).
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accounts from each CAT Reporter, and
must document and publish, with the
approval of the Operating Committee,
the minimum list of attributes to be
captured to maintain this association.177
In addition, the Plan Processor must
maintain valid Customer and Customer
Account Information 178 for each trading
day and provide a method for
Participants and the Commission to
easily obtain historical changes to that
information (e.g., name changes, address
changes).179 The Plan Processor also
must design and implement a robust
data validation process for submitted
Firm Designated IDs, Customer Account
Information and Customer Identifying
Information, and be able to link
accounts that move from one CAT
Reporter to another due to mergers and
acquisitions, divestitures, and other
events.180 Under the Customer
Information Approach, broker-dealers
will initially submit full account lists
for all active accounts to the Plan
Processor and subsequently submit
updates and changes on a daily basis.181
Finally, the Plan Processor must have a
process to periodically receive full
account lists to ensure the completeness
and accuracy of the account database.182
b. Account Effective Date vs. Account
Open Date
Rule 613(c)(7)(viii)(B) requires brokerdealers to report to the Central
Repository ‘‘Customer Account
Information’’ upon the original receipt
or origination of an order.183 The CAT
177 Id. Section 9.1 of Appendix D also addresses,
among other things, the minimum attributes that
CAT must capture for Customers and the validation
process for such attributes. Id. at Appendix D,
Section 9.1.
178 Id. at Appendix D, Section 9.1. In relevant
part, ‘‘Customer Account Information’’ is defined in
the Plan to include, but not be limited to, account
number, account type, customer type, date account
opened, and large trader identifier (if applicable).
See id. at Section 1.1.
179 See id. at Appendix C, Section A.1(a)(iii).
180 Id. at Appendix C, Section A.1(a)(iii). The
CAT NMS Plan defines ‘‘Customer Identifying
Information’’ to mean ‘‘information of sufficient
detail to identify a Customer, including, but not
limited to, (a) with respect to individuals: Name,
address, date of birth, individual tax payer
identification number (‘‘ITIN’’)/social security
number (‘‘SSN’’), individual’s role in the account
(e.g., primary holder, joint holder, guardian, trustee,
person with the power of attorney); and (b) with
respect to legal entities: name, address, Employer
Identification Number (‘‘EIN’’)/LEI) or other
comparable common entity identifier, if applicable;
provided, however, where the LEI or other common
entity identifier is provided, information covered by
such common entity identifier (e.g., name, address)
would not need to be separately submitted to the
Central Repository.’’ See id. at Section 1.1.
181 Id. at Appendix C, Section A.1(a)(iii).
182 Id.
183 17 CFR 242.613(c)(7)(viii)(B). ‘‘Customer
Account Information’’ is defined in Rule 613(j)(4)
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NMS Plan defines ‘‘Customer Account
Information’’ to include, in part, the
Customer’s account number, account
type, customer type, date account
opened and LTID (if applicable).184 The
Plan, however, provides that in two
limited circumstances, a broker-dealer
could report the ‘‘Account Effective
Date’’ in lieu of the date an account was
opened.185 The first circumstance is
where a relationship identifier—rather
than an actual parent account—has been
established for an institutional
Customer relationship.186 In this case,
no account open date is available for the
institutional Customer parent
relationship because there is no parent
account, and for the same reason, there
is no account number or account type
available.187 Thus, the Plan provides
that in this circumstance, a brokerdealer could report the ‘‘Account
Effective Date’’ of the relationship in
lieu of an account open date.188 Further,
the Plan provides that where such an
institutional Customer relationship was
established before the broker-dealer’s
obligation to report audit trail data is
required, the ‘‘Account Effective Date’’
would be either (i) the date the brokerdealer established the relationship
identifier, or (ii) the date when trading
began (i.e., the date the first order is
received) using the relevant relationship
identifier, and if both dates are available
and differ, the earlier date.189 Where
such relationships are established after
the broker-dealer’s obligation to report
audit trail data is required, the
‘‘Account Effective Date’’ would be the
date the broker-dealer established the
relationship identifier and would be no
later than the date the first order was
received.190 Regardless of when the
relationship was established for such
to ‘‘include, but not be limited to, account number,
account type, customer type, date account opened,
and large trader identifier (if applicable).’’ 17 CFR
242.613(j)(4).
184 See CAT NMS Plan, supra note 3, at Section
1.1.
185 Id. The SROs requested exemptive relief from
Rule 613 so that the CAT NMS Plan may permit
broker-dealers to report to the Central Repository
the ‘‘effective date’’ of an account in lieu of
requiring each broker-dealer to report the date the
account was opened in certain limited
circumstances. See Exemptive Request Letter, supra
note 16, at 13. The Commission granted exemptive
relief on March 1, 2016 in order to allow this
alternative to be included in the CAT NMS Plan
and subject to notice and comment. See Exemption
Order, supra note 18.
186 See Exemption Order, supra note 18; see also
September 2015 Supplement, supra note 16, at 4–
5.
187 See September 2015 Supplement, supra note
16, at 6.
188 See CAT NMS Plan, supra note 3, at Section
1.1.
189 See id.
190 See id.
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institutional Customers, the Plan
provides that broker-dealers may report
the relationship identifier in place of
Rule 613(c)(7)(viii)(B)’s requirement to
report the ‘‘account number,’’ and report
‘‘relationship’’ in place of ‘‘account
type.’’ 191
The second circumstance where a
broker-dealer may report the ‘‘Account
Effective Date’’ rather than the date an
account was opened as required in Rule
613(c)(7)(viii)(B) is when particular
legacy system data issues prevent a
broker-dealer from providing an account
open date for any type of account (i.e.,
institutional, proprietary or retail) that
was established before CAT’s
implementation.192 According to the
Plan, these legacy system data issues
may arise because:
(1) A broker-dealer has switched back
office providers or clearing firms and
the new back office/clearing firm system
identifies the account open date as the
date the account was opened on the new
system;
(2) A broker-dealer is acquired and
the account open date becomes the date
that an account was opened on the postmerger back office/clearing firm system;
(3) Certain broker-dealers maintain
multiple dates associated with accounts
in their systems and do not designate in
a consistent manner which date
constitutes the account open date, as the
parameters of each date are determined
by the individual broker-dealer; or
(4) No account open date exists for a
proprietary account of a brokerdealer.193
Thus, when legacy systems data
issues arise due to one of the four
reasons above and no account open date
is available, the Plan provides that
broker-dealers would be permitted to
report an ‘‘Account Effective Date’’ in
lieu of an account open date.194 When
the legacy systems data issues and lack
of account open date are attributable to
above reasons (1) or (2), the ‘‘Account
Effective Date’’ would be the date the
account was established, either directly
or via a system transfer, at the relevant
broker-dealer.195 When the legacy
systems data issues and lack of account
open date are attributable to above
reason (3), the ‘‘Account Effective Date’’
would be the earliest available date.196
When the legacy systems data issues
and lack of account open date are
attributable to above reason (4), the
191 See
id.
id.; see also September 2015 Supplement,
supra note 16, at 7–9.
193 See CAT NMS Plan, supra note 3, at Section
1.1.
194 Id.
195 Id.
196 Id.
192 See
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‘‘Account Effective Date’’ would be (i)
the date established for the proprietary
account in the broker-dealer or its
system(s), or (ii) the date when
proprietary trading began in the
account, i.e., the date on which the first
orders were submitted from the
account.197
c. Modification/Cancellation
Rule 613(c)(7)(iv)(F) requires that
‘‘[t]he CAT-Reporter-ID of the brokerdealer or Customer-ID of the person
giving the modification or cancellation
instruction’’ be reported to the Central
Repository.198 Because the Customer
Information Approach no longer
requires that a Customer-ID be reported
upon original receipt or origination of
an order, and because reporting the
Customer-ID of the specific person that
gave the modification or cancellation
instruction would result in an
inconsistent level of information
regarding the identity of the person
giving the modification or cancellation
instruction versus the identity of the
Customer that originally received or
originated an order, Section 6.3(d)(iv)(F)
of the CAT NMS Plan modifies the
requirement in Rule 613 and instead
requires CAT Reporters to report
whether the modification or
cancellation instruction was ‘‘given by
the Customer or was initiated by the
Industry Member or Participant.’’ 199
Request for Comment
135. The Commission granted an
exemption from Rule 613 in order to
allow the Customer Information
Approach to be included in the CAT
NMS Plan and subject to notice and
comment. The Customer Information
Approach would require each brokerdealer to assign a unique Firm
Designated ID to each trading account
and to submit an initial set of
information identifying the Customer to
the Central Repository, in lieu of Rule
613’s requirement that a CAT Reporter
must report a Customer-ID for each
Customer upon the original receipt or
197 Id.
198 17
CFR 242.613(c)(7)(iv)(F) (emphasis added).
CAT NMS Plan, supra note 3, at Section
6.3(d)(iv)(F). The SROs requested exemptive relief
from Rule 613 so that the CAT NMS Plan may
permit CAT Reporters to report whether a
modification or cancellation instruction was given
by the Customer associated with the order, or was
initiated by the broker-dealer or exchange
associated with the order, in lieu of requiring CAT
Reporters to report the Customer-ID of the person
giving the modification or cancellation instruction.
See Exemptive Request Letter, supra note 16, at 12–
13. The Commission granted exemptive relief on
March 1, 2016 in order to allow this alternative to
be included in the CAT NMS Plan and subject to
notice and comment. See Exemption Order, supra
note 18.
199 See
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origination of an order. Do Commenters
believe that allowing broker-dealers to
report a Firm Designated ID to the
Central Repository is more efficient and
cost-effective than the Rule 613
approach of requiring broker-dealers to
report a unique Customer-ID upon
original receipt or origination of an
order? Would allowing CAT Reporters
to report a Firm Designated ID to the
Central Repository merely transfer the
costs from individual broker-dealers to
the Central Repository? Or do
Commenters believe that the Rule 613
approach is preferable? Why or why
not?
136. If broker-dealers are permitted to
report a Firm Designated ID, do
Commenters believe the proposed CAT
NMS Plan includes sufficiently detailed
requirements to determine whether the
Plan Processor could use the Firm
Designated ID to identify a Customer?
137. Do Commenters believe the CAT
NMS Plan’s proposal to permit reporting
a Firm Designated ID would affect the
accuracy of CAT Data collected and
maintained under the CAT compared to
the Rule 613 approach that requires a
unique Customer-ID? If so, how? Would
permitting reporting a Firm Designated
ID result in more complete CAT Data?
If so, please explain.
138. Do Commenters believe the CAT
NMS Plan’s proposal to permit reporting
a Firm Designated ID would affect the
accessibility of CAT Data collected and
maintained under the CAT compared to
the Rule 613 approach? If so, how?
Would permitting reporting a Firm
Designated ID result in CAT Data being
more accessible? If so, please explain.
139. Do Commenters believe allowing
broker-dealers to report a Firm
Designated ID to the Central Repository
would affect the timeliness of data
collected and maintained under the
CAT compared to the Rule 613
approach? Would permitting reporting a
Firm Designated ID result in more
timely CAT Data? If so, please explain.
140. Do Commenters believe there are
any increased risks related to allowing
a broker-dealer to report a Firm
Designated ID rather than a unique
Customer-ID to the Central Repository?
How difficult would it be for the Central
Repository to utilize a Firm Designated
ID for each account?
141. Do Commenters believe that the
CAT NMS Plan has provided sufficient
information to determine whether the
Central Repository could use a Firm
Designated ID to efficiently, reliably and
accurately link orders and Reportable
Events to a Customer?
142. Do Commenters believe that the
CAT NMS Plan includes sufficient
safeguards or policies to assure that the
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same Firm Designated ID would not be
used for multiple Customers?
143. The CAT NMS Plan does not
require that a broker-dealer provide an
LEI to the Plan Processor as part of the
identifying information used to assign a
Customer-ID at the Central Repository.
The CAT NMS Plan provides that a
broker-dealer must report its LEI, if
available, but allows a broker-dealer to
report another comparable common
entity identifier, if an LEI is not
available. Do Commenters believe that
the CAT NMS Plan should mandate that
broker-dealers provide an LEI as part of
the information used by the Plan
Processor to uniquely identify
Customers? Why or why not?
144. Do Commenters believe that
reporting the Firm Designated ID, rather
than a unique Customer-ID, would affect
the security and confidentiality of CAT
Data? If so, how? Would permitting
reporting a Firm Designated ID result in
a different level of security and
confidentiality of CAT Data? If so,
please explain.
145. The CAT NMS Plan provides that
an initial set of Customer Account
Information and Customer Identifying
Information would be reported to the
Central Repository by broker-dealers
upon the commencement of reporting
audit trail data to the Central Repository
by that broker-dealer, and that such
Customer Identifying Information would
be updated as set forth in the CAT NMS
Plan. Do Commenters believe that the
approach for reporting an initial set of
Customer Account Information and
Customer Identifying Information and
updates to such information thereafter
as set forth in the CAT NMS Plan would
affect the quality, accuracy,
completeness, accessibility or timeliness
of the data? If so, what additional
requirements or details should be
provided in the CAT NMS Plan?
146. Do Commenters believe that
allowing broker-dealers to report an
initial set of Customer Account
Information and Customer Identifying
Information and updates to such
information thereafter is more efficient
and cost-effective than the Rule 613
approach for identifying Customers
under Rule 613? Or do Commenters
believe that the Rule 613 approach is
preferable? Why or why not?
147. Do Commenters believe there are
any increased risks as a result of
allowing a broker-dealer to report an
initial set of Customer Account
Information and Customer Identifying
Information and updates to such
information thereafter to be reported to
the Central Repository? How difficult
would it be for the Central Repository to
ingest the Customer Account
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30643
Information and Customer Identifying
information, and any updates thereafter?
148. Do Commenters believe that the
CAT NMS Plan provides sufficient
information to determine whether the
Central Repository could use the initial
set of Customer Account Information
and Customer Identifying Information
and updates to such information
thereafter to efficiently, reliably and
accurately link orders and Reportable
Events to a Customer?
149. Do Commenters believe that
reporting an initial set of Customer
Account Information and Customer
Identifying Information and updates to
such information thereafter would affect
the security and confidentiality of CAT
Data? If so, how? Would reporting an
initial set of Customer Account
Information and Customer Identifying
Information and updates to such
information result in a different level of
security and confidentiality? If so,
please explain.
150. As part of the Customer
Identifying Information reported to the
Central Repository, the CAT NMS Plan
requires a broker-dealer to report PII
such as the Customer’s name, address,
date of birth, and ITIN/SSN. Do
Commenters believe there is data that
could be reported by broker-dealers and
used by the Central Repository to
identify Customers that is not PII? What
types of data would this be? If data other
than PII is used to identify a Customer,
do Commenters believe that such data
would be sufficiently unique to ensure
that Customers can be accurately
identified by the Central Repository?
151. If data other than PII is used by
the Central Repository to identify a
Customer, would the use of such data
affect the quality or completeness of the
CAT audit trail, as compared to the use
of PII to identify a Customer?
152. Do Commenters believe that if
broker-dealers reported data other than
PII to identify Customers, the
accessibility and timeliness of the data
collected and maintained under the
CAT would be affected? If the data
would be affected, in what way(s)?
153. Would relying on data other than
PII to identify a Customer be a more
efficient and cost-effective way to
identify Customers, as compared to
relying on PII to identify a Customer?
154. Do Commenters believe that
there would be increased risks to the
reliability of the CAT audit trail data if
broker-dealers were required to identify
a Customer with data that does not
include PII?
155. If broker-dealers report data other
than PII to identify Customers, do
Commenters believe that the Central
Repository could efficiently, reliably
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and accurately link orders and
Reportable Events to a Customer?
156. Do Commenters believe that the
proposed CAT NMS Plan provides
sufficient information to determine
when broker-dealers would report the
‘‘Account Effective Date’’, rather than
the date the Customer’s account was
opened as required by Rule 613? Is there
any ambiguity in the circumstances
under which a broker-dealer would
report an ‘‘Account Effective Date’’
rather than the date a Customer’s
account was opened?
157. Do Commenters believe reporting
of the ‘‘Account Effective Date’’ rather
than the account open date for a
Customer’s account under the Rule 613
approach would affect the quality,
accuracy, completeness, accessibility or
timeliness of the CAT data? If it does,
what additional requirements or details
should be provided in the CAT NMS
Plan prior to the Commission’s approval
of such Plan? Or do Commenters believe
that the Rule 613 approach is
preferable? Why or why not?
158. Do Commenters believe that
reporting the ‘‘Account Effective Date’’
would provide sufficient information to
the Central Repository to facilitate the
ability of the Plan Processor to link a
Customer’s account with the Customer?
159. Do Commenters believe that
allowing the reporting of the ‘‘Account
Effective Date’’ would be more efficient
and cost-effective than requiring the
Rule 613 approach of reporting of a
Customer’s account open date? Or do
Commenters believe that the Rule 613
approach is preferable? Why or why
not? Would allowing CAT Reporters to
report the ‘‘Account Effective Date’’
rather than the date a Customer’s
account was opened merely transfer the
costs from individual CAT Reporters to
the Central Repository?
160. Do Commenters agree that the
proposed approach for reporting the
‘‘Account Effective Date,’’ which differs
depending on whether the account was
established before or after the
commencement of reporting audit trail
data to the Central Repository as set
forth in the CAT NMS Plan, is a
reasonable approach? Why or why not?
161. The Commission granted an
exemption from Rule 613 to permit the
alternative of allowing CAT Reporters to
report whether the modification or
cancellation of an order was given by a
Customer, or initiated by a broker-dealer
or exchange, in lieu of requiring the
reporting of the Customer-ID of the
person giving the modification or
cancellation instruction, to be included
in the CAT NMS Plan and subject to
notice and comment. To what extent
does the approach permitted by the
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exemption affect the completeness of
the CAT? Would the information lost
under the approach permitted by the
exemption affect investigations or
surveillances? If so, how?
8. Order Allocation Information
Section 6.4(d)(ii)(A)(1) of the CAT
NMS Plan provides that each
Participant through its Compliance Rule
must require that Industry Members
record and report to the Central
Repository an Allocation Report that
includes the Firm Designated ID when
an execution is allocated in whole or
part.200 The CAT NMS Plan defines an
Allocation Report as ‘‘a report made to
the Central Repository by an Industry
Member that identifies the Firm
Designated ID for any account(s),
including subaccount(s), to which
executed shares are allocated and
provides the security that has been
allocated, the identifier of the firm
reporting the allocation, the price per
share of shares allocated, the side of
shares allocated, the number of shares
allocated to each account, and the time
of the allocation.’’ 201 The CAT NMS
Plan explains, for the avoidance of
doubt, that an Allocation Report shall
not be required to be linked to particular
orders or executions.202
Request for Comment
162. The Commission granted an
exemption from Rule 613 in order to
allow the alternative of permitting the
CAT NMS Plan to provide that Industry
Members record and report to the
Central Repository an Allocation Report
that includes the Firm Designated ID
when an execution is allocated in whole
or part. This alternative is in lieu of the
requirement in Rule 613 that Industry
Members must report the account
number for any subaccount to which an
execution is allocated.203 Do
Commenters believe that providing the
information required in an Allocation
Report as a means to identify order
200 See CAT NMS Plan, supra note 3, at Section
6.4(d)(ii)(A)(1); see also April 2015 Supplement,
supra note 16. The SROs requested exemptive relief
from Rule 613 so that the CAT NMS Plan may
permit Industry Members to record and report to
the Central Repository an Allocation Report that
includes the Firm Designated ID when an execution
is allocated in whole or part in lieu of requiring the
reporting of the account number for any subaccount
to which an execution is allocated, as is required
by Rule 613. See Exemptive Request Letter, supra
note 16, at 26–27. The Commission granted
exemptive relief on March 1, 2016 in order to allow
this alternative to be included in the CAT NMS
Plan and subject to notice and comment. See
Exemption Order, supra note 18.
201 See CAT NMS Plan, supra note 3, at Section
1.1; see also April 2015 Supplement, supra note 16.
202 See CAT NMS Plan, supra note 3, at Section
1.1.
203 See Exemption Order, supra note 18.
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events and information related to the
subaccount allocation information (the
‘‘Allocation Report Approach’’) would
be more efficient and cost-effective than
the Rule 613 approach requiring the
reporting of the account number for any
subaccount to which an execution is
allocated? Or do Commenters believe
that the Rule 613 approach is
preferable? Why or why not?
163. Do Commenters believe that the
Allocation Report Approach would
affect the completeness of CAT Data? If
so, how? Would the Allocation Report
Approach result in more complete CAT
Data? If so, please explain.
164. Do Commenters believe that the
Allocation Report Approach would
affect the accessibility of allocation
information? If so, how? Would the
Allocation Report Approach result in
more accessible CAT Data? If so, please
explain.
165. Do Commenters believe that the
Allocation Report Approach would
affect the timeliness of allocation
information? If so, how? Would the
Allocation Report Approach result in
more timely CAT Data? If so, please
explain.
166. Do Commenters believe the
Allocation Report Approach would
affect the security and confidentiality of
CAT Data? If so, how? Would the
Allocation Report Approach result in a
different level of security or
confidentiality? If so, please explain.
167. Do Commenters believe that the
Allocation Report Approach described
by the SROs is feasible? What
challenges or risks would CAT
Reporters face in providing such
information? What challenges or risks
would the Plan Processor face when
ingesting such information and linking
it to the appropriate Customers’
accounts?
9. Options Market Maker Quotes
Section 6.4(d)(iii) of the CAT NMS
Plan states that, with respect to the
reporting obligations of an Options
Market Maker under Sections 6.3(d)(ii)
and (iv) regarding its quotes 204 in Listed
Options, such quotes shall be reported
to the Central Repository by the relevant
Options Exchange in lieu of reporting by
the Options Market Maker.205 Section
204 Rule 613(c)(7) provides that the CAT NMS
Plan must require reporting of the details for each
order and each Reportable Event, including the
routing and modification or cancellation of an
order. 17 CFR 242.613(c)(7). Rule 613(j)(8) defines
‘‘order’’ to include ‘‘any bid or offer.’’ 17 CFR
242.613(j)(8).
205 See CAT NMS Plan, supra note 3, at Section
6.4(d)(iii). The SROs requested exemptive relief
from Rule 613 so that the CAT NMS Plan may
permit Options Market Maker quotes to be reported
to the Central Repository by the relevant Options
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6.4(d)(iii) further states that each
Participant that is an Options Exchange
shall, through its Compliance Rule,
require its Industry Members that are
Options Market Makers to report to the
Options Exchange the time at which a
quote in a Listed Option is sent to the
Options Exchange (and, if applicable,
the time of any subsequent quote
modification and/or cancellation where
such modification or cancellation is
originated by the Options Market
Maker).206 Such time information also
shall be reported to the Central
Repository by the Options Exchange in
lieu of reporting by the Options Market
Maker.207
Request for Comment
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168. The Commission granted an
exemption from Rule 613 in order to
allow the alternative of permitting
Options Exchanges to report Options
Market Maker quotes to the Central
Repository in lieu of requiring such
reporting by both the Options Exchange
and the Options Market Maker as is
required by Rule 613, to be included in
the CAT NMS Plan and subject to notice
and comment.208 Do Commenters
believe that permitting exchanges to
report quote information sent to them by
Options Market Makers, including the
Quote Sent Time, to the Central
Repository would affect the
completeness or quality of CAT Data? If
so, what information would be missing?
169. Under Rule 613, Options Market
Makers would report their quotes to the
Central Repository and time stamps
would be attached to such quotes.
Under the exemption, Options Market
Makers would include the Quote Sent
Time when sending quote information
to the Options Exchanges. What, if any,
are the risks of permitting the Options
Exchanges to report information
Exchange in lieu of requiring that such reporting be
done by both the Options Exchange and the Options
Market Maker, as is required by Rule 613. See
Exemptive Request Letter, supra note 16, at 2. In
accord with the exemptive relief requested, the
SROs committed to require Options Market Makers
to report to the Exchange the time at which a quote
in a Listed Option is sent to the Options Exchange.
Id. at 3. The Commission granted exemptive relief
on March 1, 2016 in order to allow this alternative
to be included in the CAT NMS Plan and subject
to notice and comment. See Exemption Order,
supra note 18.
206 See CAT NMS Plan, supra note 3, at Section
6.4(d)(iii).
207 Id.
208 See Exemption Order, supra note 18.
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Options Market Makers otherwise
would be required to report?
170. Do Commenters believe that the
cost savings from permitting Options
Exchanges to report information
Options Market Makers would
otherwise have to report makes this a
preferable approach than Rule 613?
10. Error Rates
The CAT NMS Plan defines Error Rate
as ‘‘the percentage of [R]eportable
[E]vents collected by the [C]entral
[R]epository in which the data reported
does not fully and accurately reflect the
order event that occurred in the
market.’’ 209 Under the CAT NMS Plan,
the Operating Committee sets the
maximum Error Rate that the Central
Repository would tolerate from a CAT
Reporter reporting data to the Central
Repository.210 The Operating
Committee reviews and resets the
maximum Error Rate, at least
annually.211 If a CAT Reporter reports
CAT Data to the Central Repository with
errors such that their error percentage
exceeds the maximum Error Rate, then
such CAT Reporter would not be in
compliance with the CAT NMS Plan or
Rule 613.212 As such, ‘‘the Participants
as Participants or the SEC may take
appropriate action for failing to comply
with the reporting obligations under the
CAT NMS Plan and SEC Rule 613.’’ 213
The CAT NMS Plan, however, does not
detail what specific compliance
enforcement provisions would apply if
a CAT Reporter exceeds the maximum
Error Rate.
The CAT NMS Plan sets the initial
maximum Error Rate at 5% for any data
reported pursuant to subparagraphs (3)
and (4) of Rule 613(c).214 The SROs
highlight that ‘‘the Central Repository
will require new reporting elements and
methods for CAT Reporters and there
will be a learning curve when CAT
Reporters begin to submit data to the
Central Repository’’ in support of a 5%
initial rate.215 Further, the SROs state
that ‘‘many CAT Reporters may have
never been obligated to report data to an
audit trail.’’ 216 The SROs believe an
initial maximum Error Rate of 5%
209 See CAT NMS Plan, supra note 3, at Section
1.1; see also Rule 613(j)(6).
210 See id. at Section 6.5(d)(i).
211 See id. at Appendix C, Section A.3(b).
212 See id. at Appendix C, Section A.3(b) and Rule
613(g) and (h).
213 See id. at Appendix C, Section A.3(b).
214 See id. at Section 6.5(d)(i).
215 See id. at Appendix C, Section A.3(b).
216 See id.
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‘‘strikes the balance of making
allowances for adapting to a new
reporting regime, while ensuring that
the data provided to regulators will be
capable of being used to conduct
surveillance and market
reconstruction.’’ 217 In the CAT NMS
Plan, the Participants compared the
contemplated Error Rates of CAT
Reporters to the error rates of OATS
reporters in the time periods
immediately following three significant
OATS releases in the last ten years.218
The Participants state that for the three
comparative OATS releases: 219 An
average of 2.42% of order events did not
pass systemic validations; an average of
0.36% of order events were not
submitted in a timely manner; an
average of 0.86% of orders were
unsuccessfully matched to a trade
reporting facility trade report; an
average of 3.12% of OATS Route
Reports were unsuccessfully matched to
an exchange order; and an average of
2.44% of OATS Route Reports were
unsuccessfully matched to a report by
another reporting entity.220
The Participants, moreover, anticipate
reviewing and resetting the maximum
Error Rate once Industry Members
(excluding Small Industry Members)
begin to report to the Central Repository
and again once Small Industry Members
report to the Central Repository.221
The Participants thus propose a
phased approach to lowering the
maximum Error Rates among CAT
Reporters based on the period of time
reporting to the Central Repository and
whether the CAT Reporters are
Participants, large broker-dealers or
small broker-dealers.222 The Plan sets
forth a goal of the following maximum
Error Rates 223 where ‘‘Year(s)’’ refers to
year(s) after the CAT NMS Plan’s date
of effectiveness:
217 See
id.
id. The SROs note that the three
comparative releases are known as ‘‘(1) OATS Phase
III, which required manual orders to be reported to
OATS; (2) OATS for OTC Securities which required
OTC equity securities to be reported to OATS; and
(3) OATS for NMS which required all NMS stocks
to be reported to OATS.’’ Id.
219 See id. The SROs note that the calculated
‘‘combined average error rates for the time periods
immediately following [the OATS] release across
five significant categories for these three releases’’
was used in setting in the initial maximum Error
Rate. Id.
220 See id.
221 See id.
222 See id.
223 See id.
218 See
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TABLE 1—MAXIMUM ERROR RATES SCHEDULE
One year
%
Participants ......................................................................................................
Large Industry Members ..................................................................................
Small Industry Members ..................................................................................
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The CAT NMS Plan requires that the
Plan Processor to: (i) Measure and report
errors every business day; 224 (ii)
provide CAT Reporters daily statistics
and error reports as they become
available, including a description of
such errors; 225 (iii) provide monthly
reports to CAT Reporters that detail a
CAT Reporter’s performance and
comparison statistics; 226 (iv) define
educational and support programs for
CAT Reporters to minimize Error
Rates; 227 and (v) identify, daily, all CAT
Reporters exceeding the maximum
allowable Error Rate.228 To timely
correct data-submitted errors to the
Central Repository, the Participants
require that the Central Repository
receive and process error corrections at
all times.229 Further, the CAT NMS Plan
requires that CAT Reporters be able to
submit error corrections to the Central
Repository through a web-interface or
via bulk uploads or file submissions,
and that the Plan Processor, subject to
the Operating Committee’s approval,
support the bulk replacement of records
and the reprocessing of such records.230
The Participants, furthermore, require
that the Plan Processor identify CAT
Reporter data submission errors based
on the Plan Processor’s validation
processes.231
224 See id. The CAT NMS Plan sets forth that the
Plan Processor shall provide the Operating
Committee with regular Error Rate reports. Id. at
Section 6.1(o)(v). The Error Rate reports shall
include each of the following—if the Operating
Committee deems them necessary or advisable—
‘‘Error Rates by day and by delta over time, and
Compliance Thresholds by CAT Reporter, by
Reportable Event, by age before resolution, by
symbol, by symbol type (e.g., ETF and Index) and
by event time (by hour and cumulative on the
hour)[.]’’ Id.
225 See id. at Appendix C, Section A.3(b).
226 See id.
227 See id. at Appendix D, Section 10.1. The CAT
NMS Plan sets forth support programs that shall
include educational programs, including FAQs, a
dedicated help desk, industry-wide trainings,
certifications, industry-wide testing, maintaining
Technical Specifications with defined intervals for
new releases/updates, emailing CAT Reporter data
outliers, conducting annual assessments, using test
environments prior to releasing new code to
production, and imposing CAT Reporter attendance
requirements for testing sessions and educational
and industry-wide trainings. Id.
228 See id. at Appendix D, Section 10.4.
229 See id. at Appendix C, Section A.3(b).
230 See id.
231 See id. At a minimum, the processes would
include validating the data’s file format, CAT Data
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N/A
N/A
Request for Comment 232
171. Do Commenters believe the CAT
NMS Plan’s initial maximum Error Rate
of 5% for CAT Data reported to the
Central Repository is appropriate in
light of OATS’ current error rate of less
than 1%? 233 Why or why not?
172. Please provide examples of error
rates that are generally accepted with
respect to other regulatory data
reporting systems. At what error rate
should data be considered materially
unreliable? Please explain.
173. Do Commenters believe the CAT
NMS Plan’s initial maximum Error Rate
of 5% would negatively affect the
quality of CAT Data? Why or why not?
In explaining why or why not, please
address each quality (accuracy,
completeness, timeliness and
accessibility) separately.
174. Do Commenters believe that it
was reasonable for the Participants to
compare the contemplated Error Rates
of CAT Reporters to the error rates of
OATS reporters in the time periods
immediately following three significant
OATS releases in the last ten years?
Why or why not?
175. If not 5%, what initial maximum
Error Rate do Commenters believe
Participants and Industry Members
should be subject to and why?
176. What impact, if any, do
Commenters believe a 5% initial
maximum Error Rate would have on
Industry Members’ costs of compliance?
Please describe the costs of correcting
audit trail data. Given the costs of
correcting audit trail data, do
Commenters believe that establishing a
lower maximum Error Rate could be less
costly to Industry Members? Why or
why not? How much less costly?
177. What impact, if any, do
Commenters believe a 5% initial
maximum Error Rate would have on the
timing of the retirement of any
redundant audit trail systems and any
related costs? Please explain. Should the
actual Error Rate for CAT Data affect the
timing of the retirement of any
format, type, consistency, range, logic, validity,
completeness, timeliness and linkage. See id. at
Appendix D, Section 7.2.
232 See Section IV.E.4, infra, for further Error Rate
related requests for comment.
233 See Section IV.E.1.b(1), infra.
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Two years
%
1
5
N/A
Three years
%
Four years
%
1
1
5
1
1
1
redundant audit trail systems? If so,
why? If not, why not?
178. Do Commenters believe the CAT
NMS Plan’s target maximum Error Rate
of 1% for CAT Data reported to the
Central Repository pursuant to the CAT
NMS Plan’s phased approach is the
appropriate target maximum Error Rate
in light of current industry standards? If
not, why not? If not 1%, what target
maximum Error Rate do Commenters
believe Participants and Industry
Members should be subject to and why?
179. Do Commenters believe there are
any increased risks as a result of
allowing CAT Data subject to an initial
maximum Error Rate of 5% to be
reported to the CAT? How difficult
would it be for the Central Repository to
process and analyze CAT Data based on
data reported subject to an initial
maximum Error Rate of 5%?
Specifically, what are the increased
risks, if any, of CAT Data reported
subject to an Error Rate of 5% in respect
of combining or linking data within the
Central Repository or across other
sources of trade and order data currently
available to regulators?
180. Do Commenters believe there are
any increased risks as a result of
allowing CAT Data subject to a target
maximum Error Rate of 1% to be
reported to the CAT? How difficult
would it be for the Central Repository to
process and analyze CAT Data based on
data reported subject to a target
maximum Error Rate of 1%?
Specifically, what are the increased
risks, if any, of CAT Data reported
subject to an Error Rate of 1% in respect
of combining or linking data within the
Central Repository or across other
sources of trade and order data currently
available to regulators?
181. The CAT NMS Plan provides that
the Participants would review and reset,
at least on an annual basis, the
maximum Error Rate. Do Commenters
believe that this establishes an
appropriately rigorous schedule for the
Participants to evaluate whether the
maximum Error Rate could potentially
be set to a lower rate? Are there any
other factors that should affect when
and how the maximum Error Rate is set?
182. The CAT NMS Plan provides as
a goal a four-year phased approach
schedule to lower the maximum Error
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Rate segmented by Participants, large
broker-dealers and small broker-dealers.
Do Commenters believe a phased
schedule is appropriate and reasonable?
Do Commenters believe establishing
segments is appropriate and reasonable,
and if so are these the appropriate Error
Rate groupings? What alternative
groupings, if any, do Commenters
believe are the appropriate Error Rate
groupings?
183. Do Commenters believe that the
CAT NMS Plan is clear whether the
four-year phased approach is a goal?
Should it be more than a goal? Please
explain.
184. Do Commenters believe the
phased approach for CAT
implementation, whereby SROs would
begin reporting CAT Data one year prior
to other CAT Reporters and two years
prior to small CAT Reporters, would
affect the quality of the CAT Data and
the number of available CAT Data items
in the audit trail?
185. Do Commenters believe the CAT
NMS Plan provides adequate
enforcement provisions to ensure CAT
Reporters submit data to the Central
Repository no higher than the maximum
Error Rate? If not, what additional
enforcement provisions should the CAT
NMS Plan provide?
186. Do Commenters believe that
there should be a lower initial
maximum Error Rate and/or a more
accelerated or slower reduction of the
target maximum Error Rate? Would an
accelerated reduction of the target
maximum Error Rate facilitate the
earlier retirement of any redundant
audit trail system? What should the
initial maximum Error Rate and/or what
should be the schedule for reducing the
target maximum Error Rate?
187. What framework and criteria
should regulators adopt when
determining whether to retire
potentially redundant regulatory data
reporting systems? Please explain when
and how such retirement should take
place.
188. Do Commenters believe the CAT
NMS Plan sets forth sufficient
consequences for a CAT Reporter
exceeding the maximum Error Rates? If
not, what should be those
consequences?
189. Do Commenters believe that
some errors are of greater concern than
others? If so, what types of errors are
more or less problematic? Should the
type of error be considered when
calculating Error Rates? If so, how
should the Plan Processor take into
account different types of errors when
calculating Error Rates? How should the
Participants take into account different
types of errors when setting Error Rates?
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11. Regulatory Access
Under Section 6.5(c) of the CAT NMS
Plan, the Plan Processor must provide
regulators access to the Central
Repository for regulatory and oversight
purposes and create a method of
accessing CAT Data that includes the
ability to run complex searches and
generate reports.234 Section 6.10(c)
requires regulator access by two
different methods: (1) An online
targeted query tool with predefined
selection criteria to choose from; and (2)
user-defined direct queries and bulk
extractions of data via a query tool or
language allowing querying of all
available attributes and data sources.235
Additional requirements concerning
regulator access appear in Section 8 of
Appendix D.236
The CAT NMS Plan requires that CAT
must support a minimum of 3,000
regulatory users and at least 600 such
users accessing CAT concurrently
without an unacceptable decline in
performance.237 Moreover, CAT must
support an arbitrary number of user
roles and, at a minimum, include
defined roles for both basic and
advanced regulatory users.238
a. Online Targeted Query Tool
Sections 8.1.1, 8.1.2, and 8.1.3 of
Appendix D contain further
specifications for the online targeted
query tool.239 The tool must allow for
retrieval of processed and/or validated
(unlinked) data via an online query
screen that includes a choice of a variety
of pre-defined selection criteria.240
Targeted queries must include date(s)
and/or time range(s), as well as one or
more of a variety of fields listed in
Section 8.1.1 (e.g., product type, CATReporter-ID, and Customer-ID).241
Targeted queries would be logged such
that the Plan Processor could provide
monthly reports to the SROs concerning
metrics on performance and data usage
of the search tool.242 The CAT NMS
Plan further requires that acceptable
response times for the targeted search be
234 See CAT NMS Plan, supra note 3, at Section
6.5(c). Appendix C provides objective milestones to
assess progress concerning regulator access to the
Central Repository. See id. at Appendix C, Section
C.10(d).
235 Id. at Section 6.10(c). Section 6.10(c) also
requires the Plan Processor to reasonably assist
regulatory staff with queries, submit queries on
behalf of regulatory staff as requested, and maintain
a help desk to assist regulatory staff with questions
concerning CAT Data. Id.
236 See id. at Appendix D, Section 8.
237 Id. at Appendix D, Section 8.1.
238 Id.
239 Id. at Appendix D, Sections 8.1.1–8.1.3.
240 Id. at Appendix D, Section 8.1.1.
241 Id.
242 Id.
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in increments of less than one minute;
for complex queries scanning large
volumes of data or large result sets (over
one million records) response times
must be available within 24 hours of the
request; and queries for data within one
business date of a 12-month period must
return results within three hours
regardless of the complexity of
criteria.243 Under the CAT NMS Plan,
regulators may access all CAT Data
except for PII data (access to which
would be limited to an authorized
subset of Participant and Commission
employees) and the Plan Processor must
work with regulators to implement a
process for providing them with access
and routinely verifying a list of active
users.244
b. User-Defined Direct Queries and Bulk
Extraction of Data
Section 8.2 of Appendix D outlines
the requirements for user-defined direct
queries and bulk extraction of data,
which regulators would use to obtain
large data sets for internal surveillance
or market analysis.245 Under the CAT
NMS Plan, regulators must be able to
create, save, and schedule dynamic
queries that would run directly against
processed and/or unlinked CAT Data.246
Additionally, CAT must provide an
open application program interface
(‘‘API’’) that allows use of analytic tools
and database drivers to access CAT
Data.247 Queries submitted through the
open API must be auditable and the
CAT System must contain the same
level of control, monitoring, logging,
and reporting as the online targeted
query tool.248 The Plan Processor must
also provide procedures and training to
regulators that would use the direct
query feature.249 Sections 8.2.1 and
8.2.2 of Appendix D contain additional
specifications for user-defined direct
queries and bulk data extraction,
respectively.250
c. Regulatory Access Schedule
Section A.2 of Appendix C addresses
the time and method by which CAT
243 Id. at Appendix D, Section 8.1.2. Appendix D,
Section 8.1.2 contains further performance
requirements applicable to data and the architecture
of the online query tool. Id.
244 Id. at Appendix D, Section 8.1.3.
245 Id. at Appendix D, Section 8.2.
246 Id.
247 Id.
248 Id. Direct queries must not return or display
PII data but rather display non-PII unique
identifiers (e.g., Customer-ID or Firm Designated
ID). The PII corresponding to these identifiers could
be gathered using the PII workflow described in
Appendix D, Data Security, PII Data Requirements.
See id. at Appendix D, Section 4.1.6.
249 Id. at Appendix D, Section 8.2.
250 Id. at Appendix D, Sections 8.2.1 and 8.2.2.
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Data would be available to regulators.251
Section A.2(a) requires that data be
available to regulators any point after
the data enters the Central Repository
and passes basic format validations.252
After errors are communicated to CAT
Reporters on T+1, CAT Reporters would
be required to report corrected data back
to the Central Repository by 8 a.m.
Eastern Time on T+3.253 Regulators
must then have access to corrected and
linked Order and Customer data by 8:00
a.m. Eastern Time on T+5.254 Section
A.2(b) generally describes Bidders’
approaches regarding regulator access
and use of CAT Data and notes that
although the SROs set forth the
standards the Plan Processor must meet,
they do not endorse any particular
approach.255 Section A.2(c) outlines
requirements the Plan Processor must
meet for report building and analysis
regarding data usage by regulators,
consistent with, and in addition to, the
specifications outlined in Section 8 of
Appendix D.256
Request for Comment 257
190. Do Commenters believe the CAT
NMS Plan’s ‘‘Functionality of the CAT
System’’ Section (Section 8 of Appendix
D) describes with sufficient detail how
a regulator would access, use and
analyze CAT Data? If not, describe what,
if any, additional requirements and
details should be provided and how.
191. Do Commenters believe the CAT
NMS Plan’s ‘‘Functionality of the CAT
System’’ Section sufficiently addresses
all regulators’ end-user requirements? If
not, please explain. Describe what, if
any, additional requirements and details
should be provided and how.
192. If Commenters believe that the
CAT NMS Plan’s ‘‘Functionality of the
CAT System’’ Section does not cover all
regulators’ end-user requirements,
please describe how regulators would
integrate their applications in a timely
and reasonable manner.
193. The CAT NMS Plan permits the
CAT to be implemented in a way that
would (1) require regulators to
download entire data sets and analyze
such data within the regulator or the
251 Id.
at Appendix C, Section A.2.
at Appendix C, Section A.2(a). Appendix
C, Section A.3(e) indicates this would be no later
than noon EST on T+1. Id. at Appendix C, Section
A.3(e).
253 Id. at Appendix C, Section A.1(a)(iv);
Appendix D, Section 6.1.
254 Id. at Appendix C, Section A.2(a).
255 Id. at Appendix C, Section A.2(b).
256 Id. at Appendix C, Section A.2(c). Appendix
C, Section A.2(d) addresses system service level
agreements that the SROs and Plan Processor would
enter into. Id. at Appendix C, Section A.2(d).
257 See Section IV.H.5, infra, for further regulatory
access related requests for comment.
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regulators’ cloud or (2) permit regulators
to analyze sets of data within the CAT
using applications or programs selected
by the Commission. What do
Commenters believe are the advantages
and disadvantages to each approach?
194. Do Commenters believe the CAT
NMS Plan’s T+5 schedule for regulatory
access to corrected and linked Order
and Customer data is the appropriate
schedule in light of current industry
standards? If not, why not? Do
Commenters believe that the SROs’
determination of current industry
standards is reasonable or appropriate?
Do Commenters believe that it is
appropriate to base the timing for
regulatory access on industry standards?
Why or why not?
195. If the T+5 schedule is not
appropriate, when do Commenters
believe regulatory access to corrected
and linked Order and Customer data
should be provided and why? Do
Commenters believe the SROs’ should
include in the CAT NMS Plan detailed
provisions with milestones in achieving
a more accelerated regulatory access
schedule to corrected and linked Order
and Customer data?
196. Do Commenters believe the
Plan’s proposed error correction
timeframe—i.e., communication of
errors on T+1, corrected data
resubmitted by CAT Reporters by T+3,
and corrected data available to
regulators by T+5—is feasible and
appropriate in light of current industry
standards? If not, why not, and how
long do Commenters believe these error
correction timeframes should be and
why? Are shorter timeframes feasible
and appropriate in light of current
industry standards? Why or why not?
197. To what extent do Commenters
believe the CAT NMS Plan’s T+5
regulatory access schedule to corrected
and linked Order and Customer data
would affect the accuracy,
completeness, accessibility and/or
timeliness of CAT Data collected and
maintained under the CAT? How?
198. To what extent do Commenters
believe the Plan’s three-day window of
error correction would affect the
accuracy, completeness, accessibility
and/or timeliness of CAT Data collected
and maintained under the CAT? How?
199. Regulators’ technology teams
would be required to work with the Plan
Processor to integrate their applications
under the CAT NMS Plan. What, if any,
are the risks to this approach? Should
the Plan Processor be required to enter
into support contracts with regulators?
If so, please explain. Describe what, if
any, service contract terms should be set
forth in the CAT NMS Plan or set forth
in any related documents. Do
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Commenters have any concerns about
the security or confidentiality of CAT
Data resulting from a service contract
between the Plan Processor and the
regulators? If so, please explain. If
Commenters have any security or
confidentiality concerns resulting from
a service contract between the Plan
Processor and the regulators, please
specify any appropriate service contract
terms that would address the concerns.
200. How do Commenters believe the
Plan Processor should set pricing for a
regulator seeking additional
functionality from the Plan Processor
under the CAT? What, if anything, do
Commenters believe should govern
pricing for additional functionality by
the Plan Processor? For example, should
pricing or contract standards (e.g.,
reasonable, commercially reasonable,
etc.), agreed-upon profit margins—or
minimums and maximums, etc.—be
included under the CAT NMS Plan or
any related documentation? If so, please
explain.
201. Do Commenters believe the CAT
NMS Plan appropriately encourages or
incentivizes the Participants and the
Plan Processor to incorporate new
technology and to innovate? Does the
CAT NMS Plan appropriately encourage
or incentivize the Plan Processor to have
a flexible and scalable solution? Do
Commenters believe that the CAT NMS
Plan would result in a CAT that has
adequate system flexibility and
scalability to incorporate improvements
in technology and future regulatory,
analytic and data capture needs? Why or
why not?
202. Does the regulatory access
approach set forth in the CAT NMS Plan
provide regulators with sufficient tools
to maximize their regulatory activities,
actions, and improve their
surveillances? If not, why not and what
should be added?
203. The CAT NMS Plan provides that
targeted queries and data extractions
would be logged so that the Plan
Processor can provide the Operating
Committee, the Participants, and the
Commission with monthly performance
and usage reports including data such as
the user ID of the person submitting the
query and the parameters of the query.
Do Commenters believe that the data to
be recorded in these logs and provided
in these reports to each Participant and
to the SEC would be appropriate and
useful? Should any data elements be
added or removed from these reports?
204. Do Commenters believe it is
appropriate for the Plan Processor and
the Operating Committee to also have
access to these logs and monthly
performance and usage reports? How
should the Plan Processor and
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Operating Committee be permitted to
use these logs and reports? To the extent
that these logs and reports are accessible
by the Plan Processor and the Operating
Committee, should any data elements be
added or removed? Should additional
details or requirements be added to the
CAT NMS Plan to clarify what the
content of these logs and reports would
be and which parties would have access
to them?
12. Security, Confidentiality, and Use of
Data
The CAT NMS Plan provides that the
Plan Processor is responsible for the
security and confidentiality of all CAT
Data received and reported to the
Central Repository, including during all
communications between CAT
Reporters and the Plan Processor, data
extraction, data manipulation and
transformation, loading to and from the
Central Repository, and data
maintenance by the Central
Repository.258 The Plan Processor must,
among other things, require that
individuals with access to the Central
Repository agree to use CAT Data only
for appropriate surveillance and
regulatory activities and to employ
safeguards to protect the confidentiality
of CAT Data.259
In addition, the Plan Processor must
develop a comprehensive information
security program as well as a training
program that addresses the security and
confidentiality of all information
accessible from the CAT and the
operational risks associated with
accessing the Central Repository.260 The
Plan Processor must also designate one
of its employees as Chief Information
Security Officer; among other things, the
Chief Information Security Officer is
responsible for creating and enforcing
appropriate policies, procedures, and
control structures regarding data
security.261 The Technical
Specifications, which the Plan Processor
must publish, must include a detailed
description of the data security
standards for CAT.262
Appendix D of the CAT NMS Plan
sets forth minimum data security
requirements for CAT that the Plan
Processor must meet.263 For example,
Appendix D enumerates various
connectivity, data transfer, and
encryption requirements such as that
the CAT System must have encrypted
internet connectivity, CAT Reporters
258 See CAT NMS Plan, supra note 3, at Section
6.5(f)(i), (iv).
259 Id. at Section 6.5(f)(i).
260 Id. at Sections 6.1(m), 6.12.
261 Id. at Section 6.2(b).
262 Id. at Section 6.9.
263 Id. at Appendix D, Section 4.
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must connect to CAT infrastructure
using secure methods such as private
lines or virtual private network
connections over public lines, CAT Data
must be encrypted in flight using
industry standard best practices, PII
data must be encrypted both at rest and
in flight, and CAT Data stored in a
public cloud must be encrypted at
rest.264 Additional requirements
regarding data storage, data access,
breach management, and PII data are
also specified in Appendix D.265
In addition, the Participants must
establish and enforce policies and
procedures that ensure the
confidentiality of the CAT Data obtained
from the Central Repository, limit the
use of CAT Data obtained from the
Central Repository solely for
surveillance and regulatory purposes,266
implement effective information barriers
between each Participant’s regulatory
and non-regulatory Staff with regard to
CAT Data, and limit access to CAT Data
to designated persons.267 However, a
Participant may use the Raw Data 268 it
reports to the Central Repository for
‘‘commercial or other’’ purposes if not
prohibited by applicable law, rule or
regulation.269
Request for Comment
205. Do Commenters believe that the
CAT NMS Plan appropriately allocates
responsibility for the security and
confidentiality of CAT Data among the
Participants, the Plan Processor, and
other parties? If not, how should these
responsibilities be allocated?
206. Do Commenters believe that the
data security requirements set out in
Appendix D are appropriate and
reasonable? Should any additional
details or requirements be provided?
207. What, if any, specific details or
requirements regarding data security
and confidentiality do Commenters
believe should be included in the
information security program, training
program, and Technical Specifications
to be developed by the Plan Processor?
Should additional details on the content
of these programs and specifications be
provided?
264 Id.
at Appendix D, Section 4.1.1, 4.1.2.
at Appendix D, Section 4.1.3–4.1.6.
266 The Commission notes that regulatory
purposes includes, among other things, analysis
and reconstruction of market events, market
analysis and research to inform policy decisions,
market surveillance, examinations, investigations,
and other enforcement functions.
267 Id. at Section 6.5(f)(ii), (g).
268 Raw data is defined as ‘‘Participant Data and
Industry Member Data that has not been through
any validation or otherwise checked by the CAT
System.’’ Id. at Section 1.1.
269 Id. at Section 6.5(f)(i).
265 Id.
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208. What, if any, specific details or
requirements regarding data
confidentiality do Commenters believe
should be included in the policies and
procedures to be developed by the
Participants? Should additional details
on the content of these policies and
procedures be provided?
209. Do Commenters believe that the
CAT NMS Plan includes sufficient
safeguards to prevent the misuse of CAT
Data by employees or agents of the
Participants or other persons with
access to the Central Repository? For
example, do Commenters believe that
requiring information barriers between
regulatory and non-regulatory staff 270
and permitting the use of CAT Data only
for regulatory, surveillance, and
commercial or other purposes as
permitted by law 271 are effective
measures to prevent the misuse of CAT
Data? Should the CAT NMS Plan set
forth additional detail regarding the
distinction between regulatory and nonregulatory staff and between the
appropriate and inappropriate use of
CAT Data for commercial or other
purposes? Should the CAT NMS Plan
prescribe any specific information
barriers? If so, what should be
prescribed in the CAT NMS Plan?
210. Do Commenters believe the data
access and breach management
provisions described in Appendix D of
the CAT NMS Plan 272 are effective
mechanisms for monitoring and
preventing the misuse of CAT Data?
Why or why not? Would any additional
details or requirements make these
provisions more effective?
211. Which persons or entities should
have the responsibility to monitor for
and prevent the misuse of CAT Data?
For example, should the Chief
Compliance Officer or the Chief
Information Security Officer have this
responsibility? Why or why not? Should
additional details be provided to clarify
where this responsibility lies?
212. Do Commenters believe it is
appropriate for Participants to be
permitted to use all Raw Data reported
to the Central Repository for commercial
purposes? If not, what particular types
of Raw Data would be inappropriate to
use for commercial purposes?
213. Do Commenters believe that the
CAT NMS Plan adequately addresses
the protection and security of PII in
CAT? If not, why not and what should
be added to the CAT NMS Plan? For
example, should the CAT NMS Plan
provide that PII is accessible only when
required, that PII be properly masked,
270 See
id. at Section 6.5(f)(ii)(A).
id. at Section 6.5(f)(i)(A).
272 See id. at Appendix D, Sections 4.1.4, 4.1.5.
271 See
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and/or that it be safeguarded such that
it would not be improperly accessible?
214. Do Commenters believe that
there are alternative methods or
information that could be used in lieu
of requiring the reporting of Customer
PII to the Central Repository that,
without diminishing the quality of CAT
Data available to regulators or impairing
regulators’ ability to use CAT Data to
carry out their functions, would create
less risk of a breach of the security or
confidentiality of the personal
information of Customers? If so, what
methods or information, specifically,
could serve as such an alternative to
PII? 273
215. Do Commenters believe that the
CAT NMS Plan includes adequate
requirements regarding the operational
security of the CAT System? What, if
any, additional details or requirements
should be provided? Should the CAT
NMS Plan require the Plan Processor to
have the ability to monitor for threats,
attacks, and anomalous activity on a 24/
7 basis through a Security Operations
Center (‘‘SOC’’) or a similar capability?
What would be the costs and benefits of
such a requirement?
216. Appendix C of the CAT NMS
Plan discusses solutions for encrypting
data at rest and in motion. Appendix D
of the CAT NMS Plan states that all CAT
Data must be encrypted in flight, and PII
Data must encrypted in flight and at
rest. Do Commenters believe that the
Plan’s data encryption requirements are
adequate for CAT Data and PII Data?
Why or why not? Do Commenters
believe that the CAT NMS Plan provides
sufficient information and clarity
regarding data encryption requirements?
Do Commenters believe that there is a
particular method for data encryption,
in motion and/or at rest, that should be
used?
217. Appendix D, Section 4.1.1 of the
CAT NMS Plan states that the CAT
System must have ‘‘encrypted internet
connectivity.’’ What are the risks, if any,
of allowing Internet access from the
Central Repository, even if encrypted?
Please explain. Do Commenters believe
that the encrypted connection
requirement in the CAT NMS Plan
should apply to communication paths
from the Central Repository to the
Internet and/or connections from CAT
to/from trusted parties? What challenges
would the Plan Processor face in
implementing either option? Does one
option provide more robust security
than the other? Why or why not?
218. To the extent the requirement for
‘‘encrypted internet connectivity’’
273 See
Section III.B.7, supra, for additional PII
related requests for comment.
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applies to connectivity between the
Central Repository and trusted parties
such as the Commission and the
Participants, do Commenters believe
that the CAT NMS Plan should require
that these parties and the Plan Processor
enter into formal Memoranda of
Understanding or Interconnection
Security Agreements that document the
technical, operational, and management
details regarding the interface between
the CAT System and these parties? Why
or why not?
219. With respect to industry
standards, do Commenters believe that
the CAT NMS Plan should be updated
to include standards and requirements
of other NIST Special Publications
(‘‘SPs’’) that were not mentioned in
Appendix D (e.g., NIST SP 800–86 for
incident handling, 800–44 for securing
public-facing web servers, 800–146 for
cloud security)? Why or why not?
220. Do Commenters believe that the
Plan should be updated more broadly to
include the NIST family of guidance
documents? Why or why not?
221. Throughout the Plan, there are
numerous references to leveraging
‘‘industry best practices’’ pertaining to
compliance subjects such as system
assessments and disaster recovery/
business continuity planning. How do
‘‘industry best practices’’ compare to
NIST guidance in these areas? Do
Commenters believe that the Plan
Processor should implement NIST
guidance for the Plan rather than
industry best practices? Why or why
not?
222. The CAT NMS Plan states that
the Plan Processor must conduct third
party risk assessments at regular
intervals to verify that security controls
implemented are in accordance with
NIST SP 800–53.274 Do Commenters
believe that the CAT NMS Plan should
adopt the meaning and terminology of
Security Assessment and Authorization
as defined by the NIST and/or other
NIST guidance in the CAT NMS Plan,
particularly within the requirements set
forth in Appendix D to the CAT NMS
Plan? Why or why not?
223. Do Commenters believe that the
CAT NMS Plan should include
requirements regarding how the Plan
Processor should categorize data from a
security perspective? For example,
should the Plan Processor be required to
implement data categorization standards
consistent with Federal Information
Processing Standard (‘‘FIPS’’) 199 or
NIST SP 800–60? Why or why not?
Would including data categorization
requirements in the CAT NMS Plan
274 See
CAT NMS Plan, supra note 3, at Appendix
D, Section 5.3.
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improve data integrity, availability,
segmentation, auditing, and incident
response? Why or why not?
224. The CAT NMS Plan provides that
CAT must follow NIST SP 800–137—
Information Security Continuous
Monitoring for Federal Information
Systems and Organizations in addition
to a limited number of related
monitoring provisions.275 Do
Commenters believe that the CAT NMS
Plan provides sufficient and robust
information related to continuous
monitoring program requirements? Why
or why not?
225. Do Commenters believe the CAT
NMS Plan adequately sets forth the roles
and responsibilities of independent
third party risk assessment functions,
including the consistent description of
their specific functions and performance
frequency? For example, are the CAT
NMS Plan independent third party risk
assessment provisions consistent with
‘‘industry best practices’’? Or should the
CAT require a greater or lesser
performance frequency than as
described in the CAT NMS Plan? As
another example, do the technical
assessments described in Section 6.2,
Appendix C, Section A.5, and the NIST
SP 800–53 requirements noted in
Appendix D, Section 4.2, adequately
and clearly establish the roles and
responsibilities of the parties assessing
the technical aspects of the CAT?
226. Do Commenters believe the CAT
NMS Plan should specify the general
audit and independent assessment
requirements and the proper timeframes
for when those assessments should
occur? For instance, are there
assessments that may need to occur on
an annual basis? If so, what are those
assessments? Are there assessments that
may need to occur more frequently? If
so, what are those assessments and why
do they need to occur more frequently?
227. Do Commenters believe that the
CAT NMS Plan requirements for
conducting ad hoc penetration testing
and an application security code audit
by a reputable third-party in Appendix
D, Section 4.1.3 ‘‘prior to launch’’ and
periodically as defined by SLAs are
consistent with industry best practices?
Should additional testing or audits be
required? Why or why not? Should
testing or audits be required to occur
more frequently than required by the
CAT NMS Plan and SLAs? Why or why
not?
228. Do Commenters believe that the
third party risk assessments and
penetration tests required by the CAT
275 See id. at Sections 6.1(g), 6.10(c), Appendix C,
Section A.4, Appendix D, Sections 2.2, 4.1.2, 4.1.4,
4.2, 8.3, 8.4.
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NMS Plan could themselves
compromise the security or
confidentiality of CAT Data? Please
explain.
229. In Section 6.2(b)(vi) of the CAT
NMS Plan, the Chief Information
Security Officer is required to report to
the Operating Committee the activities
of the Financial Services Information
Sharing and Analysis Center (‘‘FS–
ISAC’’) or other comparable body. Do
Commenters believe there are other
cyber and threat intelligence bodies, in
addition to FS–ISAC, that the Plan
Processor should join? Why or why not?
230. Do Commenters believe the CAT
NMS Plan effectively describes the
verification process when CAT
Reporters connect to the Central
Repository network? For example,
which specific individual(s) at a CAT
Reporter would be allowed access to
CAT for reporting and verification
purposes? Should there be a public key
exchange process?
231. Do Commenters believe the CAT
NMS Plan provides sufficient detail
regarding the ability of CAT to
determine whether a regulator’s queries
are shielded from the Plan Processor
(including its staff, officers, and
administrators) as well as other
regulators and users of CAT? If not,
what specifically should be added to the
CAT NMS Plan?
232. Do Commenters believe that the
CAT NMS Plan should require an audit
of all CAT Reporters’ data security? If
so, which person or entity should have
responsibility for such an audit, and
what should the scope and elements of
the audit be? Please estimate the cost of
such audits. What other changes, if any,
should be made to the CAT NMS Plan
to provide for the allocation of sufficient
resources whereby such an audit could
be carried out?
233. Do Commenters believe the CAT
NMS Plan should require the Plan
Processor to provide a ‘‘blanket’’
security authorization to operate
(‘‘ATO’’) document (or its equivalent)
prior to CAT Reporters sending CAT
Data?
276 See
IV. Economic Analysis
277 Id.
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When adopting Rule 613, the
Commission noted that the adopted
Rule permitted the SROs to consider a
wider array of solutions than did the
proposed Rule. The Commission stated
its belief that, as a result, ‘‘the economic
consequences of the consolidated audit
trail now will become apparent only
over the course of the multi-step process
for developing and approving an NMS
plan that will govern the creation,
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6.
A. Introduction
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implementation, and maintenance of a
consolidated audit trail.’’ 276 In
particular, the Commission noted its
belief that ‘‘the costs and benefits of
creating a consolidated audit trail, and
the consideration of specific costs as
related to specific benefits, is more
appropriately analyzed once the SROs
narrow the expanded array of choices
they have under the adopted Rule and
develop a detailed NMS plan.’’ 277 The
Commission also noted that a ‘‘robust
economic analysis of . . . the actual
creation and implementation of a
consolidated audit trail itself . . .
requires information on the plan’s
detailed features (and their associated
cost estimates) that will not be known
until the SROs submit their NMS plan
to the Commission for its
consideration.’’ 278 Accordingly, the
Commission deferred its economic
analysis of the actual creation,
implementation, and maintenance of the
CAT until after submission of an NMS
plan.
To assist in that analysis, Rule 613, as
adopted, requires that the SROs: (1)
Provide an estimate of the costs
associated with creating, implementing,
and maintaining the consolidated audit
trail under the terms of the NMS plan
submitted to the Commission for its
consideration; (2) discuss the costs,
benefits, and rationale for the choices
made in developing the NMS plan
submitted; and (3) provide their own
analysis of the submitted NMS plan’s
potential impact on competition,
efficiency and capital formation.279 The
Commission stated that it believed that
these estimates and analyses would help
inform public comment regarding the
CAT NMS Plan and would help inform
the Commission as it evaluates whether
to approve the CAT NMS Plan.280
The Commission is sensitive to the
economic effects of the CAT NMS
Plan,281 including its costs and benefits
and its impact on efficiency,
competition and capital formation. In
the Adopting Release for Rule 613, the
Commission considered the economic
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278 Id.
at 45726.
see also 17 CFR 242.613(a)(1)(vii), (viii),
(xi), (xii).
280 See Adopting Release, supra note 9, at 45726.
Rule 613(a)(5) requires that ‘‘[i]n determining
whether to approve the national market system
plan, or any amendment thereto, and whether the
national market system plan or any amendment
thereto is in the public interest under [Rule]
608(b)(2), the Commission shall consider the impact
of the national market system plan or amendment,
as applicable, on efficiency, competition, and
capital formation.’’ 17 CFR 242.613(a)(5).
281 See CAT NMS Plan, supra note 3.
279 Id.;
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effects of the actions the SROs were
required to take upon approval of the
adopted Rule, specifically the
requirement that the SROs develop an
NMS plan, utilizing their own resources
and undertaking their own research,
that addresses the specific details, cost
estimates, considerations, and other
requirements of the Rule.282 As noted in
the Adopting Release, however, Rule
613 provided the SROs with ‘‘flexibility
in how they [chose] to meet the
requirements of the adopted Rule,’’ 283
allowing the SROs to consider a number
of different approaches in developing
the CAT NMS Plan.
In accordance with the approach
articulated by the Commission in the
Adopting Release, the Commission is
hereby publishing its economic analysis
of the CAT NMS Plan and is soliciting
comment thereon. This Section reflects
the Commission’s preliminary analysis
and conclusions regarding the economic
effects of the creation, implementation
and maintenance of the CAT pursuant
to the details proposed in the NMS plan
submitted to the Commission for its
consideration. The analysis is divided
into eight topics: (1) A summary of the
expected economic effects of approving
the CAT NMS Plan; (2) a description of
the economic framework for analyzing
the economic effects of approving the
CAT NMS Plan; (3) a discussion of the
current, or ‘‘Baseline,’’ audit trail data
available to regulators, and the sources
of such data; (4) a discussion of the
potential benefits of the CAT NMS Plan;
(5) a discussion of the potential costs of
the CAT NMS Plan; (6) an economic
analysis of the CAT NMS Plan’s impact
on efficiency, competition, and capital
formation; (7) a discussion of
alternatives to various features of the
CAT NMS Plan and to the CAT NMS
Plan itself; and (8) a request for
comment on the Commission’s
preliminary economic analysis.
B. Summary of Expected Economic
Effects
As the Commission explained in the
Adopting Release, the Commission
believes that the regulatory data
infrastructure on which the SROs and
the Commission currently must rely is
outdated for effective oversight of a
complex, dispersed, and highly
automated national market system.284 In
performing their oversight
responsibilities, regulators today must
attempt to cobble together disparate data
from a variety of existing information
systems, each lacking in completeness,
282 See
Adopting Release, supra note 9, at 45726.
at 45725.
284 See id. at 45723.
283 Id.
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accuracy, accessibility, and/or
timeliness—a model that neither
supports the efficient aggregation of data
from multiple trading venues nor yields
the type of complete and accurate
market activity data needed for robust
market oversight.285 The Commission
has analyzed the expected economic
effects of the CAT NMS Plan in light of
these existing shortcomings and the goal
of improving the ability of SROs and the
Commission to perform their regulatory
activities to the benefit of investors.286
In general, the Commission
preliminarily believes that, if approved,
the CAT NMS Plan would result in
benefits by improving the quality of the
data available to regulators in four areas
that affect the ultimate effectiveness of
core regulatory efforts—completeness,
accuracy, accessibility and
timeliness.287 The Commission
preliminarily believes that the
improvements in these data qualities
that would be realized from approval of
the CAT NMS Plan would substantially
improve regulators’ ability to perform
analysis and reconstruction of market
events, and market analysis and
research to inform policy decisions, as
well as perform other regulatory
activities, in particular market
surveillance, examinations,
investigations, and other enforcement
functions. Regulators depend on data for
many of these activities and the
improvements in the data qualities
would thus improve the efficiency and
effectiveness of such regulatory
activities. As explained further below,
these improvements could benefit
investors by giving regulators more and
better regulatory tools to provide
investors with a more effectively
regulated trading environment,288
which could increase capital formation,
liquidity, and price efficiency. Data
improvements could enhance
regulators’ ability to provide investors
and the public with more timely and
accurate analysis and reconstruction of
market events, and to develop more
effective responses to such events.289
Improved understanding of emerging
285 See
id.
Commission noted current SRO audit trail
limitations in the Proposing Release and the
Adopting Release. See Proposing Release, supra
note 9, at 32563–68; Adopting Release, supra note
9, at 45726–30. Rule 613 is designed to address
these limitations.
287 See Adopting Release, supra note 9, at 45727
(discussing four ‘‘qualities’’ of trade and order data
that impact the effectiveness of core SRO and
Commission regulatory efforts: Accuracy,
completeness, accessibility, and timeliness); see
also Section IV.E, infra, for a detailed discussion of
the expected benefits of the CAT NMS Plan.
288 See Section IV.E.2, infra.
289 See Section IV.E.2.a, infra.
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market issues resulting from enhanced
market analysis and research could
inform regulatory policies that improve
investor protection through better
market quality, more transparency, and
more efficient prices.
In terms of completeness, the Plan
requires the reporting of certain
additional data fields, events, and
products.290 More importantly, the CAT
NMS Plan requires certain data
elements useful for regulatory analysis
to be available from a single data source.
Having relevant data elements available
from a single source would simplify
regulators’ data collection process and
facilitate more efficient analyses and
surveillances that incorporate crossmarket and cross-product data.
With respect to the accuracy of
available data, the Commission
preliminarily believes that the
requirements in the Plan would improve
data accuracy significantly. For
example, the Commission expects that
the requirements to store the CAT Data
in a uniform linked format and the use
of consistent identifiers for customers
and market participants would result in
fewer inaccuracies as compared to
current data sources. These accuracy
improvements should significantly
reduce the time regulators spend
processing the data and finding
solutions when faced with inaccurate
data. The Commission preliminarily
believes that the requirements in the
Plan for clock synchronization and time
stamp granularity would improve the
accuracy of data with respect to the
timing of market events, but the
improvements would be modest. The
Commission preliminarily believes that
the Plan would improve regulators’
ability to determine the sequence of a
small percentage of market events
relative to all surrounding events.291
The Commission also preliminarily
believes that the Plan would increase
the accessibility of data for SROs and
the Commission, because regulators
290 See CAT NMS Plan, supra note 3, at Sections
6.3, 6.4; see also 17 CFR 242.613(c)(7).
291 The CAT NMS Plan would also require that
CAT Reporters’ business clocks be synchronized to
within 50 milliseconds of the time maintained by
the NIST, which would increase the precision of the
time stamps provided by the 39% of broker-dealers
who currently synchronize their clocks with less
precision than what is called for by the Plan. See
supra note 125. Independent of the potential time
clock synchronization benefits, the order linking
data that would be captured in CAT should increase
the proportion of events that could be sequenced
accurately. This reflects the fact that some records
pertaining to the same order could be sequenced by
their placement in an order lifecycle (e.g., an order
submission must have occurred before its
execution) without relying on time stamps. This
information may also be used to partially sequence
surrounding events.
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would be able to access the CAT Data
directly.292 This, coupled with the
improvements in completeness, would
vastly increase the scope of information
readily available to regulators and
significantly reduce the number of data
requests from the several hundred
thousand requests regulators make each
year. The increased scope of readily
available information should facilitate
more data-driven regulatory policy
decisions, broaden the potential
surveillances, expand the opportunities
for SRO and Commission analysis to
help target broker-dealers and
investment advisers for examinations
and help to perform those examinations.
Finally, the Commission preliminarily
believes that the CAT NMS Plan would
improve the timeliness of available data.
Because regulators would be able to
access uncorrected data the day after an
order event and would be able to access
corrected and linked data five days after
an order event,293 many data elements
would be available to regulators more
quickly than they are currently and the
amount of time regulators would need
to acquire and process data before
running analyses would be reduced. For
example, the corrected and linked data
available on T+5 would identify the
customer account associated with all
order events, information that currently
takes ten days or longer for regulators to
obtain and then need to link to other
data sources for use. These
improvements in timeliness, combined
with improvements in completeness,
accessibility, and accuracy discussed
above, would improve the efficiency of
regulatory analysis and reconstruction
of market events, as well as market
analysis and research that informs
policy decisions, and make market
surveillance, examinations,
investigations, and other enforcement
functions more efficient, allowing, for
example, the SROs and the Commission
to review tips and complaints more
effectively.
The Commission notes that the Plan
lacks information regarding the details
of certain elements of the Plan likely to
affect the costs and benefits associated
292 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.2, Appendix D, Section 8.1; see also
17 CFR 242.613(e)(2).
293 CAT Data would be reported by 8:00 a.m.
Eastern Time on day T+1 and made available to
regulators in raw form after it is received and passes
basic formatting validations with an error correction
process completed by 8:00 a.m. Eastern Time on
day T+5. While the Plan does not specify exactly
when these validations would be complete, the
requirement to link records by 12:00 p.m. Eastern
Time on day T+1 gives a practical upper bound on
this timeline. See CAT NMS Plan, supra note 3, at
Appendix C, Sections A.2(a), A.3(a), Appendix D,
Section 6.2.
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with it, primarily because those details
have not yet been determined, and this
lack of information creates some
uncertainty about the expected
economic effects. As discussed further
below, lack of specificity surrounding
the processes for converting data
formats and linking related order events
creates uncertainty as to the anticipated
improvements in accuracy because such
processes have the potential to create
new data inaccuracies. Lack of
specificity surrounding the process for
regulators to access the CAT Data also
creates uncertainty around the expected
improvements in accessibility. For
example, while the Plan indicates that
regulators would have an on-line
targeted query tool and a tool for userdefined direct queries or bulk
extraction,294 the Plan itself does not
provide an indication for how userfriendly the tools would be or the
particular skill set needed to use the
tools for user-defined direct queries.
However, the Commission has analyzed
the expected economic effects of the
Plan to the extent possible with the
information available, noting areas of
uncertainty in its analysis where
applicable. The Commission has also
considered whether certain provisions
related to the operation and
administration of the Plan could
mitigate some of the uncertainties.295
The Commission also preliminarily
believes that more effective and efficient
regulation of securities markets and
market participants resulting from
approval of the CAT NMS Plan could
significantly benefit investors and the
integrity of the market. For example, the
Commission preliminarily believes that
more effective and efficient surveillance
and enforcement would detect a higher
proportion of violative market activity.
This additional detection could not only
reduce violative behavior through
potential enforcement actions, but
through deterrence if market
participants believe violative activities
are more likely to be detected. Because
violative activity degrades market
quality and imposes costs on investors
and market participants, reductions in
violative activity would benefit
investors and market integrity.
Likewise, more effective and efficient
risk assessment and risk-based
examinations should more effectively
facilitate the selection of market
participants for examination who have
characteristics that elevate their risk of
violating the rules. Decreasing the
amount of violative activity by targeting
CAT NMS Plan, supra note 3, at Appendix
D, Sections 8.1.1, 8.1.2.
295 See Section IV.E.3.d, infra.
exams in this way would provide
investors with a more effectively
regulated trading environment and
hence better market quality. Further,
access to audit trail data that is
comprehensive, accurate, and timely
could improve regulatory reconstruction
of market events, market analysis, and
research resulting in an improved
understanding of emerging market
issues and regulatory policies that better
encourage industry competition, thus
improving investor protection through
better transparency and more efficient
prices.296
Further, regulatory initiatives that are
based on a more thorough
understanding of underlying events and
their causes, and that are narrowly
tailored to address any market
deficiency, could improve market
quality and thus benefit investors.
Moreover, access to more complete and
linked audit trail data would improve
regulators’ ability to analyze and
reconstruct market events, allowing
regulators to provide investors and the
public with more accurate explanations
of market events, to develop more
effective responses to such events, and
to use the information to assist in
retrospective analyses of their rules and
pilots.
The Commission has also evaluated
the potential costs that would result
from approval of the CAT NMS Plan. In
particular, using information included
in the Plan, information gathered from
market participants through
discussions, surveys of market
participants, and other relevant
information, the Commission has
preliminarily estimated the potential
costs associated with building and
maintaining the Central Repository as
well as the costs to report data to the
Central Repository. Currently, the 20
Participants spend $154.1 million
annually on reporting regulatory data
and performing surveillance, while the
approximately 1,800 broker-dealers
anticipated to have CAT reporting
responsibilities spend $1.6 billion
annually on regulatory data reporting,
for total current industry costs of $1.7
billion annually for regulatory data
reporting and surveillance by SROs. The
Commission preliminarily estimates the
cost of the Plan as approximately $2.4
billion in initial aggregate
implementation costs and recurring
annual costs of $1.7 billion.297 The
primary driver of the annual costs is the
data reporting costs for broker-dealers,
which are estimated to be $1.5 billion
per year. For both large and small
294 See
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296 See
297 See
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Section IV.F.2, Table 9, infra.
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broker-dealers, the primary driver of
both current $1.6 billion reporting costs
and projected $1.5 billion CAT
reporting costs is costs associated with
staffing. Estimates of the costs to build
the Central Repository are based on Bids
that vary in a range as high as $92
million. Current estimates of annual
operating costs are based on Bids that
vary in a range up to $135 million. The
eventual magnitude of Central
Repository costs is dependent on the
Participants’ selection of the Plan
Processor, and may ultimately differ
from estimates discussed above if Bids
are revised as the bidding process
progresses. Furthermore, the Plan
anticipates a period of duplicative
reporting responsibilities preceding the
retirement of potentially duplicative
regulatory data reporting systems; these
duplicative reporting costs are likely to
be significant.298
Drawing from the discussion in the
CAT NMS Plan,299 the Commission
expects that, if approved, the Plan
would have a number of additional
economic effects, including effects on
efficiency, competition, and capital
formation. The Commission
preliminarily believes that the Plan
generally promotes competition.
However, the Commission recognizes
that the Plan could increase barriers to
entry because of the costs to comply
with the Plan. Further, the
Commission’s analysis identifies several
limiting factors to competition but Plan
provisions and Commission oversight
could address such limiting factors. The
Commission preliminarily believes that
the Plan would improve regulatory
analysis and reconstruction of market
events, as well as market analysis and
research that informs policy decisions.
In addition, the Plan would improve
enforcement related activities, including
the efficiency of regulatory activities
such as market surveillance,
examinations, investigations, and other
enforcement functions that could
enhance market efficiency by reducing
violative activity that harms market
efficiency. Finally, the Commission
preliminarily believes that the Plan
could have positive effects on capital
formation and allocative efficiency and
that the threat of a security breach at the
Central Repository is unlikely to
significantly harm capital formation.
The Commission recognizes that the
Plan’s likely effects on competition,
efficiency and capital formation are
dependent to some extent on the
298 The economic analysis discusses duplicative
reporting costs in Section IV.F.2, infra.
299 See CAT NMS Plan, supra note 3, at Appendix
C, Section B.8; see also Section IV.G, infra.
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performance and decisions of the Plan
Processor and the Operating Committee
in implementing the Plan, and thus
there is necessarily some uncertainty in
the Commission’s analysis. Nonetheless,
the Commission believes that the Plan
contains certain governance provisions,
as well as provisions relating to the
selection and removal of the Plan
Processor, that mitigate this uncertainty
by promoting decision-making that
could, on balance, have positive effects
on competition, efficiency, and capital
formation.
The Commission notes that while the
Participants developed the Plan in
compliance with Rule 613 by
considering information from industry
representatives, the Commission has
discretion to approve the Plan subject to
changes or conditions that the
Commission deems necessary or
appropriate.300 Therefore, as a part of
this economic analysis, the Commission
analyzed numerous alternatives to
provisions of the CAT NMS Plan and to
the CAT NMS Plan itself. The
Commission analyzes alternatives to the
approaches the Exemption Order
permitted the Participants to include in
the Plan; 301 alternatives to certain
specific approaches in the Plan;
alternatives to the scope of certain
specific elements of the Plan; and the
broad alternative of modifying OATS or
another existing system to meet the
requirements of Rule 613 instead of
approving the Plan. Finally, the
Commission requests comment on
alternatives discussed in this economic
analysis, alternatives considered in the
Plan, and on whether the Commission
should consider any additional
alternatives.
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C. Framework for Economic Analysis
As discussed above, the Commission
is conducting an economic analysis of
the CAT NMS Plan filed by the SROs on
February 27, 2015, as amended, as
anticipated in the Adopting Release for
Rule 613.302 In particular, the
Commission has carefully evaluated the
300 See 17 CFR 242.608(b)(1) (‘‘No national market
system plan . . . shall become effective unless
approved by the Commission . . .’’); 17 CFR
242.608(b)(2) (‘‘Within 120 days of the date of
publication of notice of filing of a national market
system plan . . . the Commission shall approve
such plan . . . with such changes or subject to such
conditions as the Commission may deem necessary
or appropriate, if it finds that such plan or
amendment is necessary or appropriate in the
public interest, for the protection of investors and
the maintenance of fair and orderly markets, to
remove impediments to, and perfect the
mechanisms of, a national market system, or
otherwise in furtherance of the purposes of the
Act.’’).
301 See Exemption Order, supra note 18.
302 See Adopting Release, supra note 9, at 45789.
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information in the CAT NMS Plan,
including the twelve considerations
required by Rule 613 303 and the details
of the decisions left to the discretion of
the SROs. The Commission has also
considered information drawn from
outside the Plan in order to assess
potential economic effects not
addressed therein. To provide context
for this analysis, this Section describes
the economic framework for the analysis
and seeks to identify uncertainties
within that framework.
1. Economic Framework
a. Benefits
The CAT NMS Plan would create a
new data source that could replace the
use of some current data sources for
many regulatory activities. As such, the
economic benefits of the CAT NMS Plan
would come from any expanded and
more efficient regulatory activities
facilitated by improvements to the data
regulators use. Therefore, the framework
for examining benefits in this economic
analysis involves first considering
whether and to what degree the CAT
Data would improve on the Baseline of
current trading and order data in terms
of the four qualities of accuracy,
completeness, accessibility, and
timeliness.304
Through these improvements in the
data, the economic analysis then
considers the degree to which the Plan
would result in improvements to
regulatory activities such as the analysis
and reconstruction of market events, in
addition to market analysis and research
conducted by SROs and Commission
Staff, as well as market surveillance,
examinations, investigations, and other
enforcement functions. These potential
improvements, based on the regulatory
objectives of the CAT NMS Plan
described in the Adopting Release,305
relate to the overall goal of substantially
enhancing the ability of the SROs and
the Commission to oversee securities
markets and fulfill their regulatory
responsibilities under the securities
laws. The economic analysis explores
how the improvements to these
regulatory activities provide economic
benefits to investors and the market.
Among other things, potential benefits
that could result from the CAT NMS
Plan include benefits rooted in changes
in the behavior of market participants.
For example, requirements to report
certain data elements or events to the
CAT could have the beneficial effect of
deterring rule violations because the
inclusion of certain data fields and
303 See
17 CFR 242.613(a)(1).
Adopting Release, supra note 9, at 45727.
305 See id. at 45730.
304 See
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improvements in the ability to surveil
for violations could increase the
perceived costs of violating rules and
regulations. Potential benefits could also
stem from improved investor protection,
such as from more effective surveillance
and more informed, data-driven
rulemaking.
(1) Data Qualities
In the Adopting Release, the
Commission identified four qualities of
trade and order data that impact the
effectiveness of core SRO and
Commission regulatory efforts:
Accuracy, completeness, accessibility,
and timeliness.306 In assessing the
potential benefits of the CAT NMS Plan,
the Commission’s economic analysis
compares the data that would be
available under the Plan to the trading
and order data currently available to
regulators to determine whether and to
what degree the Plan would improve the
available data with respect to those four
qualities.
(2) Regulatory Activities
Any economic benefits would derive
from how such improved data would
affect regulatory activities. Therefore, to
analyze the potential benefits of the
CAT NMS Plan, the economic analysis
also evaluates the potential of the CAT
NMS Plan to meet the regulatory
objectives set out in the Adopting
Release for Rule 613. The objectives are:
Improvements in the analysis and
reconstruction of broad-based market
events; improvements in market
analysis in support of regulatory
decisions; and improvements in market
surveillance, investigations, and other
enforcement activities.307
A. Analysis and Reconstruction of
Broad-Based Market Events
The economic analysis considers
whether and to what extent the CAT
NMS Plan would facilitate regulators’
306 See id. at 45727. Accuracy refers to whether
the data about a particular order or trade is correct
and reliable. Completeness refers to whether a data
source represents all market activity of interest to
regulators, and whether the data is sufficiently
detailed to provide the information regulators
require. While current data sources provide the
trade and order data required by existing rules and
regulations, those sources generally do not provide
all of the information of interest to regulators in one
consolidated audit trail. Accessibility refers to how
the data is stored, how practical it is to assemble,
aggregate, and process the data, and whether all
appropriate regulators could acquire the data they
need. Timeliness refers to when the data is
available to regulators and how long it would take
to process before it could be used for regulatory
analysis. As explained in the Baseline, Section
IV.D, infra, the trading and order data currently
available to regulators suffers from deficiencies in
all four dimensions.
307 See Adopting Release, supra note 9, at 45730.
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performance of analysis and
reconstruction of market events,
potentially helping to better inform both
regulators and investors about such
market events and speeding the
regulatory response following market
events. Regulators perform
reconstructions of market events so that
they and the public can be informed by
an accurate accounting of what
happened (and, possibly, why it
happened). As discussed in the Benefits
Section,308 market reconstructions can
take a significant amount of time, in
large measure due to various
deficiencies in the currently available
trading and order data in terms of the
four qualities described above.309 The
sooner regulators complete a
reconstruction and analysis of a market
event, the sooner investors can be
informed and the sooner regulators can
begin reviewing the event to determine
what happened, who was affected and
how, and whether the analysis supports
potential regulatory responses.310 In
addition, the improved ability for
regulators to generate prompt and
complete market reconstructions could
provide improved market knowledge,
which could assist regulators in
conducting retrospective analysis of
their rules and pilots.
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B. Market Analysis in Support of
Regulatory Decisions
The economic analysis considers
whether and to what extent the CAT
NMS Plan would enhance the ability of
the SROs and the Commission to
conduct market analysis and research,
including analysis of market structure,
and the degree to which it would
improve regulators’ market knowledge
and facilitate consideration of policy
questions of interest. The SROs and
Commission Staff conduct data-driven
analysis on market structure, in direct
support of both rulemaking and other
regulatory decisions such as SRO rule
approvals. The Commission also relies
on such analysis to improve
understanding of market structure in
ways that could inform policy. Finally,
SROs conduct market analysis and
research on their own regulatory
initiatives. Improvements in the ability
to conduct market analysis could further
improve analysis related to regulatory
decisions and potentially influence
those regulatory decisions to the benefit
of investors and the markets more
generally.
Section IV.E.2.a, infra.
Section IV.C.1.a(1), supra.
310 See Adopting Release, supra note 9, at 45732.
C. Market Surveillance and
Investigations
The economic analysis examines
whether the CAT NMS Plan would
improve market surveillance and
investigations, potentially resulting in
more effective oversight of trading,
better investor protection, and
deterrence of violative behavior. As
described in more detail in the Baseline
Section,311 both SROs and the
Commission conduct market
surveillance, examinations,
investigations, and other enforcement
functions targeting illegal activities such
as insider trading, wash sales, or
manipulative practices. Improvements
in market surveillance and
investigations could come in the form of
‘‘facilitating risk-based examinations,
allowing more accurate and faster
surveillance for manipulation,
improving the process for evaluating
tips, complaints, and referrals . . ., and
promoting innovation in cross-market
and principal order surveillance.’’ 312
b. Costs
The economic analysis evaluates the
costs of building and operating the
Central Repository; the costs of CAT
reporting for Participants, brokerdealers, and service bureaus; and other
CAT-related costs. Where the CAT NMS
Plan provides estimates of these costs,
the economic analysis evaluates those
estimates and re-estimates them when
necessary. The economic analysis also
discusses the drivers of these costs, and
whether broker-dealers may or may not
pass these costs down to their
customers. In addition, the economic
analysis assesses whether the CAT NMS
Plan has the potential to result in cost
savings. Rule 613 requires the Plan to
discuss ‘‘[a] plan to eliminate existing
rules and systems (or components
thereof) that would be rendered
duplicative by the consolidated audit
trail.’’ 313 As a part of its consideration
of the costs of the CAT NMS Plan, the
economic analysis considers costs from
duplicative reporting for some period of
time as well as potential cost savings
from the retirement of duplicative
regulatory reporting systems.
The economic analysis also considers
whether the CAT NMS Plan could result
in second order effects, such as changes
to the behavior of market participants,
that impose certain costs. For example,
the CAT NMS Plan’s tiered funding
model could lead to costly efforts by
market participants to try to control
their tiers in order to affect their fee
308 See
311 See
309 See
312 See
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Section 0, infra.
Adopting Release, supra note 9, at 45730.
313 17 CFR 242.613(a)(1)(ix).
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payments, such as reducing activity
levels near the end of an activity level
measuring period to avoid being
classified as a higher activity level firm.
In addition, Participants, their members,
and investors could incur costs if their
private information were accessed in the
event of a security breach of the Central
Repository. The economic analysis
considers these and other elements of
the Plan that could lead to distortions in
behavior by market participants.
2. Existing Uncertainties
The Commission has carefully
analyzed the information in the CAT
NMS Plan, as well as other relevant
data, in order to assess the economic
effects of the Plan. As discussed
throughout the analysis, in certain cases
the Commission lacks information
needed to evaluate all of the potential
economic effects of the CAT NMS Plan,
creating uncertainty in some potential
benefits and costs. The primary drivers
of uncertainty include the fee schedule
applicable to funding the Central
Repository (the ‘‘Funding Model’’),
which has not yet been finalized, the
deferral of decisions on certain
discretionary elements including the
Technical Specifications applicable to
the CAT, and a lack of detailed
information that would enable the
Commission to assess certain economic
effects with greater precision. The
implications of each primary area of
uncertainty for the Commission’s
economic analysis are discussed below.
First, as noted above, the economic
analysis evaluates information provided
in the CAT NMS Plan on the economic
effects of the Plan, as well as
information drawn from outside of the
Plan. However, the Commission lacks
detailed information regarding some of
the individual costs and discretionary
decisions in the Plan, including the
Funding Model. Specifically, the Plan
does not outline the proportion of CAT
costs that would be allocated to
Participants versus broker-dealers. This
uncertainty limits the Commission’s
ability to evaluate the economic effects
of the Plan in some cases. However, the
Commission has analyzed the expected
economic effects of the Plan to the
extent possible with the information
available, and where the Commission
can identify such areas of uncertainty,
the economic analysis addresses this
uncertainty. In addition, the
Commission requests comments to help
resolve such uncertainties during the
consideration of the CAT NMS Plan.
Second, certain elements of the CAT
NMS Plan would not be finalized until
after the selection of a ‘‘Plan
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Processor.’’ 314 Among these are the
security and confidentiality procedures
of the Central Repository,315 the precise
methods by which regulators would
access data in the Central Repository,316
and the complete Technical
Specifications.317 The Plan also
provides the Plan Processor the ‘‘sole
discretion’’ to publish interpretations of
the Technical Specifications, including
interpretations of permitted values in
data elements.318
Because these and other elements of
the Plan have not yet been finalized, the
Commission cannot assess how and to
what extent they could affect the overall
economic effects of the Plan. The
Commission’s economic analysis is
therefore limited to the extent that the
economic effects of the Plan depend on
decisions that would be made after
approval of the Plan. However, the
Commission has identified these areas
of uncertainty and has assessed the
economic effects of the Plan to the best
of its ability in light of these existing
uncertainties.
Given the range of possible outcomes
with respect to both the costs and
benefits of the CAT NMS Plan that
depend on future decisions, the
Commission also recognizes the
importance of provisions of the Plan
related to the operation and
administration of the CAT. In particular,
governance provisions of the Plan
related to voting by the Operating
Committee and the involvement of the
Advisory Committee may help promote
better decision-making by the relevant
parties. Such provisions could mitigate
concerns about potential uncertainty in
the economic effects of the Plan by
giving the Commission greater
confidence that its expected benefits
would be achieved in an efficient
manner and that costs resulting from
inefficiencies would be avoided. As part
314 See CAT NMS Plan, supra note 3, at Article
VI. The Plan Participants have engaged in a bidding
process to select a Plan Processor, and the leading
candidate bidders have proposed different
solutions. In certain instances, the Plan Participants
have decided to adopt the solutions proposed by
whichever bidder they select.
315 See Section 0, infra, for additional discussion
of risks and uncertainties related to data security.
316 Rule 613(e)(1) requires the CAT NMS Plan to
create a Central Repository to collect, link, and store
CAT Data and to make that data available to
regulators. See 17 CFR 242.613(e)(1).
317 The CAT NMS Plan contains minimum
standards and principles for setting many of
Technical Specifications, see CAT NMS Plan, supra
note 3, at Section 6.9, and the Commission’s
economic analysis reflects those minimum
standards and principles. However, because the
detailed Technical Specifications are not yet
finalized by the Participants, the Commission
cannot fully assess any corresponding costs and
benefits.
318 See id. at Section 6.9.
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of this economic analysis, the
Commission therefore considers these
features of the Plan.319
3. Request for Comment on the
Framework
The Commission requests comment
on all aspects of the Framework for the
Economic Analysis on the CAT NMS
Plan. In particular, the Commission
seeks responses to the following
questions:
234. Do Commenters believe that the
general economic framework applied in
this analysis is appropriate? If not,
which considerations should be added
or removed?
235. Do Commenters agree with the
approach to identifying benefits of the
CAT NMS Plan? Are there important
sources of benefits that are not
discussed here? Are the data qualities
important for regulatory uses? Are there
additional data qualities that the
Commission should consider? Are the
regulatory objectives important and
beneficial for investors? Are there
additional regulatory objectives that the
Commission should consider?
236. Do Commenters agree with the
approach taken in this analysis for
examining the costs of CAT? Please
explain.
237. Do the Commenters agree with
the approach for analyzing second order
effects? Are there other sources of
economic effects that the Commission
should consider?
238. Do Commenters agree with the
Commission’s characterization of
uncertainties in the economic analysis?
How important are these uncertainties
to the Commission’s consideration of
the CAT NMS Plan? Are there other
sources of uncertainty that the
Commission should consider?
239. Do Commenters agree with the
Commission’s preliminary assessment
that governance provisions of the Plan
related to voting by the Operating
Committee and the involvement of the
Advisory Committee may help promote
better decision-making by the relevant
parties and thus mitigate concerns
associated with uncertainties in the
economic effects of the Plan? Please
explain.
D. Baseline
The CAT NMS Plan would create a
new regulatory dataset that SROs and
the Commission would use to
supplement or replace their current data
sources. The Adopting Release states
that ‘‘improvements [in the quality of
audit trail data] should have the
potential to result in the following: (1)
319 See
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Frm 00044
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[I]mproved market surveillance and
investigations; (2) improved analysis
and reconstructions of broad-based
market events; and (3) improved market
analysis.’’ 320 To assess the overall
economic impact of the CAT NMS Plan,
the economic analysis uses as the
Baseline the current state of trade and
order data and the current state of
regulatory activity that relies on that
data. The Baseline discusses the
currently available sources of data,
limits in available data that could
impact regulatory activity, how
regulators currently use the available
data, and the burden that producing that
data imposes on SROs and brokerdealers.
1. Current State of Regulatory Activities
The SROs and the Commission use
data to analyze and reconstruct market
events, conduct market analysis and
research in support of regulatory
decision-making, and conduct market
surveillance, examinations,
investigations, and other enforcement
functions. The trend in this area is to
use more automated and data-intensive
methods as regulators’ activities adjust
to the data and technology available.
The following Sections describe these
regulatory activities and how regulators
currently use data.
a. Analysis and Reconstruction of
Market Events
In the Adopting Release, the
Commission described how it expected
CAT Data to significantly improve the
ability of regulators to reconstruct
market events so that the public might
be informed by an accurate and timely
accounting of the events in question.321
In a market reconstruction, regulators
seek to provide an accurate and factual
accounting of what transpired during a
market event of interest by conducting
a thorough analysis of the available
market data. These events often
encompass activity in many securities
across multiple trading venues,
requiring the linking and analysis of
data from multiple sources. Examples of
recent market reconstructions include
the Commodity Futures Trading
Commission (‘‘CFTC’’) and SEC’s
analysis of the May 6, 2010 ‘‘Flash
Crash,’’ 322 analysis of equity market
320 See
Adopting Release, supra note 9, at 45730.
id. at 45732–33.
322 See Findings Regarding the Market Events of
May 6, 2010: Report of the Staffs of the CFTC and
SEC to the Joint Advisory Committee on Emerging
Regulatory Issues (September 30, 2010) (‘‘Flash
Crash Analysis’’), available at https://www.sec.gov/
news/studies/2010/marketevents-report.pdf.
321 See
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volatility on August 24, 2015,323 and the
multi-agency report on the U.S.
Treasuries market on October 15,
2014.324
b. Market Analysis and Research
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In the Adopting Release, the
Commission described how it expected
CAT Data to improve the ability of
regulators to monitor overall market
structure and better understand its
relationship with market behavior, so
that the Commission and the SROs
could be better informed in their policy
decisions.325 The Commission and SRO
Staffs conduct data-driven analysis on
market structure, in direct support of
both rulemaking and other regulatory
decisions such as SRO rule approvals as
well as retrospective analyses of rules
and pilots. The Commission also relies
on data analysis to inform its market
structure policy. SROs also conduct
market analysis and research on their
own regulatory initiatives. Examples of
data-driven market analysis include
reports on OTC trading,326 small
capitalization stock trading,327 the Limit
Up-Limit Down Pilot,328 short
323 See Staff of the Office of Analytics and
Research, Division of Trading and Markets,
Research Note: Equity Market Volatility on August
24, 2015 (Dec. 2015) available at https://
www.sec.gov/marketstructure/research/equity_
market_volatility.pdf; see also Austin Gerig and
Keegan Murphy, The Determinants of ETF Trading
Pauses on August 24th, 2015, White Paper
(February 2016) available at https://www.sec.gov/
marketstructure/research/determinants_eft_
trading_pauses.pdf.
324 See U.S. Department of the Treasury, Board of
Governors of the Federal Reserve System, Federal
Reserve Bank of New York, U.S. Securities and
Exchange Commission, and U.S. Commodity
Futures Trading Commission, Joint Staff Report:
The U.S. Treasury Market on October 15, 2014 (July
13, 2015), available at https://www.sec.gov/
reportspubs/special-studies/treasury-marketvolatility-10-14-2014-joint-report.pdf.
325 See Adopting Release, supra note 9, at 45733.
326 See Laura Tuttle, Alternative Trading Systems:
Description of ATS Trading in National Market
System Stocks (October 2013) available at https://
www.sec.gov/divisions/riskfin/whitepapers/
alternative-trading-systems-10-2013.pdf; Laura
Tuttle, OTC Trading: Description of Non-ATS OTC
Trading in National Market System Stocks (March
2014), available at https://www.sec.gov/dera/staffpapers/white-papers/otc-trading-white-paper-032014.pdf.
327 See Securities Exchange Act Release No.
74892, Order Approving the National Market
System Plan to Implement a Tick Size Pilot Program
(May 6, 2015), 80 FR 27514, 27534, 27541 (May 13,
2015); see also Charles Collver, A Characterization
of Market Quality for Small Capitalization US
Equities (September 2014), available at https://
www.sec.gov/marketstructure/research/small_cap_
liquidity.pdf.
328 See SRO Supplemental Joint Assessment,
available at https://www.sec.gov/comments/4-631/4631.shtml; Memo to File from the Division of
Economic and Risk Analysis regarding the
Cornerstone Analysis of the Impact of Straddle
States on Options Market Quality (February 8,
2016), available at https://www.sec.gov/comments/4-
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selling,329 and high frequency
trading.330
c. Market Surveillance and
Investigations
Regulators perform market
surveillance and investigation functions
that rely on access to multiple types of
market data. In the Adopting Release,
the Commission discussed how data
limitations impact surveillance and
investigations, including risk-based
examinations, market manipulation
investigations, tips and complaints, and
cross-market and principal order
surveillance.331 The following Sections
update and broaden the discussion from
the Adopting Release to describe the
current state of SRO surveillance and
SRO and Commission examinations and
enforcement investigations.
(1) Current SRO Surveillance
Rule 613(f) requires the SROs to
develop and implement a surveillance
system, or enhance existing surveillance
systems, reasonably designed to make
use of the CAT Data.332 For the
purposes of this economic analysis, the
Commission considers surveillance to
involve SROs running automated
processes on routinely collected or inhouse data to identify potential
violations of rules or regulations. As
such, surveillance does not include
processes run on data that the SROs
request only when needed. SRO
surveillance can help protect investors
by having systems in place that can be
used to detect fraudulent behavior and
anomalous trading. For instance, SROs
use surveillance systems, developed
internally or by a third party, to detect
631/4631-42.pdf; see also Gerig and Murphy, supra
note 323.
329 See Memo to Chairman Christopher Cox from
Daniel Aromi and Cecilia Caglio regarding an
Analysis of Short Selling Activity during the First
Weeks of September 2008, (December 16, 2008)
available at https://www.sec.gov/comments/s7-0809/s70809-369.pdf; Memo to Chairman Christopher
Cox from Daniel Aromi and Cecilia Caglio regarding
an Analysis of a Short Sale Price Test Using
Intraday Quote and Trade Data (December 17, 2008)
available at https://www.sec.gov/comments/s7-0809/s70809-368.pdf; Memo from the Office of
Economic Analysis regarding an Analysis of the
July Emergency Order Requiring a Pre-borrow on
Short Sales (January 14, 2009) available at https://
www.sec.gov/spotlight/shortsales/
oeamemo011409.pdf.
330 See Austin Gerig, High-Frequency Trading
Synchronizes Prices in Financial Markets, available
at https://www.sec.gov/dera/staff-papers/workingpapers/dera-wp-hft-synchronizes.pdf; see also Staff
of the Office of Analytics and Research, Division of
Trading and Markets, Research Note: Equity Market
Volatility on August 24, 2015 (December 2015)
available at https://www.sec.gov/marketstructure/
research/equity_market_volatility.pdf.
331 See Adopting Release, supra note 9, at 45730–
32.
332 See 17 CFR 242.613(f).
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30657
violations of trading rules, market
abuse, or unusual behavior, in real time,
within one day, or within a few weeks
of the activity in question. The
exchanges are responsible for
surveillance of their own exchanges,
and FINRA is responsible for offexchange and cross-market surveillance.
FINRA also provides surveillance
services to U.S. equity and options
exchanges through regulatory services
agreements with nearly every equity
market and all options exchanges.333
FINRA also currently conducts several
cross-market surveillance patterns, such
as surveillance focused on wash sales,
front running, relationship trading, and
high frequency trading.
FINRA has responsibility to oversee
and regulate OTC trading of exchangelisted and non-exchange-listed
securities, as well as trading in
corporate and municipal debt
instruments and other fixed income
instruments. Also, FINRA conducts
cross-market surveillance for
approximately 99% of the listed equity
market and approximately 70% of the
listed options market.334 To conduct
cross-market surveillance, FINRA uses a
variety of online and offline
surveillance techniques and programs to
reconstruct market activity, using
trading data and quote information that
is captured throughout the trading day,
as well as order audit trail data reported
daily. FINRA’s cross-market
surveillance is able to identify a single
broker-dealer’s manipulative activity
across multiple markets, as well as
manipulative activity of multiple market
participants acting in concert across
multiple markets.335
Additional surveillance is conducted
by exchange-operating SROs, some of it
333 See Richard G. Ketchum, FINRA Chairman
and CEO, Testimony Before the Subcommittee on
Capital Markets and Government Sponsored
Enterprises Committee on Financial Services (May
1, 2015), available at https://www.finra.org/
newsroom/speeches/050115-testimonysubcommittee-capital-markets-and-governmentsponsored-enterprises; Richard G. Ketchum, FINRA
Chairman and CEO, Testimony Before the
Subcommittee on Securities, Insurance and
Investment, United States Senate (March 3, 2016),
available at https://www.finra.org/newsroom/
speeches/030316-testimony-subcommitteesecurities-insurance-and-investment-united-states.
334 See Richard G. Ketchum, FINRA Chairman
and CEO, Testimony Before the Subcommittee on
Securities, Insurance and Investment, United States
Senate (March 3, 2016), available at https://
www.finra.org/newsroom/speeches/030316testimony-subcommittee-securities-insurance-andinvestment-united-states.
335 See FINRA 2015 Regulatory and Examinations
Priorities Letter, at 14, available at https://
www.finra.org/sites/default/files/p602239.pdf; see
also FINRA 2016 Regulatory and Examinations
Priorities Letter, at 12, available at https://
www.finra.org/sites/default/files/2016-regulatoryand-examination-priorities-letter.pdf.
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conducted as trading activity occurs.
This surveillance can include detection
of market manipulation, violations of
trading rules, and other unusual
behavior.
(2) Examinations
In the Adopting Release, the
Commission explained how it expected
CAT Data to facilitate risk-based
examinations.336 SROs currently
conduct exams of broker-dealers for
violations of trading-related federal
laws, rules, and regulations and for
violations of SRO rules and
regulations.337 In 2015, FINRA’s
Member Regulation Department
conducted approximately 2,400 brokerdealer examinations.338 The
Commission currently conducts exams
of broker-dealers, transfer agents,
investment advisers, investment
companies, municipal advisers, clearing
agencies, the national securities
exchanges, other SROs such as FINRA
and the Municipal Securities
Rulemaking Board, and the Public
Company Accounting Oversight Board
(‘‘PCAOB’’). The Commission
conducted 493 broker-dealer
examinations in 2014 and 484 in 2015,
70 exams of the national securities
exchanges and FINRA in 2014 and 21 in
2015. In addition, the Commission
conducted 1,237 investment adviser and
investment company examinations in
2014 and 1,358 in 2015. Virtually all
investment adviser examinations and a
significant proportion of the
Commission’s other examinations
involve analysis of trading and order
data.
Examinations of broker-dealers and
investment advisers involve intensive
analysis of trading data. Examinations
seek to determine whether the entity
being examined is: Conducting its
336 See
Adopting Release, supra note 9, at 45730–
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31.
337 SEC Rule 17d–2 permits SROs to propose joint
plans among two or more SROs for the allocation
of regulatory responsibility. Where 17d–2
agreements are in place, SROs have joint plans with
respect to their common members (i.e., members of
both/all the SROs party to an agreement under Rule
17d–2) for common rules (i.e., rules that are
identical or substantially identical). Commission
approval of a plan filed pursuant to Rule 17d–2
relieves an SRO of those regulatory responsibilities
allocated by the plan to another SRO. See 17 CFR
240.17d–2. Exchanges also enter into Regulatory
Services Agreements (‘‘RSAs’’) whereby one SRO
contractually agrees to perform regulatory services
for another. However, RSAs do not relieve the
contracting SRO from regulatory responsibility for
the performance of any regulatory services allocated
pursuant to the RSA and are not filed with the
Commission for approval.
338 This estimate is based on Staff discussions
with FINRA. See also FINRA overview of Member
Regulation available at https://www.finra.org/
industry/member-regulation.
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activities in accordance with the federal
securities laws, rules adopted under
these laws, and SRO rules; adhering to
the disclosures it has made to its clients,
customers, the general public, SROs
and/or the Commission; and
implementing supervisory systems and/
or compliance policies and procedures
that are reasonably designed to ensure
that the entity’s operations are in
compliance with the applicable legal
requirements.339
The Commission and certain SROs,
such as FINRA, use a risk-based
approach to select candidates and to
determine exam scope and focus.340
‘‘Risk-based examinations’’ seek to
increase regulatory efficiency by using
preliminary data analysis to direct
examination resources towards entities
and activities where risks of violative or
illegal activity are the highest. The
Commission uses risk and data analysis
before opening an exam to identify
broker-dealers and investment advisers
for areas of focus such as suspicious
trading, as well as during an exam to
identify the particular activities of a
broker-dealer or investment adviser that
could trigger certain compliance and
supervisory risks.
Because of the data-intensive nature
of examinations, the Commission and
SROs have systems, such as the
Commission’s National Exam Analytics
Tool (‘‘NEAT’’), to combine,
standardize, and analyze exam data. The
NEAT system allows examiners to
import trade blotter data to conduct
commission analysis, cross trades
analysis, bunch price analysis, trading
pattern analysis, and restricted trade
analysis. However, as discussed further
below, there are limitations on the trade
blotter data imported by the NEAT
system.341
(3) Enforcement Investigations
The Adopting Release details how the
Commission expects the CAT Data to
aid in the analysis of potential
manipulation.342 The Commission and
SROs undertake numerous
339 See SEC, Examination Information for Entities
Subject to Examination or Inspection by the
Commission (June, 2014), available at https://
www.sec.gov/about/offices/ocie/ocie_
exambrochure.pdf.
340 FINRA conducts regulatory examinations by
contract on behalf of all the options and equities
exchanges, except for the Chicago Stock Exchange,
Inc. (‘‘CHX’’) and the National Stock Exchange, Inc.
(‘‘NSX’’). Accordingly most exchanges also employ
a risk-based approach to examination selection and
scope. CHX examines members on a cycle basis.
NSX recently resumed operations in December,
2015. See Securities Exchange Act Release No.
76640 (December 14, 2015), 80 FR 79122 (December
18, 2015).
341 See Section IV.D.2.b, infra.
342 See Adopting Release, supra note 9, at 45731.
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investigations to enforce the securities
laws and related rules and regulations,
including investigations of market
manipulations (e.g., marking the close,
order layering, spoofing,343 wash sales,
trading ahead), insider trading, and
issuer repurchase violations. As noted
below, the Commission estimates that
30–50% of enforcement investigations
use trade and order data, and any of
these types of investigations, in addition
to numerous other investigations, could
potentially utilize CAT Data.344
SROs rely primarily on surveillance to
initiate investigations based on
anomalies in the trading of securities.
The Commission initiates enforcement
investigations when SROs or others
submit reliable tips, complaints, or
referrals, or when the Commission
becomes aware of anomalies indicative
of manipulation. After the detection of
potential anomalies, a tremendous
amount of time and resources are
expended in gathering and interpreting
trade and order data to construct an
accurate picture of when trades were
actually executed, what market
conditions were in effect at the time of
the trade, which traders participated in
the trade, and which beneficial owners
were affected by the trade. In 2015, the
Commission filed 807 enforcement
actions, including 39 related to insider
trading, 43 related to market
manipulation, 124 related to brokerdealers, 126 related to investment
advisers/investment companies, and
one related to exchange or SRO duties.
In 2014, the Commission filed 755
enforcement actions, including 52
related to insider trading, 63 related to
market manipulation, 166 related to
broker-dealers, and 130 related to
investment advisers/investment
companies, many of which involved
trade and order data.345 Similarly,
FINRA brought 1,397 disciplinary
actions in 2014 and 1,512 in 2015.346
343 Layering and spoofing are manipulations
where orders are placed close to the best buy or sell
price with no intention to trade in an effort to
falsely overstate the liquidity in a security.
344 See infra note 345 and accompanying text.
The percentage of enforcement investigations that
could be expected to utilize CAT Data depends on
the percentage of investigations that involve brokerdealers, investment advisers and investment
companies.
345 See Year-by-Year SEC Enforcement Statistics,
available at https://www.sec.gov/news/newsroom/
images/enfstats.pdf. The total number of actions
filed is not necessarily the same as the number of
investigations. An investigation may result in no
filings, one filing, or multiple filings. Additionally,
trade and order data may be utilized in enforcement
investigations that do not lead to any filings.
346 See FINRA statistics available at https://
www.finra.org/newsroom/statistics.
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(4) Tips and Complaints
The Adopting Release discussed how
the Commission expected CAT Data to
improve the processes used by the SROs
and the Commission for evaluating tips
and complaints.347 Market participants
or those with experience in analyzing
market data sometimes notice atypical
trading or quoting patterns in publicly
available market data, and these
observations sometimes result in a tip or
complaint to a regulator. Regulators
investigate thousands of tips and
complaints each year. In fiscal years
2014 and 2015, the Commission
received around 15,000 entries in its
Tips, Complaints and Referrals (‘‘TCR’’)
system, approximately one third of
which related to manipulation, insider
trading, market events, or other trading
and pricing issues.
Analysis of tips and complaints
follows three general stages. First,
regulators ensure that the tip or
complaint contains sufficient
information to facilitate analysis. The
second stage involves a triaging effort in
which regulators may use directly
accessible data or make phone calls and
other informal queries to determine if
the tip or complaint is credible. For tips
and complaints that seem credible, the
third stage involves a more in-depth
investigation or examination, which
follows the processes described above
for examinations and enforcement
investigations.
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2. Current State of Trade and Order Data
To assess how and to what degree the
CAT NMS Plan would affect the trade
and order data available to regulators,
the economic analysis considers what
data regulators use currently and the
limitations in that data.
a. Current Sources of Trade and Order
Data
The SROs and the Commission
currently use a range of trading and
order data sources for the regulatory
activities discussed above. The types of
data and ease of use can vary widely
from one source to the next. Some data
sources provide access to in-depth
information on a narrow slice of the
market, while others reveal more
limited information but with broader
market coverage. This Section reviews
the primary sources of data currently
available to regulators, describing the
content of the data provided and
examples of their specialized uses.
There are limitations on each of the data
sources discussed below that reduce
their usefulness for regulatory purposes.
347 See
Adopting Release, supra note 9, at 45731–
32.
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These limitations and their impact on
the ability of the SROs and the
Commission to use the data sources for
regulatory purposes are explained in
Section IV.D.2.b below.
(1) SRO Data
Most SROs maintain audit trails that
contain the trade and order data that
they obtain from members. Regulators
have access to at least three sources of
audit trail data. First, the National
Association of Securities Dealers
(‘‘NASD’’) 348 established its Order
Audit Trail System (‘‘OATS’’) 349 in
1998, which required NASD (n/k/a
FINRA) members to report certain trade
and order data regarding NASDAQlisted equity securities.350 OATS was
later expanded to include OTC equity
securities and all NMS stocks.351
Second, beginning in 2000, several of
the current options exchanges
implemented the Consolidated Options
Audit Trail System (‘‘COATS’’).352
Finally, each equity and options
exchange keeps an audit trail of orders
and trades that occur on its market.353
348 In 2007, NASD and the member-related
functions of NYSE Regulation, Inc., the regulatory
subsidiary of New York Stock Exchange LLC
(‘‘NYSE’’), were consolidated. As part of this
regulatory consolidation, the NASD changed its
name to FINRA. See Securities Exchange Act
Release No. 56146 (July 26, 2007), 72 FR 42190
(August 1, 2007). FINRA and the National Futures
Association (‘‘NFA’’) are currently the only national
securities associations registered with the
Commission; however, the NFA has a limited
purpose registration with the Commission under
Section 15A(k) of the Exchange Act. 15 U.S.C. 78o–
3(k); see also Securities Exchange Act Release No.
44823 (September 20, 2001), 66 FR 49439
(September 27, 2001).
349 See Securities Exchange Act Release No.
39729 (March 6, 1998), 63 FR 12559 (March 13,
1998) (order approving proposed rules comprising
OATS) (‘‘OATS Approval Order’’).
350 The FINRA Web site states: ‘‘FINRA has
established the Order Audit Trail System (OATS),
as an integrated audit trail of order, quote, and trade
information for all NMS stocks and OTC equity
securities. FINRA uses this audit trail system to
recreate events in the life cycle of orders and more
completely monitor the trading practices of member
firms.’’ FINRA, OATS, available at https://
www.finra.org/industry/oats (listing further
information on OATS).
351 See Securities Exchange Act Release No.
63311 (November 12, 2010), 75 FR 70757
(November 18, 2010) (order approving proposed
rule change by FINRA relating to the expansion of
OATS to all NMS stocks).
352 See, e.g., In the Matter of Certain Activities of
Options Exchanges, Order Instituting Public
Administrative Proceedings Pursuant to Section
19(h)(1) of the Securities Exchange Act of 1934,
Making Findings and Imposing Remedial Sanctions,
Securities Exchange Act Release No. 43268
(September 11, 2000) (‘‘Options Settlement Order’’);
Securities Exchange Act Release No. 50996 (January
7, 2005), 70 FR 2436 (January 13, 2005) (order
approving proposed rule change by Chicago Board
Options Exchange, Incorporated (‘‘CBOE’’) relating
to Phase V of COATS).
353 See, e.g., infra notes 358–364 and
accompanying text. For example, the NYSE tracks
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Specifically, for each of these stages
in the life of an order, FINRA Rule 7440
requires the recording and reporting of
the following information, as applicable,
including but not limited to: For the
receipt or origination of the order, the
date and time the order was first
originated or received by the reporting
member, a unique order identifier, the
market participant symbol of the
receiving reporting member, and the
material terms of the order; 354 for the
internal or external routing of an order,
the unique order identifier, the market
participant symbol of the member to
which the order was transmitted, the
identification and nature of the
department to which the order was
transmitted if transmitted internally, the
date and time the order was received by
the market participant or department to
which the order was transmitted, the
material terms of the order as
transmitted,355 the date and time the
order was transmitted, and the market
participant symbol of the member who
transmitted the order; for the
modification or cancellation of an order,
a new unique order identifier, original
unique order identifier, the date and
time a modification or cancellation was
originated or received, and the date and
time the order was first received or
originated; 356 and for the execution of
an order, in whole or in part, the unique
order identifier, the designation of the
order as fully or partially executed, the
number of shares to which a partial
counterparties on every trade in its Consolidated
Equity Audit Trail Data (‘‘CAUD’’) system, and
records electronic order events in a System Order
Data (‘‘SOD’’) database. See Proposing Release,
supra note 9, at 32564–68 (proposing Consolidated
Audit Trail and discussing equity exchange audit
trails). The SROs provided data in various
proprietary formats to the Commission in support
of the investigation of the May 6th, 2010 ‘‘Flash
Crash.’’ These data sources are briefly discussed in
the Flash Crash Analysis, supra note 322.
354 The specific information required to be
reported includes: The number of shares;
designation as a buy or sell or short sale;
designation of the order as market, limit, stop, or
stop limit; limit or stop price; date on which the
order expires and if the time in force is less than
one day, the time when the order expires; the time
limit during which the order is in force; any request
by a customer that a limit order not be displayed,
or that a block size limit order be displayed,
pursuant to Rule 604(b) of Regulation NMS; any
special handling requests; and identification of the
order as related to a program trade or index
arbitrage trade. See FINRA Rule 7440(b).
355 The specific information required includes the
number of shares to which the transmission applies,
and whether the order is an intermarket sweep
order. See FINRA Rule 7440(c).
356 For cancellations or modifications, the
following information also is required: If the open
balance of an order is canceled after a partial
execution, the number of shares canceled; and
whether the order was canceled on the instruction
of a customer or the reporting member. See FINRA
Rule 7440(d).
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execution applies and the number of
unexecuted shares remaining, the date
and time of execution, the execution
price, the capacity in which the member
executed the transaction, the
identification of the market where the
trade was reported, and the date and
time the order was originally received.
FINRA Rule 7440 also requires reporting
of the account type,357 the identification
of the department or terminal where an
order is received from a customer, the
identification of the department or
terminal where an order is originated by
a reporting member, and the
identification of a reporting agent if the
agent has agreed to take on the
responsibilities of a reporting member
under Rule 7450.
A majority of options exchanges
require their members to provide the
following information with respect to
orders entered onto their exchange: (1)
The material terms of the order; 358 (2)
order receipt time; 359 (3) account type;
(4) the time a modification is received;
(5) the time a cancellation is received;
(6) execution time; and (7) the clearing
member identifier of the parties to the
transaction.360
Although SROs that operate
exchanges collect much of their audit
trail information directly from their
internal systems, broker-dealers also
have the responsibility to report
regulatory data to SRO audit trails.
Some broker-dealers perform nearly all
of these data reporting requirements inhouse, whereas others contract with
service bureaus to accomplish this data
reporting.361 This reporting can
represent a significant burden on
broker-dealers.
357 ‘‘Account type’’ refers to the type of beneficial
owner of the account for which the order was
received or originated. Examples include
institutional customer, individual customer,
employee account, market making, and proprietary.
See FINRA, OATS Reporting Technical
Specifications, at 4–2, available at https://
www.finra.org/sites/default/files/
OATSTechSpec_01112016.pdf.
358 The specific information required includes
option symbol; underlying security; expiration
month; exercise price; contract volume; call/put;
buy/sell; opening/closing transaction; price or price
limit; and special instructions. See, e.g., BATS
Exchange, Inc. (‘‘BATS’’) Rule 20.7; BOX Options
Exchange LLC (‘‘BOX’’) Chapter V, Section 15;
CBOE Chapter VI, Rules 6.24 and 6.51; NASDAQ
Options Market (‘‘NOM’’) Rule Chapter V, Section
7; NYSE Amex Rules 153, Commentary .01, and
962; NYSE Arca Rules 6.67, 6.68, and 6.69; and
NASDAQ OMX PHLX LLC (‘‘Phlx’’) Rules 1063 and
1080.
359 The required information also includes
identification of the terminal or individual
completing the order ticket. See id.
360 See id.
361 See Section IV.F.1.c(2), infra, for a discussion
of how broker-dealers decide whether or not to
outsource their regulatory reporting.
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Audit trail data have become more
useful to regulators over time. As noted
above, FINRA expanded OATS from
covering only NASDAQ listed securities
to include OTC equity securities and all
NMS stocks.362 Commission Staff
understands that FINRA has also begun
collecting additional SRO audit trail
data, provided voluntarily from most
exchanges, to supplement OATS data.
In addition, NYSE, NYSE Amex LLC (n/
k/a ‘‘NYSE MKT LLC’’) (‘‘NYSE
Amex’’), and NYSE ARCA, Inc. (‘‘NYSE
Arca’’) eliminated their OTS audit trail
requirements and replaced them to
coordinate with the OATS
requirements, so that members who are
also members of either FINRA or
NASDAQ (and therefore subject to
OATS requirements) are able to satisfy
their reporting obligations by meeting
the OATS requirements.363 As a result
of all of these changes, the combined
data from these different audit trails 364
now cover most order events in equities.
SRO audit trail data is used for market
reconstructions and market analyses,
and to inform policy decisions, both by
362 See
supra note 351.
Securities Exchange Act Release No.
65523 (October 7, 2011), 76 FR 64154 (October 17,
2011) (concerning NYSE); Securities Exchange Act
Release No. 65524 (October 7, 2011), 76 FR 64151
(October 17, 2011) (concerning NYSE Amex);
Securities Exchange Act Release No. 65544 (October
12, 2011), 76 FR 64406 (October 18, 2011)
(concerning NYSE Arca).
364 Other SRO audit trails have varied reporting
requirements. Some exchanges have detailed audit
trail data submission requirements for their
members covering order entry, transmittal, and
execution. See CHX Article 11, Rule 3(b); NASDAQ
Rules 6950–6958 (substantially similar to the OATS
rules); NASDAQ OMX BX Rules 6950–6958
(substantially similar to OATS rules). The audit
trail rules of the other exchanges incorporate only
standard books and records requirements in
accordance with Section 17 of the Exchange Act, 15
U.S.C. 78q. See, e.g., NSX Chapter VI, Rule 4.1.;
BATS Chapter IV, Rule 4.1; CBOE Rule 15.1
(applicable to CBOE Stock Exchange (‘‘CBSX’’));
International Securities Exchange, LLC (‘‘ISE’’) Rule
1400; NYSE Arca Equities Rule 2.24. One exchange
only requires its members to make and keep books
and records and other correspondence in
conformity with Section 17 of the Exchange Act and
the rules thereunder, with all other applicable laws
and the rules, regulations and statements of policy
promulgated thereunder, and with the exchange’s
rules. See NSX Chapter VI, Rule 4.1. Though not an
audit trail, the Large Options Position Report
(‘‘LOPR’’) is also a source of SRO data that is used
for surveillance, examination, and enforcement
purposes by SRO and Commission staff. The data
is collected pursuant to FINRA Rule 2360(b)(5),
Reporting of Options Positions, under which each
member must file a report for each account in
which they have an interest in a position of 200 or
more options contracts, on the same side of the
market. Any increases or decreases in this position
must also be reported. The Options Clearing
Corporation (‘‘OCC’’) is the service provider for the
processing of these reports, which are used at will
by the SROs for surveillance purposes. The
Commission also frequently uses LOPR for
enforcement investigations of insider trading and
market manipulation cases.
363 See
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the Commission and by SROs.
Regulators also use SRO audit trail data
extensively for surveillance,
examinations, investigations, and other
enforcement functions. Current SRO
market surveillance relies primarily on
data from the SRO audit trails,
generated directly from the exchange
servers and from OATS. Likewise, SRO
examinations and investigations pull
information from their own audit trails
before seeking data from others.
Commission examinations and
investigations also rely heavily on SRO
audit trails to start the process of tracing
a particular trade from its execution to
the order initiations and customer
information, and the audit trails can be
useful for manipulation investigations
or other regulatory activities that require
analyses of microcap securities trading
activity. There are, however, limitations
on SRO audit trail data that reduce their
usefulness to regulators. For example,
for the examinations mentioned above,
Commission examination Staff may
undertake a laborious process of linking
SRO audit trail data with EBS data,
because SRO audit trail data does not
contain customer information.365 These
and other limitations are discussed in
Section IV.D.2.b, infra.
(2) Equity and Option Cleared Reports
The SROs and Commission also have
access to equity and option cleared
reports. Clearing broker-dealers report
their equity and option cleared data on
a daily basis and the NSCC and the OCC
aggregate the data across the market and
generate the reports.366 The reports
show the number of trades and daily
cleared trade and share volume, by
clearing member, for each equity and
listed option security in which
transactions took place. Regulators can
query these reports directly through an
internal online system that interfaces
with the Depository Trust and Clearing
Corporation (‘‘DTCC’’) data by security
name and CUSIP number.367 The
365 See
Section IV.D.2.b, infra.
provides clearing, settlement, risk
management, central counterparty services and a
guarantee of completion for certain transactions for
virtually all broker-to-broker trades involving
equities, corporate and municipal debt, American
depositary receipts, exchange-traded funds, and
unit investment trusts. See DTCC, About DTCC,
NSCC, available at https://www.dtcc.com/about/
businesses-and-subsidiaries/nscc.aspx. The OCC is
an equity derivatives clearing organization that is
registered as a clearing agency under Section 17A
of the Act, 15 U.S.C. 78q–1, and operates under the
jurisdiction of both the Commission and the CFTC.
See OCC, About OCC, available at https://
www.optionsclearing.com/about/corporateinformation/what-is-occ.jsp.
367 A CUSIP number is a unique alphanumeric
identifier assigned to a security and facilitates the
clearance and settlement of trades in the security.
366 NSCC
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originating source of the DTCC cleared
equity data is the Securities Information
Automation Corporation (‘‘SIAC’’) and
the originating source of the cleared
options data is the OCC.
Equity and option cleared reports
provide a way for regulators to directly
access a dataset to see how much
trading volume is accounted for by a
particular clearing broker. As such,
these data are often used at the
beginning of an examination or
investigation to start identifying the
market participants that may have
additional data needed to pinpoint a
particular activity. But there are
limitations on these reports that reduce
their usefulness to regulators. For
example, the information available on
the reports is limited to the date, the
clearing firm, and the number of
transactions cleared by each clearing
firm on each SRO. These and other
limitations are discussed in Section
IV.D.2.b, infra.
(3) Electronic Blue Sheets
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Broker-dealers provide detailed data
to regulators in the form of EBS. The
EBS data, provided pursuant to Rule
17a–25 under the Act,368 facilitate
investigations by the SROs and
Commission Staff, particularly in the
areas of insider trading and market
manipulations. The EBS system
provides certain detailed execution
information in its electronic format 369
upon request by SRO or Commission
Staff. This information often includes
See SEC, Fast Answers, CUSIP Number, available
at www.sec.gov/answers/cusip.htm.
368 17 CFR 240.17a–25. Rule 17a–25 codified the
requirement that broker-dealers submit to the
Commission, upon request, information on their
customer and proprietary securities transactions in
an electronic format. The Rule requires submission
of the same standard customer and proprietary
transaction information that SROs request through
the EBS system in connection with their market
surveillance and enforcement inquiries.
369 For a proprietary transaction, Rule 17a–25
requires a broker-dealer to provide the following
information electronically upon request: (1)
Clearing house number or alpha symbol used by the
broker-dealer submitting the information; (2)
clearing house number(s) or alpha symbol(s) of the
broker-dealer(s) on the opposite side to the trade;
(3) security identifier; (4) execution date; (5)
quantity executed; (6) transaction price; (7) account
number; (8) identity of the exchange or market
where the transaction was executed; (9) prime
broker identifier; (10) average price account
identifier; and (11) the identifier assigned to the
account by a depository institution. See Rule 17a–
25(a)(1), (b)(1)–(3), 17 CFR 240.17a–25(a)(1), (b)(1)–
(3). For customer transactions, the broker-dealer
also is required to include the customer’s name,
customer’s address, the customer’s tax
identification number, and other related account
information. See Rule 17a–25(a)(2), 17 CFR
240.17a–25(a)(2); see also infra note 372 and
accompanying text (discussing additional
information on ‘‘large traders’’ reported through
EBS).
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the employer of the beneficial owner of
an account,370 which can be important
to insider trading investigations, and in
some cases, a tax identification
number.371
The EBS system also provides
additional information on market
participants who meet the definition of
‘‘large traders’’ and have self-identified
to the Commission as required by Rule
13h–1.372 Large traders who file Form
13H with the Commission are assigned
a ‘‘large trader identification number’’
by the Commission and must provide
that number to their brokers for
inclusion in the EBS records that are
maintained by the clearing brokers. Rule
13h–1, subject to relief granted by the
Commission,373 requires that execution
time be captured (to the second) for
certain categories of large traders. Large
trader data provide the Commission
with a way to acquire information about
the activities of large traders and allow
the activities of large traders to be more
readily aggregated across or partitioned
by multiple broker-dealers. Regulators
generally use data from the EBS system
extensively in enforcement
investigations, for which EBS data are
vital, particularly insider trading
investigations. But again, there are
limitations on EBS data. For example,
EBS data are cumbersome to use for
broad analyses, such as analysis and
reconstruction of market events, market
analysis and research, and some
examinations, because of the
fragmentation of the data. These and
other limitations are discussed in
Section IV.D.2.b, infra.
(4) Trade Blotters and Order Tickets
Investment advisers and brokerdealers maintain data in the form of
order tickets and trade blotters that
regulators can obtain on request.374
370 Employer information is required by some
SRO EBS rules. See, e.g., NYSE and FINRA Rule
8211. While employer information is not required
under Rule 17a–25, Commission staff sometimes
request and receive this information.
371 Tax identification numbers are not required to
be reported in EBS for average price, allocation,
riskless principal, foreign accounts, and
subaccounts.
372 See Securities Exchange Act Release No.
64976 (July 27, 2011), 76 FR 46960 (August 3,
2011). A ‘‘large trader’’ is defined as a person whose
transactions in NMS securities equal or exceed 2
million shares or $20 million during any calendar
day, or 20 million shares or $200 million during
any calendar month. SEC Rule 13h–1, 17 CFR
240.13h–1, requires those market participants who
meet the definition of ‘‘large traders’’ to comply
with a number of requirements, including filing
Form 13H with the Commission to receive a large
trader identification number. Id.
373 See Securities Exchange Act Release No.
76322 (October 30, 2015), 80 FR 68590 (November
5, 2015).
374 Rule 204–2 requires investment advisers to
maintain a memorandum of each order given by the
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30661
Order tickets are in-house records
maintained by investment advisers and
broker-dealers that provide order
details, including time stamps of order
initiation and placement, special order
types, any special instructions for the
order, and plans for the allocation of
shares and prices across accounts and
subaccounts. Order tickets also identify
account owners. Commission Staff
collects order tickets regularly for
examinations, and occasionally also for
market manipulation investigations.
Broker-dealers maintain data in trade
blotters that are similar to EBS.
However, the trade blotters also contain
more information, including the
commissions paid in executing each
order, time stamps of when an order is
received and when it is executed (and
the number of fills), and the pricing
information for all executions in the
order.375 SROs use trade blotters in
examinations of their members.
Commission Staff uses trade blotters
frequently for examinations, including
in almost every broker-dealer,
investment adviser, and hedge fund
examination, as well as for insider
trading and market manipulation
investigations. Regulators use trade
blotter data to determine the order entry
time and execution time for trades by a
particular customer in examinations and
enforcement investigations. Trade
blotters are also the primary data source
used in regulatory investigations for
which subaccount allocation
information is important for
determining violative behavior, such as
cherry-picking and front-running cases.
There are limitations on trade blotter
and order ticket data that reduce their
usefulness to regulators, however. For
example, regulators lack direct access to
these data; in order to acquire trade
blotter and order ticket data, regulators
need to send a request to each
individual broker-dealer to obtain its
data, which can be a lengthy and
cumbersome process. These and other
limitations are discussed in Section
IV.D.2.b, infra.
investment adviser for the purchase or sale of any
security. 17 CFR 275.204–2(a)(3). Rule 17a–3(a)(1)
requires broker-dealers to maintain a trade blotter.
17 CFR 240.17a–3(a)(1).
375 Regulators could also request a trade
confirmation instead of a trade blotter. A trade
confirmation shows the customer, the symbol,
execution price, trade date, settlement date and
commission. A trade blotter is more detailed than
a trade confirmation. A trade blotter is what a firm
itself records and the exact information recorded
varies by firm. Typically, regulators look to the
trade confirmation when they have questions about
the veracity of a firm’s blotter, but generally prefer
to request the trade blotter due to its greater detail.
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Exchanges and SROs also make data
available to the public, in some cases on
a commercially-available basis,379 that
regulators could access for their
regulatory activities. One type of public
data is ‘‘consolidated’’ data feeds that
are disseminated by registered
Securities Information Processors
(‘‘SIPs’’) pursuant to joint SRO plans.380
For a fee, the SIPs distribute
consolidated market data on recent
equity and option transactions and the
prevailing best quotes at each exchange
to market data subscribers. In addition,
all exchanges also make data available
through direct data feeds. These feeds
contain all data included in the SIP
feed, but also include depth of book
information 381 and, depending on the
exchange, may include additional data,
such as the submission, cancellation
and execution of all displayed orders
and auction imbalance information on
the exchange, among other things.
The SEC’s Market Information Data
Analytics System (‘‘MIDAS’’) uses
information disseminated by the SIP
feeds, as well as exchange direct feeds
consisting of data that individual
exchanges choose to sell to subscribers.
In addition, at the request of
Commission Staff, most equities
exchanges produce and make public
two datasets with information on short
sales: A file of short selling volume by
stock, which contains the short selling
and total volume on that exchange by
symbol, and a file of short selling
transactions, which contains trade
information such as time, volume, and
price for each transaction involving a
short sale.382
The Commission and SROs use these
publicly available trade and order data
to conduct market analyses, market
reconstructions, examinations, and
investigations. Because of the
accessibility and ease of use of the
public data, regulators often use it as a
starting point or a basis of comparison
to other data sources. For example, realtime surveillance can rely on SIP data,
and some insider trading surveillance
relies on information from other
publicly available sources such as news
sources. Further, investigations into
short sale market manipulation
sometimes start with an analysis of the
short selling data. Some market analyses
by regulators rely on public data
alone.383 However, there are limitations
on these data that reduce their
usefulness to regulators. For example,
they do not provide customer
376 Internal matching systems of broker-dealers
may include Alternative Trading Systems (‘‘ATSs’’)
or automated trading systems that provide liquidity
to received orders without interacting on a
registered exchange. The Commission understands
that some broker-dealers rely on their clearing firms
to collect and maintain records relating to routed
orders on their behalf. Broker-dealers that operate
their own internal matching systems are more likely
to collect and maintain their own records.
377 15 U.S.C. 78q(a).
378 17 CFR 240.17a–3. For example, market
makers are only required to report information on
orders that are executed.
379 In other words, the exchanges and SROs sell
the data publicly and regulators can purchase it.
380 ICE serves as the operator for the Consolidated
Tape Association (‘‘CTA’’) Plan SIP and the
Consolidated Quote System (‘‘CQS’’) Plan SIP.
These SIPs collect and disseminate information on
quotes and trades in listed securities, other than
NASDAQ listed securities. The NASDAQ Stock
Market LLC serves as the operator for the Unlisted
Trading Privileges (‘‘UTP’’) Plan SIP, which collects
and disseminates quote and trade information in
NASDAQ listed securities.
381 An exchange’s order book consists of all
unexecuted orders at each price. Order book data
typically includes the depth (aggregated number of
shares) of the displayed orders at each price and
might include all prices in the order book or the
depth at each price over a range of prices. Displayed
orders consist of any order in which the submitter
did not instruct that some or all of the order be
hidden from display.
382 See Short Sale Reporting Study, infra note
413, for more information on available short selling
data and the demands for additional short selling
data. This study also describes information
regarding data from Form SH filings. For ten
months starting during the financial crisis, the
Commission required certain institutional investors
to submit weekly reports of their short selling
activity and positions.
(5) Trading and Order Handling System
Data
Broker-dealers and exchanges also
collect and maintain records of activity
in their order handling systems and
internal matching systems.376 This data
may include order receipt, modification
or routing information not otherwise
reported to SROs. Some elements of
these data exceed the scope of
information captured in EBS, SRO audit
trail, trade blotter, or order ticket data;
for example, SRO audit trail data
sometimes excludes market-making
activity. But certain market making
activity is included in the data that
broker-dealers and exchanges are
required to maintain pursuant to
Section 17(a) of the Act 377 and Rule
17a–3 thereunder.378 Regulators use
these trading and order handling system
data in investigations and examinations
to further analyze issues discovered
during their analysis of data from other
sources. Like other current sources of
data, there are limitations on trading
and order handling system data that
reduce their usefulness to regulators.
For example, a lack of standardization
results in variations in trading and order
handling system data across brokerdealers. These and other limitations are
discussed in Section IV.D.2.b, infra.
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information, order entry time,
information about special order
handling codes, counterparties, or
member identifiers. These and other
limitations are discussed in Section
IV.D.2.b, infra.384
b. Current Limitations of Trade and
Order Data
Although regulators have access to
trade and order data from the sources
described above,385 the available data
are, for various reasons, limited in terms
of the four qualities discussed above. In
terms of completeness, current sources
do not represent all of the market
activity of interest in sufficient detail in
one consolidated audit trail. In terms of
accuracy, current sources may reflect
data errors, insufficiently granular clock
synchronization and time stamps, errors
introduced in the process of combining
data from different sources, a lack of
consistent customer and broker-dealer
identifiers, and data that is too
aggregated at the record level to provide
the information regulators need. With
respect to accessibility, the SROs and
Commission lack direct access to most
of the data sources described above, and
with respect to timeliness, obtaining
trade and order data from current
sources and converting the data into a
form in which they can be analyzed can
involve a significant delay from the time
of a particular event of interest.386 The
qualities of market data are important to
the Commission’s ability to fulfill its
statutory mission in an efficient and
effective manner. As a result of the
limitations on current data sources,
regulators are limited in their ability to
perform the activities outlined in
Section IV.D.1, above. Table 2:
Currently Available Data Sources
summarizes the key characteristics of
the currently available data sources,
which are discussed in more detail
below.
383 See
Collver, supra note 327.
also Staff of the Office of Analytics and
Research, Division of Trading and Markets,
Research Note: Equity Market Volatility on August
24, 2015 (December 2015) available at https://
www.sec.gov/marketstructure/research/equity_
market_volatility.pdf.
385 See Section IV.D.2.a, supra.
386 As discussed above and in the Adopting
Release, accuracy refers to whether the data about
a particular order or trade is correct and reliable;
completeness refers to whether the data represents
all market activity of interest or just a subset, and
whether the data is sufficiently detailed to provide
the required information; accessibility refers to how
the data is stored, how practical it is to assemble,
aggregate, and process the data, and whether all
appropriate regulators could acquire the data they
need; and timeliness refers to when the data is
available to regulators and how long it would take
to process before it could be used for regulatory
analysis. See supra note 306.
384 See
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Idcntcticr
OATS
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COATS
PO 00000
SRO Audit
Trails
I
I
~o
I
Idcntt±icr
I Time Stamp
387
Yes (maJonty m
Yes
mtlhsecc,nds but
some m seconds)
m!ormatton
I Nt'
Order Display
Informat10n
Y cs (fOr hmtt
mders)
Routing/
Modificatlon/
Canccllatlon
mformatton
Duy-to-Cover
Indtcator
I ~0
I
Frm 00051
Fmt 4701
~beets
broker-
Sfmt 4725
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Yes (majority m
milhseconds but
some in seconds)
No
No
'To
No
No
No
'To
No
Yes
No
No
'To
No
Nt'
No
)Jo
No
No
Yes
No
No
'In
No
I Derends on tl;e
trader
Public/
Proprietary Data
I
'To
I
No
Yes (varred
behveen seconds
and
microseconds)
No
No
'To
No
I Data of
Timeliness
I Actrvrty
Off-Exchange
Vveeks
I '"
Yes
Yes
I
Tradrng and
Clr·der Handlrng
System Data
(once urder
reaches
exchan.:!el
Yes
Ko
Dtrect Access
for Regulators
I Nt'
I Yes
Yes
across
I No
Yes (can be
requested,
altlhmg\1 11\lt
always r-eliahle)
Electronic Blue
I 'To
Yes (but not
always
conststent across
bruker-dealers)
I
'To
I No
Entire Ltfecycle
Yes (before
order reaches
cxchanoe)
I Yes (comhlmnal) I Y"
I No
Yes
I Yes
I AJ~ocahon
No
I 'To
Equity and
Optwn Cleared
Reports
l"rade
Blotters/Order
Tickets
Droker- Dealer
388
Comptlmg 339
I
Raw Data: T+
Cc,~rected
I
Data
l'+A
I No
1\n (except
SROs wlr/t theu
mvn trmls).
Access can take
several weeks
I
'To
I
No
Yes
I
Yes
I
No
1\o. Access can
take scvcra 1
Vveeks t'r months
I
Yes
Nt'
~~e ~~~~:~ ~~~s I
yes
I
Same-Jay
I
Yes
I
Same-day
I
Yes
I
Same-day
exchange)
No
for
cancellatiOn
mfonnatu.,n)
I
I
No
Yes
As soon as a
trade ts executed.
Equity: T 13
Optlon: T+1
II
0 business days
after request ts
submtlled
17MYN2
387
l11e CAT '.J'v!S Plan also requires CAT Reporters to S}nchronize their time clocks to the time maintained by the NIST v.ith an allowable drift of 50 milliseconds. See CAT N'v!S Plan, _WJlTI! note 3. at Section 6.8. According to a
survey conducted by the FIF, 39% of responding broker-dealers currently synchronize their clocks with less precision than what is called for by the CAT NMS Plan. Thus. the CAT NMS Plan would also increase the accuracy ofthe time
stamps us..::d by certain broker-dealers. See §!illillllOte 127.
<.ss Off-~xchange activity indud~s currrntly reportabl~ ~vents that ar~ not handl~d by a r~gistd"ed s~curities ~xchange.
9
In this inslanc~, "timeliness'' refers to when th~ data are compil~d at the sourc~ in question(~ when OATS rtX:~iv~s data from reporting broktTI"-dealers), not wh~n they become available to regulators b~caus~ lliat timdine can vary
depending on the regulator in question. As shown in the "Direct Acce<::s for Regulators" column, it may still take several days, weeks, or months for regulators to be able to acce<::s the data. For example, V\hile OATS reporters provide the
data at T+ 1, the SEC must request OATS data ln order to access lt \\hlch may take several days or weeks. ll1ls narro\ver definltlon oftlmellness is not used throughout this economic analysis.
'fl
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
18:13 May 16, 2016
Table 2
390
Guidance from FNRA indicates that hroker-dealers must ·'identity the party to the trade'' through ERS fields such as ·'Primary Party Identifier,'' hut that party may he another hroker-dealer rather than the ultimate customer. See
F1NRA, Electronic Blue Sheet Submissions, FINRA and ISG E:.tend Effective Date for Certain Electronic Blue Sheet Data Elements, Regulatory Notice 12-47 (Oct. 2012), available at
https://wvvw ..finra.org/sil~s/defaultifiles/-:\roticeDocument/pl94655.pdf. Similarly, under th~ large trader rule. persons exd"cising "in\l~stm~t discrdion" ar~ rqJort~d through EBS, but in some cas~s such persons are inv~stm~nt advisd"s
rather than their customer<::. See .hl!llli!. note 372 and accompanying text (discussing the large trader nile).
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(1) Completeness
‘‘Completeness’’ refers to whether the
data represents all market activity of
interest or just a subset, and whether the
data is sufficiently detailed to provide
the required information.391 While
current data sources provide trade and
order data specified by existing rules
and regulations, those sources do not
contain all market activity that might be
required for certain market inquiries, in
sufficient detail, within one
consolidated audit trail. To obtain
information regarding a particular
market event, regulators may have to
piece together information from
different data sources. Further, some
data is not required to be reported at all
under existing regulations.392 Therefore,
current data sources either cover only a
limited number of events and products,
or lack some data fields that would be
useful to regulators, each of which
impedes effective market surveillance.
A. Events and Products
There is currently no single data
source that covers all market activities.
EBS data contains executed trades but
does not contain information on orders
or quotes (and thus does not provide
information on routes, modifications, or
cancellations). Similarly, trade blotters
and order tickets contain only
information recorded by that particular
broker-dealer or investment adviser and
may contain limited information about
full order lifecycles. SRO audit trail data
are limited to identifying the activity of
their members, can have incomplete
information concerning their members,
lack order lifecycle information
occurring prior to receipt by an
exchange, and may not contain
information regarding principal trading.
Furthermore, public consolidated and
direct data feeds provide data about the
entire market, but lack information
regarding non-displayed orders and do
not provide sufficient information to
identify the different lifecycle events of
a single order.
Individual SRO audit trails are
extensive but still incomplete in their
391 See
supra note 306.
e.g., Adopting Release, supra note 9, at
45726–30, 45741, 45750 n.286, 45756 n.361
(discussing the incompleteness of the data recorded
by existing audit trail systems such as OATS,
acknowledging that ‘‘certain elements are not
collected by existing audit trails,’’ and noting that
‘‘existing SRO audit trails do not require customer
information to be reported’’); see also Proposing
Release, supra note 9, at 32564–66, 32603
(discussing gaps in current required audit trail
information and stating that the proposed rule
would require ‘‘national securities exchanges,
national securities associations, and their members
to capture . . . information that is not currently
captured under the existing audit trail or other
regulatory requirements’’).
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392 See,
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coverage of the activities of the market
participants they cover; they contain
only activity of their own members and
many do not necessarily contain all
activity by their members. For example,
FINRA’s OATS data does not include
proprietary orders originated by a
trading desk in the ordinary course of a
member’s market making activities, or
options data. And while OATS collects
data from FINRA members with respect
to orders and trades involving NMS and
OTC stocks, OATS does not include
trade or order activity that occurs on
exchanges or at broker-dealers that are
not FINRA members.393 In addition,
while broker-dealers who are not
members of FINRA must be members of
an exchange SRO, an individual
exchange SRO’s audit trail data is
generally limited to activity taking place
on that exchange.394 Because brokerdealers who are not members of FINRA
may engage in trading activity in offexchange markets, a substantial portion
of the trading activity that an exchange
SRO supervises is not reported to the
supervising SRO.395
393 See CAT NMS Plan, supra note 3, at Appendix
C, Section B.7(b)(ii)(A). OATS includes records
showing the routing of an order to an exchange, but
not the outcome of that routing. In performing its
regulatory oversight of the markets, FINRA has
created an internal process in which it augments
the data it collects via OATS with trade execution
data from other exchanges with which it has
regulatory service agreements. This process
provides FINRA with a wider view of the markets
than OATS previously provided, but linking data
across these sources does not yield fully accurate
results. See Section IV.D.2.b(2), infra for a
discussion of the accuracy of linking across data
sources. See infra note 1060 for a discussion of
FINRA’s RSAs.
394 Currently, Rule 15b9–1 offers an exemption
from FINRA membership that applies if the firm is
a member of a national securities exchange, carries
no customer accounts, and has annual gross income
of no more than $1,000 that is derived from
securities transactions effected otherwise than on a
national securities exchange of which it is a
member (the ‘de minimis allowance’). Income
derived from transactions for that dealer’s own
account with or through another registered brokerdealer do not count toward the $1,000 de minimis
allowance. However, the national securities
exchanges have not generally supervised their
members’ activity outside of the markets they
operate. The Commission has proposed
modifications to Rule 15b9–1 that would require a
dealer to be a member of a registered national
securities association to conduct most off-exchange
activity. See Securities Exchange Act Release No.
74581 (March 25, 2015), 80 FR 18035, 18042 (April
2, 2015) (‘‘Exemption for Certain Exchange
Members’’) (proposing to amend rule 15b9–1 and
noting that ‘‘[n]on-Member Firms are not subject to
oversight by [FINRA] and their off-exchange
transactions typically are not overseen by the
exchanges of which they may be members,’’ and
that ‘‘[e]xchanges traditionally have not assumed
the role of regulating the totality of the trading of
their member-broker-dealers . . .’’).
395 Id. at 18043 n.85. Broker-dealers that are not
FINRA members accounted for 48% of orders sent
directly to ATSs in 2014. Therefore, OATS includes
incomplete information on a substantial portion of
PO 00000
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Fmt 4701
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Further, not all FINRA members are
obligated to report to OATS. FINRA’s
rules exempt from reporting certain
members that engage in a nondiscretionary order routing process.396
Additionally, FINRA has the authority
to exempt other members who meet
specific criteria from the OATS
recording and reporting requirements,
and has granted approximately 50 such
exemptions.397
Exchange audit trails also lack
information on the order lifecycle
events that occur prior to receipt at the
exchange.398 SRO audit trail data
available from the Intermarket
Surveillance Group (‘‘ISG’’) 399 does not
off-exchange trading. As of March 2015, 125 of the
approximately 4,209 registered broker-dealers were
not members of FINRA. Id. at 18052. Orders from
non-FINRA members accounted for 40% of orders
sent directly to ATSs in 2013, and 32% in 2012. Id.
at 18038 n.21.
396 See FINRA Rule 7410 (Definitions). The Rule
specifically excludes from the definition of
‘‘Reporting Member’’ members that (1) engage in a
non-discretionary order routing process and route
all of their orders either to a single receiving
Reporting Member or two Reporting Members,
provided orders are routed to each receiving
Reporting Member on a pre-determined schedule
and the time period for the schedule does not
exceed one year; (2) do not direct or maintain
control over subsequent routing or execution by the
receiving Reporting Member; and (3) have a written
agreement with the receiving Reporting Member
that specifies the respective functions and
responsibilities of each party to effect full
compliance with the OATS recording and reporting
rules. Finally, the receiving Reporting Member must
record and report all required information
pertaining to the order.
397 See FINRA Rule 7470 (Exemption to the Order
Recording and Data Transmission Requirements).
The Rule provides that, for good cause shown,
FINRA may exempt a member from its recording
and reporting requirements if: (1) The member and
current control affiliates and associated persons of
the member have not been subject within the last
five years to any final disciplinary action, and
within the last ten years to any disciplinary action
involving fraud; (2) the member has annual
revenues of less than $2 million; (3) the member
does not conduct any market making activities in
NMS stock or OTC securities; (4) the member does
not execute principal transactions with its
customers; and (5) the member does not conduct
clearing or carrying activities for other firms. This
authority sunsets on July 10, 2019. Approximately
799 firms that are excluded or exempt from OATS
would incur CAT reporting obligations if the Plan
were approved; see also infra note 931, Section
IV.F.1.c(2)B.i, infra.
398 The Commission understands that exchange
routing broker-dealers, which route orders from
exchanges to other Execution Venues, do
substantial business, but it is very hard in current
data sources to track orders sent to one exchange
that are then sent to another exchange or offexchange venue by the exchange routing brokerdealer.
399 The ISG was established in the early 1980s
and is comprised of over 50 international
exchanges, market centers, and market regulators
that perform market surveillance in their respective
jurisdictions. The purpose of the ISG is to provide
a framework for the sharing of information and the
coordination of regulatory efforts among exchanges
trading securities, options on securities, security
futures products, and futures and options on broad-
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capture quotes/orders away from a
market’s inside market (i.e., those
quotes/orders below the best bid or
above the best offer); currently identify
market participants in a trade only to
the clearing broker level; do not provide
information on the executing broker;
and contain certain data fields that are
not mandatory.400
Additionally, some SRO audit trails
do not include and are not required to
include activity associated with
principal trading, such as marketmaking activity. This may result in the
exclusion of a significant amount of
activity, particularly for firms with
substantial market-making business
activities. Principal trading activity
represents a significant portion of
market activity and there are aspects of
the current market regime that may
result in the underreporting of this
trading activity. Indeed, an analysis by
Commission Staff estimates that
principal trading accounted for 40.5%
of all reported transactions and
principal activity accounted for 67% of
all exchange message traffic.401 And,
because these figures do not capture
principal activity done by trading onexchange through other broker-dealers,
these estimates are likely to be biased
downwards.402
Finally, no single current data source
integrates both equities and options.
The lack of any combined equity and
options audit trail data is a significant
impediment to regulators performing
cross-product surveillance.403
based security indexes, to address potential intermarket manipulations and trading abuses. In effect,
the ISG is an information-sharing cooperative
governed by a written agreement. ISG also provides
a forum for ISG members to discuss common
regulatory concerns, thus enhancing members’
ability to efficiently fulfill their regulatory
responsibilities. As a condition to membership,
every ISG member must represent that it has the
ability to obtain and freely share regulatory
information and documents with other ISG
members, generally unencumbered by rules,
nationally imposed blocking statutes or bank
secrecy laws. Regulatory information is only shared
on an as-needed basis and only upon request, and
any information shared through ISG must be kept
strictly confidential and used only for regulatory
purposes. The SEC is not a member of ISG, nor is
ISG subject to regulatory oversight by the SEC.
400 See Comment Letter from FINRA and NYSE
Euronext regarding Proposing Release (August 9,
2010), available at https://www.sec.gov/comments/
s7-11-10/s71110-46.pdf.
401 The analysis used audit trail data (where
orders are identified at the broker-dealer level),
from 10 exchanges, excluding CHX, and OATS
reported off-exchange activity. Message traffic was
defined as order placement, cancellation, or
amendment.
402 The fact that off-exchange principal trading of
non-FINRA member broker-dealers is not fully
reported in OATS, may also bias these estimates
downwards.
403 Likewise no single audit trail combines futures
with NMS Securities either. See Adopting Release,
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B. Data Fields
Each of the available data sources
discussed above 404 is missing certain
data fields that are useful for conducting
a variety of regulatory activities.
Furthermore, certain valuable data
fields are not contained in any of the
data sources discussed above. For
example, the lack of completeness in the
data sources makes it impossible to use
certain key information, such as
customer identifiers and allocation
information, in market surveillance.
Further, even for single-security events
within a single trading venue, regulators
may need to seek data from multiple
sources such as an SRO audit trail and
EBS.405
Most notably, the identity of the
customer is unavailable from all current
data sources that are reported to
regulators on a routine basis. A unique
customer identifier could be useful for
many types of investigations and
examinations such as market
manipulation investigations and
examinations of investment advisers. As
noted above, some data sources—
specifically Large Trader, EBS, trade
blotters, and order tickets—identify
customers.406 But these data sources are
not reported on a routine basis, provide
only one part of the order lifecycle, and
have other inherent limitations.
Because there is currently no data
source that includes customer identities
across multiple parts an order
lifecycle,407 regulators must engage in a
process of linking EBS, trade blotters
and order tickets with SRO audit trails,
which can be a burdensome and
imperfect process.408 For example, trade
blotter and order ticket data that
identifies customers from one brokerdealer may only include customer
names and thus may not be readily
matched to similar data from another
supra note 9, at 45744 for a discussion of the
potential inclusion of futures in CAT Data.
404 See Section IV.D.2.a, supra.
405 See Section IV.D.2.a, supra, and Section
IV.D.2.b(3) infra, for a discussion of how regulators
access such data.
406 Trade confirmation data also identifies
customers, but trade confirmation data are much
more basic than a trade blotter. See supra note 375.
407 The Commission approved a FINRA rule that
would require broker-dealers to report to OATS the
identity of U.S. registered broker-dealers that are
not FINRA members and broker-dealers that are not
registered in the U.S. but have received an SROassigned identifier in order to access certain FINRA
trade reporting facilities, from whom they receive
or route an order. See Securities Exchange Act
Release No. 77523 (April 5, 2016), 81 FR 21427
(April 11, 2016) (Order Approving FINRA Rule to
Report Identity of Certain Broker-Dealers to OATS).
CAT would similarly capture this information upon
full implementation.
408 For further discussion of the problems
associated with linking, see Section IV.D.2.b(2)C,
infra.
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30665
broker-dealer, or may require substantial
effort and uncertainty to reconcile
across firms. Further, EBS data’s limited
coverage of trading activity and lack of
some detailed trade information creates
inefficiencies in insider trading
investigations. These investigations
often begin with a request for EBS data
of trades before a significant corporate
news event that affected a company’s
stock price. After identifying accounts
that made suspicious trades,
investigators often request additional
EBS data of all trades by the accounts
during the same period. If the additional
data reveal suspicious trades by the
accounts of the securities of other
companies, investigators often must
make a third round of EBS requests for
data of trades by all accounts in those
securities. If trading is done in an
omnibus account, Commission Staff
must ask firms to provide the identity of
the account holder, and then request
account information. To investigate for
manipulation (e.g., marking the close,
order layering, spoofing,409 wash sales,
trading ahead), Commission Staff may
also link data from multiple sources.
First, Commission Staff obtains equity
and option cleared reports from an
internal online system that interfaces
with data provided by the DTCC.
Because the equity and option cleared
reports do not have trade details,
Commission Staff may also request trade
information through EBS submissions
from one or multiple firms. If a trade
was executed on behalf of another firm,
Commission Staff may then contact the
other firm, until Staff can find out who
placed the trade and the account holder.
The Commission may then obtain
granular trade information that contains
order entry time and order execution
time from firms or brokers via request or
subpoena.410
The methods for obtaining such
information significantly reduce its
utility, particularly for surveillance and
market reconstruction purposes. Market
reconstructions, for example, cannot
take advantage of the detail in the EBS
and trade blotter data because of the
resources required to link so many data
sources, lack of necessary elements
(such as time stamps in milliseconds)
needed to link data sources (for
example, matching large trader reports
to activity on a particular exchange), or
the absence of standardized format. To
examine a tip or complaint, regulators
may consolidate data from each affected
409 See
supra note 343.
process to obtain detailed trade
information from firms and brokers via requests or
subpoenas generally takes anywhere from two to
four weeks depending on the size of the request.
410 The
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market participant to determine the
identities of those responsible for the
atypical activity in question. To the
extent that the activity originates from
several market participants, regulators
must request data from each of those
market participants, and possibly other
market participants, to obtain
information that could identify the
customer(s) originating the orders that
created the atypical activity.
For many regulatory activities, lack of
completeness results in regulators
initially relying upon the most
accessible data sources, with significant
information contained only in data
sources made available by request.
Starting regulatory functions with
incomplete data sources requires
regulators to later make data requests
and link such data request responses.
More importantly, however, incomplete
or unconsolidated data interferes with
effective surveillance. Access to data
through non-routine means makes
investigations and examinations less
efficient, and makes automated
surveillance less accurate and less
effective. For example, the publicly
available data discussed above 411
identify exchanges but lack most of the
fields found in some SRO audit trails or
EBS, such as customer information,
order entry time, order execution time,
information about special order
handling codes, counterparties, and
member identifiers. Similarly, equity
cleared reports contain only the date,
the clearing firm, and the volume
cleared by each clearing firm and not
the trade size, trade time, or trade
location. Option cleared reports contain
only the date, the clearing firm, number
of customer contracts, and number of
firm contracts for the options.
Some valuable data fields, such as
modifications that make an order nondisplayed and other special handling
instructions are consistently available
on only a few data sources or require
linking different data sources.412 The
lack of direct, consistent access to order
display information and special
411 See
Section IV.D.2.a(6), supra.
display information (i.e., whether the
size of the order is displayed or non-displayed) is
indicated in the ‘‘Customer Instruction Flag’’ and
special handling instructions are indicated in the
‘‘Special Handling Code’’ of an OATS report. The
Customer Instruction Flag is mandatory if a limit or
stop price is provided. A Special Handling Code is
required for order modifications, reserve size
orders, when the order is routed electronically to
another member, or when the terms and conditions
of the order were derived from a related options
transaction. See FINRA, OATS Reporting Technical
Specifications, at Appendix A (June 26, 2015),
available at https://www.finra.org/sites/default/files/
TechSpec_20150825.pdf. This data is not directly
available to all regulators. The Commission must
request this data from FINRA.
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handling instructions creates
inefficiencies in surveillances,
examinations, and investigations that
examine hidden liquidity and the
treatment of customer orders. Data that
are not directly accessible by regulators
at all include buy-to-cover information
and subaccount allocation information,
including the allocation time. For
example, no current data source allows
regulators to directly identify when
someone is buying to cover a short sale.
Regulators could use this information to
better understand short selling and for
investigations of short sale
manipulation. Indeed, the absence of
this information during the financial
crisis in 2008 reduced the efficiency of
the reconstruction of investor positions
in financial companies.413
Subaccount allocation information
needed for regulatory activities can be
difficult for regulators to collect and
compile. SRO audit trails currently do
not require allocation reports and
broker-dealers may not have records of
the time of a subaccount allocation.
When regulators require an
understanding of subaccount allocations
for a regulatory task, they generally
request and sift through trade blotter or
EBS data in an attempt to identify
allocations and the details of those
allocations. Current trade blotter data
contains limited customer information
on allocations and is not required to
contain allocation time information at
the subaccount level. While the
Commission is sometimes able to
acquire allocation time on trade blotters,
not all broker-dealers keep records in a
manner that facilitates efficient
regulatory requests for allocation time
information.
The difficulty in obtaining allocation
information and the difficulty in
reconstructing allocations with data
from broker-dealers limits the efficiency
of certain surveillances and
examinations. Allocation time at the
subaccount level is critical for
determining whether some customers
are systematically given more favorable
allocation treatment than others. For
example, when a broker-dealer places
an order or series of orders for multiple
customer accounts that generates
multiple executions at multiple prices,
it is possible that different customers
receive different prices in the allocation
process. However, if some customers
systematically receive less favorable
413 Having access to buy-to-cover information was
also one of the subjects of a Dodd-Frank-mandated
study on short sale reporting. See SEC, Short Sale
Position and Transaction Reporting (June 5, 2014)
(‘‘Short Sale Reporting Study’’), available at https://
www.sec.gov/dera/reportspubs/special-studies/
short-sale-position-and-transaction-reporting.pdf.
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prices than others when they should be
receiving the same prices for their
executions, this could indicate that the
broker-dealer is handling allocations
improperly.414
(2) Accuracy
In the Adopting Release, the
Commission noted that while ‘‘to some
extent, errors in reporting audit trail
data to the central repository will
occur,’’ the CAT NMS Plan would
improve the quality of data including
improvements to accuracy.415
Therefore, the economic analysis
carefully considers the Baseline of the
accuracy of data regulators currently use
in order to consider whether and to
what degree the CAT NMS Plan would
provide more accurate data.
The prospect of inaccurate data can
result in regulators expending extra
resources to run additional quality
checks to ensure reliable data and
conclusions in enforcement
investigations, or being unable to draw
reliable conclusions at all. In addition,
risk-based analysis may not properly
identify a potential risk that justifies
further examination if the underlying
data suffers from inaccuracies.
Ultimately, inaccurate data results in
less efficient investigations as well as
less effective surveillance and risk
analyses. This economic analysis
considers several forms of data
inaccuracy, including data errors,
inaccurate event sequencing, the
inability to link data accurately,
inconsistent identifiers, and obfuscating
levels of irreversible data aggregation.
A. Data Errors 416
Based on Staff experience, the
Commission preliminarily believes that
data errors affect most current data and
can persist even after corrections. For
414 If a group of orders are bundled together for
execution, when those same orders are allocated,
they should receive the same (usually average price)
allocations. However, if executions are for orders
that are not bundled together, it might be
appropriate that customers for those separate orders
would receive differently-priced allocations.
415 See Adopting Release, supra note 9, at 45730.
416 As used herein, the term ‘‘data errors’’ refers
to instances where data reflect false information or
are missing information such that they do not
reflect order events that occurred in the market
fully and accurately. Under this definition of ‘‘data
errors,’’ a trading error or an order entry error
would not be a ‘‘data error.’’ For example, if a trader
submitted an order to an exchange with an order
size of 100,000, an accurate order record would
contain an order size of 100,000. If the trader
actually intended to enter the order size as 1,000,
the accurate order record would still be 100,000
because that would reflect the actual state of the
market at the time. In other words, the 100,000
order size is not a ‘‘data error.’’ If the trader later
corrected the order size, accurate data would reflect
the subsequent corrections while still preserving
the accurate state of the market at the time.
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example, Commission Staff has
investigated instances where
information was inaccurately reported
by broker-dealers, most notably in EBS
data given to the Commission.417 In
addition, the Commission believes that
data sources that depend on data
translated from back-office systems can
be less accurate than those that come
from trading systems, such as trade
blotters and data sourced from
exchanges’ electronic trading systems,
because the data translation process
creates an additional source of potential
errors in code that may not work as
intended. Data from trading systems can
also contain errors resulting from a
coding error in the query pulling the
data. Such coding errors can affect any
data including trade blotters. For
example, trade blotters are stored using
the ticker symbol in effect at the time of
the trade. If the ticker symbol changes
between the trade and the data request,
the coding may fail to take the ticker
symbol change into account and fail to
retrieve the correct data. The
Commission has found that trade blotter
data can often be inaccurate due to
improper inclusion of cancelled orders
or corrections, making accurate
reconciliation difficult. Furthermore,
trade blotter data can lack security
information including CUSIP, symbol,
or description at the subaccount level,
which are important features for helping
regulators determine potential
violations.418
Audit trail data contain errors, as
well. The CAT NMS Plan reports that
2.42% of order events submitted to
OATS fail validation checks,419
resulting in the rejection of almost
425,000 reports per day, on average.420
While FINRA sends these records back
to its members to correct, not all data
errors are identified because OATS
limits error correction requests to
records with internal inconsistencies
within a given member’s submission. In
particular, significant error rates in
event linking are common because there
is no cross-participant error resolution
process; FINRA estimates that 0.5% of
OATS routing reports directed to
another FINRA member broker-dealer
cannot currently be linked.421 The CAT
NMS Plan reports that, following the
rollouts of three major updates to OATS,
0.86% of Trade Reporting Facility
(‘‘TRF’’) reported trades could not be
matched to OATS execution reports,
3.12% of OATS route reports could not
be matched to exchange orders, and
2.44% of inter-firm routes could not be
matched to a record of the receiving
firm’s receipt of a routed order.422
Other audit trail data may also
contain errors. For example, the
Commission notes that exchange SROs
populate most of the information with
data from their in-house order and
trading records, but a few of these
exchange SROs also rely on members to
complete their audit trails.
417 For example, Commission staff have
experienced frequent errors in EBS data such as
omitted variables, decimals in the wrong places,
blank account information, and data for the wrong
securities. The Commission has instituted actions
against entities in connection with inaccurate EBS
data. See, e.g., Securities Exchange Act Release No.
75445 (July 14, 2015), In the Matter of OZ
Management, LP, Administrative Proceeding File
No. 3–16686 (OZ Management, LP admitted
submitting inaccurate data to four of its prime
brokers); see also Section IV.D.2.b(4), infra, for a
discussion of one impact of inaccurate data.
418 In cases where Commission staff has used
these data, it has found that the frequent omission
of these important fields in trade blotter data is
generally due to the manner in which the data is
queried by broker-dealers. There are a variety of
reasons why these fields may be excluded from a
query. For example, over time firms make changes
to their software systems; records stored by
previous versions, particularly when the records are
archived in a secondary location, may not be fully
compatible with software that is written to access
more current versions of this data. Additionally,
sometimes when a broker-dealer or clearing firm
merges or is acquired, its trade data may be
compromised due to incompatible systems or
inadequate data storage issues. This problem was
particularly relevant following the financial crisis.
Consequently, staff does not currently believe that
this missing information is caused by a failure of
broker-dealers to collect and retain these variables,
but rather that over time this data becomes less
accessible by software tools and may require hand
processing by broker-dealers providing this
information.
419 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.3(b). When FINRA receives an end-ofday OATS file from a member, it performs over 152
validation checks on each order event reported to
OATS. Each of these checks can result in rejecting
an OATS data submission and generating an error
message. In addition to validation checks, FINRA
determines whether a file that is syntactically
correct nevertheless contains errors in content
related to internally inconsistent information about
processing, linking, and routing orders. For some
errors, FINRA requires the member to provide
corrections within five business days after
rejections are available. See OATS Reporting
Technical Specifications, supra note 357, at 6–1—
6–10. Duplicate records and records with symbols
that are not reportable to OATS may result in
rejections that do not require repair. Id. at 6–4.
Validation checks refer to tests of whether data is
consistent with a set of rules that specify conditions
that should be met by valid data. Validation checks
are typically limited to detecting errors that can be
discovered by a concise set of logical rules using
data within scope at the time the validation test is
run. An incorrect price that is negative would likely
be detected by a validation check, while a price that
was a few cents too low may not. Validation checks
that apply across multiple records may be difficult
to apply across data that is submitted at different
times.
420 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.3(b); see also Adopting Release, supra
note 9 at 45729.
421 See Section IV.D.2.b(2)C, infra.
422 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.3(b).
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B. Event Sequencing
The ability to sequence market events
is crucial to the efficacy of detecting and
investigating some types of
manipulation, particularly those
involving high frequency trading, those
in liquid stocks in which many order
events can occur within microseconds,
and those involving orders spread
across various markets. In today’s
market, high frequency and algorithmic
traders can react to changes in the
market in a few milliseconds or less.423
Investigations involving algorithmic
trading, therefore, can require the ability
to sequence the order and trade events
to within a few milliseconds; however,
regulators relying on currently available
data may have difficulty sequencing
events that occur within a second on
different trading venues or broker-dealer
systems.424 In addition, in one type of
trade-based manipulation, a
manipulator might build a short
position in a stock, submit sell orders
designed to decrease the stock price,
and finally buy at an artificially low
price. To analyze this activity, except
when cover orders precede the sell
activity, it would be necessary to
determine whether the orders intending
to create an artificial price came before
the orders intending to profit from the
artificial price, which becomes difficult
when the systems on which order
events occurring close in time to each
other have clocks that are not
synchronized. Further, insufficiently
granular time stamps can make
sequencing events across venues
impossible.
Thus, the sequencing of order events
requires both sufficient clock
synchronization across market
participants and time stamps that are
granular enough for accurate
sequencing.425 As discussed below,
423 See, e.g., Joel Hasbrouck and Gideon Saar,
Low-Latency Trading, 16 Journal of Financial
Markets 646 (2013) in which the authors report
apparent HFT response times to market events of
2–3 milliseconds. Given technology advances, it is
likely that response times have decreased since
their sample period, which ends in June 2008.
424 Regulators can sequence events occurring on
the same venue or on the same systems at brokerdealers, but sequencing across venues or brokerdealer systems that could have clocks that are not
synchronized with each other is more difficult.
425 For example, if two market participants report
that two non-simultaneous events happened at
10:15:45, then the time stamps are not granular
enough to sequence the events and regulators
would need sub-second time stamp granularity to
distinguish them. If the two market participants
each have up to one-second clock drift from the
actual time, the 10:15:45 time stamps only show
that the event happened between 10:15:44 and
10:15:46. Only when regulators have both adequate
time stamp granularity and sufficient clock offset
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current clock synchronization standards
make this process difficult.
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i. Clock Synchronization
Clock synchronization refers to the
synchronization of the business clocks
used by market participants for the
purposes of recording the date and time
of market events to a centralized
benchmark clock, often that maintained
by the NIST. Clock synchronization
helps to ensure that the time stamps
used by various participants are
consistent, thereby allowing regulators
to compare time stamps across
participants and to use multiple time
stamps to determine the sequence of
market events. The ability of regulators
to accurately sequence events can be
limited by the permitted ‘‘offset’’
between the clocks—i.e., the length of
the gap that is permitted between a
participant’s clock and the time
maintained by a centralized benchmark
clock.426 For example, if the offset
between the clocks is one second,
regulators cannot accurately determine
the correct sequence of events in the
market occurring within a two-second
period, because each clock may be up to
one second fast or slow.
Current rules require most brokerdealers to synchronize their system
clocks to within one second. In
particular, FINRA specifies a clock
offset tolerance of one second,427 and
tolerances can events be sequenced using time
stamps.
426 For example, if a participant’s clock records a
point in time as 11:00:00 and the NIST clock
records the same point in time as 11:00:01, then the
offset between the clocks is one second.
427 See FINRA Rule 7430 (requiring each member
to ‘‘synchronize its business clocks that are used for
purposes of recording the date and time of any
event that must be recorded pursuant to the FINRA
By-Laws or other FINRA rules, with reference to a
time source as designated by FINRA, and shall
maintain the synchronization of such business
clocks in conformity with such procedures as are
prescribed by FINRA.’’). Section 2 of the OATS
Technical Specifications states that all computer
system clocks and mechanical time stamping
devices must be synchronized to within one second
of the NIST clock and must be synchronized every
day. See OATS Reporting Technical Specifications,
supra note 357, at 2–1. In November 2014, FINRA
issued a Regulatory Notice seeking comment on a
proposal to change the clock offset tolerance to be
50 milliseconds. This proposal also proposed to
move the clock offset tolerance from the OATS
Technical Specifications to FINRA’s books and
records rules so that the requirements apply to the
recording of the date and time of any event that
FINRA By-Laws or Rules require, not just OATS
requirements. See FINRA, Equity Trading
Initiatives: Synchronization of Business Clocks,
Regulatory Notice 14–47, available at https://
www.finra.org/sites/default/files/notice_doc_file_
ref/Notice_Regulatory_14-47.pdf. On February 9,
2016, FINRA filed a proposed rule change with the
Commission. The proposal would reduce the clock
offset tolerance for members’ computer clocks that
are used to record events in NMS securities,
including standardized options, and OTC Equity
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the NASDAQ Stock Market and
NASDAQ OMX BX require members to
comply with FINRA clock
synchronization rules.428 CHX specifies
a clock offset tolerance of 500
milliseconds.429 NYSE MKT and
Securities, from within one second of the NIST
atomic clock to within a 50-millisecond tolerance
of the NIST atomic clock. FINRA would require
firms with systems that capture time in
milliseconds to comply with the new 50millisecond clock offset tolerance within six
months of the effective date; remaining firms that
do not have systems which capture time in
milliseconds would have 18 months from the
effective date to comply with the 50-millisecond
standard. The proposal would not change the
current one-second clock offset tolerance of the
NIST clock requirement for mechanical clocks or
time stamping devices. The proposal would
consolidate and codify the clock synchronization
requirements in new FINRA Rule 4590. The
Commission has published notice of this proposed
rule change. See Securities Exchange Act Release
No. 77196 (February 19, 2016), 81 FR 9550
(February 25, 2016).
428 See NASDAQ Rule 7430A (‘‘(a) Nasdaq
members shall comply with FINRA Rule 7430 as if
such Rule were part of Nasdaq’s rules. (b) For
purposes of this Rule, references to ‘the FINRA ByLaws or other FINRA rules’ shall be construed as
references to ‘the Nasdaq Rules’); NASDAQ OMX
BX Rule 6953 (‘‘(a) Exchange members shall comply
with NASD Rule 6953 [superceded by FINRA Rule
7430] as if such Rule were part of the Exchange’s
rules. FINRA is in the process of consolidating
certain NASD rules into a new FINRA rulebook. If
the provisions of NASD Rule 6953 are transferred
into the FINRA rulebook, then Equity Rule 6953
shall be construed to require Exchange members to
comply with the FINRA rule corresponding to
NASD Rule 6953 (regardless of whether such rule
is renumbered or amended) as if such rule were part
of the Rules of the Exchange. (b) For purposes of
this Rule, references to ‘the By-Laws or other rules
of the Association’ shall be construed as references
to ‘the Rules of the Exchange.’ ’’).
429 See CHX Rule 3, Interpretations and Policies
.03 (‘‘These rules shall not apply to orders sent or
received through the Exchange’s matching system
or through any other electronic systems that the
Exchange expressly recognizes as providing the
required information in a format acceptable to the
Exchange. The Exchange will not recognize a nonExchange system as providing information in an
acceptable format unless that system has
synchronized its business clocks for recording data
with reference to a time source designated by the
Exchange and maintains that synchronization in
conformity with procedures prescribed by the
Exchange.’’); Rule 4, Interpretations and Policies .02
(‘‘Each Participant or layoff service provider shall
synchronize its business clocks that are used for
purposes of recording the date and time of any
event that must be recorded pursuant to this
provision with reference to a time source as
designated by the Exchange, and shall maintain the
synchronization of such business clocks in
conformity with such procedures as are prescribed
by the Exchange.’’); Rule 5, Interpretations and
Policies .01(a) (‘‘Clock synchronization and timing
of the determination of improper trade-throughs.
The Exchange’s systems shall routinely, throughout
the trading day, use processes that capture the time
reflected on the atomic clock operated by the
National Institute of Standards and Technology and
shall automatically make adjustments to the time
recorded in the Exchange’s Matching System to
ensure that the period between the two times will
not exceed 500 milliseconds. The Exchange shall
determine whether a trade would create an
improper trade-through based on the most recent
NBBO that has been received and processed by the
Exchange’s systems.’’).
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NASDAQ OMX PSX require members to
synchronize their clocks relative to a
time source designated by the Exchange,
but do not specify the standard.430
NYSE Arca allows options traders to use
any time provider source for clock
synchronization as long as the business
clocks it uses on the Exchange are
accurate to within three seconds of the
NIST clock or the United States Naval
Observatory Master Clock in
Washington DC.431
In practice, some broker-dealers
currently synchronize their clocks to
smaller clock offset tolerances. FIF
surveyed market participants to gather
information on current broker-dealer
clock synchronization practices.432 The
430 See NYSE Rule 123, Supplementary Material
.23 (‘‘Any vendor or proprietary system used by a
member or member organization on the Floor to
record the details of an order or report for purposes
of this rule must be synchronized with reference to
a time source as designated by the Exchange.’’);
NYSE MKT Rule 7430 (‘‘Each member organization
shall synchronize its business clocks that are used
for purposes of recording the date and time of any
event that must be recorded pursuant to the Rules
of the Exchange, with reference to a time source as
designated by the Exchange, and shall maintain the
synchronization of such business clocks in
conformity with such procedures as are prescribed
by the Exchange.’’); NASDAQ OMX PSX Rule 3403
(‘‘Each member organization shall synchronize its
business clocks that are used for purposes of
recording the date and time of any event that must
be recorded pursuant to the rules of the Exchange,
with reference to a time source as designated by the
Exchange, and shall maintain the synchronization
of such business clocks in conformity with such
procedures as are prescribed by the Exchange.’’).
431 See NYSE Arca Options Rule 6.20 (‘‘(a) Each
OTP Holder and OTP Firm must synchronize,
within a time frame established by the Exchange,
the business clocks that it uses for the purpose of
recording the date and time of any event that must
be recorded pursuant to the Rules of the Exchange.
OTP Holders and OTP Firms may use any time
provider source. Each OTP Holder and OTP Firm
must, however, ensure that the business clocks it
uses on the Exchange are accurate to within a threesecond [sic] of the National Institute of Standards
and Technology Atomic Clock in Boulder Colorado
(‘NIST Clock’) or the United States Naval
Observatory Master Clock in Washington DC
(‘USNO Master Clock’). This tolerance includes all
of the following: (1) The difference between the
NIST/USNO standard and a time provider’s clock;
(2) transmission delay from the source; and (3) the
amount of drift of the OTP Holder or OTP Firm’s
business clock. For purposes of this Rule, ‘business
clocks’ mean an OTP Holder or OTP Firm’s
proprietary system clocks. OTP Holders and OTP
Firms must set forth in their written supervisory
procedures, required by Rule 11.18, the manner in
which synchronization of business clocks will be
conducted, documented and maintained.’’).
432 See FIF Clock Offset Survey, supra note 127.
The Commission notes limitations to the survey
that could result in downward bias and
imprecision. Specifically, the broker-dealers
represented by the survey are primarily complex
and large broker-dealers in terms of market activity
levels; consequently, smaller broker-dealers are
underrepresented. But, as discussed below, the
exclusion of small broker-dealers is unlikely to
materially affect industry costs because smaller
broker-dealers are unlikely to incur significant
clock-synchronization costs because the majority of
broker-dealers rely on service bureau clocks to time
stamp their CAT Reportable Events.
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survey found that 29% of respondents
currently synchronize their clocks to
permit a maximum clock offset of one
second from NIST time.433 The survey
further found that 10% of market
participants permit a maximum offset
from NIST time that is between 50
milliseconds and one second, 21% of
respondents permit a 50-millisecond
maximum offset, and 18% of
respondents permit a maximum offset
that is less than 50 milliseconds. The
remaining 22% of survey respondents
utilize multiple clock offset tolerances
across their systems, ranging from five
microseconds to one second. FIF noted
that 69% of firms that achieve a
maximum clock offset of 50
milliseconds or less are large firms
reporting more than three million OATS
records per month.
Certain exchanges, the SIPs, and
FINRA synchronize their clocks for their
trading, recordkeeping, and other
systems. According to FIF, all exchange
matching engines meet a clock offset
tolerance of 50 milliseconds.434
However, NASDAQ recently stated that
all exchanges trading NASDAQ
securities synchronize their matching
engines and quotation systems to within
100 microseconds.435 The Commission
understands that the NYSE, the options
exchanges, and the SIAC SIP have
comparable clock synchronization
standards. In conversations with
Commission Staff, the Participants
stated that absolute clock offset on
exchanges averages 36 microseconds.436
Because multiple order events can
occur within timeframes of less than
one second, current clock
synchronization requirements and
practices greatly limit the ability of
433 Id.
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434 Id.
435 See NASDAQ, UTP Vendor Alert #2015–7
(April 24, 2015), available at https://
www.nasdaqtrader.com/
TraderNews.aspx?id=UTP2015-07 (describing
additional time stamps to be reported to the SIP,
including information on exchange clock
synchronization, and stating that ‘‘[e]xchanges use
a clock sync methodology ensuring that timestamps
are accurate within tolerances of 100 microseconds
or less.’’).
436 In response to questions from Commission
Staff, the Participants surveyed the exchanges to
establish their current average clock offset. All
exchanges that currently operate matching engines
responded to the survey, which measured the offset
from the exchange clock to NIST. The Participants
noted that the frequency with which exchanges
measure their clock offset ranges from once per
second to once per fifteen minutes, and the
procedures to correct for clock offset vary. Some
exchanges correct by slewing, in which the offset
is gradually corrected, while others use stepping, in
which the offset is immediately corrected. The
process by which clock offset is corrected can
impact the ability to order events time stamped by
a single clock because stepping could result in a
backwards adjustment in recorded time.
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regulators to accurately sequence order
events. To examine, among other things,
how many events can be synchronized
with current clock offset tolerances,
Commission Staff conducted an analysis
of the frequency of events using MIDAS
data.437 In the analysis, events are all
real-time messages, consisting of trades,
orders, modifications, cancellations and
updates from exchange direct feeds and
trades from the FINRA TRFs. The
analysis focused on identifying whether,
for each order event, an event at another
venue occurred within a given time
range.438 For the purposes of the
analysis, events at another venue were
called an ‘‘unrelated event.’’ The
Commission recognized that order
events occurring on the same venue
have sequence numbers that allow
sequencing even if orders have the same
time stamp. Therefore, the analysis
considered only whether any unrelated
orders existed within a given time range
that could complicate the sequencing
across the market.439
437 The MIDAS system does not contain all of the
events in a given security that would be in CAT.
Therefore, the analysis is limited, but still provides
useful insights.
438 The methodology to calculate these
percentages starts with sorting all event messages
for every day chronologically by exchange time
stamp. (MIDAS does not report the exchange time
stamp; but it provides the difference between the
MIDAS time stamp and the exchange or TRF time
stamp; the analysis uses this value to derive the
exchange time stamp.) For each event, it calculates
the difference (Delta) between the current time
stamp (t0) and the last time stamp (t-1) in the same
security on a different venue.
Deltanearest last = t0,venue A ¥ maximum(t-1,venue B,
t-1,venue C, t-1,venue D, t-1,venue E)
This is the shortest time difference (Deltanearest last)
between an event on venue A and a preceding event
on any venue, except for venue A. Next, the
analysis calculates the time difference (Deltanearest
next) between the current time stamp (t0) and the
next time stamp (t1) in the same security on a
different venue.
Deltanearest next = minimum(t1,venue B, t1,venue C,
t1,venue D, t1,venue E) ¥ t0,venue A
Finally, the analysis uses the shorter of the time
differences to evaluate whether an event occurs
within a particular time period of another event in
the same security on a different venue.
Deltanearest = minimum(Deltanearest last, Deltanearest
next)
Values are aggregated over one week (June 15,
2015 through June 19, 2015) for the equities
analysis; and the options analysis data is from one
day (June 15, 2015).
439 Within the analysis, events reported to the
TRF are treated as occurring on a different trading
venue than other recent events because TRF data
comprises many separate venues (such as ATSs and
off-exchange market makers). While events within
a single exchange with identical time stamps can
potentially be sequenced through record identifiers
recorded by the exchange, for TRF trades this is
often untrue because many venues with
independent clocks contribute to the aggregate TRF
data.
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TABLE 3—PERCENTAGE OF EVENTS
CLOSE TO UNRELATED EVENTS
Nearest event time
stamped within
Percent of unrelated
events
Equities
2 seconds .................
1 second ...................
100 milliseconds .......
50 milliseconds .........
10 milliseconds .........
5 milliseconds ...........
2 milliseconds ...........
1 millisecond .............
200 microseconds ....
100 microseconds ....
10 microseconds ......
5 microseconds ........
98.69
97.95
92.16
89.12
83.49
81.28
77.92
74.31
57.53
48.09
21.42
14.44
Options
93.03
90.99
81.17
76.59
64.46
58.26
49.30
41.13
21.58
14.51
3.13
3.12
Table 3 shows that 97.95% of the
order events for listed equities and 91%
of order events for listed options in the
samples occurred within one second of
another unrelated order event in the
same security. At the other extreme in
Table 3, 14.44% of the unrelated order
events for listed equities and 3.12% of
the unrelated order events for listed
options in the same security occurred
within 5 microseconds of another order
event in the same security. The
Commission notes that Table 3
underestimates the true frequency of
unrelated events within the given time
frames because it includes only order
events that are included in the MIDAS
data. As such, the analysis is unable to
include events such as the placing of
hidden orders on exchanges, the placing
of orders on an ATS, order originations,
order routes, order receipts, and order
cancellations and modifications for any
order not displayed on an exchange
order book. Despite this limitation,
Table 3 illustrates how the current
frequency of order events makes
sequencing unrelated order events
difficult.
ii. Time Stamps
Given the frequency with which order
events can occur, regulators need
sufficiently granular time stamps to
sequence events across orders and
within order lifecycles. As noted above,
even if the clocks recording time stamps
have no clock offset, the granularity of
the time stamp can limit regulators’
ability to sequence events accurately.440
Current data sources have different
time stamp granularity standards. Many
public data sources report time in
seconds or milliseconds and some,
440 In addition, Craig W. Holden and Stacey
Jacobsen, Liquidity Measurement Problems in Fast,
Competitive Markets: Expensive and Cheap
Solutions, 69 Journal of Finance 1747 (2014), shows
that using time stamps in seconds instead of
milliseconds can yield liquidity measurement
problems.
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including direct data feeds, report time
in microseconds or nanoseconds. For
example, the Options Price Reporting
Authority (‘‘OPRA’’) allows for time
stamps in nanoseconds and the other
SIPs require time stamps in
microseconds for equity trades and
quotes, whereas the short sale
transactional data released by exchanges
contains time stamps in seconds.441
Currently, OATS requires time stamps
in milliseconds for firms that capture
time in milliseconds, but does not
require members to capture time in
milliseconds.442 EBS trade times are
recorded only to the second; other EBS
records must contain time stamps
containing only the transaction date.
The lack of uniform and granular time
stamps can limit the ability of regulators
to sequence events accurately and to
link data with information from other
data sources.
C. Linking and Combining Data
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Sometimes one order or market
activity event may be reflected in
information contained in various data
sources or in different fields within the
same data source, and fully
understanding that activity requires
linking information across the different
data sources. Therefore, regulators
analyzing an event or running a
surveillance pattern often need to link
data. For example, cross-market
examinations require the cumbersome
and time-consuming task of linking
many different data sources.443
441 See OPRA Option Price Reporting Authority
Binary Participant Interface Specification Version
1.7 (January 2015), available at https://
www.opradata.com/specs/opra_binary_part_
spec.pdf; see also NYSE, Modified Timestamps and
Additional Timestamp Information for Daily TAQ
(June 22, 2015), available at https://
www.nyxdata.com/nysedata/
default.aspx?tabid=993&id=2784; UTP Vendor
Alert #2015–7, supra note 435, regarding additional
time stamps to be reported to the SIP.
442 See FINRA Rule 7440 (providing that ‘‘[e]ach
required record of the time of an event shall be
expressed in terms of hours, minutes, and seconds;
provided that the time of an event shall be
expressed in hours, minutes, seconds, and
milliseconds if the member’s system captures time
in milliseconds.’’). The Commission approved the
requirement that time be expressed in milliseconds
if the member’s system captures time in
milliseconds on February 27, 2014. See Securities
Exchange Act Release No. 71623 (February 27,
2014), 79 FR 12558 (March 5, 2014); see also,
FINRA, Equity Trade Reporting and OATS,
Regulatory Notice 14–21 (May 2014), available at
https://www.finra.org/sites/default/files/
NoticeDocument/p506337.pdf.
443 Such linking is typically conducted
electronically with an algorithm unless the size of
the data set is small. This requires the person
attempting to combine and link the data to write
computer code to identify and match the records
that need to be linked. This task involves extensive
testing and debugging the first time that person tries
to combine and link those specific data sources.
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Regulators combine trading data from
sources such as public feeds, SRO audit
trails, EBS data, and trade blotters when
reviewing surveillance alerts to
determine whether violations of rules
such as Rule 611 of Regulation NMS
occurred 444 or to examine, for example,
whether an entity availing itself of a
market maker exemption is engaging in
bona fide market making. In fact, the
data needed for an examination often
consist of many audit trails and are
stored in non-uniform formats.445 In
addition, the analysis and
reconstruction of market events could
require linking many different data
sources, such as a dozen SRO audit
trails.
Regardless of whether order lifecycle
reports are reflected in the same or
different data sources, the process of
linking lifecycle events is complex and
can create inaccuracies. Merging
different data sources often involves
translating the data sources into the
same format,446 which can be a complex
process that is prone to error. Linking
records within or across data sources
also requires the sources to share ‘‘key
fields’’ that facilitate linkage, along with
a successful linking algorithm.
Regulators may be unable to link some
data source combinations accurately
because the data sources do not have
key fields in common or the key fields
are not sufficiently granular. For
example, regulators cannot always link
trade records accurately to EBS records.
The EBS records contain a symbol and
date, but the price and size on the
records may reflect multiple trades
spread over a period of time.
Sometimes, different data sources may
have key fields in common but the
relationship between the fields is not
straightforward. In these cases, the
algorithm to link them may be
necessarily complex and not entirely
successful. Further, within a single
order lifecycle, the order number may
Further, given the variation in formats across
broker-dealers and other data sources, the code may
need to change for each investigation, requiring a
repeat of the extensive testing and debugging
process.
444 17 CFR 242.611.
445 In the context of the CAT NMS Plan, the
Commission does not distinguish data format from
data taxonomy. See Section III.B.3, supra. In
discussing data format, the Commission combines
data format with data taxonomy. Id. The distinction
between format and taxonomy is not significant in
the context of the CAT NMS Plan because the Plan
does not specify either for incoming data and the
Plan effectively requires uniformity in both for
regulator access. Id. SRO audit trails currently differ
in both format and taxonomy as do many other
trading and order data sources.
446 For example, different data sources can format
dates and times differently or may use different
notations to signify that the field contains no value.
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change when a broker-dealer routes the
order to another broker-dealer or
exchange or even to another desk at the
same broker-dealer. The inability to link
all records affects the accuracy of the
resulting data and can force an
inefficient manual linkage process that
would delay the completion of the data
collection and analysis portion of the
examination, investigation, or
reconstruction.
D. Customer and Broker-Dealer
Identifiers
The data sources described in Section
IV.D.2.a also lack consistent customer
and broker-dealer identifiers, which
limit regulators’ ability to track the
activity of one client or broker-dealer
across the market. There is no standard
convention for how broker-dealers
identify customers.
Regulators face challenges in tracking
broker-dealers’ activities across markets
due to inconsistent identifiers and a
lack of a centralized database. These
challenges occur primarily in the
context of regulatory activities that
require manual or ad hoc data analysis,
as is often the case in particular
investigations, examinations, and
market studies. In the case of brokerdealers, SROs generally identify their
members within their data using market
participant identifiers (‘‘MPIDs’’).
However, the MPIDs that identify
broker-dealers on Execution Venues are
not standardized across venues;
consequently, a broker-dealer identified
as ‘‘ABCD’’ on one venue may be
identified differently on another venue,
where ‘‘ABCD’’ may refer to a different
broker-dealer entirely. Therefore,
aggregating a broker-dealer’s activity
across venues requires verifying the
MPIDs assigned to a broker-dealer on
each venue, usually referencing the
broker-dealer by its Central Registration
Depository (‘‘CRD’’) number.447 In the
course of manual data analysis, the
Commission notes that its Staff have
experienced challenges in identifying
broker-dealers using CRD numbers.
These challenges can be due to the fact
that, although every broker-dealer has a
CRD number, a broker-dealer that routes
an order seldom, if ever, provides a CRD
number to the broker-dealer that accepts
the order.448
447 The CRD is an automated database operated by
FINRA that stores and maintains information on
broker-dealers and their registered persons relating
to their licensing, registration, complaints,
professional background, and disciplinary history.
Each broker-dealer and their registered persons are
assigned a CRD number for identification.
448 The Commission and the SROs have generally
overcome these challenges in the context of
automated regulatory data analysis, and found ways
to reduce these challenges in some manual data
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Regulators sometimes find it
necessary to analyze trading activity at
the customer level instead of the brokerdealer level. Consistently identifying
customer account owners across the
multiple broker-dealers with whom they
transact is difficult and prone to error.
Although, for example, the EBS system
provides the names associated with
each account traded, these names are
drawn from the separate records of each
broker-dealer providing data to the EBS
system, and the same party may be
identified by a different name across
multiple broker-dealers. Further, the
lack of tax identification numbers in
many EBS records limits the ability for
regulators to trace the trading activity of
customers across broker-dealers. Tax
identification numbers are not required
to be reported in EBS for average price,
allocation, riskless principal, foreign
accounts, and subaccounts. In fact,
when one broker-dealer executes for a
analysis and can efficiently track broker-dealers
across venues. The Commission understands that
FINRA can track broker-dealers across venues
pursuant to its responsibilities under a plan for
allocating regulatory responsibilities pursuant to
Rule 17d–2. On September 12, 2008, the
Commission declared effective a plan for allocating
regulatory responsibilities pursuant to Rule 17d–2
filed by the American Stock Exchange, LLC, Boston
Stock Exchange, Inc., CBOE Stock Exchange, LLC,
CHX, FINRA, ISE, NASDAQ, NSX, NYSE, NYSE
Arca, NYSE Regulation, Inc., and Philadelphia
Stock Exchange, Inc. (the ‘‘Participating
Organizations,’’ which have since been updated to
be the following SROs: BATS, BYX, CBOE, CHX,
EDGA, EDGX, FINRA, NASDAQ OMX BX,
NASDAQ OMX PHLX, NASDAQ, NSX, NYSE,
NYSE MKT [f/k/a NYSE Amex], and NYSE Arca)
(‘‘Insider Trading Rule 17d–2 Plan’’). The Insider
Trading Rule 17d–2 Plan allocates regulatory
responsibility over common FINRA members
(members of FINRA and at least one of the
Participating Organizations) (collectively ‘‘Common
FINRA Members’’) for the surveillance,
investigation, and enforcement of (i) Federal
securities laws and rules promulgated by the
Commission pertaining to insider trading, and (ii)
the rules of the Participating Organizations that are
related to insider trading (‘‘common insider trading
rules’’). Under that Plan, the Participating
Organizations, other than FINRA, have been
relieved of regulatory responsibility over Common
FINRA Members (i.e., the broker-dealer and its
associated persons) for surveillance, investigation,
and enforcement of the common insider trading
rules over such persons with respect to ‘‘Listed
Stocks’’ (as defined in that Plan). Accordingly,
FINRA retains regulatory responsibility for
Common FINRA Members with respect to the
common insider trading rules—irrespective of the
market(s) on which the relevant trading may occur.
Separately, FINRA performs investigations and
enforcement with respect to non-Common FINRA
Members pursuant to a regulatory services
agreement between FINRA and several of the other
Participating Organizations. See Securities
Exchange Act Release No. 58536 (September 12,
2008), 73 FR 54646 (September 22, 2008); see also
Securities Exchange Act Release Nos. 58806
(October 17, 2008), 73 FR 63216 (October 23, 2008);
61919 (April 15, 2010), 75 FR 21051 (April 22,
2010); 63103 (October 14, 2010), 75 FR 64755
(October 20, 2010); 63750 (January 21, 2011), 76 FR
4948 (January 27, 2011); and 65991 (December 16,
2011), 76 FR 79714 (December 22, 2011).
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second broker-dealer, the tax
identification number is that of the
second broker-dealer regardless of
whether the second broker-dealer is
trading for a customer.
E. Aggregation
The practice used in some data
records of bundling together data from
different orders and trades also can
make it difficult to distinguish the
different orders and trades in a given
bundle. As an example, brokers
frequently utilize average-price accounts
to execute and aggregate multiple trades
for one or more customers. In these
cases, for example with EBS data, the
system does not reflect the details of
each individual trade execution,
because it reports only the average
aggregate prices and volumes of the
various trades within a series that have
been bundled together for reporting
purposes. Further, information on trade
allocations aggregate the trade
information to such an extent that it is
difficult for regulators to identify when
particular clients may be afforded
preferential treatment because it is
challenging to link subaccount
allocations to orders and trades.
Equity and options cleared reports
provide valuable data to regulators, but
aggregation reduces their usefulness,
because the reports do not have detailed
trade information and do not include
activity that does not require
clearing.449 The volume in these reports
cannot be fully disaggregated and
reconciled with the equity trade
execution volume from other data
sources used by the Commission, e.g.,
TAQ and MIDAS, because the volume
in the cleared reports is not necessarily
a summation of all trades. For example,
the same trade can be reported two or
more times, by both the buy and the sell
sides, for some OTC transactions and for
all trades in NASDAQ exchanges.450
Similarly, option cleared reports bundle
together multiple executions by
compressing or netting them to facilitate
clearing. This aggregation limits
regulators’ ability to link records across
data sources, as well as limiting the
accuracy with which the data source
reflects market events, which is
449 The option cleared volume from the OCC
contains the clearing firm, number of customer
contracts, and number of firm contracts for the
options.
450 This scenario of a trade being reported several
times is generally the result of agreements that
permit a broker-dealer to clear trades on behalf of
another broker-dealer and send trades directly to
the NSCC. Broker-dealers often enter into these
agreements to simplify their clearing processes,
achieve lower transaction costs, and take advantage
of extended hours of service.
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particularly problematic in applications
that require market reconstruction.
Finally, issuer repurchase information
is aggregated at the monthly and
quarterly level.451 This aggregation
limits the use of such data in
investigations of the timing of issuer
repurchases and issuer stock price
manipulation and in analysis of the use
of the Rule 10b–18 issuer repurchase
safe harbor.452
(3) Accessibility
The SROs and Commission also lack
direct access—meaning the ability to log
into a system in a manner that would
allow them to gather and analyze the
data they need—to many of the data
sources described above. SROs generally
have direct access only to their own
audit trails and the public data feeds.453
While SROs control the manner in
which they access their own data, their
investigations in some cases require
access to the data of other SROs because
firms could trade across multiple SROs.
To access another SRO’s data, SROs
must send requests to the other SROs 454
or to the ISG.455 SROs needing
information not included in their audit
trails or the audit trail of another SRO
must request such information from
their members. The SROs might not be
able to acquire data from entities that
are not members of that SRO; nonmembers are not obligated to provide
SROs with data,456 any data provided by
451 Issuers report quarterly and monthly
repurchases pursuant to Item 703 of Regulation S–
K. This data includes all issuer repurchases,
including tender offers and open market
repurchases, but does not distinguish the type of
repurchase. The Commission notes that Item 703
provides, in part, that issuers must disclose ‘‘the
number of shares purchased other than through a
publicly announced plan or program and the nature
of the transaction (e.g., whether the purchases were
made in open-market transactions, tender offers, in
satisfaction of the company’s obligations upon
exercise of outstanding put options issued by the
company, or other transactions.’’ See 17 CFR
229.703.
452 Rule 10b–18 provides issuers with a ‘‘safe
harbor’’ from liability for manipulation under
Section 9(a)(2) of the Act, 15 U.S.C. 78i(2), and Rule
10b–5 thereunder, 17 CFR 240.10b–5, solely by
reason of the manner, timing, price, and volume of
their repurchases when they repurchase common
stock in the market in accordance with the Section’s
manner, timing price, and volume conditions. See
17 CFR 240.10b–18.
453 FINRA does receive data from certain SROs on
a daily basis and subsequently has direct access to
that data.
454 Commission staff understands that SROs
receiving information requests from other SROs will
typically provide the information, although they are
not required to do so.
455 See supra note 399.
456 See, e.g., NYSE Rule 2.A.xvi.—Jurisdiction
(noting that the exchange has jurisdiction over
matters related to non-member broker-dealers that
choose to be regulated by the exchange). The
Commission may, by rule or order, subject non-
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the regulator of the non-member firm
would be on a voluntary basis, or
pursuant to the terms of the ISG
Agreement.
The Commission has direct access
only to the public data feeds and the
equity and option cleared data; it lacks
direct access to information provided in
EBS or contained in trade blotters, order
tickets, order handling data, SRO audit
trails, and OATS data. Unlike the SROs,
the Commission can subpoena data from
entities that are not registered with the
Commission, such as professional
traders that are neither broker-dealers
nor investment advisers.
If a regulator does not have direct
access to data it needs, the regulator
would request it. This can result in
many data requests to broker-dealers,
SROs, and others,457 which are
burdensome to fill. The Commission
recognizes that data requests could
impose burdens on the entities
responding to the request, in addition to
the burden on the regulators to put the
request together. Broker-dealers,
investment advisers, and SROs
responding to a data request must incur
costs in order to produce, store, and
transmit the data for the Commission or
SRO.458 Further, as indicated above,
regulators may need to request the data
needed from many different data
providers because of fragmentation in
the data, and thus one analysis, such as
an investigation, can generate many data
requests.
Fragmentation in trade and order data
can take many forms. First, an analysis
may require the same type of data from
many market participants. Second, the
required data fields for an analysis may
be reflected in different types of data.
members to the rules of national securities
exchanges if it deems it necessary or appropriate in
the public interest and for the protection of
investors, to maintain fair and orderly markets, or
to assure equal regulation. Section 6(f)(2) of the Act,
15 U.S.C. 78f(f)(2); see also Sections 6(b)(1),
15A(b)(2) of the Act, 15 U.S.C. 78f(b)(1), 78o–3(b)(2)
(requiring national securities exchanges and
securities associations, respectively, to have the
capability to enforce compliance by their members
with applicable Exchange Act requirements and
exchange or association rules).
457 In the context of an investigation or a court,
in litigation, the Commission can request or
subpoena information from entities, including those
not registered with the Commission. See SEC Rule
of Practice 232. Pursuant to their rules, SROs can
request information from their registered entities;
see also supra notes 454–456 and accompanying
text (discussing how SROs request information from
other parties, including other SROs).
458 See, e.g., CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(ii)(B) (discussing the
current process for broker-dealers and SROs to
respond to data requests, and stating that brokerdealers must commit staff to respond to requests for
EBS or large trader data and may take varied
approaches to fulfilling their regulatory reporting
obligations).
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Finally, an analysis may require data on
different products covered in separate
data sources. The fragmentation in the
data across market participants is a
function of the fragmentation of trading
and broker-dealer services. In today’s
equity markets, trades execute across 12
exchanges, more than 40 ATSs, and
around 250 dealers.459 With its RSAs,
FINRA can consolidate much of the
SRO audit trails in equities.460 In the
options markets, 14 different exchanges
trade listed options with no offexchange trading of standardized
options and no entity aggregating each
audit trail into one dataset. The vast
majority of stocks trade in more than
one location and most options trade on
multiple exchanges.
Exchange SROs generally limit their
data collection to securities traded on
their own exchanges, and limit the
scope of their audit trails to transactions
occurring on their exchanges. While
ATSs and dealers report order events in
equities to OATS, each of the 12
equities exchanges has its own audit
trail. As a result of this structure, a
market reconstruction for a single
security may involve data requests to
multiple exchanges. Likewise, a project
involving options data may require data
from each of the 14 options exchanges.
To acquire broker-dealer order
records, EBS, trade blotters, and order
tickets, regulators need to send a request
to each broker-dealer to obtain its data.
In the Commission’s experience
requested data can suffer from missing
variables, truncations, and formatting
problems due to the way that the data
is queried by the broker-dealer. These
problems can lead to substantial delays
in using data and loss in regulatory
productivity. Many different brokerdealers could have trading records in a
given security on a given day of interest,
so one narrow investigation could
generate many data requests. As a result,
in 2014 the Commission made 3,722
EBS requests that generated 194,696
letters to broker-dealers for EBS data.
Likewise, the Commission understands
that FINRA requests further generate
about half this number of letters. In
addition, for examinations of
459 See Securities Exchange Act Release No.
76474 at 81008, 81112, ‘‘Regulation of NMS Stocks’’
(November 2015), available at https://www.sec.gov/
rules/proposed/2015/34-76474.pdf; see also Laura
Tuttle, OTC Trading: Description of Non-ATS OTC
Trading in National Market System Stocks (March
2014), available at https://www.sec.gov/dera/staffpapers/white-papers/otc-trading-white-paper-032014.pdf.
460 FINRA has access to data from OATS and each
equities exchange except CHX. See supra note 333
and accompanying text. This reduces the data
fragmentation as it relates to the number of data
requests for equities.
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investment advisers and investment
companies, the Commission makes
approximately 1,200 data requests per
year. Further, an investigation that
requires tracing a single trade or a set of
trades back to an investor or investors
can generate many data requests. For
such investigations, regulators would
first need to request data from the
exchanges or market participants
executing the trades. This data would
tell the regulators which members,
subscribers, or broker-dealers sent the
orders that led to the executions.
Regulators would then need to go to the
members, subscribers, and brokerdealers to get information on the orders
and repeat until they get to the brokerdealer who initiated the order to see the
customer behind the order.
Finally, some regulatory activities
require data on both equities and
options. Because current data sources
do not contain information regarding
both equities and options, regulators
needing data on both types of securities
would need to make several data
requests. Closely related securities are
sometimes traded on entirely different
exchanges, complicating cross-product
analyses. For example, COATS data
covers options trades but excludes the
trading of the underlying assets. Often
investigations or analyses require
examining both options and their
underlying assets, creating the need for
regulators to request data from multiple
sources.
This data fragmentation also results in
disparate requirements for industry
members to record and report the same
information in multiple formats.
Because each SRO has its own data
requirements, a market participant that
is a member of multiple SROs may be
required to report audit trail data in
numerous formats and interact with
multiple regulators in response to
normal data queries. That said, the
Commission understands that the
number of disparate formats faced by
each member may have reduced over
the past several years.461
(4) Timeliness
In order to respond promptly to
market events, regulators must be able
to obtain and analyze relevant data in a
timely fashion. Currently, obtaining
trade and order data and converting the
461 For example, some exchange audit trails
require floor brokers who operated on their own
systems to submit order records to the exchange.
These same floor brokers could be members of other
SROs that require different formats for submitting
order reports. The Commission understands that the
volume of trading conducted on an exchange but
not on the exchange’s systems has declined sharply.
Therefore, the activity generating the disparate
reporting requirements has declined.
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data into a form in which they can be
analyzed can involve a significant delay
from the time of a particular event of
interest. Indeed, in some cases the
length of time from when an event
occurs until regulators can use relevant
data in an investigation or analysis can
be weeks or months. This is especially
true for trading data that includes
customer information.
Some of the data sources described
above can be accessed by SROs and the
Commission without significant delay.
For example, SROs and the Commission
have some real-time direct access to
public data and, through MIDAS, the
Commission has next-day direct access
to analytics that are based on public
data, such as volumes over various time
horizons. Regulators can also sometimes
request and receive trade blotter data on
the same day as the trade(s) of interest
because trade blotters are generally
stored in systems immediately.462
Further, the Commission understands
that FINRA receives audit trail data
from exchanges pursuant to RSAs at the
end of each trading day. However, it has
been the Commission’s experience that
trade blotter data requests can take
weeks or in excess of a month
depending on the scope of the request
and how accustomed the broker-dealer
is with fulfilling such requests.
Corrected FINRA OATS data may be
available less than two weeks after an
event and uncorrected data on day T+1.
In particular, FINRA members submit
OATS data on a daily basis, submitting
end-of-day files by 8:00 a.m. Eastern
Time the following day or they are
marked late by FINRA.463 FINRA
acknowledges receipt of the data an
hour after the member submits it, before
running its validation process. FINRA
then takes approximately four hours
after acknowledging receipt of OATS
data to determine if the data contain any
syntax errors.464 In addition to the four
hours needed to identify errors within a
462 The regulated entities that respond to data
requests need to query data to respond to the
request while still maintaining normal operations.
Large data requests can take significant computing
time and thus, may require the respondents to time
the queries to minimize disruptions. Further,
respondents need to write code to execute the
query. More experienced respondents would have
existing code that they could modify without
significant debugging whereas less experienced
respondents would need to take time to code and
debug their queries.
463 FINRA currently receives exchange data from
most SROs at the end of the trading day.
Information on broker-dealer data reporting
timeframes is available at OATS Reporting
Technical Specifications, supra note 357, at 8–1;
see also Adopting Release, supra note 9, at 45768
n.504.
464 See Section IV.D.2.b(2)A, supra (providing
more detail on the validation and error checking
process for OATS and other data sources).
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report, it takes another 24 hours for
context checking, which identifies
duplicates or secondary events without
an originating event. Once a context
rejection is available, the member has
up to five business days to repair the
rejection.465 Reports for files that
contain internally inconsistent
information about processing, linking,
and routing orders may be available
within two business days. FINRA
attempts to match the inconsistent
information against any additional data
received up to day T+2 for linking errors
and day T+30 for routing errors. The
timing for surveillance programs varies
depending on the type of surveillance
being performed; data is assumed to be
completely processed and corrected at
day T+8.466
Because market participants generally
do not report or compile datasets
immediately after an order event, there
is a delay before regulators may access
some data sources. For example, the
compilation of equity and option
cleared reports occurs on day T+1 for
options and day T+3 for equities (i.e.,
the clearing day) and the electronic
query access for equities is available
from SIAC on day T+3. Additionally,
when broker-dealers receive a request
for EBS, the firm must first fill in the
EBS report and then, if it does not selfclear, pass the reports on to its clearing
firm to compile and send to SIAC. The
EBS submission process can take up to
ten business days. More immediate
requests for cleared options data can be
submitted to FINRA, but even this
process takes up to two days. Because
EBS data do not contain order entry
time and order execution time,
regulators must obtain this information
from firms and brokers using either data
requests or subpoenas, and this process
generally can take from two to four
weeks depending on the size of the
request.
As discussed above,467 the lack of
direct access to most data sources may
further delay the ability of regulators to
use data in certain cases. When
regulators have direct access to a data
source, the time needed to receive data
is only the time it takes for a query to
run. For example, depending on the
scope of the search, it can take just a few
minutes to return the results of a query
465 See OATS Reporting Technical Specifications,
supra note 357, at 6–3. Other types of errors and
corrections adhere to slightly different time-lines.
See, e.g., id. at 6–12.
466 FINRA has the capability to query data that is
not fully corrected, processed and linked to
investigate market activity at T+1.
467 See Section IV.D.2.b(3), supra.
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of equity and option clearing data.468 As
a result of direct access to their own
audit trails, some SRO surveillance
occurs on the same day as the trading
activity. FINRA, however, typically gets
direct access to exchange data,
uncorrected OATS data, and corrected
OATS data at the time it receives it,
unlike the exchanges and broker-dealers
that have some access to the data as it
is generated.469 However, when
regulators lack direct access, their data
requests can consume significant time,
including both the time required to put
the request together and response times
from the SROs, broker-dealers, and
others producing the data.470 For
example, obtaining complete responses
from each broker-dealer for an EBS
request can take days or weeks
depending on the scope of the request.
Likewise, responses from the ISG for
SRO audit trail data can take days or
weeks.
Once regulators receive requested
data, the data often have to be processed
into a form in which they can be
analyzed. As discussed above,471 it can
take considerable time for regulators to
combine data from different sources and
link records from within or across data
sources. Furthermore, the lack of
consistency in format adds complexity
to projects involving data from multiple
data sources, even when the project
does not involve linking of these
different data.472 For example, the
468 MIDAS, one example of a direct access data
source, queries return data in seconds for single
ticker, intraday queries and within hours for
complex multi-ticker, multi-day queries. The data
response times from MIDAS vary depending on the
format of the resulting data and the number of other
users on the system. A query that pulls all message
traffic in an equity on a single day would take
around thirty minutes.
469 FINRA typically collects exchange data at the
end of the trading day and, as noted above, OATS
on T+1. FINRA can begin to access each data
source, but, as discussed below, FINRA has direct
access to combined data only after the completion
of the OATS error process and the processing
necessary to reformat and merge the data sources.
470 As discussed above, because analysis of some
events requires the collection of data from
numerous sources, the time to request and receive
data may be significant. The more fragmented the
necessary data is, the longer it would take
regulators to put together the data request. Putting
together an EBS request, for example, could involve
first identifying to which broker-dealers to send the
requests and then manually creating a request letter
for each broker-dealer. The Commission does
recognize, however, that regulators can request and
receive trade blotter data on the same day as the
trade event if the request is for a small amount of
data from an experienced provider. In fact, two
years of trade blotter data from an experienced
investment adviser can take several days while two
years of data from clearing firms can take six weeks
to several months.
471 See Section IV.D.2.b(2)C, supra.
472 Because no single data source is complete,
regulators often need to combine data across
E:\FR\FM\17MYN2.SGM
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17MYN2
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Commission understands that FINRA
takes approximately three days to
process exchange data to transform it
into a common format and prepare it for
surveillance. Therefore, FINRA crossmarket surveillances and surveillance of
the off-exchange market typically
assumes data is fully corrected and
processed on T+8.473 Any processing
that requires linking order life-cycle
events or other types of data can be time
consuming to perform, even if all of the
data comes from the same data
source.474 In some cases, the laborious
process of assembling the data delays
other critical investigative or analytical
steps.
In addition, those who use regulatory
data also typically take time to ensure
the accuracy of the data. When
regulators question the accuracy of data,
they often check several alternative
sources until they are comfortable that
their data are accurate. This checking of
data accuracy and augmentation process
adds time to an investigation or
analysis. In some cases, regulators may
filter out unreliable data or refocus an
investigation to avoid relying on data
after spending time and resources
unsuccessfully attempting to ensure
accuracy.
As discussed in the Adopting Release,
the timely accessibility of data to
regulators also impacts the efficacy of
sources to get a full picture. For example, regulators
may need to compile SRO audit trail records from
multiple SROs. Not all SROs collect data using the
OATS format. The different data formats
implemented by SROs thus involve a significant
investment of staff time to reconcile. In addition,
each options exchange maintains its own COATS
audit trail in a different format and includes
different supplemental data items in its audit trail.
These differences make it difficult and labor
intensive for regulators to view options trading
activity across multiple markets.
473 FINRA can access data as soon as T+1 when
necessary.
474 The first step in linking involves finding a key
to link the records. The key can be one field or a
series of fields in the data. The second step involves
designing an algorithm to use the key to link
records. If each data source formats or stores the
fields in the key differently, the algorithm can be
complex. Even within a single data source, the
creation of the algorithm may be complicated
because the fields needed to build the key can
change with each market participant. For example,
each member can report a different order ID for the
same order, and this order ID may even change
within the same member. The algorithm for linking
needs to recognize how order IDs change and use
additional information in the order records to piece
an order lifecycle together. As noted above in
Section IV.D.2.b(2)C, linking algorithms have
varying rates of success and significant error rates
in event linking are common. The lack of success
could be due to the lack of a cross-participant error
resolution process, the complexity in the linkage, or
otherwise missing key information needed for
linkage. As a result, regulators may invest
significant time and resources into linking data only
to achieve a success rate significantly less than
100%. Linking across multiple data sources makes
linking even more time consuming.
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Jkt 238001
detecting (and possibly mitigating the
effects of) some types of market
manipulation.475 For example, some
pernicious trading schemes are designed
to generate large ‘‘quick-hit’’ profits in
which market participants attempt to
transfer the proceeds from the activity to
accounts outside of the reach of
domestic law enforcement as soon as
the offending transactions have settled
in the brokerage account (typically three
days after execution). The timeframes
currently required to acquire data
generally complicate the prevention of
these asset transfers.
3. Request for Comment on the Baseline
The Commission requests comment
on all aspects of the Baseline for the
economic analysis of the CAT NMS
Plan. In particular, the Commission
seeks responses to the following
questions:
240. Do Commenters agree with the
Commission’s assessment of the
Baseline for the economic effects of the
CAT NMS Plan? Why or why not?
241. Do Commenters believe that the
Baseline appropriately describes current
market surveillance, examination, and
investigation activities by regulators?
Why or why not?
242. Do Commenters believe that the
Baseline appropriately describes current
market event analysis and
reconstruction activities by regulators?
Why or why not?
243. Do Commenters believe that the
Baseline appropriately describes market
analysis activities by regulators? Why or
why not?
244. Do Commenters believe that the
Baseline appropriately describes the
sources of trade and order data currently
available to regulators? Why or why
not?
245. Are there additional sources of
trade and order data currently available
to regulators? Please explain and
describe those sources in detail,
including any limitations.
246. Do Commenters agree with the
Commission’s assessment of the
completeness of the trade and order data
currently available to regulators? Why
or why not? Does the fragmented nature
of current data sources pose significant
challenges to regulators seeking
complete data?
247. Do Commenters agree with the
Commission’s assessment of the
accuracy of the trade and order data
currently available to regulators? Why
or why not?
248. Do Commenters agree that the
error rates in current data sources or in
responses to ad hoc data requests pose
475 See
PO 00000
Adopting Release, supra note 9, at 45731.
Frm 00062
Fmt 4701
Sfmt 4703
significant challenges to regulators?
Why or why not? Do Commenters have
additional statistics on error rates in
these data?
249. Do Commenters agree with the
Commission’s assessment of the
Baseline of clock synchronization for
broker-dealers, exchanges, and others in
the securities industry? Please explain.
Does the Commission’s analysis
appropriately describe the frequency of
orders that regulators may need to
sequence and the challenges to
sequencing given current clock
synchronization standards? If not, do
Commenters have more appropriate
analyses? How could the Commission
improve the analysis? Please explain.
250. Do Commenters believe that the
Baseline appropriately describes
granularity of time stamps in the trade
and order data currently available to
regulators? Please explain.
251. Do Commenters agree with the
Commission’s assessment of regulators’
ability to combine or link data across
the sources of trade and order data
currently available to regulators? Please
explain.
252. Do Commenters believe that the
Baseline appropriately describes
customer and broker-dealer identifiers
in the sources of trade and order data
currently available to regulators? Please
explain.
253. Do Commenters believe that the
Baseline appropriately describes
aggregation within the sources of trade
and order data currently available to
regulators? Please explain.
254. Do Commenters agree with the
Commission’s assessment of the current
ability of regulators to access trade and
order data? Why or why not?
255. Do Commenters agree with the
Commission’s assessment of the
timeliness of the trade and order data
currently available to regulators? Why
or why not?
256. Is there any other information
that the Commission should include in
the Baseline? Please explain.
E. Benefits
As noted in the Framework Section
above, the economic benefits of the CAT
NMS Plan would come from any
expanded or more efficient regulatory
activities facilitated by improvements to
the data regulators use because the Plan
would create a new consolidated data
source, CAT Data that could replace the
use of some current data sources for
many regulatory activities. Therefore,
the Benefits Section first describes how
CAT Data compares to data regulators
currently use for regulatory activities.
Then this Section describes how the
CAT Data would improve regulatory
E:\FR\FM\17MYN2.SGM
17MYN2
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Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
activities and how these improvements
benefit investors.
The Commission preliminarily
believes that the CAT NMS Plan would
produce data that would improve on
current data sources, because CAT Data
would result in regulators having direct
access to consolidated audit trail data
that would improve many of the
regulatory activities discussed in the
Baseline Section. As summarized in
Table 4, if the Plan is approved, the
Commission preliminarily believes that
the Plan would generate improvements
in the quality of data that regulators
would have access to in the areas of
completeness, accuracy, accessibility,
and timeliness. The Commission
preliminarily believes that the
improvements in the quality of
regulatory data within these categories
would significantly improve the ability
of regulators to perform a wide range of
regulatory activities, which would lead
to benefits for investors and markets. In
addition, the Commission preliminarily
believes that certain provisions in the
Plan related to future upgrades of the
Central Repository, the promotion of the
accuracy of CAT Data, the promotion of
the timeliness of CAT Data, and the
inclusion of specific governance
provisions identified by the
Commission in the Adopting Release for
Rule 613, increase the likelihood that
the potential benefits of the CAT NMS
Plan described below would be realized.
In the category of completeness, the
ability for regulators to access more
material data elements from a
consolidated source would enable
regulators to more efficiently carry out
investigations, examinations, and
analyses because regulators could
acquire from a single source data that
they would otherwise need to compile
from many data sources. This data
source would include data elements that
regulators currently acquire with
difficulty (if at all), including customer
information, allocation records, open/
close position information for equities,
and certain other trade and order
information not consistently available in
SRO audit trails.476
In the category of accuracy, the
Commission preliminarily believes that
the Plan would substantially improve
data accuracy by requiring CAT Data to
be collected, compiled, and stored in a
uniform linked format using consistent
identifiers for customers and market
participants. These requirements should
over time result in fewer inaccuracies in
the data as well as fewer inaccuracies
introduced in combining data compared
476 See CAT NMS Plan supra note 3, at Sections
1.1, 6.3 and 6.4; see also 17 CFR 242.613(c)(7).
VerDate Sep<11>2014
18:13 May 16, 2016
Jkt 238001
to the current data regime.477 The CAT
NMS Plan would also require that CAT
Reporters’ business clocks be
synchronized to within 50 milliseconds
of the time maintained by the NIST,
which would increase the precision of
the time stamps provided by the 39% of
broker-dealers who currently
synchronize their clocks with less
precision than what is called for by the
Plan. This information may also be used
to partially sequence surrounding
events. However, while the Commission
preliminarily believes that the
requirements in the Plan for clock
synchronization and time stamp
granularity would improve the accuracy
of data with respect to the sequencing
of market events, the improvements
would be modest, as regulators’ would
experience improvement for a small
percentage of market events relative to
all surrounding events.478 Independent
of the potential time clock
synchronization benefits, the order
linking data that would be captured in
CAT should increase the proportion of
events that could be sequenced
accurately. This reflects the fact that
some records pertaining to the same
order could be sequenced by their
placement in an order lifecycle (e.g., an
order submission must have occurred
before its execution) without relying on
time stamps.
In the category of accessibility, the
Commission preliminarily believes that
the Plan would substantially improve
the access of data for regulators due to
the Plan’s requirement for regulators to
have direct access to CAT Data. While
some elements of CAT Data can
currently be obtained from other
sources, it can take regulators weeks or
months to obtain this data. As opposed
to the current state of fragmented data
with indirect regulatory access, if the
CAT NMS Plan is approved, regulators
would have direct access to
consolidated trade and order data from
a single source. Therefore, instead of
requesting data from multiple sources,
the Plan would allow regulators to log
into a single system and query data
directly from the system. This direct
access for regulators would dramatically
reduce the hundreds of thousands of
requests that regulators must make each
year in order to obtain data, thus
reducing the burden on the industry.
477 The Commission recognizes that the high
initial Error Rate tolerance of the CAT NMS Plan
could reduce the accuracy of raw CAT Data relative
to current data sources. However, as stated in the
Plan ‘‘the Participants expect that error rates after
reprocessing of error corrections will be de
minimis.’’ See CAT NMS Plan supra note 3, at
Appendix C, Section 3(b), n.102.
478 See FIF Clock Offset Survey, supra note 127.
PO 00000
Frm 00063
Fmt 4701
Sfmt 4703
30675
In the category of timeliness, the
Commission preliminarily believes that
the Plan would significantly improve
the timeliness of data acquisition and
use, which could improve the
timeliness of regulatory actions that use
data. CAT Data would be reported by
8:00 a.m. Eastern Time on day T+1 and
made available to regulators in raw form
after it is received and passes basic
formatting validations,479 with an error
correction and linkage process that
would be completed by 8:00 a.m.
Eastern Time on day T+5.480 These
requirements would ensure that data is
available to regulators faster than in the
current system and should also reduce
the amount of time regulators would
need to process data prior to usage.
Regulatory activities expected to
benefit from improved data quality
would include surveillance,
investigations, examinations, analysis
and reconstruction of market events,
and analysis in support of rulemaking
initiatives. Data is essential to all of
these regulatory activities and therefore
substantial improvements in the quality
of the regulatory data should result in
substantial improvements in the
efficiency and effectiveness of these
regulatory activities, which should
translate into benefits to investors and
markets. For example, improved data
could lead to more effective and
efficient surveillance that better protects
investors and markets from violative
behavior and facilitates more efficient
and effective risk-based investigations
and examinations that more effectively
protect investors. Together, these
improved activities could better deter
violative behavior of market
participants, which could improve
market efficiency. Furthermore, this
increase in directly accessible data
should improve regulators’
understanding of the markets, leading to
more informed public policy decisions
that better address market deficiencies
to the benefit of investors and markets.
The Commission notes that the Plan
lacks information regarding the details
of certain elements of the Plan,
primarily because many details likely to
affect the benefits of the Plan have not
yet been determined, which creates
some uncertainty about the expected
economic effects. As discussed further
below, lack of specificity surrounding
the processes for converting data
formats and linking related order events
479 While the Plan does not specify exactly when
these validations would be complete, the
requirement to link records by 12:00 p.m. Eastern
Time on day T+1 gives a practical upper bound on
this timeline.
480 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.2(a).
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30676
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creates uncertainty in the anticipated
improvements in accuracy because such
processes have the potential to create
new data inaccuracies. Lack of
specificity surrounding the process for
regulators to access the CAT Data also
creates uncertainty around the expected
VerDate Sep<11>2014
18:13 May 16, 2016
Jkt 238001
improvements in accessibility. For
example, while the Plan indicates that
regulators would have an on-line
targeted query tool and a tool for userdefined direct queries or bulk
PO 00000
extraction,481 the Plan itself does not
provide an indication for how userfriendly the tools would be or the
particular skill set needed to use the
tools for user-defined direct queries.
481 See CAT NMS Plan, supra note 3, at Appendix
D, Sections 8.1, 8.2.
Frm 00064
Fmt 4701
Sfmt 4703
E:\FR\FM\17MYN2.SGM
17MYN2
mstockstill on DSK3G9T082PROD with NOTICES2
VerDate Sep<11>2014
Table 4
I
Broker- Dealer
Identifier
I Time Stamp
481
I A.l}ocatl~n
m!ormatton
Order Display
Informat10n
Routing/
Modificat10n/
Canccllatlon
mforllk'ltton
Buy-to-Cover
Indicator
Entire Ltfccyclc
Dm:ct Access
for Regulators
I Data of
Timeliness
I Activrty
Off-Exchange
can take several
I
483
Comptlmg
Yes (before
OATS
I
~D
I
Yes (maJonty m
mtlhsecc,nds but
Yes
I
Nt'
some in seconds)
Yes (for hmtt
mders)
I ~0
I Yes (comhlmnal) I 'res
I order reaches
exchc·mge)
Nt'
urder
I
Yes
434
~"w llatw T+ I
Cc,rrected Data
T+G
weeks
Jkt 238001
exchan.:!el
Reported s;mleda'/, but separate
flle transmitted
at latest Til
1\n (except
PO 00000
COATS
I 'To
I
Yes
SRO Audit
Trails
I
I
Yes
Frm 00065
Equity and
Optlon C lcarcd
Reports
Electromr Blue
Sheet:;
Fmt 4701
Sfmt 4725
E:\FR\FM\17MYN2.SGM
I Depends on the
trader
Public/
Propnetary Data
I
I
'To
Yes
(613(c)(7)(t)(A))
I
I
I No
Yes (majority m
milhseconds but
some m seconds)
No
No
'To
No
Ko
No
No
'To
No
No
Yes
Nt'
No
)Jo
No
No (except for
certam
cancellatiOn
in.fonnation.)
Yes(canbe
requested,
although not
always reliable)
No
No
'To
No
Yes
I
I 'To
Yes (but not
always
consistent across
broker-dealers)
Yes (but not
always
constslent acn_,ss
1
broker-
I No
No
'To
Ttadmg and
Order IIandlmg
System Data
Data from
Proposed CAT
I
I No
Yes (but not
alwav:o,
consistent actoss
broker-dealers)
'To
dealer::,)~ 85
l"rade
Blotters/Order
Tickets
I
Yes
No
No
'To
No
No
Yes (vaned
bet\veen seconds
and
miCroc;ecomlc;)
No
No
'To
No
Yes
(613(c)(7)(vt))
Yes
(6l3(c)(7)(t (F))
Yes
(613(c)(7)(tXF))
Yes
(613(c)(7)(t)(F))
Yes
(613(c )(7)(t)(C))
Yes
Yes
(mtlhsecr.mds)
(613(d))
Yes
I No
Yes
SROs wlr/t theu
'To
I
I
Yes
I
I
Yes
As soon as a
trade ts executed.
exchange)
mvn trmls).
Access can take
several weeks
No
Yes
N<'
1\o. Access can
take several
Vveeks t'r months
No
No
~~e ~~:::~ ~:~~s I
Yes
I
Same-day
Yes
Yes (except
allocations)
I
Yes
I
Same-day
I
Yes
Yes
(613((c)(7)(n))
Equity: T+3
Optlon: T+l
11 0 busmess days
all.errequeslts
submtlled
Same-day
Raw Data: T+ I
Cc,rrected Data
1"+3
482
17MYN2
l11e CAT 'J'v!S Plan also requires CAT Reporters to S}nchronize their time clocks to the time maintained by the NIST v.ith an allowable drift of 50 milliseconds. See CAT NMS Plan, 'll!llTI! note 3. at Section 6.8. According to a
survey conducted by the Financiallntormation Fomm (FIF), 39'~, of responding broker-dealers currently synchronize their clocks v.ith less precision than v.hat is called tor by 1he CAT NMS l'lan. 'lhus, 1he CAT "JMS l'lan would also
increase the accuracy of the time stamps usOO by certain broker-dealers. See §1!llli!. note 127.
4
4
s'
Off-t:xchange activity indudo;;!s currt:ntly reportablt: t:V(;)nts that art: not handlt:d by a ro;;!gistd"ed st:curities o;;!Xchang(;).
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
18:13 May 16, 2016
Customer
Idcntiflcr
In this inslanct:, "limdiness'' refcrs to wh(;)n tho;;! data are compilt:d at th(;) sourct: in question (<;;!.g., when OATS rt:co;;!iV<;;!S dala from reporting brokd"-deal..n-s), not wht:n they b(;)come availabl(;) to regulalors bo;;!causo;;! lliat timdine can vary
depending on the regulator in question. As shown in the "Direct Access for Regulators" column, it may still take several days, weeks_ or months for regulators to be able to access the data. For example, V\hile OATS reporters provide the
data at T+ 1, the SEC mu~t request OATS data in order to access it \\hich may take several days or weeks. TI1is narro\ver definition oftimeline~s is not used throughout this economic analy~i~.
fl...l
Guidance fi-om FNRA indicate~ that broker-dealers must ·'identity the party to the trade'" through EBS fields such as ·'Primary Party Identifier,·' but that party may be another broker-dealer rather than the ultimate customer. See
F1NRA, Electronic Blue Sheet Submissions, FINRA and ISG EJ-.tend Effective Date for Certain Electronic Blue Sheet Data Elements, Regulatory Notice 12-47 (Oct 2012), available at
https://wvvw ..finra.org/silt:s/d(;)fault/fil(;)s/-:\roticeDocument/pl94655.pdf. Similarly. under tho;;! larg(;) trader rule, pcrsons ext:rcising "in\lt:stmtmt discrt:tion'' art: rt:portOO through EBS, but in some caso;;!S such persons are invt:stmt:nt advist:rs
rather than their customer~. See .hl!llli!. note 3 72 and accompanying text (discussing the large trader nile).
485
30677
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1. Improvements in Data Qualities
As explained above, in the Adopting
Release the Commission identified four
qualities of trade and order data that
impact the effectiveness of core SRO
and Commission regulatory efforts:
Accuracy, completeness, accessibility,
and timeliness.486 In assessing the
potential benefits of the CAT NMS Plan,
the Commission’s economic analysis
compares the data that would be
available under the Plan to the trading
and order data currently available to
regulators.487 As explained in detail
below, the Commission preliminarily
believes that the Plan would improve
data in terms of all four qualities noted
above, although uncertainty remains as
to the expected degree of improvement
in some areas.
a. Completeness
The CAT NMS Plan, if approved,
would result in regulators having direct
access to a single data source that would
be more complete than any current data
source.488 The CAT Data would be more
complete than other data sources
because it would contain data from a
greater number of broker-dealers on
more event types, products, and data
fields, when compared to existing SRO
audit trails and other data sources. As
discussed in more detail below, while
some current data sources contain many
of the elements that would be included
in CAT Data, the CAT Data would
consolidate that data into one source to
produce a data source much more
complete than any existing source. CAT
Data would also include some elements
that are not available from any current
data source. Having this data
consolidated in a single source would
provide numerous benefits that are
described below.
mstockstill on DSK3G9T082PROD with NOTICES2
(1) Events and Products
CAT Data would be more complete
than any current data source because it
combines currently fragmented
information into one data source. In
particular, the Plan states that the
Central Repository, under the Plan
Processor’s oversight, shall receive,
consolidate, and retain all CAT Data.489
‘‘CAT Data’’ is defined as ‘‘data derived
from Participant Data, Industry Member
Data, SIP Data, and such other data as
the Operating Committee may designate
486 See
Adopting Release, supra note 9, at 45727.
in all four data qualities affect certain
data-driven regulatory activities. The benefits of the
Plan derive from the changes to these regulatory
activities.
488 See Sections IV.C.1.a(1) and IV.D.2.b(1), supra
for a definition of completeness.
489 See CAT NMS Plan, supra note 3, at Section
6.5(a)(i).
487 Changes
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18:13 May 16, 2016
Jkt 238001
as CAT Data from time to time.’’ 490
Section 6.3 of the Plan describes the
data to be received from Participants
that are national securities exchanges,
which would include data for ‘‘each
NMS Security 491 registered or listed for
trading on such exchange or admitted to
unlisted trading privileges on such
exchange.’’ Participants that are a
national securities association (i.e.,
FINRA) must report data for each
‘‘Eligible Security for which transaction
reports are required to be submitted to
that association.’’ 492 ‘‘Eligible Security’’
is defined in the Plan as all NMS
Securities and all OTC Equity
Securities,493 and ‘‘OTC Equity
Security’’ is defined as ‘‘any equity
security, other than an NMS Security,
subject to prompt last sale reporting
rules of a registered national securities
association and reported to one of such
association’s equity trade reporting
facilities.’’ 494 ‘‘Industry Member Data’’
refers to audit trail data reported by
members of the exchanges and national
associations, which includes Options
Market Makers.495 SIP Data is defined in
the Plan as information, including size
and quote condition, on quotes
including the National Best Bid and
National Best Offer (‘‘NBBO’’) for each
NMS Security; Last Sale Reports and
transaction reports reported pursuant to
an effective transaction reporting plan
filed with the Commission pursuant to,
and meeting the requirements of Rule
601 and 608; trading halts, limit-up
limit-down (‘‘LULD’’) price bands,496
490 See
id. at Section 1.1.
‘‘NMS Security’’ is defined as ‘‘any
security or class of securities for which transaction
reports are collected, processed, and made available
pursuant to an effective transaction reporting plan,
or an effective national market system plan for
reporting transactions in listed options.’’ See 17
CFR 242.600(b)(46).
492 See CAT NMS Plan, supra note 3, at Section
6.3(c)(ii).
493 See id. at Section 1.1. Audit trail data
regarding OTC Equity Securities was not required
under Rule 613, but the Participants, in
consultation with the DAG, included OTC Equity
Securities in the CAT NMS Plan so as to permit the
retirement of OATS and thereby reduce costs to the
industry. See CAT NMS Plan, supra note 3, at
Appendix C, Section C.9, Section A.1(a) n.16. The
determination to include OTC Equity Securities
would also have a positive effect on further
reducing fragmentation of data sooner.
494 See CAT NMS Plan, supra note 3, at Section
1.1.
495 See id. at Section 6.4(d).
496 See Plan to Address Extraordinary Volatility
for information on LULD, available at https://www.
finra.org/sites/default/files/regulation-NMS-plan-toaddress-extraordinary-market-volatility.pdf; see
also Securities Industry Automation Corporation,
Consolidated Tape System, CTS, Output Multicast
Interface Specifications, available at https://www.
nyse.com/publicdocs/ctaplan/notifications/traderupdate/cts_output_spec.pdf Securities Industry
Automation Corporation, Consolidated Tape
System, CQS, Output Multicast Interface
491 An
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and LULD indicators; and summary data
or reports described in the
specifications for each of the SIPs and
disseminated by the respective SIP.497
CAT Data would include data from all
SRO audit trails, combined into a single
data source. In addition, it would
include some off-exchange activity not
captured on current SRO audit trails.
Section 6.4(d) of the Plan requires the
Participants to require their Industry
Members to record and report order
events to the Central Repository. The
Commission notes that SRO audit trails
currently do not include the activity of
firms that are not members of that
SRO.498 And, currently only FINRA
requires its members to report their offexchange activity. While broker-dealers
that trade off-exchange must be
members of FINRA unless their activity
fits the terms of the exemption in Rule
15b9–1,499 firms that qualify for the
exemption in that rule and that are not
FINRA members do not report their offexchange activity to OATS.500 This
exemption amounts to a large
percentage of off-exchange activity.
Broker-dealers that are not FINRA
Members accounted for 48% of orders
sent directly to ATSs in 2014, 40% of
orders sent directly to ATSs in 2013,
and 32% in 2012.501 Because all SROs
Specifications, available at https://www.nyse.com/
publicdocs/ctaplan/notifications/trader-update/
cqs_output_spec.pdf. The UTP Plan Trade Data
Feed SM (UTDFSM), Direct Subcriber Interface
Specification, Version 14.4 available at https://www.
utpplan.com/DOC/utdfspecification.pdf.
497 See id. at Section 1.1 and Section 6.5(a)(ii).
498 This information can sometimes be inferred
through data reported by member firms. See
Securities Exchange Act Release No. 74581 (March
25, 2015), 80 FR 18036 (April 2, 2015) (‘‘Proposed
Amendments to Rule 15b9–1’’), Section V.B.2; see
also CAT NMS Plan, supra note 3, at Appendix C
Section B.7(a)(ii)(A).
499 See id. for details on the exemption to Rule
15b9–1 and the proposed modifications to the
Exemption for Certain Exchange Members that
would require a dealer to be a member of a
registered national securities association to conduct
most off-exchange activity. If these modifications
are adopted, Section IV.F.1.c(2)B.i discusses counts
of broker-dealers currently not represented in
OATS; the 15b9–1 exclusion applies to
approximately 125 firms, most of which are not
expected to incur OATS reporting obligations if
15b9–1 modifications are approved.
500 Furthermore, not all FINRA members are
obligated to report to OATS. FINRA’s rules exempt
from reporting certain members that engage in a
non-discretionary order routing process;
additionally, FINRA has the authority to exempt
other members who meet specific criteria from the
OATS recording and reporting requirements, and
has granted many such exemptions. See supra notes
396 and 397, and accompanying text.
Approximately 799 firms that are excluded or
exempt from OATS would incur CAT reporting
obligations if the Plan were approved; see also
Section IV.F.1.c(2)B.i, infra.
501 See Proposed Amendments to Rule 15b9–1,
supra note 498, at n.21. If the Commission adopts
the proposed amendments to Rule 15b9–1 set out
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are Participants in the Plan, under the
Plan all broker-dealers with Reportable
Events, including off-exchange, would
be required to report the required CAT
Data to the Central Repository. And, the
inclusion of these additional Reportable
Events would make CAT Data more
complete than the combination of
current SRO audit trails.
CAT Data would also include many
Reportable Events such as order
origination, order routing, receipt of a
routed order, order modifications,
cancellations, and executions, and trade
cancellations. Currently, OATS data
contains most of these Reportable
Events but does not cover all
participants and does not include
options.502 For example, CAT Data
would contain more events than EBS
data, trade blotters, and public data. As
previously noted, OATS data also do
not include proprietary orders
originated by a trading desk in the
ordinary course of a member’s market
making activities (or ‘‘principal
activity’’).503 But, pursuant to Rule
613(j)(8),504 principal trading would be
included in CAT reporting
requirements, an improvement over
OATS. This requirement significantly
improves completeness because such
events are not included in current SRO
audit trails, and account for a significant
portion of market activity (40.5% of all
transactions and 67% of all exchange
message traffic according to a
Commission analysis).505 This would
improve regulatory activities in which
observation of pricing information, as it
relates to market activity, is important
for determining the legality and
consequences of market activity of
interest as well as regulatory analysis of
market behavior in general.
in the proposed modifications to the Exemption for
Certain Exchange Members, the percentage of offexchange activity captured by CAT Data that is not
currently captured by another audit trail would be
smaller, and fewer broker-dealers would be
excluded from OATS, reducing the number of
broker-dealers that would be added to regulatory
data if the Plan were approved. Section
IV.F.1.c(2)B.ii discusses counts of broker-dealers
currently not represented in OATS; the 15b9–1
exclusion applies to approximately 125 firms, most
of which are not expected to incur OATS reporting
obligations if 15b9–1 modifications are approved.
Specifically, the exemption from FINRA
membership would be limited to dealers that effect
transactions off the exchanges of which they are
members solely for the purpose of hedging the risks
of their floor-based activity, and brokers and dealers
that effect transactions off the exchange resulting
from orders that are routed by a national securities
exchange of which they are members. Id. at Section
II.
502 See Section IV.D.2.b(1)A, supra.
503 Id.
504 See 17 CFR 242.613(j)(8).
505 See Section IV.D.2.b(1)A, supra for a
description of this analysis.
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CAT Data also would include the
information described above for listed
equities and options and OTC Equity
Securities.506 Therefore, the inclusion in
CAT Data of all these products adds an
additional level of completeness relative
to current data sources.
issuers repurchasing their stock and
short sellers.509
In addition to data fields providing
customer information, the Plan would
improve completeness by including
other data fields not found on current
SRO audit trails. For example, CAT Data
would include allocation information,
(2) Data Fields
open/close information, Quote Sent
The CAT NMS Plan also would
Time, and information on whether a
improve completeness by consolidating Customer gave a modification or
in a single source fields that currently
cancellation instruction.
may only be available from some data
The information in the Allocation
sources, and by including some fields
Report required by the CAT NMS Plan
that are difficult for regulators to
represents a significant improvement in
compile. Not every data field that would completeness over current sources for
be in CAT Data is currently included in
subaccount allocation data, such as
SRO audit trails, and very few fields are trade blotter and EBS data. Under the
included in all data sources.
Plan, an Allocation Report would
The inclusion of consistent unique
include the Firm Designated ID for any
customer information, in particular, in
account(s), including subaccount(s), to
the CAT Data represents a significant
which executed shares are allocated, the
improvement over current SRO audit
security that has been allocated, the
trails in terms of completeness. Rule
identifier of the firm reporting the
613(c)(7)(i) requires that a CAT Reporter allocation, the price per share of shares
report information to the Central
allocated, the side of shares allocated,
Repository that uniquely identifies a
the number of shares allocated to each
customer across all broker-dealers.507 As account, and the time of the
noted in the Baseline, very few current
allocation.510 While most of the fields
data sources contain customer
required on the Allocation Report are
information, and those that do are
included on trade blotter or EBS data,
largely limited in the completeness and
their inclusion in CAT Data would
accuracy of this information, all of
significantly reduce the time and effort
which significantly limits regulatory
expended for regulators to acquire such
efficiency.508 The identification of
information.511 Because it is not
customers underlies numerous
required on EBS or in broker-dealer
enforcement activities and many
recordkeeping rules, the allocation time
examination and surveillance activities
field on the Allocation Report provides
of regulators. This would also allow
information that is currently even more
regulators to obtain information
difficult for regulators to acquire than
efficiently regarding customers, such as
the other information on the Allocation
Report. These data improvements
506 See supra note 494.
should facilitate the use of allocation
507 17 CFR 242.613(c)(7)(i). Specifically, Sections
data in regulatory investigations and
9.1 and 9.2 of Appendix D of the Plan require the
should result in more effective and
CAT Data to include the following Customer
information, at minimum: social security number or efficient investigative processes.
Allocation data also serves an important
individual taxpayer identification number, date of
birth, current name, current address, previous name role in many other regulatory activities
and previous address. For legal entities, the Plan
that aim to protect investors.512 Indeed,
requires the reporting of the LEI (if available), tax
allocation time is an extremely
identifier, full legal name and address. The Plan
important data field because it is critical
also requires that the following information about
a Customer be reported to the Central Repository,
in investigations of violations like
at a minimum: Account owner name, account
market manipulation and cherryowner mailing address, account tax identifier,
picking.513
market identifiers, type of account, firm identifier
In addition, while many of the
number, prime broker ID, bank repository ID, and
elements contained in the definition of
clearing broker. See CAT NMS Plan supra note 3,
at Sections 9.1 and 9.2. The CAT Data must also
‘‘Material Terms of the Order’’ are
support account structures that have multiple
account holders. See id. Relatedly, the unique
Customer-ID also improves accuracy because Rule
613 requires that it be consistent and associated
with all Reportable Events involving that Customer.
Current data sources do not provide consistent
customer identifiers. See Sections IV.D.2.b(2)D
supra, and IV.E.1.b(4), infra.
508 See Sections IV.D.2.a(1) and IV.D.2.b(1)B,
supra. As discussed above, the Commission notes
that SRO audit trails typically do not provide
customer information but a recent FINRA rule
change would require its members to report to
OATS non-FINRA member customers who are
broker-dealers. See supra note 407.
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509 See Short Sale Reporting Study, supra note
413, for a discussion of the benefits of being able
to identify short sellers. Because CAT Data would
include a short sale mark and identify customers,
regulators could use CAT Data to identify short
sellers.
510 See CAT NMS Plan, supra note 3, at Section
1.1; see also Exemption Order, supra note 18, at
11867.
511 See Section IV.D.2.b(1)B, supra, for further
information on Allocation Reports.
512 Id.
513 Id.
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collected in current SRO audit trails, the
CAT NMS Plan’s definition of Material
Terms of the Order expands the CAT
Data beyond the coverage of current
SRO audit trails and other sources. The
CAT NMS Plan requires that the
Material Terms of the Order be reported
for order origination, routing, and the
receipt of a routed order. And Material
Terms of the Order is defined to include
the security symbol, security type, price
(if applicable), size (displayed and nondisplayed), side (buy/sell), order type, if
a sell order, whether the order is long,
short, or short exempt, open/close
indicator, time in force (if applicable),
and any special handling
instructions.514 In addition, if the order
is for a Listed Option, the Material
Terms of the Order would be defined to
include option type (put/call), option
symbol or root symbol, underlying
symbol, strike price, expiration date,
and open/close.515
Because data on open/close indicators
are not currently included in SRO audit
trails, obtaining data on whether a trade
opens or closes a position in equities is
currently very difficult. Ready access to
this information would facilitate
regulators’ ability to determine whether
a purchase or sale increases or decreases
equity exposure, such as when a buy
covers a short position.516 This would
help regulators reconstruct customer
positions without requiring specific
position data and would assist in
analysis of rules such as Rule 105 of
Regulation M,517 governing when short
sellers can participate in a follow-on
offering.518 This information is also
useful in investigating short selling
abuses and short squeezes.519 Among
other things, a build-up of a large short
position by one investor along with the
spreading of rumors may be indicative
of using short selling as a tool to
potentially manipulate prices.
Information on when the position
decreases is also useful for indicating
514 See CAT NMS Plan, supra note 3, Section 1.1;
see also 17 CFR 242.613(j)(7).
515 Id.
516 The open/close indicator would help to
identify buy to cover orders because a buy order
that closes a position would presumably be a buyto-cover order. See Proposing Release supra note 9,
at 32575. The Commission notes that the accuracy
of this data field may depend on how the Plan
Processor interprets when CAT Reporters should
populate the field with particular permitted values.
See infra note 537 and accompanying text.
517 17 CFR 242.105.
518 For a discussion of additional benefits of
position information and buy to cover information,
see Short Sale Reporting Study, supra note 413; see
also Press Release: SEC Charges Six Firms for Short
Selling Violations in Advance of Stock Offerings
(October 14, 2015), available at https://www.sec.gov/
news/pressrelease/2015-239.html.
519 See Proposing Release, supra note 9 at 32575.
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potential manipulation, insider trading,
or other rule violations.520 The ability to
determine whether an order adds to a
position, along with the timing of the
order, is particularly important in
detecting and investigating portfolio
pumping or marking the close.521
The CAT Data would also include
information regarding the sent time for
Options Market Maker quotes and
information about whether a
modification or cancellation instruction
for an order was given by a Customer
associated with an order, or was
initiated by a broker-dealer or exchange
associated with the order. Neither of
these data fields is currently readily
available from existing SRO audit
trails.522 Quote sent time is particularly
informative for certain narrow market
reconstructions for enforcement
investigations, and knowing whether
the member or Customer made a
modification or cancellation helps
regulators understand the decisions that
broker-dealers and others make in the
interest of best execution.
The remaining data fields included in
CAT Data are also included in some or
all current SRO audit trails, although no
single source contains all of them. For
instance, Rule 613(c)(7)(vi)(C) requires
the collection of audit trail data that
links executions to contra-side orders
and a CAT-Order-ID for the contra-side
order.523 An order identifier for the
contra-side order(s) would help
regulators better reconstruct executions.
Although some current exchange audit
trails identify counterparties to trades,
this identification is sometimes more
difficult for off-exchange equity
trading.524 Further, while all SRO audit
trails contain time stamps, as CAT Data
would, some sources of regulatory data
do not currently include all the types of
time stamps that would be in CAT Data.
Additionally, the inclusion of order
display information (i.e., whether the
size of the order is displayed or nondisplayed), and special handling
instructions in CAT Data improve
completeness because they are not
520 Id.
521 Id.
522 See Exemption Order, supra note 18 at 11857
and 11861.
523 17 CFR 613.242(c)(7)(vi)(C).
524 For off-exchange trading, OATS records
sometimes do not directly identify counterparties.
In the case of ATS trades, sometimes counterparty
broker-dealers can only be identified through TRF
records; sometimes ATS OATS records alone
suffice. For internalized trades, the reporting
broker-dealer is the counterparty. By combining
OATS with TRF data, regulators can identify the
broker-dealers representing the counterparties for
over 99% of TRF reported trades, but identifying
customer account information generally requires a
data request to those broker-dealers. See Section
IV.D.2.b(2)A, supra.
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always mandatory in SRO audit trail
data, and therefore may not be
consistently available without data
requests to broker-dealers.525 Order
display information is useful for
examining how hidden liquidity affects
markets or how regulatory changes
affect hidden liquidity, and special
order handling instructions could assist
in examinations of best execution and
could allow regulators to better
understand the role and trends of these
instructions in the market.
Other information required by the
CAT NMS Plan includes the security
symbol, date and time of the Reportable
Event, the identity of each Industry
Member or Participant accepting,
routing, receiving, modifying, canceling,
or executing each order, the identity and
nature of the department or desk to
which an order is routed, if an order is
routed internally within the system of
an Industry Member, a CAT-Order-ID,
changes in any Material Term of the
Order (if the order is modified),
execution capacity, the CAT-Order-ID of
any contra-side order(s), and the SROAssigned Market Participant Identifier
of the clearing broker or prime
broker.526 Of these fields, the security
symbol and date are the only data found
on all current data sources.
The Commission preliminarily
believes that the CAT Data would
include all data elements that would be
useful and efficient to include in a
consolidated audit trail. The
Commission previously considered
which fields should be reported to CAT
when proposing and adopting Rule 613.
The set of data fields required by Rule
613 reflected the Commission’s
assessment, as informed by public
comment, of the benefits and costs of
including various data elements in
CAT.527 While the costs and benefits of
including particular fields can change
due to technological advances and/or
changes in the nature of markets, the
Plan contains provisions regarding
periodic reviews and upgrades to CAT
that could lead to proposing additional
data fields that are deemed
important.528 In addition the
Commission reviewed gap analyses that
examine whether the CAT Data would
contain all important data elements in
current data sources.529 As a result of
525 See
supra note 412.
CAT NMS Plan, supra note 3, Sections
6.3(d); 6.4(d).
527 See Adopting Release, supra note 9, at 45751.
528 See Section IV.E.3a, infra for a discussion of
adding new data fields and other requirements for
upgrading the CAT Data after approval.
529 The Commission acknowledges that the
Participants are continuing to study gaps between
current regulatory data sources and the Plan as
526 See
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this review, the Commission is aware
that one data gap involves OATS data
fields that allow off-exchange
transactions to be matched to their
corresponding trade reports at trade
reporting facilities, and recognizes that
these fields are important to assure trade
reporting requirements are being met for
off-exchange trading.530 Similarly, the
Commission notes that EBS includes 13
data elements that are not required by
CAT or derivable through other CAT
fields and would thus reflect some
limitations of the Plan if EBS were
retired before those missing data
elements were incorporated into
CAT.531 However, as discussed in
Section 3 of Appendix D of the Plan,
prior to the retirement of existing
systems, the CAT Data must contain
data elements sufficient to ensure the
same regulatory coverage provided by
existing systems that are anticipated to
be retired.532 The Commission therefore
expects that any missing elements that
are material to regulators would be
incorporated into CAT Data prior to the
retirement of the systems that currently
provide those data elements to
regulators. And the Commission
preliminarily believes that CAT Data
would include the audit trail data
elements that currently exist in audit
trail data sources and that could be
retired upon implementation of the
CAT.
format, the use of consistent identifiers
for Customers, and the focus on
sequencing would promote data
accuracy.
The Commission notes that the full
extent of improvement that would result
from the Plan is currently unknown,
because the Plan defers many decisions
relevant to accuracy until the Plan
Processor publishes the Technical
Specifications and interpretations.534 In
particular, the CAT NMS Plan specifies
that the ‘‘[t]echnical Specifications shall
include a detailed description of . . .
each data element, including permitted
values, in any type of report submitted
to the Central Repository’’ 535 and ‘‘the
Plan Processor shall have sole discretion
to amend and publish interpretations
regarding the Technical Specifications.’’ 536 This leaves open precise
definitions and parameters for the data
fields to be included in CAT Data.537
Nonetheless, the Commission
preliminarily believes that the Plan
provides some procedural protections to
mitigate this uncertainty and help
promote accuracy. For example, the
Plan requires that, at a minimum, the
Technical Specifications be ‘‘consistent
with [considerations and minimum
standards discussed in] Appendices C
and D,’’ and that the initial Technical
Specifications and any Material
Amendments thereto must be provided
to the Operating Committee for approval
by Supermajority Vote.538 Further, all
b. Accuracy
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This Section analyzes the expected
effect of the CAT NMS Plan, if
approved, on the accuracy of the data
available to regulators.533 In general, the
Commission preliminarily believes that
the requirements in the CAT NMS Plan
for collecting, consolidating, and storing
the CAT Data in a uniform linked
filed. CAT NMS Plan, supra note 3, at Appendix C,
Section C.9; see also SEC Rule 613—Consolidated
Audit Trail (CAT) OATS—CAT Gap Analysis and
SEC Rule 613—Consolidated Audit Trail (CAT)
Revised EBS—CAT GAP Analysis, available at
https://www.catnmsplan.com/gapanalyses/
index.html.
530 The Commission notes that Rule 613 does not
require the inclusion of this information. This
information did not exist at the time the
Commission adopted Rule 613 and such
information on exchange trades does not exist
today. The Commission expects that the
requirements discussed in Section 3 of Appendix D
of the Plan would result in the inclusion of this
information in the CAT Data.
531 See SEC Rule 613—Consolidated Audit Trail
(CAT) Revised EBS—CAT GAP Analysis, available
at https://www.catnmsplan.com/gapanalyses/
p450537.pdf.
532 See CAT NMS Plan, supra note 3, at Appendix
D, Section 3.
533 As discussed above and in the Adopting
Release, accuracy refers to whether the data about
a particular order or trade is correct. See Adopting
Release, supra note 9, at 45727.
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534 See
CAT NMS Plan, supra note 3, at Section
6.9.
535 Id.
at Section 6.9(b)(v).
CAT NMS Plan provides details regarding
how the responsibility for these decisions would be
shared between the Operating Committee and the
Plan Processor, with the Plan Processor having
responsibility for data definitions and
interpretations. See CAT NMS Plan, supra note 3,
at Section 6.9(c)(i).
537 For example, the completeness Section notes
that the open/close indicator for equities does not
exist in current data sources (see Section
IV.E.1.a(2)). The accuracy of the open/close
indicator would be subject to Plan Processor
discretion, because the Plan Processor would have
responsibility for defining the permitted values and
interpreting when CAT Reporters would use such
permitted values and the Plan Processor would not
have guidance from previous data sources on how
to define or interpret such a field. While the
Commission would ultimately be able to correct
such misinterpretations, regulators may not detect
such a misinterpretation until the misinterpretation
harms an investigation, exam, or other analysis.
Based on its experience with short sale indicators,
the Commission believes that defining and
interpreting the open/close indicator would be
particularly complex. See SEC, Division of Market
Regulation: Responses to Frequently Asked
Questions Concerning Regulation SHO, Question
2.5, available at https://www.sec.gov/divisions/
marketreg/mrfaqregsho1204.htm (‘‘Regulation SHO
FAQs’’).
538 Id. at Section 6.9(a). The Commission notes
that the standards in Appendices C and D do not
cover all decisions that would affect the accuracy
of the data.
536 The
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30681
non-Material Amendments and all
published interpretations must be
provided to the Operating Committee in
writing at least ten days before
publication, and shall be deemed
approved unless two or more
unaffiliated Participants call the matter
for a vote of the full Operating
Committee.539
(1) Data Errors
The CAT NMS Plan specifies a highlevel process for handling errors that
includes target Error Rates for data
initially submitted by CAT Reporters
and a correction process and timeline.
In particular, the Plan specifies an
initial maximum Error Rate, which
measures errors by CAT Reporters and
linkage validation errors,540 of 5% for
reports received by the Central
Repository before the error correction
process and contemplates the reduction
of this Error Rate over time. It is difficult
to conclude whether the Error Rates and
processes in the CAT NMS Plan would
constitute an accuracy improvement as
compared to current data sources.
The Plan states that 5% is an
appropriate initial Error Rate, to allow
CAT Reporters the opportunity to get
used to a new reporting regime, and that
the Error Rate should be reduced over
time, with goal of a 1% Error Rate to be
achieved one year after each new
category of Reporters is required to
begin reporting.541 This was determined
based on Participants’ experience with
OATS. The initial rejection rates for
OATS when it was initially
implemented was 23%,542 although
more recent experience with OATS
reporting indicates error rates below 3%
following the implementation of
additional OATS upgrades over the past
10 years and a current error rate of less
than 1%.543
But, because the current OATS error
rate is below 1%, the Commission
preliminarily believes that the initial
539 See CAT NMS Plan, supra note 3, at Section
6.9(c)(i).
540 The Commission notes that there is some
uncertainty on whether the Error Rate definition
includes any additional errors attributable to the
Plan Processor because the Plan does not explicitly
state whether Plan Processor errors are included in
the Error Rate or not; it is also not clear whether
Plan Processor errors are included in linking errors.
See id. at Article VI, 6.1(n)(v) n.1; Appendix C,
Section A.3(b), n.102. Additional uncertainty exists
because the Operating Committee would determine
the details regarding error definitions in the
Technical Specifications after the Plan is approved.
541 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.3(b).
542 See id. at Appendix C, Section A.3(b), n.106.
543 See Memorandum to File No. S7–11–10
regarding Telephone Conferences with FINRA
(April 17, 2012) available at https://www.sec.gov/
comments/s7-11-10/s71110-116.pdf.
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percentage of errors in CAT would be
higher than current percentage of errors
in OATS, though the OATS error rate
may not be directly comparable to the
Error Rate in the Plan.544 Given the
magnitude of CAT, the fact that many
CAT Reporters would be new to audit
trail reporting, and that options would
be covered for the first time, the
Participants believe that 5% is an
appropriate initial Error Rate.545 And
the Plan injects some uncertainty by
asserting that this initial 5% rate is
subject to the quality assurance testing
period to be performed prior to launch,
and then again before each new batch of
CAT Reporters are brought online.546 In
time, the rate could be lowered, but it
also could be raised.
The Plan specifies an error correction
process after initial reports are received
and indicates that practically all errors
identifiable by the validations used in
the error correction process would be
corrected by 8:00 a.m. Eastern Time on
day T+5, stating that errors are expected
to be ‘‘de minimis’’ after the error
correction period.547 Specifically, the
Plan Processor must run initial
validation checks on the data by noon
eastern time on day T+1 (four hours
after the submission deadline for the
data). Those validation checks must be
published in the Technical
Specifications (as discussed further
below) and have the objective to ensure
that data is accurate, timely, and
complete as near as possible to the time
of submission. Once errors are
identified, the Plan Processor must
accept corrections via manual webbased entry and via batch uploads.
544 See Section IV.D.2.b(2)A, supra, for discussion
of current regulatory data error rates. It is important
to note that both the 1% OATS error rate and the
5% proposed CAT Error Rate represent error rates
measured at initial data submission. Furthermore,
some situations that do not qualify as an error in
OATS (i.e., a route that cannot be linked because
the routing destination is not required to report
OATS) would qualify as an error under CAT.
Furthermore, error rates after data correction are not
known for OATS, and are anticipated to be ‘‘de
minimis’’ under CAT, as discussed in note 547,
infra. Finally, definitions of ‘‘error’’ for both OATS
and CAT Data are dependent on proscribed data
validation checks; if data is reported and passes
validation checks, it is assumed to be correct. When
validation checks are exhaustive and stringent,
error rates are expected to be higher than when
validation checks are minimal. Consequently, the
Commission is cautious in directly comparing
OATS reported and proposed CAT Error Rates.
545 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.3(b). See also Section IV.H.2.b, infra
for a discussion and solicitation of comment on
alternative Error Rates.
546 See id. at Appendix C, Section A.3(b).
547 See id. at Appendix C, Section A.3(b) n.102.
‘‘De minimis’’ is not defined and no numerical
Error Rate is given. The Plan also includes a
compliance program intended to help achieve this
goal.
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Although there is a specific timeframe
for performing these corrections, the
Plan Processor must accept error
corrections at any time.548
Rather than providing details on the
validations that would occur, however,
the Plan provides high-level
requirements for the validations and
delegates the detailed design of the
specific validations to the Plan
Processor (with the involvement of the
Operating Committee and the Advisory
Committee).549 Additionally, the Plan
does not provide the level of detail
necessary to verify whether the CAT
validation process would run the same
validations as OATS, whether current
validations would be relevant, and what
validations, if any, would be added.
As noted above, it is therefore
difficult to conclude whether the Error
Rates and processes in the CAT NMS
Plan would constitute an accuracy
improvement as compared to current
data sources. With respect to OATS,
FINRA currently performs over 152
validation checks on each order event
reported.550 After corrections,
approximately 1–2% of each day’s
recorded events remain unmatched (i.e.,
multi-firm events, such as order routing
that cannot be reconciled).551 However,
the Commission is not certain that those
error rates are directly comparable to the
Error Rates permitted for CAT Data in
the Plan given the increased scope and
level of linkages specified in the Plan,
and the new, large, and untested system.
The Commission is not aware of other
systems that track and record similar
error rates, although the Commission
548 See Section IV.E.1.d, infra. The RFP requested
that Bidders provide information on how data
format and context validations for order and quote
events would be performed and how errors would
be communicated to CAT Reporters; a system flow
diagram showing how and when different types of
validations would be completed; and how Customer
information would be validated. Bidders noted that
the validations would be performed via rules
engines (using standard data validation techniques
like format checks, data type checks, consistency
checks, limit and logic checks, or data validity
checks), and processing would be done in real time
during data ingestion. The Plan Processor would be
required to perform validations within three
specified categories, which must be set out in the
Technical Specifications document: File
Validations (confirmation that the file is received in
the correct format); Validation of CAT Data (checks
of format, data type, consistency, range/logic, data
validity, completeness, and timeliness); and
Linkage Validation (checking the ‘‘daisy chain’’).
See CAT NMS Plan, supra note 3, at Appendix D,
Section 7.2. If errors are found, the data would be
stored in an error database and notification sent to
the CAT Reporter.
549 See CAT NMS Plan, supra note 3, at Appendix
D, Section 7.2 (discussing validation requirements);
see also id. Appendix C at Section A.3(b)
(delegating responsibility regarding measurement of
Error Rates to the Plan Processor).
550 See Adopting Release, supra note 9, at 45729.
551 Id. at 45778.
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does experience issues with errors
contained in other sources of data when
the Commission attempts to use that
data. Accordingly, the Commission is
unable to conclude whether the Error
Rates and processes in the Plan would
constitute an accuracy improvement
compared to current data.
(2) Event Sequencing
A. Clock Synchronization
Rule 613(d)(1) and (2) requires that
the CAT NMS Plan require that the
business clocks of Participants and their
members be synchronized to a specified
standard of precision and for protocols
to be in place for that standard to be
maintained over time. Complying with
this clock synchronization standard will
require that, for the purpose of
recording the date and time of
Reportable Events, the business systems
of Participants and their members be
synchronized consistently with
‘‘industry standards.’’ The Commission
did not define the term ‘‘industry
standard’’ in Rule 613, though it noted
that it expected the Plan to ‘‘specify the
time increment within which clock
synchronization must be maintained,
and the reasons the plan sponsors
believe this represents the industry
standard.’’ 552
The CAT NMS Plan describes the
‘‘industry standard’’ in this context in
terms of the technology adopted by the
majority of the industry.553 The Plan
therefore bases its clock synchronization
standard on current practices of the
broker-dealer industry generally and
provides that one standard would apply
to all CAT Reporters. Specifically,
Section 6.8(a) of the CAT NMS Plan
requires CAT Reporters to synchronize
their time clocks to the time maintained
by the NIST with an allowable clock
offset of 50 milliseconds, which the
Plan determines is consistent with the
current industry standards, as defined
in the Plan. The Plan further requires
annual review of the clock
synchronization standard to evaluate its
achievement of the Plan’s goals related
to clock synchronization. Section 6.8(c)
of the Plan requires the Chief
Compliance Officer to annually evaluate
the clock offset tolerance and to make
recommendations to the Operating
Committee regarding whether industry
standards have evolved such that the
standard in Section 6.8(a) should be
shortened.554
552 See
Adopting Release, supra note 9, at 45774.
CAT NMS Plan, supra note 3, at Appendix
C, Section 12(p).
554 See id. at Section 6.8.(c) and Appendix C,
Section A.3.(c)
553 See
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The Commission preliminarily
believes that the clock synchronization
standards in the CAT NMS Plan are
reasonably designed to improve the
accuracy of market activity sequencing
by increasing the percentage of order
events that could be chronologically
sequenced relative to other order
events,555 but notes that the
improvements to the percentage of
sequenceable order events by Plan
standards are modest and the
requirements of the Plan may not be
sufficient to completely sequence the
majority of market events relative to all
other events.
As discussed in the Baseline Section,
39% of the broker-dealers responding to
the FIF Clock Offset Survey currently
synchronize their clocks to a clock offset
tolerance of greater than 50
milliseconds.556 Accordingly, the 50
millisecond requirement for all CAT
Reporters (except on manual order
handling systems) would result in the
availability of more precise time stamps
from many broker-dealers 557 and would
increase the number of order events that
could be accurately sequenced relative
to each other.
To evaluate the proportion of order
events that could be sequenced with the
clock offset tolerance specified in the
CAT NMS Plan, the Commission has
conducted an analysis of the frequency
of market events occurring within 100
milliseconds of an event in a different
trading venue in the same security.558
Table 5 (CAT and Current Clock Offset
Tolerance) shows the percentage of
events for listed equities and options
that could be accurately sequenced with
one-second and 50-millisecond clock
offset tolerances.
TABLE 5—CAT AND CURRENT CLOCK OFFSET TOLERANCE
% of Unrelated order events
Equities
(%)
Minimum time between adjacent events
Clock offset tolerance
2 seconds .....................................................................
100 milliseconds ...........................................................
1 second .......................................................................
50 milliseconds .............................................................
1.31
7.84
Options
(%)
6.97
18.83
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The analysis finds that the current
FINRA one-second clock offset tolerance
allows only 1.31% of unrelated order
events for listed equities and 6.97% of
unrelated order events for listed options
to be sequenced. The proposed 50millisecond clock offset tolerance could
accurately sequence 7.84% for listed
equities and 18.83% for listed options of
such events included in the MIDAS
data. This analysis overestimates the
portion of unrelated events that the
proposed clock synchronization
standard could sequence because the
analysis includes only trade and quote
events observable in the MIDAS data.
The data currently available to the
Commission provides only a rough and
upwardly-biased estimate of how many
of these events could be sequenced by
the order data that would be captured
by the CAT. In sum, the results of the
Commission’s analysis suggest that the
standards required by the Plan do
represent an improvement over current
standard but that the majority of market
events would remain impossible to
sequence based on the Plan’s required
clock synchronization standards.
This analysis does not consider events
in OTC Equity Securities. The
Commission believes that the proposed
clock synchronization standard could
accurately sequence a higher proportion
of unrelated events in OTC Equity
Securities because OTC Equity
Securities trade less frequently than
NMS equities and unrelated order
events may be less frequent in OTC
Equity Securities than in listed equities.
The Commission therefore preliminarily
believes that the proposed 50
millisecond clock offset tolerance in the
CAT NMS Plan could improve accuracy
by modestly increasing the number of
events that could be sequenced in OTC
Equity Securities.
The Plan acknowledges that the
required clock offset tolerance, which is
based on its determination of the
current industry standard, would not be
sufficient to accurately sequence all
order events by their time stamps
alone.559 In particular, the Plan states
that ‘‘[f]or unrelated events, e.g.,
multiple unrelated orders from different
broker-dealers, there would be no way
to definitively sequence order events
within the allowable clock drift as
defined in Article 6.8.’’ 560 This in turn
limits the benefits of CAT in regulatory
activities that require event sequencing,
such as the analysis and reconstruction
of market events, as well as market
analysis and research in support of
policy decisions, in addition to
examinations, enforcement
investigations, cross-market
surveillance, and other enforcement
functions.
The Plan discusses its determination
of the current industry standard and
specifies implementation requirements
for the clock synchronization standards
in Appendix C.561 As noted above, the
555 Independent of the potential time clock
synchronization benefits, the order linking data that
would be captured in CAT should increase the
proportion of events that could be sequenced
accurately. This reflects the fact that some records
pertaining to the same order could be sequenced by
their placement in an order lifecycle (e.g., an order
submission must have occurred before its
execution) without relying on time stamps. This
information may also be used to partially sequence
surrounding events.
556 See Section IV.D.2.b(2)B.i, supra (reporting
results of this survey); see also FIF Clock Offset
Study, supra note 127.
557 As noted above, FINRA has indicated that it
is considering proposing a rule change that would
require a 50 millisecond clock offset tolerance. If
this rule change is proposed and approved, more
entities would record time stamps with data at a 50
millisecond clock offset tolerance regardless of
whether the CAT NMS Plan is approved.
558 The methodology to calculate these
frequencies starts with the steps described in supra
note 438 and then subtracts the result from one to
get the percentage of unrelated orders that could be
sequenced. This assumes that consecutive unrelated
events within twice the clock offset tolerance
cannot be sequenced. An unrelated event is an
order event at a different venue.
559 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.3(c). Order events occurring within a
single system using the same time clock could be
accurately sequenced by their time stamps,
assuming that their time stamps are not identical.
The CAT NMS Plan does not specify the approach
that would be used to sequence events when time
stamps are identical or indicate how this decision
would be made.
560 Id. at n.110. Events involving the same order
routed across systems could be logically sequenced
using routing-related data, because a routed order
must be sent before it can be received, and received
before it can be executed. However, the Plan would
not facilitate the accurate sequencing of events that
occur in different systems within 100 milliseconds
of each other (twice the clock offset tolerance) that
are not linked using a parent-child order
relationship. The CAT NMS Plan does not provide
a solution that will sequence these events, but
recognizes the issue and states that ‘‘the
Participants plan to require that the Plan Processor
develop a way to accurately track the sequence of
order events without relying entirely on time
stamps.’’ See CAT NMS Plan, supra note 3, at
Appendix C, Section A.3(c).
561 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.3(c).
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Plan bases industry standards on
current practices of the broker-dealer
industry, which are derived from a
survey of broker-dealers, and on the
assumption that a change in industry
standards would be premised on ‘‘the
extent existing technology that
synchronizes . . . clocks with a lower
tolerance . . . becomes widespread
enough throughout the industry to
constitute a new standard.’’ 562
The Commission notes however, that
the current practices for exchanges and
Execution Venues may differ from the
industry standard for broker-dealers as
defined in the Plan, and current
practices for certain systems within
broker-dealers may vary by the system
within the broker-dealers. As noted in
the Baseline Section, the Commission
does not have precise information on
the clock synchronization standards on
exchange and ATS matching engines
and quoting systems, but exchanges may
currently synchronize their clocks to a
100 microsecond or less clock offset
tolerance, and have an average clock
offset of 36 microseconds.563 By
defining industry standards based on
practices of the broker-dealer industry
generally, the Plan does not account for
these differences. Further, defining
industry standards by majority practices
may have the unintended effect of
setting a standard that delays adopting
advances in technology.
Despite these limitations, it is worth
noting that the Plan requires the CCO of
the Plan Processor to develop and
conduct an annual assessment of
Business Clock synchronization.564
Moreover, Plan Participants must
require Industry Members to certify
periodically that their Business Clocks
comply with the clock synchronization
standard and that any violations thereof
are reported to the Plan Processor and
the Plan Participant.565 Thus, the
Commission believes that these
provisions would help ensure that the
benefits of clock synchronization are
maintained.
B. Time Stamp Granularity
The Commission preliminarily
believes that the minimum time stamp
granularity required by the Plan would
result in some improvement in data
accuracy, but that the level of
improvement could be limited. Despite
the modest level of direct improvements
expected from the Plan’s minimum time
stamp granularity standards, the
562 Id.
563 See
supra notes 435 and436.
CAT NMS Plan, supra note 3, Section
6.2(a)(v)(M).
565 See id. at Section 6.8(a)(ii) and (iii).
564 See
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Commission preliminarily believes that
the Plan should continue to have a time
stamp granularity standard because the
Plan provides a mechanism for making
future improvements and monitoring
whether more granular time stamps
would provide better quality CAT Data
and be feasible given technology
improvements.
The level of precision or granularity
with which time stamps are recorded
has significant implications for the
usability of audit trail data in terms of
sequencing events, matching records,
and linking the data to other data
sources. In some current regulatory data,
the relative lack of time stamp
granularity standards for data reporters
could lead to difficulties in accurately
sequencing events or linking data with
other data sources. Rule 613(d)(3)
requires that CAT Reporters record time
stamps to reflect current industry
standards and be at least to the
millisecond.566 Furthermore, the Plan
requires Participants to adopt rules
requiring that CAT Reporters that use
time stamps in increments finer than
milliseconds use those finer increments
when reporting to the Central
Repository.567 Consistent with Rule 613,
Section 6.8(b) of the CAT NMS Plan
requires millisecond or less time
stamps. However, the Commission
granted exemptive relief for manual
orders to be recorded at the granularity
of one second or better.568 Further,
pursuant to Rule 613, if a CAT
Reporter’s system already utilizes time
stamps in increments less than the
minimum required by the Plan, the CAT
Reporter must record time stamps in
such finer increments.569
The Plan asserts that the millisecond
increment required for CAT Data
reflects the industry standard level of
granularity.570 As noted in the
discussion of clock synchronization, the
Commission did not define the term
‘‘industry standard’’ in Rule 613. The
Plan therefore bases its standard for
time stamp granularity on current
practices of the broker-dealer industry
generally, and provides that one
standard would apply to all CAT
Reporters. There appears to be a wide
divergence of industry standards in
practice, ranging from full seconds to
microseconds for latency-sensitive
applications, and the Plan describes the
slower systems as mostly older ones that
cannot support a finer time stamp
granularity.571 Many of the systems
from which regulators currently obtain
data already capture time stamps in
increments of milliseconds or less. For
example, OPRA allows for time stamps
in nanoseconds, and the other SIPs
require time stamps in microseconds for
equity trades and quotes.572 However,
OATS and EBS do not. Current OATS
rules require time stamps to be
expressed to the nearest second, unless
the member’s system expresses time in
finer increments; and as of September
2014, approximately 12% of OATS
records contain time stamps greater than
one millisecond. EBS records either do
not contain times or express time
stamps in seconds.573
Thus, to the extent that some current
data sources report time stamps in
increments coarser than a millisecond,
which is the case for 12% of OATS
records and all EBS records, the
Commission expects the CAT
millisecond time stamp requirement to
improve data, and thereby allow
regulators to more accurately determine
the sequence of market events relative to
surrounding events.
The Commission preliminarily
believes, however, that benefits from the
more granular time stamps could be
limited by the level of clock
synchronization required by the Plan. In
particular, the Commission believes that
time stamp granularity would not be the
limiting factor in sequencing accuracy,
because recording events with time
stamps with resolutions of less than one
millisecond cannot help to sequence
events occurring on different venues
with clocks that may be 100
milliseconds out of sync due to clock
synchronization offsets.574 Therefore,
566 17 CFR 242.613(d)(3). This requirement does
not apply to certain Manual Order Events, which
are exempted from the requirement and are
captured at one-second increments. Time stamp
granularity on manual order events is discussed
separately in the Alternatives Section.
567 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.3(c).
568 See CAT NMS Plan, supra note 3, at Section
6.8(b) and Appendix C, Section A.3(c) (explaining
that recording Manual Order Events at the
millisecond level would be costly and ultimately
arbitrary or imprecise due to the human
interaction); see also Exemption Order, supra note
18, at 11868–9.
569 Id.
570 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.3(c).
571 Id. Because older technology cannot support
finer time stamp increments, members with older
systems would incur significant effort and cost to
upgrade those systems to support reporting data in
milliseconds. The newest systems support finer
increments, but include mostly the subset of
systems dealing with low latency trading.
Electronic Order Handling and Trading systems are
commonly set at the millisecond level; see, e.g., FIF
Letter.
572 See Section IV.D.2.b(2), supra.
573 Id.
574 For example, under the requirements in the
Plan, an order event at Broker-Dealer A could have
a time stamp that is 1 millisecond sooner than an
order event at Broker-Dealer B even if the event at
Broker-Dealer B actually occurred 99 milliseconds
sooner. This could occur if Broker-Dealer A’s
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the benefits of time stamping order
events at increments finer than a
millisecond would be limited without
also improving the clock
synchronization standards of the Plan.
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(3) Linking and Combining Data
The Commission believes the
requirements of Rule 613 and the Plan
related to data linking would result in
improvements to the accuracy of the
data available to regulators, but the
extent of the improvement would
depend on the accuracy of the linking
algorithm and the reformatting process
that the Plan Processor would
eventually develop.
As discussed in the Baseline, data is
currently stored in multiple formats, is
difficult to merge, and results in errors
during the merging process. Moreover,
in some cases, the data sources do not
capture the information necessary to
link records, while in other cases
linking must be done with algorithms
that accomplish the linking with some
degree of error.
Rule 613(e)(1) generally requires the
creation and maintenance of a Central
Repository that would receive,
consolidate, and retain information
reported to the CAT.575 Further, the rule
requires that the Central Repository
store and make available to regulators
data in a uniform electronic format and
in a form in which all events pertaining
to the same originating order are linked
together in a manner that ensures timely
and accurate retrieval of information
reported to the CAT.576
The Commission preliminarily
believes that the requirement that data
be stored in a uniform format would
eliminate the need for regulators who
are accessing the data to reformat the
data. As noted in the Baseline Section
above, regulators face delays and
inaccuracies when attempting to
reformat and link data from multiple
sources, such as linking trade blotters
from several broker dealers with SRO
audit trails. Given that the reformatting
of CAT Data would be accomplished by
individuals that likely specialize in this
activity and that repetitively do so in a
prescriptive and formalized way, this
requirement could reduce the errors that
could be introduced in the current
regime where reformatting data is often
done on an ad hoc basis by regulatory
systems are recording times 50 milliseconds ahead
of NIST while Broker-Dealer B’s systems are
recording times 50 milliseconds behind NIST. Both
broker-dealers’ systems would be within the Plan’s
allowable clock synchronization tolerance.
575 17 CFR 242.613(e)(1); see also CAT NMS Plan,
supra note 3, at Section 6.5(a) and (b).
576 17 CFR 242.613(e)(1).
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Staff who need to work with the data.577
In other words, the Plan Processor
would develop a reformatting process
by working with CAT Reporters to build
an expertise in harmonizing the various
formats that it receives from Reporters.
The Plan Processor could then build,
test, and refine the reformatting process
with the ability to go back to the CAT
Reporters for further clarification. Even
if only one Staff member at each SRO
or Affiliated Participant developed the
expertise necessary to reformat each of
the various formats and ran a
reformatting process on order data, this
would result in a duplication of efforts
compared to one centralized entity (the
Plan Processor) developing the expertise
and running the reformatting process.
Storing data in a linked format removes
the need for regulators to link
information from multiple lifecycle
events of an order or orders themselves,
which could further reduce errors and
increase the usability of the data. The
Commission recognizes, however, that
despite the potential improvements, the
CAT Data could still contain errors
introduced in the reformatting and
linking processes.
The process for linking orders
designated in the CAT NMS Plan is
similar to the process FINRA currently
uses to link OATS records across market
participants. However, the Plan would
significantly improve the ability of
regulators to link order events compared
to OATS, and would link this activity to
specific customers unlike current audit
trail data.578 CAT Reporters must report
a series of unique identifiers that are
designed to allow records of events that
occur over the order’s lifecycle to be
linked together to determine how the
order was handled and how the order
interacted with other orders.579 The
Plan Processor must then create the
initial linkages in the submitted data;
unlike in OATS, the Plan Processor
would verify these linkages as part of its
data validity checks.580 In general, the
CAT NMS Plan would link orders using
the ‘‘daisy chain approach,’’ where CAT
Reporters assign their own identifiers to
577 Whether errors would decrease depends on
the actual formatting process used.
578 As discussed above, the Commission notes
that SRO audit trails typically do not provide
customer information but a recent FINRA rule
change requires its members to report to OATS nonFINRA member customers who are broker-dealers.
See supra note 407.
579 See id. at Section 6.3(d)(i) through (vi).
580 These data validations are to be established in
a Technical Specifications document by the Plan
Processor. Consequently, it is as yet unclear
precisely how that process would occur. See id. at
Appendix D, Section 7.2; Appendix C, Section
A.3(a) (validations ensure that data is submitted in
required formats and that lifecycle events can be
accurately linked).
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30685
each order event that the Plan Processor
later replaces with a single identifier
(the CAT Order-ID) for all order events
pertaining to the same order.581 The
Central Repository at a minimum must
be able to create linkages between all
order events that are internalized,
between the Customer execution and a
proprietary order in the case of a
riskless principal transaction, between
two broker-dealers, between a brokerdealer and an exchange, and vice versa,
between executed orders and trade
reports, between various legs of option/
equity complex orders, and between
order events for all equity option order
handling scenarios that currently are or
could potentially be used by CAT
Reporters.582
Unlike OATS data, CAT Data would
be less prone to breaking the order
lifecycle chain when an order is sent
across market participants because the
order lifecycle linking procedure across
reporters would be uniform and all
industry participants would be
reporters.583 Currently, linking
procedures across SROs are not
uniform, which complicates
reconstructing order lifecycles.
Furthermore, because some brokerdealers are not required to report to
OATS, these broker-dealers’ activity
cannot be completely reconstructed
from audit trail data, and therefore,
orders that they handle cannot be traced
through their lifecycle, effectively
severing the links between the order
being received and the order’s final
disposition. Furthermore, as covered
elsewhere, unlike other data sources,
CAT Data would link orders to
Customers because the Plan requires the
order lifecycle to be linked back to the
original Customer, and the Plan
Processor must be able to fix linkages
when error correction files are
submitted.584 While the success of such
a matching process is dependent on the
accurate reporting of order linkages by
CAT Reporters,585 Appendix D directs
the Plan Processor to ensure that breaks
in certain lifecycle linkages must not
cause the entire lifecycle to break or
581 See
id. at Appendix D, Section 3.
id.
583 See Section IV.D.2, supra.
584 See id.
585 For example, assume two broker-dealers
handle an order that is ultimately executed on an
exchange. Broker-Dealer A receives the order, and
transmits it to Broker-Dealer B, that routes it to
Exchange C where it is executed. In order for the
Plan Processor to link these three order events,
Broker-Dealer A would need to report the order and
its routing to Broker-Dealer B; B would need to
correctly echo A’s order ID in its CAT reporting and
its route to Exchange C, and C would need to
correctly echo Broker-dealer B’s order ID in its CAT
reporting.
582 See
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cause a CAT Reporter that correctly
reports information to have its
submission rejected.586
The CAT NMS Plan does not provide
sufficiently detailed information for the
Commission to estimate the likely Error
Rates associated with the linking
process required by the CAT NMS Plan.
Indeed, the 5% Error Rate covers data
from CAT Reporters, but the Plan
Processor could create errors as well, for
example, through the linking process.
Further, the Plan does not include
details on how the Plan Processor
would perform the linking process,
identify broken linkages, and seek
corrected reports from CAT Reporters to
correct broken linkages. Instead, the
Plan defers key decisions regarding the
validation process until the selection of
a Plan Processor and the development of
Technical Specifications.587
Accordingly, while the centralized
linking should generally promote
efficiencies and accuracies in linking,
these uncertainties make it difficult for
the Commission to gauge the degree to
which the process for linking orders
across market participants and SROs
would improve accuracy compared to
existing data, including OATS.588
Uncertainties also prevent the
Commission from determining whether
the process for converting data into a
uniform format at the Central Repository
would improve the accuracy of the data
over existing audit trail accuracy rates.
The Plan includes two alternative
approaches to data conversion. In the
first, called Approach 1, CAT Reporters
would submit data to the Central
Repository in an existing industry
standard protocol of their choice such as
the Financial Information eXchange
(‘‘FIX’’) protocol. In Approach 2, CAT
Reporters would submit data to the
Central Repository in single mandatory
specified format, such as an augmented
version of the OATS protocol. Under
Approach 1, the data must be converted
into a uniform format at the Central
586 See CAT NMS Plan, supra note 3, at Appendix
D, Section 7.3. The Commission also notes that,
even if all CAT Reporters provide the required
linking information, the success of the linking
process would depend in part on the approach
taken by the Plan Processor and whether or not that
approach results in errors.
587 The CAT NMS Plan describes the Plan
Processor’s responsibility for creating the Technical
Specifications. See CAT NMS Plan, supra note 3,
at Section 6.9.
588 The Commission notes that the Plan Processor
is required to create a quality assurance testing
environment in which, during industry-wide
testing, the Plan Processor provides linkage
processing of data submitted, the results of which
are reported back to Participants and to the
Operating Committee for review. See CAT NMS
Plan, supra note 3, at Appendix D, Section 1.2. This
may help identify challenges in the linking process
and allow for their early resolution.
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Repository in a second step. Under
Approach 2, the data is already in a
uniform format at the time of
submission. The Plan defers the
decision regarding which approach to
take until the selection of a Plan
Processor and the development of
Technical Specifications.
The Commission preliminarily
believes that Approach 1 would likely
result in a lower Error Rate than
Approach 2. Under Approach 1, the
CAT Reporters would presumably be
submitting the actual data captured in
real time without having to translate it
into another format. In addition, under
Approach 1, the conversion would be
performed at the Central Repository by
the Plan Processor, rather than the
conversion being performed by each of
the approximately 1,800 individual CAT
Reporters or their vendors, which
should reduce potential points where
errors in formatting could be
introduced, and provide for economies
of scale.589 This would likely result in
increased efficiency and accuracy due to
specialization by the Plan Processor.
However, while the Commission
preliminarily believes that Approach 1
is likely to result in greater data
accuracy than Approach 2, because of
uncertainties regarding expected Error
Rates and error rates in current data, the
Commission is unable to evaluate the
degree to which that approach would
improve data accuracy relative to
currently available data.590
Uniquely complex situations also
pose a difficulty for assessing the ability
of the Plan Processor to build a
complete and accurate database of
linked data that regulators could query
for regulatory purposes. First, the Plan
requires the Plan Processor, in
consultation with industry, to develop a
linking mechanism that would allow the
option and equity legs of multi-leg
trades to be linked within the Central
Repository.591 Because the mechanism
for this linkage is not yet determined,
the Commission cannot assess the
degree of the expected linkage error rate
but, given that equities are not linked to
options in current data sources, the
Commission expects this feature to
significantly improve the accuracy of
linking equities to options.
589 The Commission understands that a large
proportion of reports that fail OATS validation
checks do so because of errors in the translation of
the data by the OATS reporter.
590 The Plan Processor is required to have policies
and procedures, including standards, to ensure the
accuracy of the consolidation by the Plan Processor
of the data, per Rule 613(e)(4)(iii), which could
mitigate errors as well. 17 CFR 242.613(e)(4)(iii).
591 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.1(b).
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Second, the Commission in the
Proposing Release noted concern about
the ability of the daisy chain approach
to link a Customer order and a member’s
order from which the Customer is
provided with an allocation.592 The
Plan addresses this concern in the
definition of an Allocation Report,
which is a report that identifies
accounts and subaccounts to which
executed shares are allocated, but that is
not required to be tied to a particular
order or execution.593 The Report is
required to be submitted to the Central
Repository,594 but the lack of linkages in
this case could make the resulting data
less useful. Specifically, the content of
the Allocation Report and the order
lifecycles must contain content that
permits regulators to draw certain
conclusions about subaccount
allocations even without a clean
linkage.
While uncertainty about this issue
remains, the Commission notes that the
Plan’s requirement for standardized
Allocation Reports that consistently and
uniquely identify Customers and
reporters should improve the linkability
of allocation information compared to
current data, despite the limitation of
direct linkage to order lifecycles,
particularly in scenarios where
potentially violative conduct is carried
out by market participants operating
through multiple broker dealers. This
moderate improvement in the
linkability of allocation data should
improve regulators’ ability to identify
market participants who commit
violations related to improper
subaccount allocations.
(4) Customer and Reporter Identifiers
The Commission preliminarily
believes that the inclusion of unique
Customer and Reporter Identifiers
described in the CAT NMS Plan would
increase the accuracy of customer and
broker-dealer information in data
regulators use and provide benefits to a
broad range of regulatory activities that
involve audit trail data.
Currently, only a few data sources,
which typically cover only a small
portion of order lifecycles, include
information regarding customers.595
Further, the customer information in
these data sources is often incomplete
592 See
593 See
Proposing Release, supra note 9, at 32576.
CAT NMS Plan, supra note 3, at Section
1.1.
594 See
id. at Section 6.4(d)(ii).
Section IV.D.2.b(1)A, supra. As discussed
above, the Commission notes that SRO audit trails
typically do not provide customer information but
a recent FINRA rule change would require its
members to report to OATS non-FINRA member
customers who are broker-dealers. See supra note
407.
595 See
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and inconsistent and the data is
currently only obtainable by regulators
making requests to broker-dealers
directly. Additionally, although brokerdealer identifiers, in the form of MPID
numbers, CRD numbers, and clearing
broker numbers, appear within the
current sources of audit trail data,
because of the lack of a centralized
database and because these identifiers
may vary across exchanges, the
Commission faces challenges in relying
on these identifiers to accurately
identify broker-dealer activity across the
market.596
Rule 613 requires the use of a unique
Customer-ID that identifies the
Customer involved in CAT Reportable
Events.597 Based on a concern that
requiring CAT Reporters to report a
Customer-ID to the Central Repository
with each order would disrupt existing
business practices and that reporting on
that basis could risk the leakage of order
and Customer information into the
market,598 the Plan requires the Plan
Processor to translate a unique
Customer identifier assigned by the firm
to its Customer (the Firm Designated ID)
into the Customer-ID to be used in
CAT.599 Specifically, the Plan requires
CAT Reporters to provide a Firm
Designated ID for each Customer, which
is defined as the unique identifier
designated by the broker-dealer for each
trading account for purposes of
providing data to the Central
Repository.600 Upon receipt of the Firm
Designated ID, the Plan Processor would
be required to generate and associate
one or more Customer-IDs for orders
received by the Customer of the CAT
Reporter, which would also be linked to
the relevant Reportable Events for that
Customer’s order. Pursuant to the Plan,
therefore, the Customer-ID would be
generated from the Firm Designated
ID,601 and the Plan Processor would
create a unique Customer-ID that would
be consistent across that Customer’s
activity regardless of the originating
broker-dealer.
To facilitate the creation of CustomerIDs, certain information would be
Section IV.D.2.b(1)D, supra.
613(c)(7) specifies the event records that
would contain the Customer-ID. 17 CFR
242.613(c)(7). Event records that do not explicitly
capture the Customer-ID could be linked to a record
that does contain this information, typically using
the Order-ID.
598 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.1.(a)(iii).
599 Id. The Firm Designated ID could be anything,
provided that it is unique across the firm for a given
business date.
600 See id. at Section 6.3(d)(i)(A), n.2; see also id.
at Section 1.1.
601 See CAT NMS Plan, supra note 3, at Appendix
D, Section 3.
submitted to the Central Repository.
Specifically, broker-dealers would be
required to submit an initial set of
information identifying a Customer to
the Central Repository, including the
Firm Designated ID and the other
biographical information associated
therewith including, for an individual,
name, address, date of birth, ITIN/SSN,
and individual’s role in the account
(e.g., primary holder, joint holder,
guardian, trustee, person with power of
attorney). With respect to legal entities,
identifying information would include:
name, address, EIN/LEI or other
comparable common entity identifier.602
Broker-dealers must also submit to the
Central Repository daily updates for
reactivated accounts, newly-established
or revised Firm Designated IDs, or other
associated reportable Customer
information.603 The Plan also calls for
periodic refreshes of all Customer
information from CAT Reporters.604
And the Plan Processor must have a way
to periodically receive full account lists
(i.e., not just the daily changes) to
ensure the completeness and accuracy
of the database.605
Based on this information, the Plan
Processor has to ‘‘maintain information
of sufficient detail to uniquely and
consistently identify each Customer
across all CAT Reporters, and associated
accounts from each CAT Reporter.’’ 606
It is the Plan Processor’s responsibility
to document and publish, with the
approval of the Operating Committee,
the minimum list of data elements
needed to maintain this association.
Appendix D sets forth a list of minimum
data elements needed to identify each
Customer across all CAT Reporters, and
associated accounts within a CAT
Reporter, including SSN or ITIN, date of
birth, current name, current address,
previous name and address; and for
legal entities, the LEI (if available), tax
identifier, full legal name, and
address.607 The Plan Processor must
also support account structures that
have multiple account owners and
associated Customer information (e.g.,
joint accounts, managed accounts), and
must be able to link accounts that move
596 See
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602 See id. at Appendix C, Section A.1.(a)(iii); see
also id. at Appendix D, Section 9.1. The CAT NMS
Plan further provides, in the definition of Customer
Identifying Information, that where the LEI or other
comparable common identifier is provided,
information covered by such common entity
identifier (e.g., name, address) would not need to
be separately submitted to the Central Repository.
Id. at Section 1.1.
603 See id. at Appendix C, Section A.1.(a)(iii).
604 See id. at Appendix C, n.33 and Appendix D,
Section 9.1.
605 See id. at Appendix D, Section 9.1.
606 See id. at Appendix C, Section A.1.(a)(iii).
607 See id. at Appendix D, Section 9.1.
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30687
from one CAT Reporter to another,608 so
it is possible that additional data fields
would be necessary. Once a database is
established, it must be maintained over
time, and provide ready access to
regulators to historical changes to that
information.609
The Commission preliminarily
believes that approval of the Plan would
likely further remedy some of the
inconsistencies and other limitations
mentioned above. The Plan also
contains provisions related to the
accuracy of submitted Customer
information. For example, a robust data
validation process must be established
for submitted Customer and Customer
Account Information.610 There must
also be a robust error resolution process
for Customer information. The Central
Repository must be able to
accommodate minor data discrepancies
(e.g., Road versus Rd in an address) on
its own, while more substantial
discrepancies (e.g., two different
persons with the same SSN) would need
to be transmitted to the CAT Reporter
for resolution within the established
error correction timeframe.611 While
these elements should help increase the
accuracy of Customer identification
within CAT, there are some
uncertainties, as the precise methods for
submitting Customer data to the Central
Repository, along with validations, are
to be set out in Technical Specifications
in the future.612
In addition to Customer-IDs, the CAT
NMS Plan calls for the use of CATReporter-IDs. The data to be reported to
the Central Repository includes the
SRO-assigned Market Participant
Identifier (MPID) of the Industry
Member or Participant receiving,
routing, or executing the order.613 Upon
receipt of the data, the Plan Processor
must map the SRO-assigned MPID to a
CAT-Reporter-ID, which would be
assigned by the Plan Processor in the
CAT data.614 Specifically, the Plan
Processor must be able to assign a CATReporter-ID to all reports submitted to
the Central Repository based on SROassigned MPIDs. To the extent that the
different Participants assign the same
MPID to different CAT Reporters, the
Plan Processor must be able to properly
associate the correct SRO-assigned
608 See
id.
id. at Article VI, Section 6.5(b) and (c).
610 See id. at Appendix C, Section A.1.(a)(iii); see
also id. at Appendix D, Section 9.1.
611 See id. at Appendix D, Section 3.
612 See id. at Appendix C, Section A.1.(a)(iii).
613 See Exemption Order, supra note 18, at
11863–11865; CAT NMS Plan, supra note 3, at
Sections 6.3(d), 6.4(d).
614 See CAT NMS Plan, supra note 3, at Appendix
D, Section 3.
609 See
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MPIDs with the CAT Reporters.615 To
do this, the Plan Processor must develop
and maintain a mechanism for assigning
CAT-Reporter-IDs based on the relevant
SRO-assigned identifier (MPID, ETPID,
or trading mnemonic) currently used by
CAT Reporters in their order handling
and trading processes, and also to
change those identifiers should that be
necessary (e.g., in the event of a merger),
although changes are expected to be
infrequent.616 Moreover, the SROs
would have an obligation to provide all
their SRO-assigned MPIDs to the Central
Repository on a daily basis to ensure the
accuracy of the information used to
assign the CAT-Reporter-ID. The Plan
Processor must capture, store, and
maintain this information in a master/
reference database, similar to how the
Plan Processor would handle symbology
changes.617 Finally, the validity of the
SRO-assigned MPID is part of the initial
file validation process upon receipt of a
submission from a CAT Reporter, which
should facilitate the accuracy of the
Plan Processor’s subsequent assignment
of the CAT-Reporter-ID.618
The Commission preliminarily
believes that the Customer-ID approach
in the CAT NMS Plan would
significantly improve the accuracy of
customer information available to
regulators. As noted above, existing data
does not consistently capture
information about the customers
involved in a trade or other market
event, which negatively affects the
ability of regulators to accurately track
customers’ activities across brokerdealers. Additionally, customer
identities in many existing data sources
use inconsistent definitions and
mappings across market centers.
Accordingly, it is difficult for regulators
to identify the trading of a single
customer across multiple market
participants.619 The Customer-ID
approach specified in the CAT NMS
Plan constitutes a significant
improvement because it would
consistently identify the Customer
responsible for market activity,
obviating the need for regulators to
collect and reconcile Customer
identification information from multiple
broker-dealers. This should reduce the
risk of the introduction of errors into the
data by regulators and save a significant
amount of time.
Furthermore, the Commission
preliminarily believes that the Reporter
ID approach specified in the CAT NMS
Plan would improve the accuracy of
tracking information regarding entities
with reporting obligations, namely
broker-dealers and SROs. Because the
Commission currently face challenges in
using MPIDs and CRD numbers, for
example, to identify broker-dealers
across the market, the Plan’s
requirement for consistent unique
Reporter IDs would eliminate the need
for the Commission to reconcile brokerdealer information from multiple data
sources, which can be a costly task for
regulatory Staff that is often limited in
terms of accuracy by the inconsistencies
and non-uniqueness of current
identifiers, and facilitate more efficient
and effective regulatory activities that
protect investors from harm. Moreover,
because CAT Data would include more
Industry Members in the Reporter ID
category than are currently in any
current set of broker-dealer identifiers,
the Commission preliminarily believes
that approval of the Plan would likely
further remedy some of the
inconsistencies and other limitations
mentioned above.
(5) Aggregation
Most CAT Data would be
disaggregated data, meaning that CAT
Data would not suffer from the
limitations that characterize some of the
aggregated data sources that regulators
must currently use. As mentioned in the
Baseline Section, subaccount allocation
data and issuer repurchase data exist in
forms that are aggregated and thus these
data sources are limited for use in
certain regulatory activities and
interests.620 In particular, neither data
type may necessarily indicate the
individual executions. This data feature
should promote more effective and
efficient investigation by regulators of
subaccount allocation issues and
repurchase activity.
To meet the requirements of Rule 613,
the CAT NMS Plan includes a required
allocation reporting tool that would
provide information on executions that
are allocated to multiple
subaccounts.621 The Allocation Reports
required by the Plan would provide the
Firm Designated ID for any account(s),
including subaccount(s) to which
executed shares are allocated, the
security that has been allocated, the
identifier of the firm reporting the
allocation, the price per share of shares
allocated, the side of shares allocated,
the number of shares allocated to each
account, and the time of the
allocation.622 The Firm Designated IDs
could facilitate linking back to the
Customer-ID, so it may not be possible
to perfectly link a Customer’s aggregated
orders, executions, and allocations for a
day.623
The Commission preliminarily
believes that the CAT NMS Plan would
improve the accuracy of allocation data
compared to existing data available to
regulators. It would provide
disaggregated information on the
identity of the security, the number of
shares and price allocated to each
subaccount, when the allocation took
place, and how each Customer
subaccount is associated with the
master account. This would more
accurately reflect which Customer
ultimately received the shares that were
purchased in a particular trade.
The Commission anticipates that
regulators may use CAT Data for some
purposes that they use cleared data for
now because CAT is significantly less
aggregated. As discussed above,
regulators often used equity and option
cleared reports to identify market
participants involved in trading activity
relevant to an investigation.624 Because
these are aggregated, regulators can use
them to identify clearing firms that may
have higher volume in a particular stock
on a particular day, but the data does
not identify actual trades, and,
therefore, regulators make data requests
to access the underlying disaggregated
data necessary to identify broker-dealers
or customers that may be involved in
the activity under investigation. If the
CAT NMS Plan is approved, CAT Data
could be used to identify individual
trades and customers or other market
participants who were involved in such
activity with less delay and without
requiring ad hoc data requests to
clearing firms identified using equity or
option cleared reports.
Likewise, the disaggregated issuer
repurchase information that would be in
the CAT data would be an improvement
in the accuracy of information available
to regulators about those issuer
repurchases. In particular, the Plan
would require that the Plan Processor
link Customer information to the order
lifecycle and the report would identify
as Customers those issuers that are
622 See
615 See
id.
616 See id. at Appendix D, Section 10.1.
617 See id. at Appendix D, Section 2 and Section
IV.E.3.b, infra.
618 See id. at Appendix D, Section 7.2.
619 See Adopting Release, supra note 9, at 45730;
see also Section III.D.2.b(2)D, supra.
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620 See
Section IV.D.2.b.(2)E, supra. Item 703 of
Regulation S–K requires issuers to report aggregated
issuer repurchase data to the Commission on an
annual and quarterly basis in Forms 10–K and 10–
Q; see also 17 CFR 229.703 and supra note 451.
621 See CAT NMS Plan, supra note 3, at Section
6.4(d)(ii)(A)(1).
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Exemption Order, supra note 18, at 11867.
Commission notes, however, that there
may be allocations made by non-broker-dealers that
are difficult to track if they involve multiple brokerdealers, or are not tracked if they involve non-CATreporters. See Exemptive Request Letter, supra note
16, at 26 n.61.
624 See Section IV.D.2.a(2), supra.
623 The
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repurchasing their stock in the open
market.625 This would provide much
more granular data than what is
available currently for open market
issuer repurchases, which consists of
monthly aggregations of those issuer
repurchases.626
c. Accessibility
In general, the Commission believes
that the Plan, if approved, would
substantially improve the accessibility
of regulatory data by providing
regulators with direct access to the
consolidated CAT Data, including some
data elements that currently take weeks
or months to obtain. However, there is
some uncertainty regarding the process
for regulatory access under the Plan,
which creates uncertainty as to the
degree of the expected improvement.627
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(1) Direct Access to Data
As discussed in the Baseline
Section,628 one of the significant
limitations of current regulatory data
sources is lack of direct access. Rule
613(e)(1) requires the Central Repository
to store and make available to regulators
data in a uniform electronic format and
in a form in which all events pertaining
to the same originating order are linked
together in a manner that ensures timely
and accurate retrieval of the information
for all Reportable Events for that
order.629 Additionally, Rule 613(a)(1)(ii)
requires that the CAT NMS Plan discuss
the time and method of access by which
the data would be made available to
regulators.630 The CAT NMS Plan
implements this requirement in Section
6.5(c) 631 and further describes the direct
access methods and functionality in the
discussion of Consideration 2 and in
Appendix D.632 Section 6.5(c) requires
that the Participants and the
Commission have access to the Central
Repository, and access to and use of the
CAT Data stored at the Central
Repository, and further requires a
method of access to the data that
provides for the ability to run searches
and generate reports, including complex
queries. Specifically, the Central
Repository must store 6 years of CAT
625 See CAT NMS Plan, supra note 3, at Section
6.4(d)(iv).
626 See Section IV.D.2.b(2)E, supra for baseline
information on current issuer repurchase data.
627 Accessibility refers to how the data is stored,
how practical it is to assemble, aggregate, and
process the data, and whether all appropriate
regulators could acquire the data they need.
628 See Section IV.D.2.b(3), supra.
629 17 CFR 242.613(e)(1).
630 17 CFR 242.613(a)(1)(ii).
631 See CAT NMS Plan, supra note 3, at Section
6.5(c).
632 See id. at Appendix C, Section A.2(b) and (c),
Appendix D, Section 8.
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data in a ‘‘convenient and usable
standard electronic format’’ that is
‘‘directly available and searchable
electronically without any manual
intervention by the Plan Processor.’’ 633
This access to the Central Repository is
solely for the purpose of performing
regulatory functions and must include
the ability to run searches and generate
reports; further, the Plan requires that
the Central Repository shall allow the
ability to return results of queries that
are complex in nature, including market
reconstructions and the status of order
books at varying time intervals.634 The
Central Repository must also maintain
valid Customer and Customer Account
Information and permit regulators
access to ‘‘easily obtain historical
changes to that information (e.g., name
changes, address changes).’’ 635
The Commission recognizes that
improving accessibility relative to the
Baseline requires ensuring that enough
SRO and Commission Staff members are
able to use the direct access system
supplied by the Central Repository
when they need it. The ability to use the
direct access system depends, among
other things, on how user-friendly the
system is, whether it has enough
capacity for the expected use of the
system, and whether it contains the
functionality that the SROs and
Commission Staff require. The
Commission preliminarily believes that
the minimum requirements for the
direct access system would ensure that
the Plan would improve on the Baseline
of access to current data, including the
process of requesting data.
Appendix D provides minimum
functional and technical requirements
that must be met by the Technical
Specifications to facilitate these
methods of access, including the
methods of selecting data that must be
supported, query and bulk extract
performance standards, and formats in
which data could be retrieved.636
Specifically, CAT must be able to
support a minimum of 3,000 regulatory
users within the system, 600 of which
might be accessing the system
concurrently (which must be possible
without an unacceptable decline in
system performance) 637: 20% of the
3,000 users would be daily or weekly
users, and 10% would require advanced
regulatory-user access.638 Advanced
user access includes the ability to run
633 See
id. at Section 6.5(b)(i).
id. at Section 6.5(c)(ii), Appendix D,
Section 8.1.
635 See id. at Appendix C, Section A.1(a)(iii).
636 See id. at Appendix D, Section 8; see also
Appendix C, Section A.2.
637 See id. at Appendix D, Section 8.1.
638 Id.
634 See
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30689
complex queries (versus basic users who
may only run basic queries).639
Two types of query interfacing must
be supported. The first, an online
targeted query tool, must include a date
or time range, or both, and allow users
to choose from a broad menu of 26 predefined selection criteria (e.g., data type,
listing market, size, price, CATReporter-ID, Customer-ID, or CATOrder-ID), with more to be defined at a
later date.640 Results must be viewable
in the tool or downloadable in a variety
of formats and support at least a result
size of 5,000 or 10,000 records,
respectively, with a maximum result
size to be determined by the Plan
Processor.641 The other method for
regulator access to the data is a userdefined direct query or bulk
extraction.642 CAT must be able to
support at least 3,000 daily queries,
including 1,800 concurrently, and up to
300 simultaneous query requests with
no performance degradation.643 Datasets
generated by these direct queries could
run from less than 1 GB to at least 10
TB or more of uncompressed data.644
The actual method of query support is
to be determined by the Plan Processor,
but must provide an open API that
allows use of regulator-supplied
common analytic tools (e.g., Python,
Tableau) and ODBC/JDBC drivers.645
The Plan Processor is permitted to
define a ‘‘limited set of basic required
fields (e.g., date and at least one other
field such as symbol, CAT-Reporter-ID,
or CAT-Customer-ID)’’ that must be
used by regulators in direct queries.646
Direct queries must be able to be
created, saved, and run by regulators
(either directly or at a prescheduled
time), with automated delivery of
scheduled query results.647 Finally, the
Plan Processor must provide data
models and data dictionaries for all
processed and unlinked CAT Data, and
639 See id. at Appendix D, Section 8.1.1. Both
Basic and Advanced Users may be established by
an employee at the regulator designated to set up
access to the system, if the Plan Processor chooses
to do so versus processing it themselves. See id. at
Appendix C, Section D.12(k). However, providing
access to PII must always be done directly by the
Plan Processor. Id.
640 See id. at Appendix D, Section 8.1.1. This is
a broad range of criteria from which to choose,
although deferring additional selection fields to be
defined at a later date makes the precise scope of
this tool less certain.
641 See id.
642 See id. at Appendix D, Section 8.2.
643 See id. at Appendix D, Section 8.2.1.
644 See id.
645 See id. at Appendix D, Section 8.2. A
discussion of the types of data tools that bidders
proposed to support can be found in Appendix C,
Section A.2(b).
646 See id. at Appendix D, Section 8.2.
647 See id. at Appendix D, Section 8.2.1.
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the Plan Processor must provide
procedures and training to regulators
that would use the direct query feature
(although it is up to the Plan Processor
whether to require these training
sessions).648 Consideration was given to
requiring the Plan Processor to create an
online Report Center that would provide
pre-canned reports (i.e., recurring
reports of interest to regulators), but due
to the added complexity and lack of
quantifiable use cases, the decision was
made not to proceed. The Plan,
however, provides that this decision
would be reassessed when brokerdealers begin submitting data to the
CAT.649
All queries must be able to be run
against raw (i.e., unlinked) or processed
data, or both. A variety of minimum
performance metrics apply to these
queries.650 The Plan Processor must also
provide certain support to regulatory
users. Specifically, it must ‘‘develop a
program to provide technical,
operational and business support’’ to
regulators, including creating and
maintaining the CAT Help Desk to
provide technical expertise to assist
regulators with questions and/or
functionality about the content and
structure of the CAT query capability.651
The Help Desk must be available 24x7,
support email and phone
communication, and be staffed to
handle 2,500 calls per month (although
this resource would not be exclusive to
regulators; CAT Reporters could use it
as well).652 The Plan Processor must
also develop tools, including an
interface, to let users monitor the status
of their queries and/or reports,
including all in-progress queries/reports
and estimated time to completion.653 In
addition, the Plan Processor must
develop communication protocols
regarding system status, outages, and
other issues affecting access, including
access by regulators to a secure Web site
to monitor CAT System status.654
Furthermore, the Plan Processor must
develop and maintain documentation
and other materials to train regulators,
including training on building and
running queries.655
The Commission preliminary believes
that the direct access facilitated by
provisions of the CAT NMS Plan
described above is reasonably designed
648 See
id. at Appendix D, Section 8.2.
id. at Appendix D, Section 8.2.2.
650 See Section IV.E.1.IV.E.1.d(3), infra, for
additional for additional information.
651 See CAT NMS Plan, supra note 3, at Appendix
D, Section 10.2.
652 See id. at Appendix D, Section 10.3.
653 See id. at Appendix D, Section 10.2.
654 See id.
655 See id.
649 See
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to substantially reduce the number of ad
hoc data requests and provide access to
substantial data without the delays and
costly time and knowledge investments
associated with the need to create and
respond to data requests. For example,
regulators do not have direct access to
EBS or trade blotter data and therefore
they must request such data when
needed for regulatory tasks. As a result,
in 2014 the Commission made 3,722
EBS requests that generated 194,696
letters to broker-dealers for EBS data.656
Likewise, the Commission understands
that FINRA requests generate about half
this number of letters. In addition, for
examinations of investment advisers
and investment companies, the
Commission makes approximately 1,200
data requests per year. If the Plan is
approved, the Commission
preliminarily believes that the number
of data requests would decline sharply.
In addition to decreasing the amount of
time currently required for regulators to
access data sources, direct access to the
CAT Data should decrease the costs that
many regulators and market participants
incur in either requesting data or
fulfilling requests for data, such as the
time and resources that regulators and
data liaisons or back office IT staff at
broker-dealers expend to understand
and access broker-dealer data collected
and provided in a particular way.
The Plan would also permit regulators
to directly access customer information,
which could improve the ability of
SROs to conduct surveillance. Rule
613(e)(3) requires that the CAT provide
the capability to run searches and
generate reports.657 The CAT NMS Plan
indicates that regulators would be able
to run searches on many variables,
including Customer-IDs.658 Appendix D
further clarifies that both the online
targeted query tool and the user-defined
query/bulk extract process would
produce records that provide CustomerIDs, but that do not themselves provide
Customer PII data.659 Data containing
PII, however, could be obtained by
regulatory personnel specifically
authorized to obtain PII access, through
a process to be documented by the Plan
Processor.660 Currently, most regulatory
data sources do not directly link to
specific customers.661 Instead,
656 See Section IV.D.2.b(2), supra, for discussion
of ad hoc data requests.
657 17 CFR 242.613(e)(3).
658 See CAT NMS Plan, supra note 3, at Appendix
D, Section 8.2; See also supra note 632.
659 See id. at Appendix D, Section 4.1.6,
Appendix D, Section 8.1.1–8.1.3.
660 See id. at Appendix D, Section 4.1.6.
661 The EBS system, trade blotters, order tickets,
and trade confirmations are the existing data
sources that contain customer information. See
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regulators can use an ad-hoc data
request to identify the customer and
follow up with an EBS request to
identify the customer’s other activity
across market participants. In this
regard, CAT would provide SROs with
direct access to the data that is
necessary to conduct surveillance of the
trading behavior of individual market
participants in a more timely fashion.662
(2) Consolidation of Data
The Commission also preliminarily
believes that, if approved, the Plan
would improve accessibility by
consolidating various data elements into
one combined source, reducing data
fragmentation. First, Rule 613 requires
that the Central Repository collect data
that includes the trading and routing of
a given security from all CAT
Reporters.663 Currently, audit trail data
for securities that are traded on multiple
venues (multiple exchanges or offexchange venues) is fragmented across
multiple data sources, with each
regulator generally having direct access
only to data generated on the trading
venues it regulates.664 If approved, the
Plan would bring audit trail data related
to trading on all venues into the Central
Repository where it could be accessed
by all regulators. Second, Rule 613
requires that the Plan include both
equity and options data.665 Currently no
existing regulatory audit trail data
source includes both options and
equities data, so collecting this data and
providing access would allow regulators
to monitor and run surveillance on the
activity of market participants in related
instruments, such as when a market
participant has activity in both options
and the options’ underlying assets.
The Plan would also marginally
increase the accessibility of historical
exchange data. In particular, Section
6.5(b)(i) of the Plan requires that the
Central Repository make historical data
available for not less than six years, in
Section IV.D.2.b(1)A, supra; Adopting Release,
supra note 9, at 45727. Also a recent FINRA rule
change would require FINRA members to report to
OATS non-FINRA member customers who are
broker-dealers. See supra note 407.
662 Currently, FINRA receives exchange data from
SROs at the end of the trading day. It takes
approximately three days for FINRA to process and
translate this data to a common format before
surveillance programs can run. As noted in Section
IV.D.1.c, this economic analysis considers
surveillance to be SROs running automated
processes on routinely collected or in-house data to
identify potential violations of rules or regulations.
663 See 17 CFR 242.613(c).
664 The Commission recognizes that FINRA
collects data from exchanges for which it provides
regulatory services. However, this data is sent to
FINRA by the exchanges with a delay, and the data
formats are not standardized prior to receipt at
FINRA.
665 See 17 CFR 242.613(c)(5), (c)(6).
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a manner that is directly accessible and
searchable electronically without
manual intervention by the Plan
Processor.666
In some dimensions of accessibility,
the Commission notes that uncertainties
exist that could affect the degree of
expected improvement to accessibility.
In particular, while the Plan provides
detail on the method of access and the
types of queries that regulators could
run, many of the decisions regarding
access have been deferred until after the
Plan Processor is selected and finalizes
the Technical Specifications; the Plan
does not specify how regulators would
access the data beyond providing for
both an online query tool and userdefined direct queries that could do
bulk extractions.667 For example, while
the Plan indicates that regulators would
have an on-line targeted query tool and
a tool for user-defined direct queries or
bulk extraction,668 the Plan itself does
not provide an indication for how userfriendly the tools would be or the
particular skill set needed to use the
tools for user-defined direct queries.
In addition, it is not known whether
the Plan Processor would host a server
workspace that regulators could use for
more complex analyses, what software
tools would be available to regulators
within such a workspace, and whether
complex analyses would be able to be
performed without extracting significant
data from the Central Repository’s
database.
While all Bidders included certain
baseline functionality, such as some
means for regulators to perform
dynamic searches, data extraction, and
‘‘off-line analysis,’’ 669 Bidders proposed
using a variety of tools to provide
regulators with access to and reports
from the Central Repository, including
direct access portals, web-based
applications, and a number of different
options for formatting the data provided
to regulators in response to their
queries.670 While all of these proposed
666 See CAT NMS Plan, supra note 3, at Section
6.5(b)(i). Currently, broker-dealers retain data for six
years, but exchanges are only required to retain data
for five years. In practice, the Commission
understands that most exchanges generally retain
data for at least six years, but at least one exchange
does not retain data for six or more years. Therefore,
the CAT NMS Plan would improve the historical
data available from at least one exchange.
667 See, e.g., CAT NMS Plan, supra note 3, at
Appendix D, Section 8.2.
668 See CAT NMS Plan, supra note 3 at Appendix
D, Sections 8.1.1, 8.1.2.
669 See id. at Appendix C, Section A.2(b).
‘‘Offline-analysis’’ refers to a regulator’s analysis of
data extracted from the Central Repository using the
regulator’s own analytical tools, software, and
hardware to perform the analysis. See id. at
Appendix C, Section A.2(b) n.77.
670 See id. at Appendix C, Section A.2(b).
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solutions would presumably be
compatible with achieving the
accessibility benefits sought to be
achieved through the Plan—i.e., they
would all involve the aggregation of
data from various sources and the
provision of ready access to that data for
regulators—the precise degree of
functionality of the final system is still
to be determined. Similarly, the details
of system performance would depend
on Service Level Agreements to be
established between the Plan
Participants and the eventual Plan
Processor, which means that the details
would not be known until after the Plan
Processor is selected.671 These
functionality and performance
uncertainties create some uncertainty
regarding the degree of improvement in
regulatory access that would result from
the Plan.
Nonetheless, the requirements
included in the Plan describe a system
that, once implemented, would result in
the ability to query consolidated data
sources that represents a significant
improvement over the currently
available systems. This substantial
reduction in data delays and costly data
investments would permit regulators to
complete market reconstructions,
analyses, and research projects, as well
as investigations and examinations,
more effectively and efficiently and
would lead to improved productivity in
the array of regulatory matters that rely
on data, which should lead to improved
investor protection.
d. Timeliness
The Commission believes that, if
approved, the CAT NMS Plan would
significantly improve the timeliness of
the reporting, compiling, and access of
regulatory data, which would benefit a
wide array of regulatory activities that
use or could use audit trail data.672 The
Commission preliminarily believes that
the timeline for compiling and reporting
data pursuant to the Plan constitutes an
improvement over the processes
currently in place for many existing data
sources, and relative to some data
sources the improvement is dramatic.
Specifically, under the Plan, CAT Data
would be compiled and made ready for
access faster than is the case today for
some data, both in raw and in corrected
form; regulators would be able to query
and manipulate the CAT Data without
going through a lengthy data request
process; and the data would be in a
671 See
id. at Appendix D, Section 8.5.
refers to when the data is available
to regulators and how long it would take to process
before it could be used for regulatory analysis.
672 Timeliness
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30691
format to make it more immediately
useful for regulatory purposes.
(1) Timing of Initial Access to Data
The Plan would require CAT
Reporters to report data to the Central
Repository at times that are on par with
current audit trails that require
reporting, but the Central Repository
would compile the data for initial access
sooner than some other such data.673
Sections 6.3(b)(ii) and 6.4(b)(ii) of the
Plan require that the data required to be
collected by CAT Reporters must be
reported to the Central Repository by
8:00 a.m. Eastern Time on day T+1.674
These provisions also make clear that
CAT Reporters could voluntarily report
the required data prior to the
deadline.675 As described in Table 4, the
time at which data is reported often
differs significantly from the time at
which data is made available to various
regulators.676 The CAT Data would be
made available to regulators in raw form
after it is received from reporters and
passes basic formatting validations; the
Plan does not specify exactly when
these validations would be complete,
but the requirement to link records by
12:00 p.m. (noon) Eastern Time on day
T+1 gives a practical upper bound on
this timeline for initial access to the
data.677 Thus, to the extent that access
to the raw (i.e., uncorrected and
unlinked) data would be useful for
regulatory purposes, the CAT NMS Plan
provides a way for SROs and the
Commission to access the uncorrected
and unlinked data on day T+1 by 12:00
p.m. at the latest.
As noted in the Baseline, some
current data sources compile and report
the data with delays. For example,
equity and option clearing data are not
compiled and reported to the NSCC and
OCC until day T+3, and thus access to
this data by the Commission cannot
occur until day T+3 at the very soonest.
Under the Plan, raw data would be
available two days sooner to all
regulators. In other cases such as EBS
reports, the data are not compiled and
reported to a centralized database until
673 Compiling data refers to a process that
aggregates individual data records into a data set.
This could occur when regulators request data and
when the regulators receive data from multiple
providers. This is different from the act of reporting
data.
674 See Rules 613(c)(3), (c)(4), 17 CFR
242.613(c)(3), (c)(4).
675 See CAT NMS Plan, supra note 3, at Appendix
D, Section 3.1.
676 See Table 4, supra.
677 See CAT NMS Plan supra note 3, at Appendix
C, Section A.2(a); Appendix C, Section A.3(e);
Appendix D, Section 6.1.
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a request is received.678 OATS data is
initially reported to FINRA by 8 a.m. on
the calendar day following the
reportable event, and it takes
approximately 24 hours for FINRA to
run validation checks on the file.679
However, SROs do not currently access
OATS information for regulatory
purposes until after the error correction
process is complete, which imposes a
further delay of several business days
for non-FINRA SRO regulators’ use.680
Uncorrected OATS data is, however,
available at 8 a.m. on the calendar day
following the reportable event to FINRA
(several hours more timely than CAT
Data would be)—and is available to
other regulators upon request several
weeks later.681 Uncorrected CAT Data
would be available to all regulators at
12:00 p.m. on day T+1, which is at least
several days sooner than OATS is
available to non-FINRA regulators;
however, the Commission notes that
because OATS is reportable on the
calendar day following the OATSreportable event while CAT would be
reported on T+1 following a Reportable
Event, regulators’ access to CAT Data
from a day preceding a non-trading day
(Fridays or days before market holidays)
is likely to be less timely than it is
currently, if that data would be covered
by OATS. However, to the extent that
the CAT would generally make CAT
Data, which would include substantially
more information than OATS data,
available to all regulators, as opposed to
just FINRA, in raw form by at least
12:00 p.m. Eastern Time on day T+1, the
CAT would generally represent a
significant improvement in timeliness
for SROs other than FINRA compared to
OATS.
It is true that the Plan would not
necessarily improve the timeliness of
audit trail data in every case or for every
regulator, as some kinds of audit trail
data are currently timely for some
regulators. For example, exchange SROs
already have real-time access to their
own audit trail data.682 However,
678 The Commission notes, however, that brokerdealers could compile some data sources discussed
in the baseline on the day of an event. For example,
broker-dealers can compile trade blotters on the
same day as the trade. Further, regulators can
compile data received in real-time on the event day.
For example, regulators can compile direct data
feeds same day. The Commission does not believe
the CAT NMS Plan would affect the timing of the
compilation of such data, nor would it reduce the
number of requests for data on the day of an event.
679 See Adopting Release, supra note 9, at 45729.
680 Id.
681 See OATS Reporting Technical Specifications
Section 8.1, available at https://www.finra.org/sites/
default/files/OATSTechSpec_01112016.pdf.
682 Under the Plan, SROs that are exchanges
would still have the same real-time access to their
own audit trail data as they currently do. The
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regulators at other SROs or the
Commission do not have real-time
access to that exchange’s audit trail, and
therefore CAT Data could be more
timely for these other regulators to
access and use than obtaining that
exchange’s audit trail data through any
means.683
(2) Timeliness of Access to ErrorCorrected Data
Further, the Commission
preliminarily believes that the error
correction process required by the CAT
NMS Plan is reasonably designed to
provide additional improvements in
timeliness for corrected data. The CAT
NMS Plan specifies that the initial data
validation and communication of errors
to CAT Reporters must occur by noon
on day T+1, corrections of these errors
must be submitted by the CAT Reporters
to the Central Repository by 8:00 a.m.
Eastern Time on day T+3, and the
corrected data made available to
regulators by 8:00 a.m. Eastern Time on
day T+5.684 During this interim time
period between initial processing and
corrected data availability, ‘‘all
iterations’’ of processed data must be
available for regulatory use.685 The
Central Repository must be able to
receive error corrections at any time,
even if late; 686 if corrections are
received after day T+5, the Plan
Processor must notify the SEC and SROs
of this fact and how re-processing of the
data (to be determined in conjunction
with the Operating Committee) would
be completed.687 Customer information
(i.e., information containing PII) is
processed along a slightly different
timeline, but the outcome—corrected
data available by 8:00 a.m. Eastern Time
Commission does not expect that all SRO audit
trails will be retired on implementation of the Plan
because exchanges may use such audit trails to
implement their CAT reporting responsibilities.
CAT reporting requirements would require that
exchanges collect and report audit trail information
from their systems even if they elect to replace their
current audit trails. However, CAT requirements
may improve the completeness of real-time
exchange audit trail data if the information that
exchanges collect under the Plan is more complete
than what they currently collect.
683 As noted, the SROs are generally currently
able to access their own audit trail data on the same
day of an event and the Commission is currently
able to access some public data, like SIP and
MIDAS, on the same day as an event. Further,
OATS is available to FINRA at 8am on the day
following an event. The Commission preliminarily
does not expect the CAT NMS Plan would affect
these regulators’ access to most of these respective
data sources.
684 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.2(a), Appendix D, Section 6.1.
685 Id. at Appendix D, Section 6.2.
686 See id. at Appendix C, Section A.3.(b),
Appendix D, Section 7.4.
687 See id. at Appendix D, Section 6.2.
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on day T+5—is the same.688 One
exception to this timeline is if the Plan
Processor has not received a significant
portion of the data, as determined
according to the Plan Processor’s
monitoring, in which case the Plan
Processor could determine to halt
processing pending submission of that
data.689
As discussed in the Baseline Section,
the error resolution process for OATS is
limited to five business days from the
date a rejection becomes available.690
The CAT NMS Plan requires a three-day
repair window for the Central
Repository.691 Accordingly, if the Plan
is approved, regulators would generally
be able to access partially and fully
corrected data earlier than they would
for OATS.692
(3) Timeliness of direct access
Improvements to timeliness would
also result from the ability of regulators
to directly access CAT Data.693 As noted
in the Baseline Section and throughout
this Section, most current data sources
do not provide direct access to most
regulators, and data requests can take as
long as weeks or even months to
process. Other data sources provide
direct access with queries that can
sometimes generate results in minutes—
for example, running a search on all
MIDAS message traffic in one day can
take up to 30 minutes 694—but only for
a limited subset of the data to be
available in CAT, and generally only for
a limited number of regulators.
Accordingly, the Commission
preliminarily believes that the ability of
regulators to directly access and analyze
the scope of audit trail data that would
be stored in the Central Repository
should reduce the delays that are
currently associated with requesting and
receiving data. For many purposes,
therefore, CAT Data could be up to
many weeks more timely than current
data sources. Furthermore, direct access
to CAT Data should reduce the costs of
making ad hoc data requests, including
extensive interactions with data liaisons
and IT staff at broker-dealers, SROs, and
vendors, developing specialized
knowledge of varied formats, data
structures, and systems, and reconciling
data.
As discussed above, Rule 613
generally requires that the Central
688 Id.
689 See
id. at Appendix D, Section 6.1.
Section IV.D.2.b(4) and supra note 465.
691 Id. at Appendix C, Section A.2(a).
692 CAT Data being available on day T+5 may be
later than for other current SRO audit trails.
693 See CAT NMS Plan, supra note 3, Section
6.5(c).
694 See Section IV.D.2.b(4) and supra note 468.
690 See
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Repository would receive, consolidate,
and retain CAT Data in a linked uniform
electronic format and the regulators
would be able to directly access the data
stored in the Central Repository.695
Queries take time to return data because
they need to look up information across
a range of data records, process that
data, and compile it into an output
dataset. Therefore, the improvements to
timeliness depend on how long the
queries take to return data. The CAT
NMS Plan specifies that regulators
would be able to query the Central
Repository using an online targeted
query tool with response times
‘‘measured in time increments of less
than a minute’’ for targeted queries and
within 24 hours for large or complex
queries that either scan large amounts of
data or return large result sets (i.e., sets
of over 1 million records).696 That said,
if the data request is limited to one
business date, and that business date is
within the last 12-month period, the
query must not take more than 3 hours
to run, regardless of complexity.697
Specifically, searches including only
equities and options trade data must be
returned within either 1 minute (events
for a specific Customer or CAT Reporter
with filterable other fields); 30 minutes
(events for a specific Customer or CAT
Reporter in a specified date range of less
than 1 month); or 6 hours (events for a
single Customer or CAT Reporter in a
specified date range of up to 12 months
within the last 24 months).698 Searches
including equities and options trade
data, along with NBBO data, must
return within 5 minutes for all orders
for a specific security from a specific
Participant; and for all orders,
cancellations, and NBBO (or the
protected best bid and offer) for a
specific security, and with several
similar types of searches, within a
specified window not to exceed 10
minutes for a single date.699
Furthermore, the search tool must
include a resource management
component, which could manage query
requests to balance the workload, and
categorize and prioritize query requests
based on the input parameters,
complexity of the query, and the volume
of data to be parsed in the query, with
the details on the prioritization plan to
be provided at a later date.700 The
database must support the estimated
600 concurrent users to ensure that
695 See
Section IV.E.1.c, supra.
CAT NMS Plan, supra note 3, at Appendix
C, Section A.2(c); Appendix D, Section 8.1.2.
697 Id. at Appendix D, Section 8.1.2.
698 Id.
699 Id.
700 See id. at Appendix D, Section 8.1.2.
696 See
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there is not an unacceptable decline in
system performance.701 The direct query
and bulk extract features are also
designed to ensure timely regulatory
access to critical data. For example, the
bulk extract of an entire day’s worth of
data should be able to be transferred in
less than four hours (assuming the
regulator’s network could support the
required data transfer speeds).702 The
Plan Processor must have an automated
mechanism to monitor user-defined
direct queries and bulk data extracts,
including automated alerts of issues
with bottlenecks and excessively long
queues for queries or data
extractions.703 Monthly reporting on the
delivery and timeliness of these tools to
the Operating Committee and regulators
is required.704
(4) Timeliness of use of Data
The Commission also preliminarily
expects the CAT NMS Plan to reduce
the time required to process data before
analysis. Currently regulators can spend
days and up to months processing data
they receive into a useful format.705 Part
of this delay is due to the need to
combine data across sources that could
have non-uniform formats and to link
data about the same event both within
and across data sources. As discussed
above, these kinds of linking processes
can require sophisticated data
techniques and substantial assumptions,
and can result in imperfectly linked
data. The Plan addresses this issue by
stating that the Plan Processor must
store the data in a linked uniform
format.706 Specifically, the Central
Repository will use a ‘‘daisy chain’’
approach to link and reconstruct the
complete lifecycle of each Reportable
Event, including all related order events
from all CAT Reporters involved in that
lifecycle.707 Therefore, regulators
accessing the data in a linked uniform
format would no longer need to take
additional time to process the data into
a uniform format or to link the data.708
Accordingly, the Commission
preliminarily believes that the Plan
would reduce or eliminate the delays
associated with merging and linking
order events within the same lifecycle.
701 See
702 See
id. at Appendix D, Section 8.1.
id. at Appendix D, Section 8.2.2.
703 Id.
704 Id.
705 See
Section IV.D.2.b(4), supra.
CAT NMS Plan, supra note 3, at Section
6.5(b)(i). The CAT NMS Plan does not link
allocations to order events; see also 17 CFR
242.613(e)(1).
707 See CAT NMS Plan, supra note 3, at Appendix
D, Section 3.
708 This does not apply if regulators choose to
access raw data before the Central Repository
processed them.
706 See
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Further, the Plan would improve the
timeliness of FINRA’s access to the data
it uses for much of its surveillance by
several days because the corrected and
linked CAT Data would be accessible on
T+5 compared to FINRA’s T+8 access to
its corrected and linked data combining
OATS with exchange audit trails.
The expected improvements to data
accuracy discussed above could also
result in an increase in the timeliness of
data that is ready for analysis, although
uncertainty exists regarding the extent
of this benefit.709 As noted in the
Baseline, regulators currently take
significant time to ensure data is
accurate beyond the time that it takes
data sources to validate data. In some
cases, data users may engage in a
lengthy iterative process involving a
back and forth with the staff of a data
provider in order to obtain accurate data
necessary for a regulatory inquiry.
Accordingly, to the extent that the
Central Repository’s validation process
is sufficiently reliable and complete, the
duration of the error resolution process
regulators would perform with CAT
Data may be shorter than for current
data. Further, to the extent that the
Central Repository’s linking and
reformatting processes are sufficiently
successful, the SROs and Commission
may not need a lengthy process to
ensure the receipt of accurate data.
However, as discussed above, the
Commission lacks sufficient information
on the validations, linking, and
reformatting processes needed to draw a
strong conclusion as to whether users
would take less time to validate CAT
Data than they take on current data.710
Nonetheless, the Commission
preliminarily believes that the linking
and reformatting processes at the
Central Repository would be more
accurate than the current decentralized
processes such that it would reduce the
time that regulators spend linking and
reformatting data prior to use.
2. Improvements to Regulatory
Activities
The Commission preliminarily
believes that improvements in the
quality of available data have the
potential to result in improvements in
the analysis and reconstruction of
market events; market analysis and
research in support of regulatory
709 See
Section IV.E.1.b, supra.
discussed above, Rule 613 requires a
validation process but leaves significant flexibility
on the specific validations to be performed and the
timeline for validation. The details regarding
required validations do not appear in the CAT NMS
Plan and instead would appear in the Technical
Specifications, which would not be finalized until
after approval of the CAT NMS Plan. See Section
IV.E.1.b, supra.
710 As
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decisions; and market surveillance,
examinations, investigations, and other
enforcement functions.
Regulators’ abilities to perform
analyses and reconstructions of market
events would likely improve, allowing
regulators to more quickly and
thoroughly investigate these events.
This would allow regulators to provide
investors and other market participants
with more timely and accurate
explanations of market events, and to
develop more effective responses to
such events. The availability of the CAT
Data would benefit market analysis and
research in support of regulatory
decisions, facilitating an improved
understanding of markets and informing
potential policy decisions. Regulatory
initiatives that are based on an accurate
understanding of underlying events and
are narrowly tailored to address any
market deficiency should improve
market quality and benefit investors.
In the Commission’s preliminary
view, CAT Data would substantially
improve both the efficiency and
effectiveness of SRO broad market
surveillance programs, which could
benefit investors and market
participants by allowing regulators to
more quickly and precisely identify and
address a higher proportion of market
violations that occur, as well as prevent
violative behavior through deterrence.
The Commission also preliminarily
believes that CAT Data would enhance
the SROs’ and the Commission’s
abilities to effectively target risk-based
examinations of market participants
who are at elevated risk of violating
market rules, as well as their abilities to
conduct those examinations efficiently
and effectively, which could also
contribute to the identification and
resolution of a higher proportion of
violative behavior in the markets. The
reduction of violative behaviors in the
markets should benefit investors by
providing investors with a safer
environment for allocating their capital
and making financial decisions. A
reduction in violative behaviors could
also benefit market participants whose
business activities are harmed by the
violative behavior of other market
participants. The Commission further
believes that more targeted
examinations could also benefit market
participants by resulting in
proportionately fewer burdensome
examinations of compliant market
participants. A significant percentage of
Commission enforcement actions
involve trade and order data,711 and the
711 In 2015, the Commission filed 807
enforcement actions, including 39 related to insider
trading, 43 related to market manipulation, 124
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Commission also preliminarily believes
that CAT Data would significantly
improve the efficiency and efficacy of
enforcement investigations, including
insider trading and manipulation
investigations.
The Commission further anticipates
additional benefits associated with
enhanced abilities to handle tips,
complaints and referrals, and
improvements in the speed with which
they could be addressed, particularly in
connection with the significant number
of tips, complaints, and referrals that
relate to manipulation, insider trading,
or other trading and pricing issues.712
The benefits to investor protection of an
improved tips, complaints, and referrals
system would largely mirror the benefits
to investor protection that would accrue
through improved surveillance and
examinations efficiency.
a. Analysis and Reconstruction of
Market Events
The Commission preliminarily
believes that, if approved, the Plan
would improve regulators’ ability to
perform analysis and reconstruction of
market events. As noted in the Adopting
Release, the sooner regulators can
complete a market reconstruction, the
sooner regulators can begin reviewing
an event to determine what happened,
who was affected and how, if any
regulatory responses might be required
to address the event, and what shape
such responses should take.713
Furthermore, the improved ability for
regulators to generate prompt and
complete market reconstructions could
provide improved market knowledge,
which could assist regulators in
related to broker-dealers, 126 related to investment
advisers/investment companies, and one related to
exchange or SRO duties. In 2014, the Commission
filed 755 enforcement actions, including 52 related
to insider trading, 63 related to market
manipulation, 166 related to broker-dealers, and
130 related to investment advisers/investment
companies, many of which involved trade and
order data. See Year-by-Year SEC Enforcement
Statistics, available at https://www.sec.gov/news/
newsroom/images/enfstats.pdf. The total number of
actions filed is not necessarily the same as the
number of investigations. An investigation may
result in no filings, one filing, or multiple filings.
Additionally, trade and order data may be utilized
in enforcement investigations that do not lead to
any filings. Based on these numbers, the
Commission estimates that 30–50% of its
enforcement actions incorporate trading or order
data. A portion of FINRA’s 1,397 disciplinary
actions in 2014 and 1,512 in 2015 also involved
trading or order data. See https://www.finra.org/
newsroom/statistics.
712 In fiscal years 2014 and 2015, the Commission
received around 15,000 entries in its TCR system,
approximately one third of which related to
manipulation, insider trading, market events, or
other trading and pricing issues.
713 See Adopting Release, supra note 9, at 45732.
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conducting retrospective analysis of
their rules and pilots.
The fragmented nature of current
audit trail data and the lack of direct
access to such data renders market
reconstructions cumbersome and timeconsuming. Currently, the information
needed to perform these analyses is
spread across multiple audit trails, with
some residing in broker-dealer order
systems and trade blotters. Requesting
the data necessary for a reconstruction
of a market event often takes weeks or
months and, once received, regulators
then need weeks to reconcile disparate
data formats used in different data
sources. For example, on the afternoon
of May 6, 2010, the U.S. equity and
equity futures markets experienced a
sudden breakdown of orderly trading
when indices, such as the Dow Jones
Industrial Average Index and the S&P
500 Index, fell about 5% in five
minutes, only to rebound soon after (the
‘‘Flash Crash’’).714
The lack of readily available trade and
order data resulted in delays and gaps
in the Commission’s analysis of the
events of the Flash Crash. Ultimately, it
took Commission Staff nearly five
months to complete an accurate
representation of the order books of the
equity markets for May 6, 2010.715 Even
then, the reconstruction only contained
an estimated 90% of trade and order
activity for that day.
Regulators, such as the Commission
and SROs on whose exchanges events
took place, faced similar challenges
when reconstructing events around the
May 2012 Facebook IPO, the August
2012 Knight Securities ‘‘glitch,’’ and the
August 2013 NASDAQ SIP outage.716 In
addition, during the financial crisis in
2008, the lack of direct access to audit
trail data resulted in the Commission
being unable to quickly and efficiently
conduct analysis and reconstruction of
714 See CFTC and SEC, Findings Regarding the
Market Events of May 6, 2010: Report of the Staffs
of the CFTC and SEC to the Joint Advisory
Committee on Emerging Regulatory Issues
(September 30, 2010), available at https://
www.sec.gov/news/studies/2010/marketeventsreport.pdf.
715 For a further explanation of the limitations
data deficiencies imposed on the Commission’s
investigation into the Flash Crash, see Adopting
Release, supra note 9, at 45732–33.
716 For background information on these events,
see SEC Press Release, SEC Charges NASDAQ for
Failures During Facebook IPO (May 29, 2013),
available at https://www.sec.gov/News/PressRelease/
Detail/PressRelease/1365171575032; In the Matter
of Knight Capital Americas LLC, Securities
Exchange Release Nos. 70694 (October 16, 2013);
73639 (November 19, 2014), 79 FR 72252, 72255,
n.32 (December 5, 2014) (discussing NASDAQ SIP
outage); see also Adopting Release, supra note 9, at
45732–33 (discussing difficulty of analyzing and
reconstructing market events in absence of a
consolidated audit trail).
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market events. The state of OATS data
in 2008 also limited FINRA’s ability to
analyze and reconstruct the market
during the financial crisis because
FINRA could not yet augment its OATS
data with exchange data and OATS did
not include market maker quotations.
As a result, regulators had little
information about the role of short
sellers in market events and the identity
of short sellers during the financial
crisis, for example.717 Some of these
shortcomings in regulatory data still
apply today.718
More generally, regulators face
significant difficulties in using some
current data sources for a thorough
market reconstruction. Some of the most
detailed data sources, including sources
like EBS and trade blotters that identify
customers, are impractical for broadbased reconstructions of market events.
In particular, including EBS data for a
reconstruction of trading in the market
for even one security on one day could
involve many, perhaps hundreds, of
requests, and would require linking that
to SRO audit trail data or public data.719
717 See Short Sale Reporting Study, supra note
413. To resolve this lack of information, the
Commission issued an emergency order creating a
new filing requirement for 13f filers to report their
short positions and short sales to the Commission
weekly on Form SH. See former Rule 10a–3T;
available at https://www.sec.gov/rules/other/2008/
34-58591.pdf; https://www.sec.gov/rules/other/2008/
34-58591a.pdf; https://www.sec.gov/rules/other/
2008/34-58724.pdf; https://www.sec.gov/rules/final/
2008/34-58785.pdf; https://www.sec.gov/news/press/
2008/2008-209.htm; https://www.sec.gov/divisions/
marketreg/shortsaledisclosurefaq.htm. This data
was kept confidential. After evaluating whether the
benefits from the data justified the costs, the
Commission let this requirement expire, replacing
it with additional public data. See SEC Press
Release, SEC Takes Steps to Curtail Abusive Short
Sales and Increase Market Transparency (July 27,
2009), available at https://www.sec.gov/news/press/
2009/2009-172.htm. This public data did not
identify the short sellers as the Form SH data did.
In addition, using data requested from SROs, the
Commission conducted two studies on short selling
during September 2008. These studies required data
requests to select exchanges, took two months to
complete and did not have information identifying
short sellers. See ‘‘Analysis of a Short Sale Price
Test Using Intraday Quote and Trade Data’’
available at https://www.sec.gov/comments/s7-0809/s70809-368.pdf and ‘‘Analysis of Short Selling
Activity during the First Weeks of September 2008’’
available at https://www.sec.gov/comments/s7-0809/s70809-369.pdf.
718 For example, OATS still does not include all
principal orders or option data. See Section
IV.D.2.b(1)A, supra. Because FINRA collects some
exchange data, FINRA is able to merge exchange
quotes with OATS.
And although there is a proposed FINRA rule that
will require FINRA members to report to OATS
identification for their non-FINRA member
customers who are broker-dealers, even after
approval of this rule OATS will lack identification
for customers who are not broker-dealers. See
Section IV.D.2.b(1)B, supra.
719 See Section IV.D.2.b(3), supra (noting that in
2014, the SEC made 3,722 EBS requests which
generated 194,696 letters to broker-dealers
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Further, because EBS data lacks time
stamps for certain trades,720 use of EBS
data in market reconstructions requires
supplementation with data from other
sources, such as trade blotters.
The Commission therefore expects
that improvements in data completeness
and accuracy from the Plan would
enhance regulators’ ability to perform
analyses and to reach conclusions faster
in the wake of a market event by
reducing the time needed to collect,
consolidate and link the data. The
inclusion of Customer-IDs and
consistent CAT-Reporter-IDs in CAT
would allow regulators to more
effectively and efficiently identify
market participants that submit orders
through several broker-dealers and
execute on multiple exchanges and
whose activity may warrant further
analysis. This would be useful if
regulators were interested in
determining if a particular trader or
category of traders had some role in
causing the market event, or how they
might have adjusted their behavior in
response to the event, which could
amplify the effects of the root cause or
causes. Furthermore, the clock
synchronization requirements of the
Plan would improve the ability of
regulators to sequence some events that
happened in different market centers to
better identify the causes of market
events. Overall, the Commission
preliminarily believes that, if the Plan is
approved, regulators would have
dramatically improved ability to
identify the market participants
involved in market events.
The Commission further believes that
better data accessibility would
significantly improve the ability of
regulators to analyze and reconstruct
market events. As noted above, CAT
Data would improve data accessibility
relative to every other data source
because all SROs and the Commission
would have direct access to CAT Data.
If the Plan is approved, much of this
information would be housed in the
Central Repository with query
capabilities that would allow regulators
to access raw data beginning the day
requesting EBS data). The Commission understands
that FINRA makes about half this number of
requests.
720 Large traders who file Form 13H with the
Commission are assigned a ‘‘large trader
identification number’’ by the Commission and
must provide that number to their brokers for
inclusion in the EBS records that are maintained by
the clearing brokers. Rule 13h–1, subject to relief
granted by the Commission, requires that execution
time be captured (to the second) for certain
categories of large traders. See Sections IV.D.2.a.(3)
and IV.D.2.b, supra (discussing the EBS system and
large trader reports and the limitations of these data
sources in performing market reconstructions).
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after an event.721 Further, as mentioned
below in the SRO Surveillance Section,
the CAT Data would link Reportable
Events, which could allow regulators to
respond to market events more rapidly
because they would not need to process
corrected and linked data before starting
their analyses.722
b. Market Analysis and Research
The Commission preliminarily
believes that the CAT NMS Plan would
benefit the quality of market analysis
and research that is produced to
increase regulatory knowledge and
support policy decisions and would
lead to a more thorough understanding
of current markets and emerging issues.
These expected benefits would stem
from improvements in accessibility,
accuracy, and completeness of
regulatory data. Improvements in
regulatory market analysis and research
aimed at informing regulatory decisions
would benefit investors and market
participants by improving regulators’
understanding of the intricacies of
dynamic modern markets and how
different market participants behave in
response to policies and information.
These more nuanced and more thorough
insights would help regulators to
identify the need for regulation that
specifically tailors policies and
interventions to the diverse landscape of
market participants and conditions that
characterize current financial markets,
as well as assist them in conducting
retrospective analysis of their rules and
pilots.
A lack of direct access to necessary
data, along with inaccuracies in the data
that are available, currently limits the
types of analyses that regulators can
conduct. These data limitations
constrain the information available to
regulators when they are considering
the potential effects of regulatory
decisions. For example, in January 2010
the Commission published a concept
release on equity market structure that
discusses how the markets have rapidly
evolved from trading by floor-based
specialists to trading by high-speed
computers.723 The concept release poses
a number of questions about the role
and impact of high-frequency trading
721 While the Commission recognizes that some
data sources are currently available earlier, those
data sources are so fragmented as to make collecting
them for a broad-based market reconstruction
infeasible.
722 Such benefits could be limited for market
events that require linked data within five days of
an event or if the linking algorithm in the Central
Repository introduces data errors.
723 See Concept Release on Equity Market
Structure, supra note 733; see also Adopting
Release, supra note 9, at 45733 (discussing the
Concept Release on Equity Market Structure).
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strategies and the movement of trading
volume from the public national
securities exchanges to over-the-counter
trading venues such as dark pools. Over
the past five years there has been
considerable discussion about these
topics by regulators, market
participants, the media, and the general
public. Nevertheless, limitations in the
completeness and accessibility of the
available data have limited the research
that followed the concept release.
The Commission preliminarily
believes that the CAT NMS Plan
improves this situation, benefiting
market analysis and research in support
of SRO and Commission rulemaking. It
would provide direct access to data that
currently requires an often lengthy and
labor-intensive effort to request,
compile, and process. Additionally, the
expected improvements in accuracy and
completeness could benefit efforts to
analyze the activities of particular
categories of market participants,
understand order routing behavior,
identify short selling and short covering
trades, issuer repurchases, and related
topics. The requirement to store the data
in a uniform format in the Central
Repository is particularly important, as
linking and normalizing data from
disparate sources in different formats is
a major component of completing many
types of analyses and currently requires
a significant amount of time. The Plan
would provide direct access to data that
regulators could use to more directly
study issues such as high frequency
trading, maker-taker pricing structures,
short selling, issuer repurchases, and
ETF trading.
The CAT NMS Plan could improve
market analysis and research concerning
HFT by providing regulators with direct
access to more uniform and
comprehensive data that identifies HFT
activity more precisely compared to
existing academic research that
regulators currently utilize. Existing
academic research on high frequency
trading cannot precisely identify high
frequency traders or their trading
activity and more comprehensive
regulatory analysis on high frequency
trading currently relies on fragmented
data that is cumbersome to collect and
process.724 For both academics and
regulators, studying high frequency
traders is currently difficult because
these traders typically trade across
many exchanges, and often off-exchange
as well. NASDAQ distributes a trade
and quote dataset to researchers for the
purposes of performing academic
724 See High Frequency Trading, literature review,
available at https://www.sec.gov/marketstructure/
research/hft_lit_review_march_2014.pdf.
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studies on high frequency trading. This
dataset identifies the trading and
quoting activity of a group of high
frequency traders identified by
NASDAQ, but only includes activity
from the NASDAQ exchange. Other
exchanges and market centers currently
do not provide such data to academics
or the public.725 As a result, studies of
high frequency trading have been
limited in their ability to examine
thoroughly such strategies and their
impact on the market. Because data on
high-frequency trading tends to be
fragmented across many data sources, it
is difficult even for regulators to
thoroughly analyze their aggregate
activity level, study how their activity
on one exchange affects their activity on
another, and study the effect of
particular high frequency strategies on
market quality.726
The Plan also would provide
information on how various brokerdealers route their customer orders and
would allow regulators to study whether
access fees and rebates drive routing
decisions as much as execution quality
considerations. This could inform
debates about effects of conflicts of
interest created by such maker-taker
pricing. Studies of maker-taker pricing
require information on routing decisions
and how routing affects execution
quality. Current academic studies of
maker-taker pricing rely on data that
provide imprecise information that
cannot directly link routing and
execution quality, and current similar
research carried out by some regulators
is often hindered by the significant
amount of time it takes to obtain the
relevant data from all market centers.
However, the Plan would provide
regulators with direct access to a data
source that would link order lifecycle
events together in a way that would
allow regulators to more thoroughly
analyze how and where broker-dealers
route various order types. This could
assist regulators in analyzing the
importance of fees to the routing
decisions and the ultimate impact on
investors of any conflicts of interest in
broker-dealer routing decisions. Such
analysis could inform debates regarding
whether maker/taker pricing structures
are harmful to market structure.
Similarly, the Plan would provide
regulators with data to better
understand the nature of short selling.
Existing studies of the effects of short
selling lack the ability to associate short
725 Even if other exchanges did provide such data,
the NASDAQ data fields do not include the
identities of the high frequency traders. As a result
researchers would not be able to study the activity
of the same high frequency trader across exchanges.
726 See infra note 724.
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selling activity with customer-level
data, and also lack the ability to
distinguish buying activity that covers
short positions from buying activity that
establishes new long positions. The Plan
would allow regulators to examine, for
example, how long particular types of
traders hold a short position and what
types of traders short around corporate
events.
The Plan, in requiring information
about a Customer, would also facilitate
studies of how certain entities other
than natural persons trade and the
market impact of their trading. For
example, existing information on
repurchases is aggregated at the monthly
and quarterly level while the CAT Data
on issuer repurchases would be much
more granular. CAT Data would provide
information that could determine the
size and timing of issuer repurchases,
for example. In addition, CAT Data
would provide information that could
help identify open market repurchases
whereas existing data does not
distinguish the type of repurchase. As
such, the Plan would facilitate research
that addresses the timing of issuer
repurchases around corporate events or
stock option grants and exercises, the
extent to which issuers use the safe
harbor in Rule 10b–18, and how
aggressively issuers trade in the market.
In addition, CAT Data on the trading of
leveraged ETFs, particularly the end of
day rebalancing, could shed light on
how the leveraged ETFs relate to market
volatility. In addition, Customer
information should facilitate analyses of
the secondary market trading of ETF
Authorized Participants in their
ETFs.727 This could help regulators
better understand the arbitrage process
between an ETF and its underlying
securities and the limitations of that
arbitrage.
The Commission preliminarily
believes that CAT Data would also
better inform SROs and the Commission
in rulemakings and assist them in
conducting retrospective analysis of
their rules and pilots. In particular,
SROs would be able to use order data
that is currently not available to
examine whether rule changes are in the
interest of investors. For example, direct
access to consolidated audit trail data
that identifies trader types could help
an SRO examine whether a new rule
improved market quality across the
entire market and whether it benefitted
retail and institutional investors
specifically. Further, CAT Data would
allow SROs to examine whether a rule
727 The CAT NMS Plan does not include
requirements to record or report information on the
creation or redemption of ETF shares.
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change on another exchange was in the
interest of investors and whether to
propose a similar rule on their own
exchange.
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c. Surveillance and Investigations
The Commission preliminarily
believes that the enhanced surveillance
and investigations made possible by the
implementation of the CAT NMS Plan
could allow regulators to more
efficiently identify and investigate
violative behavior in the markets and
could also lead to market participants
that currently engage in violative
behavior reducing or ceasing such
behavior, to the extent that such
behavior is not already deterred by
current systems. The current markets
are characterized by surveillance
systems that identify violators so that
regulators may address these violations.
Given that violative behavior is
identifiable in current markets, and
potential violators know that there is a
positive probability that they would be
caught by surveillance should they
commit a violation, fewer potential
violators commit violations than would
do so in markets that had no
surveillance. Potential violators’
expected probability of being caught
influences their likelihood of
committing a violation.728 It then
follows that any system change that
increases the likelihood of violative
behavior detection would increase
potential violators’ expected probability
of being caught and thus reduce the
likelihood that potential violators would
commit a violation.
Specifically, if market participants
believe that the existence of CAT, and
the improved regulatory activities that
result from improvements in data and
data processes, increase the likelihood
of regulators detecting violative
behavior, they could reduce or eliminate
the violative activity in which they
engage to avoid incurring the costs
associated with detection, such as fines,
legal expenses, and loss of reputation.
Such a reduction in violative behavior
would benefit investor protection and
the market as investors would no longer
bear the costs of the violative behavior
728 It is well established in the economics and
political science literature that common knowledge
among market actors can lead to the deterrence of
behaviors; see, e.g., Schelling, Thomas, ‘‘The
Strategy of Conflict: Prospectus for a Reorientation
of Game Theory,’’ Journal of Conflict Resolution,
Vol. 2 No. 3 (1958) and Ellsberg, Daniel, ‘‘The
Crude Analysis of Strategic Choices,’’ American
Economic Review, Vol. 51, No. 2 (1961). Therefore,
market participants with knowledge of
improvements in the efficiency of market
surveillance, investigations, and enforcements, and
consequently the increased probability of incurring
a costly penalty, could be deterred from
participating in violative behavior.
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that would otherwise exist in the
current system. Many of the
improvements that would result from
CAT could also allow regulators to
identify violative activity, such as
market manipulation, more quickly and
reliably, which could improve market
efficiency by deterring market
manipulation and identifying and
addressing it more quickly and more
often when it occurs.729
(1) SRO Surveillance
The Commission preliminarily
believes that the CAT NMS Plan would
result in improvements in SROs’
surveillance capabilities and that many
of the benefits to SRO surveillance stem
from improvements to data
completeness. These benefits
encompass a number of improvements
to surveillance, including: detection of
insider trading; surveillance of principal
orders; cross-market and cross-product
surveillance, and other market
surveillance activities.
Rule 613(f) requires SROs to
implement surveillances reasonably
designed to make use of the CAT
Data.730 Further, data improvements
resulting from the Plan would improve
regulators’ ability to perform
comprehensive and efficient
surveillance. As a result, the market
surveillances required by Rule 613(f)
could identify a broader and more
nuanced set of market participant
behaviors. As such, the CAT would also
provide the opportunity for
development of more effective and
efficient surveillance system. It is also
possible that the CAT Data and tools
would enable further innovations in
market surveillance beyond those
currently contemplated. These
innovations could be in response to new
developments in the market over the
next few years or to the new capabilities
for regulators.
CAT Data would include additional
fields not currently available in data
used for surveillance.731 The inclusion
729 For example, as discussed in Section
IV.E.2.c(1), the Plan would allow regulators to more
efficiently conduct cross-market and cross-product
surveillance relative to surveillance using current
data sources, and the requirement that data be
consolidated in a single database would assist
regulators in detecting violative (but not obvious)
activity. To the extent that market participants are
aware of the current challenges to regulators in
performing cross-market surveillance and
aggregating data across venues, and to the extent
that they believe that their violative behavior is
more likely to be detected if regulators’ ability to
perform those activities improves, they may reduce
or eliminate violative behavior if the CAT Plan is
approved.
730 17 CFR 242.613(f).
731 As noted in Section IV.D.1.c, this economic
analysis considers surveillance to be SROs running
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of Customer-IDs in the CAT would
significantly improve surveillance
capabilities, including surveillance
designed to detect market manipulation
and insider trading. Because currently
available data do not include customer
identifiers, SROs performing insider
trading and manipulation surveillance
could be unable to identify some
suspicious trading 732 and must
undertake multiple steps to request
additional information after identifying
suspect trades. The ability to link
uniquely identified customers with
suspicious trading behavior would
provide regulators with better
opportunity to identify the distribution
of suspicious trading instances by a
customer as well as improving
regulators’ ability to utilize customerbased risk assessment. This enhanced
ability to link customers with behaviors
would enable detection of market
abuses that are perpetrated by customers
trading or quoting through multiple
accounts or on multiple trading venues.
Furthermore, having direct access to
data could assist an SRO in its
surveillance activities by potentially
facilitating quicker responses to
suspicious trading activity.
Additionally, the inclusion of the
principal orders of members would
enable regulators to better identify rule
violations by broker-dealers that have
not previously had to provide audit trail
data on their unexecuted principal
orders. The evolution of the market has
increased the importance of surveillance
on principal orders. Many of these
principal orders originate from
algorithmic or high frequency trading
firms who have been the recent subject
of regulatory interest.733 Further, some
rules and regulations provide for
differential treatment of the principal
orders of broker-dealer market makers.
Yet, some current data sources used for
SRO surveillance exclude unexecuted
principal orders,734 limiting the
processing on routinely collected or in-house data
to identify potential violations of rules or
regulations.
732 The Commission understands that SRO
surveillances on topics such as insider trading and
market manipulation do not incorporate data that
identifies customers. Based on alerts from their
surveillances, SROs may open a review that runs
through several stages of data requests before
identifying a customer. As discussed above, the
Commission notes that SRO audit trails typically do
not provide customer information but a recent
FINRA rule change would require its members to
report to OATS non-FINRA member customers who
are broker-dealers. See supra note 407.
733 See Securities Exchange Act Release No.
61358 (January 14, 2010), 75 FR 3594 (January 21,
2010) (‘‘Concept Release on Equity Market
Structure’’); Exemption for Certain Exchange
Members, supra note 394.
734 See Section IV.D.2.b(1), supra.
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surveillance for issues such as wash
sales. As a result, many surveillance
patterns are unable to detect certain rule
violations involving principal orders.
The Plan would also improve
regulators’ efficiency in conducting
cross-market and cross-product
surveillance. The Plan would
particularly enhance regulators’ ability
to perform cross-market surveillance,
across equity and options markets, by
enabling any regulator to surveil the
trading activity of market participants in
both equity and options markets and
across multiple trading venues without
data requests. Regulators would also
have access to substantially more
information about market participants’
activity,735 and the requirement that the
data be consolidated in a single database
would assist regulators in detecting
activity that may appear permissible
without evaluating data from multiple
venues.736 Likewise, it would assist
regulators in detecting activity that may
not appear violative without evaluating
data from multiple venues.
Increasing market complexity and
fragmentation has increased the
importance of cross-market surveillance.
The Commission noted in its Regulation
of NMS Stock Alternative Trading
Systems proposing release that, ‘‘[i]n the
seventeen years since the Commission
adopted Regulation ATS, the equity
markets have evolved significantly,
resulting in an increased number of
trading centers and a reduced
concentration of trading activity in NMS
stocks.’’ 737 However, because market
data are fragmented across many data
sources and because audit trail data
lacks consistent customer identifiers,
regulators cannot run cross-market
surveillance tracking particular
customers.738 Furthermore, routine
735 For example CAT Data would include
Customer information, subaccount allocation
information, exchange quotes, trade and order
activity that occurs on exchanges, trade and order
activity that occurs at broker-dealers that are not
FINRA members, and trade and order activity that
occurs at FINRA members who are not currently
required to report to OATS. In addition CAT Data
would require reporters to report data in
milliseconds and would be directly available to
non-FINRA regulators much faster than OATS is
currently available to them. See Section IV.E.1.a,
supra.
736 See Section IV.E.1.c(2), infra. The Commission
notes that while this is a benefit allowed by
consolidation of data in the Central Repository,
linked data would not be available in the Central
Repository until T+5, which may delay the
completion of surveillance activities.
737 See Securities Exchange Act Release No.
76474 (November 18, 2015), 80 FR 80998
(December 28, 2015), at 81000.
738 As noted in the above, SROs currently do not
conduct routine surveillance that tracks particular
customers because data currently used for
surveillance does not include customer
information.
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cross-product surveillance is generally
not possible with current data. The
potential enhancements in market
surveillance enabled by the CAT NMS
Plan are likely to result in more capable
and efficient surveillance which could
reduce violative behavior and protect
investors from harm.
(2) Examinations
The Commission preliminarily
believes that availability of the CAT
would also improve examinations and
that these improvements would benefit
investor protection, and the market in
general, by resulting in more effective
supervision of market participants. The
Commission conducted 493 brokerdealer examinations in 2014 and 484 in
2015, 70 exams of the national securities
exchanges and FINRA in 2014 and 21 in
2015. In addition, the Commission
conducted 1,237 investment adviser and
investment company examinations in
2014 and 1,358 in 2015. Virtually all
investment adviser examinations and a
significant proportion of the
Commission’s other examinations
involve analysis of trading and order
data. Currently some data that would be
useful to conduct risk-based selection
for examinations, such as trade blotters,
are not available in data sources
available for pre-exam analysis.739
Further, data available during exams
often require regulatory Staff to link
multiple data sources to analyze
customer trading. For example, some
customer identities are present in EBS
data, but time stamps are not. To
evaluate the execution price a customer
received, it is necessary to know the
time of the trade to compare the price
of the customer’s execution with the
prevailing market prices at that time.
This requires linking the EBS data with
another data source that contains trades
with time stamps (such as the trade
blotter). These linking processes can be
labor-intensive and require the use of
algorithms that may not link with 100%
accuracy. Finally, for investment
adviser examinations, examiners
sometimes use non-trading data such as
Form PF, Form 13–F, Form ADV, and
clearing broker reports as a proxy for
trading data when selecting investment
advisers for examinations. The CAT
would improve examinations in the
following specific ways.
First, the Commission preliminarily
believes that the expected
improvements in the data qualities
discussed above would enhance the
739 Regulators can obtain detailed equity
transaction data by requesting a trade blotter from
a particular firm; however, the data would only
show the activity of that firm.
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ability of regulators to select market
participants for focused examinations
on the basis of risk. The direct access to
consolidated data in a single location
would dramatically improve regulators’
ability to efficiently conduct analyses in
an attempt to select broker-dealers and
investment advisers for more intensive
examinations based on identified risk.
Having CAT Data stored in the Central
Repository in a linked format would
allow examiners to access much more
data directly through a query and
without performing the linking process
on an ad-hoc basis than is currently
available before an exam. The ability to
use Customer Account Information in
the process for selecting investment
advisers for exams, for example, could
allow those selection models to
incorporate trading data directly instead
of imperfect proxies for trading data.
This could lead to improved outcomes
for risk-based examinations, such as
more regulatory resources invested in
examining market participants who are
at an elevated risk of violating federal
securities laws, rules, and regulations,
and SRO rules, and a reduction in the
proportion of examinations that might
not have been necessary if a more
complete view of the market
participant’s activity had been available.
Compliant market participants could
benefit from a reduction in the relative
frequency of burdensome examinations.
Improvements in the breadth and
effectiveness of risk-based examination
would help protect investors by
increasing the likelihood of identifying
market participants who are violating
laws, rules and regulations.
Second, the Commission
preliminarily believes that with the
CAT, regulators would be able to
examine market participants more
effectively. In particular, regulators
would be able to conduct certain types
of exams more efficiently because of the
inclusion of Customer-IDs in CAT. In
addition, direct access to CAT Data
would provide examination Staff with
the ability to conduct more analysis
prior to opening an examination
because data would be available without
the need to make a formal data request.
In addition, the clock synchronization
provisions of the Plan could aid
regulators in sequencing some events
more accurately, thereby facilitating
more informed exams.740 In sum, the
Plan would allow the data collection
portion of examinations to be completed
more quickly with fewer formal data
requests. More efficient examinations
would help regulators better protect
740 See Sections IV.D.2.b(2), supra and
IV.H.2.a(1), infra.
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investors from the violative behavior of
some market participants and could
reduce examination costs for market
participants who would have otherwise
faced examinations that are less focused
and more lengthy.
(3) Enforcement Investigations
Many Commission enforcement
actions involve trade and order data.741
The Commission preliminarily believes
that the improvements in data qualities
that would result from the CAT NMS
Plan 742 would significantly improve the
efficiency and efficacy of enforcement
investigations, including insider trading
and manipulation investigations. The
Commission believes that more efficient
and effective enforcement activity is
beneficial to both investors and market
participants because it deters violative
behavior that degrades market quality
and that imposes costs on investors and
market participants.
Dramatic expected benefits come from
improvements to the accuracy,
accessibility, timeliness, and
completeness of the data. As noted
above,743 compiling the data to support
an investigation often requires a
tremendous amount of time and
resources and requires multiple requests
to multiple data sources and significant
data processing efforts, for both SROs
and the Commission. While individual
SROs have direct access to the data from
their own markets, their investigations
often require access to the data of other
SROs because firms trade across
multiple venues. Some enforcement
investigations, including those on
insider trading and manipulation,
require narrow market reconstructions
that allow investigators to view actions
and reactions across the market.
Currently, the data fragmentation and
the time it takes to receive requested
data, makes these market
reconstructions cumbersome and timeconsuming. Further, new data fields
related to Customer information and the
Allocation Reports should improve the
completeness of the data available to
investigators.
Under the CAT NMS Plan, the data
for an enforcement investigation
initiated at least five days after an event
would be processed, linked, and
available for analysis within 24 hours of
a query, instead of the current timeline
of weeks or longer. Further, some of the
data processing steps that are now
performed on an ad-hoc basis during an
investigation would be systematically
741 See
supra note 711 and accompanying text.
Section IV.E.1, supra.
743 See Sections IV.D.2.b(3) and IV.D.2.b(4),
supra.
742 See
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performed by the Plan Processor in
advance.744 The availability of
uncorrected data by noon on T+1 could
improve the Commission’s chances of
preventing asset transfers from
manipulation schemes because
regulators could use the uncorrected
data to detect the manipulation and
identify the suspected manipulators.745
These improvements could shorten the
times required to collect the data for
investigations.
Other expected benefits stem from
improvements in the accuracy and
completeness of the data. The inclusion
and expected improvement in the
accuracy of customer identifying data
could allow regulators to review the
activity of specific market participants
more efficiently; currently, identifying
the activity of a single market
participant across the market is
cumbersome and prone to error.746 This
information would be particularly
helpful in identifying insider trading,
manipulation and other potentially
violative activity that depends on the
identity of market participants.
Customer information could also be
helpful to regulators in more efficiently
identifying investors who qualify for
disgorgement proceeds and in
estimating such disgorgement proceeds.
The Commission also believes that
increasing the proportion of market
events that could be sequenced under
the CAT NMS Plan could yield some
benefits in enforcement investigations,
improving investigations of insider
trading, manipulation, and compliance
with Rule 201 of Regulation SHO and
Rule 611 of Regulation NMS.747 The
expected improvements in
completeness could also benefit
investigations by allowing regulators to
observe in a consolidated data source
relevant data that are not available in
some or all current data sources,
including time stamps, principal orders,
non-member activity, allocations, and
the identification of whether a trade
increases or decreases an existing
position. This data could be important,
for example, when investigating
allegations of market manipulation or
cherry-picking in subaccount
allocations. Having disaggregated
information about allocations and issuer
repurchases also could facilitate new
ways to investigate allegations of unfair
Section IV.E.1.d(4), supra.
Section IV.D.2.b(4), supra.
746 See Section IV.D.2.b(2)D, supra.
747 Again, benefits associated with the ability to
sequence events may be limited in some cases
because many order events would not be able to be
sequenced completely with the standards
established in the CAT NMS Plan. See Section
IV.D.2.b(2)B.i, supra.
30699
allocations and new ways to investigate
and monitor manipulation through
issuer repurchases.
(4) Tips and Complaints
The Commission preliminarily
believes that the CAT NMS Plan would
improve the process for evaluating tips
and complaints by allowing regulators
to more effectively triage tips and
complaints, which could focus
resources on behavior that is most likely
to be violative.748 The SROs and
Commission evaluate thousands of tips
and complaints regarding trading
behavior each year. In fiscal years 2014
and 2015, the Commission received
around 15,000 entries in its TCR system,
approximately one third of which
related to manipulation, insider trading,
market events, or other trading and
pricing issues. As stated in the Baseline
Section, the analysis of tips and
complaints follows three general stages.
The Commission expects that the Plan
would improve the second and third
stages, the third in ways described in
the Examinations and Enforcement
Investigations Sections.749 The second
stage in the evaluations of tips, which
help regulators determine the credibility
of a tip or complaint, is limited by a lack
of direct access to the most useful data;
specifically, customer information and
cross-market data.750 The availability of
the CAT Data would drastically increase
the detail of data available to regulators
for the purposes of tip assessment. This
access would assist the SROs and
Commission in identifying which tips
and complaints are credible, would help
ensure that regulators open
investigations or examinations on
credible tips and complaints, and would
limit regulatory resources spent on
unreliable tips and complaints.
Likewise, regulated market participants
would likely benefit from a reduction in
unnecessary burdens placed upon them
by inquiries that are related to tips that
the CAT Data could show are not
credible.
3. Other Provisions of the CAT NMS
Plan
The Commission notes that there are
a number of provisions of the CAT NMS
Plan that provide for features that are
uniquely applicable to a consolidated
audit trail or otherwise lack a direct
analog in existing data systems.
744 See
745 See
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748 See SEC Office of the Whistleblower, What
Happens to Tips, https://www.sec.gov/about/
offices/owb/owb-what-happens-to-tips.shtml.
749 See Sections IV.D.2.a(4), supra.
750 Cross-market data is especially key to market
manipulation complaints, because regulators may
need to examine a broad range data to see if a
complaint is valid.
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Therefore, rather than analyze the
benefits of these provisions as compared
to existing NMS Plans or data systems,
the Commission has analyzed these
provisions in comparison to a CAT NMS
Plan without these features. The
Commission preliminarily believes that
these provisions of the CAT NMS Plan
increase the likelihood that the potential
benefits of the CAT NMS Plan described
above would be realized.
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a. Future Upgrades
Several provisions in the Plan seek to
ensure that the CAT Data would
continually be updated to keep pace
with technological and regulatory
developments. For example, the Plan
would require that the Chief
Compliance Officer review the
completeness of CAT Data
periodically,751 that the Central
Repository be scalable to efficiently
adjust for new requirements and
changes in regulations,752 and that
Participants provide the SEC with a
document outlining how the
Participants could incorporate
information on select additional
products and related Reportable
Events.753 The Commission
preliminarily believes that these
provisions would allow the CAT to be
updated if and when the applicable
technologies and regulations change.
Specifically, Rule 613(b)(6)(ii) and
(iii) require that the Plan include a
provision requiring a report at least
every two years that details potential
improvements in the CAT, such as
incorporating new technology to
improve system performance. Such a
report would also include the costs of
any such improvements. The CAT NMS
Plan delegates responsibility for the
report to the Chief Compliance Officer.
Section 6.1(d)(iv) of the Plan, with
respect to new functionality, requires
the Plan Processor to ‘‘design and
implement appropriate policies and
procedures governing the determination
to develop new functionality for the
CAT including, among other
requirements, a mechanism by which
changes can be suggested by Advisory
Committee members, Participants, or
the SEC,’’ as well as providing for the
escalation of reviews of proposed
technological changes and upgrades to
751 See CAT NMS Plan supra note 3, at Sections
4.12(b)(ii), 6.2(a)(v)(E). The Chief Compliance
Officer would be required to perform reviews on
matters including the completeness of information
submitted to the Plan Processor or Central
Repository and report findings periodically to the
Operating Committee.
752 See id. at Appendix D, Section 1.1.
753 See id. at Section 6.11. This document is due
within six months of the Effective Date of the CAT
NMS Plan.
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the Operating Committee, and for
addressing the handling of surveillance.
With respect to upgrades to maintain
existing functionality, the Plan
Processor could evaluate and implement
potential system changes and upgrades
to maintain and improve the normal
day-to-day operating function of the
CAT System; material system changes
and upgrades are to be performed by the
Plan Processor in consultation with the
Operating Committee.754 The Plan
Processor may on its own discretion
initiate changes or upgrades to ensure
compliance with applicable legal
requirements.755 Regular reports on the
operations and maintenance of the CAT
System are to be provided by the Plan
Processor to the Operating Committee,
including reports on system
improvements contemplated in
Appendix D, Upgrade Process and
Development of New Functionality.756
Section 11 of Appendix D sets out the
obligations of the Plan Processor with
respect to the requirements discussed
above (e.g., to develop a process to add
functionality to CAT, including
reviewing suggestions submitted by the
SEC). The Plan Processor must create a
defined process for developing impact
assessments, including implementation
timelines for proposed changes, and a
mechanism by which functional
changes that the Plan Processor wishes
to undertake could be reviewed and
approved by the Operating Committee.
The Plan Processor ‘‘shall not
unreasonably withhold, condition, or
delay implementation of any changes or
modifications reasonably requested by
the Operating Committee.’’ 757 There
must be a similar process to govern the
changes to the Central Repository
discussed above—i.e., business-as-usual
changes that could be performed by the
Plan Processor with only a summary
report to the Operating Committee,
versus infrastructure changes that
would require approval by the
Operating Committee.758 Finally, a
process for user testing of new changes
must be developed by the Plan
Processor.759
Appendix C notes that the Plan
Processor must ensure that the Central
Repository’s technical infrastructure is
scalable (to increase capacity to handle
increased reporting volumes); adaptable
(to support future technology
developments so that new requirements
could be incorporated); and current (to
754 See
id. at Section 6.1(j).
id. at Section 6.1(k).
756 See id. at Section 6.1(o).
757 See id. at Appendix D, Section 11.1.
758 See id at Appendix D, Section 11.2.
759 See id. at Appendix D, Section 11.3.
ensure, through maintenance and
upgrades, that technology is kept
current, supported, and operational).760
These provisions are designed to
ensure that the Participants consider
enhancing and expanding CAT Data
shortly after initial implementation of
the CAT NMS Plan and that the
Participants consider improvements
regularly continuing forward. The
Commission preliminarily expects that,
in addition to these provisions, the CCO
review would further facilitate proactive
expansion of CAT to account for a
regulatory change or change in how the
market operates, or should there be a
need for regulators to have access to
new order events or new information
about particular order events. To the
extent that the Participants determine
that an expansion is necessary and it is
approved by the Commission, the Plan’s
scalability provision promotes the
efficiency of the implementation of that
expansion such that it could be
completed at lower cost and/or in a
timely manner.
Taken together, these provisions
could also provide a means for the
Commission to ensure that
improvements to CAT functionality are
considered so as to preserve its existing
benefits, or that expansion of CAT
functionality is undertaken in order to
create new benefits. These methods are
not certain, but the Commission does
retain the ability to modify the Plan, if
such a step becomes necessary to ensure
that future upgrades are undertaken as
necessary.761 Moreover, the focus on
scalability, adaptability, and timely
maintenance and upgrades promotes a
system that could be readily adapted
over time, versus one that is difficult or
costly to expand or modify. The
Commission preliminarily believes that
the provisions outlined above would
allow the CAT Data to be continually
updated to keep pace with technological
and regulatory developments.
b. Promotion of Accuracy
The Commission notes that the Plan
contains specific provisions designed to
generally promote the accuracy of
information contained in the Central
Repository. The CCO is required, among
other responsibilities, to perform
reviews related to the accuracy of
information submitted to the Central
Repository and report to the Operating
Committee with regard thereto,762 and
there is a special Compliance
Subcommittee of the Operating
755 See
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760 See
id. at Appendix C, Section A.5(a).
17 CFR 242.608.
762 See CAT NMS Plan, supra note 3, at Section
6.2(a)(v)(E).
761 See
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Committee, which is established to aid
the CCO with regard to, among other
things, issues involving the accuracy of
information.763 The Plan also contains
certain other provisions intended to
monitor and address Error Rates.764
The Operating Committee is
responsible for adopting policies and
procedures regarding the accuracy of
CAT Data, which the Plan Processor
shall be responsible to implement.765
The Plan Processor in turn must provide
regular reports regarding accuracy
issues to the Operating Committee,
specifically Error Rates relating to the
Central Repository, including (to the
extent the Operating Committee deems
necessary or advisable) Error Rates by
day, changes in the Error Rates over
time, and Compliance Thresholds by
CAT Reporter, by Reportable Event, by
age before resolution, by symbol, by
symbol type, and by event time. The
Plan documents an initial Error Rate
tolerance of 5%, but requires that, at
least annually, the Plan Processor
review the Error Rates and make
recommendations to the Operating
Committee for proposed changes to the
maximum Error Rate; and requires that
the Operating Committee set and
periodically review the maximum Error
Rate.766
Under the Plan, the Plan Processor
would also provide details to each CAT
Reporter on the number of rejected
records and the reasons for their
rejection on a daily basis. And on a
monthly basis, the Plan Processor would
publish report cards that would allow
CAT Reporters to compare their Error
Rates with those of industry peers; this
is similar to the process used by FINRA
for OATS reporting. The Plan Processor
would notify each CAT Reporter that
exceeds the maximum Error Rate, and
provide the specific reporting
requirements that they did not fully
meet. Participants and the SEC could
request reports on Error Rates from the
Plan Processor. The Plan Processor
would also provide statistics on each
CAT Reporter’s Compliance
Thresholds—the CAT Reporter’s
specific Error Rate, which could serve as
the basis for a review or investigation
into the CAT Reporter’s performance by
the Participants or the SEC for failure to
comply with CAT reporting
obligations—to the Participants or the
SEC.
In addition to providing CAT
Reporters data on their Error Rates, the
Plan states that the Participants believe
that in order to meet Error Rate targets,
industry would require certain
resources, including a stand-alone
testing environment, and time to test
their reporting systems and
infrastructure. The Technical
Specifications must also be well-written
and effectively communicated to CAT
Reporters with sufficient time to allow
proper systems updates.767 Finally, the
Plan notes that reporters may be subject
to penalties or fines for excessive Error
Rates, to be defined by the Operating
Committee.768
The Commission preliminarily
believes that these provisions to
document Error Rates and promote data
accuracy are reasonably designed to
improve the overall accuracy of CAT
Data relative to the exclusion of such
provisions; however, the Commission
also preliminarily believes that certain
procedures outlined in the Plan may not
incentivize all firms to further improve
the quality of the data they report. The
Commission recognizes that providing
feedback to individual CAT Reporters
on their individual Error Rates and
information that compares Error Rates to
industry peers could motivate firms
with high Error Rates to reduce those
rates, to avoid accruing penalties and
fines associated with being a high Error
Rate CAT Reporter.769 However, it is not
clear what incentive, if any, would be
provided to firms with median Error
Rates to improve their regulatory data
reporting processes; this could
collectively limit industry’s incentives
to reduce Error Rates. Furthermore, the
Commission notes that, under the Plan,
proposals to adjust the maximum
allowable Error Rate are to originate
from the Plan Processor. The
Commission preliminarily believes that
the Participants (as data users) have
incentives to pursue lower Error Rates
as data errors could complicate their
efforts to perform their regulatory
responsibilities. However, the
Commission preliminarily believes that
the Plan Processor would also have to
allocate resources to error resolution, so
could be incentivized to pursue Error
Rate reduction.
The Commission notes that the Plan
includes provisions requiring the
establishment of a symbology database
that will also foster accuracy. The Plan
requires the Central Repository to create
and maintain a symbol history and
mapping table, as well as provide a tool
to regulators and CAT Reporters
767 See
763 See
id. at Section 4.12(b).
764 See id. at Appendix C, Section A.3(b).
765 See id. at Section 6.5(d).
766 See id. at Section 6.5(d)(i).
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id. at Appendix C, Section A.3(b).
id. at Appendix C, Section A.3(b), n.101.
769 The Commission understands that OATS has
an analogous feedback system, but not all current
data sources have such a system.
768 See
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showing the security’s complete symbol
history, along with a start of day and
end of day list of reportable securities
for use by CAT Reporters, in .csv format,
by 6:00 a.m. on each trading day.770
This resource will assist regulators in
accurately identifying all trading
activity of securities across venues,
many of which do not natively follow
listing exchange symbology.
Regarding the Plan’s business clock
synchronization requirements, the Plan
also discusses the expectation that
Participants and their Industry Members
will each be required to maintain a fiveyear running log, or comparable
procedure, documenting the time of
each clock synchronization performed
and the result of such synchronization.
These practices would reveal the
parameters of any discrepancies,
between Business Clocks and NIST, that
exceed 50 milliseconds.771 As
mentioned above, there is currently
uncertainty regarding clock offsets,
clock drift, and synchronization
practices of Participants and Industry
Members and the required practice of
systematically maintaining five-year
logs regarding these details should
improve regulatory and industry
understanding of these dynamics, which
should provide a clearer foundation for
evaluating the standards set in the Plan
upon which future improvements could
be considered.
c. Promotion of Timeliness
In addition to the specific timeliness
benefits discussed in the foregoing
Sections, the Plan contains some
provisions that promote performance of
the Central Repository, and that
therefore could indirectly improve the
timeliness of regulator access to or use
of the CAT Data. These are found in
capacity requirements for the Plan
Processor, disaster recovery
requirements to ensure the availability
of the system, and in supervision and
reporting of timeliness issues.
Specifically, first, the Plan Processor
must measure and monitor Latency
within the Central Repository’s systems,
must establish acceptable levels of
Latency with the approval of the
Operating Committee, and must
establish policies and procedures to
ensure that data feed delays are
communicated to CAT Reporters, the
Commission, and Participants’
regulatory Staff.772 The Plan further
provides that ‘‘[a]ny delays will be
770 See CAT NMS Plan, supra note 3, at Appendix
D, Section 2.
771 Id. at Appendix C, Section A.3(c).
772 See CAT NMS Plan, supra note 3, at Appendix
D, Section 8.3.
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posted for public consumption, so that
CAT Reporters may choose to adjust the
submission of their data
appropriately. . . .’’ 773 The Plan
Processor must also provide relevant
parties, as well as to the public, with
approximate timelines provided for
system restoration.774 Moreover, the
Central Repository is required to be
designed to meet certain capacity
standards, including handling abovepeak submission volumes, storing data
for a sliding 6 year window (more than
29 petabytes of raw, uncompressed
data), and the ability to add capacity
quickly and seamlessly if needed.775
Second, the Plan Processor must
develop disaster recovery and business
continuity plans to support the
continuation of CAT business
operations.776 Business continuity
planning must include a secondary site
for critical staff, capable of recovery and
restoration of services within 48 hours,
with the goal of next day recovery.777
The secondary site must have the same
level of availability, capacity,
throughput and security (physical and
logical) as the primary site—i.e., it must
be fully redundant.778 Thus, in the
event of a widespread disruption, delays
to CAT processing and regulator access
to CAT of greater than a day or two
could likely be prevented.
Third, the Chief Compliance Officer
of the Plan Processor must conduct
regular monitoring of the CAT System
for compliance, including with respect
to the reporting and linkage
requirements in Appendix D.779
Moreover, the Plan Processor must
provide the Operating Committee with
regular reports on the CAT System’s
operations and maintenance, including
its capacity and performance, as set out
in Appendix D.780
Finally, one caveat on the foregoing
discussion is that system performance
would in part be dependent on a series
of SLAs to be negotiated between the
Plan Participants and the eventual Plan
Processor, including with respect to
linkage and order event processing
performance, query performance and
response times, and system
availability.781 As these have not yet
actually been negotiated, some of the
key timeliness benefits anticipated to
accrue from implementation of the Plan
could be subject to the successful
773 Id.
774 Id.
775 See
776 See
id. at Appendix D, Section 1.3.
id. at Appendix D, Sections 5.3–5.4.
777 Id.
778 Id.
id. at Section 6.2(a)(v)(J).
id. at Section 6.1(o)(i).
781 See id. at Appendix D, Section 8.5.
negotiation on an acceptable basis of the
terms of the SLAs.
d. Operation and Administration of the
CAT NMS Plan
There are certain elements of the CAT
NMS Plan’s governance that, like the
other factors discussed in this
subsection, are uniquely applicable to a
consolidated audit trail, and that the
Commission therefore analyzed in
comparison to a CAT NMS Plan without
these features (or that implements those
features in a different way). The
Commission preliminarily believes that
these provisions of the CAT NMS Plan
increase the likelihood that the potential
benefits of the CAT NMS Plan described
above would be realized.
(1) Introduction
In adopting Rule 613, the Commission
established certain requirements for the
governance of the CAT NMS Plan,
stating that those ‘‘requirements are
important to the efficient operation and
practical evolution of the [CAT], and are
responsive to many commenters’
concerns about governance structure,
cost allocations, and the inclusion of
SRO members as part of the planning
process.’’ 782 The Commission did not,
in Rule 613, establish detailed
parameters for the governance of the
CAT NMS Plan, but rather allowed the
SROs to develop specific governance
provisions, subject to a small number of
requirements. Recognizing that Rule 613
left Plan Participants with wide latitude
to determine how to structure the Plan’s
governance, the Commission in the
Adopting Release also stated that
‘‘[a]fter the SROs submit the NMS plan,
the Commission and the public will
have more detailed information in
evaluating the NMS plan.’’ 783
The Plan’s governance is described in
greater detail in Section III.A.3. above,
but generally consists of a Delaware
LLC, which is to ‘‘create, implement,
and maintain the CAT and the Central
Repository,’’ and which is to be
managed by the Operating Committee,
consisting of one voting representative
of each SRO Participant. The Operating
Committee acts by majority or
Supermajority Vote, depending on the
issue. An Advisory Committee that
includes a mix of broker-dealers, as
required by Rule 613, is to ‘‘advise the
[Operating Committee] on the
implementation, operation and
administration of the central
779 See
780 See
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782 See
783 Id.
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repository.’’ 784 These features are
analyzed in greater detail below.
The Commission preliminarily
believes that the governance provisions
identified in the Adopting Release
continue to be important to the efficient
operation and practical evolution of the
Plan, particularly given that there are a
range of possible outcomes with respect
to both the costs and benefits of the Plan
that depend on future decisions. The
way in which the identified governance
provisions have been incorporated into
the Plan, as discussed in greater detail
below, could help facilitate better
decision-making by the relevant parties.
This, in turn, means that the
Commission could have greater
confidence that the benefits resulting
from implementation of the Plan would
be achieved in an efficient manner and
that costs resulting from inefficiencies
would be avoided.
The Commission notes that it can
monitor whether the benefits of CAT are
being achieved. For example, certain
Operating Committee actions are subject
to Commission approval.785 The
Commission also retains the ability to
modify the Plan as it may deem
necessary or appropriate.786 To enable
the Commission to exercise its oversight
authority in an informed manner and to
make its views known, representatives
of the Commission are permitted to
attend meetings of the Operating
Committee, although the Commission
representatives may be excluded from
Operating Committee Executive
Sessions.787 Moreover, the Commission
is entitled to receive information
regarding the performance of the Central
Repository, including a Regular Written
Assessment of the operation of the
Central Repository at least every two
years, or more frequently in connection
with any review of the Plan Processor’s
performance. The assessment would
cover the performance metrics specified
in Rule 613(b)(6)(i).788 The Commission
784 See Rule 613(b)(7). Whereas Section 4.13(b)
requires that the Operating Committee select
representatives of different types of broker-dealers,
it specifies that Advisory Committee representatives
would ‘‘serve on the Advisory Committee on behalf
of himself or herself individually and not on behalf
of the entity for which the individual is then
currently employed.’’ See CAT NMS Plan, supra
note 3, at Section 4.13(b).
785 See CAT NMS Plan, supra note 3, at Section
4.3 (stating that actions authorized by Majority and
Supermajority Vote of the Operating Committee are
subject to approval by the Commission whenever
such approval is required under the Exchange Act
and the rules thereunder).
786 See 17 CFR 242.608(b)(2).
787 See CAT NMS Plan, supra note 3, at Section
4.4(a).
788 See 17 CFR 242.613(b)(6)(i). Rule 613(b)(6)
requires the Participants to provide the Commission
with a written assessment of operation of the CAT
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is also entitled to receive any reports
prepared in connection with the
Operating Committee’s annual
performance review of the Plan
Processor.789
(2) Key Factors Relating to Governance
Two factors identified by the
Commission in the Adopting Release as
‘‘important to the efficient operation
and practical evolution of the [CAT]’’
are voting within the Operating
Committee and the role and
composition of the Advisory Committee.
Voting thresholds that result in
Operating Committee decision-making
that balances the ability of minority
members to have alternative views
considered with the need to move
forward when appropriate to implement
needed policies can promote
achievement of the Plan’s benefits in an
efficient manner. Similarly, an Advisory
Committee that is balanced in terms of
membership size and composition, as
well as in its ability to present views to
the Operating Committee, can result in
better performance of its informational
role, and thus more efficient
achievement of the benefits of the Plan.
A. Voting
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In adopting Rule 613, the Commission
found that one Commenter’s concerns
about unanimous voting in the context
of the CAT NMS Plan ‘‘have merit.’’
Specifically, the Commission stated that
‘‘an alternate approach’’ to voting
involving ‘‘the possibility of a
governance requirement other than
unanimity, or even super-majority
approval, for all but the most important
decisions’’ should be considered, as it
‘‘may be appropriate to avoid a situation
where a significant majority of plan
sponsors—or even all but one plan
sponsor—supports an initiative but, due
to a unanimous voting requirement,
action cannot be undertaken.’’ 790 The
Commission ‘‘urge[d] the SROs to take
into account the need for efficient and
fair operation of the NMS Plan
governing the consolidated audit trail’’
in setting voting thresholds.791
at least every two years, along with a detailed plan,
based on the assessment, that indicates any
potential improvements to the performance of the
CAT and includes an estimate of the costs and
potential impacts of such improvements on
competition, efficiency and capital formation, as
well as an estimated implementation timeline for
such potential improvements.
789 See CAT NMS Plan, supra note 3, at Section
6.1(n). The review may be more frequent than
annually if at the request of two non-affiliated
Participants. The Commission also has other means
of accessing information (e.g., through books &
records requirements).
790 See Adopting Release, supra note 9, at 45787.
791 Id.
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The Plan sets forth two voting
thresholds for most matters to be
decided by the Operating Committee.792
Majority approval of the Operating
Committee is sufficient to approve
routine matters, arising in the ordinary
course of business, while non-routine
matters, outside the ordinary course of
business, would require a supermajority
(two-thirds) vote of the Operating
Committee to be approved.793
The Plan generally eschews a
unanimous voting threshold, except for
the three clearly-defined circumstances
noted above. Unanimity as a voting
threshold may confer greater influence
on holders of minority views, but it may
also give a small faction the ability to
extract private benefits inconsistent
with Plan objectives by acting as
holdouts.794 In a hold-out dynamic, one
member may be able to block action that
all the other members agree should
move forward. While this dynamic may
occasionally be used productively, to
produce better decision-making through
fostering discussion and compromise, it
also may give one member the power to
stand in the way of needed change.
The ability of a single member to
prevent action with regard to the Plan
could be particularly troublesome if that
member were motivated by a conflict of
interest.795 The Plan requires recusal of
792 As noted in Section IV.G.4, infra, the Plan
requires unanimous voting in only three
circumstances: A decision to obligate Participants
to make a loan or capital contribution, a decision
to dissolve the Company, and a decision to take an
action by written consent instead of a meeting.
793 See CAT NMS Plan, supra note 3, at Section
4.3; Appendix C, Section B.8(d). (specifying actions
of the Operating Committee that require a
Supermajority Vote); see also id. at Appendix C,
Section D.11(b).
794 There are other governance-related trade-offs
for majority voting versus supermajority voting;
these are discussed in greater detail in the Plan. See
CAT NMS Plan, supra note 3, at Appendix C,
Sections B.8(d) and D.11(b).
795 That there are potential conflicts of interest
between Participants acting in their self-regulatory
capacities and Participants acting in the other
capacities in which they serve is well-documented;
see, e.g., Peter M. DeMarzo, Michael J. Fishman,
and Kathleen M. Hagerty, ‘‘Self-Regulation and
Government Oversight,’’ 72 Review of Economic
Studies 687 (2005); see also David Reiffen and
Michel Robe, ‘‘Demutualization and Customer
Protection at Self-Regulatory Financial Exchanges,’’
Journal of Futures Markets (2011) and Securities
Exchange Act Release No. 50700 (November 18,
2004), 69 FR 71256 (December 8, 2004) (Concept
Release Concerning Self-Regulation); John W.
Carson, Conflicts of Interest in Self-Regulation: Can
Demutualized Exchanges Successfully Manage
Them? (World Bank Policy Research Working Paper
3183, December 2003). These conflicts could be
further complicated if the individual employee of
the Participant SRO who represents the Participant
SRO on the Operating Committee sought to advance
a private gain for the individual employee that is
inconsistent with the Plan’s regulatory objective or
the objective of the Participant SRO. Indeed, the
idea that an agency conflict between a natural
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30703
the member representing such a
Participant from voting in the Operating
Committee on matters that raise a
conflict of interest, defined as any
matter subject to a vote that interferes,
or is reasonably likely to interfere, with
the member’s objective consideration of
the matter, or that is, or would
reasonably likely be, inconsistent with
the regulatory purpose and objectives of
CAT.796 Recusal of a member could also
be compelled by a supermajority of the
Operating Committee.797 If conflicts of
interest were the cause of all
unproductive holding-out (i.e., holding
out that does not contribute to better
decision-making), then a robust conflict
of interest provision could mitigate
some of the negative features of
unanimous voting.
Majority voting as a voting threshold
strikes a different balance between the
rights of members than does unanimous
voting. Majority voting avoids the holdout problem of unanimity, but can result
in decisions that bear less concern for
the interests of the minority members.
Whether it does so or not may depend
at least in part on voting dynamics on
the Operating Committee. Under the
Plan, each member has only one vote
within the Operating Committee, and so
an individual member—and represented
Participant—could not unilaterally
advance a position that benefits only the
Participant under the Plan. That said,
however, some individual members
could exercise more influence than
others over the outcome of the voting
process. Participant SROs that are
affiliated with one another could vote as
a bloc by designating a single individual
to represent them on the Committee.798
Individuals who represent more than
one SRO would then in principle
person and the entity that the person represents has
been discussed extensively in the academic
literature on the governance of corporations; see,
e.g., Jonathan Berk and Peter DeMarzo, 2011,
Corporate Finance, Second Edition, Prentice Hall
(Section 2.1: Corporate Governance and Agency
Costs).
796 See CAT NMS Plan, supra note 3, at Section
4.3(d) (recusal requirement) and Section 1.1
(definition of Conflict of Interest). Section 4.3(d)
also automatically recuses a member from voting
with respect to matters relating to the selection or
removal of the Plan Processor if they or their
affiliates are, or are bidding to be, the Plan
Processor. Id.
797 See CAT NMS Plan, supra note 3, at Section
4.3(d).
798 See CAT NMS Plan supra note 3, at Section
4.2(a) (‘‘One individual may serve as the voting
member of the Operating Committee for multiple
Affiliated Participants, and such individual shall
have the right to vote on behalf of each such
Affiliated Participant.’’) Even if separate
representatives were appointed for each voting
member, such individuals could agree to vote in a
bloc; see also Section IV.G.1, infra, (discussing how
many affiliated groups would need to vote together
to reach a majority or supermajority).
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exercise more influence than other
individuals on the Operating
Committee.799 The Chair of the
Operating Committee also could
exercise more influence than other
members on the Committee, even
though the Chair only has one vote,
through influence over Committee
processes.800 Ultimately, however, no
individual would have unilateral
control over vote outcomes, even at a
majority voting threshold. Whether the
threshold results in adequate attention
to the rights of minority members could
therefore depend on the ease with
which a majority coalition can be
formed, whether those coalitions are
fluid or static, and whether in practice
decision-making is collegial or
contentious. While majority voting
could pose a risk of disregard for
minority positions, that risk here is
mitigated in that majority voting only
applies to the less important matters
that could arise in the operations of the
Plan.
The Plan’s supermajority voting
requirement for more important matters
represents an intermediate ground
between majority and unanimous
voting, requiring more than a bare
majority of members to agree to support
a position, which therefore enhances the
ability of members of the minority to
seek to have their views reflected in the
ultimate decision, while limiting the
ability of minority members to act as
holdouts. That said, the supermajority
voting requirement may also have some
disadvantages: To the extent that rules
and practices already in place require
799 By enabling a single individual (i.e., natural
person) to vote on behalf of groups of Affiliated
Participant SROs, the Plan reduces the share and
number of individuals needed to approve a
committee action below the share and number of
votes required for approval. For example, as few as
two individuals (who would possess more than
one-third of member votes) may be sufficient to
block an action that requires a two-thirds (a
supermajority) vote for approval of an action of the
Operating Committee under the Plan. This casting
of multiple votes by a single group is limited for
some decisions under the Plan, however. See CAT
NMS Plan, supra note 3, at Section 4.4(a) (Meetings
of the Operating Committee: special and emergency
meetings); see also Section IV.G.1, infra (discussing,
in n.1077, the various affiliated exchanges among
the 20 members of the Operating Committee, which
could appoint a single individual to represent
them).
800 Specifically, see CAT NMS Plan, supra note 3,
Section 4.2(b) which establishes that there shall be
elected a Chair from among the members of the
Operating Committee, and states that the Chair’s
powers are those that the Operating Committee may
from time to time prescribe. For example, the Chair
may be granted the power to set the agenda of
Operating Committee meetings, and thereby
advance agenda items favorable to the Chair. Id.
Section 4.2(b) also specifies that the Chair is not
entitled to a tie-breaking vote and that the Chair
may be removed by Supermajority Vote of the
Operating Committee.
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correction, a supermajority voting
requirement may make it more difficult
to assemble the votes necessary to make
needed changes. For example,
supermajority voting could have the
indirect effect of locking in the preferred
business practices of the inaugural
members of the Operating Committee.
For decisions later in the Plan
implementation, this lock-in effect of
supermajority voting could make it
more difficult for the Operating
Committee to take non-routine actions,
such as replacing the Plan Processor
after the initial selection decision.801
B. Advisory Committee
Rule 613(b)(7) requires that the Plan
designate an Advisory Committee.802
Specifically, Rule 613(b)(7) calls for the
formation of an Advisory Committee to
advise the plan sponsors on the
implementation, operation, and
administration of the Central
Repository, as detailed above in Section
III.A.3 of this Notice.803 Under Rule
613(b)(7)(i), the Advisory Committee
must include representatives of member
firms of the plan sponsors (brokerdealers), acting in their own capacities
as individuals on the Committee. Under
Rule 613(b)(7)(ii), plan sponsors must
give members of the Committee access
to information and permit them to
express their views and attend meetings
of the Operating Committee. Also under
Rule 613(b)(7)(ii), the Operating
Committee has the right to exclude
members of the Advisory Committee
from its deliberations by meeting in
Executive Session by a Majority Vote of
its members.
The Adopting Release states that the
‘‘provision requiring the creation of an
Advisory Committee, composed at least
in part by representatives of the plan
sponsors,’’ was ‘‘[i]n response to the
comment requesting that the brokerdealer industry receive a ‘seat at the
table’ regarding governance of the NMS
plan.’’ 804 In addition, the Commission
‘‘encourage[d] the plan sponsors to, in
the NMS plan, provide for an Advisory
Committee whose composition includes
SRO members from a cross-section of
the industry, including representatives
of small-, medium-and large-sized
broker-dealers.’’ Rule 613 does not give
broker-dealers a vote on the Operating
801 See id. at Section 4.3(i). Supermajority voting
as a governance mechanism in the CAT NMS plan
is distinct from an analysis of supermajority voting
rules in other settings.
802 17 CFR 242.613(b)(7).
803 See Section III.A.3 (Requirements Pursuant to
Rule 608(a)), supra; see also Section IV.G.4.a, infra,
for a discussion of the effects of the Advisory
Committee on the efficiency of the Plan.
804 See Adopting Release, supra note 9, at 45786.
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Committee itself. In the Adopting
Release, the Commission stated that the
structure of Rule 613 as adopted
‘‘appropriately balances the need to
provide a mechanism for industry input
into the operation of the central
repository, against the regulatory
imperative that the operations and
decisions regarding the [CAT] be made
by SROs who have a statutory obligation
to regulate the securities markets, rather
than by members of the SROs, who have
no corresponding statutory obligation to
oversee the securities markets.’’
In implementing these provisions of
Rule 613, the Plan requires the Advisory
Committee to have diverse
membership.805 Section 4.13 of the Plan
requires an Advisory Committee with a
minimum of six broker-dealers of
diverse types and six representatives of
entities that are not broker-dealers.806
That is, five of twelve seats on the initial
Advisory Committee would be filled by
representatives, respectively, of the
client of a registered broker or dealer,
two types of institutional investors, and
two others with academic and
regulatory expertise. Terms of Advisory
Committee members would not exceed
three years, and memberships would be
staggered so that a third of the
Committee would be replaced each
year.807
The Commission believes that the
Plan’s provisions regarding the
Advisory Committee advance the goals
of the Advisory Committee articulated
in the Adopting Release: To allow the
Operating Committee to receive the
benefit of members’ expertise with
respect to ‘‘expected or unexpected
operational or technical issues’’ and
‘‘help assure the Commission and
market participants that any
requirements imposed on SRO members
will be accomplished in a manner that
takes into account the burdens on SRO
members.’’
Given the primary purpose of the
Advisory Committee as a forum to
communicate important information to
the Operating Committee, which the
Operating Committee could then use to
ensure its decisions are fully-informed,
the Plan’s choices in implementing Rule
613 do reflect some trade-offs. One
factor in the ability of the Advisory
Committee to collect relevant
information for the Operating
Committee is the quality and depth of
the expertise, and the diversity of
viewpoints, of the Advisory
805 See CAT NMS Plan, supra note 3, Section
4.13(b).
806 See id. at Section 4.13(b)(i) through (xii).
807 See id. at Section 4.13(c).
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Committee’s membership.808 A larger
and more diverse Advisory Committee
may have better access to expertise and
diversity of viewpoints from among
members for use in advising the
Operating Committee.809 But, members
of a larger and more diverse Advisory
Committee would face potentially
greater difficulties in working among
themselves to identify and convey the
information that is available to them.
The Plan balances these considerations
by providing the Advisory Committee
with sufficient membership to be able to
generate useful information and advice
for the Operating Committee, while
being at a sufficiently low size and
diversity level to permit the members to
be able to work together without undue
obstacles that could otherwise limit the
Advisory Committee’s effectiveness in
conveying their views.810
808 In a role similar to that of the Advisory
Committee, outsiders on corporate boards of
directors can bring expertise and independence to
board actions, thereby enhancing board
effectiveness. Trade-offs in determining the
optimum size and composition of boards is the
subject of extensive academic research. For
example, Lehn, Kenneth, Sukesh Patro, and
Mengxin Zhao, 2009, ‘‘Determinants of the size and
structure of corporate boards: 1935–2000,’’
Financial Management, 747–780, consider the size
and composition of the board to be determined by
trade-offs associated with the information the
directors bring to boards, which facilitate their
monitoring and advisory role, and the coordination
costs and free-rider problems associated with their
presence. Harris, Milton and Raviv, Artur, 2008, ‘‘A
Theory of Corporate Control and Size,’’ 21 Review
of Financial Studies, 1797–1832, model the tradeoff between benefits of greater expertise that outside
directors bring versus the costs of an aggravated
free-rider problem to arrive at the optimum number
of outside directors on the board. Collective-action
and communication problems can limit the
effectiveness of a board as it gains members as
explored by Harris and Raviv (2008) and Lehn,
Patro, and Zhao (2009), in addition to Raheja,
Charu, 2005. ‘‘Determinants of Board Size and
Composition: A Theory of Corporate Boards,’’ 40
Journal of Financial and Quantitative Analysis,
283–306, and Yermack, David, ‘‘Higher Market
Valuation for Firms with a Small Board of
Directors,’’ Journal of Financial Economics, XL
(1996), 185–211; see also Jerayr Haleblian and
Sydney Finkelstein, ‘‘Top Management Team Size,
CEO Dominance, and Firm Performance: The
Moderating Roles of Environmental Turbulence and
Discretion,’’ The Academy of Management Journal,
Vol. 36, No. 4 (August, 1993), 844–863.
809 For related literature that expressly examines
trade-offs and consequences of ‘‘diverse’’ boards,
see Baranchuk, Nina, and Phil Dybvig, 2009,
‘‘Consensus in diverse corporate boards,’’ Review of
Financial Studies 22(2), 715–747; and Malenko,
Nadya, 2014, ‘‘Communication and DecisionMaking in Corporate Boards,’’ Review of Financial
Studies 27(5), 1486–1532.
810 Another factor that may bear on the Advisory
Committee’s ability to assemble a diverse range of
views is the Plan’s provisions that Advisory
Committee members sit in their individual capacity,
rather than as a representative of their employer.
This may give Advisory Committee members
greater freedom to speak to issues common to
similarly-situated entities (e.g., large brokerdealers), rather than potentially-idiosyncratic views
of the individuals’ employers, which broader views
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Another factor in the ability of the
Advisory Committee to advise the
Operating Committee is whether the
Advisory Committee, having assembled
a diverse set of views, could effectively
communicate those views to the
Operating Committee. Two Plan
provisions, relating to the staggering of
member terms and the limits on
participation of the Advisory Committee
under Rule 613(b)(7)(ii), bear on this
communication.811
First, the Plan provides for Advisory
Committee members to serve for
staggered three-year terms in order to
provide ‘‘improved continuity given the
complexity of CAT processing.’’ 812
Staggering of terms would prevent the
entire Advisory Committee or large
numbers of its members from turning
over in any given year, which could
enhance the cohesion of the Advisory
Committee, and thereby its effectiveness
in communicating member viewpoints
to the Operating Committee. Second, the
Plan gives the Advisory Committee
varying roles with respect to the
different actions to be taken by the
Operating Committee. While the
Advisory Committee members may
attend meetings and submit views to the
Operating Committee on matters prior to
a decision by the Operating Committee,
the Operating Committee may exclude
Advisory Committee members from
Executive Sessions.813
An additional factor that bears on the
ability of the Advisory Committee to
advise the Operating Committee is a
feedback loop: Whether the Advisory
Committee could receive sufficiently
detailed information on the operations
of the Plan so that the Advisory
Committee members can, in turn,
provide decision-useful information to
the Operating Committee. Here, the Plan
specifies that the Advisory Committee
has the right to receive from the
Operating Committee information
necessary and appropriate to the
fulfillment of its functions, but that the
scope and content of the information is
to be determined by the Operating
Committee.814 Thus, the Commission
notes that the Operating Committee
could act to limit the effectiveness of the
in turn could better inform the Operating
Committee about issues or impacts associated with
the operation of the CAT.
811 See CAT NMS Plan, supra note 3, at Section
4.13(b) and (c).
812 See id. at Section 4.13(c); Appendix C, Section
D.11(b) (‘‘Governance of the CAT . . . Industry
Members also recommended a three-year term with
one-third turnover per year . . . to provide
improved continuity given the complexity of CAT
processing.’’).
813 See CAT NMS Plan, supra note 3, at Section
4.13(d).
814 Id. at Section 4.13(e).
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Advisory Committee—for example, if
the Operating Committee were to fail to
provide Advisory Committee members
with notice of the items to be
deliberated and voted upon by the
Operating Committee with sufficient
time and particularity for the Advisory
Committee to be able to adequately
fulfill its function, or fail to provide
other pathways for Advisory Committee
members to become aware of topics of
interest or concern to the Operating
Committee.
One other determinant bears on the
effectiveness of the Advisory Committee
in ensuring that the Operating
Committee makes decisions in light of
diverse information—whether the
Operating Committee actually takes into
account the facts and views of the
Advisory Committee before making a
decision. Although the Plan expressly
provides for Advisory Committee input,
it does not contain a mechanism—such
as requiring the Operating Committee to
respond to the Advisory Committee’s
views, formally or informally, in
advance of or following a decision by
the Operating Committee—to ensure
that the Operating Committee considers
the views of the Advisory Committee as
a part of the Operating Committee’s
decision-making process.
(3) Conclusion
The Commission preliminarily
believes that the governance provisions
discussed above, which the Commission
identified as being ‘‘important to the
efficient operation and practical
evolution of the [CAT], and . . .
responsive to many commenters’
concerns about governance structure,
cost allocations, and the inclusion of
SRO members as part of the planning
process,’’ could help promote better
decision-making by the relevant parties.
These provisions thus could mitigate
concerns about potential uncertainty in
the economic effects of the Plan by
giving the Commission greater
confidence that its expected benefits
would be achieved in an efficient
manner and that costs resulting from
inefficiencies would be avoided.
4. Request for Comment on the Benefits
The Commission requests comment
on all aspects of the discussion of the
potential benefits of the CAT NMS Plan.
In particular, the Commission seeks
responses to the following questions:
257. Do Commenters agree with the
Commission’s assessment of the
potential benefits of the CAT NMS Plan?
Why or why not?
258. To what extent do the
uncertainties related to future decisions
about Plan implementation impact the
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assessment of potential benefits of the
Plan? Please explain.
259. Do Commenters agree that the
inclusion of the data fields in one
centralized data source in the CAT NMS
Plan described above would result in
more complete data than what is
currently available to regulators? Which
elements of the Plan would deliver
improvements to completeness? Are
there any elements of the Plan that
would degrade the completeness of
regulatory data? Please explain.
260. The Commission reviewed gap
analyses that examine whether the CAT
Data would contain all important data
elements in current data sources 815 and
concluded that certain information is
not included (e.g., OATS data fields that
allow off-exchange transactions to be
matched to their corresponding trade
reports at trade reporting facilities and
certain EBS elements). Please identify
any such data elements that are missing
under the Plan.
261. The Commission also seeks
comment on the significance of the gaps
identified in the analyses. If there are
particular fields that are identified in
the gap analyses that should not be
incorporated into CAT, please identify
them and explain.
262. The Commission expects that,
pursuant to the requirements of the
Plan,816 any missing elements that are
material to regulators would be
incorporated into CAT Data prior to the
retirement of the systems that currently
provide those data elements to
regulators. Do you agree? Why or why
not? Do you agree that CAT Data would
include the audit trail data elements
that currently exist in audit trail data
sources? Why or why not?
263. Do Commenters agree that the
CAT NMS Plan would improve the
accuracy of the data available to
regulators? Which elements of the Plan
would deliver these improvements? Are
there any elements of the Plan that
would degrade the accuracy of
regulatory data relative to today? Are
there any elements of the Plan that
would prevent or limit improvements in
the accuracy of regulatory data? Are the
815 See SEC Rule 613—Consolidated Audit Trail
(CAT) OATS—CAT Gap Analysis and SEC Rule
613—Consolidated Audit Trail (CAT) Revised
EBS—CAT GAP Analysis, available at https://
www.catnmsplan.com/gapanalyses/. The
Commission acknowledges that the Participants are
continuing to study gaps between current regulatory
data sources and the Plan as filed. CAT NMS Plan,
supra note 3, at Appendix C, Section C.9
816 The Plan requires that, prior to the retirement
of existing systems, the CAT Data must contain data
elements sufficient to ensure the same regulatory
coverage provided by existing systems that are
anticipated to be retired. See CAT NMS Plan, supra
note 3, at Appendix D, Section 3.
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provisions of the Plan related to
accuracy appropriate and reasonable in
light of the goal of improving data
quality? Please explain.
264. Do Commenters believe that
procedural protections in the Plan, such
as the requirement that the Technical
Specifications be ‘‘consistent with
[considerations and minimum standards
discussed in] Appendices C and D,’’ the
requirement to provide the initial
Technical Specifications and any
Material Amendments thereto to the
Operating Committee for approval by
Supermajority Vote,817 and the
requirement that all non-Material
Amendments and all published
interpretations be provided to the
Operating Committee in writing at least
ten days before publication,818 can
mitigate uncertainty regarding future
decisions and help promote accuracy?
Please explain.
265. Do Commenters believe that the
Error Rate, validations, and error
resolution processes described in the
CAT NMS Plan would provide
improvements in accuracy? Are these
processes appropriate and reasonable in
light of the goal of improving data
quality? Please explain.
266. The Plan specifies an error
correction process after initial reports
are received and indicates that
practically all errors identifiable by the
validations used in the error correction
process would be corrected by 8:00 a.m.
Eastern Time on day T+5, stating that
errors are expected to be ‘‘de minimis’’
after the error correction period.819 Do
Commenters believe that this is a
reasonable conclusion? Please explain.
267. Do Commenters believe that the
provisions in the CAT NMS Plan related
to event sequencing would provide
improvements in accuracy? To what
degree does the 50 millisecond clock
synchronization requirement enable or
prevent regulators’ ability to sequence
events that occur in different Execution
Venues? Are the provisions of the Plan
related to event sequencing appropriate
and reasonable in light of the goal of
improving data quality? Please explain.
268. The Plan does not specify the
approach that would be used to
sequence events when time stamps are
identical. Do Commenters believe that
there is a way for the Plan Processor to
817 Id. at Section 6.9(a). The Commission notes
that the standards in Appendices C and D do not
cover all decisions that would affect the accuracy
of the data.
818 See CAT NMS Plan, supra note 3, at Section
6.9(c)(i).
819 See id. at Appendix C, Section A.3(b) n.102.
‘‘De minimis’’ is not defined and no numerical
Error Rate is given. The Plan also includes a
compliance program intended to help achieve this
goal.
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sequence events with identical time
stamps? How would this process, or the
lack of a process, affect the quality of
the CAT Data?
269. The Plan states that ‘‘the
Participants plan to require that the Plan
Processor develop a way to accurately
track the sequence of order events [of a
particular order] without relying
entirely on time stamps.’’ 820 Do
Commenters believe it is feasible to
properly sequence the events of a
simple or complex order without relying
entirely on time stamps? Please explain.
If such a procedure could be developed,
how accurate would it be?
270. The Plan further states, ‘‘For
unrelated events, e.g., multiple
unrelated orders from different brokerdealers, there would be no way to
definitively sequence order events
within the allowable clock drift as
defined in Article 6.8.’’ 821 Do
Commenters believe it would be feasible
for the Plan Processor to develop a way
to accurately sequence such unrelated
orders given the time stamp and clock
synchronization requirements of the
Plan? Please explain. If such a
procedure could be developed, how
accurate would it be?
271. Do Commenters agree with the
Commission’s data analysis of the clock
synchronization improvements from the
Plan? If not, how could the Commission
improve the data analysis? Do
Commenters have their own data
analysis that informs on the expected
improvements from the Plan? If so,
please provide. Do Commenters agree
that the improvements to the percentage
of sequenceable order events by Plan
standards are modest and the
requirements of the Plan may not be
sufficient to completely sequence the
majority of market events relative to all
other events?
272. Do Commenters agree with the
Plan’s assessment of the industry
standard for clock synchronization?
Does this reflect the standards for all
CAT Reporters, including exchanges,
ATSs, and other broker-dealers? If not,
what would be a more appropriate way
to define the industry standard for clock
synchronization?
273. Do Commenters believe that the
provisions in the CAT NMS Plan related
to linking data would result in
improvements to the accuracy of the
data available to regulators? Would the
process for linking orders across market
participants and SROs improve
accuracy compared to existing data?
Would the Plan Processor be able to
820 See CAT NMS Plan supra note 3 at Appendix
C, Section A.3(c).
821 See id. at Appendix C, Section A.3(c) n.110.
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develop expertise in linking data more
efficiently than the regulatory staff
members from each entity could on
their own? Please explain.
274. Would the Error Rates associated
with the linking process represent
improvements to data accuracy? Would
Approach 1 to data conversion result in
a lower Error Rate than Approach 2?
Would the Approach affect the Plan
Processor’s ability to build a complete
and accurate database of linked data?
Are the Error Rates associated with the
linking process appropriate and
reasonable in light of the goal of
improving data quality? Please explain.
275. Do Commenters believe that the
inclusion of unique Customer and
Reporter Identifiers would increase the
accuracy of information in data
regulators use and provide benefits to a
broad range of regulatory activities that
involve audit trail data? Please explain.
276. Do Commenters agree that the
CAT Data would provide less aggregated
allocation information and less
aggregated issuer repurchase
information? Why or why not? Would
these changes significantly affect
regulatory activities?
277. Do Commenters agree that the
CAT NMS Plan would improve the
accessibility of the data available to
regulators? Which elements of the Plan
would deliver these improvements? Are
there any elements of the Plan that
would degrade the accessibility of
regulatory data relative to today? Are
there any elements of the Plan that
would prevent or limit improvements in
the accessibility of regulatory data?
278. Do Commenters believe that the
minimum requirements for direct access
ensure that the Plan would improve
access to current data, including the
process of requesting data? Would the
direct access facilitated by the Plan
provide sufficient capacity and
functionality? Would direct access
reduce the number of ad hoc data
requests?
279. Do Commenters agree that the
CAT NMS Plan would improve the
timeliness of the data available to
regulators? Which elements of the Plan
would deliver these improvements? Are
there any elements of the Plan that
would degrade the timeliness of
regulatory data relative to today? Are
there any elements of the Plan that
would prevent or limit improvements in
the timeliness of regulatory data?
280. Do Commenters believe that the
CAT NMS Plan will facilitate the ability
of each national securities exchange and
national securities association to
comply with the requirement in Rule
613(f) that they develop and implement
a surveillance system, or enhance
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existing surveillance systems,
reasonably designed to make use of the
consolidated information contained in
the consolidated audit trail? If not, why
not?
281. Do Commenters agree that the
CAT NMS Plan will facilitate the ability
of regulators to conduct risk-based
examinations? Why or why not? How
significantly would the Plan improve
risk-based examinations? Please
explain.
282. Do Commenters agree that the
CAT NMS Plan will improve the
efficiency of regulators’ enforcement
activities? Why or why not? Which
specific regulatory activities would be
most improved by the CAT NMS Plan?
Please explain.
283. Do Commenters agree that the
CAT NMS Plan will improve the ability
for regulators to determine the
credibility of tips and complaints?
Please explain.
284. Overall, do Commenters agree
that the surveillance, examination, and
enforcement activities of regulators
would improve with the CAT NMS
Plan? Please explain. Would these
improvements be significant enough to
deter violative behavior? Please explain.
What would be the economic effect of
this deterrence?
285. Would such improvements
reduce the percentage of activities that
generate false positives (i.e., detection of
behaviors that are not violative) and/or
reduce the percentage of activities that
are false negatives (i.e., not detecting
behaviors that are violative)? Please
explain. What would be the economic
effect of any changes in false positives
or false negatives?
286. Do Commenters agree with the
Commission’s assessment of the
economic effects of the improvements to
surveillance, examinations, and
enforcement from the CAT NMS Plan?
Please explain.
287. Do Commenters agree that the
CAT NMS Plan would improve the
efficiency and effectiveness of regulators
conducting analysis and reconstruction
of market events? Please explain. Do
Commenters agree with the
Commission’s assessment of the benefits
to investors and the market of more
efficient and effective analysis and
reconstruction of market events? Please
explain.
288. Do Commenters agree that the
CAT NMS Plan would facilitate market
analysis and research that would
improve regulators’ understanding of
securities markets? Please explain. Do
Commenters agree with the
Commission’s assessment of the benefits
to investors and the markets from
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30707
regulators having a better understanding
of the markets? Please explain.
289. Do Commenters believe that
there are other features of the CAT NMS
Plan uniquely applicable to a
consolidated audit trail that increase the
likelihood that the potential benefits of
the CAT NMS Plan would be realized?
Please identify these features and
explain.
290. Do Commenters agree that
provisions of the Plan related to future
upgrades, promoting accuracy, and
promoting timeliness increase the
likelihood that the potential benefits of
the CAT NMS Plan would be realized?
Do current regulatory data sources have
provisions similar to ones the
Commission analyzed? If so, please
describe such provisions.
291. Do Commenters believe that
provisions of the Plan provide
incentives to reduce reporting errors for
a CAT Reporter that has an Error Rate
that does not exceed the thresholds that
would trigger fines under the Plan or
possible enforcement actions by
regulators? If so, what are the
incentives? Could the Plan provide
different incentives to reduce reporting
errors? Please explain.
292. Under the Plan, proposals to
adjust the maximum allowable Error
Rate are to originate from the Plan
Processor. Do Commenters agree with
this approach? Please explain. Should
others, such as the Operating
Committee, or Advisory Committee be
able to originate changes to the Error
Rate? Please explain.
293. Do Commenters agree that
communication of data feed delays for
public consumption is beneficial to the
operation and effectiveness of the CAT?
If so, in what ways? What are the
benefits and costs of such public
disclosure?
294. Do Commenters agree that the
governance provisions identified in the
Rule 613 Adopting Release continue to
be important to the efficient operation
and practical evolution of the Plan, and
therefore to the achievement of the
Plan’s benefits? Are there other aspects
of the Plan’s governance that might
enhance (or detract from) the Plan’s
ability to achieve its intended benefits?
Are there other governance aspects that
the Plan does not address that might
enhance, if included (or detract from, if
not remedied) the Plan’s ability to
achieve its intended benefits? Please
identify these other features and explain
how they enhance (or detract from) the
Plan’s ability to achieve its intended
benefits.
295. The Commission’s analysis of the
provisions of the Plan relating to voting
assumes that these provisions will
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promote the benefits sought to be
achieved by the Plan because, by
assigning different voting thresholds to
different actions, the Plan seeks to
address potential conflict of interest and
holdout problems, balancing dissenters’
rights with the need to move forward
with needed changes. Is this a complete
and accurate list of the factors that
could bear on whether the voting
provisions of the Plan will promote the
benefits sought to be achieved by the
Plan, and did the Commission correctly
weigh these factors in preliminarily
concluding that the Plan’s voting
provisions could help promote better
Plan decision-making and, thus,
improve achievement of the Plan’s
goals? If the Commission should have
considered other factors or weighed the
identified factors differently, please
explain how, and what the costs and
benefits of an alternative approach
would be.
296. The Plan provides that ‘‘[a]ll
votes by the Selection Committee shall
be confidential and non-public.’’ 822
What are the effects of confidential
voting as a means of limiting conflicts
of interest and promoting
accountability? Would expanding
confidentiality in voting to other
situations help or hinder the
effectiveness of the Operating
Committee and its Subcommittees in
achieving the regulatory objectives of
the Plan? Please explain and provide
supporting examples and evidence, if
available.
297. Do Commenters believe that the
size, membership, and tenure of
Advisory Committee members is
appropriately tailored to encourage the
effective accumulation and
communication of Advisory Committee
member views to the Operating
Committee, thereby improving Plan
decision-making? If not, why not? Are
there other factors that could bear on
whether the provisions of the Plan
relating to the Advisory Committee will
promote better decision-making? If so,
what other factors?
298. Are there any alternatives for
Advisory Committee involvement that
could increase the effectiveness of its
involvement? What benefits would
these achieve in terms of improving the
Operating Committee’s efficiency?
Would these alternatives increase or
decrease costs?
299. What obstacles to informationsharing between individual members of
the Operating Committee and the
Commission, if any, are likely to limit
the Plan’s effectiveness in meeting its
regulatory objectives? Is there any
information, such as regarding
individual SRO clock synchronization
standards, that members would need to
share within the Operating Committee
to achieve plan regulatory objectives but
may be uncomfortable sharing with one
another (or more comfortable sharing
with the Commission than with one
another)? Please be specific and explain
what, if any, changes to the plan could
mitigate obstacles from inadequate
information-sharing.
300. Are there any other factors
relating to the operation and
administration of the Plan that the
Commission should consider as part of
determining whether to approve the
Plan? If so, what are those factors and
how could they influence the costs and
benefits of the Plan? Does the Plan
currently address these factors? If not,
how could the Plan address these
factors and what would be the relative
costs and benefits of any changes to the
Plan?
F. Costs
As noted above, at the time of the
Adopting Release the Commission
deferred its economic analysis of the
creation, implementation, and
maintenance of CAT until after
submission of the CAT NMS Plan.823
Accordingly, the Commission deferred
its detailed analysis of costs associated
with CAT. In light of the SROs having
submitted the CAT NMS Plan, this
Section sets forth the Commission’s
preliminary analysis of the expected
costs for creating, implementing, and
maintaining the CAT, as well as the
associated reporting of data.
As discussed in detail below, the
Commission has preliminarily estimated
current costs related to regulatory data
reporting, anticipated costs associated
with building and maintaining the
Central Repository, and the anticipated
costs to report CAT Data to the Central
Repository. These preliminary estimates
are calculated from information
provided in the CAT NMS Plan as well
as supplemental information. Currently,
the 20 Participants spend $154.1 million
annually on reporting regulatory data
and performing surveillance.824 The
approximately 1,800 broker-dealers
anticipated to have CAT reporting
responsibilities currently spend $1.6
billion annually on regulatory data
reporting.825 If the Plan is approved, the
Commission preliminarily estimates
that the cost of the Plan would be
823 See
Adopting Release, supra note 9, at 45789.
CAT NMS Plan, supra note 3, at Appendix
C, Section B.7(b)(ii)(B)(1).
825 See Section IV.F.1.c(2), infra.
824 See
822 See CAT NMS Plan, supra note 3, at Section
5.1(b)(v).
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approximately $2.4 billion in initial
aggregate implementation costs and $1.7
billion in ongoing annual costs.826
Furthermore, the Plan anticipates that
market participants would have
duplicative audit trail data reporting
responsibilities for a period of up to a
maximum of 2.5 years, preceding the
retirement of potentially duplicative
regulatory data reporting schemes.827
Duplicative audit trail data reporting
could cost broker-dealers $1.6 billion
per year or more and could cost the
Participants up to $6.9 million per year.
The Commission preliminarily believes
that the primary component of costs for
CAT’s estimated annual costs would be
the estimated aggregate broker-dealer
data reporting costs of $1.5 billion per
year, whereas the Central Repository
build costs are preliminarily estimated
by the Participants to be no more than
$92 million, with annual operating costs
of no more than $135 million.
As explained in detail below, the
Commission believes, however, that
there is significant uncertainty
surrounding the actual implementation
costs of CAT and the actual ongoing
broker-dealer data reporting costs if the
Plan were approved. Methodology and
data limitations used to develop these
preliminary cost estimates could result
in imprecise estimates that may
significantly differ from actual costs.
The Commission has used its best
judgment, however, in obtaining and
assessing available information and data
to provide the analysis and estimates
included in this Notice. The
Commission is also requesting comment
on the methodology and any additional
data Commenters believe should be
considered.
Furthermore, the Commission notes
that because some CAT design decisions
(such as setting forth detailed Technical
Specifications) have been deferred until
the selection of the Plan Processor, the
associated cost uncertainties could
cause the actual costs to vary
significantly from the estimates set forth
in this analysis.
The Commission notes that the cost
estimates set forth in this analysis are
updated from the cost estimates
provided in the Proposing Release. In
the Proposing Release, the Commission
estimated $4.3 billion in initial
implementation costs and $2.3 billion in
ongoing annual costs.828 The
826 See
Section IV.F.2, infra.
id.
828 See Proposing Release supra note 9, at 32596–
602. The $4.3 billion and $2.3 billion cost estimates
can be calculated using individual cost estimates
from the Proposing Release. The Proposing Release
expressed some cost estimates on a per-Participant
basis. The Plan, however, breaks out costs to
827 See
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Commission has now updated its
analysis and estimates $2.4 billion in
initial implementation costs and $1.7
billion in ongoing annual costs. The
Commission believes that several factors
drive differences in cost estimates from
the Proposing Release to the current cost
estimates in this analysis. First, the
scope of CAT as contemplated in the
Proposing Release is different than the
scope of CAT Data as would be
implemented by the CAT NMS Plan.829
For example, the Commission notes
that, unlike CAT Data envisioned in the
Proposing Release, the proposed Plan
includes OTC Equity Securities, which
if included in CAT would facilitate the
possible retirement of OATS as an audit
trail data reporting system at a relatively
earlier date. While the Commission’s
cost estimates do not explicitly
incorporate cost savings from systems
retirement, cost estimates provided in
the Plan and based on surveys of brokerdealers, participants and service
providers may reflect some of these
savings. For example, because
respondents anticipate incorporating
resources that would be devoted to OTC
equity data reporting to CAT reporting,
cost estimates may be lower than they
would be if OTC equity data were
excluded from CAT but were still
reported to OATS on an ongoing basis.
Thus, after all CAT Reporters start
reporting to the Central Repository and
the resolution of any data gaps between
OATS and CAT, FINRA would not need
to maintain OATS solely to fulfill its
regulatory responsibilities relating to
OTC Equity Securities.830 Additionally,
Participants by (i) single-exchange-operating
Participants and (ii) Affiliated Participants that
operate multiple exchanges. To validly compare the
Commission’s preliminary cost estimates to the cost
estimates set forth in the Plan, the Commission’s
analysis aggregates costs to all Participants for these
cost estimates. The Proposing Release anticipated
1,114 SRO members would report data to the
Central Repository directly, and 3,006 brokerdealers would report data through a service
provider. The Plan anticipates that approximately
1,800 broker-dealers would have CAT reporting
obligations; the Commission preliminarily believes
that the majority of these broker-dealers would rely
on service bureaus to perform their regulatory data
reporting. Again, to validly compare the different
cost estimates, the Commission aggregates the cost
estimates across all broker-dealer CAT Reporters.
829 Similarly, in the Adopting Release, the
Commission explained that ‘‘the methodology that
the Commission used in the Proposing Release to
estimate the costs of creating, implementing, and
maintaining a consolidated audit trail may no
longer be suitable’’ and that certain ‘‘assumptions
may no longer be valid since several of the specific
technical requirements underlying the Proposing
Release’s approach have been substantially
modified.’’ See Adopting Release, supra note 9, at
45781.
830 If FINRA were unable to retire OATS, the costs
of duplicative reporting (discussed in Section
IV.F.2, infra), would continue indefinitely. The
Commission preliminarily believes this outcome is
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the Commission’s updated cost
estimates are based on data submitted
with the Plan, which was unavailable
when the Commission first estimated
the costs of CAT in the Proposing
Release,831 as well as certain additional
information obtained by Commission
Staff.832 Furthermore, the Plan also
integrates exemptive relief extended to
the Participants regarding (1) Options
Market Maker quotes; (2) Customer-IDs;
(3) CAT-Reporter-IDs; (4) linking of
executions to specific subaccount
allocations on Allocation Reports; and
(5) time stamp granularity for Manual
Order Events. The Commission
preliminarily believes that this
exemptive relief contributes to
reductions in cost of the Plan relative to
those estimated in the Proposing
Release. The Commission has
incorporated this additional information
into its current cost analysis.833
1. Analysis of Expected Costs
The Plan provides estimates of the
expected costs associated with the Plan,
including costs to build and operate the
Central Repository and costs to
Participants and CAT Reporters to
implement and maintain CAT
reporting.834 As explained below, the
unlikely because the Plan discusses the
Participants’ plans to retire OATS if the Plan is
approved. See CAT NMS Plan, supra note 3, at
Appendix C, Section C.9.
831 See Proposing Release, supra note 9, at 32601–
02.
832 As discussed further below, the Commission’s
analysis also incorporates data obtained from
FINRA and information from discussions with
broker-dealers and service bureaus arranged by FIF
and staff. See infra notes 880 and 899.
833 The Commission’s revised cost estimates are
generally substantially lower than those presented
in the Proposing Release. See Proposing Release,
supra note 9, at 32601–02. The Proposing Release’s
estimate of total industry implementation costs is
40.45% higher than the current estimate, and the
Proposing Release’s estimate of ongoing total
industry costs is 57.99% higher than the current
estimate. Reductions in cost estimates are primarily
driven by lower broker-dealer implementation and
ongoing reporting costs that are largely attributable
to a reduction in the number of broker-dealers
anticipated to incur CAT reporting responsibilities,
as the Proposing Release assumed that all 4,120
broker-dealers would be CAT Reporters but the Plan
estimates that only 1,800 broker-dealers would
incur CAT reporting responsibilities. The Proposing
Release also presented higher estimates of the
number of broker-dealers that are likely to be
insourcers; these broker-dealers have significantly
higher implementation and ongoing costs that
outsourcing broker-dealers. The Proposing Release
estimated Central Repository implementation costs
that are 23.33% higher than current estimates;
ongoing Central Repository costs were lower by
33.56%; SRO implementation costs were 82.21%
higher in the proposing release; SRO ongoing costs
were estimated to be 31.79% lower than current
estimates. The Proposing Release did not recognize
costs to Service Bureaus related to CAT.
834 Because the Plan does not provide data that
permit partitioning costs associated with the
Central Repository between Participants and broker-
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30709
Commission has thoroughly reviewed
the cost estimates contained in the Plan
and other relevant information to
develop the Commission’s preliminary
estimate of expected costs of the Plan.
The Commission preliminarily believes
that in some cases the estimates
provided in the Plan are reliable
estimates of the potential costs of
certain aspects of the Plan. The
Commission preliminarily believes,
however, that in other cases the data
and methodology underlying certain
Plan estimates are unreliable and, in
such cases, the Commission has
preliminarily evaluated and provided
separate estimates based on alternative
data or a different methodology.835
In this Section, the Commission
provides preliminary estimates of the
individual elements that constitute the
estimated expected total cost associated
with implementing and maintaining the
CAT, including the costs of operating
and building the Central Repository, the
costs to Participants, the costs to brokerdealers, and other costs considered in
the CAT NMS Plan.
a. Costs of Building and Operating the
Central Repository
The Plan’s estimates of the costs to
build the Central Repository are based
on Bids that vary in a range as high as
$92 million. The Plan’s estimates of
annual operating costs are based on Bids
that vary in a range up to $135 million.
The eventual magnitude of Central
Repository costs is dependent on the
Participants’ selection of the Plan
Processor, and may ultimately differ
from estimates discussed in the Plan if
Bids are revised as the bidding process
progresses. The Plan discusses these
costs both as (i) one-time and ongoing
costs as well as (ii) a five-year total cost,
to help evaluate economic trade-offs
between initial build costs and
operating costs. The Plan anticipates
that Participants and their members
would bear the costs of building and
operating the Central Repository. The
Commission preliminarily believes that
these estimates are reliable because they
are the result of a competitive bidding
process, although the Commission
recognizes that the Bids are not legally
binding on bidders. In particular, the
Commission preliminarily believes that
a Bidder would not likely decline a
dealer CAT Reporters, this analysis discusses the
Central Repository costs separately.
835 For example, the Commission preliminarily
believes that cost estimates in the Plan relating to
the costs that would be borne by broker-dealers are
unreliable due to limitations of certain survey
response data. These limitations and the
Commission’s alternative cost estimate are
discussed in detail below. See Section IV.F.1.c,
infra.
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contract to be Plan Processor that was
based on the Bid it submitted because
that Bidder might lose future business
due to reputational consequences of its
actions. Furthermore, Bidders have
invested considerable time and effort in
evaluating the RFP and preparing their
Bids and thus if a Bidder were
unwilling to serve as Plan Processor
according to the terms outlined in its
Bid, the time and effort expended to
prepare the Bid would be wasted
resources. As explained further below,
however, the Commission believes that
these cost estimates associated with
building and operating the Central
Repository are subject to a number of
uncertainties.
To estimate the one-time total cost to
build the Central Repository, the Plan
uses the Bids of the final six Shortlisted
Bidders.836 The Bidders’
implementation cost estimates range
from $30 million to $91.6 million, with
a mean of $53 million and a median of
$46.1 million.837 The Plan also
estimates the ongoing costs of the
Central Repository. The Bids of the final
six Shortlisted Bidders estimate annual
costs to operate and maintain the
Central Repository range from $27
million to $135 million, with a mean of
$51.1 million and a median of $42.2
million.838 The Plan’s summary
statistics show that annual costs are not
expected to be constant year-over-year
for all Bidders, but the Plan does not
provide further details on how the costs
are expected to evolve over time or how
many of the Bids have time-varying
annual costs.839 Although the
Commission preliminarily believes that
costs provided by Bidders are reliable,
the Commission recognizes that these
ongoing costs could increase over time
due to inflation or changes in market
structure such as a significant increase
in message traffic. It is also possible
these costs could decrease due to
improvements in technology, reductions
in message traffic, and innovation by the
Plan Processor.
The Plan also provides information
based on the Bids on the total five-year
operating costs for the Central
Repository because the annual costs to
operate and maintain the Central
Repository are not independent of the
build cost. In particular, it is plausible
that the Bidders with the lowest build
836 See CAT NMS Plan, supra note 3, at Appendix
C, Section B.7(b)(i)(B). The Plan does not reflect any
more specific cost ranges that result from narrowing
the range of Bidders from six to three. See supra
note 35.
837 See CAT NMS Plan, supra note 3, at Appendix
C, Section B.7(b)(i)(B).
838 Id.
839 Id.
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costs trade off lower build costs for
higher recurring annual costs. To
account for this possibility, the Plan
presents the range of total five-year costs
across Bidders using the Bids of the
final six Shortlisted Bidders.840 The
methodology takes the sum of the
annual recurring costs over the first five
years (discounted to the present with a
discount rate of 2%) and adds the
upfront investment. Across the six
Shortlisted Bidders, the total five-year
costs to build and maintain CAT range
from $159.8 million to $538.7
million.841 This information is less
granular than other Bidder cost
information provided in the Plan, and
no mean or median is provided or can
be calculated with the information
provided.
The Plan provides that costs
associated with building and operating
the Central Repository would be borne
by both Participants and their
members.842 In particular, the Plan
provides for fixed-tiered fees based on
ranges of activity levels to be levied on
Execution Venues (i.e., the Participants
(including a national securities
association with trade reporting
facilities, and ATSs)) based upon the
Execution Venue’s market share of share
volumes, with options and equity venue
fees determined by separate schedules
set by CAT’s Operating Committee.843
Furthermore, the Plan provides for
fixed-tiered fees for Industry Members
(broker-dealers) based on the message
traffic generated by the member,
including message traffic associated
with an ATS operated by the
member.844 The Plan also provides for
the establishment of other fees for
activities such as late, inaccurate, or
840 See CAT NMS Plan, supra note 3, at Appendix
C, Section B.7(b)(i)(B). The five-year presentation of
Central Repository costs is converted into
implementation and annual costs by using the
maximum build cost and maximum annual
operating cost over the five year period in the Bids.
The Commission preliminarily believes that this
presentation is conservative in the sense that it
avoids underestimating the Central Repository costs
that must be borne by industry. However, the
Commission preliminarily believes that it is likely
that this presentation overestimates the actual
Central Repository costs because most individual
Bids forecast variation in operating expenses year
by year, with costs in some years lower than the
maximum used in this presentation. Because the
Central Repository costs are, in aggregate,
significantly lower than the aggregate costs brokerdealers would incur in reporting CAT Data, the
Commission preliminarily believes that this
overestimation would not materially affect the
magnitude of aggregate costs for the Plan to
industry.
841 See supra note 836, and CAT NMS Plan, supra
note 3, at Appendix C, Section B.7(b)(i)(B).
842 See CAT NMS Plan, supra note 3, at Section
11.
843 See id. at Section 11.3.
844 See id. at Section 11.3(b).
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corrected data submission by CAT
Reporters.845 The Plan does not present
information on the potential magnitude
of these fees, but the Commission
preliminarily believes they are likely to
be a minor expense for CAT reporters,
who should be able to avoid these fees
by fulfilling their normal reporting
responsibilities under the Plan. The
Plan does not provide information on
the relative allocation of these fees
between transaction-based fees, message
traffic-based fees, and other fees.846
The Commission believes that a range
of factors would drive the ultimate costs
associated with building and operating
the Central Repository and who would
bear those costs. The Plan explains that
the major cost drivers identified by
Bidders are (1) transactional volume, (2)
technical environments, (3) likely future
growth in transactional volumes, (4)
data archival requirements, and (5) user
support/help desk resource
requirements.847 The Plan does not
present information on how sensitive
the cost estimates are to each of these
factors. Further, how Bidders propose to
satisfy the RFP requirements could
materially affect the ultimate cost to the
industry to operate the Central
Repository and who would bear those
costs. For instance, some Bids may
provide more extensive user support
from the Plan Processor than others,
effectively shifting user support costs
from CAT Reporters to the Plan
Processor, where such support might be
more efficiently provided. However, the
Plan does not provide information about
how the Bidders propose to address
each of the RFP requirements; thus,
uncertainties exist around who would
bear certain costs and how such costs
could change if each Bidder’s proposal
related to these factors change.
The Commission is mindful that the
cost estimates associated with building
and operating the Central Repository are
subject to a number of additional
uncertainties. First, the Participants
have not yet selected a Plan Processor,
and the Shortlisted Bidders have
submitted a wide range of cost estimates
for building and operating the Central
845 See
id. at Section 11.3(c).
economic analysis treats estimates of costs
associated with building and operating the Central
Repository separately from estimates of costs to
Participants and other CAT Reporters to report CAT
Data. While the costs of building and operating the
Central Repository would be borne by the
Participants and Industry Members, the allocation
of the costs between and among those entities
would be determined by the CAT Funding Model,
which has not yet been finalized. See Section
IV.C.2, supra. However, these costs are included in
the Commission’s estimate of the total costs to
industry if the Plan is approved.
847 See CAT NMS Plan, supra note 3, at Appendix
C, Section B.7(b)(i)(B).
846 The
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Repository. Second, the Bids submitted
by the Shortlisted Bidders are not yet
final. Participants could allow Bidders
to revise their Bids before the final
selection of the Plan Processor. Third,
neither the Bidders nor the Commission
can anticipate the evolution of
technology and market activity with
complete prescience. Available
technologies could improve such that
the Central Repository would be built
and operated at a lower cost than is
currently anticipated. On the other
hand, if anticipated market activity
levels are materially underestimated,
the Central Repository’s capacity could
need to increase sooner, increasing the
actual costs to operate the Central
Repository than currently anticipated in
the Bids. The Commission notes that
costs to build and operate the Central
Repository are relatively small
compared to total industry costs if the
CAT NMS Plan were approved;
consequently, the Commission
preliminarily believes that these
uncertainties are unlikely to materially
affect the final cost of the Plan to
industry, if it is approved.
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b. Costs to Participants
The Commission preliminarily
believes that the Plan’s estimates for
Participants to report CAT Data are
reliable because all of the SROs
provided cost estimates, and most SROs
have experience collecting audit trail
data as well as expertise in the both the
requirements of CAT as well as their
current business practices. The Plan
provides estimated costs for the
Participants to report CAT Data.848
These estimates are based on Participant
responses to the Costs to Participants
Study (‘‘Participants Study’’) 849 that the
Participants collected to estimate SRO
CAT-related costs for hardware and
848 See id. at Appendix C, Section B.7(b)(iii)(B)(2).
In addition to the costs the Participants would incur
implementing and maintaining CAT, the
Participants would also incur and would continue
to incur costs associated with developing the CAT
NMS Plan. The Participants estimate such costs to
be $8,800,000. The Commission does not include
these costs in its estimates of the costs associated
with CAT if the CAT NMS Plan is approved
because these costs have already been incurred and
would not change regardless of whether the
Commission approves or disapproves the CAT NMS
Plan. Further, the Commission assumes that the
CAT NMS Plan’s implementation cost estimates
include any additional CAT NMS Plan
development costs that would be incurred by
Participants if the CAT NMS Plan were approved.
849 The Participants Study delineates Participant
responses into two groups. The first group consists
of affiliated Participants, which includes single
entities that hold self-regulatory licenses for
multiple exchanges. The second group consists of
Participants that hold a single self-regulatory
license, including FINRA, the sole national
securities association. Id. at Appendix C, Section
B.7(b)(i)(A)(1).
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software, full-time employee staffing
(‘‘FTE costs’’), and third-party
providers.850 Respondents to the
Participants Study also estimated the
costs associated with retiring current
regulatory data reporting systems that
would be rendered redundant by
CAT.851
The Plan estimates costs for the
Participants as an aggregate across all
Participants (the six single-license
Participants and the five Affiliated
Participant Groups).852 The
implementation cost estimate for
Participants is $17.9 million, including
$770,000 in legal and consulting costs
and $10.3 million in full-time employee
costs for operational, technical/
development, and compliance-type
functions.853 Annual ongoing costs are
estimated to be $14.7 million, including
$720,000 in legal and consulting costs
and $7.3 million in full-time employee
costs.854 Other than legal and consulting
costs and full-time employee costs, the
Plan does not specify the other
categories of implementation and
ongoing costs, but based on discussion
with the Participants, the Commission
preliminarily believes that much of the
remaining costs would be attributed to
IT infrastructure, including hardware
and software costs.
The Plan also provides estimates of
the costs Participants currently face in
reporting regulatory data.855 The Plan
anticipates that some, but not all, of
these reporting systems would be retired
after implementation of the Plan.856 The
Plan reports that aggregate annual costs
for current regulatory data reporting
850 Third-party provider costs are generally legal
and consulting costs but may include other
outsourcing. The template used by respondents is
available at https://catnmsplan.com/PastEvents/
under the Section titled ‘‘6/23/14’’ at the ‘‘Cost
Study Working Template’’ link.
851 See CAT NMS Plan, supra note 3, at Appendix
C, Section B.7(b)(iii)(B)(2).
852 Id. at Appendix C, Section B.7(b)(iii)(B)(2).
853 Id.
854 Id.
855 Id.
856 Id. As required by Rule 613(a)(1)(ix), 17 CFR
242.613(a)(1)(ix), the CAT NMS Plan includes a
plan to eliminate existing rules and systems that
would be rendered duplicative under CAT. Id. at
Appendix C, Section C.9. Among other things, this
plan requires that within 18 months after Industry
Members are required to begin reporting data to the
Central Repository, each Participant will complete
an analysis of whether its rules and systems related
to monitoring quotes, orders, and executions collect
information that is not rendered duplicative by
CAT. Id. Each Participant must also analyze
whether any such non-duplicative information
should continue to be separately collected,
incorporated into CAT, or terminated. Id. Therefore,
depending on the results of these analyses, some
existing regulatory reporting systems may continue
to be in place after the implementation of CAT.
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systems are $6.9 million across all
Participants.857
In addition to data reporting costs,
Participants face costs associated with
developing and implementing a
surveillance system reasonably designed
to make use of the information
contained in CAT Data as required by
Rule 613(f).858 The Plan provides
estimates of the costs to Participants to
implement surveillance programs using
data stored in the Central Repository.
Participants would incur expenses,
including full-time employee (‘‘FTE’’),
legal, consulting and other costs to
adapt their surveillance systems to
utilize data in the Central Repository.
The Plan provides an estimate of $23.2
million to implement surveillance
systems for CAT, and ongoing annual
costs of $87.7 million.859 The Plan does
not provide information on why
Participants’ data reporting costs would
substantially increase if the Plan were
approved, nor does it provide
information on why surveillance costs
would decrease.
The Commission preliminarily
believes the data reporting cost
estimates are reasonable because the
Commission expects that Participants
would be required to implement new
technology infrastructure to report data
to the Central Repository and support
specialized personnel to maintain this
infrastructure and respond to inquiries
from the Plan Processor and users of
CAT Data. The Commission likewise
preliminarily believes that the
surveillance cost estimates are
reasonable, even though the annual
estimate of $87.7 million is lower than
the $147.2 million Participants, in
aggregate, currently spend on
surveillance programs annually 860
because Participants could realize
efficiencies from having data
standardized and centrally hosted that
could allow them to handle fewer ad
hoc data requests. In addition, the Plan
could allow Participants to automate
some surveillance processes that may
currently be labor intensive or
processed on legacy systems, which
857 Id.
at Appendix C, Section B.7(b)(ii)(B)(1).
17 CFR 242.613(f).
859 See CAT NMS Plan, supra note 3, at Appendix
C, Section B.7(b)(iii)(B)(2). Rule 613 requires the
SROs to file updated surveillance plans within 14
months of CAT implementation. 17 CFR 242.613(f).
The Commission assumes that the CAT NMS Plan’s
estimate is limited to adapting current surveillance
programs to the Central Repository. The
Commission believes this is a conservative
assumption because if other expenses were
included in the estimate, the Commission would be
overestimating the costs Participants would incur to
implement and operate CAT if the CAT NMS Plan
is approved.
860 See CAT NMS Plan, supra note 3, at Appendix
C, Section B.7(b)(ii)(B)(1).
858 See
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could reduce costs because the primary
driver of these costs is FTE costs.
Table 6 summarizes the Participants’
estimated costs, both current and CATrelated, that are set forth in the Plan.
Currently, Participants spend
approximately $154 million per year on
data reporting and surveillance
activities. The Participants estimate that
they would incur $41 million in CAT
implementation costs, and $102 million
annually in ongoing costs to report CAT
Data and perform surveillance as
mandated under Rule 613.
TABLE 6—PARTICIPANTS’ COST ESTIMATES
Current
CAT implementation
CAT ongoing
Data Reporting .........................................................................................
Surveillance .............................................................................................
$6,900,000
147,200,000
$17,900,000
23,200,000
$14,700,000
87,700,000
Total ..................................................................................................
154,100,000
41,100,000
102,400,000
c. Costs to Broker-Dealers
(1) Estimates in the Plan
The Plan estimates total costs for
those broker-dealers expected to report
to CAT. In particular, the Plan relies on
the Costs to CAT Reporters Study
(‘‘Reporters Study’’), which gathered
from broker-dealers the same categories
of cost estimates used in the
Participants Study—i.e., the hardware
and software costs, full-time employee
staffing costs, and third-party provider
costs that CAT Reporters would incur if
the Commission approves the Plan.861
The Reporters Study surveyed brokerdealers to respond to two distinct
approaches for reporting CAT Data to
the Central Repository.862 Approach 1
assumes CAT Reporters would submit
CAT Data using their choice of industry
protocols. Approach 2 assumes CAT
Reporters would submit data using a
pre-specified format. The Participants
distributed the Reporters Study to 4,406
broker-dealers and received 422
responses, of which the Participants
excluded 180 deemed materially
incomplete and 75 determined to be
erroneous.863 The Plan’s cost estimate
calculations are based on the remaining
167 responses. In aggregating the cost
estimates across all broker-dealers
expected to report CAT Data to the
Central Repository, the Plan assumed
that the characteristics of survey
respondents (firm size and OATS
reporting status) were representative of
the approximately 1,800 broker-dealers
expected to have CAT reporting
obligations.864
861 See
id. at Appendix C, Section B.7(b)(i)(A)(2).
id.
863 See id.
864 Not all broker-dealers are expected to have
CAT reporting obligations; the Participants report
that approximately 1,800 broker-dealers currently
quote or execute transactions in NMS Securities,
Listed Options or OTC Equity Securities and would
likely have CAT reporting obligations. The
Commission understands that the remaining 2,338
registered broker-dealers either trade in asset
classes not currently included in the definition of
Eligible Security or do not trade at all (e.g., brokerdealers for the purposes of underwriting, advising,
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862 See
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Based on the Reporters Study survey
data, the Plan estimates implementation
costs of less than $740 million for small
firms 865 and approximately $2.6 billion
for large firms, for a total of $3.34 billion
in implementation costs for brokerdealers.866 For annual ongoing costs, the
Plan estimates costs of $739 million for
small firms and $2.3 billion for large
firms, for a total of $3.04 billion in
annual ongoing costs for brokerdealers.867 For both large and small
broker-dealers, the Plan suggests that
the primary cost driver for projected
CAT reporting costs for broker-dealers is
costs associated with full-time
employees.868 For the reasons discussed
below, the Commission preliminarily
believes that the broker-dealer cost
estimates in the Plan are in part
unreliable, based on limitations with the
Plan’s underlying data in estimating
costs. As discussed below, the
Commission preliminarily believes that
cost estimates in the Plan for large
broker-dealers may be reliable, and the
Commission has incorporated large firm
data from the Plan into the
Commission’s estimates outlined
below.869
private placements). The Plan describes the process
of determining that 1,800 broker-dealers would
report to the Central Repository in Appendix C. See
CAT NMS Plan, supra note 3, at Appendix C,
Section B.7(b)(ii)(B)(2).
865 Survey respondents were instructed to classify
themselves as ‘‘small’’ if their Total Capital (defined
as net worth plus subordinated liabilities) was less
than $500,000. See CAT NMS Plan, supra note 3,
at Appendix C, Section B.7(b)(ii)(C) n.188. This is
consistent with the definition of ‘‘small business’’
or ‘‘small organization’’ used with reference to a
broker or dealer for purposes of Commission
rulemaking in accordance with provisions of
Chapter Six of the Administrative Procedure Act (5
U.S.C. 601 et seq.). See 17 CFR 240.0–10(c).
866 See CAT NMS Plan, supra note 3, at Appendix
C, Section B.7(b)(iv)(A)(3).
867 Id.
868 See id. at Appendix C, Section B.7(b)(iii)(C)(2).
869 While the estimates presented in the Plan
assume that the proportion of large versus small
broker-dealers that responded to the Reporters
Study is representative of the relative number of
large versus small broker-dealers that are expected
to incur CAT reporting obligations, the
Commission’s cost estimates do not embed this
assumption. Instead, the Commission relies on data
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The Commission preliminarily
believes, however, that the cost
estimates for small broker-dealers
provided in the Plan, which are based
upon responses set forth in the
Reporters Study, do not prove reliable
estimates of smaller CAT Reporter costs
for a number of reasons. First, some
respondents classified as small in the
Reporters Study appear to have
responded numerically with incorrect
units, with such responses resulting in
annual estimated cost figures that would
be 1,000 times too large. Second,
maximum responses in certain
categories of costs suggest that some
large broker-dealers may have
misclassified themselves as small
broker-dealers.870 Third, methods used
to remove outliers are likely to have
introduced significant biases. Finally,
the response rate to the Reporters Study
survey was low and is likely to have
oversampled small broker-dealers who
currently have no OATS reporting
obligations.871
First, the Commission preliminarily
believes that the respondents to the
Reporters Study survey are likely to
have used different units in their
responses and that the survey precision
is materially affected because
from FINRA to determine which firms are likely to
outsource, and models those firms’ costs based on
information gleaned from FIF-organized discussions
with industry. This is discussed further below, but
this estimation results in relatively fewer firms’
costs being estimated using ‘‘large’’ firm cost
estimates presented in the Plan.
870 The Plan presents summary statistics such as
average, median and maximum for each survey
response. See CAT NMS Plan supra note 3, at
Appendix C, Section B(7)(b)(ii)(C), Table 5. In the
left most column, $14 million is the maximum
response for ‘‘Hardware/Software Current Cost.’’
871 In reaching these preliminary conclusions, the
Commission reviewed the detailed discussions of
the Reporters Study survey methodology in the Plan
and the survey form and instructions provided to
respondents. See 6/23/14 entry on CAT NMS Plan
Web site, available at https://www.catnmsplan.com/
pastevents/. The Commission staff also
discussed with the Participants potential
methodology adjustments in aggregating the CAT
Reporters Study data. After Commission staff
discussions with the Participants, the Commission
concluded that no methodology could address these
fundamental issues with the survey data.
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inconsistent use of reporting units
across respondents introduces an
upward bias to the Reporters Study’s
findings. The survey collected cost
estimates in $1,000 increments;
however, there is evidence that some
respondents did not provide estimates
in $1,000 increments as requested.
Rather, survey results in the Plan reveal,
for example, that one small firm
reported current annual hardware/
software costs for current regulatory
data reporting to be $14,000,000 per
year.872 Because small firms responding
to the survey by definition have no more
than $500,000 in total capital, an annual
$14,000,000 estimate for hardware/
software costs for current data reporting
seems unreasonable.873 Furthermore, a
small survey respondent cited
$3,500,000 in hardware/software
retirement of systems costs, which
seems unreasonable for a broker-dealer
with less than $500,000 in total capital.
These are only a few examples, but they
raise the question of how many other
respondents recorded incorrect units in
their responses, particularly if screening
methodologies have difficulty detecting
such incorrect units. In light of these
unreasonable results, the Commission
preliminarily believes that the Plan’s
cost estimates for small broker-dealers
reporting data to CAT has an upward
bias because some firms did not
correctly respond to the survey in
$1,000 increments.
Because of errant responses of this
type, the Plan recommends using
medians instead of averages; 874
however, for nearly all estimated cost
categories in the Reporters Study, the
median response was zero, which the
Commission believes underestimates
the costs that CAT Reporters are likely
to face in most categories of costs.
Consequently, the Commission is
unable to adjust for these biases.
In addition, the Commission
preliminarily believes that the small
firm cost survey information in the
Reporters Study is unlikely to be
representative of the small brokerdealers that would have CAT reporting
responsibilities in part because the
Commission also believes preliminarily
that some survey respondents
misclassified their firm’s size, which
renders the Plan’s separate presentation
of results for large and small broker872 See CAT NMS Plan, supra note 3, at Appendix
C, Section B.(7)(b)(ii)(C), Table 5.
873 The Plan notes that it is possible that the firm
intended to report that it had $14,000 in annual
expenses for hardware/software. See CAT NMS
Plan, supra note 3, at Appendix C, Section
B.7(b)(ii)(C), n.193.
874 See CAT NMS Plan, supra note 3, at Appendix
C, Section B.7.(b)(ii)(C), n.194.
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dealers imprecise. In particular, the
Commission believes that at least one
large firm misclassified itself as a small
firm. The CAT NMS Plan Table 6
reveals that one firm designated as a
small firm responded to the Reporters
Study survey with it having 68 full-time
employees dedicated to performing
regulatory data reporting activities for a
yearly cost of $27,300,000.875 The
Commission believes, however, that a
firm with 68 full-time employees
reporting regulatory data could not be
small (again, as defined by the survey to
include firms with less than $500,000 in
total capital) because such a firm would
lack the working capital to support that
level of employee expense.876 The
presence of large-firms with
significantly higher costs in the smallfirm sample significantly biases the
small-firm cost estimates upward.
Moreover, the Commission
preliminarily believes that the
methodologies implemented to remove
outliers in the Reporters Study
introduce cost estimate biases.877 Based
on discussions with the Participants, the
Commission understands that to
identify and remove outliers, the
Participants first determined if each
survey item’s maximum response was a
potential outlier because it was more
than twice the value of the next highest
response; the Participants then
individually reviewed potential outliers
and omitted those deemed errant. While
the Commission recognizes that this
methodology may mitigate the precision
bias discussed above by removing a
single response that is 1,000 times too
high, it may not remove such outliers
when two or more firms errantly report
values 1,000 times too high, in which
case an upward bias to the cost
estimates would remain. Furthermore, if
one firm genuinely incurs expenses that
are more than twice those of the next
highest respondent, such survey
response might be removed under this
methodology, even though such a
response may accurately identify
expenses expected by the respondent,
which in turn introduces a downward
bias to the cost estimates. For example,
only 21 large OATS reporting firms are
represented in the Reporters Study
survey responses. If most of these 21
firms perform the majority of their
regulatory data reporting functions in
house, but one firm outsources all of its
regulatory data reporting, that single
firm could have outsourcing costs far
higher than its peers. Under the Plan’s
cost estimate methodology, this
outsourcing response in the Reporters
Study might be removed as an outlier,
unless another large, OATS reporting
firm responded to the Reporters Study
with at least half of the outsourcing
costs. The Commission considered
whether to request that the Participants
provide updated cost estimates under a
methodology that did not remove
Reporters Study outlier responses, but
the Commission preliminarily believes
that this approach would exacerbate the
precision problem discussed above and
possibly increase the number of errant
responses that are 1,000 times too high
to the cost estimate data set.
Finally, the Commission believes that
the Reporters Study response rate is not
adequate to be representative of the
population of broker-dealers that would
report to CAT. The survey was delivered
to 4,025 broker-dealers. After removing
erroneous and materially incomplete
responses, only 167 responses remained
of the 4,025 broker-dealers who were
sent the survey. To be representative of
the broker-dealers that would report to
CAT, a final response rate of 4.15%
seems low considering the diversity of
these broker-dealers. The majority of
broker-dealers are small and smaller
broker-dealers are diverse along many
dimensions relevant to the likely
magnitude of their expected CAT costs,
including business practices; tendency
to centralize technology; specialization
in market segments, such as options
versus equities; and the range of
products and markets in which
individual broker-dealers participate.
Because broker-dealer diversity is great,
a survey of expected broker-dealer costs
would ideally have a higher response
rate to ensure a representative sample.
Furthermore, of the 167 responses
incorporated into the Plan’s cost
estimates, 118 respondent firms were
classified as small in the Reporters
Study, and 88 of these 118 small firms
were identified as having no current
OATS reporting responsibilities.878 The
Commission preliminarily believes that
small firms that anticipate limited CAT
reporting responsibilities may have been
oversampled by the Reporters Study
survey because for nearly all categories
of cost estimates, the median small firm
response was zero, suggesting that they
do not expect to have CAT reporting
responsibilities. Consequently, the
875 See id. at Appendix C, Section B.(7)(b)(ii)(C),
Table 6.
876 See id. at Appendix C, Section B.7.(b)(i)(C),
n.188.
877 See id. at Appendix C, Section
B.7.(b)(i)(B)(ii)(C).
878 Small firms may have no OATS reporting
responsibilities because they do not engage in
activities that would incur OATS reporting
obligations, or they may be excluded or exempted
under FINRA’s OATS reporting rules. See Section
IV.D.2.b(1)A, supra.
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Commission preliminarily believes that
the small firms that responded to the
study cannot be statistically
representative of the small firms that
would incur CAT reporting obligations,
because the Commission believes that
most small broker-dealers would incur
significant costs in reporting to CAT.879
These costs are estimated below.
Although the Commission has
preliminarily concluded that the small
broker-dealer cost estimates presented
in the Plan are unreliable, the
Commission also preliminarily believes
that the cost estimates in the Plan for
large broker-dealers may be reliable. The
Commission preliminarily believes that
problems with the Reporters Study data
are less likely to affect the Plan’s large
broker-dealer cost estimates for several
reasons. First, if a large broker-dealer
were to respond to the Reporter Study
survey with the incorrect level of units
(resulting in estimates that were 1,000
times too large as was the case for some
small broker-dealer responses), then
these errant cost survey responses
would result in estimates that likely
would be denominated in billions of
dollars. The maximums presented in the
Plan’s tables describing the Reporters
Study data do not include responses
denominated in billions; notably, under
the Plan’s cost estimate methodology, if
such responses were generated, these
responses likely would have been
removed as outliers. Second, although it
is possible that small broker-dealers
misclassified themselves as large brokerdealers in the Reporters Study data,
such misclassification does not seem to
have biased the cost estimate results for
large broker-dealers to the degree that
the Commission preliminarily believes
has occurred for the small broker-dealer
Reporters Study data. Cost estimates for
large broker-dealers, particularly those
that do not have current OATS reporting
obligations, are not inconsistent with
information gathered by the
Commission in discussions with broker
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879 The
Commission notes that small firms
currently excluded from OATS reporting due to
their size would have CAT reporting
responsibilities under the Plan because the Plan
makes no provision to exempt or exclude them, as
FINRA does with OATS reporting. The Commission
preliminarily believes that these firms are likely to
experience higher implementation costs than other
small firms because CAT reporting would likely
necessitate establishing business relationships with
service providers if they do not already have such
relationships. The Commission preliminarily
believes that most small firms that would have CAT
reporting obligations but do not currently have
OATS reporting obligations would not have the IT
and regulatory personnel infrastructure to
accomplish this reporting in-house. The
Commission’s estimation of these firms’ costs to
implement CAT includes higher estimates of
employee costs to implement CAT to account for
this increased burden.
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dealers and service providers,880
although the Commission preliminarily
believes that averages presented in the
Plan generally fall between the expenses
that a very large and complex brokerdealer would experience and those of a
more typical broker-dealer in the same
category. For example, the Plan
estimates that the average large OATSreporting broker-dealer currently spends
$8.7 million annually to comply with
current data reporting requirements.881
The Commission preliminarily believes
that this estimate is likely to be
substantially lower than the actual data
reporting costs incurred by the largest
and most complex broker-dealers that
currently report to OATS; these very
large and complex firms are assumed to
spend far more than this estimate. There
are, however, only a limited number of
exceptionally large OATS-reporting
broker-dealers. Similarly, the Plan’s
estimate is likely to significantly
overestimate the costs incurred by the
majority of firms classified as large by
the Plan because most large firms are
not as large or as complex as these
limited number of exceptionally large
broker-dealers. Summary statistics on
activity levels of OATS reporting firms
are discussed in detail below.
The Plan presents cost estimates for
large broker-dealers’ current regulatory
data reporting costs and costs they
would incur to implement and maintain
CAT Data reporting. The Plan estimates
that an OATS-reporting large brokerdealer has current data reporting costs
of $8.7 million per year.882 A non-OATS
880 FIF arranged a group discussion with a small
number of broker-dealers whose identities were not
provided to Commission staff and individual
discussions with five service bureaus whose
identities were not provided to Commission staff.
Also, staff arranged individual discussions with five
additional broker-dealers. When market participant
identities were unknown, FIF provided
demographic information that allowed Commission
staff to gauge a firm’s size, complexity, and general
market activities. Broker-dealers outside of the
group discussion and service bureaus were asked
for specific cost information that related to their
regulatory data reporting costs; most broker-dealers
and some service bureaus shared general estimates,
particularly of staffing levels, and provided
information on cost drivers and obstacles that firms
face in accomplishing their regulatory data
reporting, particularly challenges that they face in
implementing changes to these requirements. Most,
but not all, firms participating in discussions with
Commission staff discussed OATS as their most
challenging data reporting requirement. Some firms
named LOPR and EBS as additional sources of
regular challenges and significant costs. It is our
understanding from these discussions, that some
data reporting requirements, such as Rule 605 and
Rule 606 reporting, are nearly always outsourced.
881 See infra note 882.
882 See CAT NMS Plan, supra note 3, at Appendix
C, Section B.(7)(b)(ii)(C), Table 3. The $8.7 million
figure was calculated by summing the average
hardware/software cost, third party/outsourcing
cost, and full-time employee costs using the
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reporting large broker-dealer is
estimated to spend approximately $1.4
million annually.883 The Plan estimates
that OATS-reporting large brokerdealers would spend approximately
$7.2 million to implement CAT Data
reporting, and $4.8 million annually for
ongoing costs.884 For non-OATS
reporting large broker-dealers, the Plan
estimates $3.9 million in
implementation costs and $3.2 million
in annual ongoing costs.885 According to
the Plan, the magnitude of each of these
cost estimates is primarily driven by
FTE costs.
(2) Commission Cost Estimates
The Commission’s broker-dealer cost
estimates incorporate some brokerdealer data from the Plan, but to address
issues in the Plan’s Reporters Study
data, the Commission’s cost estimates
also include other data sources.886 As
previously discussed, the Commission
preliminarily believes that the small
firm cost estimates presented in the
Reporters Study are unreliable. As a
result, the Commission has re-estimated
the costs that broker-dealers likely
would incur for CAT implementation
and ongoing reporting. As with the
Plan’s cost estimates, the Commission’s
re-estimation relies on classifying
broker-dealers based on whether they
currently report OATS data. However,
the re-estimation further classifies
broker-dealers, as in the Commission’s
cost estimates presented in the
Proposing Release, based on whether
the firm is likely to use a service bureau
to report its regulatory data, or,
alternatively, whether the firm might
choose to self-report its regulatory data.
In this updated analysis, the
Commission preliminarily estimates
that the 1,800 broker-dealers expected to
incur CAT reporting obligations
currently spend approximately $1.6
billion annually to report regulatory
data.887 If the CAT NMS Plan is
Commission’s estimated cost per employee of
$424,350.
883 See CAT NMS Plan, supra note 3, at Appendix
C, Section B.(7)(b)(ii)(C), Table 4. The $1.4 million
figure was calculated by summing the average
hardware/software cost, third party/outsourcing
cost, and full-time employee costs using the
Commission’s estimated cost per employee of
$424,350.
884 See CAT NMS Plan, supra note 3, at Appendix
C, Section B.(7)(b)(iii)(C)(2)a., Table 9; and at
Appendix C, Section B.(7)(b)(iii)(C)(2)b., Table 15.
885 See CAT NMS Plan, supra note 3, at Appendix
C, Section B.(7)(b)(iii)(C)(2)a., Table 10; and at
Appendix C, Section B.(7)(b)(iii)(C)(2)b., Table 16.
886 Discussions below present information on data
obtained from FINRA and gleaned from discussions
with broker-dealers and service bureaus arranged by
FIF and staff. See supra notes 880 and 899.
887 To the extent that the CAT NMS Plan
underestimates the number of broker-dealers that
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approved, the Commission
preliminarily believes that these brokerdealers would incur approximately $2.2
billion in implementation costs and $1.5
billion in ongoing data reporting
costs.888
The Commission preliminarily
believes classifying broker-dealers based
on their manner of reporting provides a
more accurate estimate of the costs firms
will incur because, as noted below,
costs differ based on whether the firm
insources or outsources reporting
responsibilities and insourcing/
outsourcing does not necessarily
correlate with firm size. Accordingly,
the Commission begins its estimation of
costs using the number of OATS
Reportable Order Events (‘‘ROEs’’)
reported by firms that report to OATS.
The Commission preliminarily believes
that because OATS reportable events,
such as order originations, routes, and
executions are also CAT Reportable
Events, these two measures are likely to
be highly correlated, making the number
of OATS records a proxy for the
anticipated level of CAT reporting.889
Based on discussions with broker
dealers and service providers, however,
the Commission preliminarily believes
that firms that report high numbers of
OATS ROEs decide to either self-report
their regulatory data or outsource their
regulatory data reporting based on a
number of criteria, including potential
costs.890 Thus, simply using the number
of OATS ROEs as a proxy for firm size
may not provide an accurate picture of
the reporting costs for such firms. As a
result, the Commission goes a step
further in its estimation of costs by
segmenting firms into two groups—
those that insource and those that
outsource their regulatory data
reporting—and estimates costs
separately for each group. Empirical
evidence supporting this approach is
detailed further below.891
The Plan also separates industry costs
of current OATS reporting firms from
those that currently have no OATS
reporting obligations, recognizing that
the group of non-OATS reporting firms
are diverse in size and scope of
activities. The Commission maintains
this approach in its re-estimation, as
firms that do not currently report to
OATS would face a different range of
costs to implement and maintain CAT
reporting because firms that currently
do not report to OATS may have little
to no regulatory data infrastructure in
place. Broker-dealers that do not
currently report to OATS may have
higher or lower costs than firms that do
report to OATS, depending on whether
they do not report because of SRO
membership status or lack of equity
market activity or because of size and
scope of activity within equity markets.
For example, an electronic liquidity
provider (‘‘ELP’’) may trade extensively
both on and off-exchange, yet not report
to OATS because it is not a FINRA
member; such a firm could incur high
data reporting costs under CAT because
it has a high volume of records to report.
Conversely, a small equity trading firm
might be excluded or exempted from
OATS reporting due to its size and
scope of activities; such a firm could
have relatively low CAT reporting costs,
although still higher than its existing
regulatory reporting costs, because it has
few Reportable Events and is assumed
to outsource its reporting
responsibilities. Recognizing this
diversity in non-OATS firms, the
Commission’s re-estimation anticipates
a large range of firm activity levels in
non-OATS CAT reporters and treats
them differently when estimating their
costs.892 This is discussed further
below.
In sum, the framework for the
Commission’s re-estimation is as
follows. First, the Commission identifies
would incur CAT reporting obligations, the
Commission’s updated estimates understate the
actual costs Reporters would face if the CAT NMS
Plan is approved.
888 These figures cover only broker-dealer costs.
Industry-wide costs are summarized below in
Section IV.F.2.
889 In other words, the Commission preliminarily
believes that the higher the number of OATS ROEs
reported, the higher the anticipated number of CAT
records to report. As noted below, however, the
Commission anticipates that the number of CAT
records would exceed the number of OATS ROEs.
890 As explained further below, the Commission
believes that firms reporting relatively few OATS
ROEs would be unlikely to have the infrastructure
and specialized employees necessary to insource
regulatory data reporting and would almost
certainly outsource their regulatory data reporting
functions.
891 The Commission in its cost calculation uses
the number of OATS ROEs as a measure of firm
size, rather than traditional measures of firm size
based on a single metric, such as capital level, or
OTC dollar volume. The Commission preliminarily
believes that the use of OATS ROEs provides a
more accurate predictor of firm reporting behavior.
Data provided by FINRA, for example, reveals that
some firms with extremely high levels of OATS
reporting activity have relatively low capital levels;
furthermore, many firms that report exceptionally
high numbers of OATS ROEs have no OTC dollarvolume. See infra note 893.
892 The Commission’s re-estimation of costs
assumes that firms that are currently excluded or
exempted from OATS reporting are Outsourcers. By
definition, OATS-reporting Outsourcers report
fewer than 350,000 OATS ROEs per month.
However, firms that are not FINRA members are not
assumed to be Outsourcers; many of these firms are
in the business of proprietary trading as ELPs or are
Options Market Makers, which are assumed to be
typical of large non-OATS reporters discussed in
the Plan. The identification of these firms and their
estimated costs of CAT reporting are discussed
further in Section IV.F.1.c(2)B.i, infra.
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those OATS-reporting firms that
insource (‘‘Insourcers’’) and those that
outsource based on an analysis of the
number of OATS reporting ROEs
combined with specific data provided
by FINRA on how firms report.
Furthermore, the Commission identifies
firms that do not currently report to
OATS but are likely to insource based
on their expected activity level by
identifying Options Market Makers and
ELPs. Based on that analysis, the
Commission preliminarily estimates
that there are 126 OATS-reporting
Insourcers and 45 non-OATS reporting
Insourcers; these estimates are
discussed further below. The
Commission’s re-estimation classifies
the remaining 1,629 broker-dealers that
the Plan anticipates would have CAT
Data reporting obligations as
‘‘Outsourcers,’’ based on outsourcing
practices observed in data obtained from
FINRA and discussed further below.
The Commission preliminarily believes
that most of these firms would
accomplish their CAT Data reporting
through a service bureau. Next, to
determine costs for Insourcers, the
Commission relies upon cost estimates
for firms classified as ‘‘large’’ in the
Reporters Study. For Outsourcers, the
Commission uses a model of ongoing
outsourcing costs (‘‘Outsourcing Cost
Model’’) to estimate both current
regulatory data reporting costs and CATrelated data reporting costs Outsourcers
would incur if the CAT NMS Plan were
approved.
A. Broker-Dealer Reporting Practices
Although the Commission’s analysis
segregates broker-dealers into two
groups (Insourcers and Outsourcers),
within those groups, broker-dealer data
reporting methods currently vary widely
across firms, and these varied methods
affect the data reporting costs that
broker-dealers incur. As discussed
previously, depending on the business
in which broker-dealers participate,
broker-dealers can have a wide range of
reporting responsibilities.
There are two primary methods by
which broker-dealers accomplish data
reporting: Insourcing, where the firm
reports data to regulators directly; and
outsourcing, where a third-party service
provider performs the data reporting,
usually as part of a service agreement
that includes other services. Firms that
outsource retain responsibility for
complying with rules related to
outsourced activity. Based on data from
FINRA and conversations with market
participants, the Commission
preliminarily believes that the vast
majority of broker-dealers outsource
most of their regulatory data reporting
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functions to third-party firms. Data
provided by FINRA shows that 932
broker-dealers reported at least one
OATS ROE between June 15 and July
10, 2015.893 Of these 932 firms, 799
reported at least 90% of their OATS
ROEs through a service bureau. Brokerdealers generally used a single service
bureau (497 firms) to report OATS, but
some broker-dealers used multiple
service bureaus (up to 9 service
bureaus).
Often, service bureaus bundle
regulatory data reporting services with
an order-handling system service that
provides broker-dealers with market
access and order routing capabilities.
Sometimes regulatory data reporting
services are bundled with trade clearing
services. A broker-dealer’s decision to
insource/outsource these functions and
services can be complex, and different
broker-dealers reach different solutions
based on their business characteristics.
To illustrate, some broker-dealers selfclear trades but outsource regulatory
data reporting functions; some brokerdealers have proprietary order handling
systems, self-clear trades, and outsource
regulatory data reporting functions.
Other broker-dealers outsource orderhandling, outsource clearing trades, and
self-report regulatory data. The most
common insource/outsource service
configuration, however, for all but the
most active-in-the-market broker-dealers
is to use one or more service bureaus to
handle all of these functions.
In most, but not all, cases, service
bureaus host their client broker-dealer’s
order-handling system on the service
bureau’s servers while the broker-dealer
has software serving as a ‘‘front end’’ for
this system running on the brokerdealers’ local IT infrastructure. For
broker-dealers whose order-handling
systems are thus hosted on their service
bureau’s servers, their service bureaus
would handle many elements of CAT
implementation, including clock
synchronization. These broker-dealers
would still incur some CAT
implementation costs because some
893 The Commission analyzed data on brokerdealer OATS reporting received from FINRA. This
data source included the number of OATS ROEs
reported by each individual broker-dealer, as well
as counts of how many ROEs were reported by the
firm directly and how many ROEs were reported
through service bureaus, and the number of service
bureaus that reported data for the firm. The dataset
includes the firms’ minimum net capital required
and actual net capital as well as the number of
registered persons associated with the firm. Factors
that affect broker-dealers’ insourcing/outsourcing
decision are discussed below. Because market
activity is highly correlated with volatility, this
four-week period was chosen to have a typical level
of volatility (as measured by VIX level) for the
period September 16, 2010 through September 15,
2015.
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CAT Data, such as Customer
information (including PII), is likely to
reside outside of the broker-dealer’s
order handling system; consequently,
such broker-dealers would need to
develop technical and regulatory
infrastructure to provide such CAT Data
to its service bureaus. Further, brokerdealers that outsource could still need
to adapt their in-house software systems
to address order-management system
changes. In addition to the resources
needed to reprogram the system, any
order-handling system change is likely
to require significant staff training.
Furthermore, broker-dealers that
outsource would need to update their
internal monitoring of their service
bureau’s reporting to ensure it meets the
requirements of the Plan.
In discussions arranged by FIF,
broker-dealers cited a number of factors
that influence a broker-dealer’s decision
on whether to handle regulatory data
reporting in-house. Generally, smaller
broker-dealers (with relatively few
registered persons and limited capital)
do not have the business volume
required to support the IT infrastructure
and specialized staff that is necessary to
perform in-house regulatory data
reporting; these broker-dealers may have
no business choice but to rely upon
third-party service providers to provide
order handling and market connectivity,
as well as clearing services.894 For larger
broker-dealers, outsourcing is more
likely to be a discretionary business
decision. In discussions with staff,
larger broker-dealers cited a number of
reasons to outsource. First, it may be a
strategic choice; some broker-dealers
view regulatory data reporting as a
function that offers no competitive
advantages and a costly distraction from
other business activities, as long as an
alternative solution satisfies reporting
requirements. For these firms,
compliance might be achieved at a
lower-cost in-house, but the firms prefer
to outsource the data reporting function
to focus key resources on business
functions. Second, some broker-dealers
outsource these functions to reduce
costs associated with demonstrating
regulatory compliance. Multiple brokerdealers stated that using a regulatory
reporting service that was familiar to
regulators allowed more efficient
894 In conversations with market participants,
several broker-dealers suggested that for very small
firms, establishing these service bureau
relationships could be difficult. These firms might
‘‘piggy back’’ on another broker-dealer’s
infrastructure, essentially relying on them to act as
an introducing broker. This would generally add
another cost layer for these very small firms but
could be more cost effective than establishing
stand-alone service bureau relationships.
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regulatory examinations, because an inhouse regulatory reporting system might
require more staff time invested in
facilitating examinations and
demonstrating compliance. Third, some
broker-dealers cited that keeping current
with regulatory requirements drove
their decision to outsource. These
broker-dealers may have insourced
initially, but they relayed that over time
they experienced accelerating regulatory
rule changes, which led to an escalation
in their compliance costs. For these
firms, the pace of regulatory rule
changes drove the decision to outsource
where they had at one time insourced,
because the firm could fulfill its
regulatory responsibilities at a lower
cost by outsourcing and monitoring the
service bureau’s compliance.895
On the other hand, some brokerdealers choose to insource their
regulatory data reporting functions. In
discussions arranged by FIF, brokerdealers cited a number of reasons
supporting their decision to self-report.
First, some broker-dealers cited
ancillary benefits to constructing the IT
infrastructure necessary to accomplish
their regulatory data reporting. Data
collected in a central location for
regulatory data reporting and the
software necessary to manipulate the
regulatory data facilitates selfmonitoring and business reporting,
providing other benefits to the firm.
Second, some broker-dealers cited
protecting their proprietary strategies as
a motivator to self-report regulatory
data. These broker-dealers felt that
sharing their trading data with a service
bureau was potentially too revealing of
their proprietary trading strategies.
Third, some broker-dealers cited
operational complexity as a driver of
their insourcing decision. For these very
large broker-dealers that traded in a
wide range of assets, outsourcing would
involve multiple service provider
contracts. At least one broker-dealer
stated that it did not believe service
bureaus could meet all of its
requirements due to its complexity.
Finally, while some broker-dealers
preferred to outsource to reduce the
costs of demonstrating compliance,
others stated that outsourcing would
increase compliance costs because they
could not conduct their own
compliance checks to ensure the reports
comply with relevant regulations.
895 The Commission notes that an Industry
Member CAT Reporter remains responsible for
compliance with the requirements of the CAT NMS
Plan and Rule 613, as reflected in the Compliance
Rule of the SRO(s) of which it is a member,
regardless of whether it has outsourced some or all
of its regulatory data reporting functions to a third
party.
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Current costs of outsourcing
regulatory data reporting vary widely
across broker-dealers. Whether data
reporting is provided on behalf of a
broker-dealer by the provider of an
order-management system or another
third-party firm, a broker-dealer
generally enters into long-term
agreements with its service provider to
obtain a bundle of services that includes
regulatory data reporting, and costs to
change service bureaus are high.
Furthermore, based on discussions with
service providers, the Commission
understands that switching service
bureaus can be costly and involve
complex onboarding processes and
requirements, and that systems between
service bureaus may be disparate;
furthermore, changing service bureaus
may require different or updated client
documentation.896 The Commission
preliminarily believes that annual costs
for provision of an order-handling
system (including market connectivity,
routing and regulatory data reporting)
range from $50,000 to $180,000
annually for very small broker-dealers.
Costs for very large broker-dealers that
outsource these functions begin at $1
million to 2.4 million annually.897
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896 See Section IV.G.1.d, infra, for a discussion of
the potential effects of the Plan on the market to
report regulatory data.
897 These estimates are based on Staff discussions
with service bureaus that were arranged by FIF. See
supra note 895 and accompanying text. The $1
million per year figure contemplated a very large
broker-dealer that provided its own order
management system and market connectivity, so it
likely represents a rough estimate of the regulatory
data reporting costs of a very large firm. Because
service bureaus did not provide an OATS activity
level corresponding to ‘‘very large,’’ the
Commission relies on an analysis of FINRA data on
OATS reporting to calibrate its definition of ‘‘very
large’’ in terms of OATS activity level and seeks
comment on what activity level should correspond
to cost estimates for ‘‘very large’’ broker-dealers.
The Commission notes that because there are
relatively few broker-dealers that report at medium
activity levels, the Commission’s estimation of
outsourcing costs is not particularly sensitive to this
definition because most broker-dealers whose costs
are estimated using the Outsourcing Cost Model
have very low OATS reporting levels. Finally,
estimates of total reporting costs include provision
of an order-management system and market
connectivity.
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For broker-dealers that perform
regulatory data reporting in-house,
implementation costs are likely to vary
widely. Some very large broker-dealers
that self-report regulatory data have a
centralized IT infrastructure and trade
in relatively few asset classes. Some of
these broker-dealers carry no customer
accounts, simplifying their regulatory
data reporting obligations. The
Commission preliminarily believes that
such broker-dealers could incur
relatively low CAT implementation
costs because they have a centralized IT
infrastructure that captures all brokerdealer activity and specialized
personnel who are dedicated to brokerdealer-wide data reporting. At the other
end of the spectrum, large brokerdealers may be very complex,
facilitating complex multi-leg
transactions and operating within a noncentralized structure. These brokerdealers would be likely to experience
CAT implementation costs far higher
than broker-dealers with less complex
structures for several reasons. First,
some of these broker-dealers do not
have a centralized IT infrastructure;
instead, orders could originate from
many locations in the broker-dealer and
may be handled by diverse legacy
systems, each of which the brokerdealer would need to adapt for CAT
Data reporting.898 Second, brokerdealers that accommodate more
complex transactions that involve
multiple asset classes would likely need
to invest more time in understanding
new regulatory requirements. In
discussions with market participants,
several broker-dealers noted, among
other concerns, that determining the
898 In discussions with market participants, some
broker-dealers indicated that they operate more
than a dozen instances of a third-party’s order
handling system, suggesting they originate orders at
more than a dozen places within the broker-dealer,
yet they handle data reporting in-house. Firms such
as these are likely to incur far higher costs to
implement CAT compared to broker-dealers with a
centralized IT infrastructure and fewer legacy
systems because there are more systems that require
changes to comply with new data reporting
requirements.
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30717
correct regulatory treatment for unusual
trades can be a significant cost-driver in
implementing regulatory rule changes
and can delay implementation of system
changes or precipitate a second round of
changes once regulatory treatment of
these trades is clarified. Third, brokerdealers that lack a centralized IT
infrastructure would likely incur higher
costs to comply with clock
synchronization requirements because
more servers may be handling orders
than in firms with a more centralized IT
infrastructure.
B. Re-Estimation
i. Count of Firms Likely To Rely Upon
Service Bureaus for Data Reporting
To separately examine the costs to
broker-dealers that outsource and to
aggregate those costs across all brokerdealers, Commission Staff first
established a count of CAT Reporters
likely to outsource their regulatory data
reporting functions. For this, the
Commission analyzed data provided by
FINRA.899
The FINRA data allows the
Commission to examine how brokerdealers’ current outsourcing activities
vary with the number of ROEs reported
to OATS. Figure 1 shows the percentage
of OATS ROEs that are self-reported for
five size categories of broker-dealers
with the following OATS reporting
activity levels for a four-week period
from June 15–July 10, 2015: More than
1 billion records; 1 million to 1 billion
records; 350,000 to 1 million records;
100,000 to 350,000 records; and 100,000
records or fewer.900 The bars for each
category represent the percentage of
total OATS ROEs reported by brokerdealers in the category that were
reported directly by the broker-dealers.
899 See
supra note 893 and accompanying text.
group that reports one billion records or
more comprises 77.90% of OATS records; the group
that reports one million records to one billion
comprises an additional 22.05% of OATS records.
The remaining three groups comprise just 0.05% of
all OATS records. Overall, firms self-report 65.44%
of OATS ROEs.
900 The
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Based on this analysis of FINRA data,
the Commission preliminarily believes
that the 126 broker-dealers that reported
more than 350,000 OATS ROEs between
June 15 and July 10, 2015 make the
insourcing-outsourcing decision
strategically based on the brokerdealer’s characteristics and preferences,
while the remaining OATS reporters are
likely to utilize a service bureau to
accomplish their regulatory data
reporting.901 The categories of brokerdealers assumed to outsource their data
reporting are marked with an asterisk (*)
in Figure 1.
As seen in Figure 1, broker-dealers in
the highest OATS-reporting category
insourced reporting for more than 60%
of the OATS ROEs reported. More
specifically, the FINRA data shows that
16 broker-dealers reported more than a
billion OATS ROEs each between June
15 and July 10, 2015; most of these
broker-dealers (11) self-reported nearly
all of their regulatory data, but 3 used
901 The Commission preliminarily believes this
decision is strategic and discretionary because
FINRA data reveals that while many broker-dealers
at these activity levels self-report most or all of their
regulatory data, other broker-dealers outsource most
or all of their regulatory reporting at these activity
levels. At lower activity levels, most, but not all,
broker-dealers outsource most if not all of their
regulatory data reporting. The Commission is
cognizant that some broker-dealers reporting fewer
than 350,000 OATS ROEs per month can and do opt
to self-report their regulatory data. However, based
on conversations with broker-dealers, the
Commission preliminarily believes that most
broker-dealers at these activity levels do not have
the infrastructure and specialized staff that would
be required to report directly to the Central
Repository, and electing to self-report would be
cost-prohibitive in most but not all cases. See
Section IV.F.1.c(2)A, supra.
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service bureaus for 100% of their OATS
reporting.
Figure 1 also shows that brokerdealers that report between 1 million
and 1 billion OATS ROEs during the
four-week period insourced reporting
for more than 70% of the OATS ROEs
they reported in aggregate. Thirty-six of
these 89 broker-dealers used service
bureaus to report at least 90% of their
OATS data while 42 of these 89 brokerdealers self-reported over 99% of their
regulatory data.
For the 21 broker-dealers that
reported more than 350,000 but fewer
than 1 million OATS ROEs during the
sample period, Figure 1 shows that they
insource approximately 27% of their
aggregate OATS ROEs reporting.
Thirteen of these broker-dealers use
service bureaus for more than 99% of
their OATS reporting while 7 of these
21 broker-dealers self-reported more
than 98% of their OATS data.
For the 806 broker-dealers that
reported fewer than 350,000 OATS
ROEs during the sample period,
approximately 88.9% of those OATS
ROEs were reported through service
bureaus, with 730 broker-dealers
reporting more than 99% of their OATS
ROEs through one or more service
bureaus.902 These broker-dealers are
902 Although
most of these broker-dealers report
nearly all of their ROEs through a service bureau,
there are broker-dealers, both large and small, that
self-report nearly all of their OATS data at all
activity levels, including a broker-dealer that selfreported two OATS ROEs during the sample.
Despite this variation, the Commission believes that
its assumptions regarding which firms are likely to
outsource and which firms have discretion are
appropriate because (1) small firms that insource
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represented in the two right-most bars
in Figure 1 that are identified with
asterisks (*) in their labels. Because of
the extensive use of service bureaus in
these categories of broker-dealers, the
Commission assumes that these brokerdealers are likely to use service bureaus
to accomplish their CAT Data reporting.
ii. Estimation of Outsourcing Costs
The Commission has estimated
ongoing costs for outsourcing firms
using a model based on data gleaned
from discussions with service bureaus
and broker-dealers and implementation
costs using information learned in
conversations with industry.903 Service
bureaus that provide order-handling
systems, market connectivity and
regulatory data reporting services
estimated that a very small brokerdealer was likely to currently spend
$50,000–$180,000 per year for these
services; they suggested that current
annual costs for very large brokerdealers would likely be $1,000,000–
$2,400,000 but could be greater in some
cases.904 The Commission assumes that
a very small broker-dealer would report
a single OATS ROE per month and a
very large broker-dealer would report
100 million OATS ROEs per month.905
likely do so because it is less costly so the
assumption simplifies the analysis and
overestimates costs and (2) the cost information for
the other firms already accounts for both insourcing
and outsourcing.
903 See supra note 880.
904 Estimates are based on FIF-arranged
conversations with service bureaus. See supra note
880.
905 The Commission preliminarily believes that
firms that report more than 350,000 OATS ROEs per
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30719
endpoints. To illustrate the
underestimation concern, if the
estimated pricing function was a
straight line but the actual pricing
function was concave, the estimates
would be too low. Lacking data on
outsourcing costs faced by brokerdealers with activity levels that are
neither very small nor very large, which
would assist the Commission in
estimating the degree of concavity of the
pricing function, the Commission’s
estimation assumes that service bureau
pricing functions are similar in
concavity to equity exchange pricing
functions.907
The Commission relies on a schedule
of average charges to access liquidity
and rebates to provide liquidity from
four non-inverted exchanges to estimate
the concavity of the exchange pricing
function, which the Commission uses to
approximate the concavity of the
outsourcing cost model.908 On such
exchanges, the party receiving liquidity
in the transaction generally pays a fixed
fee to do so; the party providing
liquidity receives a rebate from the
exchange. This rebate often marginally
increases with the market participant’s
aggregate volume on the exchange.909
For liquidity providing firms, this
pricing scheme would imply a concave
function of the cost differential between
taking and providing liquidity, which
informs the Commission’s estimation of
the degree of concavity of the
outsourcing cost model. The
Commission preliminarily believes that
estimating the shape of the function 910
using exchange pricing functions is a
reasonable approach because the same
month outsource on a discretionary basis. If the
estimate of activity level for very large firms is too
large (100 million ROEs is used in the model
estimation), the Commission’s model would
underestimate the costs of all firms that report
fewer than 350,000 OATS ROEs per month
currently. The Commission preliminarily believes
the 100 million ROEs per year size estimate to be
reliable because although most firms at activity
levels between 40 million and 300 million OATS
ROEs (15 firms) self-report, several use service
bureaus.
906 The Commission preliminarily believes that
service bureau pricing functions are concave based
on discussions with service bureaus arranged by
FIF. See supra note 897.
907 The Commission relies on exchange pricing
functions because the data is publicly available and
because a broker-dealer’s activity level on
exchanges is correlated with the quantity of
regulatory data it generates. If the pricing function
for service bureau services is more concave than
exchange pricing functions, the Commission’s
preliminary model would underestimate costs for
broker-dealers that are neither very small nor very
large because an increase in concavity would
increase the distance between the concave and
linear functions in Figure 2.
908 On many exchanges, the party posting a
resting order earns a rebate when his order is
executed. His counterparty, whose order
immediately executes, pays a fee to the exchange,
which exceeds the rebate the liquidity-providing
party earned. The difference between the rebate and
the fee represents the cost a market participant
would incur to fill a resting order on the exchange,
then immediately trade out of the position—a socalled ‘‘round-trip’’ cost. The magnitude of this
round-trip cost is often a function of the market
participant’s trading activity on the exchange, with
more active traders paying lower round-trip costs.
On ‘‘inverted’’ exchanges, the party with the resting
order pays a fee while her counterparty that
receives immediate execution earns a rebate. The
Commission’s estimate of concavity relies on data
from exchanges that do not feature inverted pricing.
The Commission obtained public fee schedule
data from Web sites for NASDAQ, PSX, NYSE, and
ARCA during October, 2015. For NASDAQ, the
differential between access fees and liquidity
rebates was calculated using the universal ‘‘take
fee,’’ and rebates were for shares trading at greater
than $1.00 per share (https://www.nasdaqtrader.
com/Trader.aspx?id=PriceListTrading2. For PSX,
calculations used the Tape C remove charge less
rebate to add displayed liquidity (https://www.
nasdaqtrader.com/Trader.aspx?id=PSX_Pricing).
For NYSE, calculations used the ‘‘Providing Tier 3/
2/1’’ rebates versus the universal ‘‘take fee’’ (NYSE
Trading Fees). For ARCA, calculations used charges
and rebates for midpoint passive liquidity orders
available at https://www.nyse.com/publicdocs/
nyse/markets/nyse-arca/NYSE_Arca_Marketplace_
Fees.pdf.
909 See supra note 908 for examples of exchange
pricing schedules.
910 This estimation affects the shape of the
function, and thus the relative prices that are
estimated for each broker-dealer; the absolute level
of prices is determined through the function’s
calibration, which is described below.
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Based on discussions with market
participants, the Commission assumes
that the cost function for outsourcing is
concave.906 This type of function is
appropriate when costs increase as
activity level increases, but the cost per
unit of activity (e.g., cost per report)
declines as activity increases. Volume
discounts can create such cost
functions. Alternatively, if the
Commission estimates outsourcing costs
as a linear function using the two pointestimates (very small firms and very
large firms) obtained from service
bureaus, that outsourcing cost model
would underestimate the costs of
broker-dealers that are neither very large
nor very small due to the concavity of
the function. As shown in Figure 2, a
concave function is greater than the
linear function that connects its
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activities that determine a brokerdealer’s access fees on exchanges—such
as executing orders and the activities
such as order submission that are
requisite to those executions—would
affect the broker-dealer’s impact on a
service bureau’s infrastructure and thus
the fee that a service bureau is likely to
charge to provide services to the brokerdealer.
The Commission’s estimation of the
outsourcing cost model begins with
construction of a tiered function based
on the exchange pricing function; the
incorporation of the exchange pricing
function is the source of the concavity
in the model.911 The Commission’s
estimation of exchange pricing assumes
four activity level categories.912 The
Commission preliminarily mapped
OATS reporting activity levels to
exchange fee break points, with the
assumptions that only a very small
minority of firms would qualify for the
lowest-fee tier of services and all of the
firms that reported so few OATS ROEs
to be assumed to be Outsourcers would
be at the highest-cost tier of service.913
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911 A tiered function often looks like a set of steps
with points of discontinuity where the function
appears to suddenly move up or down. Often, a
tiered function’s behavior is determined by the
range of its independent variable (input value). For
example, a firm that charges $1 per unit for orders
of 100 units or less, or $.80 per unit for orders of
more than 100 units prices according to a step
function, with the number of units ordered being
the independent variable. On exchanges, the round
trip cost (access fee less rebate) is often a step
function based on the firm’s activity level during a
given calendar period.
912 The Commission chose four tiers to strike a
balance between incorporating as much information
from exchange pricing models and having to
extrapolate information from them. NASDAQ and
PSX have five activity level tiers, while NYSE and
ARCA have three activity level tiers. Building a
model with only three tiers would ignore
potentially significant information from NASDAQ
and PSX while building a model with five tiers
would require extrapolating information on
nonexistent tiers on NYSE and ARCA, which adds
imprecision to the function. For NASDAQ and PSX,
the Commission used prices for the four most active
tiers in the analysis; for NYSE and ARCA, the
Commission used all three, with the middle activity
level assumed constant over the two middle activity
tiers in the outsourcing cost model. The aggregate
exchange price function averages prices on those
four exchanges.
913 The Commission preliminarily believes that
this is a conservative assumption because all of the
firms assumed to be outsourcing are assumed to be
at the highest priced service level on a per record
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Consequently, the Commission assumed
the first fee break-point to be 350,000
OATS messages per month. A firm with
1 million messages per month is
assumed to qualify for the third pricing
tier. To qualify for the most favorable
pricing tier, a firm would need to report
more than 100 million OATS messages
per month. The model is fitted by
adding a constant to the implied cost of
message traffic to bring firms with a
single OATS ROE to the minimum
$50,000 annual fee discussed by service
bureaus. The fee for very large firms (for
purposes of this model, 100 million plus
records per month) is calibrated by
multiplying the estimated exchange fee
tiered function by a constant scale factor
of 30. With these adjustments, the tiered
function implies a firm with 20,000
OATS ROEs per month would incur a
service bureau fee of $50,705 annually;
a firm with 100 million OATS ROEs per
month would incur a service bureau fee
of $1.175 million annually; and a firm
with 1 billion OATS ROEs per month
firm would incur a service bureau fee of
$11.3 million annually.914
The final step in estimating the
Outsourcing Cost Model is to smooth
the tiered function by fitting it to a
polynomial. As discussed previously,
tiered functions are not continuous; the
behavior of the function can change
dramatically at a discontinuity, such as
happens when moving from one activity
level category to another. In the earlier
illustrative example, a vendor offered
pricing that would be characterized by
a tiered function, in which the firm
charges $1 per unit for orders of 100
units or less, or $.80 per unit for orders
up to 400 units. In this example, a
purchase of 100 units is more expensive
than a purchase of 120 units.915 On
exchanges, the pricing discontinuities
reported basis. This causes the Commission’s
estimate of their costs to be higher than other
possible assumptions.
914 Estimates are outputs of the calibrated step
function based on exchange pricing. Calculations
are as follows: Outsourcing Cost = Fixed Fee
($50,000) + Monthly OATS ROEs × Fee per ROE.
$50,705 = $50,000 + 20,000 × $0.03525; $1.175
million = $50,000 + 100MM × $0.01125; $11.3MM
= $50,000 + 1B × $0.01125.
915 In this illustrative example, 100 units would
cost $100 (100 units × $1 per unit), while 120 units
would cost $96 (120 units × $.80).
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may be acceptable to broker-dealers
because the broker-dealers can more
easily estimate a range of volume rather
than actual volume, and thus pricing
discontinuities may allow the brokerdealers to better forecast their expected
exchange fees based on those volume
ranges. For the Outsourcing Cost Model,
however, such discontinuities are
undesirable because service bureaus
negotiate the contract with each
customer individually and contracts
generally cover a period of several years.
Consequently, service providers provide
custom quotations in consideration of
the firm’s business activities and likely
capacity impact upon the provider’s
infrastructure. The Commission
preliminarily believes that there are
unlikely to be instances in which a
service bureau’s costs to service a
customer would decrease if the
customer were to become more active,
and because the contract has a fixed
cost, there is unlikely to be incentives
to price with a tiered function to ease
billing. To smooth the Outsourcing Cost
Model, the Commission estimates a
second degree polynomial to points
imputed across the tiered function.916
This step essentially involves finding a
smooth curve that closely tracks the
tiered function, but smoothes its
discontinuities.
916 A first degree polynomial is linear; a seconddegree polynomial includes a term raised to the
power of two and defines a quadratic function. The
Commission did not consider higher degree
polynomials because they include inflection points,
which would be undesirable in this model because
there is unlikely to be a range in which costs per
unit would be expected to increase with volume.
Quadratic functions are characterized by curves
with a single minimum or maximum and include
concave curves that would be typical of cost curves
with volume discounts. The estimated functional
form of the outsourcing cost model used in cost
estimates is based on OATS ROE activity levels
expressed in millions of ROEs per month. The
estimated function is: Cost estimate = ¥1.3939
ROEs 2 + 12,473 ROEs + 124,005. Model fit
statistics, used to measure how well a model fits its
underlying data, are not meaningful for this model
because points used for the estimation are imputed
rather than observed. This function is not
monotonic (always increasing or always
decreasing); it has a maximum at 4.47 billion ROEs.
The Commission believes this is not a serious
concern because the model is not used to provide
cost estimates for firms that report more than
350,000 OATS ROEs per month.
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917 In conversations with Commission staff,
service bureaus related that some very large clients
provide their own order-handling system and
market connectivity. See supra note 880.
918 Although the pricing function is assumed
constant, broker-dealer costs would increase
because the number of ROEs they report through
their service bureaus would increase under the
Plan. It is possible that, if the Plan is approved, data
under CAT might be reported in a form other than
ROEs; however, if a ROE is equivalent to a
Reportable Event, the number of Reportable
Events—regardless of the form of the event report—
would increase by approximately the same
adjustment factor.
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Commission estimates CAT Data ROEs
reported by broker-dealers would
increase from those reported to OATS
by a factor of 1.9431.919 The
919 To approximate the increase in reporting
activity that broker-dealers would likely experience
if the Plan were approved, the Commission relied
on equity data from the week of September 15–19,
2014, previously provided by FINRA. This FINRA
data includes all OATS data reported to FINRA, as
well as SRO audit trail data from all equity
exchanges effecting trades that week except the
Chicago Stock Exchange. The adjustment factor was
estimated by dividing the number of ROEs in SRO
audit trail data hosted by FINRA for all exchanges
and OATS, by the number of ROEs in OATS; this
methodology is equivalent to assuming that all
exchange message traffic would become reportable
by broker-dealers. Because some exchange message
traffic is already reported through OATS, this is a
conservative assumption in the sense that it
increases the adjustment factor and consequently
increases estimates of broker-dealer reporting costs.
To adjust for the missing exchange, data for the
NASDAQ OMX BX (the lowest volume exchange
with trading volume exceeding that of the Chicago
Stock Exchange, based on trades reported through
NYSE TAQ) was double-counted in the exchange
activity total. Although this adjustment factor does
not capture options data, the Commission
preliminarily believes that the underestimation is
not material in this application because the Plan
assumes that Options Market Maker quotes (the
most frequent option event) would not be reported
by broker-dealers. Furthermore, the Commission
notes that the largest group of events excluded by
OATS but reportable under CAT’s reporting rules
(proprietary orders originated by a trading desk in
the ordinary course of a member’s market making
activities) predominantly originate from insourcing
firms for which the service-bureau model does not
provide estimates of reporting costs. Consequently,
the adjustment factor is likely to overestimate the
increased regulatory data volume of outsourcing
firms under CAT to a degree that should encompass
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Commission preliminarily believes that
the assumption of the same cost
function is reasonable for several
reasons. First, the service bureaus that
provide market access for broker-dealers
already process the exchange traffic for
most of these broker-dealers. Although
the number of ROEs reported would
increase, service bureaus already host
most of the data that broker-dealers
would report to the Central Repository.
Second, although some broker-dealers
would have to establish a process of
hosting or processing their customer
information at their service bureau,
many broker-dealers already do so to
allow their service bureau to prepare
information for clearing.920
the limited option activity reported by outsourcing
broker-dealers.
920 Broker-dealers that self-clear but rely on a
service bureau to perform their regulatory data
reporting may not have infrastructure in place to
share customer information with their service
providers. However, service bureaus that provide
regulatory data reporting services would need
customer information to perform CAT reporting.
The Commission preliminarily believes that service
bureaus that do not currently collect customer
information but provide regulatory data reporting
services would need to change their business
processes to continue to offer regulatory data
reporting services; the Commission further assumes
that the cost estimates presented in the Vendors
Study encompass the expenses these service
bureaus would incur to continue providing their
current service offerings. In discussions with
service bureaus arranged by FIF, some service
bureaus that do not offer clearing services discussed
additional costs, some related to security, that
accompany hosting customer information. If these
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The model’s output in Figure 3 is an
estimate of a broker-dealer’s current cost
to outsource data reporting services as
part of a bundle of services from a
service bureau; for smaller brokerdealers, it is assumed to include
provision of an order management
system and market connectivity.917
To estimate costs of CAT Data
reporting by the service bureaus, the
Commission preliminarily assumes that
the current pricing function would
apply for CAT Data reporting, but the
costs in relation to the number of ROEs
would increase because some events
that are excluded from OATS (like
proprietary orders originated by a
trading desk in the ordinary course of a
member’s market making activities),
would be included in CAT.918 The
Commission estimates the expected
increase in broker-dealer data by
estimating the ratio of all SRO audit trail
data (OATS and exchange data) to
OATS data; with this methodology, the
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Consequently, most service bureaus
have already established the
infrastructure to host or process
customer information. Third, the Plan
requires broker-dealers to update
customer information files, one of the
additional data sources that brokerdealers would need to report to the
Central Repository. While the costs of
ensuring the appropriate security could
be significant, these updates occur at a
much lower frequency than the rate of
a service bureau customer’s market
activity, and thus such updating activity
would be unlikely to provide a
technological stress on a service
bureau’s infrastructure.
The Commission preliminarily
believes this activity is unlikely to result
in a service bureau pricing structure that
significantly differs from the
Commission’s current outsourcing cost
model. The Commission recognizes,
however, that these new data sources
create implementation costs for both
broker-dealers and service bureaus, and
preliminarily believes that these costs
are reflected in cost estimates provided
by service bureaus because service
providers that responded to the Service
Providers Study were presumably
familiar with the requirements of CAT
service bureaus were to stop offering regulatory data
reporting services due to unwillingness to host
customer information, their customers would be
forced to establish new service bureau relationships
or undertake self-reporting. The Commission cannot
rule out that one or more service bureaus may
choose to exit the market to provide data reporting
services rather than change their business practices
to satisfy their clients’ responsibilities under the
Plan. Any such event would potentially be very
costly to the broker-dealer clients of the exiting
service bureaus due to the switching costs that
broker-dealers incur to change service bureaus.
Such an event could also contribute to crowded
entrances problems. See infra note 934. The
Commission preliminarily believes that such
service bureau exit events are unlikely because
service bureaus should be able to pass costs
associated with handling customer information on
to their clients as part of a more comprehensive
bundle of services. Furthermore, based on
information from broker-dealer discussions
arranged by FIF, the Commission preliminarily
believes that the market for regulatory data
reporting services is generally expanding and the
trend is for more, not less, outsourcing.
Consequently, the Commission believes that market
share in this market is valuable and existing
competitors are unlikely to voluntarily exit the
market abruptly. The Commission preliminarily
believes that most firms that report fewer than
350,000 OATS ROEs per month do not self-clear;
smaller firms that do not self-clear are likely to
already have relationships with service bureaus that
host their customer information. It is possible that
some of these firms have clearing arrangements that
do not include regulatory data reporting; these firms
may be forced to seek new service bureau
relationships to satisfy their CAT reporting
obligations, but it is also possible these clearing
firms may either add CAT reporting as a service or
establish a relationship with a service bureau to
perform the function of providing customer
information for CAT on behalf of its clients.
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when they estimated the costs they
could likely incur if the CAT NMS Plan
is approved. The number of ROEs
broker-dealers would report would
likely increase because, for example,
proprietary orders originated by a
trading desk in the ordinary course of a
member’s market-making activities,
currently excluded from OATS, would
be included in a broker-dealer’s audit
trail data under the Plan.921 The
increase in ROEs would drive an
increase in service bureau costs that the
Commission’s model anticipates for
broker-dealers that would outsource
CAT Data reporting obligations.922 For
illustration, consider two firms: Firm A
reports the median number of OATS
ROEs per month in the Outsourcers
sample (1,251) and Firm B reports the
maximum number of OATS ROEs per
month (348,636). After CAT
implementation, the estimation would
assume that Firm A would report 2,431
ROEs of audit trail data per month and
Firm B would report 677,435 ROEs of
921 The Commission recognizes that OATS does
not include options market activity. Because option
quotes are not reportable by broker-dealers under
the Plan, the Commission preliminarily believes
that option related events would not significantly
increase the number of events that would be
included in regulatory data reporting for brokerdealers whose costs are estimated by the
Outsourcing Cost Model. The Outsourcing Cost
Model predicts costs only for broker-dealers that the
Commission expects to outsource CAT reporting
responsibilities. Because exchanges would report
Options Market Maker quotes, the Outsourcing Cost
Model would not predict the costs of reporting
Options Market Maker quotes. See Exemption
Order, supra note 18, at 11857–58.
In addition, the Commission recognizes that
larger and more complex broker-dealers are likely
to have significant regulatory reporting
responsibilities related to their options activities,
but the Commission preliminarily believes that
these broker-dealers are likely to be included in the
broker-dealers reporting more than 350,000 OATS
ROEs per month. The Commission estimates these
broker-dealers’ costs using information from the
Reporters Study in the Plan as opposed to the
Outsourcing Cost Model, and those cost estimates
presumably include costs related to options
activity.
922 The Outsourcing Cost Model assumes that
other CAT reporting tasks like providing customer
information to the Central Repository are handled
by the firms’ service bureaus. In practice, some
Outsourcers may have a service bureau that
provides an order handling system and market
connectivity, but does not currently host brokerdealers’ customer information, while another
service provider provides clearing services and
hosts customer information. For broker-dealers with
multiple service provider relationships, the clearing
broker-dealer is assumed to provide services that
include providing the Central Repository with the
customer information for its broker-dealer clients.
The Commission recognizes that not all clearing
firms may plan to provide this service to their
customers, and this may result in additional costs
for broker-dealers that do not have relationships
with service providers that will provide all services
they need to comply with CAT, if it is approved.
This is discussed further below in Section IV.G.1.d,
infra.
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audit trail data per month.923 Using the
outsourcing cost model discussed
above, Firm A’s annual cost would
increase from $124,021 to $124,035.
Firm B’s average annual cost would
increase from $128,353 to $132,454.924
Application of the model to data
provided by FINRA allows the
Commission to estimate current
outsourcing costs for broker-dealers, as
well as projected costs under the CAT
NMS Plan.925 The Commission
estimates that the 806 broker-dealers
that monthly each currently report
fewer than 350,000 OATS ROEs
currently spend an aggregate $100.1
million on annual outsourcing costs.926
Under the CAT NMS Plan, the
Commission estimates these 806 brokerdealers would spend $100.2 million on
annual outsourcing costs. The
Commission recognizes that the
magnitude of this increase is quite
small, but this is driven by the fact that
the vast majority of firms that are
assumed to outsource have very low
regulatory data reporting levels
currently. As mentioned previously, the
median firm in this group reports 1,251
OATS ROEs per month; only 39 of these
806 firms currently reports more than
100,000 OATS ROEs per month. The
Outsourcing Cost Model also does not
include additional staffing costs that the
broker-dealer is likely to incur for
implementation and maintenance of
CAT reporting; these are discussed
further below, and are the primary cost
driver of costs that Outsourcers are
expected to incur if the Plan is
approved. Furthermore, the Commission
is cognizant that data reporting is
923 Firm A: 2,431 = 1,251 × 1.9431. Firm B:
677,435 = 348,636 × 1.9431.
924 Firm A: $124,021 = ¥1.3939 × (0.001251) 2 +
12,473 × 0.001251 + 124005; $124,035 = ¥1.3939
× (0.002431) 2 + 12,473 × 0.002431 + 124,005. Firm
B: $128,353 = ¥1.3939 × (0.348636) 2 + 12,473 ×
0.348636 + 124,005; $132,454 = ¥1.3939 ×
(0.677435) 2 + 12,473 × 0.677435 + 124,005. The
Commission notes that, as set forth, the outsourcing
cost model’s output is dominated by the fixed cost
of maintaining service at low reporting levels. But
if the service bureau cost model estimated a very
large firm’s outsourcing cost, a very large firm’s cost
increase due to CAT would be far more significant.
For example, a firm that reported 1.05 billion OATS
ROEs per month would have estimated current
costs of $11.7 million annually; after CAT
implementation, its costs would be estimated to be
$19.8 million. However, the Commission does not
assume that firms that report more than 350,000
OATS ROEs per month are Outsourcers nor does
the Commission assume that they are necessarily
Insourcers; instead, their costs are estimated using
data from the Reporters Study.
925 This data is described above. See supra note
893.
926 The average broker-dealer in this category
reported 15,185 OATS ROEs from June 15–July 10,
2015; the median broker-dealer reported 1,251
OATS ROEs. Of these broker-dealers, 39 reported
more than 100,000 OATS ROEs during the sample
period.
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normally part of a bundle of services
provided by a service bureau; many of
those services, including the provision
of market access and an order handling
system, are likely to contribute
substantially to the costs service
bureaus bear to service their clients. The
Commission is cognizant that while the
volume of transactions reported by
broker-dealers assumed to be
Outsourcers are unlikely to dramatically
increase under CAT, the service bureaus
would incur significant costs to
implement changes required by CAT
reporting. Those costs are discussed
below.927 Assuming service bureaus
pass those implementation costs on to
their broker-dealer clients eventually,
the Outsourcing Cost Model would
change.928
Firms that outsource their regulatory
data reporting still incur internal
staffing costs associated with this
activity. These employees perform
activities directly related to regulatory
data reporting such as answering
inquiries from their service bureaus,
investigating reporting exceptions,
maintaining any systems that transmit
data to their service providers, and
overseeing their service bureaus’ data
reporting to ensure compliance.929
Based on conversations with market
participants, the Commission estimates
that these firms currently have 0.5 fulltime employees devoted to regulatory
data reporting activities. The
Commission further estimates these
firms would need one full-time
employee for one year to implement
CAT reporting requirements, and 0.75
full-time employees on an ongoing basis
to maintain CAT reporting.930
927 See
Section IV.F.1.d, infra.
would constitute a transfer of costs
between market participants, but would not affect
the Commission’s estimate of the total costs to
industry. In particular, the Commission
preliminarily believes that if service bureaus pass
their implementation costs on to their broker-dealer
clients, it would appear as higher ongoing costs for
those clients, but the overall costs would not
change.
929 Other employees perform other compliance
duties such as supervising associated persons, and
creating and enforcing internal regulatory policies
(e.g., personal trading, churning reviews, sales
practice reviews, SEC filings and net capital
compliance). Because these regulatory activities are
not part of regulatory data reporting directly
affected by the Plan, they are not included in
activities that contribute to current regulatory data
reporting costs in the Commission’s analysis.
930 As previously discussed, the Commission
preliminarily believes that small broker-dealer cost
data in the Reporters Study is unreliable. Based on
discussions with broker-dealers, the Commission
preliminarily believes that very small brokerdealers are unlikely to have employees entirely
dedicated to regulatory data reporting. Instead,
other employees have duties that include dealing
with service bureau matters and answering
regulatory inquiries. The Commission assumes a
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928 This
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In addition to broker-dealers that
currently report to OATS, the
Commission estimates there are 799
broker-dealers that are currently
excluded from OATS reporting rules
due to firm size, or exempt because all
of their order flow is routed to a single
OATS reporter, such as a clearing
broker, that would have CAT reporting
responsibilities.931 The Commission
assumes these broker-dealers would
have low levels of CAT reporting,
similar to those of the typical
Outsourcers that currently report to
OATS.932 For these firms, the
Commission assumes that under CAT
they would incur the average estimated
outsourcing cost of firms that currently
report fewer than 350,000 OATS ROEs
per month, which is $124,373 annually.
Furthermore, because these firms have
more limited data reporting
requirements than other firms, the
Commission assumes these firms
currently have only 0.1 full-time
employees currently dedicated to
regulatory data reporting activities. The
Commission assumes that these firms
would require 2 full-time employees for
one year to implement the CAT NMS
Plan and 0.75 full-time employees
annually to maintain CAT Data
reporting.933
full-time employee costs $424,350 per year. See
Section V.D.2(2)A.i, infra.
931 In discussions with Commission Staff, FINRA
has stated that there are currently 54 OATS-exempt
broker-dealers and 691 OATS-excluded firms. The
Commission’s estimate of 799 new CAT-reporting
broker-dealers is based on the counts of other
broker-dealer types (current OATS reporters, ELPs,
Options Market Makers, and floor brokers) and the
1,800 broker-dealer estimate provided in the Plan.
Based on the FINRA information on OATSexcluded or OATS-exempt broker-dealers, there are
54 remaining broker-dealers in the 1,800 with an
unknown type. The Commission preliminarily
assumes that these broker-dealers are small and
new reporters, although it is possible that they are
floor brokers on exchanges other than the CBOE
(CBOE floor brokers are accounted for directly as
discussed below.) Floor brokers are assumed to
have the same costs as new reporting small firms,
so there would be no impact on the Commission’s
cost estimate if these firms were reclassified as
options floor brokers.
932 Exemption or exclusion from OATS may be
based on firm size or type of activity. Broker-dealers
with exemptions or exclusions that relate to firm
size are presumably relatively inactive. However,
some firms may be exempted or excluded because
they route only to a single OATS-reporting brokerdealer; this could encompass large firms that would
be more similar to Insourcers.
933 The Commission assumes that these very
small firms already have established service bureau
relationships to provide an order handling system,
market access, and clearing services. If any of these
firms would have to establish these relationships to
comply with CAT, they would likely face greater
costs associated with implementing these
relationships. Furthermore, the Commission notes
that conversations with market participants
revealed that establishing these relationships can be
difficult for very small firms because their relatively
low activity levels results in service bureau fees that
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30723
The Commission recognizes that some
broker-dealers that are categorized in its
estimation as Outsourcers in fact
currently self-report their regulatory
data; there are 36 firms that the
Commission categorized as Outsourcers
that self-report more than 95% of their
OATS ROEs. Some of these brokerdealers could find that the costs
associated with adapting their systems
to the CAT NMS Plan reporting would
render self-reporting (insourcing) CAT
Data reporting infeasible or undesirable;
others could continue to self-report
regulatory data. The Commission
preliminarily believes that the estimated
cost of outsourcing for these brokerdealers is reliable, but recognizes that
some of these broker-dealers could
choose to self-report for other reasons at
costs that could exceed these estimates.
If some of these broker-dealers choose to
outsource under CAT, these brokerdealers would likely incur additional
costs associated with establishing or renegotiating service bureau
relationships.934 The Commission does
may not make the relationship economically
feasible for service providers. Faced with this
constraint, some very small firms currently resort to
establishing ‘‘piggy back’’ relationships with larger
broker-dealers, essentially using another firm as its
introducing broker. Such a relationship may add an
additional layer of costs to those discussed here, but
such an agreement may actually prove less costly
for these small firms than establishing the service
bureau relationships assumed in the cost estimation
because the process of onboarding with a service
bureau is costly.
934 In addition to the 36 broker-dealers discussed
above, it is possible that many of the 799 brokerdealers that are currently exempt or excluded from
OATS reporting may seek to establish service
bureau relationships to accomplish their regulatory
reporting required under the Plan if it were
approved. It is possible that this could precipitate
a ‘‘crowded entrances’’ problem in the market for
regulatory data reporting services, in which more
broker-dealers wished to establish relationships
than the market could accommodate. As discussed
previously, the onboarding process for service
bureaus is onerous and time-consuming, both for
the broker-dealer and the service bureau. If a large
number of broker-dealers seek relationships
simultaneously, service bureaus might not
accommodate them in time to meet CAT reporting
requirements. In such a situation, smaller brokerdealers are more likely to fail to establish service
bureau relationships because they are presumably
less profitable for service bureaus to serve and so
are likely to be seen as lower-priority when
onboarding resources are constrained. Some small
broker-dealers could be forced to establish
relationships with larger broker-dealers and rely on
their infrastructure, essentially using the larger
partner as an introducing broker. This could add an
additional layer of costs for the smaller brokerdealer. The Commission preliminarily believes that
significant crowded entrances problems with
service bureaus are unlikely for two reasons. First,
in discussions with service bureaus arranged by
FIF, several service bureaus stated that onboarding
resources were not difficult to scale up.
Consequently, it seems likely that service bureaus
could deploy additional onboarding resources to
accommodate new demand for their services.
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not have information on existing service
bureau relationships for firms that
currently self-report OATS data, so
cannot estimate the costs these firms
might face in aggregate. It would be,
however, unlikely that many firms of
this size do not have relationships with
service bureaus that would provide this
service because firms with limited
OATS reporting are unlikely to be large
enough to self-clear and support the IT
infrastructure necessary to provide a
proprietary order handling system and
market access.
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C. Aggregate Broker-Dealer Cost
Estimate
The Commission’s methodology to
estimate costs to broker-dealers of
implementing and maintaining CAT
reporting varies by the type of brokerdealer. As discussed previously,935 the
Commission preliminarily believes that
the survey of small broker-dealers used
in the Reporters Study is unreliable. The
Commission does, however, rely on the
Reporters Study’s large broker-dealer
cost estimates in estimating costs for
Insourcers. Consequently, for brokerdealers that are FINRA members, the
Commission relies on the Reporters
Study data to estimate costs for brokerdealers that report more than 350,000
OATS ROEs per month (using estimates
from the Reporters Study for large,
OATS-reporting broker-dealers).936 For
lower activity FINRA-member brokerdealers (including those that do not
currently report to OATS due to
exclusions and exemptions to OATS
reporting requirements), the
Commission relies on the Outsourcing
Cost Model to estimate costs for CAT
Data reporting.
The Commission, however,
preliminarily believes that there are
three other categories of broker-dealers
not reflected in the above detailed cost
estimates that do not currently report
OATS data but could be CAT Reporters.
First, there are at least 14 ELPs that do
not carry customer accounts; these firms
Second, the Commission preliminarily believes that
most of the OATS exempt or excluded brokerdealers already have service bureau relationships
which provide them with order handling systems
and market access; it is likely that these service
bureaus could add regulatory data reporting
packages to their current bundle of services.
Finally, the implementation timelines may help
alleviate strained capacity because it would allow
some time for expanding onboarding capacity and
new entrants and would spread out onboarding
somewhat. See Section IV.G.1.d, infra.
935 See Section IV.F.1.c(1), supra.
936 The Commission’s cost estimates assume that
broker-dealers that currently reporter fewer than
350,000 OATS ROEs per month are likely to use
one or more service bureaus to report their
regulatory data. This is discussed further in Section
IV.F.1.c(2)B.i, supra.
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are not FINRA members and thus have
no regular OATS reporting
obligations.937 The Commission
preliminarily believes that it is likely
that these broker-dealers already have
self-reporting capabilities in place
because each is a member of an SRO
that requires the ability to report OATS
on request. The second group of brokerdealers that are not encompassed by the
cost estimates of FINRA member brokerdealers discussed above are those that
make markets in options and not
equities. Although not required by the
CAT NMS Plan to report their option
quoting activity to the Central
Repository,938 these broker-dealers may
have customer orders and other activity
that would cause them to incur a CAT
Data reporting obligation. Based on
CBOE membership data, the
Commission believes there are 31
options market-making firms that are
members of multiple SROs but not
FINRA.939 The third group comprises 24
937 The category of Insourcers that do not
currently report OATS data includes firms that have
multiple SRO memberships that exclude FINRA.
This category includes Options Market Makers and
at least 14 ELPs; these are firms that carry no
customer accounts and directly route proprietary
orders to Alternative Trading Systems; further
information on these firms including the
methodology by which they are identified can be
found in the 15b9–1 Proposing Release. See
Proposed Amendments to Rule 15b9–1, supra note
498, at 18052. Because the Commission has
identified at least 14 ELPs, it can consider these
firms separately from Options Market Makers for
analysis. However, the Commission recognizes that
some firms that are classified as Options Market
Makers may actually be ELPs, if they were not
identified as ELPs previously and are members of
CBOE; because the same cost estimates are used for
these groups, this misclassification does not affect
the Commission’s aggregate cost estimates for
broker-dealers. The Commission recognizes that
some FINRA member firms also make markets in
options; if these firms report more than 350,000
OATS ROEs per month, the Commission’s estimate
of these firms’ costs would be based on the
estimates for OATS-reporting large firms based on
data in the Reporters Study, which are higher than
estimates for non-OATS reporting large firms
(which include Options Market Makers that do not
currently report OATS). If FINRA member Options
Market Makers report fewer than 350,000 OATS
ROEs per month or are exempt or excluded from
reporting, they would be incorrectly classified as
Outsourcers. Furthermore, ELPs that were not
included in the analysis for the 15b9–1 Proposing
Release and are not CBOE members would be
incorrectly classified as new Outsourcers.
Most if not all ELPs have SRO memberships that
require them to report OATS data upon request.
Consequently, these firms are likely to have
infrastructure in place that would reduce their
implementation costs for CAT. The Commission
preliminarily believes that this is reflected in the
lower CAT implementation costs that the Plan
estimates for large firms that do not currently report
OATS; these estimates form the basis of the
Commission’s estimates of costs that ELPs would
face if CAT were approved.
938 See Section III.B.9, supra; see also Exemption
Order, supra note 18, at 11857–58.
939 The Commission identified 39 CBOE-member
broker-dealers that are not FINRA members, but are
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broker-dealers that have SRO
memberships only with CBOE; the
Commission believes this group is
comprised primarily of CBOE floor
brokers and, further, preliminarily
believes these firms would incur CAT
implementation and ongoing reporting
costs similar in magnitude to small
equity broker-dealers that currently
have no OATS reporting responsibilities
because they would face similar tasks to
implement and maintain CAT reporting.
The Commission assumes the 31
options market-making firms and 14
ELPs would be typical of the Reporters
Study’s large, non-OATS reporting firms
because this group encompasses large
broker-dealers that are not FINRA
members, a category that would exclude
any broker-dealer that carries customer
accounts and trades in equities. For
these 45 firms, the Commission relies on
cost estimates from the Reporters
Study.940
The estimated costs in the Reporters
Study for non-OATS reporting firms are
lower than the Reporters Study’s
estimated costs for large OATSreporting firms; in reviewing the
Reporters Study data, the Commission
considered the possibility that firms that
do not currently report OATS may
systematically underestimate the costs
they would incur to initiate and
maintain the type of comprehensive
regulatory data reporting that OATS
entails or the CAT NMS Plan would
entail. After discussions with multiple
broker-dealers, the Commission,
however, preliminarily believes that
large non-OATS reporting firms would
likely have lower CAT Data reporting
costs than current OATS reporting large
members of multiple SROs; 8 of these brokerdealers were previously identified as ELPs, leaving
31 firms with multiple SRO memberships that are
unlikely to be CBOE floor brokers. These 31 firms
are likely to include some ELPs. This methodology
implicitly assumes that there are no Options Market
Makers that are not members of the CBOE. Because
the Commission uses the same cost estimates for
ELPs and options market making firms, uncertainty
in the classification of the 31 Non-FINRA member
CBOE member firms does not impact the
Commission’s cost estimates. The Commission
recognizes that Options Market Makers may be
FINRA members, but preliminarily believes these
broker-dealers would be identified as Insourcers
using FINRA data discussed in Section
IV.F.1.c(2)B.i and thus would not fall under cost
estimates produced by the Outsourcing Cost Model.
940 The Commission recognizes that additional
broker-dealers may be members of neither FINRA
nor CBOE, yet may incur CAT reporting obligations
if the Plan is approved. Indeed, the Plan estimates
that 100 CAT Reporters are not currently FINRA
members (B.7.(b)(ii)(B)(2)), while the Commission
estimates 69 (24 floor brokers, 31 Options Market
Makers, and 14 ELPs). The Commission has
determined that categorizing additional brokerdealers that are currently classified as exempt or
excluded FINRA members as non-FINRA members
would not change the cost estimates because these
groups have identical estimated per-firm costs.
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firms because large non-OATS reporting
firms tend to be cutting-edge technology
firms that already have a centralized IT
infrastructure; they are unlikely to have
a fragmented structure with multiple
legacy systems. A centralized IT
infrastructure with cutting-edge
technology would likely simplify their
implementation of the CAT NMS Plan,
as fewer of their systems would need
altering and fewer servers would be
subject to clock synchronization
requirements.
The Commission presents cost
estimates for individual broker-dealers
in Table 7 that include estimates of
current costs, CAT implementation
costs, and ongoing CAT reporting costs.
In addition, Table 7 presents cost
estimates for three categories of costs:
Hardware/software; staffing; and
outsourcing.941 Table 7 also presents a
total across these three categories.942
Current data reporting cost estimates
range from $167,000 annually for floor
broker and firms that are currently
exempt from OATS reporting
requirements to $8.7 million annually
for firms that currently report more than
350,000 OATS ROEs per month
(‘‘Insourcers’’). One-time
implementation costs range from
$424,000 for current OATS reporters
that are assumed to outsource (‘‘OATS
Outsourcers’’) to $7.2 million for
Insourcers. Ongoing annual costs range
from $443,000 annually for firms that
are assumed to outsource (OATS
Outsourcers, New Outsourcers and
Floor Brokers) to $4.8 million for
Insourcers.
TABLE 7—COST ESTIMATES FOR INDIVIDUAL BROKER-DEALERS BY TYPE
Costs
Broker-dealer type
Hardware/
software
Current Costs:
Insourcers .................................................................................................
ELPs .........................................................................................................
Options Market Makers ............................................................................
OATS Outsourcers 1 .................................................................................
New Outsourcers 1 ....................................................................................
Floor Brokers 1 ..........................................................................................
CAT Implementation:
Insourcers .................................................................................................
ELPs .........................................................................................................
Options Market Makers ............................................................................
OATS Outsourcers 1 .................................................................................
New Outsourcers 1 ....................................................................................
Floor Brokers 1 ..........................................................................................
CAT Ongoing:
Insourcers .................................................................................................
ELPs .........................................................................................................
Options Market Makers ............................................................................
OATS Outsourcers 1 .................................................................................
New Outsourcers 1 ....................................................................................
Floor Brokers 1 ..........................................................................................
1 Outsourcing
Staffing
Outsourcing
Total
$720,000
3,000
3,000
0
0
0
$7,587,000
1,409,000
1,409,000
212,000
42,000
42,000
$400,000
22,000
22,000
124,000
124,000
124,000
$8,707,000
1,433,000
1,433,000
336,000
167,000
167,000
750,000
450,000
450,000
0
0
0
6,331,000
3,416,000
3,416,000
424,000
849,000
849,000
150,000
10,000
10,000
0
0
0
7,231,000
3,876,000
3,876,000
424,000
849,000
849,000
380,000
80,000
80,000
0
0
0
4,256,000
3,144,000
3,144,000
318,000
318,000
318,000
120,000
1,000
1,000
124,000
124,000
124,000
4,756,000
3,226,000
3,226,000
443,000
443,000
443,000
costs are modelled on an individual broker-dealer basis. Category averages are presented here.
Table 8 presents aggregate total costs
to broker-dealers by broker-dealer type.
The Commission estimates that brokerdealers spend approximately $1.6
billion annually on current regulatory
data reporting activities. The
Commission estimates approximate onetime implementation costs of $2.1
billion, and annual ongoing costs of
CAT reporting of $1.5 billion. The
Commission notes that estimates of
ongoing CAT reporting costs of $1.5
billion are slightly lower than current
data reporting costs of $1.6 billion. This
differential is driven by reductions in
data reporting costs reported by large
OATS-reporting broker-dealers in the
Reporters Study survey.943 The
Commission estimates that all other
categories of broker-dealers would face
significant increases in annual data
reporting costs.
TABLE 8—AGGREGATE BROKER-DEALER COST ESTIMATES
Costs
mstockstill on DSK3G9T082PROD with NOTICES2
Broker-dealer type
Count
Hardware/
software
Staffing
Outsourcing
Current Data Reporting Costs:
Insourcers .............................................
ELPs .....................................................
Options Market Makers ........................
OATS Outsourcers 1 .............................
New Outsourcers 1 ................................
$720,000
3,000
3,000
0
0
941 The Commission preliminarily believes that
‘‘Hardware/Software’’ costs include technology
such as servers and telecommunications
infrastructure necessary to report data to the Central
Repository, as well as software that must be
acquired or costs to alter existing software.
‘‘Staffing’’ includes the costs of employees assigned
to regulatory data reporting, and includes existing
staff as well as staff that would need to be hired
if the CAT NMS Plan is approved. ‘‘Outsourcing’’
includes costs of service bureau relationships, legal
and technical consulting, as well as other services
that firms would need to acquire from service
vendors to accomplish CAT reporting.
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$7,587,000
1,409,000
1,409,000
212,000
42,000
Frm 00113
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$400,000
22,000
22,000
124,000
124,000
Sfmt 4703
126
14
31
806
799
Individual
total
$8,707,000
1,433,000
1,433,000
336,000
167,000
Aggregate total
$1,097,130,000
20,068,000
44,437,000
271,113,000
133,137,000
942 Rounding may cause totals to vary from the
sum of individual elements in Table 7.
943 In the Reporters Study, Large OATS Reporters
cite average current data reporting costs of $8.32
million and Approach 1 maintenance costs of $4.5
million annually.
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TABLE 8—AGGREGATE BROKER-DEALER COST ESTIMATES—Continued
Costs
Broker-dealer type
Individual
total
Count
Hardware/
software
Staffing
Outsourcing
Aggregate total
Floor Brokers 1 ......................................
0
42,000
124,000
24
167,000
3,999,000
Total ...............................................
CAT Implementation Costs:
Insourcers .............................................
ELPs .....................................................
Options Market Makers ........................
OATS Outsourcers 1 .............................
New Outsourcers 1 ................................
Floor Brokers 1 ......................................
....................
....................
....................
1,800
....................
1,569,884,000
750,000
450,000
450,000
0
0
0
6,331,000
3,416,000
3,416,000
424,000
849,000
849,000
150,000
10,000
10,000
0
0
0
126
14
31
806
799
24
7,231,000
3,876,000
3,876,000
424,000
849,000
849,000
911,144,000
54,257,000
120,141,000
342,026,000
678,111,000
20,369,000
Total ...............................................
CAT Ongoing Costs:
Insourcers .............................................
ELPs .....................................................
Options Market Makers ........................
OATS Outsourcers 1 .............................
New Outsourcers 1 ................................
Floor Brokers 1 ......................................
....................
....................
....................
....................
....................
2,126,048,000
380,000
80,000
80,000
0
0
0
4,256,000
3,144,000
3,144,000
318,000
318,000
318,000
120,000
1,000
1,000
124,000
124,000
124,000
126
14
31
806
799
24
4,756,000
3,226,000
3,226,000
443,000
443,000
443,000
599,285,000
45,160,000
99,998,000
356,764,000
353,666,000
10,623,000
Total ...............................................
....................
....................
....................
....................
....................
1,465,496,000
1 Outsourcing
costs are modeled on an individual broker-dealer basis. Category averages are presented here.
mstockstill on DSK3G9T082PROD with NOTICES2
d. Costs to Service Bureaus
The Plan discusses costs that service
bureaus would face to implement the
CAT NMS Plan and maintain ongoing
CAT reporting.944 The CAT NMS Plan’s
cost estimates for service bureaus are
based on the Participant’s Costs to
Vendors Study (‘‘Vendors Study’’),
which gathered data from third-party
vendors.945 The Vendors Study
requested information from thirteen (13)
service providers about their potential
costs for reporting CAT Data—five (5)
service providers responded. The CAT
NMS Plan cites aggregate
implementation costs of $51.6 million to
$118.2 million for service bureaus,
depending on whether Approach 1 or
Approach 2 is selected, where Approach
1 would be more costly to vendors.946
Aggregate ongoing annual cost estimates
ranged from $38.6 million to $48.7
million.
The Commission preliminarily
believes that costs that service bureaus
would face to implement CAT should be
included as part of the aggregate costs
of CAT. While the CAT NMS Plan does
not require the use of service bureaus to
944 See CAT NMS Plan, supra note 3, at Appendix
C, Section B.7(b)(iii)(D), Appendix C, Section
B.7(b)(iv)(A)(4).
945 See id. at Appendix C, Section B.7(b)(i)(A)(3);
Appendix C, Section B.7(b)(iii)(D). The Commission
preliminarily believes that most if not all market
participants that responded to the Vendors Survey
are service bureaus, but it is possible that some
respondents are firms providing technology rather
than service bureau services.
946 Approach 1 allows broker-dealers to submit
data to the Central Repository using their choice of
existing industry messaging protocols while
Approach 2 would specify a pre-defined format. See
Section IV.E.1.b(3), supra.
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report CAT Data, the Commission
recognizes that the most cost effective
manner to implement the CAT NMS
Plan likely would be for most market
participants to continue their current
practice of outsourcing their regulatory
data reporting to one or more service
bureaus. By doing so, the roughly 1,600
broker-dealers predicted to outsource
would avoid incurring a significant
fraction of CAT implementation costs;
instead, service bureaus would incur
implementation costs on their behalf.
Based on conversations with market
participants, the Commission
preliminarily believes that these
implementation costs are likely to passthrough to broker-dealers that outsource
data reporting, because service contracts
between broker-dealers and service
bureaus are renegotiated periodically,
and approval of the CAT NMS Plan
might trigger renegotiation as the bundle
of services provided would materially
change. Consequently, service bureaus
likely would renegotiate their client
agreements during the period of
implementation of the CAT NMS Plan.
The Commission preliminarily
recognizes that service bureaus may,
when re-negotiating these service
contracts factor in the CAT
implementation costs the service
bureaus incurred; consequently, brokerdealers could see increases in costs that
reflect a service bureau’s efforts to
recoup those costs. In its analysis of
costs, the Commission includes these
service bureau costs and separately
identifies them as service bureau
implementation costs, but the
Commission recognizes that they are
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likely to ultimately be borne by brokerdealers.947
The Commission, however,
preliminarily believes that the ongoing
costs of CAT Data reporting by service
bureaus would be duplicative of costs
incurred by broker-dealers. The
aggregate fees paid by outsourcing
broker-dealers to service bureaus cover
the service bureaus’ costs of ongoing
data reporting. To include ongoing
service bureau costs as a cost of CAT
would double-count the costs that
broker-dealers incur for CAT Data
reporting; thus, in aggregating the cost
estimates for CAT, the Commission
includes only the maximum
implementation cost that vendors would
likely face of $118.2 million.
2. Aggregate Costs to Industry
The Sections above provide four sets
of cost estimates that together
encompass the costs of the Plan. This
Section discusses aggregation of these
costs into the total costs of the Plan. The
Plan provides estimates of the total costs
to industry if the Commission approves
the Plan. The Plan estimates initial
aggregate costs to industry of $3.2
billion to $3.6 billion and annual
ongoing costs of $2.8 billion to $3.4
947 Although the Commission preliminarily
believes that service bureau implementation costs
would ultimately be passed on to broker-dealers,
the Commission believes these costs are not doublecounted in this analysis because re-negotiation of
service bureau’s contracts with their clients is not
explicitly factored in to the Outsourcing Cost
Model. Instead, the Commission recognizes these
costs as being borne by the service bureaus initially,
and does not identify a specific mechanism by
which they will ultimately be passed onto brokerdealers.
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billion, with system retirement costs of
$2.6 billion.948 The Commission
estimates that industry would spend
$2.4 billion to implement CAT, and $1.7
billion per year in ongoing annual costs.
Using estimates discussed above, the
Commission recalculated total
implementation and ongoing annual
costs, partitioned across market
participant types as possible. Because
the Plan does not discuss how Central
Repository costs would be partitioned
across Participants and CAT Reporters,
the analysis here presents Central
Repository costs separately from costs to
Participants and costs to CAT Reporters.
The Plan presents some costs related to
constructing and operating the Central
Repository as ranges; in these cases, the
Commission uses range maximums in
the total cost calculation. Where costs
differ for Approach 1 and Approach 2,
the Commission uses estimates for the
approach that is more costly in
aggregate.949
Table 9 presents estimates of
aggregate current, implementation, and
ongoing costs to the industry. The
Commission notes that costs to brokerdealers are much greater than the costs
of building and maintaining the Central
Repository. In terms of magnitudes of
aggregate costs, costs to the 126 largest
broker-dealers that currently report
OATS data is the largest driver of
implementation costs, accounting for
38.3% of CAT implementation costs.
Although these firms would face
significant costs in implementing CAT,
the Reporters Study survey results
suggest that they anticipate lower
ongoing reporting costs than they
currently incur ($599 million annually
in expected aggregate costs versus $1.1
billion annually in current aggregate
regulatory data reporting costs).950 For
all other categories of broker-dealers, the
Commission estimates ongoing annual
costs to be higher than currently
reporting costs.
TABLE 9—AGGREGATE DATA REPORTING COSTS TO INDUSTRY
CAT
Number
Current costs
Implementation
Ongoing
1
1
1
$0
154,100,000
Unknown
$92,000,000
41,100,000
118,200,000
$134,900,000
102,400,000
Excluded
126
806
799
14
31
24
1,097,130,000
271,113,000
133,137,000
20,068,000
44,437,000
3,999,000
911,144,052
342,026,100
678,111,300
54,257,245
120,141,043
20,368,800
599,285,000
356,764,000
353,666,000
45,160,000
99,998,000
10,623,000
Total BD ................................................................................................
1800
1,569,884,000
2,126,048,540
1,465,496,000
Total Industry ........................................................................................
mstockstill on DSK3G9T082PROD with NOTICES2
Central Repository .......................................................................................
Participants (all) ...........................................................................................
Service Bureaus (all, 13) .............................................................................
Broker Dealers:.
Insourcers (126) ...........................................................................................
Outsourcers (806) ........................................................................................
New Small Firms (799) ................................................................................
ELPs (14) .....................................................................................................
Options Market Makers (31) ........................................................................
Options Floor Brokers (24) ..........................................................................
........................
1,723,984,000
2,377,348,540
1,702,796,000
Although the Commission relied on
an alternative to the Reporters Study
data to estimate costs for most brokerdealers, the Commission’s aggregate cost
estimate is consistent with information
presented in the Plan that suggests that
ongoing costs under CAT would likely
be lower than ongoing costs for current
reporting systems.951 The Plan,
however, also discusses significant costs
($2.6 billion) for retirement of current
regulatory reporting systems.952
The Commission has not included
those costs in its estimate of the
aggregate costs of the Plan for several
reasons. First, for reasons discussed
below, the Commission preliminarily
believes that cost estimates provided in
the Plan are unlikely to accurately
represent the actual costs industry will
face in retiring duplicative reporting
systems. Second, the retirement of
current regulatory reporting systems is
not a requirement of the Plan and the
timeline and process for their retirement
is uncertain.953 While the Commission’s
cost estimates do not recognize explicit
system retirement expenses, it also does
not explicitly recognize savings from
elimination of these systems, though
they are recognized qualitatively as
additional benefits of the Plan. The
Commission preliminarily believes that
this approach is conservative in the
sense that (for reasons that are discussed
below) system retirement costs are
likely to be mitigated by incorporation
of current reporting infrastructure into
CAT reporting infrastructure, while cost
savings associated with industry’s need
to maintain fewer regulatory data
reporting systems are not explicitly
recognized. Finally, while the
Commission does not include explicit
system retirement costs, the
Commission does recognize that
industry will experience a costly period
of duplicative reporting if the CAT NMS
Plan is approved, and the Commission
believes it is possible that these costs
may be conflated with actual retirement
costs estimated in the Plan. These
reasons are discussed further below. As
discussed above, the Commission
preliminarily believes that retirement
costs are unlikely to reflect actual costs
to industry in eliminating duplicative
reporting systems for several reasons.
First, for the majority of broker-dealers
that outsource, system retirement would
affect few in-house systems; these
broker-dealers are likely to adapt the
systems that interface with service
bureaus for current regulatory data
reporting to interface for CAT Data
reporting. Consequently, the
Commission believes that, for these
broker-dealers, costs to implement CAT
reporting are likely to implicitly
948 See CAT NMS Plan, supra note 3, at Appendix
C, Section B.7(b)(iv)(A)(5).
949 Approach 1 aggregate costs are higher than
those for Approach 2 for all market participants
except in one case where service bureaus have
lower ongoing costs for Approach 1. In its
discussion of industry (broker-dealer) costs, the
Plan states that the cost differences between these
two approaches are not statistically significant and
that there would likely be no incremental costs
associated with either approach. See CAT NMS
Plan, supra note 3, at Appendix C, Section
B.7(b)(iii)(C)(2)e.
950 As discussed in Section IV.F.1.c(1), supra, the
Commission preliminarily believes that cost
estimates for Large Broker-Dealers presented in the
Plan are reliable.
951 See CAT NMS Plan, supra note 3, at Appendix
C.
952 Id. at Appendix C, Section B.7(b)(iv)(A)(5).
953 Id. at Appendix C, Section C.9.
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accomplish the retirement of older
regulatory data reporting systems
because these older systems will be
transformed—in whole or in part—into
systems that accomplish CAT reporting.
Second, for broker-dealers that selfreport regulatory data, the Commission
cannot determine the source of the costs
of system retirement that are estimated
in the Plan. At its simplest level, ceasing
reporting activities would include
scrapping IT hardware dedicated to the
endeavor and terminating the
employees responsible for such
regulatory data reporting.954 The
Commission recognizes that there are
costs associated with those activities,
but does not preliminarily believe their
magnitude (estimated in the Plan as $2.6
billion) should approach or exceed the
magnitude of costs of CAT
implementation (estimated in this
analysis as $2.4 billion). Although the
Commission is uncertain what estimates
were included in system retirement
costs and the Commission recognizes
that different survey respondents may
have interpreted the question
differently, the Commission
preliminarily believes that the system
retirement costs cited in the Plan might
include industry estimates of an
extended period of duplicative reporting
costs, during which industry would
report data to both CAT and to the
systems that CAT would likely replace.
The Commission preliminarily
believes that the period of duplicative
reporting would likely constitute a
major cost to industry for several
reasons. These reasons include the
length of the duplicative reporting
period; constraints on the capacity of
industry to implement changes to
regulatory reporting infrastructure that
might cause market participants to
implement changes using less costeffective resources; and the inability of
some market participants to implement
duplicative reporting in house,
necessitating that they seek service
bureau relationships to accomplish their
CAT reporting requirements.
Based on data provided in the Plan,
the Commission believes that the period
of duplicative reporting anticipated by
the Participants is likely to last for 2 to
mstockstill on DSK3G9T082PROD with NOTICES2
954 Based
on discussions with industry, the
Commission believes that industry is likely to
implement the CAT NMS Plan by repurposing
systems and employees currently assigned to other
regulatory data reporting. The cost of eliminating
these resources, however, should provide an upper
bound to what actual system retirement costs would
be, because eliminating these resources is an
available and effective means of retiring these
systems; market participants could choose other
methods if they are preferable in terms of reducing
costs of system retirement or CAT implementation.
See supra note 880.
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2.5 years. The Commission
preliminarily believes that these
estimates are reliable because they
reflect the Participants’ experience with
their historical rulemaking activity,
although the Commission preliminarily
believes that some steps outlined by the
Participants might happen concurrently
with Commission rulemaking required
to facilitate ending some duplicative
reporting. The Plan outlines a timeline
for eliminating duplicative reporting.955
The timeline begins when Industry
Members (other than Small Industry
Members) are required to begin
reporting to the Central Repository. The
elimination of duplicative reporting
would require several steps: (1) The
SROs would identify their respective
duplicative SRO rules and systems; (2)
the SROs would file with the
Commission the relevant rule
modifications or eliminations; (3) the
Commission would review and consider
such rule modification or elimination
filings; and (4) subject to the requisite
Commission approval, the SROs would
then implement such SRO rule changes.
According to the Plan, step (1)—SRO
identification of duplicative SRO rules
and systems—of the process could take
12 to 18 months from implementation.
SROs have 12 months (in the case of
duplicative rules and systems) or 18
months (in the case of partially
duplicative rules and systems) to
complete their analysis of existing rules
and systems to identify which systems
should continue collecting data, or
whether data in the Central Repository
could substitute for the information
collected through rules and systems in
place.956
Certain SRO rules or systems
identified by the SROs in step (1) might
first necessitate an SEC rule change
before the SROs can properly modify or
eliminate such SRO rule or system. If so,
Commission rulemaking may be
required.957 This step (1)—even for
955 See CAT NMS Plan, supra note 3, at Appendix
C, Section C.9. The elimination of duplicative
reporting may or may not involve actually retiring
IT systems. If current regulatory data reporting
systems are adapted to report CAT Data, some of
these systems may continue to also report
duplicative data during the period of duplicative
reporting. In such a case, system retirement would
involve no longer using these systems to report the
duplicative data and any savings may be associated
with no longer requiring staff to maintain the
software and systems that support the duplicative
reporting.
956 The Plan notes that if a Participant determines
that sufficient data is not available to complete the
analysis, a subsequent date could be identified for
such a determination to be made.
957 See CAT NMS Plan, supra note 3, at Appendix
C, Section C.9. For example, Commission rules that
require broker-dealers to be able to report Large
Trader or EBS data would prevent SROs from
changing their rules to eliminate this capability. See
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those SRO rule and system changes
requiring Commission rulemaking—
could still feasibly take less than 18
months total because the SRO’s analysis
of their rules and their corresponding
SRO rule filings could be undertaken in
parallel with any such related
Commission rulemaking during this
period.
According to the Plan, step (2) of the
process could take 6 months. After
identifying the rules to eliminate or
modify, the Plan provides the
Participants with six months to file the
proposed rule change with the
Commission. It is possible for the
Participants to file these sooner if their
rule changes are not complex, but the
Plan places an upper bound on this.
Under this timeline, it could take 18
months to two years after the first
broker-dealers start reporting to the
Central Repository for Participants to
file rules to eliminate duplicative
reporting.958
According to the Plan, step (3) of the
process could take another 3 months to
a year. The Commission recognizes that
the approval process for Participant rule
changes can take time. In particular, for
the Commission to approve such rules
could take another 3 to 12 months
depending on how complex the rule
change. However, the Commission
preliminarily expects that as long as
such rule changes would be fairly
straight forward, approval would likely
take 3 months or less. As such, the first
three steps add up to 21 months to 27
months.
Step (4) involves implementing the
Participant rule changes, which would
eliminate duplicative reporting. The
Plan states that Participants would,
upon Commission approval of rule
changes, implement the ‘‘. . . most
appropriate and expeditious timeline
. . . for eliminating such rules and
systems.’’ 959 The Commission
preliminarily believes that the
elimination of duplicative reporting will
require significant planning and
implementation, but believes that much
of the required planning is likely to
happen concurrently with the
Commission approval process of the
id. Consequently, the timeframe for retirement of
these systems may also be dependent on
Commission rulemaking. The Commission
recognizes that during the comment period of any
SEC rulemaking, SROs might begin their analysis of
their own rules and preparation of potential filings,
possibly compressing this timeline further.
958 It could also take longer if the Participant
determines that sufficient data is not available to
complete such analysis by 12 or 18 months after
Industry Member reporting to the Central
Repository commences.
959 See CAT NMS Plan, supra note 3, at Appendix
C, Section C.9.
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underlying SRO rules. Consequently,
the Commission preliminarily believes
that actual implementation could occur
as soon as 90 days after approval, and
is not likely to occur more than six
months after approval. The Plan also
states that Participants should consider
in setting an implementation timeline,
when the quality of CAT Data would be
sufficient to meet surveillance needs. In
addition, reducing some duplicative
reporting could require changing
Participant rules in response to the
elimination or modification of
Commission Rules.
Based on the timelines for all four
steps and the Commission’s analysis of
how this timeline would be affected by
the need in some cases for Commission
rulemaking, the Commission
preliminarily believes that the period of
duplicative reporting could last at least
2 years, and the period of system
retirement could extend for up to 2.5
years after Industry Members begin
reporting data, assuming SROs are not
limited in their initial analysis by
problems such as delays in Commission
rulemaking or excessive Error Rates, and
Commission approval of SRO rules is
completed within 90 days of
submission.
Second, industry-wide resources to
update order-handling systems are
limited. Based on conversations with
market participants, the Commission
preliminarily believes that while most
Insourcers and service bureaus have
permanent staff that specialize in these
activities, some would rely on hiring
additional staff or utilizing contractors
to increase their capacity to implement
changes to order handling and data
reporting systems and support of
duplicative reporting systems.
Furthermore, multiple broker-dealers
and service providers cited access to
specialized staff as a constraint that
limits their ability to implement
regulatory rule changes, stating that
while current and newly hired staff
might be able to implement the CAT
NMS Plan and continue supporting
OATS, they would be unlikely to be
able to continue to implement changes
to both systems. Consequently,
Insourcers and service bureaus would
likely incur significant costs associated
with hiring additional employees to
implement the CAT NMS Plan and
accomplish regulatory data reporting
during any duplicative reporting period.
Third, the Commission preliminarily
believes that some firms that are
currently challenged to maintain their
self-reporting of data may not have the
resources to implement the CAT NMS
Plan at the same time as current
reporting absent a service bureau
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relationship. It is possible that a number
of relatively large firms would seek to
establish service bureau relationships to
accomplish both CAT reporting and
current reporting even as a number of
very small firms that currently do not
report OATS could seek to establish
such relationships. This could
precipitate a ‘‘crowded entrances’’
situation in the market to provide data
reporting services. The establishment of
these relationships would pose a
significant cost to industry.960
The Commission expects that there
would be some cost efficiencies with
respect to current data reporting costs
and CAT reporting costs during any
period of duplicative reporting. For
example, servers hosting software to
produce records for CAT could possibly
also host software to produce records for
OATS during the duplicative reporting
period because these regulatory
reporting systems rely upon much of the
same underlying data. However, the
Commission does not currently have the
necessary data to determine the extent
of these efficiencies, which would vary
across market participants. Therefore,
the Commission cannot estimate
duplicative reporting costs. The
Commission preliminarily believes,
however, that the current data reporting
costs of $1.7 billion per year constitutes
an estimate of the cost per year to
industry of duplicative reporting
requirements, as it represents the cost of
duplicative reporting to industry if there
are no efficiencies. The Commission
notes, however, that staff required to
implement changes to order handling
systems are a limited resource. If market
participants do not have adequate
staffing to implement the changes
required by CAT and maintain
duplicative reporting, costs for
duplicative reporting could exceed
current reporting costs because market
participants could have to rely on
external staff (such as consultants) or
contract through service bureaus to
accomplish this reporting; this is likely
to be more expensive than staff used for
current reporting.
Further, the Commission does not
believe that duplicative reporting costs
should be added to the estimated
aggregate costs of the CAT NMS Plan.
The Commission believes that the
aggregate costs above represent the total
costs of the Plan and do not account for
the differential between these costs and
the costs the industry currently incurs
for regulatory data reporting and
maintenance. During the period of
duplicative reporting, industry would
incur the aggregate costs of
960 See
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30729
accomplishing CAT reporting described
above, plus the costs of current data
reporting, which the Commission uses
as an estimate of duplicative reporting
costs. The Commission notes that
market participants will incur costs
equal to current data reporting costs if
the Plan were not approved (because
current regulatory data reporting would
continue), or as duplicative reporting
costs if the Plan were approved.
Consequently, the Commission
preliminarily believes these costs
should not be considered as costs
attributable to approval of the Plan,
because market participants would bear
these costs whether the Plan is
approved or disapproved.
While broker-dealers are anticipated
to bear the burden of the costs
associated with CAT, including
implementation costs, ongoing costs and
duplicative reporting costs, the
Commission does not know whether
these costs would be passed on to
investors, or whether these costs would
be absorbed by the broker-dealers
themselves. On one hand, it could be
assumed that broker-dealers could pass
on the costs associated with CAT to
investors because broker-dealers
currently already pass on certain
regulatory fees to their customers. For
instance, the SROs have adopted rules
that require broker-dealer to pay Section
31 transaction fees,961 and some of these
broker-dealers have in turn imposed
fees on their customers in order to
provide funds to pay for the fees owed
to the SROs. However on the other
hand, if the passing on of these costs is
associated with higher fees, a given
broker-dealer could decide to absorb
these costs and not increase their fees,
and by doing so, they may attract more
customer order flow. The incremental
order flow that the broker-dealer attracts
from having lower fees relative to their
competitors may indeed offset the costs
associated with CAT that they incur by
not passing these on to their customers.
Other broker-dealers, cognizant that
they could lose order flow to other
broker-dealers that do not pass on the
costs to their customers could
strategically respond and thus, could
also absorb these costs. Ultimately, the
Commission does not know which
situation is more likely to eventuate,
961 Under Section 31 of the Securities Exchange
Act of 1934, SROs and all the national securities
exchanges must pay transaction fees to the
Commission based on the volume of securities that
are sold on their markets. These fees are designed
to recover the costs incurred by the government,
including the Commission, for supervising and
regulating the securities market and securities
professionals. See ‘‘SEC Fee—Section 31
Transaction Fees,’’ available at https://www.sec.
gov/answers/sec31.htm.
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primarily because the Commission
generally does not know the cost
structure of broker-dealers.
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3. Further Analysis of Costs
a. Costs Included in the Estimates
In general, the CAT NMS Plan does
not break down its cost estimates as a
function of particular CAT NMS Plan
requirements, although it does provide
some cost information for certain
requirements in the Plan. However, the
Commission has considered which
elements of the CAT NMS Plan are
likely to be among the most significant
contributors to CAT costs. The
Commission preliminarily believes that
significant sources of costs would
include the requirement to report
customer information, the requirement
to report certain information as part of
the material terms of the order, the
requirement to use listing exchange
symbology, and possibly, the inclusion
of Allocation Reports. The Commission
preliminarily believes that the clock
synchronization requirements, the
requirement that Options Market
Makers send quote times to the
exchanges, the requirement that the
Central Repository maintain six years of
CAT Data, and the inclusion of OTC
Equity Securities in the initial phase of
the implementation of the CAT NMS
Plan are unlikely to be significant
contributors to the overall costs of the
Plan. Notably, the Commission believes
that its estimates of the implementation
costs and ongoing costs to industry
above include each of the costs
discussed in this Section because these
provisions encapsulate major parts of
the Plan.
The Commission preliminarily
believes that the requirement in the
CAT NMS Plan to report customer
information for each transaction
represents a significant source of
costs.962 In particular, the adapting of
systems to report customer information
that is not included in current
regulatory data on a routine basis could
require significant and potentially
difficult reprogramming because current
audit trail data does not routinely
provide this information. Consequently,
this reprogramming could require
gathering information from separate
systems within a broker-dealer’s
infrastructure and consolidating it in
one location, and redesigning an IT
infrastructure to satisfy this requirement
could interrupt other workflows within
the broker-dealer, expanding the scope
of systems that must be altered to
accomplish CAT reporting. While the
Commission preliminarily believes that
the requirement to report customer
information would be a significant
source of costs, the Commission lacks
the necessary information to estimate
what proportion of the costs of the Plan
are attributable to this requirement. The
Plan does not provide information on
the costs attributable to the reporting of
customer information, and the
Commission has no other data from
which it can independently estimate
these costs, because the Commission is
not aware of any data currently
available to it regarding the number of
broker-dealers that would need to
engage in significant reprogramming in
order to report customer information as
required in the Plan, or the costs of
doing so. The Commission therefore
seeks comment on the costs that would
be attributable to the requirement to
report customer information as set out
in the CAT NMS Plan. The Commission
also notes that the Plan reflects
exemptive relief granted by the
Commission in connection with this
requirement. Specifically, as discussed
further in the Alternatives Section, the
Commission granted exemptive relief
from certain requirements of Rule 613 to
allow the alternative approach to
customer information that leverages
existing identifiers to be included in the
Plan and subject to notice and
comment.963 Based on cost survey data
provided by the Participants, this
approach would reduce quantifiable
costs to the top three tiers of CAT
Reporters by at least $195 million as
compared to an approach that followed
requirements of Rule 613 as adopted.964
Similarly, the Commission
preliminarily believes that the
requirement to report material terms of
the order that include an open/close
indicator, order display information,
and special handling instructions
represents a significant source of
costs.965 Not all broker-dealers are
currently required to report these
elements on every order and no market
participants report an open/close
indicator on orders to buy or sell
equities. Thus, the adapting of some
market participants’ systems to report
this information for each transaction
could require significant and potentially
difficult reprogramming that requires
centralizing or copying information
from multiple IT systems within the
broker-dealer. As discussed above,
redesigning a broker-dealer’s IT
infrastructure could disrupt multiple
963 See
Exemption Order, supra note 18.
at 17–18.
965 See CAT NMS Plan, supra note 3, at Article
964 Id.
962 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.1.a.iii.
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workflows and dramatically increase the
costs associated with implementing the
changes required by CAT. While the
Commission preliminarily believes that
this reprogramming would be a
significant source of implementation
costs, the Commission lacks the
necessary information to estimate what
proportion of the costs of the Plan are
attributable to this requirement. The
Plan does not provide information on
the costs attributable to these elements
of the Plan, and the Commission has no
other data from which it can
independently estimate the costs,
because the Commission is not aware of
any data currently available to it
regarding the number of broker-dealers
that would need to engage in significant
reprogramming in order to report this
information as required in the Plan, or
the costs of doing so. The Commission
therefore seeks comment on the costs
that would be attributable to reporting
the material terms of the order as set out
in the CAT NMS Plan, including an
open/close indicator, order display
information, and special handling
instructions.
The Commission also preliminarily
believes that the requirement to use
listing exchange symbology in the CAT
NMS Plan could represent a significant
source of costs. The Plan requires CAT
Reporters to report CAT Data using the
listing exchange symbology format,966
which would also be used in the display
of linked data; because broker-dealers
do not necessarily use listing exchange
symbology when placing orders on
other exchanges or off-exchange, this
requirement could require brokerdealers to perform a translation process
on their data before they submit CAT
Data to the Central Repository.967 The
translation process could be costly to
design and perform and result in errors
that would be costly for the brokerdealers to correct. If other elements of
the Plan were to necessitate a
translation, then the listing exchange
symbology could be fairly low cost
because it would be just another step in
the translation. However, if the Plan has
no other requirement that would
necessitate a translation, the costs of
including listing exchange symbology
on all CAT reports would include the
costs of designing and performing the
966 See CAT NMS Plan, supra note 3, at Appendix
C, Section A.1.a.
967 For example, class A shares of ABC Company
might be traded using ticker symbol ‘‘ABC A’’ on
one exchange, ‘‘ABC_A’’ on another exchange, and
‘‘ABC.A’’ on a third. As written, the Plan would
require all broker-dealers to use the listing
exchange’s symbol for its Central Repository
reporting, regardless of the symbol in the order
messages received or acted upon at the brokerdealer or exchange.
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translation as well as the costs of
correcting any errors caused by the
translation. While the Commission
preliminarily believes that the
requirement to use listing exchange
symbology could be a significant source
of costs, the Commission lacks the
necessary information to estimate what
proportion of the costs of the Plan are
attributable to this requirement. The
Plan does not provide information on
the costs attributable to this particular
element of the Plan, and the
Commission has no other data from
which it can independently estimate
these costs, because the Commission is
not aware of any data currently
available to it regarding the number of
broker-dealers that would need to
undertake the translation process, either
as a result of this or other elements of
Plan, or the costs of doing so. The
Commission seeks comment on the
costs that would be attributable to the
requirement to report CAT Data using
listing exchange symbology format as
set out in the CAT NMS Plan.
The Commission recognizes that
industry would bear certain costs
associated with Allocation Reports,
particularly the requirement that the
reports include allocation times. The
Commission understands that some
broker-dealers already record allocation
times; broker-dealers that do not
currently record these times will face
implementation costs associated with
changing their business processes to
record these times. Implementation
costs for allocation reporting may
include significant costs associated with
incorporating additional systems into
their regulatory data reporting
infrastructure to facilitate this reporting,
if such systems would not already be
involved in recording or reporting order
events. Furthermore, Outsourcers could
face significant implementation and
ongoing costs associated with reporting
Allocation Reports if their service
bureaus do not extend their services to
manage the servers that handle
allocations. Because implementation
costs for Allocation Reports would vary
widely across broker-dealers and
because the Plan does not break out
costs associated with reporting
allocation information, the Commission
cannot separately estimate costs
attributable to this reporting.
The Commission preliminarily
believes that the clock synchronization
requirements in the Plan represent a less
significant source of costs. The CAT
NMS Plan estimates industry costs
associated with the 50 millisecond clock
synchronization requirement, based on
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the FIF Clock Offset Survey.968 The FIF
Clock Offset Survey states that brokerdealers currently spend $203,846 per
year on clock synchronization activities,
including documenting clock
synchronization events.969 The FIF
Clock Offset Survey states that firms
expect the 50 millisecond requirement
to increase those costs by $109,197 per
firm.970
Based on discussions with industry,
the Commission preliminarily believes
that the majority of broker-dealers
(Outsourcers) would not face significant
direct costs for clock synchronization
because time stamps for CAT Data
reporting would be applied by service
bureaus.971 However, the Commission
preliminarily estimates there are 171
firms that make the insourcingoutsourcing decision on a discretionary
basis; 972 if these firms decide to
insource their data reporting under
CAT, each of these firms is likely to face
costs associated with complying with
new clock synchronization
requirements. The Commission
preliminarily estimates that industrywide implementation costs for the 50
millisecond clock synchronization
requirement would be $268 million,
with $25 million annually in ongoing
968 See CAT NMS Plan, supra notes 3, at Section
D.12, and note 127. The Commission notes that the
survey has two limitations pertinent to specific cost
estimates provided in the summary of survey
results. First, cost estimates are likely to be
significantly downward biased. Individual
responses to cost data were gathered within a range;
for example, a firm would quantify its expected
costs as ‘‘Between $500K and less than $1M’’ or
‘‘$2.5M and over’’. When aggregating these
responses, FIF generally used the range midpoint as
a point estimate; however, for the highest response,
the range minimum was used (i.e., ‘‘$2.5M and
over’’ was summarized as $2.5M.) This is likely to
have produced a significant downward bias in
aggregate survey responses. Second, the survey
includes only broker-dealers and service bureaus,
thus the data excludes exchanges. The Commission
preliminarily believes this limitation would not
significantly impact industry costs because all
exchanges currently maintain clock
synchronization standards finer than those
discussed as alternatives.
969 See FIF Clock Offset Survey, supra note 127.
This is based on the current practice of the brokerdealers who responded to the survey.
970 See id. at 16. The $109,197 figure is obtained
by subtracting the cost of maintaining current clock
offsets of $203,846 annually from the estimated perfirm annual cost of maintaining a 50 millisecond
clock offset of $313,043; see also id. at 7 (‘‘Even
where firms were at the target clock offset, many
firms cited additional costs associated with
compliance including logging and achieving greater
degrees of reliability’’).
971 See Section IV.F.1.d for discussion of service
bureau costs and the degree to which those costs
might be passed on to broker-dealers.
972 These are the 126 current OATS reporters that
report more than 350,000 OATS ROEs per month;
the 31 options market-making firms; and the 14
ELPs.
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30731
costs.973 The Commission preliminarily
believes that approximately $19.7
million in broker-dealer implementation
costs would be attributable to clock
synchronization requirements.974 The
Commission also preliminarily believes
that service bureaus would face similar
clock synchronization costs if the CAT
NMS Plan is approved. Using 13 as an
estimate of the number of service
bureaus, approximately $1.4 million in
service bureau implementation costs
would be attributable to clock
synchronization requirements in the
Plan.975
Other Plan requirements that the
Commission preliminarily believes are
unlikely to represent major
contributions to the overall costs of the
Plan include the requirement that
Options Market Makers report the quote
times sent to the exchanges,976 which
the Plan estimates would cost between
$36.9 million and $76.8 million over
five years; the requirement to maintain
six years of data at the Central
Repository, which the Plan estimates
would cost $5.59 million,977 and the
inclusion of OTC Equity Securities in
the initial phase of the implementation
of the CAT NMS Plan.978
973 See Section IV.H.2.a(1), infra, for a discussion
of how these implementation costs might vary for
different clock synchronization standards.
974 See id., for discussion of costs attributable to
the 50 millisecond clock synchronization tolerance
proposed in the Plan, including the $109,197
estimate of per-firm implementation costs of the 50
millisecond clock synchronization requirement; see
also CAT NMS Plan, supra note 3, at Appendix C,
Section B.7(b)(i)(A)(3). 171 broker-dealers ×
$109,197 = $18,672,687.
975 The CAT NMS Plan states that the Vendor
Study was distributed to 13 service bureaus or
technology-providing firms identified by the DAG.
See CAT NMS Plan, supra note 3, at Appendix C,
Section B.7(b)(i)(A)(3). 13 service bureaus ×
$109,197 = $1,419,561. The Commission believes
clock synchronization costs are already included in
cost estimates provided in the Vendor Study. As
discussed above (see Section IV.F.1.d), the
Commission believes it is likely that these costs
would ultimately be passed on to service bureaus’
broker-dealer clients.
976 See FIF, SIFMA, and Security Traders
Association, Cost Survey Report on CAT Reporting
of Options Quotes by Market Makers (November 5,
2013), available at https://catnmsplan.com/web/
groups/catnms/@catnms/documents/appsupport
docs/p601771.pdf; see also CAT NMS Plan, supra
note 3, at Appendix C, Section B.7(b)(iv)(B).
977 See CAT NMS Plan, supra note 3, Section
12(m).
978 See id. at Section 12(q). The Commission does
not have the information necessary to precisely
estimate the costs that are incurred by including
OTC Equity Securities in the initial phase of the
implementation of the CAT NMS Plan, because the
Plan does not separately present the costs
associated with OTC Equity Securities. Because of
low trading activity in the OTC equity markets, any
significant costs associated with including OTC
Equity Securities would be in implementation
costs. Further, broker-dealers that implement CAT
Data reporting for NMS securities may not incur
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There are many other categories of
costs that contribute to the aggregated
estimates of the costs of the Plan in
addition to the items discussed above.
For example, in addition to providing
CAT Reporters data on their Error Rates,
the Plan states that the Participants
believe that in order to meet Error Rate
targets, industry would require certain
resources, including a stand-alone
testing environment, and time to test
their reporting systems and
infrastructure. There are also likely to be
costs related to the Plan Processor’s
management of PII.979 As noted above,
the Commission does not have sufficient
information to analyze each individual
category of costs, because the available
cost estimates do not reflect a detailed
breakdown of the expected cost of each
element of the CAT NMS Plan.
However, the Commission preliminarily
believes that its estimates of
implementation costs and the ongoing
costs of the CAT NMS Plan reflect all
relevant costs to industry.
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b. Fees
The Plan states that the Operating
Committee would have the authority to
levy ancillary fees on both brokerdealers reporting to, and regulators
accessing, the Central Repository.980
The Commission believes that ancillary
fees levied on broker-dealers are
unlikely to be levied broadly, because
discussion in the Plan associates these
fees with late and/or inaccurate
reporting. The Plan also discusses
ancillary fees possibly levied on
regulators associated with the use of
Central Repository data. The
Commission recognizes that costs
estimated in Bids for constructing and
operating the Central Repository already
anticipate use of the CAT Data by
regulators, and that additional fees to
access the data might give regulators
incentives to make less use of the data
than anticipated in the Benefits Section.
However, any fee schedule proposed by
the Participants would be filed with the
Commission. Consequently, the
significant additional costs to implement CAT Data
reporting for OTC Equity Securities.
979 The Commission also acknowledges that the
costs associated with handling PII could create an
incentive for service bureaus not to offer CAT
Reporting services. The Commission does not
believe that this incentive would significantly alter
the services available to broker-dealers. For further
discussion, see supra note 920 and Section IV.G.1.e,
infra. The Commission also notes that, pursuant to
the exemptive relief granted by the Commission, the
approach to the reporting of Customer information
in the CAT NMS Plan could allow for the
bifurcation of PII reporting from the reporting of
order data. See Exemption Order, supra note 18, at
11858–63.
980 See CAT NMS Plan, supra note 3, at Section
11.3(c).
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Commission does not believe that the
provisions for ancillary fees would
likely significantly impact the costs or
benefits of CAT.
4. Second-Order Effects and Other
Security-Related Costs
a. Security
As noted in the Adopting Release,
Commenters have expressed concerns
regarding the risk of failing to maintain
appropriate controls over the privacy
and security of CAT Data.981 The
Commission recognizes that investors
and market participants could face
significant costs if CAT Data security
were breached.
The Commission believes that it is
difficult to form reliable economic
expectations for the costs of security
breaches, because there are few
examples of security breaches analogous
to the type that could occur under the
CAT NMS Plan. However, the
Commission can break down the
expected costs of security breaches into
two components: The risk of a security
breach and the cost resulting from a
security breach. Therefore, the
Commission separates its discussion of
the expected costs of security breaches
into these two components. The
Commission recognizes that security
risks could give rise to second order
costs as well where the costs come not
directly from the security breach but
rather from the actions of market
participants attempting to avoid security
risks.
(1) Costs of a Security Breach
The form of the direct costs resulting
from a security breach would vary
across market participants and could be
significant. For broker-dealers,
investment advisers, and other similar
institutions, a security breach could leak
highly-confidential information about
trading strategies or positions,982 which
could be deleterious for market
participants’ trading profits and client
relationships. A data breach could also
expose the proprietary information
about the existence of a significant
business relationship with either a
counterparty or client, which could
reduce business profits.
A data breach could also potentially
reveal PII of Customers. Because some
of the CAT Data that would be stored in
981 See Adopting Release, supra note 9, at 45725,
45756–58.
982 Although the Plan does not require reporting
positions, observation of a broker-dealer’s recent
executions can offer information about their change
in position, or, potentially, information about their
actual position if the audit trail information
breached contains all trading activity since the
creation of the position.
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the Central Repository would contain
PII such as names, addresses and social
security numbers, a security breach
could raise the possibility of identity
theft, which currently costs Americans
billions of dollars per year.983 Because
PII would be stored in a single,
centralized location rather than stored
across multiple locations, a breach in
the Central Repository could leak all PII,
rather than a subset of PII that could be
leaked if the information was stored in
multiple locations. As such, these costs
associated with the risk of a security
breach could be substantial in
aggregate.984
A breach that reveals the activities of
regulators within the Central
Repository, such as data on the queries
and processes run on query results,
could compromise regulatory efforts or
lead to speculation that could falsely
harm the reputation of market
participants and investors. For example,
a breach could result in an article that
reports on regulators querying trading
information of certain individuals or
broker-dealers, which could harm those
individuals or broker-dealers even if no
regulators open investigations. Further,
perpetrators of a breach could attempt to
trade on information on regulatory
queries to try to profit ahead of public
information of an action, to the
disadvantage of other investors.
(2) Risk of a Security Breach
The Commission preliminarily
believes that the risks of a security
breach may not be significant because
certain provisions of Rule 613 and the
983 According to survey data, the Bureau of Justice
Statistics reported $24.7 billion in identity theft
costs in 2012, available at https://www.bjs.gov/
content/pub/press/vit12pr.cfm.
984 At a June 23, 2015 congressional hearing
titled, ‘‘Government Personnel Data Security
Review’’, Office of Personnel Management (OPM)
Director Katherine Archuleta estimated the direct
costs of the OPM data breach at $19 to $21 million.
Available at https://www.c-span.org/video/?3267101/opm-director-katherine-archuleta-testimonyspending-data-security&start=3304. This breach of
PII of current and former federal employees
exposed PII for approximately 4 million
individuals. Available at https://www.federaltimes.
com/section/OPM-Cyber-Report/. The Commission
recognizes that the number of individuals whose PII
would be stored in the Central Repository far
exceeds the number of federal employees whose
data was exposed in the OPM breach, and that these
costs include only the direct costs (such as the
provision of credit monitoring services to affected
individuals) incurred by OPM and do not reflect the
total costs that these individuals may face as a
result of the data breach, which could be far larger
than the direct costs faced by OPM. These indirect
costs may include the consequences of the breach
as well as costs of credit fraud and legal services
to address consequences of the data breach. There
may also be second-order effects to such a breach,
if investors reduce their engagement with the
securities industry to avoid these costs. See Section
IV.F.4.a(3), infra.
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CAT NMS Plan appear reasonably
designed to mitigate these risks.
However, the Commission notes that the
considerable diversity in the potential
security approaches of the bidders
creates some uncertainty about the
effectiveness of the eventual security
procedures and hence, the risk of a
security breach.985
Provisions of Rule 613 provide
safeguards designed to prevent security
breaches. Rule 613(e)(4) requires
policies and procedures that are
designed to ensure the rigorous
protection of confidential information
collected by the Central Repository, and
Rule 613(iv) requires that the Plan
contain a discussion of the security and
confidentiality of the information
reported to the Central Repository. Rule
613 also restricts access to use only for
regulatory purposes, and requires
certain provisions that are designed to
mitigate these security risks such as the
appointment of a Chief Compliance
Officer and annual audits of Plan
Processor operating procedures.
The Plan also includes provisions
designed to prevent security breaches.
First, governance provisions of the CAT
NMS Plan could mitigate the risk of a
security breach. Section 4.12 of the CAT
NMS Plan provides for a Compliance
Subcommittee whose activities could
reduce the risk that information is
released to unauthorized entities.986
Among the Subcommittee’s
responsibilities is ‘‘the maintenance of
the confidentiality of information
submitted to the Plan Processor or
Central Repository.’’ Furthermore, the
Plan Processor is required to submit a
comprehensive security plan to the
Operating Committee and update this
security plan annually.987 The security
plan must cover all components of CAT,
including physical assets and personnel;
the plan ‘‘must document how the Plan
Processor would protect, monitor and
patch the environment; assess it for
vulnerabilities as part of a managed
process, as well as the process for
response to security incidents and
reporting of such incidents.’’988 In
addition, Section 6.2(b) of the Plan
establishes a Chief Information Security
Officer who is responsible for
monitoring and addressing data security
issues for the Plan Processor. Second,
the Plan includes specific provisions
985 The Commission notes that, at a minimum, the
security of the CAT Data must be consistent with
Regulation Systems Compliance and Integrity under
the Exchange Act (‘‘Reg SCI’’) (17 CFR 242.1000 to
1007).
986 See CAT NMS Plan, supra note 3, at Section
4.12.
987 Id. at Section 6.12.
988 See id. at Appendix D, Section 4.
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designed to ensure the security of data
in flight. For instance, the Plan requires
that bulk extract data be encrypted,
password protected and sent via secure
methods of transmission.989 Third,
Section 6.7(g) of the Plan requires that
the Participants establish, maintain, and
enforce written policies and procedures
reasonably designed to (1) ensure the
confidentiality of the CAT Data obtained
from the Central Repository; and (2)
limit the use of CAT Data obtained from
the Central Repository solely for
surveillance and regulatory purposes.
Finally, the Plan makes further
provisions designed to provide security
for PII. For example, regulators
authorized to access PII would be
required to complete additional
authentications, and PII would be
masked unless users have permissions
to view PII.990
As discussed in the Plan,991 the
Participants collected information from
the Bidders regarding security and
confidentiality during the RFP process,
however, there was considerable
diversity in the approaches proposed by
the Bidders and the Participants chose
to give the Plan Processor flexibility on
many implementation details and state
the requirements as a set of minimum
standards. These requirements include
both general security and PII treatment
requirements. General security
requirements are designed to address
physical security, data security during
transmissions, transactions, and while
at-rest, confidentiality, and a cyberincident response plan. PII requirements
include a separate PII-specific
workflow, PII-specific authentication
and access control, separate storage of
PII data, and a full audit trail of PII
access.992 Because many of the
decisions that define security measures
for the Central Repository are coincident
with the selection of the Plan Processor,
there is a degree of uncertainty with
regards to security measures that would
be implemented by the Plan Processor.
Consequently, there is uncertainty about
the significance of the risks, the
expected costs of a breach when
considering the likelihood of a data
breach,993 and the second-order effects.
989 See
id. at Appendix D, Section 8.2.2.
id. at Appendix C, Section A.2(c).
991 See id. at Appendix C, Section A.4; Appendix
D, Section 4.
992 See CAT NMS Plan, supra note 3, at Appendix
D, Section 4.1.2–4.1.6.
993 One study of 62 U.S. companies experiencing
data breaches in 2015 puts the average cost per
stolen record containing personal or sensitive
information at $217; the average number of
breached records per incident was 28,070. See
Ponemon Institute, 2015 Cost of Data Breach Study:
United States (May 2015) (noting, however, that the
study specifically excluded breaches of over
990 See
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30733
The Commission preliminarily
believes the Plan marginally increases
the threat of breach of broker-dealer
trading and business strategies because
although SROs currently receive this
data from their own members, SROs are
expected to have access to other SROs
data more readily within the Central
Repository. There is some risk that
SROs could use this data improperly to
gain information on how broker-dealers
interact with other SROs’ trading
platforms. The Plan includes certain
measures that mitigate this risk,
however, by restricting the use of CAT
Data reported by other entities for
business purposes.994
(3) Second Order Effects
The desire to avoid direct costs of a
security breach could motivate actions
that would result in second order effects
of security breaches. For example, if
service bureaus perceive the costs and
risks of a security breach to be great
enough because of the addition of PII in
the data, which is not included in
current data, some could decide not to
provide CAT Data reporting services.
This could increase the potential for a
short term strain on capacity and
exacerbate the costs of this strain
described above and below.995 Further,
investors or other market participants
could move their activity off-shore or
cease market participation altogether to
100,000 records as not representative of ‘‘typical’’
data breaches). As one example of a large data
breach, Target Corporation’s 2013 data breach
affecting 40 million credit card numbers and 70
million other records containing PII had, as of
January 2015, resulted in $252 million of related
expenses for Target. See Target Corporation, Form
10–K for the Fiscal Year ended January 31, 2015
(March 13, 2015). Because it is not clear what the
risk of a breach would be for CAT, in terms of either
likelihood or magnitude, these types of numbers are
simply indicative; it is impossible to estimate with
any precision what the cost of a breach might be.
For example, a complete breach of the CAT System,
including the PII storage, might expose records an
order of magnitude larger than the Target breach;
however the types of records stored in CAT could
be more difficult to exploit than credit card
information, but their exploitation might prove far
more damaging to individuals and entities whose
trading information, for example, were
compromised.
994 Rule 613(e)(4)(1)(A) states that Participants
and the Plan Processor ‘‘agree not to use such data
for any purpose other than surveillance and
regulatory purposes, provided that nothing in this
paragraph (e)(4)(i)(A) shall be construed to prevent
a plan sponsor from using the data that it reports
to the central repository for regulatory, surveillance,
commercial, or other purposes as otherwise
permitted by applicable law, rule, or regulation.’’
Similar language appears in the CAT NMS Plan.
The Commission preliminarily believes this
provision does not increase security risks because
the data reported to the Central Repository by a
Participant is already available to that Participant.
See CAT NMS Plan, note 3, supra, at Section
6.5(f)(i)(A).
995 See supra note 934 and Section IV.G.1.d, infra.
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avoid having sensitive information
stored in the Central Repository.
Consequences of changes in investor
behavior in response to the threat of a
breach include: Investors holding
suboptimal portfolios; lost profits to the
securities industry; and higher costs of
raising capital for U.S.-based securities
issuers, if the public’s willingness to
participate in capital markets is
sufficiently reduced.996
Nonetheless, the Commission
preliminarily does not believe that the
effect of the Plan on the risk or costs of
a data breach would be great enough to
result in significant second order effects.
As discussed above, the Commission
preliminarily believes the Plan
marginally increases the threat of breach
of broker-dealer trading and business
strategies. However, the Plan includes
certain measures that mitigate this risk.
In light of these provisions, the
Commission preliminarily believes that
the Plan is unlikely to significantly
deter broker-dealers from participating
in markets. In addition, in deciding
whether to trade in the U.S. markets or
abroad, investors and other market
participants would continue to assess a
multitude of potential trade-offs. While
the expected costs of a security breach
may factor in, so would the level of
investor protections, which the
Commission preliminarily believes
would increase if it approved the
Plan.997
Another possible second order effect
of avoiding the risk and cost of a
security breach event could be the risk
that one or more service bureaus could
choose to exit the market in providing
data reporting services rather than
change their business practices to report
PII to the Central Repository, in order to
assist their client(s) in meeting their
reporting responsibilities under the
Plan. Specifically, while some service
bureaus currently handle PII for their
broker-dealer clients, others do not or
do so only on an occasional and limited
basis. To the extent service bureaus that
do not already handle such PII were to
stop offering regulatory data reporting
services due to an unwillingness to host
such customer information, their
customers would be forced to establish
new service bureau relationships, or
undertake self-reporting. This
potentially would be very costly to the
broker-dealer clients of the exiting
service bureaus due to the switching
costs that broker-dealers incur to change
service bureaus. Such an event could
also contribute to crowded entrances
problems.998 As noted above, however,
the approach in the Plan to the reporting
of customer information could allow for
the bifurcation of PII reporting from the
reporting of order data, which could
affect a service bureau’s decision
whether to exit the market for reporting
services to a broker-dealer client.999
While the Commission cannot rule out
that one or more service bureaus could
choose to exit the data reporting
services market to avoid the costs of a
potential security breach, the
Commission preliminarily believes that
such exits are unlikely. In addition, the
Commission preliminarily believes that
security breach risks are unlikely to
result in service bureau exit because the
market for regulatory data reporting
services is generally expanding and the
trend is for more, not less,
outsourcing.1000 Consequently, the
Commission preliminarily believes that
market share in this market is valuable
and existing competitors are unlikely to
voluntarily exit the market abruptly.
b. Changes to CAT Reporter Behavior
The Commission acknowledges that
increased surveillance could potentially
impose some costs by altering the
behavior of market participants. Benefits
could accrue to the extent that improved
surveillance, investigation, and
enforcement capabilities allow for
regulators to better identify and address
violative behavior when it occurs; and
to the extent that common knowledge of
improved capabilities deters violative
behavior.1001 Costs could accrue to the
extent that some forms of market
activity, which are permissible and
economically beneficial to the market
and investors, could come under higher
scrutiny, which could create a
disincentive to engage in that activity.
In particular, the Commission
acknowledges that some market
participants could reduce economically
beneficial behavior if those market
participants believe that, because of
enhanced surveillance, their activities
would increase the level of regulatory
scrutiny that they bear. In other words,
if market participants engaging in nonviolative activity believe that such
activity could increase the likelihood of
examinations, inspections, and other
interactions with regulators, those
market participants could reduce or
cease such activity to reduce the
frequency and costs of interactions with
regulators, including staff time to
accommodate inspections, facilitate
998 See
supra note 934.
supra note 979.
1000 See Section IV.G.1.d, infra.
1001 See Section IV.E.2.c, supra.
999 See
996 See
997 See
Section IV.G.3, infra.
Section IV.E.2, supra.
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examinations and answer regulatory
inquiries. Because facilitating regulatory
inquiries is costly to firms, such a firm
might conclude that certain permissible
activities generate insufficient profits to
offset costs associated with the
regulatory scrutiny generated by these
activities, even if the firm’s behavior is
permissible and no fines or other
penalties result from these inquiries. To
the extent that market participants
could reduce activity that benefits the
market, this could impose costs on
investors and the market in the form of
a reduction in the economic value of
such activity.
Additionally, in an environment of
improved surveillance, regulators could
increase the number of inspections,
examinations and enforcement
proceedings that they initiate.1002 To the
extent that these activities result in a
reduction in violative behavior, the
market benefits in not bearing the costs
of this behavior. To the extent, however,
the additional regulatory activity
increases the number of inspections,
examinations and enforcement on
permissible activities,1003 market
participants would incur the increased
costs of facilitating these regulatory
inquiries. The Commission
preliminarily believes, however, that
these costs would be offset by other
effects of CAT such as fewer ad hoc data
requests, improvement in regulators’
precision in selecting firms for riskbased exams, and other efficiency
improvements, and that the related
savings would likely be greater than
such costs in aggregate.
c. Tiered Funding Model
The Commission preliminarily
believes that establishing a small
number of discrete fee tiers, as occurs
under the Plan, could create incentives
for CAT Reporters to alter their behavior
to switch from one tier to another,
thereby qualifying for lower fees.
Specifically, in the discussion of
Consideration 7, the Plan states that
CAT Reporters would be classified into
a number of groups based on reporter
type and market share of share volume
or message traffic and assessed a fixed
fee that is determined by this
classification.1004 The higher-activity
groups would be assessed higher fees.
1002 See
Section IV.E.2.c, supra.
example, the Commission preliminarily
believes that the Plan would improve the efficiency
and effectiveness of risk-based exams. However,
because the efficiency could increase the total
number of risk-based exams, the total number of
exams on permissible activity could go up even if
the percentage of exams on permissible activity
goes down.
1004 See CAT NMS Plan, supra note 3, at Section
11.3 and Appendix C, Section B.7(b)(4)(C).
1003 For
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Equity Execution Venues would be
classified into 2–5 fee tiers based on
market share of share volume, option
Execution Venues would be classified
into a separate set of 2–5 fee tiers based
on market share of share volume, and
Industry Members would be classified
into another set of 5–9 fee tiers based on
message traffic.1005 That is, the Plan
describes a funding policy with a tiered
funding model that places market
participants who fall into the lower tiers
at a fee advantage over the market
participants that fall into the higher
tiers.1006 The Plan states that this
funding model is designed to reward the
characteristics—small market share of
share volume in the case of Execution
Venues, low message traffic in the case
of broker-dealers—that would enable
CAT Reporters to qualify for the lower
tiers. The potential effect of rewarding
these characteristics is to incent market
participants at the margins to
reconfigure their operations so as to
qualify for smaller tiers than would
otherwise apply. The potential for such
an effect would be greater among those
CAT Reporters that fall at the low end
of a tier and could most easily alter their
operations to qualify for a smaller tier.
Similarly, the funding model could
create incentives for a firm that has an
activity level near the top of a tier to
avoid additional market activity that
might move it to a higher fee tier. For
example, to control its tier level, a
market participant could reduce its
quoting activity or cease providing
services in a set of securities. Such
activity could affect liquidity and the
availability of trading services to
investors. The Commission notes,
however, that because this incentive is
contingent on being near a fee-tier cutoff
point, it preliminarily believes relatively
few market participants would likely be
affected and thus market quality effects
1005 The CAT NMS Plan defines ‘‘Execution
Venue’’ as ‘‘. . . a Participant or an alternative
trading system (‘‘ATS’’) (as defined in Rule 300 or
Regulation ATS) that operates pursuant to Rule 301
of Regulation ATS (excluding any such ATS that
does not execute orders).’’ The Plan also defines
Industry Member as ‘‘. . . a member of a national
securities exchange or a member of a national
securities association’’. See CAT NMS Plan, supra
note 3, at Article I, Section 1.1 for definitions.
Classification of Execution Venues into tiers is
based on transacted volume market share of share
volume (in the case of NMS stocks and OTC Equity
Securities) or contract volume (in the case of listed
options). For Industry Members, classification into
tiers is based on message traffic. Based on
conversations with Participants, the Commission
preliminarily believes message traffic would be
based on CAT Reportable Events reported to the
Central Repository. See id. at Article XI, Section
11.3 for discussion of assignment to funding tiers.
1006 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(v).
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would likely not be significant.1007
Furthermore, for those market
participants near a cutoff point,
managing activity to avoid a higher fee
tier would necessarily incur costs of lost
business and potential loss of market
share, and would possibly be difficult to
implement, which should mitigate any
effects on market quality.
The Commission recognizes that the
tiering of fees also could create calendar
effects within markets. Although the
Plan does not detail the horizon at
which CAT would measure activity
levels, the structure ultimately approved
by the Operating Committee could affect
market participant behavior near the
end of a measuring period. For example,
high levels of market activity during a
measuring period might cause CAT
Reporters to limit their activity near the
end of a measurement period to avoid
entering a higher fee tier. If this
translates into a reduction in quoting
activity, market liquidity conditions
could deteriorate at the end of activity
measurement periods, and improve
when a new measurement period
begins, for example.
The Commission notes that the
Operating Committee has discretion
under the Plan governance structure to
make the tier adjustments discussed in
Section 11.1.d for individual CAT
Reporters. This provision might mitigate
incentives for individual market
participants to alter market activities to
reduce their expected CAT fees.
d. Differential CAT Costs Across
Execution Venues
The funding model proposed in the
Plan is a bifurcated funding model, in
which costs are first allocated between
the group of all broker-dealers and the
group of all Execution Venues, then
within these groups by market activity
level.1008 The proposed funding model
treats Execution Venues differently from
broker-dealers; this differential
treatment could introduce inefficiencies
to the market for execution services. As
discussed in a recent academic
paper,1009 differential funding models
in execution venues could influence
how broker-dealers route customer
1007 This argument assumes that activity levels
used to determine funding tiers do not naturally
cluster near cutoffs, and that if such natural cutoff
points exist, the Operating Committee would avoid
setting such funding tier cutoff levels near those
activity levels.
1008 See CAT NMS Plan, supra note 3, at Article
XI.
1009 See Robert H. Battalio, Shane A. Corwin and
Robert H. Jennings, Can Brokers Have It All? On the
Relation between Make-Take Fees and Limit Order
Execution Quality (2015 working paper), available
at https://papers.ssrn.com/sol3/papers.cfm?abstract_
id=2367462. (‘‘Battalio, Corwin, and Jennings’’).
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30735
order flow, possibly to the detriment of
execution quality realized by investors.
The Commission preliminarily believes
that the bifurcated funding model
proposed in the Plan almost certainly
results in differential CAT costs
between Execution Venues because it
would assess fees differently on
exchanges and ATSs for two reasons.
First, message traffic to and from an
ATS would generate fee obligations on
the broker-dealer that sponsors the ATS,
while exchanges incur almost no
message traffic fees.1010 Second, brokerdealers that internalize off-exchange
order flow, generating off-exchange
transactions outside of ATSs, would
face a differential funding model
compared to ATSs and exchanges.1011
The cost differentials that result might
create incentives for broker-dealers to
route order flow to minimize costs,1012
creating a potential conflict of interest
with broker-dealers’ investor customers,
who are likely to consider many facets
of execution quality (such as price
impact of a trade and probability of
execution in a venue in which the order
is exposed) in addition to any of these
costs that are passed on to them.
In addition to friction created by the
bifurcated structure of the funding
model, the Commission preliminarily
believes that the CAT NMS Plan
funding model shifts broker-dealer costs
associated with the Central Repository
to all broker-dealers and away from
Options Market Makers. The CAT NMS
Plan provides that broker-dealers would
not report their options quotations to
the Central Repository, while equity
market makers would report their equity
1010 See CAT NMS Plan, supra note 3, at Section
11.3.(b): ‘‘For the avoidance of doubt, the fixed fees
payable by Industry Members pursuant to this
paragraph shall, in addition to any other applicable
message traffic, include message traffic generated
by: (i) an ATS that does not execute orders that is
sponsored by such Industry Member; and (ii)
routing orders to and from any ATS sponsored by
such Industry Member.’’ The Commission notes
that exchange broker-dealers would be subject to
message traffic fees as Industry Members under the
Plan. However, the Commission notes that based on
its analysis of OATS data from September 15–19,
2014, these broker-dealers are minor contributors to
overall message traffic, accounting for less than
0.03% of OATS ROEs.
1011 See CAT NMS Plan, supra note 3, at Article
XI.
1012 This assumes that CAT fees would ultimately
be borne by the broker-dealers that make routing
decisions. Currently, exchange access fees are often
borne by broker-dealers that make routing
decisions, as discussed in Battalio, Corwin, and
Jennings. Id. If Execution Venues were to absorb
these fees rather than pass them on to customers,
broker-dealer routing decisions might not be
affected. It is also possible that some Execution
Venues could incorporate some sort of rebate for
broker-dealer message fees into their fee schedules,
effectively making some venues less expensive for
broker-dealers to access.
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quotations to the Central Repository.1013
This differential treatment of market
making quotes affects costs of funding
the Central Repository in two ways.
First, the elimination of Options Market
Maker quotes from the message traffic of
broker-dealers decreases the number of
messages that must be reported and
stored, which presumably reduces the
overall cost of building and operating
the Central Repository. This reduction
in the overall cost of the Central
Repository reduces costs to both brokerdealers and Execution Venues. Second,
because Options Market Maker quotes
would not be in the message traffic
which determines the allocation of
broker-dealer costs of the Central
Repository, broker-dealers that do not
quote listed options would pay a higher
share of broker-dealer-assessed CAT fees
than they would if Options Market
Makers’ quotes were included in the
allocation of fees. Also, Options Market
Makers would pay relatively lower fees
than they would if their quotations were
included in CAT message traffic from
broker-dealers.
Although this differential treatment
would marginally increase the cost of
providing other broker-dealers services
relative to options market making, the
Commission preliminarily does not
believe that this would materially affect
a market participant’s willingness to
provide broker-dealer services other
than options market making for several
reasons. First, many market participants
participate in both equities and options
markets because activity in one market
(equities or options) could be used to
hedge positions acquired in the other
market. Consequently, many firms
already find it cost effective to
participate in both markets. Second,
broker-dealers participating in equity
markets have significant infrastructure
in place for serving that market and
switching costs to participate in options
market making are high due to the need
to establish quantitative infrastructure
to quote options, market connectivity,
IT infrastructure, and clearing/
settlement arrangements required to
transact in options; consequently,
reducing the cost to make markets in
options is unlikely to attract brokerdealers to change their business models.
Finally, the Commission believes that
the market to provide liquidity in the
options market is already a competitive
one because many broker-dealers
participate in that market and market
share that is sufficient to cover
substantial fixed costs of making
1013 See Section IV.H.1.a, supra for a discussion
of an alternative that would require Options Market
Makers to report their quotes.
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markets in options is valuable;
consequently, options market
participants have incentives to compete
to win market share. Without a market
change that significantly affects profits
to be made in options market making, it
seems broker-dealers would need a
competitive advantage relative to
existing competitors to successfully win
market share from the existing
competitors. The Commission
preliminarily believes that that brokerdealers that currently focus on equity
market making and other broker-dealer
services unrelated to options market
making are likely to continue to focus
on the markets in which they participate
because their competitive advantages
relate to these activities.
5. Request for Comment on the Costs
The Commission requests comment
on all aspects of the discussion of the
potential costs of the CAT NMS Plan. In
particular, the Commission seeks
responses to the following questions:
301. Do Commenters agree with the
Commission’s assessment of the
potential costs of the CAT NMS Plan?
Why or why not?
302. To what extent do the
uncertainties related to future decisions
about Plan implementation impact the
assessment of potential costs of the
Plan? Please explain.
303. Do Commenters agree that the
Plan’s level of detail regarding the
drivers of the costs to build, operate,
and maintain the Central Repository is
sufficient to assess the economic effects
of the Plan? If more detail is needed,
how can this information be obtained?
304. Do Commenters agree that using
the cost estimates provided in Bids from
the Shortlisted Bidders provides
reasonable estimates of costs to build
and operate the Central Repository?
Why or why not?
305. Estimates in the Plan suggest that
the Participants’ data reporting costs
will significantly increase while
surveillance costs will significantly
decrease if the Plan is approved. Do
Commenters agree that these changes
are likely to occur? Please explain.
306. Do Commenters agree with the
Commission’s characterization of the
limitations in the cost studies? Do
Commenters agree with the
Commission’s assessment that the
Vendors Study and Participants Study
have reliable cost estimates? Do
Commenters agree that cost estimates
for large OATS Reporters and large nonOATS Reporters are reliable? Do
Commenters agree that cost estimates
for small reporters are unreliable? Why
or why not? Do Commenters have more
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precise estimates of the costs than
provided in the cost surveys?
307. The Commission re-estimated
aggregated costs under a different set of
assumptions than the Plan. Do
Commenters agree that the re-estimated
costs better represent the expected costs
of the CAT NMS Plan? Why or why not?
Do Commenters agree that most brokerdealers that report fewer than 350,000
OATS ROEs per month are likely to
report this data through a service
bureau?
308. Do Commenters agree with the
estimates of annual service bureau costs
for a very small OATS-reporting firm of
$50,000 to $180,000 per year, which
assumes that the service bureau
provides order routing and an orderhandling system? If not, please provide
alternate estimates.
309. Do Commenters agree that the
pricing function for service bureaus is
concave (increasing at a decreasing
rate)? Why or why not? The
Commission assumes in its reestimation that service bureau cost
functions are approximately as concave
as exchange pricing functions. Do
Commenters agree? Why or why not?
310. Will the requirement to provide
customer information to the Central
Repository be a significant cost-driver
for Outsourcers? Why or why not? Is the
need for encryption of this data a
significant cost-driver?
311. Will the anticipated retirement of
duplicative reporting systems such as
EBS affect Outsourcer costs? Why or
why not? Will the reduction in ad hoc
data requests significantly affect the
costs incurred by service bureaus in
assisting their clients in responding to
these requests? Why or why not?
312. Are there ways in which the
Commission could better estimate the
aggregate costs of the CAT NMS Plan?
If so, please explain.
313. Do Commenters agree with the
Commission’s assumption that most
firms that report fewer than 350,000
OATS ROEs per month are self-clearing?
If not, please explain. Do Commenters
believe that these firms would have
significantly higher implementation
costs due to their need to provide this
information to any service bureaus they
use for regulatory data reporting?
314. Do Commenters agree that
broker-dealers that are exempt or
excluded from OATS reporting are
likely to be small and should have their
costs estimated as Outsourcers? If no,
how many of these broker-dealers
currently participate in more than
350,000 events that would be OATSreportable, were they not exempt or
excluded, per month?
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315. Are Commenters aware of
options market making firms that are
FINRA members and report fewer than
350,000 OATS ROEs per month, or that
are exempt or excluded from OATS
reporting rules? If so, are there ways that
the Commission can identify these firms
to better estimate their costs under the
Plan?
316. Are Commenters aware of ELPs
that are not CBOE members that did not
trade on ATSs in 2014? If so, are there
ways that the Commission can identify
these firms to better estimate their costs
under the Plan?
317. Do Commenters agree that
FINRA member broker-dealers that are
Options Market Makers are unlikely to
be exempt or excluded from OATSreporting requirements, and are likely to
report more than 350,000 OATS ROEs
per month? If not, how many FINRA
member Options Market Makers exist
that are exempt or excluded from OATS
reporting requirements, or that report
fewer than 350,000 OATS ROEs per
month? Are there methods by which the
Commission could improve its estimates
of costs these broker-dealers are likely to
face if the Plan is approved?
318. According to survey results,
Approach 1 aggregate implementation
and ongoing costs are higher than those
for Approach 2 for CAT Reporters,
though not statistically so.1014 The
Commission notes that this cost
estimate does not seem intuitive
because Approach 2 could result in
extra data processing by CAT Reporters
to translate data into a fixed format
whereas Approach 1 would require no
translation. Why is the cost of Approach
1 anticipated to be higher than
Approach 2? Can this be explained by
the use of service bureaus whom CAT
Reporters expect to charge the same for
either approach? Can this be explained
by the need to process data under either
approach to replace ticker symbols with
listing exchange symbology?
319. Do Commenters believe that
duplicative reporting systems will be
retired and, if so, when? What systems
do Commenters expect to be retired? 1015
Are there any systems that cannot be
retired? What are the costs associated
with retiring duplicative reporting
systems? What are the benefits of
retiring duplicative reporting systems?
Would there be cost savings as a result
of retiring any duplicative reporting
systems? How does the timeline for
retiring duplicative reporting systems
1014 Approach 1 assumes CAT Reporters would
submit CAT Data using their choice of industry
protocols. Approach 2 assumes CAT Reporters
would submit data using a pre-specified format.
1015 See supra note 856.
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affect the costs and benefits? Please
explain.
320. Do service bureaus handle EBS
reporting for their clients? To what
extent would EBS reporting contribute
to duplicative reporting costs or system
retirement costs and savings?
321. The Commission’s analysis
discusses the Plan’s timetable for
retirement of duplicative reporting
systems (i.e., a maximum of 2.5 years).
Is the timetable for retirement of these
systems in the Plan realistic and/or
reasonable? Are there ways that the
timetable for duplicative reporting
system retirement could be accelerated?
If so, how?
322. Do Commenters believe that the
period of duplicative reporting that
would precede the retirement of certain
current, anticipated to be retired,
regulatory reporting systems would
impose significant cost burdens on
industry? Are the Commission’s
estimates of those costs accurate? Are
there dimensions of these costs that the
Commission has not recognized? If so,
what are they and what are their
magnitudes?
323. What milestones should CAT be
required to reach before duplicative
reporting systems can be retired?
324. What costs would service
bureaus face in accomplishing a period
of duplicative reporting during which
both CAT and the regulatory data
reporting systems that the Plan
anticipates would be retired are
operational? How many FTEs would be
involved?
325. What costs would broker-dealers
face in accomplishing a period of
duplicative reporting during which both
CAT and the regulatory data reporting
systems that the Plan anticipates would
be retired are operational? How many
FTEs would be involved?
326. The CAT NMS Plan estimates
that market participants would face
significant costs of approximately $2.6
billion in connection with retiring
duplicative reporting systems. What
expenses does this estimate cover, and
which systems account for which costs?
For some broker-dealers, would
implementation of CAT reporting
accomplish the retirement of other
regulatory data reporting systems? How
do system retirement costs differ
between broker-dealers that outsource
their data reporting versus those who
perform this function in-house?
327. Do Commenters believe that the
CAT NMS Plan would deliver
additional cost savings from sources
other than the retirement of duplicative
reporting systems and a reduction in the
amount of ad-hoc data requests to
regulated entities? Are there any
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30737
changes to the CAT NMS Plan that
would increase the potential cost
savings?
328. Are SROs adequately
incentivized to retire current regulatory
reporting and surveillance systems that
might be replaced by CAT? Do they
have incentives to resist the retirement
of these systems that this analysis fails
to identify?
329. Do Commenters agree that costs
associated with the Plan incurred by
broker-dealers could be passed down to
their customers? Why or why not? If so,
do Commenters have estimates
regarding what fraction of broker-dealer
costs would be passed down?
330. The Commission preliminarily
believes that the Vendors Study
measures ongoing costs that would also
be captured by the third-party
outsourcing costs in the other surveys.
As a result, the Commission does not
add these to the aggregated cost
estimates. Do Commenters agree with
this approach? Is there any double
counting of costs across the surveys, or
can the individual survey estimates be
aggregated into an industry-wide
estimate? Please explain.
331. According to survey results,
Approach 1 aggregate implementation
costs are higher than those for Approach
2 for vendors and ongoing costs are
lower.1016 The Commission notes that
this implementation cost result does not
seem intuitive because Approach 2
could result in creating a whole new
data translation process to implement
the Plan whereas Approach 1 would
require no translation. Why is Approach
1 costlier for vendors to implement than
Approach 2? Can this be explained by
the need to process data under either
approach to replace ticker symbols with
listing exchange symbology?
332. The Commission assumes that
cost estimates from Participants include
all costs the Participants would incur if
the Plan is approved, and that other
costs related to development of the Plan
are not avoidable if the Plan is not
approved. Is it reasonable for the
Commission to treat all costs related to
development of the Plan that are not
included in implementation and
ongoing costs as sunk costs? Why or
why not?
333. To what degree would industry’s
costs to implement and maintain CAT
reporting be passed on to investors?
Would competition between brokerdealers affect the passing on of costs to
investors? Why or why not?
334. How significant to the total
industry costs of the CAT NMS Plan are
1016 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(iv)(A).
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clock synchronization requirements, the
requirement that Options Market
Makers send quote times to the
exchanges, the requirement that the
Central Repository maintain six years of
CAT Data, and the inclusion of OTC
Equity Securities in the initial phase of
the implementation of the CAT NMS
Plan? Why?
335. How significant to the total
industry costs of the CAT NMS Plan is
the requirement to report customer
information to the Central Repository?
What elements of this requirement
contribute to its significance of the
potential costs of the Plan? Are there
ways in which this data can be made
available to regulators that would prove
less costly to industry and investors? If
so, what are they?
336. How significant to the total
industry costs of the CAT NMS Plan is
the requirement to report certain
information as part of the material terms
of the order? What elements of this
requirement contribute to its
significance of the potential costs of the
Plan? Are there ways in which this data
can be made available to regulators that
would prove less costly to industry and
investors? If so, what are they?
337. How significant to the total
industry costs of the CAT NMS Plan is
the requirement to report information to
the Central Repository using listing
exchange symbology? What elements of
this requirement contribute to its
significance of the potential costs of the
Plan? Are there ways in which this data
can be made available to regulators that
would prove less costly to industry and
investors? If so, what are they?
338. How significant to the total
industry costs of the CAT NMS Plan is
the requirement to report allocation
information to the Central Repository?
What elements of this requirement
contribute to its significance of the
potential costs of the Plan? Are there
ways in which this data can be made
available to regulators that would prove
less costly to industry and investors? If
so, what are they?
339. Are there other requirements of
the CAT NMS Plan that would be
significant sources of costs? If so, what
are they? Are there ways in which those
requirements could be made less costly?
If so, what are they?
340. Do Commenters agree that
ancillary fees levied by the Plan
Processor on broker-dealers in response
to late or inaccurate reporting are
unlikely to broadly levied on brokerdealers? Do Commenters believe they
would comprise a significant source of
CAT costs to industry? Why or why not?
341. Do Commenters agree with the
Commission’s analysis of potential cost
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savings from a reduction in the number
(and ultimately the cost) of data requests
as a result of regulators having direct
access to CAT Data?
342. Do Commenters agree with the
Commission’s analysis of the risk of a
security breach? Do Commenters agree
with the Commission’s analysis of the
potential costs of a security breach? Are
there factors not covered in the
analysis? What are they? Are the
security measures outlined in the Plan
appropriate and reasonable? Why or
why not?
343. Do Commenters agree with the
Commission’s analysis of potential
changes to CAT reporter behavior? Why
or why not? Are there additional factors
that should be considered?
344. Do Commenters agree with the
Commission’s analysis of the Plan’s
funding model? Why or why not? Are
there additional factors that should be
considered?
345. Do Commenters agree with the
Commission’s analysis of potential costs
resulting from differential CAT costs
across Execution Venues? Why or why
not? Are there additional factors that
should be considered?
346. Should the Plan require the
inclusion of a web-based manual data
entry option for initial CAT reporting in
addition to updates and corrections?
Please explain. How would a web-based
manual data entry option affect the costs
incurred by CAT Reporters? Do any
current regulatory data reporting
systems have a web-based manual data
entry option? If so, which ones and how
often do broker-dealers utilize that
option for data submission?
G. Efficiency, Competition, and Capital
Formation
In determining whether to approve
the CAT NMS Plan, and whether the
Plan is in the public interest, Rule 613
requires the Commission to consider the
impact of the Plan on efficiency,
competition and capital formation.1017
The Commission preliminarily
believes that the Plan generally
promotes competition. However, as
explained below, the Commission
recognizes that the Plan could increase
barriers to entry because of the costs to
comply with the Plan. Further, the
Commission’s analysis identifies several
limitations to competition, but the Plan
contains provisions to address some
limitations and Commission oversight
can also address the limitations.
The Commission preliminarily
believes that the Plan would improve
the efficiency of regulatory activities
1017 See
17 CFR 242.613(a)(5); see also 15 U.S.C.
78c(f).
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and enhance market efficiency by
deterring violative activity that harms
market efficiency. The Commission
preliminarily believes that the Plan
would have modest positive effects on
capital formation and that the threat of
a security breach at the Central
Repository is unlikely to significantly
harm capital formation.
The Commission notes that the
significant uncertainties discussed
earlier in this economic analysis also
affect the Commission’s analysis of
efficiency, competition, and capital
formation. For example, the
Commission recognizes that the
uncertainties around the improvements
to data qualities can affect the strength
of the Commission’s conclusions on
efficiency, and the uncertainty regarding
how the Operating Committee allocates
the fees used to fund the Central
Repository could affect the
Commission’s conclusions on
competition. Additionally, the
Commission recognizes that the Plan’s
likely effects on competition, efficiency
and capital formation are dependent to
some extent on the performance and
decisions of the Plan Processor and the
Operating Committee in implementing
the Plan, and thus there is necessarily
some further uncertainty in the
Commission’s analysis. Nonetheless, the
Commission believes that the Plan
contains certain governance provisions,
as well as provisions relating to the
selection and removal of the Plan
Processor, that mitigate this uncertainty
by promoting decision-making that
could, on balance, have positive effects
on competition, efficiency, and capital
formation.
1. Competition
As required by Rule 613, the Plan
contains an analysis of its expected
impact on competition.1018 The Plan’s
analysis considers potential impacts of
the CAT NMS Plan on competition
related to technology, cost allocation
across CAT Reporters, and changes in
regulatory reporting requirements.1019
The Plan splits its analysis between
‘‘Participants and broker-dealers
communities’’ and concludes that the
Plan generally would avoid placing an
inappropriate burden on competition in
U.S. markets.1020 The Plan’s analysis
states the criteria for evaluating impacts
on competition by outlining the channel
of potential impacts as policy changes
1018 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.8 (noting that Rule
613(a)(1)(viii) requires the Plan to include a
discussion of an analysis of the impact of the Plan
on competition, efficiency and capital formation).
1019 See id.
1020 See id.
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caused by the Plan that ‘‘burden a group
or class of CAT Reporters in a way that
would harm the public’s ability to
access their services’’ and states that
such impacts ‘‘should be measured
relative to the economic baseline.’’ 1021
The Commission’s evaluation of
competition reorients the Plan’s
approach to analyzing competition,
expands upon it, and notes some
limitations in the scope and conclusions
of the Plan’s analysis. In particular, the
Commission’s analysis of competition is
organized and segmented by the
particular markets in which competition
among service providers of types of
services exists. The Commission’s
analysis focuses on four distinct
markets: The market for trading
services, the markets for broker-dealer
services, the market for regulatory
services, and the market for data
reporting services. In the context of the
Plan, this allows the competition
analysis to consider a more complex
interaction between all market
participants in a defined market than
would be feasible by focusing solely on
market participant types. This approach
allows the Commission to determine
whether a differential impact across
competitors affects overall competition
in the market. Much like the Plan’s
criteria for evaluation, the Commission
recognizes that any effects on
competition, with respect to each
market, should be compared to a
Baseline that characterizes the
competitive environment without the
CAT NMS Plan. In addition, the
Commission considered uncertainty in
the effect of the Plan on competition in
any of these markets.
After analyzing the discussion of
competition and the other relevant
provisions of the Plan in the context of
four affected markets, the Commission
preliminarily believes that, while there
could be effects on individual
competitors, these effects would not
lead to changes to competition as a
whole in affected markets in a way that
would generate significant adverse
effects. In sum, and as discussed in
detail below, the Commission
preliminarily believes that the Plan
poses a risk for competition for trading
services, but provisions in the Plan and
Commission oversight could mitigate
this risk. Additionally, the Plan could
have a differential impact on the ability
of smaller broker-dealers and brokerdealers subject to CAT reporting to
compete in the various markets for
broker-dealer services, but these
differential impacts may not be
significant enough to affect overall
1021 See
id.
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competition in the markets for brokerdealer services. Moreover, the Plan
generally promotes competition to be
the Plan Processor and competition for
regulatory services, but friction in those
markets could limit the competition.
Finally, the Plan could have a harmful
effect on competition in the market for
data reporting services, at least in the
short term, because of capacity
constraints, but the prolonged
implementation for small broker-dealers
could limit these harmful effects.
a. Market for Trading Services
The Commission analyzed the CAT
NMS Plan’s economic effects on
competition in the market for trading
services, compared to the Baseline of
the competitive environment without
the Plan, and preliminarily believes that
the Plan would not place a significant
burden on competition for trading
services. The Commission recognizes
the risk for the Plan to have negative
effects on competition and to increase
the barriers to entry in this market, but
preliminarily believes that Plan
provisions and Commission oversight
could mitigate these risks.
The market for trading services,
which is served by exchanges, ATSs,
and liquidity providers (internalizers
and others), relies on competition to
supply investors with execution
services at efficient prices. These
trading venues, which compete to match
traders with counterparties, provide a
framework for price negotiation and
disseminate trading information. The
market for trading services in options
and equities consists of 19 national
securities exchanges, which are all Plan
Participants,1022 and off-exchange
trading venues including broker-dealer
internalizers, which execute substantial
volumes of transactions, and 44 ATSs,
which are not Plan Participants.1023
Since the adoption of Regulation NMS
in 2005, the market for trading services
has become more fragmented and
competitive, and there has been a shift
in the market share of trading volume
among trading venues. For instance,
from 2005 to 2013, there was a decline
in the market share of trading volume
for exchange-listed stocks on NYSE. At
the same time, there was an increase in
the market share of newer national
securities exchanges such as NYSE
1022 The Commission understands that ISE
Mercury, LLC will become a Participant in the CAT
NMS Plan and thus is accounted for as a Participant
for purposes of this Notice. See supra note 3.
1023 See Concept Release on Equity Market
Structure, at 3598–3560, supra note 733 (for a
discussion of the types of trading centers); see also
Alternative Trading Systems with Form ATS on
File with the SEC as of April 1, 2016, available at
https://www.sec.gov/foia/ats/atslist0416.pdf.
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Arca, BATS–Z, BATS–Y, EDGA and
EDGX.1024 During the same time period,
the proportion of NMS Stocks trading
off-exchange (which includes both
internalization and ATS trading)
increased; for example, during the
second quarter of 2015, NMS Stock
ATSs alone comprised approximately
15 percent of consolidated volume, and
other off-exchange volume totaled 18
percent of consolidated volume over the
same period.1025 Aside from trading
venues, exchange market makers
provide trading services in the securities
market. These firms stand ready to buy
and sell a security ‘‘on a regular and
continuous basis at publicly quoted
prices.’’ 1026 Exchange market makers
quote both buy and sell prices in a
security held in inventory, for their own
account, for the business purpose of
generating a profit from trading with a
spread between the sell and buy prices.
Off-exchange market makers also stand
ready to buy and sell out of their own
inventory, but they do not quote buy
and sell prices.1027
The Plan examined the effect of the
CAT NMS Plan on the market for
trading services primarily from the
perspective of the exchanges. The Plan
asserts that distribution of regulatory
costs incurred by the Plan would be
distributed according to ‘‘the Plan’s
funding principles,’’ calibrated to avoid
placing ‘‘undue burden on exchanges
relative to their core characteristics,’’
and would thus not cause any exchange
to be at a relative ‘‘competitive
disadvantage in a way that would
materially impact the respective
Execution Venue marketplaces.’’ 1028
Likewise, the Plan asserts that its
method of cost allocation would avoid
discouraging entry into the Participant
community because a potential entrant,
like an ATS, would ‘‘be assessed exactly
the same amount [of allocated CATrelated fees] for a given level of activity’’
both before and after becoming an
exchange.1029
1024 See Securities Exchange Act Release No.
76474 at 81112, ‘‘Regulation of NMS Stock
Alternative Trading Systems’’, available at https://
www.sec.gov/rules/proposed/2015/34-76474.pdf.
1025 See id. at 81124.
1026 See ‘‘Market Maker’’, available at https://www.
sec.gov/answers/mktmaker.htm (last visited April
18, 2016).
1027 Laura Tuttle, OTC Trading: Description of
Non-ATS OTC Trading in National Market System
Stocks (March 2014), available at https://www.sec.
gov/dera/staff-papers/white-papers/otc-tradingwhite-paper-03-2014.pdf.
1028 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.8(a)(i); see also id. at Section
11.2 (for a discussion of the Plan’s funding
principles); Section, III.A.3.d, supra.
1029 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.8(a)(i).
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The Commission also examined the
effect of the funding model on
competition in the market for trading
services, including off-exchange
liquidity suppliers and ATSs. In
addition, the Commission considered
the effect of implementation and
ongoing costs of the Plan, whether
particular elements of the Plan could
hinder competition, and the effect of
enhanced surveillance on competition
in the market for trading services.
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(1) The Funding Model
As noted above, the Operating
Committee would fund the Central
Repository by allocating its costs across
exchanges, FINRA, ATSs and brokerdealers.1030 The Operating Committee
would decide which proportion of costs
would be funded by exchanges, FINRA,
and ATSs and which portion would be
funded by broker-dealers. The Plan does
not specify how the Operating
Committee would select this allocation.
However, the portion allocated to the
exchanges, FINRA, and ATSs would be
divided among them according to
market share of share volume and the
portion allocated to broker-dealers
would be divided among them
according to message traffic, including
message traffic sent to and from an
ATS.1031 The Operating Committee
would allocate fees for the equities
market and options market separately
based on market share in each market.
The Operating Committee would file the
fees resulting from its funding model
with the Commission under the
Exchange Act.
Any entity that becomes a new
exchange would be required to join the
CAT NMS Plan as a Participant. In
addition, any new Participant to the
Plan must pay a ‘‘Participation Fee,’’ to
the Company ‘‘in an amount determined
by a Majority Vote of the Operating
Committee as fairly and reasonably
compensating the Company and the
Participants for costs incurred in
creating, implementing, and
maintaining the CAT.’’ 1032 This
Participation Fee would be based on,
among other potential factors, capital
expenditures paid by the Company
amortized over five years, costs incurred
by the Company to accommodate the
new Participant, and Participant Fees
paid by other new Participants.1033
1030 See
id. at Article XI.
1031 Id.
1032 See id. at Section 3.3. The Commission notes
that the Plan does not specify the Participation Fee.
The Commission expects this fee to be filed as an
amendment to the CAT NMS Plan under Rule 608
of Regulation NMS. See 17 CFR 242.608.
1033 The Commission notes that Section 3.3(b)(v)
of the CAT NMS Plan states, ‘‘In the event the
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The Commission preliminarily
believes that any impacts of such fees
on competition in the market for trading
services would manifest either through
the model for the fees itself or through
the later allocation of the fees across
market participant types, across equity
or options exchanges or, within market
participant types and markets, through
the levels of fees paid by each tier. Each
of the different channels through which
the Plan could have an adverse effect on
competition is discussed separately
below.
A. Funding Model
As discussed in Section IV.F.4.d, the
Commission preliminarily believes that
the structure of the funding model could
provide a competitive advantage to
exchanges over ATSs. The Plan states
that an entity would be assessed exactly
the same amount for a given level of
activity whether it acted as an ATS or
an exchange.1034 However, FINRA
would be charged fees based on the
market share of off-exchange trading.
ATSs, which are FINRA members,
would presumably pay a portion of the
FINRA fee through their broker-dealer
membership fees. In addition, ATSs
would pay a fee for their market share,
which is a portion of the total offexchange market share. Therefore, ATS
volume would effectively be charged
once to the broker-dealer operating the
ATS and a second time to FINRA.1035
This would result in ATSs paying more
than exchanges for the same level of
activity. Ultimately, if the funding
model disadvantages ATSs relative to
registered exchanges, trading volume
could migrate to exchanges in response,
and ATSs could have incentives to
register as exchanges as well.1036
Company (following the vote of the Operating
Committee contemplated by Section 3.3(a)) and a
prospective Participant do not agree on the amount
of the Participation Fee, such amount shall be
subject to review by the Commission pursuant to
§ 11A(b)(5) of the Exchange Act.’’ See CAT NMS
Plan, supra note 3, at Section 3.3(b)(v); see also text
accompanying notes 1038–1039, infra.
1034 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(iii)(C).
1035 Id. at Section 11.3(b).
1036 The Commission notes that ATSs currently
incur a different set of regulatory fees than are
incurred by exchanges, because ATSs are required
to be members of a national securities association.
FINRA charges its members fees to cover its
regulatory costs. See FINRA Manual: Corporate
Organization: By-Laws of the Corporation: Schedule
A: Section 1—Member Regulatory Fees, available at
https://finra.complinet.com/en/display/display_
main.html?rbid=2403&element_id=4694 (‘‘FINRA
shall, in accordance with this Section, collect
member regulatory fees that are designed to recover
the costs to FINRA of the supervision and
regulation of members, including performing
examinations, financial monitoring, and policy,
rulemaking, interpretive, and enforcement
activities.’’).
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Additionally, the Commission
preliminarily believes that the
Participation Fee could discourage new
entrants or the registration of an ATS as
an exchange, increasing the barriers to
entry to becoming an exchange. In
particular, the factors listed in the Plan
for determining the Participation Fee
consider the previous costs incurred by
the existing Participants but not the
costs already incurred by the new
Participant when it acted as an ATS.1037
However, the Plan does not prescribe a
set formula for determining the
Participation Fee and the Plan does not
preclude considering previous costs
incurred by the ATS in the Participation
Fee. In addition, although amendments
designated by sponsors to an NMS plan
as establishing or changing a fee may be
effective upon filing with the
Commission,1038 the Commission may
summarily abrogate the amendment that
establishes (or in the future, changes)
the Participation Fee within 60 days of
its filing and require that the fee
amendment be refiled in accordance
with Rule 608(a)(1) and reviewed in
accordance with Rule 608(b)(2) of
Regulation NMS, if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or the maintenance of fair and orderly
markets, to remove impediments to, and
perfect the mechanisms of, a national
market system or otherwise in
furtherance of the purposes of the
Act.1039
Further, because the funding model
seems to charge ATSs more for their
market share than exchanges, ATSs
could pay relatively less for their market
share as an exchange than as an ATS,
countering this barrier to entry
depending on the magnitudes of the two
fee types.
B. Allocation of Fees
The Plan discusses the allocation of
fees among market participants of
different sizes within the same market
participant type (Execution Venues
versus broker-dealers), but does not
1037 See
CAT NMS Plan, supra note 3, at Section
3.3(b).
1038 See
17 CFR 242.608(b)(3)(i).
17 CFR 242.608(a)(1); 608(b)(2);
608(b)(3)(i); and 608(b)(3)(iii). Pursuant to Rule
608(b)(2) of Regulation NMS, the Commission shall
approve such amendment, with such changes or
subject to such conditions as the Commission may
deem necessary or appropriate, if it finds that such
amendment is necessary or appropriate in the
public interest, for the protection of investors and
the maintenance of fair and orderly markets, to
remove impediments to, and perfect the
mechanisms of, a national market system, or
otherwise in furtherance of the purposes of the Act.
Approval of the amendment shall be by
Commission order.
1039 See
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discuss the allocation of fees across the
different market participant types or
markets. The Operating Committee
would determine this allocation and
would submit a filing to the
Commission, which would be subject to
Commission review and public
comment.1040 The Commission
recognizes the potential for the
Operating Committee to influence the
market for trading services either by
coordinating to favor one segment over
another, or through an imbalance in the
voting rights on the Operating
Committee. The Commission also
preliminarily believes that the Plan
contains governance provisions that
could mitigate such potential burdens
on competition.
The Commission recognizes that the
potential for a burden on competition
and effects on competitors in the market
for trading services could arise from
provisions relating to the allocation and
exercise of voting rights. In particular, a
concentration of influence over
Committee decisions could directly and
indirectly affect competition. The
potential for concentration of influence
over vote outcomes arises from
proposed provisions to give one vote to
each Plan Participant 1041 in an
environment where some Participants
are Affiliated SROs.1042 Indeed,
supermajority approval could be
achieved through five of the 10 groups
of Affiliated SROs and majority
approval could be achieved with just
four such groups.1043 In light of this
potential for concentration, voters could
weigh some particular interests more
than others. For example, the
Participant groups with options
exchanges could have the incentive to
allocate a disproportionately low level
of fees for options market share than for
equity market share. Such an allocation
could disadvantage competing
Participants with only equities
exchanges.
The inclusion of all exchanges on the
Operating Committee could give the
Plan Participants opportunities and
incentives to share information and
coordinate strategies in ways that could
reduce the competition among
exchanges or could create a competitive
advantage of exchange trading over offexchange trading.1044 However, the
Commission preliminarily believes that
the Plan would limit these potential
burdens on competition. In particular,
the Plan includes provisions designed to
limit the flow of information between
the employees of the Plan Participants
who serve as members of the Operating
Committee and other employees of the
Plan Participants.1045 Additionally, the
Plan includes provisions that guide the
Operating Committee to set fees
between exchanges and ATSs in a tiered
fashion, based upon market share.1046
Finally, Commission oversight could
also mitigate any concerns that burdens
on competition might arise as a result of
this approach.
Additionally, the Commission agrees
with the Plan’s assessment that some
1040 See supra notes 78 and 79 (describing how
fee schedules for CAT could be filed and noting that
they could take effect upon filing with the
Commission).
1041 See CAT NMS Plan, supra note 3, at Section
4.3.
1042 The CAT NMS Plan states that the Operating
Committee shall consist of one voting member
representing each Participant and that one
individual may serve as the voting member of the
Operating Committee for multiple Affiliated
Participants and shall have the right to vote on
behalf of each such Affiliated Participant. See id. at
Section 4.2(a).
1043 The twenty SROs that are Participants in the
CAT NMS Plan include five sets of affiliated SROs
(New York Stock Exchange LLC, NYSE Arca, Inc.,
and NYSE MKT LLC (the ‘‘NYSE Group’’); The
NASDAQ Stock Market LLC, NASDAQ OMX BX,
Inc., and NASDAQ OMX PHLX LLC (the ‘‘NASDAQ
Group’’); BATS Exchange, Inc., BATS Y-Exchange,
Inc., EDGX Exchange, Inc., and EDGA Exchange,
Inc. (the ‘‘BATS Group’’); Chicago Board Options
Exchange, Incorporated and C2 Options Exchange,
Incorporated (the ‘‘Chicago Options Group’’);
International Securities Exchange, LLC, ISE Gemini,
LLC, and ISE Mercury, LLC (the ‘‘ISE Group’’); and
five independent SROs (National Stock Exchange,
Inc.; Chicago Stock Exchange, Inc.; BOX Options
Exchange LLC; Miami International Securities
Exchange LLC; and Financial Industry Regulatory
Authority, Inc.). The BATS Group has four votes,
the NYSE Group, the NASDAQ Group and the ISE
Group each have three votes, and the Chicago
Options Group has two votes. See CAT NMS Plan,
supra note 3, at Appendix C, Section D.11(b)
(Affiliated Participant Groups and Participants
without Affiliations). A majority approval requires
eleven votes. This could include as few as four of
the SROs and sets of affiliated SROs: the affiliated
SROs that have four votes, two sets of affiliated
SROs that have three votes, and one other SRO or
set of affiliated SROs. Supermajority approval
requires fourteen votes. This could include as few
as five SROs and sets of affiliated SROs: the
affiliated SROs that have four votes, three sets of
affiliated SROs with three votes, and any additional
SRO. Note also that as few as two sets of affiliated
SROs could block a Supermajority approval by
casting seven ‘‘no’’ votes: the affiliated SROs with
four votes and any one of the affiliated SROs with
three votes.
1044 See infra note 1272. The Commission notes
that FINRA could represent the perspectives of the
off-exchange portion of the market, but FINRA
would have only one vote and exchanges would
have nineteen.
1045 See CAT NMS Plan, supra note 3, at Section
9.6(a) (Participants may share Plan information
with their employees and other Representatives on
a need-to-know basis; their use of Plan information
is restricted to what is needed to achieve plan
regulatory objectives). Details on the
implementation of these confidentiality provisions
are not stated. However, see also id. at Section
9.6(c) (Participants may share information among
themselves without Operating Committee approval
in some instances).
1046 See id. at Section 11.3; Appendix C, Section
B.7(b)(iv)(C).
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30741
governance features of the Plan would
limit adverse effects on competition in
the market for trading services. The
governance structure of the Plan
contains provisions to limit the
incentive and ability of Operating
Committee members to serve the private
interests of their employers, such as
rules regulating conflicts of interest.1047
Such governance provisions could
mitigate the potential for members of
the Operating Committee to use their
influence over the fee schedule to
benefit their own enterprise in a way
that unfairly harms the customers of
competing exchanges and ATSs and
places a burden on competition.
Moreover, as discussed above, the
Commission may summarily abrogate
and require the filing of Plan
amendments that establish or change a
fee in accordance with Rule 608(a)(1)
and review such amendments in
accordance with Rule 608(b)(2) of
Regulation NMS, if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or the maintenance of fair and orderly
markets, to remove impediments to, and
perfect the mechanisms of, a national
market system or otherwise in
furtherance of the purposes of the
Act.1048 In such a case, if the
Commission chooses to approve such
amendment, it would be by order and,
with such changes or subject to such
conditions as the Commission may
deem necessary or appropriate.
(2) Costs of Compliance
Because all Participants but one
compete in the market for trading
services, the ability of affiliates to vote
as a group could in principle allow a
few large Participant groups to influence
the outcome of competition in the
market for trading services by making
various decisions that can alter the costs
of one set of competitors more than
another set. Further, the Plan would
allocate profits and losses from
operating the Central Repository equally
across Participants, which could
advantage small exchanges in the event
of a profit and disadvantage small
exchanges in the event of a loss. This
could negatively impact competition if
the cost differentials are unnecessary in
light of the cost-benefit trade-offs of
alternatives and if the cost differentials
are significant enough to alter the set of
services that some Participants offer.
Generally, smaller competitors could
have implementation and ongoing costs
of compliance that are disproportionate
1047 See
1048 See
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relative to their size. Any choices that
could exacerbate these differences could
potentially result in the exit of smaller
competitors. To lessen the impact of
funding the Central Repository on
smaller exchanges and ATSs, the Plan
would apply a tiered funding model that
charges the smallest exchanges and
ATSs the lowest fees. Likewise, the Plan
would apply a tiered funding model that
would charge the smallest brokerdealers, including liquidity suppliers,
the lowest fees. However, the
Commission notes that the Plan does
not indicate whether off-exchange
liquidity providers would pay fees
similar to similarly-sized ATSs and
exchanges.
In addition, as noted above, the Plan
provides that the Technical
Specifications would not be finalized
until after the selection of a Plan
Processor, which would not occur until
after any decision by the Commission to
approve the Plan.1049 The Commission
recognizes that the costs of compliance
associated with future technical choices
or the selection of the Plan Processor
could exacerbate the relative cost
differential across competitors. For
example, the Affiliated Participants on
the Selection Committee could favor a
Plan Processor that employs technology
that would make implementation costs
relatively higher for the exchanges that
do not have affiliates. In addition, the
Affiliated Participants, who have more
votes on the Operating Committee,
could be amenable to adding particular
CAT Data items in the future that could
expose violations on other exchanges,
but not be amenable to CAT Data items
that could expose violations on their
own exchanges. While those groups
could still use such data to surveil their
own exchanges, if not in CAT Data, the
data items would not be available for
cross-market surveillance or efficient
Commission examinations and
enforcement. As such, the independent
exchanges, which have only one vote on
the Operating Committee, could face
higher regulatory costs than exchanges
of the Affiliated Participants. However,
for the same reasons as stated above, the
Commission preliminarily believes that
the governance provisions of the Plan
and Commission oversight could help to
mitigate such effects on these
competitors in the market for trading
services.
(3) Enhanced Surveillance and
Deterrence
The Commission also preliminarily
believes that the CAT NMS Plan could
promote competition in the market for
1049 See
Section IV.C.2, supra.
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trading services through enhanced
surveillance and the deterrence of
violative behavior that could inhibit
competition.1050 Should the Plan deter
violative behavior, passive liquidity
suppliers, such as on or off-exchange
market makers could increase profits as
a result of reduced losses from others’
violative behavior. This increase in
profits could encourage new entrants or
could spark greater competition, which
reduces transaction costs for investors.
For example, spoofing, which involves
building up the apparent depth of the
market to trigger particular trading
patterns and then trading against those
patterns, could cause confusion about
bona-fide supply and demand for a
particular security. Liquidity providers
could compete less than is optimal to
provide liquidity in that security out of
fear that they could suffer a decline in
profitability if they trade at inopportune
times as a result of others’ spoofing
behavior. If the Plan facilitates
surveillance improvements that deter
spoofing, it could increase incentives to
provide liquidity and promote lower
transaction costs for investors,
particularly in stocks that may lack a
critical mass of competing liquidity
providers or that could be targets for
violative trading behavior.
b. Market for Broker-Dealer Services
The Commission analyzed the effect
of the CAT NMS Plan on the market for
broker-dealer services. For
simplification, the Commission presents
its analysis as if the market for brokerdealer services encompasses one broad
market with multiple segments even
though, in terms of competition, it
actually may be more realistic to think
of it as numerous inter-related markets.
The market for broker-dealer services
covers many different markets for a
variety of services, including, but not
limited to, managing orders for
customers and routing them to various
trading venues, holding customer funds
and securities, handling clearance and
settlement of trades, intermediating
between customers and carrying/
clearing brokers, dealing in government
bonds, private placements of securities,
and effecting transactions in mutual
funds that involve transferring funds
directly to the issuer. Some brokerdealers may specialize in just one
narrowly defined service, while others
may provide a wide variety of services.
The market for broker-dealer services
relies on competition among brokerdealers to provide the services listed
1050 See Section IV.E.2.c, supra, for a discussion
of how the CAT NMS Plan would enhance
surveillance and deter violative behavior.
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above to their customers at efficient
levels of quality and quantity. The
broker-dealer industry is highly
competitive, with most business
concentrated among a small set of large
broker-dealers and thousands of small
broker-dealers competing for niche or
regional segments of the market. To
limit costs and make business more
viable, small broker-dealers often
contract with larger broker-dealers or
service bureaus to handle certain
functions, such as clearing and
execution, or to update their
technology.1051 Large broker-dealers
typically enjoy economies of scale over
small broker-dealers and compete with
each other to service the smaller brokerdealers, who are both their competitors
and their customers.
There are approximately 1,800 brokerdealers likely to be CAT Reporters,
while approximately 2,338 brokerdealers would not be CAT Reporters
because their businesses do not involve
reportable events in securities covered
by the Plan.1052 Further, broker-dealers
that are anticipated to have CAT
reporting obligations could compete
with the broker-dealers that would not
have CAT reporting responsibilities in
various broker-dealer market segments
that are unrelated to CAT reporting.
Some broker-dealers may offer
specialized services in one line of
business mentioned above, while other
broker-dealers may offer diversified
services across many different lines of
businesses. As such, the competitive
dynamics within each of these specific
lines of business for broker-dealers is
different, depending on the number of
broker-dealers that operate in the given
segment and the market share that the
broker-dealers occupy.
The Commission preliminarily
believes costs of compliance incurred by
broker-dealers to comply with the Plan,
particularly to report order events to the
Central Repository, will differ
substantially between broker-dealers
and may affect competition between
smaller and larger broker-dealers. As
discussed previously in the
Commission’s analysis of Costs, brokerdealers that outsource regulatory data
reporting activities are expected to see
their costs of regulatory data reporting
increase, while broker-dealers that
Insource may see a decrease in their
regulatory data reporting costs.1053 The
Commission preliminarily believes this
1051 See Securities Exchange Act Release No.
63241 (November 3, 2010), 75 FR 69791, 69822
(November 15, 2010) (Risk Management Controls
for Brokers or Dealers with Market Access).
1052 Examples of these business activities include
underwriting and advising. See supra note 864.
1053 See Section IV.F.1.c(2)C, supra.
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dynamic may affect competition
between Outsourcers (that tend to be
smaller) and Insourcers (that tend to be
larger), and may increase barriers to
entry in some segments of this market.
The Plan discusses certain aspects of
competition pertaining to broker-dealers
that relate to costs and the allocation of
fees. The Plan states, ‘‘[b]roker-dealer
competition could be impacted if the
direct and indirect costs associated with
meeting the CAT NMS Plan’s
requirements materially impact the
provision of their services to the public.
Further, competition may be harmed if
a particular class or group of brokerdealers bears the costs
disproportionately . . . .’’ The Plan
asserts that it would have little to no
adverse effect on competition between
large broker-dealers, and would not
materially disadvantage small brokerdealers relative to large broker-dealers.
Regarding small broker-dealers, the Plan
states, ‘‘. . . . [the allocation of costs on
broker-dealers based on their
contribution to market activity] may be
significant for some small firms, and
may even impact their business models
materially . . . .’’ and that the
Participants were sensitive to the
burdens the Plan could impose on small
broker-dealers, noting that such brokerdealers could incur minimal costs under
their existing regulatory reporting
requirements ‘‘because they are OATSexempt or excluded broker-dealers or
limited purpose broker-dealers.’’ The
CAT NMS Plan attempts to mitigate its
impact on these broker-dealers by
proposing to follow a cost allocation
formula that (in expectation) charges
lower fees to smaller broker-dealers;
furthermore, Rule 613 provides them
additional time to commence their
reporting requirements.
The Commission preliminarily agrees
with the Plan’s general assessment of
competition among broker-dealers, and
also with the Plan’s assessment of
differential effects on small versus large
broker-dealers. The Commission agrees
that the Plan’s funding model is an
explicit source of financial obligation
for broker-dealers and therefore an
important feature to evaluate when
considering potential differential effects
of the Plan on competition in the market
for broker-dealers. The Commission
understands that the tiered funding
model should result in the smallest
broker-dealers paying the smallest fees,
but the Plan does not outline how the
magnitudes of fees would differ across
the tiers. The Commission also
recognizes that the potentially greater
level of service specialization that may
characterize small broker dealers and
the potentially non-linear economies of
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scale may result in the compliance costs
associated with the Plan competitively
disadvantaging small broker-dealers, on
average, relative to large broker-dealers.
However, the Commission
preliminarily believes that the segments
of the market most likely to experience
higher barriers to entry are those that
currently have no data reporting
requirements of the type the Plan
requires and those that would involve
more CAT Reporting obligations, such
as the part of the broker-dealer market
that involves connecting to exchanges,
because of the technology infrastructure
requirements and the potential to have
to report several types of order
events.1054 The opportunity to rely on
service bureaus or other solutions to
reduce the costs of complying with the
Plan could limit any increases in the
barriers to entry in this market.
Nonetheless, the Commission
preliminarily believes that any increases
in the barriers to entry are justified
because they are necessary in order for
the CAT Data to include data from small
broker-dealers. In the Adopting Release,
the Commission explained that
excluding small broker-dealers from
reporting requirements would
‘‘eliminate the collection of audit trail
information from a segment of the
broker-dealer community and would
thus result in an audit trail that does not
capture all orders by all participants in
the securities markets.’’ 1055 The
Commission further noted that ‘‘illegal
activity, such as insider trading and
market manipulation, can be conducted
through accounts at small broker-dealers
just as readily as it can be conducted
through accounts at large brokerdealers’’ and that ‘‘granting an
exemption to certain broker-dealers
might create incentives for prospective
wrongdoers to utilize such firms to
evade effective regulatory oversight
through the consolidated audit
trail.’’ 1056
The Commission also recognizes that
the Plan could affect the current relative
competitive positions of broker-dealers
in the market for broker-dealer services.
To varying degrees, the economic
impacts resulting from the Plan could
benefit some broker-dealers and
adversely affect others. The magnitude
of these effects on broker-dealers could
vary across and within categories of
broker-dealers and classes of securities.
However, there is no clear reason to
expect these impacts, should they occur,
1054 The majority of broker-dealers do not directly
engage in exchange trading, and most brokerdealers are not expected to have CAT reporting
obligations. See supra note 864.
1055 See Adopting Release supra note 9, at 45749.
1056 See id.
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to decrease the current state of overall
competition in the market for brokerdealer services so as to materially
burden the price or quality of services
received by investors on average.
Regardless of the differential effects of
the CAT NMS Plan on small versus
large broker-dealers, it is the
Commission’s preliminary view that the
CAT NMS Plan, in aggregate, would
likely not reduce competition and
efficiency in the overall market for
broker-dealer services. Even if small
broker-dealers potentially face a burden,
this may not necessarily have an
adverse effect on competition as a whole
in the overall market for broker-dealer
services. Under the CAT NMS Plan,
broker-dealers would have greater
reporting responsibilities than they
would otherwise have. Broker-dealers
could face high upfront infrastructure
costs to set up a processing environment
to meet reporting responsibilities.
Because these infrastructure costs are
upfront, fixed costs, the burden to bear
these costs could be potentially greater
for small broker-dealers. Instead of
bearing these costs in-house, small
broker-dealers could contract with
outside technology vendors for
reporting services. This outcome could
lead to lower costs relative to not using
a vendor for reporting services. For
these reasons, even firms that currently
do not report to OATS, but will be CAT
Reporters under the Plan, could face
manageable upfront costs that permit
them to continue in their line of
business without a severe setback in
their profitability.
The Commission notes that a
difficulty in assessing the likely impacts
of the CAT NMS Plan on competition
among broker-dealers is that
competition in the markets for different
broker-dealer services could be affected
in different ways. As mentioned above,
there is great diversity in the business
activities of broker-dealers. Brokerdealer services that are likely to incur
CAT reporting responsibilities include:
executing orders, whether it be as an
ATS or acting as a carrying brokerdealer; intermediating between
customers and carrying/clearing
brokers; effecting transactions in mutual
funds that involve transferring funds
directly to the issuer; writing options;
and acting as an exchange floor broker.
As noted above, these broker-dealers
may also compete with the
approximately 2,338 other brokerdealers in market segments that are not
related to CAT reporting, such as
dealing in municipal bonds or arranging
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private placements of securities.1057 If
CAT costs represent a significant
increase in overall costs, the Plan could
disadvantage broker-dealers who are
CAT Reporters in the market segments
that do not require CAT reporting. For
example, broker-dealers that, in
addition to providing services related to
market transactions that are reportable
to CAT, also compete to provide fixedincome order entry as a line of business
may be at a relative disadvantage to
competitors in the fixed-income market
who do not provide broker-dealer
services that are related to market
activity that is reportable to CAT.
Whether this disadvantage amounts to a
substantial reduction in competition in
various markets depends on the
magnitude of the disadvantage and
whether it affects the price and level of
services available to investors.
The Commission recognizes that the
CAT NMS Plan could result in fewer
broker-dealers providing specialized
services that trigger CAT reporting
obligations. The Commission
preliminarily believes that this potential
effect on broker-dealer specialization
depends on whether three key
conditions are met. First, the effect
requires that, compared to large brokerdealers, small broker-dealers
disproportionately specialize in
providing regional or niche services to
a particular market segment of clients.
Second, the effect requires that this
specialization is correlated with
business risk associated with changes in
marginal cost. Finally, the effect
requires that the compliance costs of the
CAT NMS Plan could affect the ability
for some small broker-dealers to provide
these specialized services. This effect, in
which fewer broker-dealers compete in
specialized market segments, could
thereby negatively affect the competitive
dynamics in these market segments,
especially if these segments currently
contain relatively few broker-dealers.
The Commission preliminarily believes
that these conditions could hold,
particularly for smaller broker-dealers,
and result in fewer broker-dealers
operating in specialized or niche
markets if the Plan is approved.
The Commission recognizes, however,
that fewer broker-dealers in a
specialized segment of the market may
not necessarily harm competition in that
segment. In particular, the costs of
compliance with the Plan may be less of
a relative burden for large broker-dealers
who may, compared to small brokerdealers, provide a larger portfolio of
specialized services to clients. This
portfolio may buffer large broker-dealers
1057 See
Section IV.F.1.c, supra.
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from business risk associated with
specialization. Because of the lower
relative burden, large broker-dealers are
more likely to maintain their presence
in specialized market segments. If a
sufficient number of large brokerdealers, or all broker-dealers more
generally, maintain their presence in
specialized market segments, a net
decrease in broker-dealers may not
affect the competition in such market
segments to a level in which the market
segment offers fewer or lower quality
services or higher prices. However, the
Commission recognizes that negative
effects on competition in specialized
market segments could result if brokerdealers achieve a level of market
concentration necessary to adversely
affect prices for investors.
c. Market for Regulatory Services
SROs compete in the market for
regulatory services.1058 Regulatory
functions include market surveillance,
cross-market surveillance, oversight,
compliance, investigation, and
enforcement, as well as the registration,
testing, and examination of brokerdealers. Although the Commission
oversees exchange SROs’ supervision of
trading on their respective venues, the
responsibility for direct supervision of
trading on an exchange resides in the
SRO that operates the exchange.
Currently, SROs compete to provide
regulatory services in at least two ways.
First, because SROs are responsible for
regulating trading within venues they
operate, their regulatory services are
bundled with their operation of the
venue. Consequently, for a brokerdealer, selecting a trading venue also
entails the selection of a provider of
regulatory services surrounding the
trading activity. Second, SROs could
provide this supervision not only for
their own venues, but for other SROs’
venues as well through the use of
Regulatory Service Agreements or a plan
approved pursuant to Rule 17d–2 under
the Exchange Act.1059 Consequently,
SROs compete to provide regulatory
services to venues they do not operate.
Because providing trading supervision
is characterized by high fixed costs
(such as significant IT infrastructure and
specialized personnel), some SROs
could find that another SRO could
provide some regulatory services at a
lower cost than it would incur to
provide this service in-house. Until
recently, nearly all the SROs that
operate equity and option exchanges
1058 FINRA is the SRO responsible for supervision
of trading off-exchange, which includes trading
occurring on ATSs.
1059 17 CFR 240.17d–2.
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contracted with FINRA for some or
much of their trading surveillance and
routine inspections of members’
activity.1060
As a result, the market for regulatory
services in the equity and options
markets currently has one dominant
competitor, FINRA. This may provide
relatively uniform levels of surveillance
across trading venues. One SRO having
a competitive advantage in providing
such services could also limit the
incentives to innovate in surveillance.
Hypothetically, increases in the
competition to provide regulatory
services could promote regulatory
oversight of exchanges and investor
protection for investors. To the extent
that a regulator could improve on
current regulatory oversight, this could
result in a better functioning, more
liquid, financial market. However, it is
possible that increased competition
between SROs to provide regulatory
services could have negative effects on
the market if SROs compete on the basis
of providing light-touch regulation,
which might be less likely to detect
violative activity.
The Commission preliminarily
believes that the Plan could provide
opportunities for increased competition
in the market to provide regulatory
services. In particular, designated
regulatory Staff from all of the SROs
would have access to CAT Data, which
would reduce the differences in data
access across SROs.1061 This could
reduce barriers to entry in providing
regulatory services because data would
be centralized and standardized,
possibly reducing economies of scale in
performing surveillance activities.1062
Furthermore, because some types of
1060 Every equity exchange except CHX and NSX
has an RSA with FINRA which allows FINRA to
provide cross-market surveillance for nearly 100%
of the equity markets. These RSAs differ in scope,
but in every case these contracts represent a
partnership between FINRA and the other SROs to
provide a full set of effective regulatory services.
Recently NYSE Group and NASDAQ OMX decided
to significantly scale back their RSA with FINRA
and directly resume most of their market
surveillance and investigation regulatory
obligations.
1061 Without a Central Repository, an SRO
wishing to compete as a regulatory services
provider would need to invest in the IT
infrastructure and enter into the data access
agreements necessary to surveil broadly beyond its
exchanges’ data resources. By providing access to
consolidated trade and order data to all SROs, CAT
may reduce barriers to entry for this market. See
Exemption for Certain Exchange Members, supra
note 394, at 18057–58 (describing the barriers to
entry of potential new national securities
associations).
1062 The Commission recognizes that efficient
access to data is not the only prerequisite for
entering the market to provide regulatory services
and that high barriers to entry may still characterize
this market.
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previously infeasible surveillance
would become possible with the
availability of additional data,1063 SROs
would have greater opportunities to
innovate in the type of surveillance that
is performed, and the efficiency with
which it is performed. In addition,
when as Rule 613(a)(3)(iv) requires,
SROs implement new or updated
surveillance within 14 months after
effectiveness of the CAT NMS Plan,1064
any SRO could reconsider its approach
to outsourcing its own regulation and
whether it wants to compete for
regulatory service agreements.
d. Market for Regulatory Data Reporting
Services
The Commission analyzed the effect
of the CAT NMS Plan on competition in
the market for data reporting services
with a focus on its impact on the costs
incurred by broker-dealers to comply
with the Plan. As discussed in the Costs
Section above, the Commission
preliminarily believes that many brokerdealers, particularly smaller brokerdealers, would fulfill their CAT
Reporting obligations by outsourcing to
service bureaus and that the fees
charged by the service bureaus would be
a major cost driver for these brokerdealers. Further, these fees would factor
into the increase in barriers to entry in
the market for broker-dealer
services.1065 Therefore, the Commission
preliminarily believes that any effects
on competition in the market for
regulatory data reporting services could
have a significant effect on the costs
incurred by broker-dealers in complying
with the CAT NMS Plan.
The Plan provides information on
broker-dealers’ use of third-party service
providers to accomplish current
regulatory data reporting. The Plan
notes that while some broker-dealers
perform their regulatory data reporting
in-house, others outsource this activity.
The Plan does not state what proportion
of broker-dealers currently outsources
their regulatory data reporting work.
However, the Commission interviewed a
variety of broker-dealers and service
bureaus in order to gain insight into the
scope of broker-dealers’ use of data
reporting services. As noted in the Costs
Section,1066 the Commission
understands that most firms outsource
the bulk of their regulatory data
reporting to third-party firms. The
Commission preliminarily believes that
the competition in the market to provide
1063 See Section IV.G.2.a, infra, for a discussion
of the efficiency improvements for surveillance.
1064 17 CFR 242.613(a)(3)(iv).
1065 See Section IV.G.1.b, supra.
1066 See Section IV.F.1.c(2)A, supra.
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data reporting services is a product of
firms choosing to perform this activity
in-house or to outsource it based on a
number of considerations including
cost, with some firms choosing to
outsource this activity across multiple
service providers.
The market for regulatory data
reporting services is characterized by
bundling, high switching costs, and
barriers to entry. The high IT
infrastructure costs of regulatory data
reporting creates economies of scale that
give rise to the data reporting services
provided by service bureaus. Brokerdealers, instead of investing in the IT
infrastructure necessary for regulatory
data reporting, could share the costs of
the IT infrastructure with other brokerdealers by paying for a service bureau to
report for them. Often, service bureaus
bundle regulatory data reporting
services with an order-handling system
service that provides broker-dealers
with market access and order routing
capabilities.1067 Sometimes service
bureaus bundle regulatory data
reporting services with trade clearing
services.
In discussions with Staff, service
bureaus stated that switching service
bureaus can be costly and involve
complex onboarding processes and
requirements, that systems between
service bureaus may be disparate, and
switching service providers may require
different or updated client
documentation. However, service
bureaus stated that on-boarding
operations were infrequent and that it
was rare for broker-dealers to switch
between service providers. Difficulty
switching between service providers
could limit the competition among
service bureaus to provide data
reporting services, and impact the costs
that Outsourcers incur to secure
regulatory data reporting services.
Furthermore, the high IT infrastructure
costs also give rise to barriers to entry,
which could slow the entry of new
market participants into the market.
Despite this, the trend in the market is
toward expansion.1068
The Commission preliminarily
believes that the Plan could alter the
competitive landscape in the market for
data reporting services in several ways.
It is not clear whether demand for
regulatory data reporting services would
increase or decrease; although more
broker-dealers would be required to
report regulatory data, it is possible that
flexible reporting options allowed by
the Plan could make preparing data for
1067 See Section IV.F.1.c(2)A, supra, for more
information on broker-dealer use of service bureaus.
1068 See supra note 920.
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reporting less onerous, leading to fewer
firms choosing to outsource this
activity.
It is possible that the Plan would
increase the demand for data reporting
services by requiring regulatory data
reporting by broker-dealers that may
have previously been exempt due to size
under individual SRO rules.1069
Because more broker-dealers would be
required to report regulatory data under
the Plan, the Commission preliminarily
believes there could be an opportunity
for increased competition in this market
which might benefit all broker-dealers
that outsource their regulatory data
reporting activity. However, it is also
possible that the increase in demand for
data reporting services could serve to
entrench existing providers if they
capture a large share of newly created
demand; this could lead to relatively
higher costs for broker-dealers than they
would face in a more competitive
market. The potential increase in
demand for data reporting services
could impact the capacity of already
existing data reporting services to meet
this increase in demand, and this in
turn could have implications for
competition and pricing in the market
for data reporting services. Considering
the barriers to entry that characterize the
market for data reporting services and
this potential increase in demand,
service bureaus could have less
incentive to compete for broker-dealer
clients because these clients are no
longer scarce, and as such, the CAT
NMS Plan could result in a decline in
the competition for data reporting
services. It is possible that brokerdealers seeking to establish
relationships with service bureaus could
have trouble securing them because of
the limited on-boarding capacity and
need to on-board many broker-dealers at
once. In the short-run these capacity
constraints and the high demand could
increase the costs of reporting through
a service bureau. However, the two year
implementation period for large brokerdealers and three year period for small
broker-dealers could alleviate the
reduction in competition due to the
onboarding capacity strain because
current service bureaus have time to
increase their on-boarding capacity and
new entrants have time to build the
necessary IT infrastructure and a client
base.
The CAT NMS Plan could also
dramatically change the pool of firms
demanding data reporting services,
which would be skewed toward firms
that are smaller and on average costlier
to service, which could result in higher
1069 See,
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prices, which could eventually be
passed onto investors. In addition to
small and medium sized broker-dealers
that previously self-reported, the CAT
NMS plan would result in more brokerdealers having data reporting
responsibilities and the Commission
preliminarily believes that these brokerdealers would predominantly be small.
For example, very small broker-dealers
that are currently exempt from OATS
reporting requirements could seek to
establish service bureau relationships.
In addition, because the Plan would
require additional elements in
regulatory data, particularly customer
data, some broker-dealers that currently
self-report could no longer find it
economically feasible to continue to do
so.
In addition to possibly increasing
demand for data reporting services, the
CAT NMS Plan may have a mixed effect
on the number of firms offering data
reporting services. This can impact the
competitiveness of this market, and
affect the costs broker-dealers bear in
securing these services. On one hand,
the number of firms offering data
reporting services could decrease,
because the need to secure PII might
increase the likelihood of liability and
litigation risks in the event of a security
breach.1070 On the other hand, it is
possible that the number of service
bureaus offering data reporting services
would increase. New reporting
requirements for numerous brokerdealers could create opportunities for
new entrants to meet this demand. This
could increase capacity and result in
innovation in providing these services,
which could benefit broker-dealers
needing data reporting services by
potentially reducing reporting costs, or
at least reducing the potential for cost
increases. Lower reporting costs for
broker-dealers could in turn benefit the
investors who are serviced by these
broker-dealers, through reduced costs.
It is also possible that the Plan would
decrease the demand for data reporting
services. Many broker-dealers currently
pay another firm (such as a service
bureau) to fulfill their regulatory data
reporting; this may be because these
broker-dealers find it would be more
expensive to handle the translation of
their order management system data
into fixed formats, such as is required
for OATS. If the Plan Processor allows
broker-dealers to send data to the
Central Repository in the formats that
they use for normal operations, in drop
copies for example, these broker-dealers
1070 See Section IV.F.4.a(3), supra for a discussion
of the potential exit of service bureau resulting from
the risk of a security breach.
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may no longer see a cost advantage in
engaging the services of a regulatory
data reporting service provider because
one of the costs associated with
regulatory data reporting—having to
translate data into a fixed format—will
have been eliminated.1071 Without the
cost of having to translate data, some
broker-dealers that currently outsource
OATS reporting could choose, at the
margin, to insource their regulatory data
reporting.
The Commission preliminarily
believes that this reduction in demand
would not likely be realized and, if
realized, would be unlikely to offset the
increase in demand that would come
from CAT reporters not subject to OATS
reporting. As noted in the Costs Section,
of the 1,800 expected CAT Reporters,
868 do not currently report to
OATS.1072 This means that the
Commission expects a large proportion
of CAT Reporters may be broker-dealers
that currently do not have a service
bureau for regulatory data reporting but
would choose to engage one to manage
their CAT reporting responsibilities.
This is more than the Commission’s
estimate of 806 current outsourcing
broker-dealers.1073 Therefore, it is
unlikely that the number of current
Outsourcers that choose to become
Insourcers would be larger than the
number of non-OATS reporters that
would elect to outsource. As a result,
demand is more likely to increase.
Further, the requirement for CAT
reports to use listing exchange
symbology could require pre-report data
processing even if the Plan Processor
allows for the receipt of reports in the
formats that broker-dealers use for
normal operations.1074 As a result, the
CAT NMS Plan is unlikely to eliminate
the costs of processing data prior to
reporting that data to the Central
Repository.
2. Efficiency
The Commission has analyzed the
potential impact of the Plan on
efficiency. The Plan includes a
discussion of certain efficiency effects
1071 The Plan does not mandate the data ingestion
format. See CAT NMS Plan, supra note 3, at
Appendix C, at Section A.1(b). The Commission
recognizes that the CAT Reporters Study found no
difference in expected costs for a fixed format, but
requests comment on why the costs may be similar
when it would seem logical that allowing flexible
data reporting formats would reduce costs for
broker-dealers. See Request for Comment Nos. 318
and 331 in Section IV.F.5, supra.
1072 The Plan estimates that 1,800 broker-dealers
are expected to have CAT reporting obligations.
Based on data from FINRA, 932 broker-dealers
currently report OATS data. 1,800–932=868. See
Section IV.F.1.c(2)A, supra.
1073 Id.
1074 See supra note 949.
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anticipated if the Plan is approved; as
part of its economic analysis, the
Commission discusses these effects, as
well as additional effects on efficiency
anticipated by the Commission. The
Commission preliminarily believes that
the Plan as proposed is likely to result
in significant improvements in
efficiency related to how regulatory data
is collected and used. The Plan also has
the potential to result in improvements
in market efficiency by deterring
violative activity that could reduce
market efficiency.1075 The Commission
notes, however, that efficiency gains
from the retirement of duplicative and
outdated reporting systems would be
delayed for up to two and a half years
and the interim period of increased
duplicative reporting would impose
significant financial burden on Industry
Members.1076
a. Effect of the Plan on Efficiency
The Commission has analyzed the
possible effects of the CAT NMS Plan on
efficiency. Specifically, building off the
discussion in the Plan, the Commission
analyzed the effect of the Plan on the
efficiency of detecting violative
behavior through examinations and
enforcement, on the efficiency of
surveillance, on market efficiency
through deterrence of violative
behavior, on operational efficiency of
CAT Reporters, and on efficiencies
through reduced ad hoc data requests
and quicker access to data.
The current state of regulatory data
collection and use provides ample
opportunity for efficiency
improvements. First, regulators’ ability
to efficiently perform cross-market
surveillance is hindered by data
fragmentation.1077 Second, regulators’
ability to efficiently supervise and
surveil market participants and carry
out their enforcement responsibilities is
hindered by limitations in current
regulatory data.1078 Finally, there are a
number of other inefficiencies
associated with the current system of
regulatory data collection. These
include: Delays in data availability to
regulators; lack of direct access to data
collected by other regulators results in
numerous ad-hoc data requests; and the
need for regulatory Staff to invest
1075 The Commission has also analyzed the likely
effect of the Plan on allocative efficiency of existing
capital within the industry. These potential effects
are discussed in Section IV.G.3, infra.
1076 See Section IV.F.2, supra.
1077 See Section IV.E.2.c, supra.
1078 See Section IV.E.2.c, supra.
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significant time and resources to
reconciling disparate data sources.1079
The Plan discusses a number of
expected efficiency effects associated
with the Plan, including both positive
and negative effects.1080 The
Commission preliminarily agrees with
the Plan’s assessment and has identified
additional efficiency effects as well. The
Plan outlines several positive effects
relating to efficiency in: Monitoring for
rule violations; performing surveillance;
and supporting fewer reporting systems.
Some of these efficiencies are also
discussed in the Benefits Section of this
analysis.1081
The Plan concludes SROs would
experience improved efficiency in the
detection of rule violations, particularly
for violations that involve trading in
multiple markets.1082 The Plan states an
expectation that SROs would need to
expend fewer resources to detect
violative cross-market activity, and such
activity would be detected more
quickly.1083 The Commission agrees that
the Plan would result in improvements
in efficiency in the performance of
examinations of market participants by
SROs and the Commission.
Improvements to data availability and
access through the Central Repository
could allow SROs and the Commission
to more efficiently identify market
participants for examination.1084 The
Commission also agrees that the Plan
would improve the efficiency of
enforcement investigations. If regulatory
data access improves, the quality and
quantity of enforcement investigations
could increase through improvements to
the comprehensiveness and timeliness
of data used to support investigations.
As mentioned previously, it can take
months for regulators to assemble the
data necessary to comprehensively
investigate a regulatory inquiry.1085 To
the extent that the Plan allows
regulators to access more
comprehensive data directly from the
Central Repository, regulators would be
able to collect data faster and start
processing it sooner, resulting in a more
efficient data analysis portion of an
investigation. As a result, follow-up
enforcement inquiries could be avoided
entirely in situations where data from
1079 See Section IV.D.2.b, supra. These other
inefficiencies are discussed above in the Baseline
and Benefits Sections.
1080 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.8(b).
1081 See Section IV.E, supra.
1082 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.8(b); see also Section IV.E.2,
supra.
1083 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.8(b).
1084 See Section IV.E.2.c, supra.
1085 See Section IV.E.2.c, supra.
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the Central Repository allows regulators
to conclude an initial inquiry without
initiating an enforcement
investigation.1086 This benefit would be
observable to both regulators and
subjects of investigations, for whom
ongoing enforcement investigations can
be costly and the source of uncertainty.
The Plan states that the Participants
believe that the CAT NMS Plan could
improve the efficiency of
surveillance.1087 According to the Plan,
this improvement is due to a number of
factors including: Increased surveillance
capacity; improved system speed, which
would result in more efficient data
analysis; and a reduction in surveillance
system downtime.1088 The Plan also
cites reduced monitoring costs,1089 but
the Commission notes that estimates in
the Costs Section of the Plan predict
increased surveillance costs if the Plan
is approved. The increased surveillance
costs predicted in the Plan could reflect
more effective surveillance under the
Plan. Although the Plan does not
discuss the cost-benefit trade-off of
increased surveillance directly, the
Commission notes that achieving the
level of surveillance that would be
possible if the Plan is approved would
likely be more expensive using
currently available data sources, if it is
achievable at all, due to the
inefficiencies that currently exist in
delivering regulatory supervision,
discussed previously.1090
The Commission preliminarily
believes that CAT may reduce violative
behavior.1091 The Plan states that CAT
may serve a deterrent effect, thereby
reducing investor losses attributable to
such behavior.1092 Improvements in the
efficiency of market surveillance,
investigations, and enforcement could
1086 The Commission notes that this does not
preclude an increase in total enforcement
investigations, but rather that some enforcement
investigations may determine earlier in the
investigation that no violation occurred.
1087 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.8(b) (stating that the CAT
NMS Plan could reduce monitoring costs, enable
regulators to detect cross-market violative activity
more quickly, provide regulators more fulsome
access to unprocessed data and timely and accurate
information on market activity, and provide CAT
Reporters with long term efficiencies resulting from
the increase in surveillance capabilities); see also
IV.E.2.c, supra.
1088 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.8(b). The Participants
surveyed the 10 exchange-operating SRO groups on
surveillance downtime. In conversations with Staff,
the Participants informed Staff that average
surveillance downtime was 0.03% from August 1,
2014 to August 31, 2015, and ranges from 0 to
0.21% across SROs.
1089 See id.
1090 See Section IV.E.2, supra.
1091 See Section IV.E.2.c, supra.
1092 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.8(b).
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30747
directly reduce the amount of violative
behavior by identifying and penalizing
market participants who violate rules
and who would more easily go
undetected in the current regime.
Furthermore, market participants’
awareness regarding improvements in
the efficiency of market surveillance,
investigations, and enforcement (or
perceptions thereof), and the resultant
increase in the probability of incurring
a costly penalty for violative behavior,
could deter violative behavior.1093
Reductions in violative behavior
through both of these economic
channels could improve market
efficiency, assuming violative behavior
receives diminishing marginal gains and
generates increasing marginal harm.1094
The Plan discusses increased
efficiency due to reductions in
redundant reporting systems.1095 The
Plan also discusses increases in system
standardization, which would allow
consolidation of resources, including
the sunsetting of legacy reporting
systems and processes, as well as
consolidated data processing envisioned
from the Plan.1096 However, the
Commission is aware that the Plan, as
proposed, calls for a period of years
during which Industry Members would
face duplicative reporting systems
before older regulatory data reporting
systems are retired.1097 This period of
duplicative reporting would impose a
considerable financial burden on
Industry Members.1098
The Plan discusses two other
efficiency improvements: a reduction in
ad-hoc data requests and more fulsome
access to raw data. The Plan predicts a
reduction in ad-hoc data requests,
which would free up resources
previously used to service such
requests.1099 However, while the Plan
anticipates a decrease in ad-hoc data
requests as a result of Plan-related data
improvements, the Commission notes
that it is possible that some types of adhoc data requests might increase. For
instance, even if enforcement
1093 See, e.g., Schelling, Thomas, ‘‘The Strategy of
Conflict: Prospectus for a Reorientation of Game
Theory,’’ Journal of Conflict Resolution, Vol. 2 No.3
(1958); Ellsberg, Daniel, ‘‘The Crude Analysis of
Strategic Choices,’’ American Economic Review,
Vol. 51, No. 2 (1961).
1094 See, e.g., Becker, Gary and William Landes,
‘‘Essays in the Economics of Crime and
Punishment,’’ Columbia University Press, (1974).
1095 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii)(C) (discussing
benefits of CAT to broker-dealers).
1096 See id. at Appendix C, Section B.8(b).
1097 See id. at Appendix C, Section B.9.
1098 See Section IV.F.2, supra for a discussion of
duplicative reporting and whether broker-dealers
would pass costs on to investors.
1099 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.8(b).
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investigations initially use CAT Data,
later-stage investigations may involve
requests for data not included in CAT
Data, such as commissions paid or a
locate identifier for a short sale. An
increase in the efficiency of enforcement
investigations could increase the total
number of later-stage investigations.1100.
Such investigations could produce
additional ad-hoc data requests and
require other interactions with market
participants.1101 The Commission
recognizes that these data request
increases would partially offset the
efficiency improvements from the
reduction in data requests noted above,
but the Commission preliminarily
believes that the Plan would improve
efficiency by reducing the total number
of data requests. The Commission,
however, acknowledges that this
decrease in data requests may be
partially offset in an increase in the
number of investigations in general,
because enhanced surveillance is likely
to detect more potentially violative
activity that would need to be
investigated.
Furthermore, the Plan anticipates
more robust access to unprocessed
regulatory data, which could improve
the efficiency with which SROs could
respond to market events where they
previously had to submit data requests
and wait for data validation procedures
to be completed before accessing data
collected by other regulators.1102 The
Commission recognizes that
unprocessed data may contain errors
that would later be fixed.1103 The
Commission preliminarily believes the
benefits of the greater timeliness of the
unprocessed data may justify the lack of
validations and corrections in such
unprocessed data.1104
b. Effects of Certain Costs of the Plan on
Efficiency
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The Plan discusses several sources of
inefficiency due to costs of the Plan that
are difficult to quantify, and are
transient in nature. First, the Plan
anticipates that implementation would
introduce new costs related to data
mapping and data dictionary
1100 This does not preclude regulators
determining sooner if the actions they are
investigating are not violative. Rather, an increase
in the total number of enforcement investigations
due to efficiency improvements can result in more
later-stage investigations even if regulators are
better able to conclude some investigations earlier.
1101 See Section IV.D.1.c, supra.
1102 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.8(b).
1103 See Section III.B.10, supra.
1104 See Section IV.E.2.c, supra, for an example of
benefits from regulators accessing uncorrected data
on T+1.
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creation.1105 Second, the Plan discusses
needs for expenditures, such as staff
time for compliance with encryption
requirements associated with the
transmission of PII.1106 While the
Commission recognizes that these are
additional activities and costs that the
Plan would require, it views these as
additional costs rather than
inefficiencies and, though the
Commission cannot quantify the
magnitude, these costs are likely to have
relatively minor contributions to overall
costs of the Plan because they impose
technical requirements on systems that
industry will need to significantly alter
to comply with other provisions in the
Plan.1107 Furthermore, the Commission
notes that the costs of data mapping and
encryption requirements are likely to be
included in costs covered by surveys
conducted by the Participants while
preparing the Plan because these
requirements were known publicly at
the time the surveys were conducted,
and are anticipated to be small relative
to other costs entailed in potentially
complying with the Plan if it is
approved.1108
The Plan notes that there could be a
market inefficiency effect related to the
funding proposal for the Plan. For
example, the cost allocation
methodology for the Plan could create
disincentives for the provision of
liquidity, which could impair market
quality and increase the costs to
investors to transact.1109 The Plan notes
that the funding principles set forth in
the Plan 1110 seek to mitigate the risk of
reduction in market quality resulting
from allocation of costs from building
and operating the Central
Repository.1111 The Commission
preliminarily recognizes that negative
effects on efficiency could result from
the CAT Funding Model.1112 First, data
reporters could respond to the Funding
Model by taking actions to limit their
fee payments, such as exiting the market
or reducing their activity levels. Second,
the funding policy of the CAT NMS
Plan of aligning fees closely with the
amounts that are required to cover costs
could create incentives for the Plan
Processor or Operating Committee to
propose a cost schedule for the CAT that
matches a given fee schedule, but is not
1105 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.8(b).
1106 See id.
1107 See Section IV.G.2.a, supra.
1108 See Section IV.F.1, supra.
1109 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.8(b).
1110 See id. at Section 11.2, Appendix C, Section
B.7(b)(iv)(C).
1111 See id. at Appendix C, Section B.7.(b)(iv)(C).
1112 See id. at Appendix C, Section B.7(b)(v)(B).
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the most efficient cost schedule for
meeting the CAT regulatory
objectives.1113
3. Capital Formation
a. Enhanced Investor Protection
The Commission has examined the
potential effects on capital formation
discussed in the Plan in addition to
other potential effects on capital
formation that the Commission believes
could result if the Plan is approved. The
Commission preliminarily believes that
the Plan would have a modest positive
effect on capital formation.
The Plan’s analysis regarding capital
formation concludes that the Plan
would generally not have a deleterious
effect on capital formation and could
bolster capital formation that could lead
to increased investor participation in
capital markets.1114 The Plan’s analysis
provides several reasons why the Plan
would not adversely affect capital
formation. Specifically, it asserts that
the Plan would not place any undue
burden on primary issuances; would not
pass along CAT related costs to
‘‘investors in a way that would limit
their access to or participation in capital
markets’’; and would not discourage
market participation as a result of data
security concerns given the data
security safeguards outlined in the
Plan.1115 The Commission preliminarily
agrees with the rationale of the Plan’s
analysis, but addresses some additional
considerations regarding the scope of
the Plan’s effects on capital formation,
as well as the channels through which
these effects could accrue.
The Plan’s analysis states that the
Plan may improve capital formation by
improving investor confidence in the
market due to improvements in
surveillance. As discussed
previously,1116 the Commission believes
that the Plan would provide substantial
enhancements to investor protection
through improvements to surveillance,
particularly for cross-market trading.1117
1113 Economics research that dates back to
Averch, Harvey, and Johnson, Leland L. (1962)
(‘‘Behavior of the Firm Under Regulatory
Constraint,’’ American Economic Review 52 (5):
1052–1069) characterizes an incentive of regulated
utilities to inflate their costs in order to establish
larger rate bases and justify higher rates. An
opposite effect would arise if the regulated utility
were unable to justify sufficient fee revenue to pay
the fixed cost of expanding the base.
1114 See CAT NMS Plan, supra note 3, at
Appendix C, Section C.8(c).
1115 See id.
1116 See Section IV.E.2.c, supra and CAT NMS
Plan, supra note 3, at Appendix C, Section
B.7(b)(ii)(B)(1) and (2), B.7(b)(iii)(C).
1117 FINRA currently provides cross-market
surveillance, but limitations in the data (e.g. reliable
cross-market linkages, customer identification,
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As discussed throughout, improved
surveillance, as well as other regulatory
activities, could decrease the rate of
violative activity in the market,
reducing investor losses due to violative
activity, to the extent that such behavior
is not already deterred by current
systems.1118 If improved surveillance
leads to expectations of fewer losses due
to violative activity, this may increase
capital formation by facilitating a
market where investors could be more
likely to mobilize capital into securities
markets.1119
The Commission preliminarily
believes there could be additional
increases in capital formation in the
form of improvements in allocative
efficiency of existing capital within the
industry. If investors perceive an
environment of improved surveillance,
they could be willing to allocate
additional capital to liquidity provision
or other activities that increase market
efficiency. Furthermore, an environment
of improved surveillance efficiency
could result in the reduction of capital
allocated to violative activities that
impose costs on other market
participants, because these market
participants may no longer find it
possible to engage in such behavior that
exposes them to regulatory action. In
this scenario, this reallocation of capital
could improve market quality and
efficiency even if net capital formation
changes little. In addition to the
potential reallocation of capital
currently mobilized toward violative
activities, investor capital that may
currently be diverted because of the risk
of loss to violative activities could also
be reallocated should the violative
activities decrease. If the CAT NMS Plan
reduces manipulative quoting activities,
either through improved detection/
parent order identification) limit the scope and
reliability of this surveillance.
1118 For example, as discussed in Section IV.E.2.c,
the Plan would allow regulators to more efficiently
conduct cross-market and cross-product
surveillance relative to surveillance using current
data sources, and the requirement that data be
consolidated in a single database would assist
regulators in detecting activity that does not appear
clearly violative until data is linked and evaluated
from multiple venues. To the extent that market
participants are aware of the current challenges to
regulators in performing cross-market surveillance
and aggregating data across venues, and to the
extent that they believe that their violative behavior
is more likely to be detected if regulators’ ability to
perform those activities improves, they may reduce
or eliminate violative behavior if the CAT Plan is
approved.
1119 There is evidence in the academic finance
literature that countries with weaker investor
protections, considering both the character of rules
as well as the quality of enforcement, have smaller
and narrower capital markets in terms of investor
participation. See La Porta, R. et al, ‘‘Legal
Determinants of External Finance,’’ Journal of
Finance, Vol. 52 No. 3 (1997).
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enforcement or through deterrence of
such activities, then investors are less
likely to make capital allocation
decisions in response to manipulative
quoting activities. In this scenario,
because manipulative quoting activities
have been reduced, the contribution of
manipulation to prices has been
reduced and prices should therefore
better reflect fundamentals. It would
follow that, to the extent that displayed
prices better reflect fundamentals rather
than manipulation, investors could
allocate capital more efficiently for their
purposes. The Commission notes,
however, that market participants
engaging in allowable activity that
might risk additional regulatory scrutiny
under the Plan regime could allocate
capital to other activities to avoid this
scrutiny, because even when activity is
not violative, interacting with regulators
can be costly for market
participants.1120 This reallocation away
from allowable activity to avoid
regulatory interactions could result in
capital allocations that are less
efficient.1121
The Plan states that the costs from
CAT are unlikely to deter investor
participation in the capital markets.1122
The Commission notes, however, that
the final costs of the Plan and the
funding mechanism for CAT are not
wholly certain at this time; thus, it is the
Commission’s view that there is
uncertainty concerning the extent to
which investors would bear Plan costs
and consequently to what extent Plan
costs could affect investors’ allocation of
capital. As mentioned above in the
Costs Section,1123 the Commission
preliminarily does not know whether
Plan costs incurred by the industry are
likely to be passed on to investors.
Competition in the market for brokerdealer services could mitigate some of
these costs, but it may not minimize
costs passed on to retail investors.
Despite these potential costs to
1120 See Section IV.F.4.b, supra, for a discussion
of the potential for the efficiencies in surveillance,
examinations, and investigations to increase the
number of regulatory activities, including the
number of regulatory activities on conduct that
turns out not to violate regulations.
1121 The Commission is unable to estimate the
magnitude of allowable economic activity that does
not occur when market participants anticipate
relatively high costs of demonstrating regulatory
compliance in the course of normal regulatory
interactions such as exams and inquiries because
this activity is not observable. However, Section
IV.F.1.c(2) discusses how some broker-dealers avoid
self-reporting regulatory data because of
expectations of higher costs to demonstrate
compliance, providing an example of an allowable
activity that is perceived as costly due to the risk
of compliance costs. See Section IV.F.1.c(2), supra.
1122 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.8(c).
1123 See Section IV.F.2, supra.
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investors, investors could believe that
the additional benefits they receive from
the potential of a market that is more
effectively regulated justify any
additional costs they pay to access
capital markets.
b. Data Security
The Commission preliminarily agrees
with the Plan’s assessment that data
security concerns are unlikely to
materially affect capital formation. In its
discussion of capital formation, the Plan
recognizes that data security concerns
could potentially impact capital
formation through market participants’
perception that sensitive proprietary
data might be vulnerable in case of a
data breach at the Central Repository.
The Plan’s analysis discusses the
security measures that are required by
Rule 613 and the manner in which they
have been implemented in the Plan. It
concludes that these security measures
are sufficient and that it is unlikely
market participants would reduce their
participation in markets in a manner
that would affect capital formation.
As noted above, the Commission
agrees that concerns regarding data
security are unlikely to substantially
affect capital formation, but that some
uncertainty about the risks exist because
of the variations in the potential
security solutions and their resulting
effectiveness.1124 The Commission notes
that the consequences of a data breach,
nonetheless, could be quite severe. It is
inherently difficult to form reliable
economic expectations given that
security breaches of the form that could
occur under the CAT NMS Plan occur
infrequently. Therefore, as described in
Section IV.F above, even if a CAT Data
security breach is unlikely with the
safeguards required by the Plan, the
scope of the potential consequences of
such a breach in the event that one
should occur is important to evaluating
the risk to capital formation.1125
A data breach could also substantially
harm market participants by exposing
proprietary information, such as a
proprietary trading strategy or the
existence of a significant business
relationship with either a counterparty
or client. The Commission notes,
however, that broker-dealers already
bear such risks in transmitting
regulatory data to SROs. The
Commission preliminarily believes that
the marginal increase in the risks to
broker-dealers associated with a data
breach would be unlikely to deter
1124 See
Section IV.F.4.a, supra.
id. for a more thorough discussion of the
costs and risks of security breaches of the Central
Repository.
1125 See
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broker-dealers from participating in
markets.
A data breach could potentially reveal
PII of investors. To address the potential
for harm to the investing public and the
health of capital markets through such
a breach, the Plan has enhanced
requirements for security around PII.
Those requirements include a separate
PII-specific workflow, PII-specific
authentication and access control,
separate storage of PII data, and a full
audit trail of PII access.1126 The
Commission preliminarily believes that
these risks will not materially affect
investors’ willingness to participate in
markets because they already face these
risks with PII shared with brokerdealers, though not in one centralized
location.1127 However, the risk and costs
of a security breach would be only one
factor that market participants would
consider in deciding whether to
participate in the market. Another
consideration would be investor
protection, which the Commission
preliminarily believes would increase
under the CAT NMS Plan.1128
4. Related Considerations Affecting
Competition, Efficiency and Capital
Formation
The Commission recognizes that the
Plan’s likely effects on competition,
efficiency and capital formation are
dependent to some extent on the
performance and decisions of the Plan
Processor and the Operating Committee
in implementing the Plan, and thus
there is necessarily some uncertainty in
the Commission’s analysis. Nonetheless,
the Commission believes that the Plan
contains certain governance provisions,
as well as provisions relating to the
selection and removal of the Plan
Processor, that mitigate this uncertainty
by promoting decision-making that
could, on balance, have positive effects
on competition, efficiency, and capital
formation.
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a. The Efficiency of Plan DecisionMaking
As noted in several places above,1129
future decisions of the Operating
Committee could significantly alter the
economic effects of the Plan. As a result,
1126 See CAT NMS Plan, supra note 3, at
Appendix D, Sections 4.1.1–4.1.6. The Commission
notes that there is considerable diversity in the
approaches proposed by the Bidders. Further, the
Participants chose to give the Plan Processor
flexibility on many implementation details and the
Plan states the requirements as a set of minimum
standards. Consequently, the final PII security
solution cannot be evaluated—only the minimum
standards specified in the Plan.
1127 See Section IV.F.2, supra.
1128 See Section IV.E.2, supra.
1129 See, e.g., Section IV.C.2, supra.
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this economic analysis also considered
whether the process by which the
Operating Committee would make such
decisions promotes efficiency.
According to the Plan, the inability of
the Operating Committee to act in a
timely manner could create
consequences for efficiency,
competition, and capital formation.1130
On the other hand, the Commission
notes that consequences also could arise
if the Operating Committee makes
decisions so quickly that it does not
consider all relevant information. This
Section analyzes whether the decisionmaking processes in the Plan promote
timely decisions that consider all
relevant information of value. While the
Plan considers the potential for
inefficiencies in the decision-making
process, the Commission preliminarily
believes that certain governance
provisions in the Plan could create some
inefficiencies in the decision-making
process, but that these inefficiencies are
limited or exist to promote better
decision-making. The Plan discusses
two areas where the proposed
governance structure impacts the
efficiency of the decision-making
process: (1) Voting protocols and (2) the
role of industry advisers.1131 The
Commission also considered the
efficiency implications of the level of
detail included in the Plan and the
scalability of the Plan.
The Plan specified three types of
voting protocols and determines when
each protocol applies.1132 The Plan
requires unanimous voting in only three
circumstances: A decision to obligate
Participants to make a loan or capital
contribution, a decision to dissolve the
Company, and a decision to take an
action by written consent instead of a
meeting.1133 Further, the Plan requires
supermajority voting in instances
considered by the Participants to have a
direct and significant impact on the
functioning, management, and financing
of the CAT System,1134 such as selection
and removal of the Plan Processor and
key officers, approving the initial
Technical Specifications, approving
Material Amendments to the Technical
Specifications proposed by the Plan
Processor, and approving direct
amendments to the Technical
Specifications proposed by the
Operating Committee.1135 The Plan
considers other matters as routine
matters that arise in the ordinary course
of business and would be subject to
majority voting. As a practical matter,
Majority Vote is the default standard for
decisions other than those requiring
supermajority or unanimous voting.
The Plan balanced the efficiency of
the decision-making process against the
value of considering minority and
dissenting opinions in proposing these
voting protocols.1136 In particular, the
Plan recognizes that some voting
protocols might impede the effective
administration of the CAT System.1137
From a mechanical perspective, voting
protocols determine a threshold for a
passing vote. Unanimity requires a
threshold of 100% yes votes while
majority voting requires a threshold of
more than 50% yes votes and
Supermajority requires two-thirds or
more. The Plan explains that too-high a
threshold for decision-making, such as
may be the case in applying unanimity
to all voting matters, could limit the
ability of the Operating Committee to
adopt broadly agreed upon
provisions.1138 For example, in the
extreme, requiring unanimity in voting
could result in one dissenting opinion
holding up the entire decision-making
process. Conversely, the Plan explains
that a threshold that is set too low might
limit the opportunities for the
consideration of dissenting or minority
opinions and alternative
approaches.1139 For example, if voting
thresholds were too low, a set of
Participants could potentially adopt
provisions that might provide them a
competitive advantage over other
Participants.
The Commission preliminarily agrees
with the discussion on the need to
balance efficiency in the voting
protocols in the Plan. The Commission
notes that the speed and ability to make
a decision are key components of
whether the Plan promotes efficiency in
its operations. High-vote thresholds may
result in an increase in the effort needed
to obtain enough votes to make a
decision. Further, in addition to the
drawn out discussions necessary to
obtain a unanimous vote, a unanimous
1130 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.8(d).
1131 See id.
1132 See Section III.A.3.a(3), supra, for a
discussion of the management of the Company,
including the definitions of the voting protocols
and details on their application.
1133 See CAT NMS Plan, supra note 3, at
Appendix C, Section D.11(b), Voting Criteria of the
Operating Committee.
1134 See id. at Appendix C, Section D.11(b).
1135 See id. at Appendix C, Section D.11(b). The
Plan also requires supermajority voting on matters
outside the ordinary course of business, such as
modifications to a Material Contract, incurring debt,
making distributions or tax elections, or changing
the fee schedules.
1136 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.8(d).
1137 See id.
1138 See id.
1139 See id.
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vote might also require compromises
that reduce the efficiency of the
decision-making process. This could be
particularly costly in situations in
which the Operating Committee must
make a decision by a particular date. It
could also result in inaction for
decisions related to making
discretionary changes that could
improve data qualities, such as updates,
if the Participants disagree among the
various alternatives.
Furthermore, while the decisionmaking processes with a very low voting
threshold would be faster, the resulting
decisions might not consider all
relevant information.1140 As a result, the
Commission preliminarily agrees that
the inefficiencies in the voting protocols
in the Plan are limited enough to strike
a balance between the inefficiencies of
the decision-making process and the
quality of the decisions.
The Plan also discusses the role of
industry representation as part of the
governance structure.1141 Section 4.13
of the Plan requires an Advisory
Committee that contains twelve
members, including representatives
from 7 types of broker-dealers, 2
institutional investors, and 3
individuals.1142 In addition, the Plan
says that the Advisory Committee is
‘‘intended to support the Operating
Committee and to promote continuing
efficiency in meeting the objective of the
CAT.’’ 1143 The Plan also indicates that
it is important to include industry
representation to assure that all affected
parties have representation.
The Commission preliminarily agrees
with the discussion in the Plan that
including industry representation might
result in a more efficiently designed
CAT, but adds that an Advisory
Committee also adds operational
inefficiencies. As discussed above, the
Commission preliminarily believes that
an Advisory Committee could add more
diverse viewpoints to the debates
surrounding Operating Committee
decisions and thus reduce the risk that
members of the Operating Committee
could make decisions without first
obtaining a full understanding of the
underlying facts or the likely impact of
its decisions.1144 The Commission also
recognizes, however, that including an
Advisory Committee in the decisionmaking process might add complexity to
1140 See Section IV.E.3.d, supra, for a discussion
of how certain governance provisions could help
promote better decision-making by the relevant
parties.
1141 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.8(d).
1142 See id. at Section 4.13 (Advisory Committee).
1143 See id. at Appendix C, Section B.8(d).
1144 See Section IV.E.3.d(2)B, supra.
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the process and decisions might require
more time relative to allowing the
Operating Committee to make decisions
without the input of an Advisory
Committee. The inclusion of an
Advisory Committee could thereby
potentially adversely affect the
efficiency of the Plan’s operation. In
general, the Commission preliminarily
believes that as long as the Advisory
Committee adds sufficiently useful
information, the benefits from the
Advisory Committee would justify any
operational inefficiencies from the
inclusion of the Advisory Committee.
The Commission considered an
additional source of potential
efficiencies in the decision-making
process. The Plan specifies minimum
standards for particular provisions or
solutions in Appendix D of the Plan
instead of specifying the solutions
themselves in the Plan.1145 While this
creates uncertainty in the costs and
benefits of the Plan and reduces the
transparency for the bidders, the
Commission recognizes that decisions to
not specify certain solutions in the Plan
could promote efficiency in the
decision-making process of the
Operating Committee. The Operating
Committee and/or Selection Committee
would effectively decide upon the
unspecified details when selecting the
Plan Processor and when approving the
Technical Specifications.1146 As such,
certain technical details may not appear
in the Plan and may not be subject to
Commission approval or, potentially, to
public comment. Instead, the Operating
Committee could implement such
decisions much more quickly and at a
potentially lower cost. The Commission
believes that the Commission and
public review process could add value
to the decision-making process,
particularly in assuring that the
decisions consider costs and benefits.
However, a notice and comment process
for certain technical changes could be
cumbersome and time-consuming, and
may not therefore be justified in the
context of certain technical issues. The
Plan therefore may be more agile and
efficient in its ability to upgrade and
improve systems quickly. On the other
hand, the cost of this efficiency comes
1145 For example, the Plan provides minimum
standards for regulator access to CAT Data but does
not propose any particular method for regulatory
access. Nor does the Plan specify whether the
regulators would have work space on servers at the
Central Repository or whether regulators would
have to download the results of every query before
being able to process such results.
1146 For example, the Selection Committee would
decide on the details of regulator access in
conjunction with selecting the Plan Processor or in
subsequent negotiations with the selected Plan
Processor.
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in the form of the significant
uncertainties surrounding the economic
effects of the Plan during the approval
process.
Provisions of the Plan should also
promote efficiently implementing
expansions to the CAT Data. Appendix
C of the Plan notes that the Plan
Processor must ensure that the Central
Repository’s technical infrastructure is
scalable and adaptable.1147 These
provisions should reduce the costs and
time needed for expansions to the
Central Repository.
b. Selection and Removal of the Plan
Processor
The CAT NMS Plan uses a request for
proposal (‘‘RFP’’) to select the Plan
Processor that would design, build, and
operate the Central Repository. The
winning bidder becomes the sole
supplier of the operation of the Central
Repository. The Commission
preliminarily believes this is necessary
to achieve the benefits of a single
consolidated source of regulatory data.
The competitiveness of the selection
process influences the ultimate
economic effect of the Plan because
those effects depend in large part on the
efficiency and effectiveness of the Plan
Processor. In particular, many of the
details of the Plan would be determined
either by the winning bid or in
negotiations with the Plan Processor
after selection. The Plan Processor
exercises control over the future costs of
operating and maintaining the Central
Repository in this context and the Plan
Processor chooses its performance level,
subject to the minimum standards in the
Plan and with oversight from the
Operating Committee.
Given the effects associated with the
selection process for the Plan Processor,
the Commission considered whether the
Plan promotes a competitive process
and whether the Plan contains
provisions that would create incentives
for the chosen Plan Processor to set
costs and performance competitively.
As explained below, the Commission
preliminarily believes that the selection
process generally promotes competition
but that there are also a few potential
limitations on competition. Moreover,
the Commission recognizes that a
competitive bidding process does not
necessarily mean that the selected
bidder would behave competitively after
being selected as the Plan Processor.1148
1147 See CAT NMS Plan, supra note 3, at
Appendix C, Section A.5(a).
1148 See Goldfine and Vorrasi, ‘‘The Fall of the
Kodak Aftermarket Doctrine: Dying A Slow Death
in the Lower Courts,’’ 74 Antitrust Law Journal No.
1 (2004), p. 209 (stating that ‘‘competition in the
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But the Commission preliminarily
believes that the Plan could control the
costs of the Central Repository and the
performance of the Plan Processor if the
Plan included sufficient competitive
incentives for the selected Plan
Processor. While the Commission
preliminarily believes that threat of
replacement of the Plan Processor could
incentivize them to set costs and
performance competitively, the high
cost of replacement could limit these
incentives.1149
(1) Competitiveness of the Plan
Processor Selection Process
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The Commission believes that two
elements determine the competitiveness
of the bidding process. The first relates
to the voting process and the second
relates to the degree of transparency in
the bidding process. The Commission
preliminarily believes that the Plan
provisions relevant to these two factors
could promote competition in the
bidding process and limit the risk that
selection of the Plan Processor would be
affected by a conflict of interest, thereby
promoting better decision-making.
The CAT NMS Plan outlines a
bidding process whereby a Selection
Committee votes on bidders during
several rounds of voting that each
narrow the potential bidders until one
primary market, as a matter of law, does not
necessarily preclude the possibility of market
power (and anticompetitive conduct) in the
aftermarkets for parts and services,’’ and citing
Eastman Kodak Co. v. Image Technical Services,
Inc., 504 U.S. 451 (1992)). Economic theories of the
relation between primary markets and aftermarket
are the focus of other literature as well; see infra
note 1149. (In the context of the Plan, the ‘‘primary
market’’ would be the initial selection of the Plan
Processor while in the ‘‘aftermarket,’’ the selected
Plan Processor would supply a performance level
for the given revenues received from the Company.)
1149 Under the theory of contestable markets, it is
possible for the sole supplier of a service to behave
as if there multiple suppliers, and thus not exercise
monopoly power. Necessary conditions include the
absence of entry and exit costs. William J. Baumol,
John C. Panzar, Robert D. Willig (1982), Contestable
Markets and the Theory of Industry Structure.
When the conditions needed to support contestable
markets are not met, the presence of alternative
suppliers may not be sufficient to prevent the costly
exercise of monopoly power, post-selection. For
example, if the supplier cannot make complete and
binding commitments to the price and quality of its
post-selection services, and the buyer becomes
locked into the sole supplier (e.g., due to switching
costs or other sources of friction), a competitive
selection process may lead to monopoly outcomes,
post-selection; see, e.g., Carl Shapiro, 1995,
‘‘Aftermarkets and Consumer Welfare: Making
Sense of Kodak,’’ Antitrust Law Journal, and
Borenstein, Severin, Jeffrey K. Mackie-Mason, and
Janet S. Netz, 1995, Antitrust Policy in
Aftermarkets, Antitrust Law Journal 63: 455–82. For
a recent survey of alternative theories, see section
3.1, Dennis W. Carlton and Michael Waldman,
2014. ‘‘Robert Bork’s Contributions to Antitrust
Perspectives on Tying Behavior,’’ Journal of Law &
Economics.
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bidder is selected.1150 Pursuant to the
Plan, the bidders compete to be selected
by proposing solutions to comply with
Rule 613 and documenting the
anticipated costs of doing so. The Plan
also contains provisions for revising
Bids if the Commission approves the
Plan.1151
The Participants received 31 Intent to
Bid forms during the RFP process; 13 of
the potential bidders withdrew before
January 30, 2014; the Participants
reported receiving 10 Bids by April 2,
2014.1152 Six of these Bidders were
shortlisted through the selection process
in July 2014, including one SRO that is
also a Bidder. In November 2015, the
shortlist was further narrowed to three
Bidders.1153
In considering how competitive the
voting process is, the Commission has
considered whether conflicts of interest
could limit competition in the bidding
process through the proposed
participation of a bidder representative
on the Selection Committee. The Plan
includes provisions that mitigate this
conflict but that have not eliminated it
completely. In particular, the Plan
requires recusal of an SRO from any
selection round if that SRO or its
affiliate has submitted a bid—or is
included as a material subcontractor as
part of a bid—that is still under
consideration in such round.1154
Similarly, the Plan creates information
barriers between the Staff at the SRO
selecting the bidder and the Staff
undertaking the bidding.1155 These
provisions promote a level playing field
for all bidders because the SRO bidder
does not know any more than a nonSRO bidder and so has no informational
advantage in submitting a bid that the
Selection Committee may find
favorable. Further, the information
barriers prevent those working on the
bid from attempting to persuade
members of the Selection Committee
toward their bid in a way that other
bidders cannot. The Commission
recognizes, however, that there is a
residual risk in having an SRO among
the bidders; it is possible that voting
Participants would be biased for or
against that SRO either because they
compete with that SRO in another
1150 See CAT NMS Plan, supra note 3, at Section
5.2 (Bid Evaluation and Initial Plan Processor
Selection).
1151 Id. at Section 5.2(e).
1152 For details on the progression of the CAT RFP
process, see RFP Process, SEC Rule 613:
Consolidated Audit Trail (CAT), available at https://
catnmsplan.com/process/ (last visited November
19, 2015).
1153 See supra note 35.
1154 See CAT NMS Plan, supra note 3, at Section
4.3(d), at Section 5.1(b).
1155 See id. at Section 5.1(d).
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market (and could gain a competitive
advantage in that market by acting as
Plan Processor) or because of repeated
interactions with that SRO.
The Commission also recognizes that,
to the extent the Operating Committee
has specific preferred solutions as to
how the Plan should be implemented,
the degree to which the Committee is
transparent about those preferences in
the bidding process would affect the
competitiveness of that process. For
example, if the Commission were to
approve the Plan and bidders were
thereafter given the opportunity to
revise their bids, the Operating
Committee could promote
competitiveness in the bidding process
by outlining its preferences.
Transparency into the Operating
Committee’s views regarding potential
optimal solutions could assist a bidder
in revising its bid to inform how that
bidder could supply those optimal
solutions, and the Selection Committee
could then compare all bidders on those
particular solutions. To the extent that
the Operating Committee has strong
preferences toward particular solutions
but did not specify those preferences
directly in the Plan, the bidder may not
know that it could improve its chances
of winning the bid by proposing a
different solution and the Selection
Committee would not know whether the
bidder is capable of delivering the
preferred solution more efficiently than
the other bidders. On the other hand,
the Commission notes that specifying a
preferred solution also has the potential
to discourage bidders from competing
on innovation by proposing novel
approaches that may deliver superior
outcomes.
The Commission has no reason to
believe that the Operating Committee
has preferred solutions beyond what is
in the Plan that would significantly
impact the competitiveness of the Plan
Processor selection process. Indeed,
Appendix D of the Plan details
numerous minimum standards not
included in the RFP. In addition, the
Plan also provides details on the range
of solutions proposed by bidders and
why the Operating Committee may not
have a preference and therefore did not
select a particular solution. This
provides transparency to the bidders on
the criteria the Selection Committee
may use to compare bidders.
(2) Competitive Incentives of the
Selected Plan Processor
The Plan could create competitive
incentives for the selected Plan
Processor by detailing strong
requirements for the Plan Processor and
providing an efficient mechanism to
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remove the selected Plan Processor and
introducing an alternative Plan
Processor in the event of
underperformance. As described below,
the Commission preliminarily believes
that the Plan provides the selected Plan
Processor with competitive incentives
because the Plan contains defined
procedures for monitoring and removing
the Plan Processor for failure to perform
functions adequately or otherwise.
However, the ease with which the
Operating Committee could remove the
Plan Processor and the costs of
switching to another Plan Processor
could limit these competitive
incentives.
The Plan contains several provisions
that would allow the Operating
Committee to remove the Plan
Processor.1156 By Supermajority Vote,
the Operating Committee could remove
the Plan Processor for any reason. The
Operating Committee may, by Majority
Vote, remove the Plan Processor if it
determines that the Plan Processor has
failed to perform its functions ‘‘in a
reasonably acceptable manner’’ or if the
Plan Processor’s expenses ‘‘have become
excessive or are not justified.’’ The
consideration of such poor performance
or excessive expenses would include (1)
responsiveness to requests for
technological changes or enhancements,
(2) results of assessments performed
pursuant to Section 6.6 of the Plan, (3)
staying up-to-date on reliability and
security of operations, (4) compliance
with the requirements of Appendix D,
and (5) other factors the Operating
Committee may determine to be
appropriate.
The Commission preliminarily
believes that the ability of the Operating
Committee to remove the Plan Processor
for poor performance with only a
Majority Vote incentivizes the Plan
Processor to perform well enough to
avoid being removed. The Commission
further preliminarily believes that the
performance of the Plan Processor
would depend significantly on strong
oversight by the Operating
Committee.1157
The Commission recognizes that the
effort required to remove a Plan
Processor could be significant, which
would limit the incentives of the Plan
Processor to perform well. To subject a
removal to a Majority Vote, the
Operating Committee would
presumably need to demonstrate the
Plan Processor’s performance and
1156 See CAT NMS Plan, supra note 3, at Section
6.1(q), (r), (s).
1157 See Section IV.E.3.d, supra, for a discussion
of the incentives of the Operating Committee in
overseeing the Plan Processor.
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determine that it was not ‘‘reasonably
acceptable.’’ If not, the removal would
be subject to Supermajority Vote, which
could also take significant effort and a
removal would be less likely to pass.
In addition, significant switching
costs could influence whether removing
a Plan Processor despite poor
performance makes economic sense. In
other words, the Operating Committee
could wait for significant performance
issues before initiating a vote to remove
the Plan Processor. Additionally, before
removing a Plan Processor, the
Operating Committee would need to
select a new Plan Processor. This would
likely be a lengthy process taking
significant time and effort by the
Operating Committee. Moreover,
switching Plan Processors could entail a
complete rebuild of the Central
Repository and significant
implementation costs for CAT Reporters
and Participants, potentially amounting
to the initial implementation costs of
the Plan. These costs would be higher
if the Plan Processor’s solutions include
proprietary technologies that no other
potential replacement (competitor)
could supply. The costs would be lower
if the new Plan Processor could
implement the existing Technical
Specifications. The benefits of switching
could also depend on the benefits from
technological advancements that these
competitors could supply. In light of
these costs, the competitive incentives
of the Plan Processor to maintain top
performance could be limited.
Specifically, the Plan Processor may
only need to perform well enough to
keep the inefficiencies associated with
their performance from exceeding the
cost to switch to another Plan Processor.
Despite the limitations on competitive
incentives due to switching costs,
however, the Commission preliminarily
believes that the threat of replacement
still provides an incentive to stay
relatively current on technology
advancements to avoid falling
significantly behind potential
competitors.
5. Request for Comment on Efficiency,
Competition, and Capital Formation
The Commission requests comment
on all aspects of the discussion of the
effects of the CAT NMS Plan on
efficiency, competition, and capital
formation. In particular, the
Commission seeks responses to the
following questions:
347. The Participants state in the Plan
that they believe the Plan would avoid
disincentives such as placing an
inappropriate burden on competition in
the U.S. securities markets. In its
analysis, the Commission concludes
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that competition is unlikely to be
harmed to a degree that would affect
investors. Do Commenters agree with
the conclusions discussed in the Plan?
Why or why not? Do Commenters agree
with the Commission’s conclusion
regarding the Plan’s impact on
competition? Why or why not?
348. Do Commenters agree with the
Commission’s characterization of the
relevant markets that the CAT NMS
Plan affect? Why or why not? Do
Commenters agree with the identified
level of competition in each of the
relevant markets in the Commission’s
analysis? Why or why not?
349. Do Commenters agree with the
Commission’s discussion of the Baseline
for the market for trading services? Why
or why not?
350. Do Commenters agree with the
Commission’s analysis of competition in
the market for trading services under the
Plan? Why or why not?
351. Do Commenters agree with the
Commission’s analysis of effects of the
Plan’s funding model on competition?
Why or why not? Would the funding
model as outlined in the Plan affect
competition in the market for trading
services between exchanges and ATSs?
If so, how? Do Commenters agree with
the Commission’s analysis of the effects
on competition of the Plan’s allocation
of CAT fees across market participants?
Why or why not? Would the
Participation Fee outlined in the Plan
serve as a barrier to entry for ATSs that
might otherwise register as exchanges?
Why or why not?
352. Do Commenters believe that the
allocation of voting rights among the
Participants may serve to affect
competition between Participants that
operate options exchanges and those
that do not? Why? Do governance
provisions outlined in the Plan provide
controls that could prevent burdens on
competition due to the allocation of
voting rights among Participants? If not,
are there controls that could achieve
this?
353. Do Commenters believe that the
allocation of voting rights among the
Participants may serve to affect
competition between exchanges and
ATSs in the market for trading services?
Why or why not?
354. Do Commenters agree with the
Commission’s analysis of the effects on
competition of costs of compliance with
the Plan? Why or why not?
355. Do Commenters agree with the
Commission’s analysis of the effects on
competition of the Plan’s enhanced
surveillance and deterrence? Why or
why not?
356. Do Commenters agree with the
Commission’s analysis of the Baseline
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for competition in the market for brokerdealer services? Why or why not?
357. Do Commenters agree with the
Commission’s analysis of the effects on
competition in the market for brokerdealer services of the Plan? Why or why
not? Are these effects different for
smaller broker-dealers? How? How
significant are these impacts?
358. Do Commenters agree with the
Commission’s analysis of the
competition to be Plan Processor? Why
or why not?
359. Do Commenters believe that any
elements of the CAT NMS Plan may
affect competition among the bidders?
Do Commenters believe that any
decisions by the Operating Committee
that are allowable or likely under the
proposed Plan may affect competition
among the bidders in the market to be
Plan Processor? If so, how would these
competitive dynamics affect CAT as
outlined in the Plan?
360. Do Commenters agree with the
Commission’s analysis of competition in
the market to be Plan Processor postselection? Why or why not?
361. Do Commenters agree with the
Commission’s analysis of the Baseline
for competition in the market for
regulatory services? Why or why not?
362. Do Commenters agree with the
Commission’s analysis of competition in
the market for regulatory services of the
Plan? Why or why not?
363. Do Commenters agree with the
Commission’s analysis of the Baseline
for competition in the market for data
reporting services? Why or why not? Do
Commenters believe that capacity
constraints in this market may affect
broker-dealers’ ability to comply with
data reporting requirements under the
Plan?
364. Do Commenters agree with the
Commission’s analysis of competition in
the market for data reporting services
under the Plan? Why or why not?
365. If some or all of the Participants
decide to share the Raw Data they
collect pursuant to the CAT NMS Plan
and use the combined data for
commercial purposes, how do
Commenters believe that might affect
competition in the markets described
above?
366. In the Plan, the Participants state
that they believe the Plan would have a
net positive effect on efficiency. The
Commission’s analysis states that the
Commission preliminarily believes the
Plan would have a significant positive
effect on efficiency. Do Commenters
agree with the conclusions stated in the
Plan? Why or why not? Do Commenters
agree with the Commission’s analysis?
Why or why not?
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367. Do Commenters agree that costs
related to the Plan’s requirements for
data mapping, data dictionary creation,
and encryption associated with the
transmission of PII would not
significantly affect efficiency? Why or
why not?
368. Do Commenters agree with the
Commission’s analysis of the Plan’s
effects on the efficiency of market
regulation and oversight? Why or why
not?
369. Do Commenters agree with the
Commission’s analysis of the Plan’s
effects on market efficiency due to
reductions in violative behavior? Why
or why not?
370. Do Commenters agree with the
Commission’s analysis of the Plan’s
effect on efficiency related to reductions
in ad hoc data requests from regulators?
Why or why not?
371. Do Commenters agree with the
Commission’s analysis of the Plan’s
effect on efficiency due to reductions in
duplicative reporting systems? Why or
why not?
372. Do Commenters believe that the
period of duplicative reporting that
would precede the retirement of certain
current, anticipated to be retired,
regulatory reporting systems would
significantly affect efficiency? Why or
why not?
373. Do Commenters agree with the
Commission’s analysis of inefficiencies
related to the funding model? Why or
why not?
374. Do Commenters agree with the
Commission’s analysis of the likelihood
of CAT fees being passed on to investors
under the Plan? Why or why not?
375. Do Commenters agree with the
Commission’s analysis of the efficiency
of Plan operations? Why or why not?
376. Do Commenters agree with the
Commission’s analysis of the effects of
voting thresholds for Operating
Committee decisions on efficiency?
Why or why not?
377. Do Commenters agree with the
Commission’s analysis of the Advisory
Committee’s effect on efficiency under
the Plan? Why or why not?
378. Do Commenters agree with the
Commission’s analysis of the effects on
efficiency of the Participants’ decision
to specify or not specify certain aspects
of CAT in the RFP? Why or why not?
379. Do Commenters believe that the
CAT NMS Plan would impact investor
confidence? If so, how? Do investors
currently lack confidence because of the
current state of regulatory data? Would
the expected improvements to investor
protection result in increased investor
confidence? Please explain. What would
be the expected effects of changes in
investor confidence on allocative
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efficiency and capital formation? What
would be the magnitude of the
economic effects from expected changes
to investor confidence? Please provide
analysis.
380. The Plan states that the
Participants believe that the Plan would
have no deleterious effect on capital
formation. Do Commenters agree with
the Participants’ conclusions stated in
the Plan? Do Commenters agree with the
Commission’s preliminary belief that
the Plan would not have a deleterious
effect on capital formation? Why or why
not?
381. Do Commenters agree with the
Commission’s analysis of the Plan’s
effects on capital formation due to
enhanced market surveillance and
regulatory activities? Why or why not?
382. Do Commenters agree with the
Commission’s analysis of effects on
capital formation due to data security
provisions of the Plan? Why or why not?
H. Alternatives
As a part of its economic analysis, the
Commission is considering and
soliciting comment on alternatives to
certain approaches or elements of the
CAT NMS Plan. The Commission
analyzes alternatives that could have a
direct and significant impact on costs or
benefits deriving from at least one of the
four data qualities discussed above:
accuracy, completeness, accessibility,
and timeliness. While the discussed
alternatives are not the only alternatives
that could significantly impact costs,
benefits, or data quality, they are an
attempt to identify reasonable options.
Each has the potential to alter the
Commission’s preliminary conclusions
regarding the economic effects of the
CAT NMS Plan.
The analysis of alternatives is divided
into three categories. First, the
Commission analyzes alternatives to the
approaches the Exemption Order
permitted the Participants to include in
the Plan.1158 As noted in the Exemption
Order, the Commission was persuaded
to grant exemptive relief to provide
flexibility such that the proposed
approaches described in the Exemption
Request can be included in the CAT
NMS Plan and subject to notice and
comment.1159 Second, the Commission
analyzes alternatives to certain specific
approaches in the CAT NMS Plan,
including alternative approaches to
clock synchronization, time stamps,
Error Rates, error correction timelines,
the funding model, listing exchange
symbology, data accessibility standards,
and the intake capacity levels. Third,
1158 See
Exemption Order, supra note 18.
1159 Id.
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the Commission analyzes alternatives to
the scope of certain specific elements of
the Plan. Specifically, the Commission
analyzes the impact of changing the
scope of the CAT to exclude certain data
fields. The Commission also analyzes
alternatives to exclude OTC Equity
Securities and the requirement to
periodically refresh all customer
information. Finally, the Commission
solicits comment on the broad
alternative of modifying OATS and/or
another existing system to meet the
requirements of Rule 613 instead of
approving the Plan.
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1. Alternatives to the Approaches the
Exemption Order Permitted To Be
Included in the Plan
The Commission is soliciting
additional comment on alternatives to
the approaches the Exemption Order
permitted the SROs to include in the
CAT NMS Plan.1160 Specifically, the
Commission is soliciting comment on
how the following alternatives (the
‘‘Rule 613 approach’’), described in
further detail below, would affect the
costs and benefits of the CAT: (a)
Requiring both Options Market Makers
and Options Exchanges to report
Options Market Maker quotations to the
Central Repository, (b) requiring CAT
Reporters to report a Customer-ID for
each Customer upon the original receipt
or origination of an order, (c) requiring
CAT Reporters to report a universal
CAT-Reporter-ID to the Central
Repository for orders and certain
Reportable Events, (d) requiring the
reporting of the account number for any
subaccount to which an execution is
allocated, and (e) requiring that Manual
Order Events be reported with a time
stamp granularity of one millisecond.
a. Options Market Maker Quotes
The Commission is soliciting
comment on how an alternative
approach—the Rule 613 approach—to
the reporting of Options Market Maker
quotations might impact the costs and
benefits of the Plan. Rule 613(c)(7)
provides that the CAT NMS Plan must
require each national securities
exchange, national securities
association, and any member of such
exchange or association to record and
electronically report to the Central
Repository details for each order and
each Reportable Event, including the
routing and modification or cancellation
of an order.1161 Rule 613(j)(8) defines
‘‘order’’ to include ‘‘any bid or offer’’ so
that the details for each Options Market
Maker quotation must be reported to the
1160 Id.
1161 See
17 CFR 242.613(c)(7).
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Central Repository by both the Options
Market Maker and the exchange to
which it routes its quote.1162 The SROs
requested an exemption from Rules
613(c)(7)(ii) and (iv) and proposed an
approach whereby only Options
Exchanges—but not Options Market
Makers—would be required to report
information to the Central Repository
regarding Options Market Maker
quotations.1163 The Commission granted
exemptive relief to the SROs to allow
the approach to collecting Options
Market Maker quotations described in
the Exemption Request to be included
in the CAT NMS Plan and subject to
notice and comment.1164
Pursuant to the exemptive relief
granted by the Commission, the CAT
NMS Plan provides that only Options
Exchanges—but not Options Market
Makers—would be required to report
information to the Central Repository
regarding Options Market Maker
quotations.1165 On the other hand, the
Rule 613 approach would require that
each Options Market Maker quotation
be reported to the Central Repository by
both the Options Market Maker and the
exchange to which it routes its quote.
The Commission preliminarily believes
that the Rule 613 approach would
increase certain costs associated with
the implementation and operation of
CAT as compared to the Plan as filed
without providing any additional
material information.
Under the Rule 613 approach, the
reports from the Options Exchanges
would be virtually identical to the
reports coming from the Options Market
Makers, with the exception that reports
from the Options Market Makers would
indicate the time that the Options
Market Maker routes its quote, or any
modification or cancellation thereof, to
the exchange (‘‘Quote Sent Time’’).
However, to ensure that regulators
would receive all of the information
contemplated by Rule 613(c)(7), the
CAT NMS Plan requires that (1) Options
Market Makers report to the relevant
Options Exchange the Quote Sent Time
along with any quotation, or any
modification or cancellation thereof;
and (2) Options Exchanges submit the
quotation data received from Options
Market Makers, including the Quote
Sent Time, to the Central Repository
without change.1166 Under the CAT
NMS Plan, therefore, regulators would
have access to all the material
1162 See
1163 See
17 CFR 242.613(j)(8).
Exemptive Request Letter, supra note 16,
at 2–5.
1164 See Exemption Order, supra note 18.
1165 See CAT NMS Plan, supra note 3, at
Appendix C, Background Section.
1166 Id. at Section 6.4(d)(iii).
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information in CAT that would be
provided under the Rule 613 approach.
As such, the Commission preliminarily
does not believe that there would be any
additional benefits to using the Rule 613
approach.
Furthermore, the CAT NMS Plan
estimates that the Rule 613 approach
would increase the amount of records
that must be handled by the Central
Repository by 18 billion records per
day, at an additional cost of between $2
million and $16 million for data storage
and technical infrastructure over a five
year period.1167 A cost survey estimates
the Rule 613 approach would cost all
Options Market Makers between $307.6
million and $382 million over five
years.1168 Under the approach taken in
the CAT NMS Plan, these costs would
be avoided but the Options Market
Makers surveyed would spend
approximately $8.5 million to send
Quote Sent Times to the exchanges and
all Options Market Makers would spend
$36.9M to $76.8M.1169 In aggregate, the
estimates provided suggest that the Rule
613 approach would add between
$230.80 million and $345.10 million to
industry costs over five years.1170 The
Exemption Request also notes that the
additional costs would be
disproportionately borne by smaller
broker-dealers relative to their market
share.1171
The Commission notes that there are
limitations to the cost estimation
methodology presented in the
Exemption Request. These limitations
include the lack of quantified cost
estimates for additional indirect cost
savings associated with the exemption.
However, the Commission preliminarily
believes that the Rule 613 approach
would increase certain costs associated
with the implementation and operation
of CAT as compared to the Plan as filed
1167 Id.
at Appendix C, Section B.7(b)(iv)(B).
FIF, SIFMA, and Security Traders
Association, Cost Survey Report on CAT Reporting
of Options Quotes by Market Makers (November 5,
2013), available at https://www.catnmsplan.com/
industryfeedback/p601771.pdf; see also CAT NMS
Plan, supra note 3, at Appendix C, Section
B.7(b)(iv)(B).
1169 See FIF, SIFMA, and Security Traders
Association, Cost Survey Report on CAT Reporting
of Options Quotes by Market Makers 3–4
(November 5, 2013), available at https://www.catnms
plan.com/industryfeedback/p601771.pdf.
1170 To be conservative, the Commission
estimates the lower end of the range to be the lower
cost to comply with a CAT NMS Plan without the
exemption minus the higher cost to comply with a
CAT NMS Plan with the exemption ($230.8M =
$307.6 ¥ $76.8M). Likewise, the higher end of the
range is the higher cost to comply with a CAT NMS
Plan without the exemption minus the lower cost
to comply with a CAT NMS Plan with the
exemption ($345.1M = $382M ¥ $36.9M).
1171 See Exemptive Request Letter, supra note 16,
at 7.
1168 See
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without providing any additional
material information.
b. Customer-ID
The Commission is soliciting
comment on how an alternative
approach—the Rule 613 approach—to
the reporting of customer information
might impact the costs and benefits of
the Plan. Rule 613(c)(7)(i)(A) requires
that for the original receipt or
origination of an order, a CAT Reporter
report the ‘‘Customer-ID(s) for each
Customer.’’ 1172 ‘‘Customer-ID’’ is
defined in Rule 613(j)(5) to mean ‘‘with
respect to a customer, a code that
uniquely and consistently identifies
such customer for purposes of providing
data to the central repository.’’ 1173 Rule
613(c)(8) further requires that ‘‘[a]ll plan
sponsors and their members shall use
the same Customer-ID and CATReporter-ID for each customer and
broker-dealer.’’ 1174 The SROs requested
an exemption from the requirements in
Rule 613(c)(7)(i)(A) and Rule 613(c)(8),
and proposed an approach whereby
each broker-dealer would assign a
unique Firm Designated ID to each
trading account, which would be linked
to a set of identifying information (the
‘‘Customer Information Approach’’).1175
Using the Firm Designated ID and the
other information identifying the
Customer that would be reported to the
Central Repository, the Plan Processor
would then assign a unique CustomerID to each Customer. Upon original
receipt or origination of an order,
broker-dealers would only be required
to report the Firm Designated ID on each
new order, rather than using the
Customer-ID. The Commission granted
exemptive relief to the SROs to allow
the alternative approach to CustomerIDs described in the Exemption Request
to be included in the CAT NMS Plan
and subject to notice and comment.1176
Pursuant to the exemptive relief
granted by the Commission, the CAT
NMS Plan provides for the use of the
Customer Information Approach.1177
The Commission is soliciting comment
on the Rule 613 approach, which would
require that broker-dealers report
Customer information using a
consistent, unique Customer-ID, as set
out in in Rule 613(c)(7)(i)(A) and Rule
1172 See
17 CFR 242.613(c)(7)(i)(A).
17 CFR 242.613(j)(5).
17 CFR 242.613(c)(8).
1175 See Exemptive Request Letter, supra note 16,
at 9. Because the Plan Processor would still assign
a Customer-ID to each Customer under the
Customer Information Approach, the SROs did not
request an exemption from Rule 613(j)(5).
1176 See Exemption Order, supra note 18, at
11863.
1177 See CAT NMS Plan, supra note 3, at
Appendix C, Section A.1(a)(iii).
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1173 See
1174 See
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613(c)(8). The Commission
preliminarily believes that the Rule 613
approach would increase certain costs
associated with the implementation and
operation of CAT as compared to the
Customer Information Approach while
providing substantially identical data.
The Commission also preliminarily
believes that the Rule 613 approach
would have no significant impact on the
benefits of the CAT NMS Plan. The
Participants maintain that, under the
Rule 613 approach, there would be no
gains in terms of accuracy or reliability,
no effect on the ability to link records,
and no effect on the time the data would
be made available to regulators, as
compared to the Customer Information
Approach.1178 The Participants also
believe that there may be accuracy gains
under the Customer Information
Approach if it reduces errors that may
otherwise occur if broker-dealers must
adapt their systems and business
processes to manage Customer-IDs.1179
The Commission also preliminarily
believes that the Rule 613 approach
would increase the costs of the CAT
NMS Plan. In their Exemption Request,
the Participants discussed a number of
reasons why the Customer Information
Approach is less burdensome than the
Rule 613 approach. First, it reduces the
CAT implementation burden on market
participants by eliminating the need for
changes to their current customer
identification systems.1180 Currently,
market participants have individual
formats for their customer identifiers;
under the Customer Information
Approach, no standardization of form
would be required. Second, the
Customer Information Approach
eliminates the need for centrallyassigned Customer-IDs to be assigned at
the Central Repository and
communicated back to market
participants.1181 Third, it allows the
Plan Processor to implement
modifications and technical upgrades to
the Customer-ID generation process and
infrastructure without the involvement
of CAT Reporters.1182 Fourth, the
Customer Information Approach
eliminates the need to train CAT
Reporters on the Customer-ID
management process and provide
related technical support. Fifth, it
potentially reduces delays faced by
investors opening new accounts, who
might not be able to transact until the
Central Repository has assigned a
1178 See Exemptive Request Letter, supra note 16,
at 15–18.
1179 Id.
1180 See id. at 17.
1181 See id.
1182 See id.
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Customer-ID and communicated it to
the broker-dealer representing the
Customer.1183
Based on cost survey data provided by
the Participants, the Rule 613 approach
would increase quantifiable costs to the
top three tiers of CAT Reporters by at
least $195 million.1184 The Commission
notes that this likely underestimates the
increased costs to all CAT Reporters
because the Rule 613 approach would
likely increase costs to CAT Reporters
outside the top three tiers also.
Furthermore, the Bidders have indicated
that the costs of building and operating
the Central Repository under the Rule
613 approach would not be lower than
the costs of the Customer Information
Approach.1185 The Commission
therefore preliminarily believes that the
Rule 613 approach would increase the
costs of the CAT NMS Plan relative to
the Plan’s Customer Information
Approach, while providing substantially
identical data.
c. CAT-Reporter-ID
The Commission is soliciting
comment on how an alternative
approach—the Rule 613 approach—to
the reporting of CAT Reporter
information might impact the costs and
benefits of the Plan. A CAT-Reporter-ID
is ‘‘a code that uniquely and
consistently identifies [a CAT Reporter]
for purposes of providing data to the
central repository.’’ 1186 Subparagraphs
(c)(7)(i)(C), (ii)(D), (ii)(E), (iii)(D), (iii)(E),
(iv)(F), (v)(F), (vi)(B), and (c)(8) of Rule
613 provide that the CAT NMS Plan
must require CAT Reporters to report
CAT-Reporter-IDs to the Central
Repository for orders and certain
Reportable Events.1187 Additionally,
Rule 613(c)(8) requires that CAT
Reporters use the same CAT-Reporter-ID
for each broker-dealer.1188 To leverage
existing infrastructure and business
processes, the Participants requested an
exemption from Rule 613(c)(7) and
(c)(8) to allow a different approach to be
included in the Plan; CAT Reporters
would report existing SRO-assigned
market participant identifiers when
submitting data to the Central
Repository (‘‘SRO-Assigned Market
Participant Identifiers’’).1189 The Central
Repository would then generate a
corresponding CAT-Reporter-ID for
internal use to identify CAT Reporters.
1183 See
id. at 16–17.
at 17–18.
1185 Id. at 17.
1186 17 CFR 242.613(j)(2).
1187 17 CFR 242.613(c)(7)(i)(C), (ii)(D), (ii)(E),
(iii)(D), (iii)(E), (iv)(F), (v)(F), (vi)(B), and (c)(8).
1188 17 CFR 242.613(c)(8).
1189 See Exemptive Request Letter, supra note 16,
at 19.
1184 Id.
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This approach—called the ‘‘Existing
Identifier Approach’’—allows the CATReporter-IDs to be managed at the
Central Repository by the Plan Processor
without the involvement of the
Reporters.1190 The Commission granted
exemptive relief to the SROs to allow
the Existing Identifier Approach to be
included in the CAT NMS Plan and
subject to notice and comment.1191
Pursuant to the exemptive relief
granted by the Commission, the CAT
NMS Plan provides for the use of the
Existing Identifier Approach.1192 The
Commission is soliciting additional
comment on the Rule 613 approach,
which would require that CAT
Reporters use a consistent, unique CATReporter-ID, as set out in in Rule
613(c)(7) and Rule 613(c)(8). The
Commission preliminarily believes that
the Rule 613 approach would increase
certain costs associated with the
implementation and operation of CAT
as compared to the Existing Identifier
Approach while providing substantially
identical data.
The Commission preliminarily
believes that the Rule 613 approach
would not result in more reliable or
accurate data as compared to the
Existing Identifier Approach. The
Exemption Request states that ‘‘the
proposed approach would not
compromise the goal of Rule 613 to
record and link Reportable Events to the
CAT Reporter associated with the
event.’’ 1193 The processed CAT Data
would contain the CAT-Reporter-ID
fields, and the Participants maintain
that there would be no loss of accuracy
or reliability, no effect on the ability to
link records, and no effect on the time
the data would be made available to
regulators.1194
In fact, the Commission preliminarily
believes that the Rule 613 approach
would reduce the quality of data
obtained as compared to the Existing
Identifier Approach. Specifically, the
Rule 613 approach would reduce the
granularity of information on
departments, trading desks, and other
business units within CAT Reporters,
which would be captured under the
Existing Identifier Approach. This
additional granularity would be possible
under the Existing Identifier Approach
because identifiers currently in use are
often assigned to entities that are
defined more granularly than the CAT1190 Id.
1191 See
Exemption Order, supra note 18, at
11866.
1192 See, e.g., CAT NMS Plan, supra note 3, at
Sections 6.3(d) and (e), 6.4(d).
1193 See Exemptive Request Letter, supra note 16,
at 21.
1194 Id. at 22–23.
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Reporter-ID level. The Commission also
preliminarily believes that the ability to
leverage existing infrastructure and
business processes may reduce the
potential for delays and errors that
could be associated with requiring CAT
Reporters to modify their systems and
workflows to handle the CAT-ReporterIDs.
The Commission preliminarily
believes that the Rule 613 approach
would increase the costs of the CAT
NMS Plan relative to the Existing
Identifier Approach. The Participants
estimate implementation costs for the
top three tiers of CAT Reporters for the
Rule 613 approach of $78 to $244
million, depending on how report types
have to use the CAT-Reporter-IDs.1195
The Exemption Request does not
compare these costs to the Existing
Identifier Approach allowed by the
exemption and included in the Plan.1196
The Participants note that these
estimates are conservative because they
are based on only 11% of brokerdealers.1197 The Participants indicated
that they have consulted with the
bidders and the industry in compiling
this analysis.1198
While the Commission preliminarily
believes that the Rule 613 approach
would increase certain costs associated
with the implementation and operation
of CAT as compared to the Existing
Identifier Approach, the Commission
notes that there are limitations
associated with the cost estimation
methodology presented in the
Exemption Request. These limitations
include the exclusion of SROs and
smaller CAT Reporters from the survey,
no apparent differentiation between
initial, deferred, and recurring costs,
and lack of support for the method used
to extrapolate the estimates for large
broker-dealers to the industry. Nor do
the cost estimates address the brokerdealers who would be CAT Reporters
but are currently not OATS reporters,
including those that are currently not
registered with FINRA, which may have
a very different cost structure. However,
it is likely that the dominant effect
would be the exclusion of many CAT
Reporters from the cost estimates, which
would tend to underestimate the cost
increases. The Commission currently
has no data from which it can
independently estimate the cost
differential because it depends on
information internal to each of a
heterogeneous group of CAT Reporters,
which is not compiled or stored
1195 Id.
at 24.
at 24.
1197 Id. at 25.
1198 Id. at 22.
1196 Id.
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30757
anywhere and to which the Commission
therefore does not have ready access.
The Commission believes that these
effects are not likely to alter its
preliminary conclusion that the Rule
613 approach would significantly
increase the costs of the CAT NMS Plan
as compared to the Plan’s Existing
Identifier Approach. The Commission is
requesting comment on this preliminary
conclusion and any additional data
Commenters believe should be
considered.
d. Linking Order Executions to
Allocations
The Commission is soliciting
comment on how an alternative
approach to the reporting of allocation
information—the Rule 613 approach—
might impact the costs and benefits of
the Plan. Rule 613(c)(7)(vi)(A) requires
each CAT Reporter to record and report
to the Central Repository ‘‘the account
number for any subaccounts to which
the execution is allocated (in whole or
part).’’ 1199 This information would
allow regulators to link the subaccount
to which an allocation was made to the
original order placed and its execution.
In the Exemptive Request Letter and
April 2015 Supplement, the SROs
requested an exemption from Rule
613(c)(7)(vi)(A) to include in the Plan an
approach whereby CAT Reporters
would instead submit information to the
Central Repository that would allow
regulators to link subaccount
information to the Customer that
submitted the original order.1200 The
Commission granted exemptive relief to
the SROs to allow this approach to be
included in the CAT NMS Plan and
subject to notice and comment.1201
Pursuant to the exemptive relief
granted by the Commission, the CAT
NMS Plan provides that, rather than
providing the account number for any
subaccounts to which the execution is
allocated, CAT Reporters would submit
information to the Central Repository in
the form of an Allocation Report, in
order to allow regulators to link
subaccount information to the Customer
that submitted the original order.1202
The Allocation Report would include
the Firm Designated ID for any
account(s), including subaccount(s), to
which executed shares are allocated,
and provide the security that has been
allocated, the identifier of the firm
1199 See
17 CFR 242.613(c)(7)(vi)(A).
Exemptive Request Letter, supra note 16,
at 28–29; April 2015 Supplement, supra note 16, at
2.
1201 See Exemption Order, supra note 18, at
11868.
1202 See CAT NMS Plan, supra note 3, at Section
6.4(d)(ii)(A)(1).
1200 See
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reporting the allocation, the price per
share of shares allocated, the side of
shares allocated, the number of shares
allocated to each account, and the time
of the allocation, which is information
that is not currently required to be
reported and/or retained by brokerdealers.1203 There would not be a direct
link in the Central Repository between
the subaccounts to which an execution
is allocated and the execution itself.
However, CAT Reporters would be
required to report each allocation to the
Central Repository on an Allocation
Report, and the Firm Designated ID of
the relevant subaccount provided to the
Central Repository as part of the
Allocation Report could be used by the
Central Repository to link the
subaccount holder to those with
authority to trade on behalf of the
account.1204 Further, the Allocation
Reports used in conjunction with order
lifecycle information in CAT would
assist regulators in identifying, through
additional investigation, the probable
group of orders that led to
allocations.1205
The Commission is soliciting
comment on the Rule 613 approach,
which would require CAT Reporters to
record and report the account number
for any subaccounts to which the
execution is allocated, as described
above. The Commission preliminarily
believes that that the Rule 613 approach
could provide the Central Repository
with a way to link allocations to order
lifecycles.1206 This linkage would not be
available under the current approach.
However, based on estimates provided
by the Participants, the Commission
preliminarily believes that the Rule 613
approach would increase certain costs
associated with the implementation and
operation of CAT as compared to the
Plan as filed by roughly $525
million.1207
1203 See id. at Section 1.1; see also Exemption
Order, supra note 18, at 44–45.
1204 See Exemption Order, supra note 18, at 45.
1205 Id.
1206 In the Exemption Request, the SROs
explained that under the Rule 613 approach
allocations made from an average price account
would not reflect a true one-to-one relationship
between an execution and an allocation, and
therefore the information provided would not
directly link a single order execution and the
subaccount to which an allocation was made. See
Exemptive Request Letter, supra note 16, at 28.
However, the Commission believes that under the
Rule 613 approach, regulators would receive
information that would identify each execution
resulting from the original order placed, as well as
the identity of all the subaccounts to which those
executions were allocated. This information would
provide regulators a finite list of executions from
which the subaccount allocations could have been
made.
1207 The Participants estimate that the Plan’s
approach to allocation information would result in
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The Commission preliminarily
believes that either approach would
allow regulators to link specific
allocations, and the prices received on
those allocations, with the aggregated
executions that resulted in the
allocations and their execution prices.
Industry feedback received by the
Participants indicates that existing
business practices typically involve
aggregating executions in an average
price account before making allocations,
and forcing a precise matching between
orders and executions ex-post would be
misleading.1208 The Exemption Request
maintains that, under the approach in
the Plan, there would be no loss of
accuracy or reliability, no effect on the
ability to link order records, and no
effect on the time the data would be
made available to regulators as
compared to the Rule 613 approach.1209
The Exemption Request also states that
there may be accuracy and reliability
gains if the exemption reduces errors
that may otherwise occur if brokerdealers were required to re-engineer
their allocation handling systems and
business processes to meet the
requirements of Rule 613.1210
However, the Rule 613 approach
would provide regulators access to
allocations linked to specific
disaggregated orders, which is not
possible under the approach in the Plan.
The Exemption Request notes that
linking particular allocations to
particular order lifecycles would be
inaccurate in some circumstances, such
as when many orders are allocated to
many customers.1211 The Commission is
soliciting comment on whether such
information would necessarily be
inaccurate, and whether requiring the
linking of allocations to order lifecycles
would reduce accuracy for several
reasons. First, in cases in which one
order is allocated to one customer, the
Rule 613 approach would provide an
improvement in accuracy over the
approach proposed in the CAT NMS
Plan because the Rule 613 approach
would allow the Central Repository to
accurately link such allocations to order
a reduction in implementation cost for the top three
tiers of CAT Reporters of $525 million as compared
to the Rule 613 approach. See Exemptive Request
Letter, supra note 16, at 31.
1208 See Exemptive Request Letter, supra note 16,
at 28 (‘‘[T]his approach . . . introduces an artificial
relationship between any one execution and one
allocation. . . . Although, . . . the ultimate
allocation of the shares executed that result from
[an] aggregated order may be useful for regulatory
surveillance purposes, tying these allocations to
multiple different executions is of little regulatory
benefit.’’).
1209 Id. at 30.
1210 Id.
1211 See id. at 28–30.
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lifecycles whereas the approach
proposed in the CAT NMS Plan might
not. Under the CAT NMS Plan, for
regulators to link the allocations to the
order lifecycles, they would need to
construct an algorithm that would rely
on less information than the Central
Repository would have under the Rule
613 approach. As a result, these
regulator linkages would likely be less
accurate than a Central Repository
linkage. The Commission preliminarily
believes that this is true for cases in
which one order is allocated to many
customers and when many orders are
linked to one customer. For the manyto-many allocations, in which many
customer orders are grouped and
worked by the market participant using
many orders to acquire the aggregate
position ultimately used to fill the
customer orders, the Commission notes
that broker-dealers likely already
maintain records that allow them to
ensure that the allocations receive fair
prices based on market executions. The
Commission is soliciting comment on
whether such information might be
sufficient to link the many allocations to
the many orders executed in an accurate
manner. Such information would
greatly aid investigations of fair
allocations because it would allow
regulators to reconstruct the manner in
which allocations occur.
The Commission preliminarily
believes that the Rule 613 approach
would increase the costs of compliance
with the CAT NMS Plan. According to
industry feedback collected by the
Participants, the Rule 613 approach
would require broker-dealers to
undertake a major re-engineering of
their middle and back office systems
and processes.1212 The Participants
estimate a reduction in implementation
cost over the Rule 613(c)(7)(vi) Baseline
for the top three tiers of CAT Reporters
of $525 million; consequently, the
Commission preliminarily believes that
this alternative would cost at least $525
million more than the estimated costs of
the CAT NMS Plan to implement.1213
The Participants indicated that they
have consulted with the bidders and the
industry in compiling this analysis.1214
e. Time Stamp Granularity
The Commission is soliciting
comment on how an alternative
approach—the Rule 613 approach—to
time stamps on ‘‘Manual Order Events’’
might impact the costs and benefits of
1212 Id.
at 27.
at 31.
1214 See id. at 30–31.
1213 Id.
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the Plan.1215 Rule 613(c)(7) and Rule
613(d)(3) require time stamps with a
minimum granularity of one
millisecond on all order events.1216 The
Participants requested an exemption
from the requirement in Rule 613(d)(3)
that for Manual Order Events each CAT
Reporter record and report details for
Reportable Events with time stamps that
‘‘reflect current industry standards and
[are] at least to the millisecond.’’ 1217
The Commission granted exemptive
relief to the SROs to allow the approach
to recording and reporting time stamps
for Manual Order Events described in
the Exemption Request to be included
in the CAT NMS Plan and subject to
notice and comment.1218
Pursuant to the exemptive relief
granted by the Commission, the CAT
NMS Plan provides that: (1) Each CAT
Reporter would record and report
Manual Order Event time stamps to the
second; (2) Manual Order Events would
be identified as such when reported to
the CAT; and (3) CAT Reporters would
report in millisecond time stamp
increments when a Manual Order Event
is captured electronically in the relevant
order handling and execution system of
the CAT Reporter (‘‘Electronic Capture
Time’’).1219 On the other hand, the Rule
613 approach would require that CAT
Reporters record and report details for
Manual Order Events with time stamps
that are at least to the millisecond, as
required by Rule 613(c)(7) and Rule
613(d)(3). The Commission
preliminarily believes that the Rule 613
approach would increase the costs of
implementing the CAT NMS Plan while
providing little regulatory benefit
relative to the current approach.
The Participants maintain in the
Exemption Request that there would be
little benefit, and possibly some adverse
consequences, of capturing Manual
Order Event time stamps in
milliseconds.1220 They note that
determining the time of a manual event
is inherently imprecise, due to the
limits of human reaction time in
completing a transaction and the time
1215 ‘‘Manual Order Events’’ are defined to mean
‘‘non-electronic communication[s] of order-related
information for which CAT Reporters must record
and report the time of the event.’’ See CAT NMS
Plan, supra note 3, at Section 1.1.
1216 See 17 CFR 242.613(c)(7) (requiring use of
time stamps pursuant to 17 CFR 242.613(d)(3)); 17
CFR 242.613(d)(3) (requiring time stamp granularity
be ‘‘at least to the millisecond’’).
1217 See 17 CFR 242.613(d)(3); Exemptive Request
Letter, supra note 16, at 32.
1218 See Exemption Order, supra note 18, at
11869.
1219 See CAT NMS Plan, supra note 3, at Section
6.8.
1220 See Exemptive Request Letter, supra note 16,
at 33.
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required to manually record the
event.1221 They claim human reaction
time to visual stimulus is on the order
of 400–500 milliseconds, making
millisecond time stamps imprecise.1222
The Commission preliminarily agrees
that attempting to record the precise
millisecond in which a manual event
occurred would necessarily be
imprecise. The Commission also
preliminarily agrees that potential
adverse consequences could arise from
relying on time stamps with a
misleading level of precision.1223
The Participants discussed the costs
and benefits of the proposed exemption
in their Exemption Request. They
estimated a minimum total cost to the
industry of $10.5 million based on the
cost of advanced OATS-compliant
clocks with granularity of one second,
and noted that clocks with millisecond
granularity would likely be more
expensive if available.1224 The
Participants also noted that the industry
was consulted through the DAG and an
unsuccessful attempt was made to find
a commercially available time stamping
device with millisecond granularity.1225
Based on this information, the
Commission preliminarily believes the
Rule 613 approach to Manual Order
Events would increase certain costs
associated with the implementation and
operation of CAT as compared to the
Plan as filed without providing any
significant additional benefit.
2. Alternatives to Certain Specific
Approaches in the CAT NMS Plan
The Commission has analyzed
alternatives to specific approaches in
the CAT NMS Plan with respect to clock
synchronization, time stamps, error
rates, the time within which errors must
be corrected, the funding model,
requirements regarding listing exchange
symbology, data accessibility standards,
and intake capacity levels.
a. Clock Synchronization
The Commission is soliciting
comments on alternate approaches to
clock synchronization as compared to
those proposed in the CAT NMS Plan.
1221 Id.
at 37.
1222 Id.
1223 The Commission notes that Manual Order
Events are not clearly and exhaustively defined,
and the definitions may not be available until the
Technical Specifications are published. It may be
possible for the Plan Processor to classify some
types of order events as Manual Order Events that
were not considered to be a Manual Order Event for
the purposes of this analysis. This creates a degree
of uncertainty as to whether the Rule 613 approach
might yield some regulatory benefit.
1224 See Exemptive Request Letter, supra note 16,
at 36–37.
1225 Id. at 35.
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First, the Commission is soliciting
comment on alternatives to the Plan’s
one-size-fits-all definition of ‘‘industry
standard.’’ Under these alternatives,
‘‘industry standard’’ would be defined
in terms of the standard practices of
different segments of the CAT Reporters,
or by looking at information other than
current industry practices. These
alternative approaches could result in
clock offset tolerances shorter than the
CAT NMS Plan’s proposed 50
millisecond standard for some or all
CAT Reporters. The Commission
preliminarily believes that these
alternatives could substantially increase
the benefits of CAT in regulatory
activities that require event sequencing,
such as analysis and reconstruction of
market events, as well as market
analysis and research in support of
policy decisions, and cross-market
surveillance, examinations,
investigations, and other enforcement
functions.1226
Second, the Commission is soliciting
comment on two additional alternatives
that could allow for more cost-effective
clock synchronization standards. In
particular, the Commission is soliciting
comment on modifying the requirement
to document clock synchronization
activities such that only events that
require clock adjustment would be
required to be documented, and
modifying the clock synchronization
requirement such that clocks would not
have to be synchronized at times when
systems are not recording time-sensitive
CAT Reportable Events, such as orders
originated outside of market hours when
they are not immediately actionable.
The Commission preliminarily believes
that reduced clock synchronization
logging requirements might significantly
reduce ongoing costs associated with
clock synchronization compliance as
compared to the Plan as filed, without
losing any additional material
information. In addition, the
Commission preliminarily believes that
more flexible clock synchronization
standards outside of regular and
extended trading hours may also reduce
costs without a material loss to the
ability of regulators to sequence order
events as compared to the Plan as filed,
without losing any additional material
information. Each of these alternatives
is outlined below.
(1) Alternative Clock Synchronization
Standards
Rule 613(d)(1) requires
synchronization of business clocks for
the purposes of recording the date and
time of Reportable Events consistent
1226 See
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with industry standards.1227 The CAT
NMS Plan describes the ‘‘industry
standard’’ in terms of the technology
adopted by the majority in the
industry.1228 The Plan therefore bases
its clock synchronization standard on
current practices of the broker-dealer
industry generally, and provides that
one standard would apply to all CAT
Reporters. The Commission is soliciting
comment on an alternative
interpretation of ‘‘industry standard’’
that would consider the standard
practices of different segments of the
CAT Reporters for the purposes of
setting the clock synchronization
requirements. The Commission is also
soliciting comment on an alternative
that would define industry standard by
looking at information other than
current industry practice; for example,
the most accurate technology currently
available in the industry, or the
standard recommended by a particular
authority or industry group.
First, the Commission is soliciting
comment on an alternative definition of
industry standard that would consider
the standard practices of different
segments of CAT Reporters. Under this
alternative, all systems within market
participants that process CATReportable Events would be required to
comply with a clock synchronization
requirement reflecting an industry
standard particular to that market
participant’s segment of the industry.
Currently, the Commission lacks the
information necessary to reach a
preliminary conclusion regarding the
appropriate industry standards for all
subsets of the industry. Specifically,
neither the FIF Clock Offset Survey nor
the Plan provides comprehensive data
on the clock synchronization practices
of firms within each of the relevant
subsets of the industry, and the
Commission has no data from which it
can independently estimate the cost
differential because the Commission is
not aware of any such data available to
it at this time. However, the
Commission is soliciting comment on
this approach, which it believes would
result in a clock offset tolerance of less
than 50 milliseconds for some market
1227 The Commission did not define the term
‘‘industry standard’’ in Rule 613. In the Adopting
Release, the Commission noted that it expected the
Plan to ‘‘specify the time increment within which
clock synchronization must be maintained, and the
reasons the plan sponsors believe this represents
the industry standard.’’ See Adopting Release,
supra note 9, at 45774.
The benefits of alternative clock offset tolerances
discussed in this Section may be dependent on time
stamp granularity requirements. Related
alternatives are discussed in Section IV.H.2.b, infra.
1228 See CAT NMS Plan, supra note 3, at
Appendix C, Section 12(p).
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participants. The Commission seeks
comment on the current practices for
clock synchronization in various
segments of the industry, including but
not limited to broker-dealers that are
introducing firms, institutional firms,
retail firms that accept customer orders
electronically, registered market makers
and principal trading firms, as well as
service bureaus hosting order
management systems, exchanges and
ATSs, and branches of broker-dealers
that predominantly handle manual
orders. The Commission also seeks
comment on the costs and benefits of
requiring varying clock offset tolerances
within the industry.
The Commission notes that the
current practices for exchanges and
Execution Venues may differ from the
industry standard for broker-dealers as
defined by the Plan, and current
practices for certain systems within
broker-dealers may vary by the system
within the broker-dealers. For example,
a small clock offset tolerance may be
nearly universally adopted for systems
like ATSs that operate a matching
engine, while systems involved in
manual entry of orders may typically
have larger clock offset tolerances. By
defining industry standard based on
practices of the broker-dealer industry
generally, the Plan does not account for
these differences.
Other information now available for
the Commission and the public to study,
particularly information from the FIF
Clock Offset Survey, shows that several
of the survey respondents that have a
current clock offset tolerance of one
second are clearing firms or service
bureaus.1229 According to the same
survey, current clock offset tolerances
vary from one second to five
microseconds among the broker-dealers
surveyed with 22% of respondents
having multiple clock offset tolerances
across their systems.1230 Further, the
FIF Clock Offset Survey shows that the
firms with multiple clock offset
tolerances typically engage in multiple
lines of business. The fact that some
broker-dealers maintain clock offset
tolerances at different levels within the
firm suggests that these broker-dealers
believe that clock precision is more
important for some systems;
furthermore, based on conversations
with market participants,1231 the
Commission preliminarily believes that
market participants strategically
1229 See
FIF Clock Offset Survey, supra note 127.
Section IV.D.2.b(2)B.i, supra for more
information regarding the distribution of brokerdealer clock offset tolerances.
1231 Based on FIF-organized conversations with
broker-dealers and service bureaus. See supra note
880.
1230 See
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upgrade certain systems and reallocate
older technology within the firm to
applications where up-to-date
technology is less critical.1232
Finally, exchanges and ATSs, as well
as the SIPs, may have current clock
offset tolerances that are significantly
different from the clock offset tolerances
at broker-dealers and could therefore
achieve finer clock offset tolerances at
lower cost than broker-dealers.1233
According to FIF, all exchange matching
engines meet a clock offset tolerance of
50 milliseconds or less while NASDAQ
states that all exchanges that trade
NASDAQ securities have clock offset
tolerances of 100 microseconds or
less.1234 In conversations with
Commission Staff, the Participants
stated that absolute clock offset on
exchanges averages 36 microseconds,
further suggesting that certain business
activities warrant smaller clock
synchronization tolerances.1235
Given this information, the
Commission recognizes the possibility
that some business systems and some
CAT Reporter types would rarely be
responsible for recording the date and
time of reportable events and also
recognizes that the time stamp precision
of such rare events might not be as
critical as for other events. For example,
a system that routes customer orders to
market centers may be considered
critical for sequencing market events,
while a system that facilitates manual
input of orders received by telephone
may not. Conversely, the clock
synchronization practices of some CAT
Reporters may be more critical to the
overall benefits of CAT or could be less
costly to implement. For example, a
service bureau that provides an orderhandling system hosted on its own
servers is likely to route orders for many
market participants and its clock
synchronization practices would, thus,
be critical to event sequencing. On the
other hand, the precision of time stamps
from systems of an isolated brokerdealer that routes customer orders to its
service bureau or another broker-dealer
for market access and conducts no
1232 Systems that have greater clock offset
tolerances may have technology that is too old to
support smaller clock offset tolerances. The
Commission preliminarily believes that if a shorter
clock offset tolerance is important to these brokerdealers, they would update their systems to support
newer technology capable of smaller clock offset
tolerances.
1233 See supra notes 441 and 442. Specifically, the
NASDAQ SIP Web site implies that exchanges
reporting to the NASDAQ SIP synchronize their
systems to 100 microseconds.
1234 See Section IV.D.2.b(2)B.i, supra for more
information on clock offset tolerances of exchanges
and the SIPs.
1235 See supra note 436.
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proprietary trading may be less critical
to event sequencing, especially if the
receiving system at the service bureau
would record a high-precision time
stamp when the order is received.
Furthermore, instituting higher clock
precision at a single service bureau
would be less costly than instituting
that same level of clock precision at the
service bureau and all of its brokerdealer customers as is required by the
Plan as filed.
Relative to the proposed clock
synchronization standard, the
Commission preliminarily believes that
an alternative approach that would
consider the standard practices of
different segments of the industry for
the purposes of setting the clock
synchronization requirements, and
would require a smaller clock offset
tolerance than in the Plan for certain
business systems that are more critical
to being able to accurately sequence
order events, could have significant
benefits. In other words, the
Commission preliminarily believes that
some business systems may be
responsible for time stamping more
time-sensitive order events than others,
where more time-sensitive orders are
those for which precise time stamps are
more critical for event sequencing.
The Commission does not currently
have the information necessary to
specify which particular types of
business system handle more timesensitive orders because neither the FIF
Clock Offset Survey nor the Plan
provides this data. The Commission has
no data from which it can
independently estimate this because the
Commission is not aware of any such
data available to it. However, the
Commission recognizes the potential for
such an approach. For example, it is
possible that almost all of the order
origination events, routing events,
modification events, and execution
events, which are likely to be more
time-sensitive than other CAT
Reportable Events, occur on systems at
broker-dealers that conduct certain
types of businesses. The businesses that
seem most likely to record these timesensitive events include: Introducing
broker-dealers; institutional brokerdealers; retail broker-dealers that accept
customer orders electronically;
registered market makers; principal
trading firms; service bureaus that host
order management systems; exchanges;
and ATSs.
Further, some systems collect order
events that either do not require a
granular time stamp; other systems
would not be required to record order
events in real time. An example would
be regional branches of broker-dealers
that only handle manual orders which
require a time stamp to the second until
the broker enters the order into an
electronic system. If the order entry hits
a centralized system quickly, then
perhaps the clock precision of the
centralized system may be sufficient for
sequencing.
The Commission is also soliciting
comment on an alternative approach
that would define industry standard by
looking at information other than
current industry practices; for example,
by considering the most accurate
technology currently available in the
industry, or the standard recommended
by a particular industry group or
authority. Defining industry standards
by majority practices may have the
unintended effect of setting a standard
that delays adopting advances in
technology. The Commission
preliminarily believes that this
alternative approach could result in
defining an industry standard for clock
synchronization that would require a
clock offset tolerance for all CAT
Reporters that is lower than the 50
millisecond standard required by the
Plan. The Commission seeks comment
on any appropriate definitions of
‘‘industry standard’’ with respect to
clock synchronization, including the
costs and benefits of using any
alternative definitions of ‘‘industry
standard’’ for the purposes of setting
clock synchronization requirements.
The Commission also seeks comment on
whether a definition of ‘‘industry
standard’’ could set a maximum clock
offset tolerance with an expectation that
each CAT Reporter would be
responsible for smaller clock offsets if
the CAT Reporter is technically capable
of such clock offsets.
The Commission conducted an
analysis to assess the benefits of
alternative approaches to defining
industry standard that would result in
smaller clock offset tolerances for some
or all segments of CAT Reporters. The
Commission evaluated the percentage of
unrelated events that can potentially be
sequenced under various clock offset
tolerances, including the 50 millisecond
tolerance outlined in the CAT NMS
Plan. The Commission estimates that
approximately 7.84% of unrelated
orders for listed equities and 18.83% of
unrelated orders for listed options can
be accurately sequenced using a clock
offset tolerance of 50 milliseconds.1236
The Commission augmented this
analysis by conducting a clock
synchronization analysis to examine
certain alternative clock offset
tolerances from those examined in the
FIF Clock Offset Survey.1237 Table 10
shows the results of the Commission’s
analysis as a percentage of unrelated
order events for equities that could be
sequenced under various alternative
clock offset tolerance.
TABLE 10—SEQUENCING ACCURACY OF UNRELATED EVENTS BY CLOCK OFFSET TOLERANCE
Percentage of unrelated
events that can be sequenced
Clock offset tolerance
Equities
(%)
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50 milliseconds ................................................................................................................................................
5 milliseconds ..................................................................................................................................................
1 millisecond ....................................................................................................................................................
100 microseconds ............................................................................................................................................
1236 See Section IV.E.1.b(2)A, supra. In general,
events occur with such frequency that a 50
millisecond clock synchronization standard would
not be sufficient to sequence all orders; see also
CAT NMS Plan, supra note 3, at Appendix C,
Section A.3(c) n.110 (‘‘Events occurring within a
single system that uses the same clock to time
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stamp those events should be able to be accurately
sequenced based on the time stamp. For unrelated
events, e.g., multiple unrelated orders from
different broker-dealers, there would be no way to
definitively sequence order events within the
allowable clock drift as defined in Article 6.8 [of the
CAT NMS Plan].’’).
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7.84
16.51
22.08
42.47
Options
(%)
18.83
35.54
50.70
78.42
1237 See Section IV.D.2.b(2)B, supra, for
information on the Commission’s clock offset
tolerance analysis. Specifically, the analysis says
that an order event can be sequenced if its time
stamp is at least twice the clock offset tolerance
from any other event on another venue.
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The Commission’s analysis suggests
that approximately 16.51% of unrelated
order events for equities and 35.54% of
unrelated order events for options could
be sequenced under a clock offset
tolerance of 5 milliseconds, 22.08% of
orders events for equities and 50.70% of
order events for options could be
sequenced under a clock offset tolerance
of 1 millisecond, and 42.47% of order
events for equities and 78.42% of orders
events for options could be sequenced
under a clock offset tolerance of 100
microseconds. Given these results, the
Commission believes that requiring a
smaller clock offset tolerance than the
Plan’s proposed 50 milliseconds for
some segments of the industry could
improve the accuracy of event
sequencing.
Relative to the Plan’s proposed
universal 50 millisecond clock offset
tolerance, the Commission preliminarily
believes that requiring a smaller clock
offset tolerance for some segments of the
industry would likely increase the costs
of the CAT NMS Plan. Table 11 is from
page C–126 of the CAT NMS Plan, and
it provides the costs of the Plan’s
proposed clock offset tolerance (50
milliseconds) and alternative tolerances
(100 microseconds, 5 milliseconds, and
1 millisecond).1238 These costs assume
that each clock offset tolerance is
applied to all business systems.
However, as noted above, the alternative
the Commission is soliciting comment
on is to require smaller clock offset
tolerance for certain segments of the
industry. So, the estimates below
provide an upper bound on the
potential cost if the Commission
requires smaller clock offset tolerances
in some cases.
TABLE 11—IMPLEMENTATION AND ANNUAL ONGOING COST ESTIMATES PER FIRM BY CLOCK OFFSET TOLERANCE
Estimated
implementation
cost
(per firm)
Clock offset tolerance
50 milliseconds ................................................................................................................................................
5 milliseconds ..................................................................................................................................................
1 millisecond ....................................................................................................................................................
100 microseconds ............................................................................................................................................
The Commission understands that the
cost figures in Table 11 do not net out
the current ongoing costs of clock
synchronization, which are
$203,846.1239 Table 12 shows the
preliminary estimated annual ongoing
cost increase (ongoing costs minus
current costs) to comply with various
alternative clock offset tolerances as
well as the clock offset tolerance
specified in the Plan.
TABLE 12—ANNUAL ONGOING COST
INCREASES PER FIRM BY CLOCK
OFFSET TOLERANCE
Clock offset tolerance
50 milliseconds .................
5 milliseconds ...................
1 millisecond .....................
100 microseconds ............
Estimated
annual
ongoing cost
increases
(per firm)
$109,197
278,763
330,937
579,487
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Based on these estimates, the
Commission estimated aggregate clock
synchronization costs for broker-dealers
1238 Table 11 is from the CAT NMS Plan, supra
note 3, at Appendix C, Section D.12(p) and it draws
its numbers from the FIF Clock Offset Survey. See
supra note 127.
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$554,348
887,500
1,141,667
1,550,000
Estimated
annual
ongoing cost
(per firm)
$313,043
482,609
534,783
783,333
consistent with the estimation of their
total CAT compliance costs as detailed
in the Costs Section above.1240 The
Commission assumed that 171 brokerdealers would incur the full ongoing
costs and full implementation costs
indicated in the FIF Clock Offset
Survey.1241 Conversely, the remaining
1,629 broker-dealers that are already
assumed to use service bureaus would
rely on the 13 service bureaus to
facilitate their clock synchronization,
and therefore would pay lower
implementation and ongoing costs than
those in the FIF Clock Offset Survey.
The Commission understands that
broker-dealers that rely on service
bureaus for order management systems
and regulatory reporting usually use
servers operated by their service
bureaus and most would therefore not
directly bear the costs to implement and
comply with clock synchronization
standards.1242 For the implementation
costs for those relying on service
bureaus for clock synchronization, the
Commission assumes 1⁄4 FTE for 50
milliseconds, 1⁄2 FTE for 5 milliseconds,
3⁄4 FTE for 1 millisecond, and 1 FTE for
100 microseconds. Under these
assumptions, broker-dealers that
outsource their order management and
regulatory reporting obligations would
incur costs (shown in Table 13) that are
significant relative to the estimated
implementation costs for broker-dealers
that handle order management and
reporting obligations in-house.1243
1239 See FIF Clock Offset Survey, supra note 127,
at 16. This is based on current practice of the
broker-dealers who responded to the survey.
1240 See Section IV.F.3.a, supra.
1241 The 171 broker-dealers comes from the total
of Insourcers, ELPs, and Options Market Makers.
1242 See Section IV.F.1.d, supra for a discussion
of service bureaus passing costs on to clients.
1243 As in the Costs Section above (see Section
IV.F.1.c(2)C), monetizing the FTE costs involves
multiplying the number of FTEs by $424,350. See
infra note 1487.
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TABLE 13—IMPLEMENTATION COST
ESTIMATES PER FIRM FOR OUTSOURCING FIRMS BY CLOCK OFFSET
TOLERANCE
Clock offset tolerance
50 milliseconds .................
5 milliseconds ...................
1 millisecond .....................
100 microseconds ............
Estimated
implementation
costs (per firm)
for outsourcing
firms
$106,000
212,000
318,000
424,000
With these implementation costs, the
Commission aggregated implementation
and ongoing costs as indicated in Table
14.
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TABLE 14—AGGREGATED IMPLEMENTATION AND ANNUAL ONGOING COST ESTIMATES BY CLOCK OFFSET TOLERANCE
Estimated
aggregate
implementation
cost 1244
Clock offset tolerance
50 milliseconds ................................................................................................................................................
5 milliseconds ..................................................................................................................................................
1 millisecond ....................................................................................................................................................
100 microseconds ............................................................................................................................................
Table 14 suggests that the Plan’s clock
synchronization costs for the
approximately 1,800 expected CAT
Reporters would be approximately $268
million in estimated implementation
costs and about $25 million in ongoing
costs. To estimate the relative costs of
each alternative compared to the Plan,
the Commission subtracted the costs of
the Plan from the costs of each
alternative.
Table 15 provides estimates for how
the costs of alternative clock offset
tolerances applied to all business
$268
497
714
956
million
million
million
million
Estimated
aggregate annual
ongoing cost 1245
$25
63
75
131
million.
million.
million.
million.
systems would be greater than those of
the CAT NMS Plan if a different clock
offset tolerance applied to all CAT
Reporters.
TABLE 15—AGGREGATED IMPLEMENTATION AND ANNUAL ONGOING COST INCREASES BY CLOCK OFFSET TOLERANCE
Estimated
increase in
implementation
cost
(aggregate)
Clock offset tolerance
5 milliseconds ..................................................................................................................................................
1 millisecond ....................................................................................................................................................
100 microseconds 1246 .....................................................................................................................................
$229 million
446 million
688 million
Estimated
increase in
annual
ongoing cost
(aggregate)
$38 million.
50 million.
106 million.
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The Commission does not have
information on the implementation and
ongoing costs to exchanges or ATSs of
various alternative clock offset
tolerances because trading venues were
not included in the FIF Clock Offset
Survey. The Plan does not provide this
data, and the Commission has no other
data from which it can independently
estimate this, because the Commission
is not aware of any such data available
to it. However, exchanges may currently
synchronize their clocks to within 100
microseconds.1247 Consequently, the
Commission preliminarily believes that
any of the alternative clock offset
tolerances discussed above would not
materially increase costs to Participants
relative to the costs they would incur
under the Plan because their current
clock synchronization procedures seem
to satisfy any of the proposed clock
offset tolerances. In the case of ATSs,
these systems tend to be operated by
large and complex broker-dealers that
are unlikely to rely upon service
bureaus to perform their clock
synchronization responsibilities.
Consequently, the Commission
preliminarily believes that cost
estimates for the broker-dealers
surveyed by FIF are likely to include
broker-dealers that operate ATSs and
already reflect any additional clock
synchronization costs attributable to
operating ATSs. However, if Execution
Venues (including ATSs) were to have
smaller clock offset tolerances than
other broker-dealer systems, brokerdealers operating ATSs would be
expected to incur higher clock
synchronization costs than other brokerdealers.
As noted above, the Commission is
soliciting comment on both an
alternative that would consider the
standard practices of different segments
of the CAT Reporters for the purposes
of setting the clock synchronization
requirements, and an alternative that
would define industry standard by
looking at information other than
current industry practice. The
Commission preliminarily believes that
if the CAT NMS Plan used an
alternative interpretation of ‘‘industry
standard’’ that considered the standard
practices of different segments of the
CAT Reporters for the purposes of
setting the clock synchronization
requirements, the cost increases
associated with smaller clock offset
tolerances might be lower than
estimates presented in the tables above.
In particular, if the clock
synchronization requirements were only
applied to the most time-sensitive
systems, the costs increases would be
lower than those presented.1248 In
addition, if the only broker-dealers
required to comply with clock
synchronization requirements were the
ones accepting, routing, and executing
orders, the costs could be lower than
those presented above. The Commission
does not have the information necessary
to quantify how much lower the costs
would be under an alternative that
applied different clock offset tolerances
to different segments of the CAT
Reporters, because neither the Plan nor
1244 $268 million ≈ 171*$554,348 +
1,629*0.25*$424,350. $497 million ≈ 171*$887,500
+ 1,629*0.5*$424,350. $714 million ≈
171*$1,141,667 + 1,629*0.75*$424,350. $956
million ≈ 171*$1,550,000 + 1,629*$424,350.
1245 $25 million ≈ 171*$109,197 +
13*4.2*$109,197. $63 million ≈ 171*$278,763 +
13*4.2*$278,763. $75 million ≈ 171*$330,937 +
13*4.2*$330,937. $131 million ≈ 171*$579,487 +
13*4.2*$579,487. 13 is the number of service
bureaus and 4.2 is the ratio between the total
incremental ongoing charges to broker-dealers and
the total incremental ongoing costs to service
bureaus derived from the cost estimates above. See
Section IV.F.2, supra.
1246 The Commission recognizes that the benefits
of clock synchronization of less than one
millisecond are limited unless the time stamps are
also more granular. Requiring more granular time
stamps than the 1 millisecond in the Plan would
increase the costs relative to those in Table 15.
1247 See Section IV.D.2.b(2)B.i, supra; see also
supra notes 435 and 436.
1248 This belief is also consistent with information
in the FIF Clock Offset Survey. See supra note 127,
at 20. Specifically, the survey found that
respondents would save on costs if the alternative
clock offset tolerance were applied only to ‘‘serverside trading systems.’’
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the FIF Clock Offset Survey break the
cost estimates for changes in clock
synchronization requirements down by
business system types, and the
Commission has no data from which it
can independently estimate this,
because the Commission is not aware of
any such data available to it.
The Commission recognizes that a
clock offset tolerance smaller than 50
milliseconds would have differential
cost across market participants. An
alternate approach to defining ‘‘industry
standard’’ that took into account the
standard practices of different segments
of CAT Reporters could mitigate those
costs. All FIF Clock Offset Survey
respondents that provided technology
information use technology capable of
50 millisecond clock offset tolerances,
but 36% of those respondents do not
employ a technology capable of clock
offset tolerances smaller than 50
milliseconds. Some survey respondents
indicated that they employ software that
is not capable of clock offset tolerances
of less than 50 milliseconds or that
desktop PCs would be a challenge with
such clock offset tolerances. An
alternative definition of ‘‘industry
standard’’ that considered the practices
of various segments of the industry
could apply smaller clock offset
tolerances to a subset of business
systems; the Commission expects that
applying smaller clock offset tolerances
to a subset of systems would cost less
than applying such clock offset
tolerances to all systems. However, the
benefits could also be limited in terms
of the percentage of unrelated events
that could potentially be sequenced, as
compared to a definition of ‘‘industry
standard’’ that a set a lower clock offset
tolerance for all CAT Reporters.
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(2) Alternative Logging Procedures
Rule 613(d)(1) requires synchronizing
business clocks that are used for the
purposes of recording the date and time
of any Reportable Event. The CAT NMS
Plan further requires that Participants
and other CAT Reporters maintain a log
recording the time of each clock
synchronization that is performed and
the result of such synchronization,
specifically identifying any
synchronization initiated in response to
an observed discrepancy between the
CAT Reporter’s business clock and the
time maintained by the NIST exceeding
50 milliseconds.1249 According to the
FIF Clock Offset Survey, costs in logging
the synchronization events is a
1249 See CAT NMS Plan, supra note 3, at
Appendix C, Section A.3(c).
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significant driver of overall clock
synchronization costs.1250
A few survey respondents indicated
that the number of logged events would
go up significantly with a shorter clock
offset, which requires a costly logging
system.1251 Therefore, the Commission
is soliciting comment on an alternative
that would require logging only
exceptions to the clock offset (i.e.,
events in which a market participant
checks the clock offset and applies
changes to the clock).1252 While logging
every event, including clock offset
checks, may be cost effective with
longer clock synchronization tolerances,
the Commission questions whether
logging each event is cost efficient with
finer clock offset tolerances, given the
large number of events expected for the
proposed and alternative clock
synchronization standards. For
example, if an investigation is relying
on properly sequenced events, the
investigation only would need to
examine exception files to ensure the
precision of the time stamps. The FIF
Clock Offset Survey suggests that
relaxing the logging requirement could
reduce the burdens associated with
clock synchronization.
The Commission cannot quantify the
reduction in costs from this alternative
because it lacks data on the proportion
of clock synchronization costs that are
associated with event logging and the
proportion of those costs that could be
avoided by alternative event logging
requirements. The Commission
preliminarily believes that any
reduction in benefits from this
alternative, as compared to the CAT
NMS Plan’s approach for clock
synchronization, would be minor
because the inclusion of clock
synchronization checks that required no
clock adjustment would not improve
regulators’ ability to sequence events.
The Commission notes, however, that
enforcement of clock synchronization
requirements may be more difficult
without comprehensive logging
requirements that document firms’
actions to comply with requirements;
consequently, relaxing the logging
1250 Other cost drivers include hardware and
software costs and costs in ensuring reliability.
1251 See FIF Clock Offset Survey, supra note 127,
at 19. One survey respondent noted that a log file
for a one second clock offset would require 1
gigabyte of compressed storage each day but clock
offset log files for 50 millisecond clock offset would
increase the daily data storage 10 fold. Another
survey respondent noted that its current system logs
86,000 events per day and that the proposed clock
offset would require logging 35 million events per
day; see also CAT NMS Plan, supra note 3, at
Appendix C, Section A.3(c).
1252 This is one of the alternatives suggested in
the FIF Clock Offset Survey. See supra note 127.
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requirement may also reduce incentives
to comply with the clock
synchronization requirements.
(3) Alternative Clock Synchronization
Hours
The Commission is soliciting
comment on alternative requirements
for the times during which clock
synchronization is required that would
provide more flexibility than the
requirements of the Plan. The clock
synchronization requirement presented
in the CAT NMS Plan makes no
provision for reduced clock
synchronization requirements at times
during which systems are not
performing tasks that produce timesensitive CAT Reportable Events; in the
FIF Clock Offset Survey, respondents
identified that there were certain times
during which maintaining clock
synchronization is more costly. Survey
respondents noted they would incur
additional costs in maintaining clock
offset ‘‘99.9% of the time’’ or with
‘‘100% reliability’’ and costs associated
with managing ‘‘clock synch instability
. . . after server reboot.’’ The
Commission notes that maintaining
99.9% or 100% reliability may be
unnecessary during times when the
system does not record Reportable
Events. Further, the Commission
understands that generally a system
does not record Reportable Events
during server reboots. Therefore, the
Commission preliminarily believes that
an alternative that does not require
synchronizing clocks when servers are
not recording Reportable Events or
when precise time stamps are not as
important to sequencing, such as
outside of normal trading hours, would
not materially reduce benefits. Given
the responses to the FIF Clock Offset
Survey, the Commission preliminarily
believes that this alternative could
reduce costs because synchronization
activities and log entries related to those
events would not be as beneficial
outside of normal trading hours. The
Commission does not have information
necessary to quantify the cost reduction
because cost information available to
the Commission is not broken down by
time of day or server status.
b. Time Stamp Granularity
The Commission is soliciting
comment on the benefits and costs of an
alternative time stamp granularity
requirement of less than one
millisecond. Rule 613(d)(3) requires
time stamp granularity consistent with
industry standards and, as discussed
above, the Plan requires time stamps
that reflect industry standards and are at
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least to the millisecond.1253
Furthermore, the Plan requires
Participants to adopt rules requiring that
CAT Reporters that use time stamps in
increments finer than milliseconds use
those finer increments when reporting
to the Central Repository.1254 As
discussed in the Commission’s analysis
of alternative clock offset tolerance
requirements, millisecond time stamps
may be inadequate to allow sequencing
of the majority of unrelated Reportable
Events across markets.1255 In addition,
as discussed below, the Commission
recognizes that the benefits of more
granular time stamps would be limited
unless the Plan were to require a clock
offset tolerance far lower than is
proposed in the Plan.
The Commission recognizes that
regulators’ ability to sequence events is
dependent on both clock offset tolerance
and time stamp granularity. If the Plan
requires any or all CAT Reporters to
implement clock offset tolerances of less
than a millisecond, time stamps
reported at the millisecond level would
not capture the additional precision of
the smaller clock offset tolerance and
much of the benefits of this smaller
clock offset requirement would be lost
if time stamps were rounded or
truncated due to a millisecond time
stamp granularity requirement. The
Commission notes that provisions in the
Plan require that any Participant that
utilizes time stamps in increments finer
than the minimum required to be
reported under the Plan utilize such
increments in reporting data to the
Central Repository. Also, the
Commission notes that a submillisecond clock offset tolerance would
not in itself require the reporting of submillisecond time stamps to the Central
Repository.1256
A requirement for time stamps at
resolutions finer than 1 millisecond
would entail certain costs. Because
some market participants already use
time stamps at the sub-millisecond level
and will be required to report this
information under the Plan, such a
requirement is unlikely to create
significant additional costs for CAT
Reporters. Furthermore, while some
exchanges and broker-dealers are
already required to report time stamps
at the sub-millisecond level,
implementation costs are likely to vary
across CAT Reporters. The Plan does
not provide data on the cost of requiring
1253 See
Section IV.H.1.e, supra.
1254 See CAT NMS Plan, supra note 3, at
Appendix C, Section A.3(c).
1255 See Section IV.E.1.b(2)B, supra.
1256 See CAT NMS Plan, supra note 3, at Section
6.8(b).
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sub-millisecond time stamps, and the
Commission has no other data from
which it can independently estimate
this, because the Commission is not
aware of any such data currently
available to it.
Requiring sub-millisecond time stamp
reporting would bring certain benefits.
However, the Commission preliminarily
believes these benefits may be limited
without requiring clock offset tolerances
of less than one millisecond as well. For
example, with a 50 millisecond clock
offset tolerance, a time stamp can only
pinpoint the time of an event to a 100
millisecond range.1257 In this case, submillisecond time stamps provide little
benefit to regulators attempting to
determine the order of events occurring
in venues with separate clocks.
However, even with a 1 millisecond
clock offset tolerance, a sub-millisecond
time stamp granularity requirement
could provide some benefit for
regulators attempting to sequence
events. For example, two events
recorded at times 12:00:00.0001 and
12:00:00.0021 on different venues can
be sequenced with a 1 millisecond clock
offset, while if these time stamps were
rounded or truncated to 12:00:00.000
and 12:00:00.002, they could not be
sequenced with certainty, because it
would be possible that both events
occurred at 12:00:00.001. If the Plan
were to require sub-millisecond clock
offset tolerances, the additional benefits
of this sub-millisecond clock offset
tolerance would be significantly limited
without time stamps that were similarly
granular.
c. Error Rate
The Commission is soliciting
comment on the benefits and costs of
alternative maximum Error Rates. The
Commission does not possess sufficient
data to quantitatively assess the costs
and benefits of an alternative to the
maximum Error Rates specified in the
CAT NMS Plan. However, the
Commission is using information
provided in the CAT NMS Plan to
perform a qualitative assessment of the
proposed maximum Error Rates.1258
The potential benefits from a lower
maximum Error Rate than proposed in
the CAT NMS Plan could be improved
accuracy in the data, and a quicker
retirement of OATS and other regulatory
data reporting systems.1259 However,
1257 See
Section IV.H.2.a(1), supra.
CAT NMS Plan, supra note 3, at
Appendix C, Section A.3(b).
1259 The Commission recognizes that a lower
Error Rate could also lead to the same accuracy
level as the proposed Error Rate, but more
violations and consequences from those violations.
This is likely to occur if the Error Rates in the Plan
1258 See
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the CAT NMS Plan states that errors
would be de minimis by the morning of
day T+5, therefore the improvement in
accuracy does not seem to affect the
data available to regulators starting on
day T+5.1260 Accordingly, the benefit of
improved accuracy as a result of a lower
maximum Error Rate comes primarily
from regulatory use of the data prior to
day T+5. While the Commission
believes that most regulatory uses
would involve data after day T+5,
regulators also have essential needs for
uncorrected data prior to day T+5. For
example, as discussed in the Benefits
Section, the availability of unprocessed
data within three days of an event could
improve the Commission’s chances of
preventing asset transfers from
manipulation schemes.1261 Therefore, a
lower Error Rate in data available before
day T+5 could, in certain regulatory
contexts, be meaningful.
Second, because OATS currently has
a lower observed error rate than the
CAT NMS Plan, a reduction in CAT
Error Rates may accelerate the
retirement of OATS because the SROs
may find it advantageous to retain
OATS until CAT Data is at least as
accurate as OATS data. However, the
CAT NMS Plan does not require a
particular target Error Rate before OATS
can be retired and the Plan does not
estimate any cost savings associated
with the retirement of OATS or other
systems, beyond those resulting from
the end of a period of costly duplicative
reporting. Therefore, any acceleration in
the retirement of OATS would not
provide a direct benefit resulting from a
lower Error Rate. Further, the error rates
in OATS may not be comparable to the
Error Rates in CAT Data because the
algorithm that identifies errors in CAT
Data is unlikely to be identical to the
algorithm that identifies errors in OATS.
In particular, the Plan requires some
types of validation checks on CAT Data
that OATS data does not go through.
These additional validation checks will
help to ensure the accuracy of
information types not currently
collected by OATS such as Customer
Account Information, Firm Designated
are lower than what every broker-dealer could
reasonably obtain on the timeline; as a
consequence, because broker-dealers are reporting
the most accurate data they are currently able to
report, a lower Error Rate cannot improve data
quality, but it can produce additional costs in the
form of penalties levied by the Plan Processor.
However, as long as at least one broker dealer can
reasonably obtain lower Error Rates than those in
the Plan, a lower Error Rate would improve
accuracy because the lower Error Rate would
incentivize that broker-dealer to reduce its initial
errors.
1260 See id. at Appendix C, Section A.3(b), n.102.
1261 See Section IV.E.3.d(3), supra.
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ID, and options information, or to
ensure the accuracy of information
necessary for the order lifecycle linking
process.1262 Consequently, the
Commission cannot be sure of the
specific CAT Error Rate that would
accelerate retirement of OATS. In
addition, the Commission does not have
cost estimates for different maximum
Error Rates because such information
was not provided in the CAT NMS Plan.
While reducing error rates may have
these potential benefits, the Commission
recognizes that it would also come at a
cost. In particular, reducing Error Rates
could increase the implementation and
ongoing costs incurred by CAT
Reporters and the Central Repository as
compared to costs estimated in the Plan,
as filed. To achieve lower Error Rates,
some CAT Reporters might have to run
additional validation checks on their
data before sending their data to the
Central Repository. Such CAT Reporters
would incur additional costs to code
and test any additional validation
checks prior to implementation. CAT
Reporters might also have to monitor
and adjust their validation checks to
respond to Error Rate reports from the
Central Repository, incurring additional
ongoing costs. However, the CAT
Reporters already achieving lower Error
Rates might not require additional
checks, adjustments, or monitoring.
Additionally, the Commission
preliminarily believes that costs
incurred by CAT Reporters to reduce
error rates prior to sending data to the
Central Repository may ultimately result
in lower costs associated with correcting
errors after the data is sent. The
Commission also notes that the costs
incurred would depend in part on the
format in which data is reported to the
Central Repository, which has yet to be
determined. If a solution is chosen that
requires the reformatting of data, and
this reformatting results in errors, then
the costs could be higher. Conversely, a
solution that does not require data
reformatting could result in a lower
Error Rate with lower costs to CAT
Reporters.
Additionally, the Plan contains
provisions that require the Plan
Processor to monitor and address Error
Rates. For example, the Plan Processor
is required to notify each CAT Reporter
that exceeds the maximum Error Rate,
and provide the specific reporting
requirements that they did not fully
meet. Requiring a lower Error Rate
could increase the costs of these
1262 See CAT NMS Plan, supra note 3, at
Appendix C, Sections A.1(a)(iii) and A.3(a) and
Appendix D, Section 7.2 for a discussion of the
types of required validations of CAT Data.
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provisions, as compared to the costs
estimated in the Plan as filed, because
more CAT Reporters would exceed the
Error Rate at which penalties are levied
by the Plan Processor.
d. Error Correction Timeline
The Commission is soliciting
comment on an alternative error
correction timeline to that proposed in
the CAT NMS Plan. The CAT NMS Plan
proposes a deadline of T+3 for
submission of corrected data to the
Central Repository.1263 The CAT NMS
Plan also discusses recommendations
from FIF and SIFMA to impose a day
T+5 deadline, which is the current
standard for OATS.1264 The Participants
state in the CAT NMS Plan that they
believe it is important to retain the day
T+3 deadline in order to make data
available to regulators as soon as
possible.1265
The Commission is soliciting
comment on whether the CAT NMS
Plan should impose a day T+5 deadline
rather than the day T+3 deadline. In
comment letters submitted to the
Participants, FIF and SIFMA maintain
that the day T+3 deadline may not be
feasible and would prove costly to
market participants.1266 The alternative
of a day T+5 deadline could reduce the
costs relative to the CAT NMS Plan for
CAT Reporters. The Commission
preliminarily believes that the delays in
regulatory access from a day T+5
deadline would significantly reduce
regulators’ ability to conduct
surveillance and slow the response to
market events relative to the CAT NMS
Plan. However, the Commission also
believes that day T+5 error correction
may reduce costs to industry relative to
the CAT NMS Plan, although the
Commission is unaware of any cost
estimates that have been provided to
date.
e. Funding Model
The mechanism by which CAT fees
are allocated is important because it can
potentially disadvantage particular
business models. Although the Plan
does not discuss the final details of the
CAT funding model, it does provide
some details, including a set of funding
principles that the Participants have
1263 See CAT NMS Plan, supra note 3, at
Appendix C, Section A.1(a)(iv).
1264 Id.
1265 Id.
1266 See Letter from Manisha Kimmel, Managing
Director, FIF, to the Participants, dated November
19, 2014, available at https://www.catnmsplan.com/
industryfeedback/p601972.pdf; Industry
Recommendations for the Creation of a
Consolidated Audit Trail (CAT), SIFMA, March 28,
2013, available at https://www.catnmsplan.com/
industryfeedback/p242319.pdf.
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discussed with the Development
Advisory Group. The Commission is
soliciting comment on alternative
mechanisms for allocating fees across
Execution Venues and across Industry
Members.
The CAT NMS Plan presents details
regarding an allocation of costs between
the Execution Venues and the other
Industry Members (i.e., broker-dealers),
but does not detail the proportions of
fees to be borne by each group. Under
the CAT NMS Plan, fees would be tiered
by activity levels, with market
participants within a given tier
incurring a fixed fee.1267 In the case of
Execution Venues (exchanges and
ATSs), market share of share volume
would determine the tier of the
Execution Venue. In the case of brokerdealers, fees would be allocated by
message traffic. The Commission is
cognizant that ATSs are operated by
broker-dealers, complicating this
division of fees between broker-dealers
and Execution Venues. This is
discussed further below.
(1) Unified Funding Models
The Commission is soliciting
comment on several unified funding
models as alternatives to the Plan’s
bifurcated funding model. One of the
alternative funding models the
Commission is soliciting comment on is
a unified funding model in which
Central Repository costs are allocated
across all market participants (including
Execution Venues) by message traffic.
The Commission expects that message
traffic will be a primary cost driver for
the Central Repository, because
transactional volume (which is cited by
the Plan as a primary cost driver for the
Central repository) is highly correlated
with message traffic. Consequently,
assessing CAT costs on market
participants by message traffic may have
the benefit of aligning market
participants’ incentives with the
Participants’ stated goal of minimizing
costs. However, the Commission is also
aware that while a broker-dealer’s
choice of business model is likely to
determine its level of message activity,
the majority of an exchange’s message
traffic is passive receipt of quote
updates.1268 Because quotes must be
updated on all exchanges when prices
change, exchanges with low market
share are likely to have more message
1267 For a discussion of the economic effect of the
tiered structure, see IV.F.4.c, supra.
1268 Using MIDAS data, Commission staff
analyzed the number of equity exchange proprietary
feed messages and trades during the week of
October 12, 2015. The message per trade ratio
varied across exchanges from 38.46 to 987.17, with
a median of 57.21.
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traffic (incurring CAT fees) per executed
transaction (generating revenue).1269
Consequently, a model that charges
exchanges for the passive receipt of
messages from broker-dealers is likely to
disadvantage the smaller exchanges
relative to a model that charges for
market share of executions.
The Commission is also soliciting
comment on an alternative approach to
reporting market maker quotations on
exchanges that could address this
concern. In this approach, market
makers (both equity and options) would
not need to report their quotation
updates. Exchanges (both equity and
options) would report quotation sent
times (as detailed in the Plan with
regard to Options Market Makers and
the Exemption Request 1270). Exchanges
would not be assessed message traffic
fees for these quotation updates; the
broker-dealers who sent the quotes
would be assessed for this message
traffic. All other message traffic,
regardless of which market participant
initiated it, would be assessed fees
associated with CAT using a common
rate formula.
The Commission is soliciting
comment on this alternative for a
number of reasons. First, it ties CAT
costs to a primary driver of the
magnitude of Central Repository costs:
message traffic.1271 Second, it
substantially reduces the number of
messages stored in the Central
Repository. Third, it avoids
disadvantaging smaller exchanges
whose message traffic may be relatively
large compared to their execution
volume. Finally, this alternative avoids
bifurcated fee approaches that may
cause one Execution Venue to be
relatively cheaper than another due to
the manner in which CAT fees are
assessed and may cause conflicts of
interest for broker-dealers routing
customer orders.1272 However, this
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1269 Commission
staff data analysis confirms this
for the smallest exchanges. Except for the smallest
exchanges, the trade to message ratios range from
about 0.016 trades for every quote update to about
0.026 trades for every quote update and appear
constant across market share levels. However, the
smallest exchanges by market share have only about
0.001 trades for every quote update to about 0.009
trades for every quote update.
1270 See Exemption Order, supra note 18, at 7–8.
1271 See Section IV.F.1.a, supra, stating that
transactional volume is a primary driver of the costs
of the Central Repository. The Commission
preliminarily believes that transactional volume is
highly correlated with message traffic.
1272 For example, if the CAT funding model were
set to make ATS trades significantly more costly
relative to exchange trades, the exchanges might
benefit from increased market share because ATSs
might be compelled to increase their access fees to
offset the proportionately higher CAT charges that
they would incur. In the extreme, some ATSs might
cease operations or seek to register as exchanges.
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alternative assesses CAT fees based on
messages rather than the revenuegenerating activity of trades. This may
provide market participants with
incentives to change their business
models to reduce CAT fees, which could
lead to reduced quotation activity that
could be detrimental to market liquidity
levels. Furthermore, because the vast
majority of message activity originates
with broker-dealers, this approach
necessarily shifts most of the ultimate
CAT funding burden to broker-dealers.
The Commission also is soliciting
comment on a second alternative
approach to CAT funding, a unified
funding approach where the tiers in the
funding model are based on market
share of share volume. Under this
approach, all market participants (both
exchanges and broker-dealers) would
qualify for a tier based on reported share
volumes. Share volume would count
equally toward the tier regardless of the
Execution Venue selected by the brokerdealer originating the order. However,
this approach does not align the costs of
operating and maintaining the Central
Repository, which would largely
depend on message traffic, with the fees
charged to market participants.
Furthermore, it is possible that some
Execution Venues could compete for
order flow by not passing this fee on to
their customers, generating the same
limitations as discussed above for the
funding model in the Plan.1273
A third alternative would be for the
funding model to impose fees on every
individual trade instead of imposing a
fixed fee by tier. This approach has
several benefits. First, the Commission
preliminarily believes that
implementation costs for this approach
are likely to be lower than other
alternatives because infrastructure
already exists to levy fees on each trade
(this is the mechanism by which Section
31 fees are levied).1274 Second, it ties
Most ATSs do not disseminate quotation
information; exchanges are required to do so.
Reorganizing an ATS as an exchange therefore
involves significant changes to its business model.
Consequently, the Commission believes it unlikely
that many ATSs would register as exchanges to
avoid proportionately higher CAT charges. If certain
types of trades have lower costs when their trades
execute on an ATS, their trading costs would
increase if they are forced onto exchanges. If some
trades would not happen in the absence of an ATS,
this would drive down overall trading volumes (as
opposed to a shift from ATS to exchange). Lower
overall trading volumes would be considered
welfare-reducing, as they indicate foregone gains
from trade.
1273 See Section IV.F.4.c, supra.
1274 Under Section 31 of the Act, 15 U.S.C. 78ee,
and Rule 31 thereunder, 17 CFR 240.31, SROs such
as FINRA and the national securities exchanges
must pay transaction fees to the SEC based on the
volume of securities that are sold on their markets.
These fees are designed to recover the costs
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fees to the revenue-generating activity of
trading, rather than quoting activity,
which results in those more likely to
afford high fees paying the higher fees.
Quoting activity provides liquidity to
the market, but often does not
necessarily result in an execution that
can bring revenue to the market
participant placing the quote;
consequently, levying CAT fees on
trades avoids making a generally
desirable activity (posting liquidity)
more costly.1275 Third, it avoids the
problems that may accompany a
bifurcated approach to CAT cost
allocation. Because the fee is levied
regardless of where the trade occurs, it
limits incentives of market participants
to route to exchanges to avoid message
traffic fees within broker-dealers or to
avoid exposing an order in multiple
venues to try to find non-displayed
liquidity. These liquidity-seeking
activities might reduce a client’s trading
costs, but they also potentially incur
message traffic fees, creating a conflict
of interest for broker-dealers.
Assessing fees directly on trades
entails certain costs as well. First, it
does not provide incentives for market
participants to limit their message
traffic, which is a primary cost-driver
for the Central Repository. Second, it
does not provide the benefits of a tiered
approach, which the CAT NMS Plan
lists as including transparency,
predictability and ease of
calculation.1276
(2) Bifurcated Funding Models
The Commission is also soliciting
comment on alternatives to the funding
model proposed in the CAT NMS Plan
that would also be bifurcated. One
alternative would be to allocate CAT
costs to broker-dealers by market share
of share volume while retaining the
Plan’s funding model for Execution
incurred by the government, including the SEC, for
supervising and regulating the securities markets
and securities professionals. The SROs have
adopted rules that require their broker-dealer
members to pay a share of these fees. Brokerdealers, in turn, may impose fees on their customers
that provide the funds to pay the fees owed to their
SROs. See SEC, Section 31 Transaction Fees
(September 25, 2013), available at https://
www.sec.gov/answers/sec31.htm.
1275 Some quoting behavior may be costly to the
market, for example spoofing or layering. This
analysis assumes that message traffic fees associated
with this undesirable behavior would not be
sufficient to reduce that behavior. If that
assumption is false, funding models that assign fees
to quotes have the additional benefit of reducing
disruptive activity. The Commission preliminarily
believes that the benefits of reducing disruptive
quoting activity via levying fees on quotes would
not justify the costs of reducing beneficial quoting
activity through the same fees.
1276 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(v)(B).
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Venues.1277 A benefit of this alternative
would be to avoid disincentives to
liquidity provision operations,
particularly for infrequently traded
securities and high volatility securities.
A disadvantage of this approach would
be that it does not align the fees charged
to a CAT Reporter with the costs those
CAT Reporters impose on the Central
Repository in terms of message traffic,
potentially resulting in disproportionate
charges to CAT Reporters because high
message traffic broker-dealers would
pay no more than low message-traffic
broker-dealers with the same level of
trading activity.
The Commission is further soliciting
comment on the alternative of requiring
the CAT NMS Plan to treat ATSs only
as broker-dealers for funding purposes,
instead of treating ATSs as Execution
Venues. Under this alternative, firms
that operate ATSs would not be charged
for both their ATS’s market share of
share volume (like an exchange) and its
message traffic (as a broker-dealer).1278
1277 SROs currently fund their regulatory data
collection through a number of mechanisms. The
Commission notes that FINRA does not charge its
members for OATS directly. Rather, it is funded
from FINRA’s regulatory budget, which is collected
from its members through various membership fees.
The options exchanges charge an Options
Regulatory Fee (‘‘ORF’’), which is a pass-through
exchange fee collected by OCC clearing members on
behalf of the U.S. option exchanges. The stated
purpose of the fee is to assist in offsetting exchange
costs relating to the supervision and regulation of
the options market (e.g., routine surveillance,
investigations, and policy, rule-making, interpretive
and enforcement activities). The fee was first
adopted by CBOE in 2008. See Securities Exchange
Act Release No. 58817 (October 20, 2008), 73 FR
63744 (October 27, 2008). Subsequently, PHLX
(Securities Exchange Act Release No. 61133
(December 9, 2009), 74 FR 66715 (December 16,
2009), ISE (Securities Exchange Act Release No.
61154 (December 11, 2010, 74 FR 67278 (December
18, 2009)), BOX (See Securities Exchange Act
Release No. 61388 (January 20, 2010), 75 FR
4431(January 27, 2010)), NYSEAmex (Securities
Exchange Act Release No. 64400 (May 4, 2011), 76
FR 27114 (May 10, 2011), NYSE Arca (Securities
Exchange Act Release No. 64399 (May 4, 2011), 76
FR 27114 (May 10, 2011), NASDAQ (Securities
Exchange Act Release No. 66158 (January 13, 2012),
77 FR 3024 (January 20, 2012, C2 (Securities
Exchange Act Release No. 67596 (August 6, 2012),
77 FR 47902 (August 10, 2012)), MIAX (Securities
Exchange Act Release No. 68711 (January 23, 2013),
78 FR 6155 (January 29, 2013)), ISE Gemini
(Securities Exchange Act Release No. 70200 (August
14, 2013), 78 FR 51242 (August 20, 2013)), and
BATS (Securities Exchange Act Release No. 74214
(February 5, 2105), 80 FR 7665 (February 11, 2015))
also adopted an ORF. The OFR is currently assessed
to customer orders at a rate of $0.0417 per U.S.
exchange listed option contract. The ORF is
assessed on all trades, both buys and sells. Further,
FINRA charges fees for reporting to TRACE. Certain
fees are based on the number of users and type of
connection a firm has to the system, and others are
based on size of the transaction. See FINRA Rule
7730.
1278 As explained in Section IV.F.4.c, supra, the
Commission preliminarily believes that the
bifurcated funding model proposed in the Plan
results in differential CAT costs between Execution
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Instead, the firm operating the ATS
would pay fees based on the ATS’s
message traffic as part of its operations
as a broker-dealer, rather than as an
Execution Venue as well, for fee
purposes. As described in Section
IV.F.4.d, the Commission preliminarily
believes that under the current funding
model in the CAT NMS Plan, the cost
differentials that result might create
incentives for broker-dealers to route
order flow to minimize costs, creating a
potential conflict of interest with
broker-dealers’ investor customers, who
are likely to consider many facets of
execution quality (such as price impact
of a trade and probability of execution
in a venue in which the order is
exposed) in addition to any of these
costs that are passed on to them.1279 The
Commission is aware that this
alternative would, in effect, shift part of
the Central Repository funding costs
from broker-dealers to Execution
Venues because volume transacted on
ATSs would not be assessed a portion
of the Execution Venue funding burden
and this portion would instead be
allocated to exchanges. Furthermore, the
Commission is aware that it is possible
that under this alternative approach,
ATSs might pay less in fees than
similarly situated exchanges, which
could disadvantage exchanges relative
to ATSs.
The Commission is also soliciting
comment on the alternative approach of
not charging broker-dealers for message
traffic to and from their ATSs while still
assessing fees to ATSs as Execution
Venues or exchange broker-dealers for
their message traffic. Under this
alternative, broker-dealers that operate
ATSs would pay trading volume based
fees on their ATSs volume in the same
manner as exchanges’ fees are assessed.
However, the message traffic to and
from the ATS would not be included in
the message traffic used to calculate fees
assessed to the broker-dealer that
sponsors the ATS. The Commission
preliminarily believes this alternative
would help mitigate the broker-dealer
routing incentives discussed above. The
Commission is aware that because the
volume executed on ATSs would be
included in the portion of Central
Repository funding assigned to
Execution Venues, this funding
Venues because it would assess fees differently on
exchanges and ATSs for two reasons. First, message
traffic to and from an ATS would generate fee
obligations on the broker-dealer that sponsors the
ATS, while exchanges incur no message traffic fees.
Second, broker-dealers that internalize off-exchange
order flow, generating off-exchange transactions
outside of ATSs, would face a differential funding
model compared to ATSs and exchanges.
1279 See CAT NMS Plan, supra note 3, at Article
VIII.
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approach would not shift part of the
funding burden assigned to Execution
Venues away from ATSs (and the
broker-dealers that operate them) to
exchanges as the previous alternative
would.
The Commission preliminarily
believes that either of these ATS-related
funding alternative approaches would
avoid disadvantaging ATSs relative to
similarly situated exchanges, and would
be less likely to result in the conflicts of
interest in routing described above.
Currently, the Commission lacks
sufficient details on the fee structure to
make this determination, because the
fee structure has not yet been finalized.
The Commission is also soliciting
comment on the alternative of excluding
ATS volume from TRF volume for
purposes of allocating fees across
Execution Venues. Under this
alternative, SROs that operate TRFs
(currently only FINRA) would not pay
Execution Venue fees for volume that
originated from an ATS execution. This
alternative would avoid the problem of
double-counting ATS volume as share
volume, which originates because each
ATS trade is counted for fee-levying
purposes as share volume associated
with an ATS, then counted again as
share volume when the trade is printed
to a TRF. However, the Commission
notes that other over the counter
volume, such as occurs when orders are
executed off-exchange against a brokerdealer’s inventory, would be assessed
share volume fees while the message
traffic that resulted in this execution
would also be subject to fees through
the broker-dealers that had order events
related to these transactions. This
contrasts to executions that occur on
exchanges, where the venue that
facilitates the execution does not pay
fees for message traffic that led to the
execution.
The Commission is also soliciting
comment on the alternative of not
treating the Trade Reporting Facilities
(‘‘TRFs’’) as FINRA Execution Venues.
TRFs capture ATS share volume, which
is already subject to fees allocated to
Execution Venues, and non-ATS offexchange share volume, which is
subject to CAT fees allocated to brokerdealer message traffic. Consequently,
under the approach in the Plan, the
activity that generates a TRF trade
report is already assessed CAT fees
through the broker-dealers that facilitate
the trade, or the ATSs that served as the
Execution Venue. Under this alternative
approach, FINRA would not pay any
fees directly into the Central Repository,
and broker-dealers would only incur
fees directly levied on them by the
Operating Committee, rather than also
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indirectly paying the TRF fees passed
on to them by FINRA. If FINRA does not
pay fees directly to the Central
Repository, this could alter its
incentives with respect to matters of
cost voted on by the Operating
Committee. However, it is possible that,
since FINRA represents the viewpoints
of its broker-dealer members, its
incentives would be similar under
either approach.
The CAT NMS Plan would allocate
net profit or net loss from the operation
of the CAT equally among the
Participants, regardless of size, which
could advantage small exchanges in the
event of a profit and disadvantage small
exchanges in the event of a loss. This
could negatively impact competition if
the cost differentials are significant
enough to alter the set of services that
some competitors offer. As an
alternative, the Commission is soliciting
comment on whether the profit or loss
from operating CAT should be allocated
across Participants by market share of
share volume, consistent with how the
CAT costs would be allocated under the
Plan.1280 The Commission preliminarily
believes that this alternative would limit
the possibility of extraordinary profits
or losses from CAT resulting in a
disproportionate advantage or
disadvantage to exchanges with low
trading volume.
Finally, the Commission is soliciting
comment on requiring a strictly variable
funding model, rather than the fixedtiered model in the CAT NMS Plan.
Under a variable funding model, each
trade or message is subject to a fee,
rather than a broker-dealer incurring a
fixed fee that depends on that brokerdealer’s volume tier.1281 The
Commission preliminarily believes that
this alternative might increase
administrative costs of the CAT NMS
Plan as compared to an approach that
uses the fixed-tiered funding model.
However, the Commission also
preliminarily believes that the fixedtiered funding model can create
incentives for market participants to
change their behavior to avoid fees
when their activity is near the boundary
between two tier levels.1282 The
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1280 Id.
1281 For example, under a fixed-tiered funding
approach, any broker-dealer with no more than
10,000 CAT Reportable Events in a given month
might pay $100 in fees, even a broker-dealer
reporting a single event. Under a strictly variable
funding approach, every broker-dealer CAT
message might be assessed one cent in fees. For a
broker-dealer reporting 10,000 CAT Reportable
Events in a given month, the same fee burden
would be incurred, but a broker-dealer reporting a
single CAT reportable event would pay only one
cent.
1282 See Section IV.F.3.b, supra.
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Commission preliminarily believes that
a strictly variable funding model could
reduce inefficiencies resulting from
market participants changing their
behavior to move into a lower fee tier.
f. Requiring Listing Exchange
Symbology
The Commission is soliciting
comment on an alternative to the CAT
NMS Plan that would allow CAT
Reporters to report using their existing
symbologies, rather than listing
exchange symbology. The Plan requires
the Plan Processor maintain a complete
symbology database, including the
historical symbology. The CAT NMS
Plan also requires CAT Reporters to
report data using the listing exchange
symbology format, which would be used
in the display of linked data. The CAT
NMS Plan also requires Participants to
provide the Plan Processor with the
issue symbol information, and
validation of symbology would be part
of data validation performed by the Plan
Processor.1283
The Commission preliminarily
believes that, in light of the proposed
requirement for the Plan Processor to
maintain a complete symbology
database, the requirement that CAT
Reporters report using listing exchange
symbology may result in unnecessary
costs to CAT Reporters. Therefore, the
Commission preliminarily believes that
the alternative of allowing CAT
Reporters to use their existing
symbologies for reporting purposes
could significantly reduce the costs for
exchanges and broker-dealers to report
order events to the Central Repository,
as compared to the approach in the CAT
NMS as filed, without a significant
impact on the expected benefits of the
Plan or the costs to operate the Central
Repository.
Currently, Execution Venues handle
complex symbology in different
fashions. Some common stocks, for
example, have multiple classes of
shares. Exactly specifying the issue to be
traded involves identifying the ticker
symbol and sometimes a share class. On
some venues, the convention is that
these security types are reported
without a delimiter in the symbol; other
venues use a delimiter, and delimiters
can vary across venues. For example,
assume a firm has a listing symbol of
ABC, and has two classes of shares, A
and B. An issue might be ‘‘ABC A’’ on
one venue, ‘‘ABC_A’’ on another, and
‘‘ABCA’’ on a third. This can cause
numerous problems for analyses that
extend beyond a single trading venue,
1283 See CAT NMS Plan, supra note 3, at
Appendix C, Section A.1(a).
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30769
particularly if ‘‘ABCA’’ is the complete
listing symbol for an unrelated security.
As mentioned in the Benefits Section,
the inclusion of the complete symbol
history of a security and the
requirement for queries, reports, and
searches to automatically collect the
appropriate data despite symbol
changes promotes accurate query
responses by ensuring the inclusion of
order events that might have been
excluded because of symbology
differences and by excluding order
events in unrelated securities. The
Commission preliminarily believes that
the CAT NMS Plan can achieve these
benefits without requiring CAT
Reporters to report using listing
exchange symbology.
As discussed in the Costs Section, one
potential cost driver to CAT Reporters is
the need to process reports before
submitting them to the Central
Repository.1284 If reports can contain
drop copies from an order management
system, CAT Reporters can aggregate
their drop copies and send them
without further processing the reports.
If, on the other hand, CAT Reporters
need to transform or add any fields to
the report, those CAT Reporters would
need to develop, test, and maintain code
to run the transformation, and they
would need to actually transform the
data at least once a day. If CAT
Reporters do not need to run this
transformation at all, they could save
money. The Commission preliminarily
believes that the requirement to report
in listing exchange symbology could be
the only requirement that necessitates
that CAT Reporters transform data
before reporting it to the Central
Repository.1285 Therefore, the
Commission preliminarily believes that
eliminating this requirement could
reduce costs relative to the CAT NMS
Plan as filed.
Some broker-dealers may already
have adequate computational resources
to run the transformation, whether at
once, in batches, or in real-time; others
could have to invest in such resources—
an investment that would be saved by
eliminating the requirement to use
listing exchange symbology. The degree
of cost savings would depend on any
requirements to transform the data prior
to reporting, which depends on the
allowable formats for transmission. The
CAT NMS Plan does not specify the
allowable formats or whether the
Central Repository would require a
fixed format. If the Technical
Specifications require a fixed format,
broker-dealers would most likely have
1284 See
1285 See
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to transform their data prior to reporting
it to the Central Repository regardless of
the requirement to use listing exchange
symbology, and the listing exchange
symbol requirement could add very
little to the reporting costs. Therefore,
the Commission recognizes significant
uncertainty in the cost savings
associated with this alternative.
Further, the Commission cannot
estimate the degree to which
eliminating this requirement could
reduce costs as compared to those in the
CAT NMS Plan as filed, because it lacks
the data to do so. The Plan assumes the
need to transform the data to match
exchange symbologies and therefore
does not separately itemize the cost for
transformation as a separate step in the
reporting process. The Commission has
no data from which it can
independently estimate the cost
differential because it depends on
information internal to each of a
heterogeneous group of CAT Reporters
(e.g., the symbologies their current
systems use and whether those are
readily transformed to match listing
exchange symbologies), which
information is not compiled or stored
anywhere and to which the Commission
therefore does not have ready access.
g. Data Accessibility Standards
The Commission is soliciting
comment on alternative approaches to
the manner in which the CAT NMS Plan
provides data access to regulators.
Section IV.E.1.c of the CAT NMS Plan
summarizes the Central Repository’s
requirements to provide access to
regulators. This access would include
both an online targeted query tool and
a user-defined direct query or bulk
extract.1286 The CAT NMS Plan also
specifies minimum standards the
Central Repository must meet, such as
capacity to support 3,000 minimum
regulatory users and minimum
acceptable response times for queries of
varying complexity and size.1287 The
CAT NMS Plan also requires that the
Plan Processor provide an open API that
allows use of regulator-supplied
common analytic tools. As discussed
above, the CAT NMS Plan could result
in many improvements to regulatory
activities such as surveillance,
examinations, and enforcement, but
these benefits may not be fully realized
if access to data is cumbersome or
inefficient.1288 The Commission does
not have information on the incremental
benefits and costs of each aspect of
1286 See CAT NMS Plan, supra note 3, at
Appendix C, Section A.2(c).
1287 Id. at Appendix C, Section A.1(b).
1288 See Section IV.E.2, supra.
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regulator access as would be necessary
to analyze specific alternatives to the
many data access standards in the CAT
NMS Plan.
The Commission is generally
soliciting comment on alternatives to
each minimum data accessibility
standard required in the CAT NMS
Plan. With multiple standards that
could each be adjusted in countless
ways, the set of possibilities is infinite,
which precludes their enumeration and
discussion within this analysis. Instead,
this Section discusses several examples
and requests comment on alternative
standards that might be adopted.
Because query response time standards
provide exact limits, the Commission
uses those to illustrate how changing
the standards could affect benefits and
costs. The CAT NMS Plan requires
query responses for various types of
queries of 5 minutes, 10 minutes, 3
hours, and 24 hours, where the simplest
queries involving scanning narrow sets
of data would be required to return in
5 minutes and complex queries
scanning multiple days of data and
returning large datasets would be
required to return within 24 hours.
The Commission notes that
particularly large and complex data
queries can take extensive computing
resources. While the benefits of direct
access to CAT Data depend on
reasonably fast query responses, the
Commission recognizes that faster query
response times come at a cost. The
Commission does not have detailed
information on significant breakpoints
in those costs to judge whether slightly
longer response times than those in the
Plan could significantly reduce the costs
of developing, maintaining, and
operating the Central Repository. For
example, the Commission does not
know whether a 48-hour response time
on a query of 5 years of data is
significantly less expensive than a 24
hour response time, but either
maximum response time would provide
a significant improvement in timeliness
over current data. Likewise, the
Commission does not know whether the
response times could be faster without
a significant increase in costs. The
Commission recognizes that the detailed
information on numerous other
minimum standards regarding access to
regulators is similarly unclear.
Therefore, the Commission requests
comment regarding all standards for
regulatory access and whether
technology creates natural breakpoints
in costs such that a particular
alternative could reduce the costs of the
Plan without significantly reducing
benefits or could increase benefits
without significantly increasing costs.
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h. Intake Capacity Levels
The Commission is soliciting
comment on alternatives to the intake
capacity level required in the CAT NMS
Plan. The CAT NMS Plan requires that
the Central Repository have an intake
capacity of twice historical peak daily
volume measured over the most recent
six years and the ability to handle peaks
beyond this Baseline level for short
periods.1289 In setting this requirement,
the Participants could have selected any
number of alternative intake capacity
standards.
The Commission performed an
analysis using MIDAS data and
determined that, for equities, the daily
message traffic volume would exceed
two times the maximum daily message
volume from the previous six years
(2010 through 2015) with a probability
of 0.033%, which amounts to the intake
exceeding capacity levels about once
every 81⁄3 years. Message volume
measures all equity messages, including
orders, order updates, executions and
cancellations, from MIDAS exchange
direct feeds, consolidated SIP feeds, and
a small portion of the FINRA ATS
feed.1290
The Commission preliminarily
believes that intake capacity level is
likely to be a primary cost driver for the
Central Repository.1291 In selecting a
standard, there is a trade-off between
additional cost for constructing and
operating the Central Repository and the
risk that increased volume could exceed
the Central Repository’s capacity. If the
capacity were exceeded, the
Commission preliminarily believes that
regulators’ access to CAT Data could be
1289 See CAT NMS Plan, supra note 3, at
Appendix D, Section 1.1.
1290 The Commission collected daily message
volume from MIDAS for six years (January 1, 2010
through November 19, 2015) and found that August
10, 2011 generated the highest message traffic with
8.6 billion messages. A Box-Cox transformation was
applied to the data to fit it into a normal
distribution. Using a probability density function to
fit the transformed data into a normal distribution,
the Commission found the probability that the daily
message volume would exceed 17.2 billion (twice
the maximum) messages is 0.033%. The MIDAS
data used are all equity messages between 4 a.m.
and 7 p.m. on trading days—including orders, order
updates, executions, and cancellations—from
exchange direct feeds, consolidated SIP feeds, and
a small portion of the FINRA ATS feed. MIDAS
does not receive messages before 4 a.m. and after
7 p.m. from its feed sources. The data is missing
AMEX feeds from January 1, 2010 through October
4, 2010; however, on average AMEX messages
represent only 0.26% of daily message volume from
all feeds.
1291 Transactional volume and the growth in
transactional volume is likely a primary driver of
the costs of the Central Repository. See Section
IV.F.1.a, supra. The Commission believes that
higher transactional volumes require higher intake
capacity levels, higher storage capacity, and higher
processing capacity.
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significantly delayed. The Commission
is cognizant that periods of heavy
market activity are more likely to be
periods with market events that would
require regulatory investigation, so the
risk that the Central Repository might
not be able to provide timely access to
data when it is most needed is
concerning.
The Commission is soliciting
comment on requiring a different intake
capacity level. Alternative intake
capacity levels would result in costs and
benefits that depend on the specific
alternative capacity level and whether it
is higher or lower than the proposed
level. For an alternative with a lower
intake capacity level, such as 1.5 times
the historic peak capacity level, the cost
of creating and operating the Central
Repository might be lower, but the risk
that the Central Repository would be
unable to meet regulator’s data needs
would be higher than under the CAT
NMS Plan, particularly following events
similar to the Flash Crash and August
24th, which created both a high volume
of trading records and a high demand
for timely regulatory analysis.
An alternative with a higher required
intake capacity level, such as 3 times
the historic peak capacity level, would
likely entail higher costs than the CAT
NMS Plan, but higher intake capacity
levels would reduce the risk of the
Central Repository being unable to meet
regulators’ data needs and thus increase
the benefits of the Plan.
The CAT NMS Plan does not provide
sufficient information for the
Commission to quantify the cost
difference between alternative intake
capacities and the intake capacity in the
CAT NMS Plan and there are no
analogous projects of this scope with
publicly-available data from bidding or
otherwise from which the Commission
could extrapolate.
3. Alternatives to the Scope of Certain
Specific Elements in the CAT NMS Plan
The Commission notes that Rule 613
sets forth the minimum elements the
Commission believes are necessary for
an effective consolidated audit trail.1292
The Commission also notes that it
adopted these elements after notice and
comment, including analyzing comment
letters submitted in response to the Rule
613 Proposing Release.1293 Moreover,
the Participants, pursuant to Rule 613,
analyzed and proposed for inclusion in
the CAT NMS Plan certain elements
after consultation with their members,
the Bidders and the DAG.1294
While the Commission and the SROs
have previously analyzed Rule 613,
including the elements to be included in
the CAT NMS Plan, the Commission
now has the Plan, together with the cost
and alternatives analysis provided by
the Participants. The Commission has
reviewed the Plan, including the cost
estimates, and has performed its own
economic analysis of the Plan. With the
benefit of having reviewed and analyzed
the Plan, the Commission believes that
it is reasonable to solicit comment on
alternatives to the scope of certain
elements of the CAT NMS Plan because
these alternatives could impact the cost
and benefits of CAT, and given the
passage of time, there may be market
developments that could affect those
costs and benefits that should be
evaluated. These alternatives include:
(1) Not requiring certain data fields that
are currently required by the Plan; (2)
requiring the Operating Committee to
consider including more primary market
transactions than it would otherwise be
required to consider under the Plan; (3)
removing from the Plan the OTC Equity
Securities recording and reporting
requirements; and (4) excluding certain
Customer information periodic update
requirements.
a. Data Fields
Rule 613 provides that the Plan must
require the reporting of certain data
fields.1295 It also gives discretion to the
Participants to require the reporting of
data fields beyond the minimum set of
fields mandated by Rule 613.1296 The
Commission is soliciting comment on
whether there should be changes to the
data fields that would be subject to CAT
reporting. Specifically, the Commission
is soliciting comment on whether any
data fields that would be subject to CAT
reporting under the Plan should be
excluded.
The Commission is soliciting
comment on whether any data fields
that would be subject to CAT reporting
under the Plan should be excluded. For
example, Rule 613 required the Plan to
include a unique customer identifier. As
discussed further in Section IV.H.1
above the Commission granted the
Participants an exemption from certain
requirements in Rule 613 so that the
Plan could include an approach
whereby each broker-dealer would
assign a unique Firm Designated ID to
each trading account, which would be
linked to a set of identifying
information.1297 The Commission
1295 See
1292 See
Adopting Release, supra note 9.
1293 See id.
1294 See CAT NMS Plan, supra note 3.
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17 CFR 242.613(c)(7).
1296 Id.
1297 Using the Firm Designated ID and the other
information identifying the Customer that would be
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30771
preliminarily believes that this
approach would reduce the costs of
requiring the customer identifier as
compared to the Rule 613 approach.1298
As an alternative, the Commission
could eliminate the requirement to
report customer identifiers. In the
Adopting Release, the Commission
recognized that the implementation of
the unique customer identifier
requirement might be complex and
costly, and that the reporting of a
unique customer identifier would
require SROs and their members to
modify their systems to comply with the
Rule’s requirements.1299 While the
Commission preliminarily believes that
eliminating the customer identifier
would reduce certain costs to industry
associated with the implementation and
operation of CAT as compared to the
Plan as filed, without providing any
additional material information, the
Commission preliminarily believes that
such a change would limit the benefits
of the Plan significantly. As the
Commission noted in the Adopting
Release for Rule 613, unique customer
identifiers are vital to the effectiveness
of the consolidated audit trail, and the
inclusion of unique customer identifiers
would greatly facilitate the
identification of the orders and actions
attributable to particular customers and
thus substantially enhance the
efficiency and effectiveness of the
regulatory oversight provided by the
SROs and the Commission. Further,
without the inclusion of unique
customer identifiers, many of the
potential benefits of a consolidated
audit trail would not be achievable.1300
The Commission could also consider
the alternative of excluding the
allocation time field from reporting
requirements in the Allocation Reports.
Although this field is not currently
required for recordkeeping, some
broker-dealers do already retain
allocation time information at the
subaccount level in their trade blotters,
though the Commission does not have
precise information on the prevalence of
this practice. The Commission
preliminarily believes that removing
allocation time would significantly
reported to the Central Repository, the Plan
Processor would then assign a unique Customer-ID
to each Customer. Upon original receipt or
origination of an order, broker-dealers would only
be required to report the Firm Designated ID on
each new order, rather than using the Customer-ID.
See Exemption Order, supra note 18, at 14–15.
Because the Plan Processor would still assign a
Customer-ID to each Customer under the Customer
Information Approach, the SROs are not requesting
an exemption from Rule 613(j)(5).
1298 See Section IV.H.1.b, supra.
1299 See Adopting Release, supra note 9, at 45756.
1300 Id.
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reduce the benefits of the Plan because
regulators currently undergo significant
difficulties to obtain allocation times
and the allocation times would be
useful for enforcement
investigations.1301 At the same time,
given the uncertainty in the current
practices and the lack of information on
the costs of this field in the Plan, the
Commission is not sure how significant
the cost savings of excluding the
allocation time field would be. The
Commission preliminarily believes that
the substantial benefits of having
allocation time at the subaccount level
available and relatively accessible for
regulatory activities warrants the costs
associated with requiring CAT Reporters
to include this field in CAT Data and
that these costs would be significantly
mitigated to the extent that CAT
Reporters already retain this
information.
The Plan requires both the CATReporter-ID for the broker-dealer routing
an order and the CAT-Reporter-ID for
the broker-dealer receiving a routed
order to be reported to the Central
Repository, both when the order is
routed and again when the routed order
is received. The Commission could
eliminate the requirement to report the
CAT-Reporter-IDs when the routed
order is received. However, while the
Commission preliminarily believes this
might reduce the CAT Reporting burden
on some broker-dealers as compared to
the Plan as filed, without providing any
additional material information, the
Commission noted in the Adopting
Release that it does not believe the
information reported when the order is
received would be duplicative. Instead,
the Commission noted that information
regarding when a broker-dealer received
a routed order could prove useful in an
investigation of allegations of best
execution violations to see if, for
example, there were delays in executing
an order that could have been executed
earlier.1302 In addition, the Commission
notes that if a market participant is
required to report when it receives an
order, regulators could solely rely on
information gathered directly from that
market participant when examining or
investigating the market participant.1303
The Commission also noted that it relies
on such data to improve its
understanding of how markets operate
and evolve, including with respect to
the development of new trading
practices, the analysis and
reconstruction of atypical or novel
1301 See
1302 See
Section IV.E.1.a, supra.
Adopting Release, supra note 9, at 45763.
1303 Id.
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market events, and the implications of
new market dynamics.1304
The Commission preliminarily
believes that, with respect to the
reporting of data fields required by Rule
613, the analysis in the Adopting
Release is still applicable and the
elimination of these data fields from the
Plan would result in a failure to achieve
many of the significant potential
benefits of the Plan. However, as noted
above, the costs or benefits of including
particular fields in the Plan as filed,
may have changed due to technological
advances and/or changes in the nature
of markets since Rule 613 was adopted.
The Commission is therefore soliciting
comment on the benefits and drawbacks
of eliminating these and any other
required data fields from the Plan.
b. Primary Market Transactions
The CAT NMS Plan does not require
the reporting of any primary market
information to the Central Repository.
However, as required by Rule 613(i), the
CAT NMS Plan commits to
incorporating a discussion of how and
when to implement the inclusion of
some primary market information into a
document outlining how additional
Eligible Securities could be reported to
the Central Repository (the ‘‘Discussion
Document’’), which would be jointly
provided to the Commission within six
months after effectiveness of the
Plan.1305 Additionally, as required by
Rule 613(a)(1)(vi), the Plan includes a
discussion of the feasibility, benefits
and costs of including primary market
transactions in the CAT NMS Plan.1306
In its discussion of primary market
transactions, the CAT NMS Plan states
that including some primary market
allocation information in the CAT NMS
Plan would provide significant benefits
without unreasonable costs, while other
allocation information would provide
marginal benefits at significantly higher
cost.1307 Specifically, the discussion in
the CAT NMS Plan divides the primary
market allocation information into two
categories: Top-account allocations and
subaccount allocations. Top-account
allocations refer to allocations during
the book-building process to
institutional clients and retail brokerdealers. These allocations are
conditional and can fluctuate until the
offering syndicate terminates. Topaccount institutions and broker-dealers
1304 Id.
1305 See CAT NMS Plan, supra note 3, at
Appendix C, Section C.9. Section 6.11 of the Plan
satisfies a requirement in 17 CFR 242.613(i) to plan
for expansion.
1306 17 CFR 242.613(a)(1)(vi); CAT NMS Plan,
supra note 3, at Appendix C, Section A.6.
1307 See id. at Appendix C, Section A.6(b)–(c).
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make the subsequent subaccount
allocations to the actual accounts
receiving the shares. The Plan
concludes that, with respect to primary
market information, only the
subaccount allocations would provide
significant benefits without
unreasonable costs if they were to be
incorporated into the CAT.
Based on that discussion, the Plan
states that ‘‘the Participants are
supportive of considering the reporting
of Primary Market Transactions, but
only at the subaccount level, and would
incorporate analysis of this requirement,
including how and when to implement
such a requirement, into their document
outlining how additional Eligible
Securities could be reported to the
Central Repository, in accordance with
SEC Rule 613(i) and Section 6.11 of the
Plan.’’ 1308 The Plan therefore would
limit the discussion of reporting
primary market transactions in the
Discussion Document to the subaccount
level. As an alternative to the approach
in the Plan, the Commission is soliciting
comment on whether to broaden the
required scope of the discussion of
primary market allocation information
in the Discussion Document to include
an analysis of incorporating both topaccount and subaccount information for
primary market transactions into the
CAT. The Commission preliminarily
believes that the potential benefits of
including top-account information in
the CAT could be significant and that
the costs of including top-account
information could be lower than what is
described in the CAT NMS Plan and
appropriate in light of significant
potential benefits. For these reasons, the
Commission preliminarily believes that
top-account information should not be
excluded from the Discussion
Document.
Some primary market information is
currently available to regulators. FINRA
collects primary market allocation
information on the initial and final list
of distribution participants in their
Distribution Manager. Based on
discussions with Participants, the
Commission understands that issuers of
IPOs are required to report primary
market allocations to broker-dealers
within the Distribution Manager, but
reported information does not contain
broker-dealer customer information on
those allocations. Primary market
allocations to market participants other
than broker-dealers can be voluntarily
reported to the system. FINRA uses this
system in the course of investigations in
response to complaints and in normal
1308 See CAT NMS Plan, supra note 3, at
Appendix C, Section A.6(c).
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examinations of broker-dealers. The
Commission can request data from the
Distribution Manager. When the
Commission or an SRO needs additional
primary market information, they
request it from underwriters and other
broker-dealers in the offering process.
These ad hoc data requests can take
weeks for underwriters to process and,
if requesting data from multiple
underwriters or other broker-dealers,
each could submit the data in a different
format or with different data definitions,
adding time to the process of combining
the data across underwriters.
Primary market information currently
assists regulators in examining
underwriting practices and surveilling
for violations of regulations regarding
allocations in primary offerings. The
information also is useful for
conducting market analysis and
research on policy issues such as
allocation decisions, flipping, and
secondary market price support and the
analysis and reconstruction of market
events such as the Facebook IPO or the
Vonage IPO.1309
The Commission preliminarily
believes that including both top-account
and subaccount allocation information
for primary market transactions in CAT
would make primary market
information that identifies customers
directly accessible to regulators, which
would be beneficial. In particular, topaccount information in addition to
subaccount information would be
necessary to surveil, without requesting
data from underwriters, for prohibited
activities in the book-building process
and would improve the efficiency of
investigations into such prohibited
activities. For example, including topaccount information in CAT Data would
provide regulators efficient access to
data relevant for investigations into tiein arrangements because regulators
1309 See Reena Aggarwal, Allocation of Initial
Public Offering and Flipping Activity, 68(1) Journal
of Financial Economics 111–135 (2003); Reena
Aggarwal, Manju Puri and N. Prabhala, Institutional
Allocation in Initial Public Offerings: Empirical
Evidence 57 (3) Journal of Finance 1421–1442
(2002); Raymond P. Fishe, How Stock Flippers
Affect IPO Pricing and Stabilization, Journal of
Financial and Quantitative Analysis 319–339
(2002); and Raymond P. Fishe, Ekkehart Boehmer,
Underwriter Short Covering in the IPO Aftermarket:
A Clinical Study, Journal of Corporate Finance,
575–594 (2004). For background information on the
Facebook IPO, see SEC Press Release, SEC Charges
NASDAQ for Failures During Facebook IPO (May
29, 2013), available at https://www.sec.gov/News/
PressRelease/Detail/PressRelease/1365171575032.
For background information on the Vonage IPO, see
FINRA, FINRA Fines Citigroup Global Markets,
UBS and Deutsche Bank $425,000, Orders Customer
Restitution for Supervisory Failures in Vonage IPO
(September 22, 2009), available at https://
www.finra.org/newsroom/2009/finra-finescitigroup-global-markets-ubs-and-deutsche-bank425000-orders-customer.
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would be able to correlate treatment in
the primary offering with other trading
activity to see if, for example, those who
trade more in the aftermarket receive
more of the initial public offering shares
they request than others. Including such
information in CAT Data would also
provide efficient access to data that
could identify potential allocations that
preference some customers over others
in the IPO allocation process because
the SROs and Commission could
examine the relationship between IPO
initial allocations, initial indications of
interest, and fluctuations in allocations
and indications of interest during the
book-building process. In the Adopting
Release, the Commission noted several
additional benefits of collecting topaccount information in addition to
subaccount information for primary
market transactions. For example,
examinations of ‘‘spinning,’’
‘‘laddering,’’ and other ‘‘quid pro quo’’
arrangements would benefit from
efficient access to such CAT Data,
which would facilitate a comparison of
those customers allocated shares in an
offering to those who are not allocated
shares in an offering and how the
conditional allocations change during
the book-building process. Bookbuilding information, which is currently
very difficult for regulators to assemble,
would provide very useful insights into
IPO and follow-on allocations in market
analysis. Such insights would better
inform rulemaking and other policy
decisions.
The CAT NMS Plan estimates that for
broker-dealers to implement a system to
record and report top-account and
subaccount allocation information for
primary market transactions would take
36 months of staff time per firm at a cost
of $234.8 million whereas just
subaccount information would take 12
months of staff time per firm at a cost
of $58.7 million.1310 The inclusion of
top-account allocation information
accounts for the difference of $176.1
million. The CAT NMS Plan explains
that including top-account information
in the CAT would result in higher
implementation costs because the topaccount information is maintained in
1310 See CAT NMS Plan, supra note 3, at
Appendix C, Section A.6(c). The estimated costs
reflect the implementation cost of systems
development needed to support top-account and
subaccount information for primary market
transactions to CAT. The $234.8 million figure
assumes 36 months of staff time, with 21.741 days
per month at a $1200 daily FTE rate for 250 firms.
The $58.7 million figure assumes 9 months of staff
time, with 21.741 days per month at a $1200 daily
FTE rate for 250 firms. The estimates do not include
any ongoing annual costs to maintain the reporting;
the Commission assumes that these systems would
be supported by staff already engaged to support
CAT reporting.
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30773
book-building systems in investment
banking divisions of broker-dealers that
differ fundamentally from secondary
market systems.1311
However, the Commission
preliminarily believes that the costs of
adding top-account allocation
information may be lower than those
estimated in the CAT NMS Plan, for
several reasons. First, in combination
with an alternative that would require
less granular time stamps or a larger
allowable clock offset on less timesensitive systems, the costs for topaccount information would be lower
than indicated in the Plan. The
Commission recognizes that the benefits
from time stamp granularity and clock
synchronization in the systems for
reporting top-account information may
be lower than those for secondary
market systems because activity occurs
far less frequently than it does on
exchanges and regulators may not need
to sequence primary market transactions
relative to secondary market
transactions within a second. The
Commission is unable to estimate cost
savings from alternative clock
synchronization requirements because
estimates presented in the Plan do not
cite these specific costs. Second, the
Plan’s estimate is sensitive to the
number of underwriters. In particular,
the estimates assume 250 underwriters
would need to implement changes to
provide for top-account allocation
information for primary market
transactions.1312 This is also the same
number of underwriters assumed to
need to implement subaccount
allocation information. However, the
Commission suspects that the number of
underwriters that would need to
implement changes for top-account
information may be lower than the
number that implement subaccount
information for primary market
transactions because the lead
underwriters could have all of the
information necessary to report the topaccount information. If so, then only
those underwriters that expect to lead
an offering would need to implement
systems changes to report top-account
allocation information. Estimating costs
only for lead underwriters could result
in a much smaller estimate.
The Commission does not have an
estimate of the ongoing costs of
underwriters reporting top-account
information. However, the Commission
preliminarily estimates an average of
1311 Id.
at Appendix C, Section A.6(a).
Cost Estimate for Adding Primary Market
Transactions into CAT (February 17, 2015),
available at https://www.catnmsplan.com/
industryfeedback/p602480.pdf.
1312 See
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approximately 120 IPOs each year and
340 follow-on offerings each year from
2001 to 2014. Assuming each offering
contains approximately 260 initial
allocations, including all indications of
interest, with 10 amendments from
initial allocation to final allocation, each
offering would generate 2,600 CAT
Reportable Events for a total of 1.2
million per year.1313 This total is much
smaller than the number of Reportable
Events in the secondary market
(trillions). Therefore, while the
Commission cannot estimate the costs of
ongoing primary market reporting, the
Commission believes the ongoing costs
of reporting primary market transactions
would be a fraction of the ongoing costs
of secondary market reporting and
would likely be supported by staff
already engaged to maintain CAT
reporting.
The Commission also recognizes that
including top-account information in
the CAT NMS Plan could change the
competitive landscape of the market for
underwriting services. In particular,
some underwriters may choose to exit
the market instead of report top-account
information. The Commission
preliminarily believes that the
compliance costs themselves would be
low compared to underwriting fees.1314
Nonetheless, the Commission
recognizes that some underwriters may
exit rather than comply with the CAT
NMS Plan requirements. Likewise, the
Commission recognizes that the costs to
implement CAT reporting of topaccount allocation information could
increase barriers to entry.
Finally, the Commission recognizes
that requiring top-account information
in the CAT NMS Plan could alter the
way underwriters conduct their bookbuilding activities. The Commission is
not sure if these changes would be
beneficial or harmful to issuers and
investors. For example, issuers and
1313 The Commission estimated the number of
allocations per offering by averaging the data for the
11 IPOs made public along with an academic paper.
See Jay R. Ritter and Donghang Zhang, Affiliated
Mutual Funds and the Allocation of Initial Public
Offerings, 86(2) Journal of Financial Economics
337–368 (2007) and https://bear.warrington.ufl.edu/
ritter/Allocation08282012.xls. If the Commission
assumes that each offering would generate 10
amendments to allocations prior to the subaccount
allocations, there would be 2,600 reports per
offering and 1.2 million reports per year using the
number of offerings in 2014. If each offering instead
generates 5 or 20 amendments, the number of
reports per year would be 0.6 million or 2.4 million.
1314 The primary market issued about $450 billion
in common stock in 2014 and underwriters earned
$5.2 billion in underwriting fees in 2014. This is
high relative to the $176 million cost estimate
above. The value of issuances comes from the
Securities Data Corporation and information
regarding the aggregate underwriting fees comes
from FOCUS reports.
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investors could benefit if including topaccount information in CAT deters
book-building activity that violates
Regulation M or FINRA Rule 5110, 5130
or 5131, though some particular
investors may lose any gains from
preferential treatment. However, the
Commission is uncertain whether
investors and issuers would benefit if
underwriters altered their book-building
activity in an effort to reduce their
reporting burden. For example, if
reporting every change to a conditional
allocation proved cumbersome,
underwriters may choose to update
preliminary allocations less often. This
could change the way that underwriters
and investors interact with each other in
the book-building process with
implications for the potential success of
the offering or investors’ satisfaction
with the outcome.
c. OTC Equity Securities
The CAT NMS Plan requires the
reporting of data regarding OTC Equity
Securities upon implementation of the
CAT NMS Plan. The Commission is
soliciting comment on the alternative of
eliminating the requirement to report
activity in OTC Equity Securities from
the CAT NMS Plan, and instead
requiring only that the SROs include a
discussion of how OTC Equity
Securities could be incorporated into
the CAT in the Discussion Document
that they are required to provide within
six months after the effective date of the
Plan pursuant to Rule 613(i).1315 This
was the approach taken with respect to
OTC Equity Securities in Rule 613,
because the Commission believed that
limiting the scope of the CAT to NMS
securities was a reasonable first step in
implementing the CAT.1316 Under this
approach, the CAT NMS Plan would
require each national securities
exchange and national securities
association, within six months after
effectiveness of the national market
system plan, to jointly provide to the
Commission a document outlining in
detail how OTC Equity Securities (along
with certain other categories of
securities) could be incorporated into
the CAT information, including an
implementation timeline and a cost
estimate. The Commission preliminarily
believes that excluding OTC Equity
Securities from the CAT upon
1315 17
CFR 242.613(i).
see also Adopting Release, supra note 9
at 45744. The Plan states that ‘‘[e]ven though SEC
Rule 613 does not require reporting of OTC Equity
Securities, the Participants have agreed to expand
the reporting requirements to include OTC Equity
Securities to facilitate the elimination of OATS.’’
See CAT NMS Plan, supra note 3, at Appendix C,
Section C.9.
1316 Id.;
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implementation would reduce costs of
the CAT NMS Plan. But, the
Commission also preliminarily believes
that removing the requirement to report
activity in OTC Equity Securities from
the CAT NMS Plan would limit the
regulatory benefits of the CAT NMS
Plan significantly.
Under the alternative approach, OTC
Equity Securities would be excluded
from the Plan upon implementation.
While they could still be incorporated
into the Plan following the submission
of the Discussion Document, the
alternative approach would create
uncertainty as to whether or not OTC
Equity Securities would ultimately be
incorporated into CAT NMS Plan and
the timeline for that process.
Excluding OTC Equity Securities from
the CAT NMS Plan could limit oversight
of the OTC equity market relative to the
oversight obtainable under the Plan.1317
FINRA currently collects reports on
OTC equity markets in its OATS
data.1318 The primary difference
between OATS and CAT Data for OTC
Equity Securities would be in
completeness, due to the additional data
fields in CAT Data that are not in OATS,
particularly Customer-ID; in any
accuracy improvements relative to
OATS; in direct access for the
Commission; and in the timeliness
relative to OATS, particularly in having
linked data that requires less time to
process. Relative to the Plan, therefore,
excluding OTC Equity Securities could
reduce the efficiency and effectiveness
of regulators overseeing the OTC
market, conducting investigations of
manipulation, pump and dumps, and
improper penny stock sales. It could
also reduce the efficiency of estimating
disgorgement payments to harmed
investors relative to the Plan.
The CAT NMS Plan states that
including OTC Equity Securities could
facilitate the retirement of OATS.1319 If
OTC Equity Securities are not included
in the CAT NMS Plan upon
implementation, including OTC Equity
Securities at a later time would require
an amendment to the CAT NMS Plan,
which could take significant time and
potentially delay the retirement of
OATS.1320 The Commission is cognizant
1317 The Commission has discussed the potential
for fraudulent activity in the OTC market. See SEC,
Microcap Fraud, available at https://www.sec.gov/
spotlight/microcap-fraud.shtml.
1318 See supra note 351 and related text.
1319 See CAT NMS Plan, supra note 3, at
Appendix C, Section A.1(a) n.16.
1320 The Commission notes, however, that the
incorporation of OTC Equity Securities is not the
only hurdle needed to retire OATS, and other
hurdles may remain open even after any approval
of the CAT NMS Plan. For example, the Plan
anticipates a period of 12–18 months during which
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that the period of duplicative reporting,
during which both CAT and OATS
would be reported by market
participants, is likely to impose a
significant cost on industry.1321 The
CAT NMS Plan states that the inclusion
of OTC Equity Securities at CAT
implementation is generally supported
by industry to facilitate the retirement of
OATS.1322
The Commission preliminarily
believes that excluding OTC Equity
Securities from the CAT upon
implementation would reduce certain
costs associated with implementation
and operation of CAT as compared to
the Plan as filed, without providing any
additional material information, because
less data would be reported,1323
therefore requiring fewer resources to
implement and maintain the CAT. The
Commission further preliminarily
believes that CAT Reporters and the
Central Repository would avoid certain
compliance costs if OTC equities were
excluded. To the extent that market
participants rely on separate IT
infrastructure to handle activity in OTC
as opposed to listed securities, delaying
the inclusion of OTC Equity Securities
in CAT postpones costs associated with
updating these systems. Postponing
these system modifications may allow
these modifications to be more
efficiently integrated into other planned
system upgrades, reducing costs to
industry. The Commission notes that,
even under this alternative approach,
market participants still may incur these
costs eventually, because the approach
contemplates that the CAT NMS Plan
could be expanded to require the
reporting of order events in OTC
Equities following the submission of the
Discussion Document.
Furthermore, the Commission
preliminarily believes that the cost
savings from delaying incorporating
OTC Equity Securities in the CAT NMS
Plan are likely to be lower than the
increase in costs of duplicative
reporting that result from a delay to
OATS retirement. Any broker-dealers
that trade both OTC Equity Securities
and listed equity or option securities
would have to comply with the Plan
the SROs would analyze rules and systems to
determine which require duplicative information.
The process and timeline for elimination of
duplicative reporting systems is discussed in
Section IV.F.2, supra.
1321 See Section IV.F.2, supra.
1322 See CAT NMS Plan, supra note 3, at
Appendix C, Section C.9.
1323 For example, in February, 2016, the average
daily number of trades in OTC securities is
approximately 98,300, on an average of
approximately 18,500 issues over that same period.
While that volume of trades is not large, the number
of distinct issues is.
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regardless of the inclusion of OTC
equities, so the cost savings to these
broker-dealers from the exclusion of
OTC Equity Securities may not be
significant. The Commission
preliminarily believes that the number
of broker-dealers that trade only OTC
Equity Securities is small. Finally, the
Commission expects that the
duplicative reporting costs would be
fairly significant and that extending the
time until the retirement of OATS
would be a significant additional cost.
The Commission cannot estimate the
amount of the cost reduction from
excluding OTC Equity Securities
because it lacks the data to do so. The
CAT NMS Plan presents data only on
the aggregate costs of on-exchange and
OTC equity reporting; it does not
present data on the costs specifically
attributable to OTC equity reporting.
The Commission has no data from
which it can independently estimate the
cost differential because it depends on
information internal to each CAT
Reporter (e.g., how their systems would
change for the alternative compared to
the Plan), which is not compiled or
stored anywhere, and to which the
Commission therefore does not have
ready access, and it depends on when
OTC Equity Securities would otherwise
be included and the status of OATS and
other systems in the interim.
d. Periodic Updates to Customer
Information
As noted above in Section IV.E.1.b(4),
the Plan Processor is required to create
a Customer-ID and map Firm Designated
IDs to this Customer-ID so that records
stored in the CAT Data link to the
Customers. To facilitate this, the Plan
requires CAT Reporters to submit an
initial set of Customer information to
the Central Repository and subsequent
daily updates and changes to that
Customer information.1324 In addition to
daily updates to reflect changes in
Customer information required in Rule
613, the CAT NMS Plan also requires
members to submit periodic full
refreshes of all Customer information to
the CAT.1325 The Commission is
soliciting comment on an alternative
that would eliminate the requirement
for periodic full refreshes.
The CAT NMS Plan states that the
purpose of these refreshes is to ‘‘ensure
the completeness and accuracy of
Customer information and
associations.’’ 1326 Although the
1324 See CAT NMS Plan, supra note 3, at
Appendix C, Section A.1(a)(iii); Appendix D,
Section 9.1.
1325 See id., at Appendix C, Section A.1(a)(iii)
n.33.
1326 Id.
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30775
Commission believes that the
Participants should ensure that
customer information in the Central
Repository is complete and accurate, the
requirement for periodic full refreshes
seems redundant if the initial list and
daily updates are complete and accurate
and would, therefore, provide no
additional benefit. Further, not
requiring these periodic refreshes could
reduce the risk of a security breach of
personally identifiable information.
However, the Commission recognizes
that periodic full refreshes of customer
information could address any errors
that are introduced in the daily update
process, although the Commission
preliminarily believes that such
problems are likely to be quite rare. In
addition, the Commission recognizes
that not requiring the periodic full
refreshes could reduce certain costs
associated with implementation and
operation of CAT as compared to the
Plan as filed for CAT Reporters,
although the Commission preliminarily
believes that these cost reductions
would be minor for two reasons. First,
the quantity of data required to refresh
the customer information table is very
small compared to the size of market
data files submitted regularly by most
market participants. Second, because
market participants would need to
develop software and procedures to
initially populate the customer
information table, that software and
procedure should be available to refresh
the table periodically. Therefore, the
Commission preliminarily believes that
removing the requirements for periodic
full refreshes of customer information
could minimally reduce the cost of the
Plan without materially reducing the
benefits.
4. Alternatives to the CAT NMS Plan
The Commission is soliciting
comment on the broad set of alternatives
of modifying existing systems to reduce
the data limitations described above
instead of approving the CAT NMS
Plan.
When it adopted Rule 613, the
Commission noted that ‘‘the costs and
benefits of creating a consolidated audit
trail, and the consideration of specific
costs as related to specific benefits, are
more appropriately analyzed once the
SROs narrow the expanded array of
choices they have under the adopted
Rule and develop a detailed NMS
plan.’’ 1327 The Commission also noted
that a ‘‘robust economic analysis of . . .
the actual creation and implementation
of a consolidated audit trail itself . . .
1327 See Adopting Release, supra note 9, at
45725–26.
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requires information on the plan’s
detailed features (and their associated
cost estimates) that will not be known
until the SROs submit their NMS plan
to the Commission for its
consideration.’’ 1328 Accordingly, the
Commission deferred its economic
analysis of the actual creation,
implementation, and maintenance of the
CAT until after submission of an NMS
plan.
The Commission recognizes that
approving the CAT NMS Plan is not the
only available means of improving the
completeness, accuracy, accessibility,
and timeliness of the data used in
regulatory activities. Alternatively, the
Commission could mandate
improvements to one or more existing
data sources to address the data
limitations noted in the Baseline
Section. The Commission previously
considered this set of alternatives when
considering whether to adopt Rule
613.1329 The Commission has now
reviewed the CAT NMS Plan, including
the cost estimates, and has performed its
own economic analysis of the Plan.
With the benefit of having reviewed and
analyzed the Plan, the Commission is
now soliciting comment on this set of
alternatives.
As an alternative to the CAT NMS
Plan, the Commission could require
modifications to OATS. In the Adopting
Release, the Commission noted that it
had received comments suggesting
various ways that the OATS system
could be modified to serve as the central
repository for the consolidated audit
trail.1330 However, the Commission also
noted that OATS would require
significant modifications in order to
provide the attributes that the
Commission deems crucial to an
effective audit trail. In particular, OATS
excludes some exchange-based and
other types of non-member activity; it
does not collect market-making quotes
submitted by registered market makers
(in those stocks for which they are
registered); it is not a central repository
and therefore does not presently provide
other regulators with ready access to a
central database containing processed,
reconciled, and linked orders, routes,
and executions ready for query,
analysis, or download; it does not
presently collect options data; it does
not afford regulators an opportunity to
perform cross-product surveillance and
monitoring; and it does not collect
information on the identities of the
1328 Id.
1329 Id.
at 45726.
at 45739–41.
1330 Id.
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customers of broker-dealers from whom
an order is received.1331
The Commission preliminarily
believes that, as stated in the Adopting
Release, the missing attributes identified
above are crucial to improving the
completeness, accuracy, accessibility,
and timeliness of the data used in
regulatory activities. Thus, any
alternative to CAT based on OATS that
does not address those deficiencies
would limit the potential benefits of the
alternative significantly. Given the
modifications necessary, the
Commission cannot estimate the
potential cost savings, if any, from
mandating an OATS-based approach as
an alternative to the CAT NMS Plan,
because the Commission does not have
sufficient information to estimate the
cost of modifying OATS to address
some or all of these deficiencies, either
separately or in combination. The Plan
does not provide data on the cost of
making each relevant modification to
OATS, and the Commission has no
other data from which it can
independently estimate this, because
the Commission is not aware of any
such data currently available to it. The
Commission notes, however, that Rule
613 provided flexibility to the SROs to
propose an approach based on OATS
and/or other existing data sources.1332
Given that Rule 613 provided this
flexibility to the SROs, the Commission
preliminarily believes that the SROs
could have utilized an OATS-based
approach if that approach would have
represented significant cost savings
relative to the Plan’s approach, and the
SROs that operate those reporting
systems had presented such a solution
as a Bid. Furthermore, the Commission
notes that an approach that modifies
and expands OATS to satisfy the
requirements of the CAT NMS Plan
remains feasible under the current
bidding process. The Commission seeks
comment on the costs and benefits of
requiring modifications to OATS as an
alternative to the CAT NMS Plan.
Another alternative would be for the
Commission to modify other data
sources instead of, or in combination
with, OATS. However, like OATS, all of
the current data sources have
limitations that would need to be
addressed in order to provide the
attributes that the Commission deems
crucial to an effective audit trail.1333
1331 Id.
at 45741.
1332 Id. The Commission also notes that the
current Plan could allow the Plan Processor to
leverage some elements of the existing OATS
infrastructure and/or other existing data sources in
the implementation of the CAT.
1333 The limitations of the various data sources
are discussed in Section IV.D, supra.
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Furthermore, the Commission
preliminarily believes that modifying
any other single data source would be
more costly than modifying OATS,
which is currently the most
comprehensive audit trail. While the
Commission could require the
modification of multiple data sources in
combination, the Commission
preliminarily believes that an
alternative to the CAT NMS Plan that
relied on multiple data sources, such as
a combination of OATS, COATS, other
SRO audit trail data and/or publicly
available data, would eliminate the
benefits associated with having a single,
complete consolidated source from
which regulators can access trade and
order data, which the Commission
considers to be very significant.1334
In summary, the Commission cannot
estimate the potential cost savings, if
any, from modifying one or more other
data sources instead of, or in
combination with, OATS, because the
Commission does not have sufficient
information to estimate the cost of
modifying each of the currently
available data sources to address their
current limitations, separately or in
combination. The Plan does not provide
data on the cost of making each relevant
modification to each current data
source, and the Commission has no
other data from which it can
independently estimate this, because
the Commission is not aware of any
such data currently available to it.
However, the Commission
preliminarily believes that mandating
improvements to the completeness,
accuracy, accessibility, and timeliness
of current data sources without an NMS
Plan that requires the consolidation of
data and increased coverage across
markets and broker-dealers would likely
significantly limit the potential benefits,
possibly without providing significant
cost savings. The Commission seeks
comment on the costs and benefits of
modifying one or more currently
available data sources, separately or in
combination, as an alternative to the
CAT NMS Plan.
5. Request for Comment on the
Alternatives
a. Generally
383. Are there any other alternatives
that the Plan should require? If so,
please describe the alternative and the
costs and benefits of the alternative
relative to the Plan.
1334 These
benefits are discussed in Section IV.E,
supra.
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b. Alternatives to the Approaches
Permitted by the Exemption Order 1335
384. Should the CAT NMS Plan
require Options Market Makers to report
their quotes to the Central Repository?
Please explain. Do Commenters believe
that the costs of the Rule 613 approach
would be disproportionately borne by
smaller broker-dealers? Why or why
not? Please provide data supporting
your position.
385. Should the Plan treat equity
market makers the same as Options
Market Makers for purposes of quotation
reporting—i.e., equity market makers
report only Quote Sent Time and
exchanges to which the quote is routed
report the other information? Why or
why not? What are the relative costs and
benefits of this alternative? Please
provide cost estimates.
386. Should the Plan require an
alternative approach to reporting market
maker quotes on exchanges where both
equity and Options Market Makers
would not need to report their quotation
updates, and instead the exchanges
would report Quote Sent Times in their
reports of receiving these quotation
updates? Why or why not? How would
such an alternative affect the costs of
building and operating the Central
Repository? How would such an
alternative affect market-maker costs of
implementing and continuing CAT
reporting?
387. Should the CAT NMS Plan
require that Allocation Reports provide
sufficient information for the Central
Repository to be able to link those
allocations to order lifecycles? What are
the costs and benefits of providing this
information? Please explain and provide
cost estimates.
388. How do broker-dealers currently
track which customers should receive
allocations from which set of orders and
how do broker-dealers ensure that those
orders receive the correct average price?
Can these same systems provide a key
that could accurately link the
allocations to lifecycles in many-tomany allocations? Please explain.
389. Should the CAT NMS Plan
require an alternative to the Customer
Information Approach? If so, what
alternative should the Commission
require and what are the relative costs
and benefits of the alternative? Please
explain.
390. Should the CAT NMS Plan
require an alternative approach to
assigning CAT-Reporter-IDs? If so, what
1335 See also Sections III.B.5–III.B.9, supra, for
additional requests for comment on the alternative
Rule 613 approaches to the approaches the
Exemption Order allowed to be included in the
CAT NMS Plan.
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alternative should the Commission
require and what are the relative costs
and benefits of the alternative? Please
explain.
391. Should the CAT NMS Plan
provide for the use of the LEI or another
unique identification code as an
alternative to the CAT-Reporter-ID?
What are the advantages and
disadvantages of this approach?
392. Should the CAT NMS Plan
require an alternative to the requirement
to time stamp manual orders to the
second? If so, what alternative should
the Commission require? For example,
should the Plan require millisecond
time stamps or one-minute time stamps?
Please explain and provide information
on the relative costs and benefits of the
alternatives.
c. Alternatives to Certain Specific
Approaches in the CAT NMS Plan 1336
393. Should the ‘‘industry standard’’
for the purposes of the clock
synchronization and time stamping be
‘‘one-size-fits-all’’? Please explain. If
not, how should the CAT NMS Plan
structure variations in clock
synchronization and time stamp
requirements that are based on industry
practices?
394. Should the ‘‘industry standard’’
for the purposes of the clock
synchronization and time stamping
requirements be defined based on
industry practice? Please explain. If not,
how should ‘‘industry standard’’ be
defined? Should the ‘‘industry
standard’’ consider information other
than current industry practice, such as
the most accurate technology currently
available in the industry, or the
standard recommended by a particular
industry group or authority? Could a
definition of ‘‘industry standard’’ set a
maximum clock offset threshold with an
expectation that each CAT Reporter
would be responsible for smaller clock
offsets if the CAT Reporter is technically
capable of such clock offsets? Please
explain and include information on the
relative costs and benefits of such
alternative definitions.
395. What benefits, if any, would
derive from applying the same uniform
clock synchronization standards to all
market participants versus applying
different standards to different
participant types? Which approach is
preferable? If applying different
standards to different participant types,
which participant types should have
smaller clock offset tolerances and
1336 See also Sections III.B.2, III.B.4, III.B.10,
III.B.11, supra, for additional requests for comment
related to alternatives to certain specific approaches
in the CAT NMS Plan.
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which should have larger clock offset
tolerances and what are the industry
standards for those participant types?
Please explain and provide any
supporting data.
396. Do Commenters agree with the
Commission’s cost estimates for clock
synchronization alternatives? Are there
CAT Reporters other than broker-dealers
that would incur significant costs from
increasing clock synchronization
standards to allowable clock drifts of
less than 50 milliseconds, such as 1
millisecond or 100 microseconds? At
what level of clock synchronization
would these costs become material?
Please explain. Do Commenters have
estimates of these costs?
397. Does the FIF Clock Offset Survey
reflect the operational capabilities of all
potential CAT Reporters? Please
explain.
398. Do Commenters agree that an
alternative that would relax the logging
requirements such that CAT Reporters
would only need to log exceptions and
resulting synchronization events (and
not every synchronization event) would
reduce costs of the CAT NMS Plan
without materially reducing its benefits?
Why or why not? Do Commenters have
an estimate of how much such an
alternative would reduce costs, either in
isolation or in combination with the
alternative to not require
synchronization outside of event
recording times? Please provide
supporting documentation for these
estimates.
399. Is there a need for clock
synchronization standards outside of
regular and extended trading hours? Is
clock synchronization beneficial for
retail orders that come in overnight? Are
there examples of times or events
outside of regular and extended trading
hours when clock synchronization is
more beneficial? Do Commenters agree
that an alternative that would not
require synchronizing clocks outside of
times when servers record Reportable
Events would reduce costs of the Plan
without materially reducing its benefits?
Do Commenters have an estimate of
how much such an alternative would
reduce costs? Please explain and
provide supporting documentation if
possible.
400. Are some CAT Reportable Events
more time-sensitive than other events? If
so, what events are more time-sensitive
and why? What systems are more likely
to process these events, and where are
those systems located (i.e., within
broker-dealers, service bureaus,
Execution Venues)? Please explain.
401. What market participant systems,
if any, should have smaller clock offset
tolerances? Why? What clock
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synchronization standard should these
systems have? Why? What market
participant systems, if any, should have
smaller clock offset tolerances? Why?
What clock offset tolerances should
these systems have? Why?
402. Should the Plan require time
stamps to be reported more granularly
than the one millisecond required in the
Plan? If so, what standard should be
required? Do Commenters agree with
the Commission’s analysis of the costs
and benefits of requiring finer time
stamp resolution than 1 millisecond?
Please explain.
403. Should the CAT NMS Plan
require different Error Rates in CAT?
For example, should the Plan require a
lower initial Error Rate? If so, what
initial Error Rate should the Plan
require and why? What would be the
costs and benefits of requiring a lower
initial Error Rate? Should the Plan
require a lower Error Rate at some time
period after implementation? If so, what
Error Rate should the Plan require and
why and when? What would be the
costs and benefits of requiring a lower
Error Rate?
404. Should the CAT NMS Plan
require a day T+5 error correction
deadline instead of a day T+3 error
correction deadline? What are the
relative costs and benefits of different
error correction deadlines? Please
explain and provide cost estimates.
405. Should the CAT NMS Plan
require an alternative to the funding
model in which broker-dealers and
Execution Venues pay fees on the same
fee schedule? If so, how would that
funding model be structured and what
metric would determine the fee level?
How would that funding model affect
the costs and benefits of the Plan,
including the effect on competition?
Please explain.
406. The Plan cites ‘‘transactional
volume’’ as a cost driver for the Central
Repository, but uses ‘‘message traffic’’ to
allocate Central Repository costs across
Industry Members. Do Commenters
agree with the Commission’s
assumption that these two metrics are
highly correlated? Is one of these
metrics preferable for allocating costs
across Industry Members? Please
explain.
407. Should the CAT NMS Plan
require alternative metrics to the
message traffic and market share metrics
required by the Plan for determining the
tiers of the funding model but still place
Execution Venues on a different fee
schedule than broker-dealers? If so,
which metrics? How would these
alternative metrics affect the costs and
benefits of the Plan, including effects on
competition? Could these alternative
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metrics create conflicts of interest?
Please explain.
408. Do Commenters agree with the
Commission’s analysis of unified versus
bifurcated funding models? Why or why
not?
409. Should the Plan require a unified
funding model wherein Central
Repository costs are allocated across all
market participants by message traffic?
Why or why not?
410. Should the Plan require a unified
funding model wherein the tiers of the
funding model for all CAT Reporters
would be based on market share of share
volume? Why or why not?
411. Should the Plan require a unified
funding model wherein a fixed fee is
levied on every trade? Why or why not?
Could such a funding model reduce
implementation costs by utilizing
infrastructure already in place to assess
Section 31 fees?
412. Should the Plan require a
bifurcated funding model wherein
Central Repository costs are allocated
across broker-dealers by market share of
share volume? Why or why not?
413. Should the Plan require a
bifurcated funding model wherein
Central Repository costs treat ATSs as
part of broker-dealers only, instead of
including them as Execution Venues?
Why or why not?
414. Should the Plan require a
bifurcated funding model wherein
broker-dealer message traffic to and
from an ATS are not included in
message traffic measures used to assess
fees on broker-dealers? Why or why not?
415. Should the Plan require a
bifurcated funding model wherein ATS
volume is excluded from TRF volume
for the purposes of assessing Execution
Venue fees to operators of TRFs? Why
or why not?
416. Should the Plan require a
bifurcated funding model wherein TRFs
are not counted as Execution Venues for
purposes of assessing fees on Execution
Venues? Why or why not?
417. Should the Plan require that
profits or losses from operating the
Central Repository be allocated across
Participants by market share of share
volume? Why or why not?
418. Should the Plan require a strictly
variable, rather than tiered, funding
model? Why or why not?
419. Should the CAT NMS Plan
require any funding model alternatives
that could result in ATSs and exchanges
paying equivalent fees? If so, how
should that funding model be structured
and what metrics should determine the
funding tiers? How would that funding
model affect the costs and benefits of
this alternative, including effects on
competition? Could these alternatives
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create conflicts of interest and, if so, to
what extent? Please explain.
420. How should the CAT NMS Plan
distribute the profits and losses of the
Company among Participants? What are
the relative costs and benefits of
alternative ways to divide the profits
and losses among the Participants?
Please explain.
421. Should the CAT NMS Plan
require a strictly variable funding model
in which the fees paid are a set
percentage of message traffic or share
volume instead of a tiered funding
model in which fees are fixed for a tier
that is determined by message traffic or
market share of share volume? If so,
how would that funding model be
structured? What are the relative costs
and benefits of that funding model,
including the effect on competition?
Please explain.
422. Should the CAT NMS Plan
exclude the requirement to report listing
exchange symbology and instead allow
CAT Reporters to use existing
symbologies? Please explain. Would
excluding this requirement allow
broker-dealers to report data to CAT
without processing the data ahead of the
report? Please explain. What would be
the relative costs and benefits of
removing this requirement from the
Plan? Please provide any cost estimates.
423. Should the CAT NMS Plan
require alternative minimum standards
for access to the CAT Data to those
proposed in the CAT NMS Plan? If so,
what alternative minimum standards
should the Commission require? For
example, should the response time on
the largest queries be longer or shorter
than 24 hours? How would changes to
the alternative minimum standards
affect the costs and benefits of the Plan?
Please be specific and provide cost
estimates.
424. Should the CAT NMS Plan
require an intake capacity level different
from twice historical peak daily volume
measured over the most recent six
years? If so, what intake capacity level
should the Plan require? What are the
relative costs and benefits of this
alternative intake capacity level?
425. The Plan proposes using a ‘‘daisy
chain’’ approach for linking order
events within the Central
Repository.1337 This approach was
chosen in favor of an approach that
would require a unique order ID to be
assigned by the first market participant
that receives an order, and that order ID
to be passed to and used by any market
participant that handles the order
afterward (the ‘‘unique order ID’’
1337 See CAT NMS Plan, supra note 3, at
Appendix C, Section A.1(b).
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approach). Do Commenters believe that
a unique order ID approach or any other
alternative approach would produce
more accurate linkages than a daisy
chain approach or any other benefits?
Please explain. According to the Plan,
the daisy chain approach would
minimize impact on existing OATS
reporters because OATS already uses
this type of linkage.1338 Do Commenters
believe that a unique order ID approach
or any other alternative approach would
increase the costs for CAT Reporters
who currently report to OATS or have
any other effect on the costs of the Plan?
Please explain and provide estimates.
Given that the Bids from potential Plan
Processors all utilize the ‘‘daisy chain’’
approach, would adopting a unique
order ID approach at this stage cause a
significant disruption in the progress
toward the implementation of a
consolidated audit trail? Please explain.
What would the costs of such a
disruption be?
426. The CAT NMS Plan requires that
the Plan Processor make use of a
commercially available file management
tool. What are the benefits to CAT
Reporters from this requirement? Does
this requirement have any effects on the
competition between bidders? For
example, are any bidders, such as those
that could more efficiently use a
proprietary file management tool,
disadvantaged by this requirement?
Please explain. Does this requirement
affect the ability of the Operating
Committee to replace an underperforming Plan Processor? Are there
other costs or benefits of this
requirement? Please explain.
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d. Alternatives to the Scope of Certain
Specific Approaches in the CAT NMS
Plan
427. Should the CAT NMS Plan
require excluding any data fields
currently required to be included in the
CAT Data (e.g., unique customer
identification, allocation time, and CATReporter-IDs at both order routing and
receipt)? If so, which ones? Please
explain and provide information on the
relative costs and benefits of excluding
those data fields, including any cost
estimates.
428. Should the CAT NMS Plan
exclude primary market information?
Why or why not?
429. Do Commenters agree with the
analysis in the Plan of the feasibility,
benefits, and costs of the inclusion of
primary market information (including
primary market transactions) in the CAT
NMS Plan? Please explain.
1338 Id.
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430. Do Commenters have additional
analysis relevant to the decision to
include primary market information
(including primary market transactions)
in the CAT NMS Plan? If so, please
describe that analysis, including any
data.
431. Do Commenters agree with the
Plan’s decision to include subaccount
allocation information for primary
market transactions in the Discussion
Document, which commits the
Operating Committee to consider the
implementation of this subaccount
allocation information in the CAT NMS
Plan? Please explain.
432. Do Commenters agree with the
Commission’s assessment of the costs
and benefits of requiring top-account
allocation information for primary
market transactions? Please explain.
Should the Operating Committee
consider requiring top-account
information? Please explain.
433. What are the implications of the
SROs decision not to include topaccount information for primary market
transactions in the Discussion
Document? Please explain.
434. Should the CAT NMS Plan
exclude OTC Equity Securities? Please
explain. Would the exclusion of OTC
Equity Securities in the CAT NMS Plan
delay the retirement of OATS? If so, by
how long and what would be the added
cost be? Please provide an estimate.
What are the other costs and benefits of
excluding OTC Equity Securities from
the CAT NMS Plan?
435. The CAT NMS Plan requires that
CAT Reporters provide periodic
refreshes of all customer information to
the Central Repository to maintain an
accurate database of customer
information. What intervals for updates
would be appropriate and reasonable,
and what information should be
required to be updated? Should the CAT
NMS Plan remove the requirement for
periodic full submission of customer
information beyond the daily updates
sent when customer information
changes? Please explain. Would brokerdealers reduce their costs if they did not
have to report all customer information
periodically? Would the removal of this
requirement significantly reduce the
risk of a security breach of personally
identifiable information? Please explain.
e. Alternatives to the CAT NMS Plan
436. Do Commenters agree with the
Commission’s analysis of the broad
alternatives to approving the CAT NMS
Plan, such as modifying OATS and/or
other data sources to meet the objectives
of Rule 613? Please explain. Are there
other alternative approaches that the
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Commission has not identified that it
should consider? Please explain.
f. Alternatives Discussed in the CAT
NMS Plan
The Commission recognizes that the
Plan discusses many alternatives that
the Commission does not analyze above,
including alternatives in Consideration
12 therein. This Consideration (Rule
613(a)(1)(xii)) requires the Participants
to discuss in the Plan any reasonable
alternative approaches that the plan
sponsors considered in developing the
Plan, including a description of any
such alternative approach; the relative
advantages and disadvantages of each
such alternative, including an
assessment of the alternative’s costs and
benefits; and the basis upon which the
plan sponsors selected the approach
reflected in the CAT NMS Plan. Such
discussions appear in Section 12 of
Appendix C. The Commission reviewed
these alternatives and has not included
above a discussion of all of the specific
alternatives addressed in the Plan. In
some cases, the Commission, at this
time, has no analysis to add beyond the
analysis in the Plan. In other cases, the
Plan does not require any specific
alternative, so the Commission cannot
analyze the effect on the Plan of
selecting a different alternative. The
Commission is soliciting comment on
the alternatives discussed by the
Participants in the Plan but not
discussed above. The Commission
requests comment on each of these
alternatives, both in isolation and in
combination, as well as any data that
would assist the Commission in
evaluating the costs and trade-offs
associated with these alternatives.
437. Organizational Structure.
According to the CAT NMS Plan, the
Participants considered various
organizational structures of the
Bidders.1339 The CAT NMS Plan notes
that the Bidders have three general
organizational structures: (1)
Consortiums or partnerships (i.e., the
Plan Processor would consist of more
than one unaffiliated entity that would
operate the CAT), (2) single firms (i.e.,
one entity would be the Plan Processor
and that entity would operate the CAT
as part of its other ongoing business
operations), and (3) dedicated legal
entities (i.e., Plan operations would be
conducted in a separate legal entity that
would perform no other business
activities). The CAT NMS Plan notes
that each type of organizational
structure has strengths and weaknesses
but does not discuss those strengths and
1339 See CAT NMS Plan, supra note 3, at
Appendix C, Section D.12(b).
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weaknesses. The CAT NMS Plan
concludes that the organizational
structure should not be a material factor
in selecting a bidder and does not
mandate any specific organizational
structure for the Plan Processor.1340 The
Commission requests comment on
whether the CAT NMS Plan should
mandate a particular organizational
structure. Why or why not? How can the
organizational structure of the Plan
Processor affect the costs and benefits of
the CAT NMS Plan? What are the
relative strengths and weaknesses of the
different organizational structures?
438. Primary Storage. The CAT NMS
Plan states that bidders proposed two
methods of primary data storage:
traditionally-hosted storage architecture
and infrastructure-as-a-service.1341 The
CAT NMS Plan does not mandate a
specific method for primary storage, but
does indicate that the storage solution
would meet the security, reliability, and
accessibility requirements for the CAT,
including storage of PII data, separately.
The CAT NMS Plan also indicates
several considerations in the selection
of a storage solution including maturity,
cost, complexity, and reliability of the
storage method. The Commission
requests comment on whether the CAT
NMS Plan should mandate a particular
data storage method. Why or why not?
How can the storage method affect the
costs and benefits of the Plan? What are
the relative strengths and weaknesses of
the different primary storage methods?
439. Personally Identifiable
Information. The CAT NMS Plan
discusses several requirements to
reduce the risk of misuse of PII, such as
multi-factor authentication 1342 and Role
Based Access Control for access to
PII; 1343 separation of PII from other
CAT Data; restricted access to PII; and
an auditable record of all access to PII
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1340 Id.
1341 See CAT NMS Plan, supra note 3, at
Appendix C, Section D.12(c). Traditionally-hosted
storage architecture is a model in which an
organization would purchase and maintain
proprietary servers and other hardware to store CAT
Data. Infrastructure-as-a-service is a provisioning
model in which an organization outsources the
equipment used to support operations, including
storage, hardware, servers, and networking
components, to a third party who charges for the
service on a usage basis.
1342 See CAT NMS Plan, supra note 3, at
Appendix C, Section D.12(e). Multifactor
authentication is a mechanism that requires the
user to provide more than one factor (e.g.,
biometrics/personal information in addition to a
password) in order to be validated by the system.
Id.
1343 See CAT NMS Plan, supra note 3, at
Appendix C, Section D.12(e). Role Based Access
Control (‘‘RBAC’’) is a mechanism for
authentication in which users are assigned to one
or many roles, and each role is assigned a defined
set of permissions. Id.
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data contained in the Central
Repository.1344 The CAT NMS Plan
notes that all bidders proposed some of
these requirements, but only some
bidders proposed others. The
Commission requests comment on
whether the Plan should mandate any/
all of these requirements. The
Commission further requests comment
on the alternatives to these
requirements. What are the potential
alternative ways to protect PII? What are
the costs and benefits of those
alternatives compared to the Plan?
Please provide estimates or other data to
support answers.
440. Data Ingestion Format. The Plan
discusses the trade-offs between
requiring that the CAT Reporters report
data to CAT in a uniform defined format
or in existing messaging protocols.1345
The Plan does not require either
method. A uniform defined format
would include the current process for
reporting data to OATS. This is
Approach 2 in the CAT Reporters
Study.1346 Several bidders proposed to
leverage the OATS format and enhance
it to meet the requirements of Rule 613.
The Plan states that this could reduce
the burden on certain CAT Reporters
(i.e., current OATS Reporters) and
simplify the process for those CAT
Reporters to implement the CAT.1347
Accepting existing messaging protocols
would allow CAT Reporters to submit
copies of their order handling messages
that are typically used across the order
lifecycle and within order management
processes, such as FIX. This is
Approach 1 in the CAT Reporters’
Survey.1348 The Plan states that using
existing messaging protocols could
result in quicker implementation times
and simplify data aggregation.1349 The
Plan further notes that the surveys
revealed no cost difference between the
two approaches,1350 but that FIF
members prefer using the FIX
protocol.1351 Should the Plan specify a
particular approach? Please explain.
441. The Commission requests further
information on the relative costs and
benefits and strengths and weaknesses
of these two data ingestion format
1344 See CAT NMS Plan, supra note 3, at
Appendix C, Section D.12(e). Appendix D provides
additional discussion of these PII requirements. See
id. at Appendix D, Section 4.1–4.2.
1345 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(i)(A)(2); Section D.12(f).
These are also called ‘‘Approach 1’’ and ‘‘Approach
2’’ in the Costs Section herein.
1346 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(i)(A)(2).
1347 Id. at Appendix C, Section D.12(f).
1348 Id. at Appendix C, Section B.7(b)(i)(A)(2).
1349 Id. at Appendix C, Section D.12(f).
1350 Id.
1351 Id.
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approaches. Would either of these
approaches produce more accurate data?
For example, would using existing
messaging protocols such as FIX be
more accurate because CAT Reporters
would send their messages without the
possibility of adding errors when
translating them to a different format?
Alternatively, would using existing
messaging protocols such as FIX be less
accurate because the Central Repository
would have to translate too many
different and possibly bespoke formats
into a uniform format for the CAT data?
Would a hybrid approach produce the
most accurate data? 1352 How else would
the benefits of the CAT NMS Plan differ
between these approaches?
442. The Commission requests
comment on the implementation costs
of these two data ingestion format
approaches. The Commission expects
that broker-dealers would need to
modify existing messaging protocols to
implement CAT regardless of which
approach the Plan requires for reporting
order events. What additional
implementation costs would CAT
Reporters incur to report using existing
messaging protocols? What additional
implementation costs would CAT
Reporters, both OATS and non-OATS
reporters, incur to report using a
uniform defined format such as a
modification of OATS format? In what
ways would the implementation costs
incurred at the Central Repository differ
for the two approaches? What is the
estimated cost of implementing each
approach for CAT Reporters,
Participants, and the Central
Repository?
443. The Commission requests
comment on the ongoing costs of these
two data ingestion format approaches.
How would ongoing costs be different
for the two approaches? Would CAT
Reporters need to process the order
messages before reporting using existing
messaging protocols to comply with
requirements such as using the listing
exchange symbology? If so, how costly
is that processing? How costly is the
processing required to translate order
messages into a uniform defined format
such as OATS format? What other
ongoing costs associated with these
approaches would CAT Reporters incur
and how would they differ for the two
approaches? How do the ongoing costs
incurred by the Central Repository differ
for the two approaches? Would the
translation process from existing
messaging protocols into a uniform
format be more costly for the Central
1352 A hybrid approach would allow data to be
submitted in either a uniform defined format or
using existing messaging protocols.
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Repository relative to putting reports
submitted in a uniform defined format
in a single dataset? Would the
validation process associated with
existing messaging protocols be more
costly for the Central Repository than
uniform defined format because of the
complexity of validating data from
many different and possibly bespoke
messaging protocols? What are the
estimated ongoing costs of each
approach for CAT Reporters,
Participants, and the Central
Repository?
444. Process to Develop the CAT.
Bidders proposed, and the Plan
describes, several processes for
development of the CAT: The agile or
iterative development model, the
waterfall model, and hybrid models.1353
The CAT NMS Plan does not mandate
a particular development process
because any of the options could be
utilized to manage the development of
CAT.1354 The CAT NMS Plan notes that
the agile model is more flexible and
more susceptible to the early delivery of
software for testing and feedback, but
that the agile model makes it more
difficult to accurately estimate the effort
and time required for development. The
waterfall model would also facilitate
longer-term planning and coordination
among multiple vendors or project
streams.1355 The Commission requests
comment on the strengths and
weaknesses of each development
process. The Commission further
requests comment on whether the CAT
NMS Plan should mandate a particular
process and the impact on the relative
costs and benefits of the mandating a
particular process.
445. Industry Testing. The CAT NMS
Plan requires a dedicated test
environment that is functionally
equivalent to the production
environment and available 24 hours a
day, six days a week.1356 The CAT NMS
Plan discusses alternative approaches
for industry testing.1357 Using the
production environment for scheduled
testing events on weekends or on
specific dates would allow for realistic
testing because multiple users are likely
to test at the same time. However, CAT
1353 See CAT NMS Plan, supra note 3, at
Appendix C, Section D.12(g). An agile methodology
is an iterative model in which development is
staggered and provides for continuous evolution of
requirements and solutions. A waterfall model is a
sequential process of software development with
dedicated phases for Conception, Initiation,
Analysis, Design, Construction, Testing,
Production/Implementation and Maintenance. Id.
1354 Id.
1355 Id.
1356 See CAT NMS Plan, supra note 3, at
Appendix D, Section 1.2.
1357 See id, at Appendix C, Section D.12(h).
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Reporters would not be able to test
when it might be more convenient or
less costly for them to test. The
Commission requests comment on
whether the Plan should mandate
particular industry testing processes and
the benefits and costs of these
alternatives compared to the
requirements of the CAT NMS Plan.
How would either of these alternatives
lead to more accurate data than the
Plan? Would the alternatives otherwise
affect the benefits of the CAT NMS
Plan? How would either of these
alternatives affect the costs of the CAT
NMS Plan for CAT Reporters,
Participants, and the Central
Repository? Please provide estimates, if
available.
446. Quality Assurance (QA). The
CAT NMS Plan mentions several
alternative approaches to quality
assurance, but does not select a
particular approach.1358 In particular,
the CAT NMS Plan states that the
Participants considered many
approaches, including continuous
integration, test automation, and
industry standards such as ISO 20000/
ITIL. Although the Plan does not
mandate a particular approach, certain
requirements were detailed in the
RFP.1359 In addition, the CAT NMS Plan
discusses the trade-offs associated with
the QA staffing level.1360 The
Commission requests comment on
whether the CAT NMS Plan should
mandate a particular QA approach. Why
or why not? If so, which approach
should the Plan mandate? How can the
QA approach affect the costs and
benefits of the CAT NMS Plan? For
example, how does the QA approach
affect the accuracy and accessibility of
the CAT Data? What are the relative
strengths and weaknesses of the
different quality assurance approaches?
447. User Support and Help Desk. The
CAT NMS Plan discusses several
alternatives related to how the Plan
Processor provides a CAT Help Desk
that would be available 24 hours a day,
7 days a week and be able to manage
2,500 calls per month.1361 Specifically,
1358 See
id., at Appendix C, Section D.12(i).
RFP, supra note 29, at 31. Specifically,
the RFP requires that Bidders’ responses include
both the functional and non-functional testing that
includes the following: System testing, integration
testing, regression testing, software performance
testing, system performance testing, application
programming interface (API) testing, user
acceptance testing, industry testing,
interoperability, security, load and performance
testing, and CAT Reporter testing.
1360 See CAT NMS Plan, supra note 3, at
Appendix C, Section D.12(i). Bidder QA staffing
levels range from 2 to 90. Id.
1361 See CAT NMS Plan, supra note 3, at
Appendix C, Section D.12(j). The RFP specified
these standards. Id.
1359 See
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alternatives relate to the number of user
support staff members, the degree to
which the support team is dedicated to
CAT, and whether the help desk is
located in the US or offshore. The CAT
NMS Plan discusses the benefit and cost
trade-offs,1362 but does not mandate any
of the particular alternatives. Instead,
the CAT NMS Plan commits to
considering each bidder’s user support
proposals in the context of the overall
bid. The Commission requests comment
on whether the CAT NMS Plan should
specify the standards for user support.
How would the various alternatives
affect the benefits of CAT? How would
the various alternatives affect the
implementation costs of CAT? How
would the various alternatives affect the
ongoing costs of CAT for CAT Reporters,
Participants, and the Central
Repository? Please explain and provide
estimates, if available.
448. CAT User Management. The CAT
NMS Plan discusses several alternatives
to manage users, but does not require a
specific approach or standards.1363
Specifically, the CAT NMS Plan
discusses help desk creation of
accounts, user creation (by brokerdealers or regulators), and multi-role
solutions. Generally, there are trade-offs
in terms of convenience and security in
the approaches.1364 The Commission
requests comments on whether the CAT
NMS Plan should specify an approach
for user management. How would the
various alternatives affect the benefits of
CAT, such as accessibility? How would
the various alternatives affect the
implementation costs of CAT? How
would the various alternatives affect the
ongoing costs of CAT for CAT Reporters,
Participants, and the Central
Repository? How would the various
alternatives affect the risk of a security
breach or misuse of the CAT Data?
Please explain and provide estimates, if
available.
449. Required Reportable Events. The
CAT NMS Plan states that the
Participants considered requiring the
reporting of multiple additional order
event types, such as the ‘‘results order
event’’ and the ‘‘CAT feedback order
1362 See id. The Plan states that a larger support
staff could be more effective, but would be more
costly. Further, a dedicated CAT support team
would have a deeper knowledge of CAT but would
be more costly. Finally, a U.S.-based help desk
could facilitate greater security and higher quality
service, but would be more costly. Id.
1363 See CAT NMS Plan, supra note 3, at
Appendix C, Section D.12(k). User management is
a business function that grants, controls, and
maintains user access to a system. Id. at n.253.
1364 See id. for more specific information on the
relative strengths and weaknesses of each approach.
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event.’’ 1365 According to the CAT NMS
Plan, a ‘‘results order event’’ type would
not provide additional value over a
‘‘daisy chain’’ linkage method and a
‘‘CAT feedback order event’’ can be
generated by the Plan Processor, making
reporting by others unnecessary.1366
The Commission requests comments on
these additional order event types and
any other order event types that the Plan
might require. Should the CAT NMS
Plan require additional order event
types? What are these order event types
and what distinguishes them from the
required order event types? What would
be the purpose of these order event
types? Would they make the CAT Data
more complete or more accurate? How
would regulators use these event types?
How much would these additional order
event types cost to report, to validate,
and/or to store? Are there any other
costs associated with these additional
order event types? Please provide
estimates, if available.
450. Data Feed Connectivity. The Plan
discusses requiring the collection of SIP
data in real-time as opposed to through
an end-of-day batch process.1367
According to the Plan, real-time data
would provide for more rapid access to
SIP Data, but may require additional
processing support to deal with out-ofsequence or missing records.1368
Because CAT Reporters are only
required to report order information on
a next-day basis, the Plan does not
require the Plan Processor to have realtime SIP connectivity. The Commission
requests comments on whether the Plan
should require a particular SIP
connectivity. The Commission requests
comment on the costs and benefits of
requiring real-time SIP connectivity, or
conversely, the costs and benefits of
requiring end-of-day batch SIP
connectivity (and not allow real-time).
What would the Plan Processor do with
real-time SIP data? Would the real-time
SIP data be available to regulators, and
if so, what would regulators do with
that data? Do all regulators currently
receive real-time SIP data? How much
would the various SIP connectivity
alternatives cost? How much processing
would each alternative require to be of
use to the Plan Processor or regulators?
I. Request for Comment on the
Economic Analysis
The Commission has identified above
the economic effects associated with the
proposed CAT NMS Plan and requests
1365 See CAT NMS Plan, supra note 3, at
Appendix C, Section D.12(l).
1366 Id.
1367 See CAT NMS Plan, supra note 3, at
Appendix C, Section D.12(n).
1368 See id.
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comment on all aspects of its
preliminary economic analysis. The
Commission encourages Commenters to
identify, discuss, analyze, and supply
relevant data, information, or statistics
regarding any such economic effects.
Commenters should, when possible,
provide the Commission with data to
support their views. Commenters
suggesting alternative approaches
should provide comprehensive
proposals, including any conditions or
limitations that they believe should
apply, the reasons for the suggested
approaches, their analysis of the costbenefit trade-offs of suggested
approaches compared to the Plan, and
their analysis regarding why their
suggested approaches would satisfy the
objectives of Rule 613. In particular, the
Commission seeks comment on the
following:
451. Do Commenters agree with the
Commission’s analysis of the potential
economic effects of the Plan? Why or
why not?
452. Has the Commission considered
all relevant economic effects? If not,
what other economic effects should the
Commission consider?
453. Do Commenters have
information that could help the
Commission fill in gaps in the economic
analysis related to a lack of information
on details in the plan that could
significantly affect the economic
analysis? If so, please provide this
information and explain how it could
affect the economic analysis.
454. Do Commenters have data that
could help the Commission fill in gaps
in the economic analysis related to a
lack of available data? If so, please
provide this information and explain
how it could affect the economic
analysis.
455. Do Commenters believe that
there are additional categories of
benefits or costs that could be quantified
or otherwise monetized? If so, please
identify these categories and, if possible,
provide specific estimates or data.
456. Do Commenters believe that the
CAT NMS Plan would change the
behavior of any market participant in
such a way as to create unintended
effects? For example, would
requirements to report certain data
elements or events change the activities
of market participants in ways other
than deterrence but that create secondorder economic effects? If so, please
explain. Would such effects be
economic benefits or economic costs?
Please explain.
V. Paperwork Reduction Act
Certain provisions of Rule 613 contain
‘‘collection of information
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requirements’’ within the meaning of
the Paperwork Reduction Act of 1995
(‘‘PRA’’) 1369 and the Commission has
submitted them to the Office of
Management and Budget (‘‘OMB’’) for
review in accordance with 44 U.S.C.
3507 and 5 CFR 1320.11. An agency
may not conduct or sponsor, and a
person is not required to respond to, a
collection of information unless it
displays a currently valid OMB control
number. The title of the collection of
information is ‘‘Creation of a
Consolidated Audit Trail Pursuant to
Section 11A of the Securities Exchange
Act of 1934 and Rules Thereunder.’’
As noted above, Rule 613 of
Regulation NMS (17 CFR part 242)
requires the Participants to jointly
submit to the Commission the CAT
NMS Plan to govern the creation,
implementation, and maintenance of the
consolidated audit trail and Central
Repository for the collection of
information for NMS securities. The
CAT NMS Plan must require each
Participant and its respective members
to provide certain data to the Central
Repository in compliance with Rule
613. When it adopted Rule 613, the
Commission discussed the burden hours
associated with the development and
submission of the CAT NMS Plan.1370 In
doing so, the Commission noted that the
1369 44
U.S.C. 3501 et. seq.
Adopting Release, supra note 9, at 45804.
On September 25, 2015, the Commission submitted
to OMB a request for approval of an extension of
the collection of information related to the
development and submission of the CAT NMS Plan.
The Commission stated that, although that
collection of information pertained to the
development and submission of an NMS plan, and
that such NMS plan had already been developed
and submitted, the Commission believed it was
prudent to extend the collection of information
during the pendency of the Commission’s review of
the NMS plan. The Commission provided estimates
for 19 SROs, stating that they would spend a total
of 2,760 burden hours of internal legal, compliance,
information technology, and business operations
time to comply with the existing collection of
information, calculated as follows: (880
programmer analyst hours) + (880 business analyst
hours) + (700 attorney hours) + (300 compliance
manager hours) = 2,760 burden hours to prepare
and file an NMS plan, or approximately 52,440
burden hours in the aggregate, calculated as
follows: (2,760 burden hours per SRO) × (19 SROs)
= 52,440 burden hours. Amortized over three years,
the annualized burden hours would be 920 hours
per SRO, or a total of 17,480 for all 19 SROs. The
Commission further estimated that the aggregate
one-time reporting burden for preparing and filing
an NMS plan would be approximately $20,000 in
external legal costs per SRO, calculated as follows:
50 legal hours × $400 per hour = $20,000, for an
aggregate burden of $380,000, calculated as follows:
($20,000 in external legal costs per SRO) × (19
SROs) = $380,000. Amortized over three years, the
annualized capital external cost would be $6,667
per SRO, or a total of $126,667 for the 19 SROs. See
Submission for OMB Review; Comment Request for
Extension of Rule 613; SEC File No. 270–616, OMB
Control No. 3235–0671 (September 25, 2015), 80 FR
59209 (October 1, 2015).
1370 See
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development and submission of the
CAT NMS Plan that would govern the
creation, implementation and
maintenance of a consolidated audit
trail is a multi-step process and
accordingly that the Commission was
deferring its discussion of the burden
hours associated with the other
paperwork requirements required by
Rule 613 and ongoing burdens since
they would only be incurred if the
Commission approves the CAT NMS
Plan.1371
The Commission is now publishing
its preliminary estimates of the
paperwork burdens of the CAT NMS
Plan. These estimates are based on the
requirements of Rule 613 and take into
account the Exemption Order discussed
above.1372 Information and estimates
contained in the CAT NMS Plan that
was submitted by the Participants also
informed these estimates because they
provide a useful, quantified point of
reference regarding potential burdens
and costs. The Commission
acknowledges that the CAT NMS Plan
as filed contains provisions in addition
to those required by Rule 613 (e.g.,
requiring the inclusion of OTC Equity
Securities; 1373 the availability of
historical data for not less than six years
in a manner that is directly available
and searchable without manual
intervention from the Plan
Processor; 1374 a complete symbology
database to be maintained by the Plan
Processor, including the historical
symbology; as well as issue symbol
information and data using the listing
exchange symbology format 1375).
A. Summary of Collection of
Information Under Rule 613
Rule 613 requires that the CAT NMS
Plan must provide for an accurate, timesequenced record of an order’s life, from
receipt or origination, through the
process of routing, modification,
cancellation and execution.1376 The
Central Repository, created by the
Participants, would be required to
receive, consolidate and retain the data
required under the Rule.1377 Such data
must be accessible to each Participant,
as well as the Commission, for purposes
1371 Id.
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1372 See
Exemption Order, supra note 18.
CAT NMS Plan, supra note 3, at Section
1.1 (defining ‘‘Eligible Security’’ as all NMS
securities and all OTC Equity Securities); Appendix
C, Section A.1(a).
1374 See id. at Section 6.5(b)(i).
1375 See CAT NMS Plan, supra note 3 at
Appendix C, Section A.1(a); Appendix D, Section
2.
1376 See 17 CFR 242.613(c)(1).
1377 See 17 CFR 242.613(e)(1).
1373 See
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of performing regulatory and oversight
responsibilities.1378
Rule 613 provides that the CAT NMS
Plan must require that all Participants
that are exchanges, and their members,
record and report to the Central
Repository certain data for each NMS
security registered or listed on a
national securities exchange, or
admitted to unlisted trading privileges
on such exchange, and each Participant
that is a national securities association,
and its members, record and report for
each NMS security for which
transaction reports are required to be
submitted to the national securities
association in a uniform electronic
format or in a manner that would allow
the Central Repository to convert the
data to a uniform electronic format for
consolidation and storage. This data
must be recorded contemporaneously
with the Reportable Event and reported
to the Central Repository in no event
later than 8:00 a.m. Eastern Time on the
trading day following the day such
information has been recorded by the
national securities exchange, national
securities association, or member.1379
Rule 613 also provides that the CAT
NMS Plan must require each member of
a Participant to record and report to the
Central Repository other information
which may not be available until later
in the clearing process no later than 8:00
a.m. Eastern Time on the trading day
following the day the member receives
such information.1380 The CAT NMS
Plan also requires the Participants to
provide to the Commission, at least
every two years after the effectiveness of
the CAT NMS Plan, a written
assessment of the operation of the
consolidated audit trail.1381
Rule 613 requires all Participants to
make use of the consolidated
information, either by each developing
and implementing new surveillance
systems, or by enhancing existing
surveillance systems.1382 The Rule also
requires the CAT NMS Plan to require
Participants to submit to the
Commission a document outlining the
manner in which non-NMS securities
and primary market transactions in
NMS and non-NMS securities can be
incorporated into the consolidated audit
trail.1383
1. Central Repository
Rule 613 provides that the CAT NMS
Plan must require the creation and
1378 See
17 CFR 242.613(e)(1), (e)(2).
17 CFR 242.613(c)(3).
1380 See 17 CFR 242.613(c)(4).
1381 See 17 CFR 242.613(b).
1382 See 17 CFR 242.613(a)(3)(iv).
1383 See 17 CFR 242.613(i).
1379 See
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maintenance of a Central Repository
that would be responsible for the
receipt, consolidation, and retention of
all data submitted by the Participants
and their members.1384 The Rule also
requires that the CAT NMS Plan require
the Central Repository to retain the
information reported pursuant to
subparagraphs (c)(7) and (e)(7) of the
Rule for a period of not less than five
years in a convenient and usable
standard electronic data format that is
directly available and searchable
electronically without any manual
intervention.1385 The Plan Processor is
responsible for operating the Central
Repository in compliance with the Rule
and the CAT NMS Plan. In addition, the
Rule provides that the CAT NMS Plan
must include: Policies and procedures
to ensure the security and
confidentiality of all information
submitted to the Central Repository,1386
including safeguards to ensure the
confidentiality of data; 1387 information
barriers between regulatory and nonregulatory staff with regard to access
and use of data; 1388 a mechanism to
confirm the identity of all persons
permitted to use the data; 1389 a
comprehensive information security
program for the Central Repository that
is subject to regular reviews by the
CCO;1390 and penalties for noncompliance with policies and
procedures of the Participants or the
Central Repository with respect to
information security.1391 Further, the
Rule provides that the CAT NMS Plan
must include policies and procedures to
be used by the Plan Processor to ensure
the timeliness, accuracy, integrity, and
completeness of the data submitted to
the Central Repository,1392 as well as
policies and procedures to ensure the
accuracy of the consolidation by the
Plan Processor of the data.1393
2. Data Collection and Reporting
Rule 613 provides that the CAT NMS
Plan must require each Participant, and
any member of such Participant, to
record and electronically report to the
1384 See
17 CFR 242.613(e)(1).
17 CFR 242.613(e)(8). The Commission
notes that the CAT NMS Plan proposes to require
that the Central Repository retain data reported in
a convenient and usable standard electronic data
format that is directly available and searchable
electronically without any manual intervention for
six years. See CAT NMS Plan, supra note 3, at
Section 6.5(b)(i).
1386 See 17 CFR 242.613(e)(4)(i).
1387 See 17 CFR 242.613(e)(4)(i)(A).
1388 See 17 CFR 242.613(e)(4)(i)(B).
1389 See 17 CFR 242.613(e)(4)(i)(C).
1390 Id.
1391 See 17 CFR 242.613(e)(4)(i)(D).
1392 See 17 CFR 242.613(e)(4)(ii).
1393 See 17 CFR 242.613(e)(4)(iii).
1385 See
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Central Repository details for each order
and Reportable Event documenting the
life of an order through the process of
original receipt or origination, routing,
modification, cancellation, and
execution (in whole or part) for each
NMS security.1394 For national
securities exchanges, Rule 613 requires
the CAT NMS Plan to require each
national securities exchange and its
members to record and report to the
Central Repository the information
required by Rule 613(c)(7) for each NMS
security registered or listed for trading
on an exchange, or admitted to unlisted
trading privileges on such exchange.1395
Rule 613 provides that the CAT NMS
Plan must require each Participant that
is a national securities association, and
its members, to record and report to the
Central Repository the information
required by Rule 613(c)(7) for each NMS
security for which transaction reports
are required to be submitted to the
Participant.1396 The Rule requires each
Participant and any member of a
Participant to record the information
required by Rule 613(c)(7)(i) through (v)
contemporaneously with the Reportable
Event, and to report this information to
the Central Repository by 8:00 a.m.
Eastern Time on the trading day
following the day such information has
been recorded by the Participant or
member of the Participant.1397 The Rule
requires each Participant and any
member of a Participant to record and
report the information required by Rule
613(c)(7)(vi) through (viii) to the Central
Repository by 8:00 a.m. Eastern Time on
the trading day following the day the
Participant or member receives such
information.1398 The Rule requires each
Participant and any member of such
Participant to report information
required by Rule 613(c)(7) in a uniform
electronic format or in a manner that
would allow the Central Repository to
convert the data to a uniform electronic
format for consolidation and storage.1399
Such information must also be
reported to the Central Repository with
a time stamp of a granularity that is at
least to the millisecond or less to the
extent that the order handling and
execution systems of a Participant or a
member utilize time stamps in finer
increments.1400 The Commission
understands that any changes to brokerdealer recording and reporting systems
to comply with Rule 613 may also
1394 See
17 CFR 242.613(c)(1), (c)(5), (c)(6), (c)(7).
17 CFR 242.613(c)(1), (c)(5).
1396 See 17 CFR 242.613(c)(1), (c)(6).
1397 See 17 CFR 242.613(c)(3).
1398 See 17 CFR 242.613(c)(4).
1399 See 17 CFR 242.613(c)(2).
1400 See 17 CFR 242.613(d)(3).
1395 See
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include changes to comply with the
millisecond time stamp requirement.
3. Collection and Retention of NBBO,
Last Sale Data and Transaction Reports
Rule 613(e)(7) provides that the CAT
NMS Plan must require the Central
Repository to collect and retain on a
current and continuing basis: (i)
Information on the NBBO for each NMS
Security; (ii) transaction reports
reported pursuant to a transaction
reporting plan filed with the
Commission pursuant to, and meeting
the requirements of, Rule 601 of
Regulation NMS; and (iii) Last Sale
Reports reported pursuant to the OPRA
Plan.1401 The Central Repository must
retain this information for no less than
five years.1402
4. Surveillance
Rule 613(f) provides that the CAT
NMS Plan must require that every
Participant develop and implement a
surveillance system, or enhance existing
surveillance systems, reasonably
designed to make use of the
consolidated information contained in
the consolidated audit trail. Rule
613(a)(3)(iv) provides that the CAT NMS
Plan must require that the surveillance
systems be implemented within
fourteen months after effectiveness of
the CAT NMS Plan.
5. Participant Rule Filings
Rule 613(g)(1) requires each
Participant to file with the Commission,
pursuant to Section 19(b)(2) of the
Exchange Act and Rule 19b–4
thereunder,1403 a proposed rule change
to require its members to comply with
the requirements of Rule 613 and the
CAT NMS Plan approved by the
Commission.1404 The burden of filing
such a proposed rule change is already
included under the collection of
information requirements contained in
Rule 19b–4 under the Exchange Act.1405
6. Written Assessment of Operation of
the Consolidated Audit Trail
Rule 613(b)(6) provides that the CAT
NMS Plan must require the Participants
1401 See
17 CFR 242.613(e)(7); 17 CFR 242.601.
17 CFR 242.613(e)(8).
1403 15 U.S.C. 78s(b)(2) and 17 CFR 240.19b–4.
1404 See 17 CFR 242.613(g)(1).
1405 See Securities Exchange Act Release No.
50486 (October 5, 2004), 69 FR 60287, 60293
(October 8, 2004) (File No. S7–18–04) (describing
the collection of information requirements
contained in Rule 19b–4 under the Exchange Act).
The Commission has submitted revisions to the
current collection of information titled ‘‘Rule 19b–
4 Filings with Respect to Proposed Rule Changes by
Self-Regulatory Organizations’’ (OMB Control No.
3235–0045). According to the last submitted
revision, for Fiscal Year 2012 SROs submitted 1,688
Rule 19b–4 proposed rule changes.
1402 See
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to provide the Commission a written
assessment of the consolidated audit
trail’s operation at least every two years,
once the CAT NMS Plan is effective.1406
Such written assessment shall include,
at a minimum, with respect to the CAT:
(i) An evaluation of its performance; (ii)
a detailed plan for any potential
improvements to its performance; (iii)
an estimate of the costs associated with
any such potential improvements; and
(iv) an estimated implementation
timeline for any such potential
improvements, if applicable.1407
7. Document on Expansion to Other
Securities
Rule 613(i) provides that the CAT
NMS Plan must require the Participants
to jointly provide to the Commission,
within six months after the CAT NMS
Plan is effective, a document outlining
how the Participants could incorporate
into the CAT information regarding: (1)
Equity securities that are not NMS
securities; 1408 (2) debt securities; and
market transactions in equity securities
that are not NMS securities and debt
securities.1409
B. Proposed Use of Information
1. Central Repository
Rule 613 states that the Central
Repository is required to receive,
consolidate and retain the data required
to be submitted by the Participants and
their members.1410 Participant and
Commission Staff would have access to
the data for regulatory purposes.1411
2. Data Collection and Reporting
The Commission believes that the
data collected and reported pursuant to
the requirements of Rule 613 would be
used by regulators to monitor and
surveil the securities markets and detect
and investigate activity, whether on one
market or across markets.1412 The data
collected and reported pursuant to Rule
613 would also be used by regulators for
the evaluation of tips and complaints
and for complex enforcement inquiries
or investigations, as well as inspections
and examinations. Further, the
Commission believes that regulators
would use the data collected and
reported to conduct timely and accurate
analysis of market activity for
reconstruction of broad-based market
1406 See
17 CFR 242.613(b)(6).
id.
1408 As noted above, the CAT NMS Plan would
require the inclusion of OTC Equity Securities,
while Rule 613 does not include such a
requirement. See supra note 1373.
1409 See 17 CFR 242.613(i).
1410 See 17 CFR 242.613(e)(1).
1411 See 17 CFR 242.613(e)(2).
1412 See Section IV.E.2, supra.
1407 See
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events in support of regulatory
decisions.
3. Collection and Retention of NBBO,
Last Sale Data and Transaction Reports
The CAT NMS Plan must require the
Central Repository to collect and retain
NBBO information, transaction reports,
and Last Sale Reports in a format
compatible with the order and event
information collected pursuant to Rule
613(c)(7).1413 Participant and
Commission Staff could use this data to
easily search across order, NBBO, and
transaction databases. The Commission
believes that having the NBBO
information in a uniform electronic
format compatible with order and event
information would assist Participants in
enforcing compliance with federal
securities laws, rules, and regulations,
as well as their own rules.1414 The
Commission also believes that a CAT
NMS Plan requiring the Central
Repository to collect and retain the
transaction reports and Last Sale
Reports in a format compatible with the
order execution information would aid
regulators in monitoring for certain
market manipulations.1415
4. Surveillance
The requirement in Rule 613(f) that
the Participants develop and implement
a surveillance system, or enhance
existing surveillance systems,
reasonably designed to make use of the
consolidated information in the
consolidated audit trail,1416 is intended
to position regulators to make full use
of the consolidated audit trail data in
order to carry out their regulatory
1413 See
17 CFR 242.613(e)(7).
Commission and Participants use the
NBBO to, among other things, evaluate members for
compliance with numerous regulatory
requirements, such as the duty of best execution or
Rule 611 of Regulation NMS. See 17 CFR 242.611;
see also, e.g., ISE Rule 1901 and Phlx Rule 1084.
1415 Rules 613(e)(7)(ii) and (iii) require that
transaction reports reported pursuant to an effective
transaction reporting plan and Last Sale Reports
reported pursuant to the OPRA Plan be reported to
the Central Repository. This requirement should
allow regulators to evaluate certain trading activity.
For example, trading patterns of reported and
unreported trades may cause Participant or
Commission staff to make further inquiries into the
nature of the trading to ensure that the public was
receiving accurate and timely information regarding
executions and that market participants were
continuing to comply with trade reporting
obligations under Participant rules. Similarly,
patterns in the transactions that are reported and
unreported to the consolidated tape could be
indicia of market abuse, including failure to obtain
best execution for customer orders or possible
market manipulation. The Commission and the
Participants would be able to review information on
trades not reported to the tape to determine whether
they should have been reported, whether Section 31
fees should have been paid, and/or whether the
trades are part of a manipulative scheme.
1416 17 CFR 242.613(f).
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obligations. In addition, because trading
and potentially manipulative activities
could take place across multiple
markets, and the consolidated audit trail
data would trace the entire lifecycle of
an order from origination to execution
or cancellation, new or enhanced
surveillance systems may also enable
regulators to investigate potentially
illegal activity that spans multiple
markets more efficiently.
5. Written Assessment of Operation of
the Consolidated Audit Trail
Rule 613(b)(6) requires the CAT NMS
Plan to require the Participants to
provide the Commission a written
assessment of the CAT’s operation at
least every two years, once the CAT
NMS Plan is effective.1417 These
assessments would aid Participant and
Commission Staff in understanding and
evaluating any deficiencies in the
operation of the consolidated audit trail
and to propose potential improvements
to the CAT NMS Plan. The Commission
believes the written assessments would
allow Participants and Commission
Staff to periodically assess whether such
potential improvements would enhance
market oversight. Moreover, the
Commission believes these assessments
would help inform the Commission
regarding the likely feasibility, costs,
and impact of, and the Participants’
approach to, the consolidated audit trail
evolving over time.
6. Document on Expansion to Other
Securities
Rule 613(i) requires the CAT NMS
Plan to require the Participants to
jointly provide to the Commission,
within six months after the CAT NMS
Plan is effective, a document outlining
how the SROs could incorporate into
the CAT information regarding certain
products that are not NMS
securities.1418 A document outlining a
possible expansion of the consolidated
audit trail could help inform the
Commission about the SROs’ strategy
for potentially accomplishing such an
expansion over a reasonable period of
time. Moreover, such document would
aid the Commission in assessing the
feasibility and impact of possible future
proposals by the SROs to include such
additional securities and transactions in
the consolidated audit trail.
1417 17
CFR 242.613(b)(6).
17 CFR 242.613(i). See also supra note
1418 See
1408.
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C. Respondents
1. National Securities Exchanges and
National Securities Associations
Rule 613 applies to the 20
Participants (the 19 national securities
exchanges and the one national
securities association (FINRA))
currently registered with the
Commission.1419
2. Members of National Securities
Exchanges and National Securities
Association
Rule 613 also applies to the
Participants’ members, that is, brokerdealers. The Commission believes that
Rule 613 applies to 1,800 brokerdealers. The Commission understands
that there are currently 4,138 brokerdealers; however, not all broker-dealers
are expected to have CAT reporting
obligations. The Participants report that
approximately 1,800 broker-dealers
currently quote or execute transactions
in NMS Securities, Listed Options or
OTC Equity Securities and would likely
have CAT reporting obligations.1420
D. Total Initial and Annual Reporting
and Recordkeeping Burden
1. Burden on National Securities
Exchanges and National Securities
Associations
a. Central Repository
Rule 613 requires the Participants to
jointly establish a Central Repository
tasked with the receipt, consolidation,
and retention of the reported order and
execution information. The Participants
issued an RFP soliciting Bids from
entities to act as the consolidated audit
trail’s Plan Processor.1421 Bidders were
asked to provide total one-year and
annual recurring cost estimates to
estimate the costs to the Participants for
implementing and maintaining the
1419 The Participants are: BATS Exchange, Inc.,
BATS–Y Exchange, Inc., BOX Options Exchange
LLC, C2 Options Exchange, Incorporated, Chicago
Board Options Exchange, Incorporated, Chicago
Stock Exchange, Inc., EDGA Exchange, Inc., EDGX
Exchange, Inc., Financial Industry Regulatory
Authority, Inc., International Securities Exchange,
LLC, ISE Gemini, LLC, ISE Mercury, LLC, Miami
International Securities Exchange LLC, NASDAQ
OMX BX, Inc., NASDAQ OMX PHLX LLC, The
NASDAQ Stock Market LLC, National Stock
Exchange, Inc., New York Stock Exchange LLC,
NYSE MKT LLC, and NYSE Arca, Inc. The
Commission understands that ISE Mercury, LLC
will become a Participant in the CAT NMS Plan and
thus is accounted for as a Participant for purposes
of this Section. See supra note 3.
1420 The Commission understands that the
remaining 2,338 registered broker-dealers either
trade in asset classes not currently included in the
definition of Eligible Security or do not trade at all
(e.g., broker-dealers for the purposes of
underwriting, advising, private placements). See
supra note 864.
1421 See Section III.A.1, supra.
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Central Repository.1422 There are
currently three remaining Bidders, any
of which could be selected to be the
Plan Processor. The Plan Processor
would be responsible for building,
operating, administering and
maintaining the Central Repository.
The Plan’s Operating Committee,
which consists of one voting
representative of each Participant,1423
would be responsible for the
management of the LLC, including the
Central Repository, acting by Majority or
Supermajority Vote, depending on the
issue.1424 In managing the Central
Repository, among other things, the
Operating Committee would have the
responsibility to authorize the following
actions of the LLC: (1) Interpreting the
Plan; 1425 (2) determining appropriate
funding-related policies, procedures and
practices consistent with Article XI of
the CAT NMS Plan; 1426 (3) terminating
the Plan Processor; (4) selecting a
successor Plan Processor (including
establishing a Plan Processor Selection
Subcommittee to evaluate and review
Bids and make a recommendation to the
Operating Committee with respect to the
selection of the successor Plan
Processor); 1427 (5) entering into,
modifying or terminating any Material
Contract; 1428 (6) making any Material
Systems Change; 1429 (7) approving the
initial Technical Specifications or any
Material Amendment to the Technical
Specifications proposed by the Plan
Processor; 1430 (8) amending the
Technical Specifications on its own
motion; 1431 (9) approving the Plan
Processor’s appointment or removal of
the CCO, CISO, or any Independent
Auditor in accordance with Section
6.1(b) of the CAT NMS Plan; 1432 (10)
approving any recommendation by the
CCO pursuant to Section
6.2(a)(v)(A); 1433 (11) selecting the
members of the Advisory
1422 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(i)(B). The CAT NMS
Plan listed the following as primary drivers of Bid
costs: (1) Reportable volumes of data ingested into
the Central Repository; (2) number of technical
environments that would be have to be built to
report to the Central Repository; (3) likely future
rate of increase of reportable volumes; (4) data
archival requirements; and (5) user support and/or
help desk resource requirements. See id. at Section
B.7(b)(i)(B).
1423 See id. at Section 4.2(a).
1424 See Section IV.E.3.d(1), supra.
1425 See CAT NMS Plan, supra note 3, at Section
4.3(a)(iii).
1426 See id. at Section 4.3(a)(vi).
1427 See id. at Section 4.3(b)(i).
1428 See id. at Section 4.3(b)(iv).
1429 See id. at Section 4.3(b)(v).
1430 See id. at Section 4.3(b)(vi).
1431 See id. at Section 4.3(b)(vii).
1432 See id. at Section 4.3(b)(iii).
1433 See id. at Section 4.3(a)(iv).
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Committee; 1434 (12) selecting the
Operating Committee chair; 1435 and (13)
determining to hold an Executive
Session of the Operating Committee.1436
Additionally, in managing the Central
Repository, the Operating Committee
would have the responsibility and
authority, as appropriate, to: (1) Direct
the LLC to enter into one or more
agreements with the Plan Processor
obligating the Plan Processor to perform
the functions and duties contemplated
by the Plan to be performed by the Plan
Processor, as well as such other
functions and duties the Operating
Committee deems necessary or
appropriate; 1437 (2) appoint as an
Officer of the Company the individual
who has direct management
responsibility for the Plan Processor’s
performance of its obligations with
respect to the CAT; 1438 (3) approve
policies, procedures, and control
structures related to the CAT System
that are consistent with Rule 613(e)(4),
Appendix C and Appendix D of the
CAT NMS Plan that have been
developed and will be implemented by
the Plan Processor; 1439 (4) approve any
policy, procedure or standard (and any
material modification or amendment
thereto) applicable primarily to the
performance of the Plan Processor’s
duties as the Plan Processor; 1440 (5) for
both the CCO and CISO, render their
annual performance reviews and review
and approve their compensation; 1441 (6)
review the Plan Processor’s performance
under the Plan at least once each year,
or more often than once each year upon
the request of two Participants that are
not Affiliated Participants; 1442 (7) in
conjunction with the Plan Processor,
approve and regularly review (and
update as necessary) SLAs governing
the performance of the Central
Repository; 1443 (8) maintain a
Compliance Subcommittee for the
purpose of aiding the CCO as
necessary; 1444 and (9) designate by
resolution one or more Subcommittees
it deems necessary or desirable in
furtherance of the management of the
business and affairs of the Company.1445
The CAT NMS Plan also proposes to
establish a Selection Committee
1434 See
id. at Section 4.3(a)(ii).
id. at Section 4.3(a)(i).
1436 See id. at Section 4.3(a)(v).
1437 See id. at Section 6.1(a).
1438 See id. at Section 4.6(b).
1439 See id. at Section 6.1(c).
1440 See id. at Section 6.1(e).
1441 See id. at Section 6.2(a)(iv) and Section
6.2(b)(iv).
1442 See id. at Section 6.1(n).
1443 See id. at Section 6.1(h).
1444 See id. at Section 4.12(b).
1445 See id. at Section 4.12(a).
1435 See
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comprised of one Voting Senior Officer
from each Participant,1446 which is
tasked with the review and evaluation
of Bids and the selection of the initial
Plan Processor.1447 The Selection
Committee would determine, by
Majority Vote, whether Shortlisted
Bidders will have the opportunity to
revise their Bids.1448 The Selection
Committee would review and evaluate
all Shortlisted Bids, including any
permitted revisions submitted by
Shortlisted Bidders, and in doing so,
may consult with the Advisory
Committee (or the DAG until the
Advisory Committee is formed) and
such other Persons as the Selection
Committee deems appropriate.1449 After
receipt of any permitted revisions, the
Selection Committee would select the
Initial Plan Processor from the
Shortlisted Bids in two rounds of voting
where each Participant has one vote via
its Voting Senior Officer in each
round.1450 Following the selection of
the Initial Plan Processor, the
Participants would file with the
Commission a statement identifying the
Initial Plan Processor and including the
information required by Rule 608.1451
For its initial and ongoing internal
burden and cost estimates associated
with the management of the Central
Repository, the Commission is relying
on estimates provided in the CAT NMS
Plan for the development of the CAT
NMS Plan, which the Participants ‘‘have
accrued, and will continue to
accrue,’’ 1452 and have described in the
CAT NMS Plan as ‘‘reasonably
associated with creating, implementing,
and maintaining the CAT upon the
Commission’s adoption of the CAT
NMS Plan.’’ 1453
The Commission believes that the
activities of the Operating Committee
and the Selection Committee overlap
with those undertaken by the
Participants to develop the CAT NMS
Plan. The CAT NMS Plan describes the
costs incurred by the Participants to
develop the CAT NMS Plan as including
‘‘staff time contributed by each
Participant to, among other things,
determine the technological
requirements for the Central Repository,
develop the RFP, evaluate Bids
received, design and collect the data
necessary to evaluate costs and other
economic impacts, meet with Industry
1446 See
id. at Section 5.1(a).
id. at Section 5.1.
1448 See id. at Section 5.1(d)(i).
1449 See id. at Section 5.1(d)(ii).
1450 See id. at Section 5.1(e).
1451 See id. at Section 6.7(a)(i).
1452 See id. at Appendix C, Section B.7(b)(iii).
1453 See id.
1447 See
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Members to solicit feedback, and
complete the CAT NMS Plan submitted
to the Commission for
consideration.’’ 1454 For the building
and management of the Central
Repository, the Selection Committee
and the Operating Committee would
have comparable responsibilities. The
Selection Committee would be required
to review and evaluate all Shortlisted
Bids, including any permitted revisions
submitted by Shortlisted Bidders, and
then to select the initial Plan Processor
from those Bids. As part of its overall
management of the Central Repository,
the Operating Committee would have
responsibility for decisions associated
with the technical requirements of the
Central Repository.1455 Furthermore, the
Operating Committee would be required
to establish a Selection Subcommittee to
evaluate Bids received to select a
successor Plan Processor,1456 and would
also be required to authorize the
selection of the members of the
Advisory Committee,1457 comprising
members of the Industry, to advise the
Participants on the implementation,
operation, and administration of the
Central Repository.1458 Because the
responsibilities of the Operating
Committee and the Selection Committee
are similar to those described in the
CAT NMS Plan for the development of
the CAT NMS Plan itself, the
Commission believes that it is
reasonable to use the CAT NMS Plan
estimates as the basis for its burden and
cost estimates for the initial and ongoing
management of the Central Repository.
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(1) Initial Burden and Costs To Build
the Central Repository
As proposed, each Participant would
contribute an employee and a substitute
for the employee to serve on the
1454 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii).
1455 For example, the Operating Committee would
be required to authorize the following actions of the
LLC: Entering into, modifying or terminating any
Material Contract (see id. at Section 4.3(b)(iv));
making any Material Systems Change (see id. at
Section 4.3(b)(v)); amending the Technical
Specifications on its own motion (see id. at Section
4.3(b)(vii)); and approving the initial Technical
Specifications or any Material Amendment to the
Technical Specifications proposed by the Plan
Processor (see id. at Section 4.3(b)(vi)). Further, the
Operating Committee would be able to approve
policies, procedures, and control structures related
to the CAT System that are consistent with Rule
613(e)(4), Appendix C and Appendix D of the CAT
NMS Plan that have been developed and will be
implemented by the Plan Processor (see id. at
Section 6.1(c)); and in conjunction with the Plan
Processor, approve and regularly review (and
update as necessary) SLAs governing the
performance of the Central Repository (see id. at
Section 6.1(h)).
1456 See id. at Section 4.3(b)(i).
1457 See id. at Section 4.3(a)(ii).
1458 See id. at Section 4.13(d).
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Operating Committee that would
oversee the Central Repository.1459
Additionally, each Participant would
select a Voting Senior Officer to
represent the Participant as a member of
the Selection Committee responsible for
the selection of the Plan Processor of the
Central Repository.1460
The Commission preliminarily
estimates that, over the 12-month period
after the effectiveness of the CAT NMS
Plan within which the Participants
would be required to select an initial
Plan Processor 1461 and begin reporting
to the Central Repository,1462 each
Participant would incur an initial
internal burden of 720 burden hours
associated with the management of the
creation of the Central Repository and
the selection of the Plan Processor
(including filing with the Commission
the statement identifying the Initial Plan
Processor and including the information
required by Rule 608), for an aggregate
initial estimate of 14,407 burden
hours.1463
1459 In the case of Affiliated Participants, one
individual may be the primary representative for all
or some of the Affiliated Participants, and another
individual may be the substitute for all or some of
the Affiliated Participants. See id. at Section 4.2(a).
1460 In the case of Affiliated Participants, one
individual may be (but is not required to be) the
Voting Senior Officer for more than one or all of the
Affiliated Participants. Where one individual serves
as the Voting Senior Officer for more than one
Affiliated Participant, such individual will have the
right to vote on behalf of each such Affiliated
Participant. See id. at Section 5.1(a).
1461 Rule 613(a)(3)(i) requires the selection of the
Plan Processor within 2 months after effectiveness
of the CAT NMS Plan. See 17 CFR 242.613(a)(3)(i).
1462 Rule 613(a)(3)(iii) requires the Participants to
provide to the Central Repository the data required
by Rule 613(c) within one year after effectiveness
of the CAT NMS Plan. See 17 CFR 242.613(a)(3)(iii).
1463 The Commission is basing this estimate on
the internal burden estimate provided in the CAT
NMS Plan related to the development of the CAT
NMS Plan. See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii) (stating ‘‘. . . the
Participants have accrued, and will continue to
accrue, direct costs associated with the
development of the CAT NMS Plan. These costs
include staff time contributed by each Participant
to, among other things, determine the technological
requirements for the Central Repository, develop
the RFP, evaluate Bids received, design and collect
the data necessary to evaluate costs and other
economic impacts, meet with Industry Members to
solicit feedback, and complete the CAT NMS Plan
submitted to the Commission for consideration. The
Participants estimate that they have collectively
contributed 20 FTEs in the first 30 months of the
CAT NMS Plan development process’’). The
Commission believes the staff time incurred for the
development of the CAT NMS Plan would be
comparable to the staff time incurred for the
activities required of the Operating Committee and
the Selection Committee for the creation and
management of the Central Repository once the
Plan is effective). (20 FTEs/30 months) = 0.667
FTEs per month for all of the Participants to
develop the CAT NMS Plan. Converting this into
burden hours, (0.667 FTEs) × (12 months) × (1,800
burden hours per year) =14,407 initial burden hours
for all of the Participants to develop the CAT NMS
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Additionally, the Commission
preliminarily estimates that the
Participants will collectively spend
$2,400,000 on external public relations,
legal and consulting costs associated
with the building of the Central
Repository and the selection of the Plan
Processor for the Central Repository, or
$120,000 per Participant.1464 The
Commission is basing this estimate on
the estimate provided in the CAT NMS
Plan for public relations, legal and
consulting costs incurred in preparation
of the CAT NMS Plan. Because the
Participants described such costs as
‘‘reasonably associated with creating,
implementing and maintaining the
CAT,’’ 1465 the Commission
preliminarily believes these external
cost estimates should also be applied to
the creation and implementation of the
Central Repository.
The CAT NMS Plan provides the
estimates given by the Shortlisted
Bidders 1466 for the one-time total cost
associated with the Plan Processor that
would build the Central Repository.1467
Plan. (14,407 burden hours for all Participants/20
Participants) = 720 initial burden hours for each
Participant to develop the CAT NMS Plan.
1464 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii) (stating ‘‘the
Participants have incurred public relations, legal
and consulting costs in preparation of the CAT
NMS Plan. The Participants estimate the costs of
these services to be $8,800,000’’). $2,400,000 for all
Participants over 12 months = ($8,800,000/44
months between the adoption of Rule 613 and the
filing of the CAT NMS Plan) × (12 months).
($2,400,000/20 Participants) = $120,000 per
Participant over 12 months.
1465 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii).
1466 The Selection Committee narrowed the list of
Shortlisted Bidders from six to three Shortlisted
Bidders. See ‘‘Participants, SROs Reduce Short List
Bids from Six to Three for Consolidated Audit
Trail’’ (November 16, 2015), available at https://
www.catnmsplan.com/pastevents/catnms_release_
downselect_111615.pdf. However, the costs
provided by the SROs in the CAT NMS Plan are
based on the Bids of the six Shortlisted Bidders.
1467 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(i)(B). See also id. at
Appendix C, Section B.7(b)(iv)(A)(1). The
Commission notes that the cost associated with the
build and maintenance of the Central Repository
includes compliance with the requirement in Rule
613(e)(8) that the Central Repository retain
information collected pursuant to Rule 613(c)(7)
and (e)(7) in a convenient and usable standard
electronic data format that is directly available and
searchable electronically without any manual
intervention for a period of not less than five years.
See id. at Section 6.1(d)(i) (requiring the Plan
Processor to comply with the recordkeeping
requirements of Rule 613(e)(8)). See also id. at
Appendix C, Section D.12(l) (stating that Rule
613(e)(8) requires data to be available and
searchable for a period of not less than five years,
that broker-dealers are currently required to retain
data for six years under Rule 17a–4(a), and that the
Participants are requiring CAT Data to be kept
online in an easily accessible format for regulators
for six years, though this may increase the cost to
run the CAT). The Commission notes that a
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The CAT NMS Plan states that this
includes internal technological,
operational, administrative and ‘‘any
other material costs.’’ 1468 Using the
estimates in the CAT NMS Plan, which
are based on the Bids of the six
Shortlisted Bidders, the Commission
preliminarily estimates that the initial
one-time cost to develop the Central
Repository would be an aggregate initial
external cost to the Participants of $91.6
million,1469 or $4.6 million per
Participant.1470 Therefore, the
Commission preliminarily estimates
that each Participant would incur initial
one-time external costs of $7
million 1471 to build the Central
Repository, or an aggregate initial onetime external cost across all Participants
of $140 million.1472
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(2) Ongoing, Annual Burden Hours and
Costs for the Central Repository
After the Central Repository has been
developed and implemented, there
would be ongoing costs for operating
and maintaining the Central Repository,
including the cost of systems and
connectivity upgrades or changes
necessary to receive, consolidate, and
store the reported order and execution
information from Participants and their
members; the costs to store data, and
make it available to regulators, in a
uniform electronic format, and in a form
in which all events pertaining to the
same originating order are linked
together in a manner that ensures timely
and accurate retrieval of the
Shortlisted Bidder may be permitted to revise its
Bid prior to approval of the CAT NMS Plan if the
CAT Selection Committee determines by Majority
Vote that such revisions are necessary or
appropriate, so the estimates provided in the CAT
NMS Plan may be subject to change. See id. at
Section 5.2(c)(ii). In addition, changes in
technology between the time the Bids were
submitted and the time the Central Repository is
built could result in changes to the costs to build
and operate the Central Repository.
1468 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(i)(B).
1469 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(i)(B) (describing the
minimum, median, mean and maximum Bidder
estimates for the build and maintenance costs of the
Central Repository).
1470 Id. The Bidders provided a range of estimates.
For purposes of this Paperwork Burden Act
analysis, the Commission is using the build cost of
the maximum Bidder estimate. $4,580,000 =
$91,600,000/20 SROs.
1471 $7 million for each Participant to build the
Central Repository = ($4.6 million per Participant
in initial one-time costs to compensate the Plan
Processor to build the Central Repository) + ($2.4
million per Participant in initial one-time public
relations, legal and consulting costs associated with
the building of the Central Repository and the
selection of the initial Plan Processor).
1472 $140 million for all of the Participants to
build the Central Repository = $7 million per
Participant to build the Central Repository) × (20
Participants). Id.
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information; 1473 the cost, including
storage costs, of collecting and
maintaining the NBBO and transaction
data in a format compatible with the
order and event information collected
pursuant to the Rule; the cost of
monitoring the required validation
parameters, which would allow the
Central Repository to automatically
check the accuracy and completeness of
the data submitted and reject data not
conforming to these parameters
consistent with the requirements of the
proposed Rule; and the cost of paying
the CCO. The CAT NMS Plan provides
that the Plan Processor would be
responsible for the ongoing operations
of the Central Repository.1474 The
Operating Committee would continue to
be responsible for the management of
the Central Repository. In addition, the
CAT NMS Plan states that the
Participants would incur costs for
public relations, legal, and consulting
costs associated with maintaining the
CAT upon approval of the CAT NMS
Plan.1475
The Commission preliminarily
estimates that the Participants would
incur an ongoing annual internal burden
of 720 burden hours associated with the
continued management of the Central
Repository, for an aggregate annual
estimate of 14,407 burden hours across
the Participants.1476
1473 See
1474 See
supra note 1469.
CAT NMS Plan, supra note 3, at Section
6.1.
1475 See
id. at Appendix C, Section B.7(b)(iii).
Commission is basing this estimate on
the internal burden estimate provided in the CAT
NMS Plan for the development of the CAT NMS
Plan. The Commission notes that the CAT NMS
Plan describes the internal burden estimate for the
development of the CAT NMS Plan as a cost the
Participants will continue to accrue; therefore, the
Commission preliminarily believes that it is
reasonable to use this burden estimate as the basis
for its ongoing internal burden estimate for the
maintenance of the Central Repository, particularly
as the Commission believes the reasons for the staff
time incurred for the development of the CAT NMS
Plan would be comparable to those of the staff time
to be incurred by the Operating Committee and the
Selection Committee for the continued management
of the Central Repository. See CAT NMS Plan,
supra note 3, at Appendix C, Section B.7(b)(iii)
(stating ‘‘ . . . the Participants have accrued, and
will continue to accrue, direct costs associated with
the development of the CAT NMS Plan. These costs
include staff time contributed by each Participant
to, among other things, determine the technological
requirements for the Central Repository, develop
the RFP, evaluate Bids received, design and collect
the data necessary to evaluate costs and other
economic impacts, meet with Industry Members to
solicit feedback, and complete the CAT NMS Plan
submitted to the Commission for consideration. The
Participants estimate that they have collectively
contributed 20 FTEs in the first 30 months of the
CAT NMS Plan development process’’). (20 FTEs/
30 Participants) = 0.667 FTEs per month for all of
the Participants to continue management of the
Central Repository. Converting this into burden
hours, (0.667 FTEs) × (12 months) × (1,800 burden
1476 The
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Additionally, the Commission
estimates that the Participants will
collectively spend $800,000 annually on
external public relations, legal and
consulting costs associated with the
continued management of the Central
Repository, or $40,000 per
Participant.1477
The CAT NMS Plan includes the
estimates the six Shortlisted Bidders
provided for the annual ongoing costs to
the Participants to operate the Central
Repository.1478 The CAT NMS Plan did
not categorize the costs included in the
ongoing costs, but the Commission
believes they would comprise external
technological, operational and
administrative costs, as the Participants
described the costs included in the
initial one-time external cost to build
the Central Repository.1479 Using these
estimates, the Commission preliminarily
estimates that the annual ongoing cost
to the Participants 1480 to compensate
the Plan Processor for building,
operating and maintaining the Central
Repository would be an aggregate
ongoing external cost of $93 million,1481
or approximately $4.7 million per
hours per year) = 14,407 ongoing annual burden
hours for all of the Participants to continue
management of the Central Repository. (14,407
ongoing annual burden hours for all Participants/
20 Participants) = 720 ongoing annual burden hours
for each Participant to continue management of the
Central Repository.
1477 The Commission is basing this external cost
estimate on the public relations, legal and
consulting external cost estimate provided in the
CAT NMS Plan associated with the preparation of
the CAT NMS Plan (which the Participants consider
‘‘reasonably associated with creating,
implementing, and maintaining the CAT upon the
Commission’s adoption of the CAT NMS Plan’’).
See CAT NMS Plan, supra note 3, at Appendix C,
Section B.7(b)(iii) (stating ‘‘the Participants have
incurred public relations, legal and consulting costs
in preparation of the CAT NMS Plan. The
Participants estimate the costs of these services to
be $8,800,000’’). $2,400,000 for all Participants over
12 months = ($8,800,000/44 months between the
adoption of Rule 613 and the filing of the CAT NMS
Plan) × (12 months). Because the Central Repository
will have already been created, the Commission
believes it is reasonable to assume that the
Participants will have a lesser need for public
relations, legal and consulting services. The
Commission is estimating that the Participants will
incur one-third of the external cost associated with
development and implementation of the Central
Repository to maintain the Central Repository.
$800,000 = (0.333) × ($2,400,000). ($800,000/20
Participants) = $40,000 per Participant over 12
months.
1478 See Section IV.F.1.a, supra, for a discussion
of the total five-year operating costs for the Central
Repository presented in the CAT NMS Plan. See
also CAT NMS Plan, supra note 3, at Appendix C,
Section B.7(b)(i)(B); supra note 840; supra note
1467.
1479 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(i)(B).
1480 See supra note 1469.
1481 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(i)(B).
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Participant.1482 Therefore, the
Commission preliminarily estimates
that each Participant would incur
ongoing annual external costs of
$4,740,000 1483 to maintain the Central
Repository, or aggregate ongoing annual
external costs across all Participants of
$94,800,000.1484
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b. Data Collection and Reporting
Rule 613(c)(1) requires the CAT NMS
Plan to provide for an accurate, timesequenced record of orders beginning
with the receipt or origination of an
order by a Participant, and further to
document the life of the order through
the process of routing, modification,
cancellation and execution (in whole or
in part) of the order. Rule 613(c)
requires the CAT NMS Plan to impose
requirements on Participants to record
and report CAT information to the
Central Repository in accordance with
specified timelines.
Rule 613(c) would require the
collection and reporting of some
information that Participants already
collect to operate their business and are
required to maintain in compliance with
Section 17(a) of the Exchange Act and
Rule 17a–1 thereunder.1485 For instance,
the Commission believes that the
national securities exchanges keep
records pursuant to Section 17(a) of the
Exchange Act and Rule 17a–1
thereunder in electronic form, of the
receipt of all orders entered into their
1482 The Bidders provided a range of estimates.
For purposes of this Paperwork Burden Act
analysis, the Commission is using the maximum
operation and maintenance cost estimate.
$4,650,000 = $93,000,000/20 Participants. See also
Section IV.F.1.a, supra. The Commission noted
several uncertainties that may affect the Central
Repository cost estimates, including (1) that the
Participants have not yet selected a Plan Processor
and the Shortlisted Bidders have submitted a wide
range of cost estimates for building and operating
the Central Repository; (2) the Bids submitted by
the Shortlisted Bidders may not be final because
they may be revised before the final selection of the
CAT Processor; and (3) neither the Bidders nor the
Commission can anticipate the evolution of
technology and market activity with precision, as
improvements in available technology may allow
the Central Repository to be built and operated at
a lower cost than is currently anticipated, but if
levels of anticipated market activity are materially
underestimated, the capacity of the Central
Repository may need to be increased, resulting in
an increase in costs.
1483 $4,740,000 for each Participant to build the
Central Repository = ($4.7 million per Participant
in ongoing annual costs to build the Central
Repository) + ($40,000 per Participant in ongoing
annual public relations, legal and consulting costs
associated with the maintenance of the Central
Repository).
1484 $94,800,000 for all of the Participants to
maintain the Central Repository = ($4,740,000 per
Participant to compensate the Plan Processor and
for external public relations, legal and consulting
costs associated with the maintenance of the
Central Repository) × (20 Participants). Id.
1485 15 U.S.C. 78q(a); 17 CFR 240.17a–1.
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systems, as well as records of the
routing, modification, cancellation, and
execution of those orders. However,
Rule 613 requires the Participants to
collect and report additional and more
detailed information, and to report the
information to the Central Repository in
a uniform electronic format, or in a
manner that would allow the Central
Repository to convert the data to a
uniform electronic format for
consolidation and storage.
The CAT NMS Plan provides
estimated costs for the Participants to
report CAT Data. These estimates are
based on Participant responses to the
Participants Study that the Participants
collected to estimate CAT-related costs
for hardware and software, FTE costs,
and third-party providers, if the
Commission approves the CAT NMS
Plan.1486 For these estimates, the
Commission is relying on the cost data
provided by the Participants because it
believes that the Plan’s estimates for
Participants to report CAT Data are
reliable since all of the Participants
provided cost estimates, and most
Participants have experience collecting
audit trail data, as well as knowledge of
both the requirements of Rule 613 as
well as their current business practices.
The Commission is providing below its
paperwork burden estimates for the
initial burden hours and external costs,
and ongoing, annual burden hours and
external costs to be incurred by the
Participants to comply with the data
reporting requirements of Rule 613.
The Commission notes that
throughout this Paperwork Reduction
Act analysis, it is categorizing the FTE
cost estimates for the Participants, as
well as the broker-dealer respondents,
that were provided in the CAT NMS
Plan as an internal burden. To convert
the FTE cost estimates into internal
burden hours, the Commission: (1)
Divided the FTE cost estimates by a
divisor of $424,350, which is the
Commission’s estimated average salary
for a full-time equivalent employee in
the securities industry in a job category
associated with regulatory data
reporting; 1487 and then (2) multiplied
1486 Third-party provider costs are generally legal
and consulting costs, but may include other
outsourcing. The template used by respondents is
available at https://catnmsplan.com/PastEvents/
under the Section titled ‘‘6/23/14’’ at the ‘‘Cost
Study Working Template’’ link.
1487 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(ii)(C) at n.192. The
Participants represented that the cost per FTE is
$401,440. The $401,440 figure used in the CAT
NMS plan was based on a Programmer Analyst’s
salary ($193 per hour) from SIFMA’s Management
& Professional Earnings in the Securities Industry
2008, multiplied by 40 hours per week, then
multiplied by 52 weeks per year. The Commission
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30789
the quotient by 1,800 (the number of
hours a full-time equivalent employee is
estimated to work per year).
(1) Initial Burden Hours and External
Cost
The CAT NMS Plan provides the
following average costs that the
Participants would expect to incur to
adopt the systems changes needed to
comply with the data reporting
requirements of the consolidated audit
trail: $10,300,000 in aggregate FTE costs
for internal operational, technical/
development, and compliance
functions; $770,000 in aggregate third
party legal and consulting costs; and
$17,900,000 in aggregate total costs.1488
Based on estimates provided in the
CAT NMS Plan, the Commission
preliminarily estimates that the initial
internal burden hours to develop and
implement the needed systems changes
to capture the required information and
transmit it to the Central Repository in
compliance with the Rule for each
Participant would be approximately
2,185 burden hours.1489 The
Commission also estimates that each
Participant would, on average, incur
approximately $38,500 in initial third
party legal and consulting costs 1490 for
has updated this number to include recent salary
data for other job categories associated with
regulatory data reporting in the securities industry,
using the hour and multiple methodology used by
the Commission in its paperwork burden analyses.
The Commission is using $424,350 as its annual
cost per FTE for purposes of its cost estimates. The
$424,350 FTE cost = 25% Compliance Manager +
75% Programmer Analyst (0.25) × ($283 per hour
× 1,800 working hours per year) + (0.75) × ($220 per
hour × 1,800 working hours per year). The $282 per
hour figure for a Compliance Manager and the $220
per hour figure for a Programmer Analyst are from
SIFMA’s Management & Professional Earnings in
the Securities Industry 2013, modified by the
Commission to account for an 1800-hour work-year
and multiplied by 5.35 to account for bonuses, firm
size, employee benefits and overhead.
1488 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii)(B)(2). Of the
$17,900,000 in aggregate total costs, $11,070,000 is
identified (subtotal of FTE costs and outsourcing),
but the remaining $6,830,000 is not identified in the
CAT NMS Plan. The Commission believes that the
$6,830,000 may be attributed to hardware costs
because the Participants have not provided any
hardware costs associated with data reporting
elsewhere and the Commission believes that the
Participants will likely incur external costs to
purchase upgraded hardware to report data to the
Central Repository.
1489 ($10,300,000 anticipated initial FTE costs)/
(20 SROs) = $515,000 in anticipated initial FTE
costs per Participant. ($515,000 in anticipated
initial FTE costs per Participant)/($424,350 FTE
costs per Participant) = 1.214 anticipated FTEs per
Participant for the implementation of data
reporting. (1.214 FTEs) × (1,800 working hours per
year) = 2,184.5 initial burden hours per Participant
to implement CAT Data reporting.
1490 ($770,000 anticipated initial third party
costs)/(20 Participants) = $38,500 in initial
anticipated third party costs per Participant.
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a total of $380,000 in initial external
costs.1491 Therefore, the Commission
preliminarily estimates that, for all
Participants, the estimated aggregate
one-time burden would be 43,690
hours 1492 and the estimated aggregate
initial external cost would be
$7,600,000.1493
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(2) Ongoing, Annual Burden Hours and
External Cost
Once a Participant has established the
appropriate systems and processes
required for collection and transmission
of the required information to the
Central Repository, the Commission
preliminarily estimates that Rule 613
would impose on each Participant
ongoing annual burdens associated
with, among other things, personnel
time to monitor each Participant’s
reporting of the required data and the
maintenance of the systems to report the
required data; and implementing
changes to trading systems that might
result in additional reports to the
Central Repository. The CAT NMS Plan
provides the following average aggregate
costs that the Participants would expect
to incur to maintain data reporting
systems to be in compliance with Rule
613: $7,300,000 in anticipated annual
FTE costs for operational, technical/
development, and compliance functions
related to data reporting; $720,000 in
annual third party legal, consulting, and
other costs; 1494 and $14,700,000 total
annual costs.1495
Based on estimates provided in the
CAT NMS Plan, the Commission
believes that it would take each
1491 To determine the total initial external cost
per Participant, the Commission subtracted the
anticipated initial FTE cost estimates for the
Participants as provided in the Plan from the total
aggregate initial costs to the Participants and
divided the remainder by 20 Participants.
($17,900,000 total aggregate initial cost to
Participants) ¥ ($10,300,000 initial FTE cost to
Participants) = $7,600,000. ($7,600,000)/20
Participants = $380,000 in initial external costs per
Participant. See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii)(B)(1) for the
Participants’ anticipated costs associated with the
implementation of regulatory reporting to the
Central Repository.
1492 43,690 initial burden hours = (20
Participants) × (2,184.5 initial burden hours).
1493 $7,600,000 = ($380,000 in initial external
costs) × (20 Participants).
1494 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii)(B)(2). The CAT
NMS Plan did not identify the other costs.
1495 Of the $14,700,000 in aggregate total annual
costs, $8,020,000 is identified (subtotal of FTE costs
and outsourcing), but the remaining $6,680,000 is
not identified in the CAT NMS Plan. The
Commission believes that this amount may be
attributed to hardware costs because the
Participants have not provided any hardware costs
associated with data reporting elsewhere and the
Commission believes that the Participants will
likely incur costs to upgrade their hardware to
report data to the Central Repository.
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Participant 1,548 ongoing burden hours
per year 1496 to continue compliance
with Rule 613. The Commission
preliminarily estimates that it would
cost, on average, approximately $36,000
in ongoing third party legal and
consulting and other costs 1497 and
$370,000 in total ongoing external costs
per Participant.1498 Therefore, the
Commission preliminarily estimates
that the estimated aggregate ongoing
burden for all Participants would be
approximately 30,966 hours 1499 and an
estimated aggregate ongoing external
cost of $7,400,000.1500
c. Collection and Retention of NBBO,
Last Sale Data and Transaction Reports
Rule 613(e)(7) provides that the CAT
NMS Plan must require the Central
Repository to collect and retain on a
current and continuous basis NBBO
information for each NMS security,
transaction reports reported pursuant to
an effective transaction reporting plan,
and Last Sale Reports reported pursuant
to the OPRA Plan.1501 Additionally, the
CAT NMS Plan must require the Central
Repository to maintain this data in a
format compatible with the order and
event information consolidated and
stored pursuant to Rule 613(c)(7).1502
Further, the CAT NMS Plan must
require the Central Repository to retain
the information collected pursuant to
paragraphs (c)(7) and (e)(7) of Rule 613
for a period of not less than five years
in a convenient and usable uniform
electronic format that is directly
available and searchable electronically
1496 ($7,300,000 in anticipated Participant annual
FTE costs)/(20 Participants) = $365,000 in
anticipated per Participant annual FTE costs.
($365,000 in anticipated per Participant FTE costs)/
($424,350 FTE cost per Participant) = 0.86
anticipated FTEs per Participant. (0.86 FTEs) ×
(1,800 working hours per year) = 1,548.3 burden
hours per Participant to maintain CAT Data
reporting.
1497 ($720,000 in annual third party costs)/(20
Participants) = $36,000 per Participant in
anticipated annual third party costs.
1498 To determine the total external annual cost
per Participant, the Commission subtracted the
anticipated annual FTE cost estimates for the
Participants as provided in the Plan from the total
aggregate annual costs to the Participants and
divided the remainder by 20 Participants.
($14,700,000 total aggregate annual cost to
Participants) ¥ ($7,300,000 annual FTE cost to
Participants) = $7,400,000. ($7,400,000)/20
Participants = $370,000 in annual external costs per
Participant. See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii)(B)(1) for the
Participants’ anticipated maintenance costs
associated with regulatory reporting to the Central
Repository.
1499 30,966 annual burden hours = (20
Participants) × (1,548.3 annual burden hours).
1500 $7,400,000 = ($370,000 in total annual
external costs) × (20 Participants).
1501 See 17 CFR 242.613(e)(7).
1502 Id.
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without any manual intervention.1503
The Commission notes that the CAT
NMS Plan includes these data as ‘‘SIP
Data’’ to be collected by the Central
Repository.1504 The Commission
believes the burden associated with SIP
Data is included in the burden to the
Participants associated with the
implementation and maintenance of the
Central Repository.
d. Surveillance
Rule 613(f) provides that the CAT
NMS Plan must require that every
national securities exchange and
national securities association develop
and implement a surveillance system, or
enhance existing surveillance systems,
reasonably designed to make use of the
consolidated information contained in
the consolidated audit trail. Rule
613(a)(3)(iv) provides that the CAT NMS
Plan must require that the surveillance
systems be implemented within
fourteen months after effectiveness of
the CAT NMS Plan.
(1) Initial Burden Hours and External
Cost
The CAT NMS Plan states that the
estimated total cost to the Participants
to implement surveillance programs
within the Central Repository is
$23,200,000.1505 This amount includes
legal, consulting, and other costs of
$560,000, as well as $17,500,000 in FTE
costs for operational, technical/
development, and compliance Staff to
be engaged in the creation of
surveillance programs.1506
Based on the estimates provided in
the CAT NMS Plan, the Commission
preliminarily estimates that the initial
internal burden hours to implement
new or enhanced surveillance systems
reasonably designed to make use of the
consolidated audit trail data for each
Participant would be approximately
3,711.6 burden hours,1507 for an
1503 See
1504 See
17 CFR 242.613(e)(8).
CAT NMS Plan, supra note 3, at Section
6.5(a)(ii).
1505 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii)(B)(2).
1506 Id. The Commission also notes that based
upon the data provided by the Participants, the
source of the remaining $5,140,000 in initial costs
to implement new or enhanced surveillance
systems is unspecified. The Commission believes
that this amount may be attributed to hardware
costs because the Participants have not provided
any hardware costs associated with surveillance
elsewhere and the Commission believes that the
Participants will likely incur costs to implement
new or enhanced surveillance systems reasonably
designed to make use of the consolidated audit trail
data.
1507 ($17,500,000 in anticipated initial FTE costs)/
(20 Participants) = $875,000 in anticipated FTE
costs per Participant. ($875,000 in anticipated
initial FTE costs per Participant)/($424,350 FTE
cost per Participant) = 2.06 anticipated initial FTEs
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aggregate initial burden hour amount of
74,232 burden hours.1508 The
Commission also estimates that each
Participant would, on average, incur an
initial external cost of approximately
$28,000 1509 for outsourced legal,
consulting and other costs in order to
implement new or enhanced
surveillance systems, for a total of
$285,000 in initial external costs,1510 for
an aggregate one-time initial external
cost of $5,700,000 across the 20
Participants to implement new or
enhanced surveillance systems.1511
mstockstill on DSK3G9T082PROD with NOTICES2
(2) Ongoing, Annual Burden Hours and
External Cost
The CAT NMS Plan states that the
estimated total annual cost associated
with the maintenance of surveillance
programs for the Participants is
$87,700,000.1512 This amount includes
annual legal, consulting, and other costs
of $1,000,000, as well as $66,700,000 in
annual FTE costs for internal
operational, technical/development, and
compliance Staff to be engaged in the
maintenance of surveillance
programs.1513 Based on the estimates
provided in the CAT NMS Plan,1514 the
Commission preliminarily estimates
that the ongoing internal burden hours
to maintain the new or enhanced
surveillance systems reasonably
designed to make use of the
consolidated audit trail data for each
Participant would be approximately
14,146 annual burden hours,1515 for an
per Participant. (2.06 FTEs) × (1,800 working hours
per year) = 3,711.6 initial burden hours per
Participant to implement new or enhanced
surveillance systems.
1508 (3,711.6 initial burden hours per Participant
to implement new or enhanced surveillance
systems) × (20 Participants) = 74,232 aggregate
initial burden hours.
1509 $28,000 = $560,000/20 Participants.
1510 $285,000 = ($23,200,000 in total initial
surveillance costs—$17,500,000 in FTE costs)/(20
Participants).
1511 $5,700,000 = $285,000 × 20 Participants.
1512 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii)(B)(2).
1513 Id. The Commission also notes that based
upon the data provided by the Participants, the
source of the remaining $21,000,000 in ongoing
costs to maintain the new or enhanced surveillance
systems is unspecified. The Commission believes
that this amount may be attributed to hardware
costs because the Participants have not provided
any hardware costs associated with surveillance
elsewhere and the Commission believes that the
Participants would likely incur costs associated
with maintaining the new or enhanced surveillance
systems.
1514 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii)(B)(2).
1515 ($66,700,000 in anticipated ongoing FTE
costs)/(20 Participants) = $3,335,000 in anticipated
ongoing FTE costs per Participant. ($3,335,000 in
anticipated ongoing FTE costs per Participant)/
($424,350 FTE cost per Participant) = 7.86
anticipated FTEs per Participant. (7.86 FTEs) ×
(1,800 working hours per year) = 14,146 ongoing
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aggregate annual burden hour amount of
282,920 burden hours.1516 The
Commission also estimates that each
Participant would, on average, incur an
annual external cost of approximately
$50,000 1517 for outsourced legal,
consulting and other costs in order to
maintain the new or enhanced
surveillance systems, for a total
estimated ongoing external cost of
$1,050,000,1518 for an estimated
aggregate ongoing external cost of
$21,000,000 across the 20 Participants
to maintain the surveillance
systems.1519
e. Written Assessment of Operation of
the Consolidated Audit Trail
Rule 613(b)(6) provides that the CAT
NMS Plan must require the Participants
to provide the Commission a written
assessment of the CAT’s operation at
least every two years, once the CAT
NMS Plan is effective.1520 The
assessment must address, at a
minimum, with respect to the
consolidated audit trail: (i) An
evaluation of its performance; (ii) a
detailed plan for any potential
improvements to its performance; (iii)
an estimate of the costs associated with
any such potential improvements; and
(iv) an estimated implementation
timeline for any such potential
improvements, if applicable.1521 Thus,
the Participants must, among other
things, undertake an analysis of the
consolidated audit trail’s technological
and computer system performance.
The CAT NMS Plan states that the
CCO would oversee the assessment
required by Rule 613(b)(6), and would
allow the Participants to review and
comment on the assessment before it is
submitted to the Commission.1522 The
CCO would be an employee of the Plan
Processor and would be compensated by
the Plan Processor.1523 The Commission
assumes that the overall cost and
associated burden on the Participants to
implement and maintain the Central
burden hours per Participant to maintain the new
or enhanced surveillance systems.
1516 (14,146 annual burden hours per Participant
to maintain new or enhanced surveillance systems)
× (20 Participants) = 282,920 aggregate annual
burden hours.
1517 $50,000 = $1,000,000 for ongoing legal,
consulting and other costs associated with
maintenance of surveillance programs/20
Participants.
1518 $1,050,000 = ($87,700,000 in total ongoing
surveillance costs¥$66,700,000 in ongoing FTE
costs)/20 Participants
1519 $21,000,000 = $1,050,000 × 20 Participants.
1520 17 CFR 242.613(b)(6). See also Section
IV.E.3.a, supra.
1521 See 17 CFR 242.613(b)(6).
1522 See CAT NMS Plan, supra note 3, at Section
6.6.
1523 Id. at Section 6.2(a).
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30791
Repository includes both the
compensation for the Plan Processor as
well as its employees for the
implementation and maintenance of the
Central Repository.
The Commission preliminarily
estimates that it would take each
Participant approximately 45 annual
burden hours of internal legal,
compliance, business operations, and
information technology staff time to
review and comment on the assessment
prepared by the CCO of the operation of
the consolidated audit trail as required
by Rule 613(b)(6).1524 The Commission
preliminarily estimates that on average,
each Participant would outsource 1.25
hours of legal time annually to assist in
the review of the assessment, for an
ongoing annual external cost of
approximately $500.1525 Therefore, the
1524 The Commission calculated the total
estimated burden hours based on a similar
formulation used for calculating the total estimated
burden hours of Rule 613(i)’s requirement for a
document addressing expansion of the CAT to other
securities. See Section V.D.1.f., infra. The
Commission assumes that the review and potential
revision of the written assessment required by Rule
613(b)(6) would be approximately one-half as
burdensome as the document required by Rule
613(i) as the Participants are delegating the
responsibility to prepare the written assessment
required by Rule 613(b)(6) to the CCO and the
Participants would only need to review the written
assessment and revise it as necessary. As noted in
note 1530, infra, to estimate the Rule 613(i) burden,
the Commission is applying the internal burden
estimate provided in the CAT NMS Plan for Plan
development over a 6-month period, and dividing
the result in half. See CAT NMS Plan, supra note
3, at Appendix C, Section B.7(b)(iii). To estimate
the Rule 613(b)(6) written assessment burden, the
Commission is dividing the result further by half.
0.667 FTEs required for all Participants per month
to develop the CAT NMS Plan = (20 FTEs/30
months). 0.667 FTEs × 6 months = 4 FTEs. 4 FTEs/
2 = 2 FTEs needed for all of the Participants to
create and submit the Rule 613(i) document. 2
FTEs/2 = 1 FTE needed for all of the Participants
to review and comment on the written assessment.
(1 FTE × 1,800 working hours per year) = 1,800
ongoing annual burden hours per year for all of the
Participants to review and comment on the written
assessment. (1,800 burden hours/20 Participants) =
90 ongoing annual burden hours per Participant to
review and comment on the written assessment
prepared by the CCO. The Commission notes that
this assessment must be filed with the Commission
every two years and is providing an annualized
estimate of the burden associated with the
assessment as required for its Paperwork Reduction
Act analysis. To provide an estimate of the annual
burden associated with the assessment as required
for its Paperwork Reduction Act analysis,
Commission is dividing the 90 ongoing burden
hours in half (over two years) = 45 ongoing annual
burden hours per Participant to review and
comment on the written assessment prepared by the
CCO.
1525 $500 = ($400 per hour rate for outside legal
services) × (1.25 hours). The Commission based this
estimate on the assumption that the written
assessment required by Rule 613(b)(6) would
require approximately one-half the effort of drafting
and submitting the document required by Rule
613(i) regarding the expansion of the CAT to other
securities because the Participants have delegated
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Commission preliminarily estimates
that the ongoing annual burden of
submitting a written assessment at least
every two years, as required by Rule
613(b)(6), would be 45 ongoing burden
hours per SRO plus $500 of external
costs for outsourced legal counsel per
Participant per year, for an estimated
aggregate annual ongoing burden of 900
hours 1526 and an estimated aggregate
ongoing external cost of $10,000.1527
mstockstill on DSK3G9T082PROD with NOTICES2
f. Document on Expansion to Other
Securities
Rule 613(i) provides that the CAT
NMS Plan must require the Participants
to jointly provide to the Commission,
within six months after the CAT NMS
Plan is effective, a document outlining
how the Participants could incorporate
into the consolidated audit trail
information regarding: (1) Equity
securities that are not NMS
securities; 1528 (2) debt securities; and
(3) primary market transactions in
equity securities that are not NMS
securities and debt securities.1529 The
document must also detail the order and
Reportable Event data that each market
participant may be required to provide,
which market participants may be
required to provide such data, an
implementation timeline, and a cost
estimate. Thus, the Participants must,
among other things, undertake an
analysis of technological and computer
system acquisitions and upgrades that
would be required to incorporate such
an expansion.
The Commission preliminarily
estimates that it would take each
Participant approximately 180 burden
hours of internal legal, compliance,
business operations and information
technology staff time to create a
document addressing expansion of the
consolidated audit trail to additional
securities as required by Rule 613(i).1530
the responsibility to draft the written assessment on
the CCO, rather than having to draft it themselves
(as with the expansion report), but would also have
to review the written assessment and revise it as
necessary. See Section V.D.1.f., infra. Because the
written assessment is a biennial requirement, the
Commission is further dividing the cost of the
written assessment in half (over two years) to
estimate the annual ongoing external cost per
Participant for outside legal services to review and
comment on the written assessment prepared by the
CCO.
1526 900 ongoing annual burden hours = (45
ongoing annual burden hours) × (20 Participants).
1527 $10,000 = 20 Participants × ($400 per hour
rate for outside legal services) × (1.25 hours).
1528 As noted above, the CAT NMS Plan would
require the inclusion of OTC Equity Securities,
while Rule 613 does not include such a
requirement. See supra note 1408.
1529 See 17 CFR 242.613(i).
1530 The Commission is basing this estimate on
the internal burden provided in the CAT NMS Plan
related to the development of the CAT NMS Plan.
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The Commission preliminarily
estimates that on average, each
Participant would outsource 25 hours of
external legal time to create the
document, for an aggregate one-time
external cost of approximately
$10,000.1531 Therefore, the Commission
preliminarily estimates that the onetime initial burden of drafting the
document required by Rule 613 would
be 180 initial burden hours plus $10,000
in initial external costs for outsourced
legal counsel per Participant, for an
estimated aggregate initial burden of
3,600 hours and an estimated aggregate
initial external cost of $200,000.1532
2. Burden on Members of National
Securities Exchanges and National
Securities Associations
a. Data Collection and Reporting
Rule 613(c)(1) requires the CAT NMS
Plan to provide for an accurate, timesequenced record of orders beginning
with the receipt or origination of an
order by a broker-dealer member of a
Participant, and further documenting
the life of the order through the process
of routing, modification, cancellation
and execution (in whole or in part) of
the order. Rule 613(c) requires the CAT
NMS Plan to impose requirements on
broker-dealer members to record and
See CAT NMS Plan, supra note 3, at Appendix C,
Section B.7(b)(iii) (stating ‘‘[t]he Participants
estimate that they have collectively contributed 20
FTEs in the first 30 months of the CAT NMS Plan
development process’’). Because this document is
much more limited in scope than the CAT NMS
Plan, and because the Commission assumes that in
drafting the CAT NMS Plan, the Participants have
already contributed time toward considering how
the CAT can be expected to be expanded in
accordance with Rule 613(i), the Commission is
applying the CAT NMS Plan development internal
burden over a 6-month period (Rule 613(i) requires
this document to be submitted to the Commission
within six months after effectiveness of the CAT
NMS Plan), divided by half. 0.667 FTEs required for
all Participants per month to develop the CAT NMS
Plan = (20 FTEs/30 months). 0.667 FTEs × 6 months
= 4 FTEs. 4 FTEs/2 = 2 FTEs needed for all of the
Participants to create and submit the document. 2
FTEs × 1,800 working hours per year = 3,600
burden hours. 3,600 burden hours/20 Participants
= 180 burden hours per Participant to create and
file the document.
1531 $10,000 = (25 hours of outsourced legal time
per Participant) × ($400 per hour rate for outside
legal services). The Commission derived the total
estimated cost for outsourced legal counsel based
on the assumption that the report required by Rule
613 would require approximately fifteen percent of
the Commission’s approximated burden of drafting
and filing the CAT NMS Plan. This assumption is
based on the Participants leveraging their
knowledge gained from their drafting and filing of
the CAT NMS Plan and applying it to efficiently
preparing the report required by Rule 613 with
respect to other securities’ order and Reportable
Events, implementation timeline and cost estimates.
1532 The initial burden hour estimate is based on:
(20 Participants) × (180 initial burden hours to draft
the report). The initial external cost estimate is
based on: (20 Participants) × ($10,000 for
outsourced legal counsel).
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report CAT information to the Central
Repository in accordance with specified
timelines.
The Commission acknowledges the
inherent difficulty in establishing
precise burden estimates because the
Commission does not know the exact
method of data reporting the
Participants would decide for brokerdealers. For these estimates, the
Commission is relying, in part, on the
cost data provided by the Participants in
the CAT NMS Plan,1533 and, as noted
earlier, on its own estimates of the costs
that broker-dealers are likely to face for
CAT implementation and ongoing
reporting in compliance with Rule
613.1534
The Commission’s estimates delineate
broker-dealer firms by whether they
insource or outsource, or are likely to
insource or outsource, CAT Data
reporting obligations.1535 The
Commission preliminarily believes that
firms that currently report high numbers
of OATS ROEs strategically would
decide to either self-report their CAT
Data or outsource their CAT Data
reporting functions, while the firms
with the lowest levels of activity would
be unlikely to have the infrastructure
and specialized employees necessary to
insource CAT Data reporting and would
almost certainly outsource their CAT
Data reporting functions.1536 The
Commission recognizes that more active
firms that will likely be CAT Reporters
and insource regulatory data reporting
functions may not have current OATS
reporting obligations because they either
are not FINRA members, or because
they do not trade in NMS equity
securities.1537
The Commission preliminarily
estimates that there are 126 OATSreporting Insourcers and 45 non-OATS
reporting Insourcers.1538 The
Commission’s estimation categorizes the
remaining 1,629 broker-dealers that the
Plan anticipates would have CAT Data
reporting obligations as Outsourcers.1539
1533 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b).
1534 See Sections IV.F.1.c(1) and IV.F.1.c(2),
supra.
1535 See Section IV.F.1.c(2)B, supra.
1536 Id.
1537 The Commission also preliminarily
recognizes as discussed above that some brokerdealer firms may strategically choose to outsource
despite the Plan’s working assumption that these
broker-dealers would insource their regulatory data
reporting functions.
1538 See Section IV.F.1.c(2)B, infra.
1539 Id.
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(1) Insourcers
A. Large Non-OATS Reporting BrokerDealers
i. Initial Burden Hours and External
Cost
The Commission relies on the
Reporters Study’s large broker-dealer
cost estimates in estimating costs for
large broker-dealers that can practicably
decide between insourcing or
outsourcing their regulatory data
reporting functions. The Commission
estimates that there are 14 large brokerdealers that are not OATS reporters
currently in the business of electronic
liquidity provision that would be
classified as Insourcer firms.1540
Additionally, the Commission
estimates that there are 31 brokerdealers that may transact in options but
not in equities that can be classified as
Insourcer firms.1541 Although the
Exemptive Relief may relieve these
firms of the obligation to report their
option quoting activity to the Central
Repository, these firms may have
customer orders and other activity offexchange that would cause them to
incur a CAT reporting obligation.
The Commission assumes the 31
options firms and 14 ELPs would be
typical of the Reporters Study’s large,
non-OATS reporting firms; for these
firms, the Commission relies on the cost
estimates provided under Approach
1 1542 for large, non-OATS reporting
firms in the CAT NMS Plan.
The CAT NMS Plan provides the
following average initial external cost
and FTE count figures that a large nonOATS reporting broker-dealer would
expect to incur to adopt the systems
changes needed to comply with the data
reporting requirements of Rule 613
under Approach 1: $450,000 in external
hardware and software costs; 8.05
mstockstill on DSK3G9T082PROD with NOTICES2
1540 These
broker-dealers are not FINRA members
and thus have no regular OATS reporting
obligations. See supra note 937.
1541 See supra note 939.
1542 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(i)(A)(2). The Reporters
Study requested broker-dealer respondents to
provide estimates to report to the Central
Repository under two approaches. Approach 1
assumes CAT Reporters would submit CAT Data
using their choice of industry protocols. Approach
2 assumes CAT Reporters would submit data using
a pre-specified format. Approach 1’s aggregate costs
are higher than those for Approach 2 for all market
participants except in one case where service
bureaus have lower Approach 1 costs. See supra
note 946. For purposes of this Paperwork Reduction
Act analysis, the Commission is not relying on the
cost estimates for Approach 2 because overall the
Approach 1 aggregate estimates represent the higher
of the proposed approaches. The Commission
believes it would be more comprehensive to use the
higher of the two estimates for its Paperwork
Reduction Act analysis estimates.
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internal FTEs; 1543 and $9,500 in
external third party/outsourcing
costs.1544 Based on this information, the
Commission preliminarily estimates
that the average initial burden
associated with implementing
regulatory data reporting to capture the
required information and transmit it to
the Central Repository in compliance
with the Rule for each large, non-OATS
reporting broker-dealer would be
approximately 14,490 initial burden
hours.1545
The Commission also preliminarily
estimates that these broker-dealers
would, on average, incur approximately
$450,000 in initial costs for hardware
and software to implement the systems
changes needed to capture the required
information and transmit it to the
Central Repository, and an additional
$9,500 in initial third party/outsourcing
costs.1546 Therefore, the Commission
preliminarily estimates that the average
one-time initial burden per ELP and
options market-making firm would be
14,490 internal burden hours and
external costs of $459,500,1547 for an
estimated aggregate initial burden of
652,050 hours 1548 and an estimated
aggregate initial external cost of
$20,677,500.1549
ii. Ongoing, Annual Burden Hours in
External Cost
Once a large non-OATS reporting
broker-dealer has established the
appropriate systems and processes
required for collection and transmission
of the required information to the
Central Repository, the Commission
1543 Approach 1 also provided $3,200,000 in
initial internal FTE costs. The Commission believes
the $3,200,000 in internal FTE costs is the
Participants’ estimated cost of the 8.05 FTEs. (8.05
FTEs) × ($401,440 Participants’ assumed annual
cost per FTE provided in the CAT NMS Plan) =
$3,231,592. See CAT NMS Plan, supra note 3, at n.
192. See also supra note 1487.
1544 See CAT NMS Plan, supra note 3, at Section
B.7(b)(iii)(c)(2)(a). The Commission believes that
the third party/outsourcing costs may be attributed
to the use of service bureaus (potentially),
technology consulting, and legal services.
1545 14,490 initial burden hours = (8.05 FTEs for
implementing CAT Data reporting systems) × (1,800
working hours per year).
1546 See supra note 1544.
1547 ($450,000 in initial hardware and software
costs) + ($9,500 initial third party/outsourcing
costs) = $459,500 in initial external costs to
implement data reporting systems.
1548 The Commission preliminarily estimates that
45 large non-OATS reporting broker-dealers would
be impacted by this information collection. (45
large non-OATS reporting broker-dealers) × (14,490
burden hours) = 652,050 initial burden hours to
implement data reporting systems.
1549 ($450,000 in hardware and software costs) +
($9,500 third party/outsourcing costs) × 45 large,
non-OATS reporting broker-dealers = $20,677,500
in initial external costs to implement data reporting
systems.
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30793
preliminarily estimates that the Rule
would impose ongoing annual burdens
associated with, among other things,
personnel time to monitor each large
non-OATS reporting broker-dealer’s
reporting of the required data and the
maintenance of the systems to report the
required data; and implementing
changes to trading systems that might
result in additional reports to the
Central Repository. The CAT NMS Plan
provides the following average ongoing
external cost and internal FTE count
figures that a large non-OATS reporting
broker-dealer would expect to incur to
maintain data reporting systems to be in
compliance with Rule 613: $80,000 in
external hardware and software costs;
7.41 internal FTEs; 1550 and $1,300 in
external third party/outsourcing
costs.1551 Based on this information, the
Commission preliminarily believes that
it would take a large non-OATS
reporting broker-dealer 13,338 burden
hours per year 1552 to continue to
comply with the Rule. The Commission
also preliminarily estimates that it
would cost, on average, approximately
$80,000 per year per large non-OATS
reporting broker-dealer to maintain
systems connectivity to the Central
Repository and purchase any necessary
hardware, software, and other materials,
and an additional $1,300 in third party/
outsourcing costs.1553
Therefore, the Commission
preliminarily estimates that the average
ongoing annual burden per large nonOATS reporting broker-dealer would be
approximately 13,338 hours, plus
$81,300 in external costs 1554 to
maintain the systems necessary to
collect and transmit information to the
Central Repository, for an estimated
aggregate ongoing burden of 600,210
1550 Approach 1 also provided $3,000,000 in
internal FTE costs related to maintenance. The
Commission believes the $3,000,000 in ongoing
internal FTE costs is the Participants’ estimated cost
of the 7.41 FTEs. (7.41 FTEs) × ($401,440
Participants’ assumed annual cost per FTE provided
in the CAT NMS Plan) = $2,974,670. See CAT NMS
Plan, supra note 3, at n.192. See also supra note
1487.
1551 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii)(C)(2)(b). The CAT
NMS Plan did not break down these third party
costs into categories.
1552 13,338 ongoing burden hours = (7.41 ongoing
FTEs to maintain CAT data reporting systems) ×
(1,800 working hours per year).
1553 See supra note 1544; CAT NMS Plan, supra
note 3, at Appendix C, Section B.7(b)(iii)(C)(2)(b).
1554 ($80,000 in ongoing external hardware and
software costs) + ($1,300 ongoing external third
party/outsourcing costs) = $81,300 in ongoing
external costs per large non-OATS reporting brokerdealer.
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hours 1555 and an estimated aggregate
ongoing external cost of $3,658,500.1556
B. Large OATS-Reporting BrokerDealers
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i. Initial Burden Hours and External
Cost
Based on the Commission’s analysis
of data provided by FINRA and
discussions with market participants,
the Commission estimates that 126
broker-dealers, which reported more
than 350,000 OATS ROEs between June
15 and July 10, 2015, would
strategically decide to either self-report
CAT Data or outsource their CAT data
reporting functions.1557 To conduct its
Paperwork Burden Analysis for the 126
broker-dealers, the Commission is
relying on the Reporters Study estimates
used by the CAT NMS Plan of expected
costs that a large OATS-reporting
broker-dealer would incur as a result of
the implementation of the consolidated
audit trail under Approach 1.1558
The CAT NMS Plan provides the
following average initial external cost
and internal FTE count figures that a
large OATS-reporting broker-dealer
would expect to incur as a result of the
implementation of the consolidated
audit trail under Approach 1: $750,000
in hardware and software costs; 14.92
internal FTEs; 1559 and $150,000 in
external third party/outsourcing
costs.1560 Based on this information the
Commission preliminarily estimates
that the average initial burden to
develop and implement the needed
systems changes to capture the required
1555 The Commission estimates that 45 large nonOATS reporting broker-dealers would be impacted
by this information collection. (45 large non-OATS
reporting broker-dealers) × (13,338 burden hours) =
600,210 aggregate ongoing burden hours.
1556 ($80,000 in ongoing external hardware and
software costs) + ($1,300 ongoing external third
party/outsourcing costs) × (45 large non-OATS
reporting broker-dealers) = $3,658,500 in aggregate
ongoing external costs.
1557 See Section IV.F.1.c.2.B and Section
IV.F.1.c(2)B.i, supra. See also supra note 901,
stating that the Commission believes that brokerdealers that report fewer than 350,000 OATS ROEs
per month are unlikely to be large enough to
support the infrastructure required for insourcing
data reporting activities.
1558 See supra note 1544.
1559 Approach 1 also provided $6,000,000 in
initial internal FTE costs. The Commission
preliminarily believes the $6,000,000 in initial
internal FTE costs is the Participants’ estimated cost
of the 14.92 FTEs. (14.92 FTEs) × ($401,440
Participants’ assumed annual cost per FTE provided
in the CAT NMS Plan) = $5,989,485. See CAT NMS
Plan, supra note 3, at n. 192. See also supra note
1487.
1560 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii)(C)(2)(a). The CAT
NMS Plan did not break down these third party
costs into categories. The Commission preliminarily
believes that these costs may be attributed to the
use of service bureaus, technology consulting, and
legal services.
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information and transmit it to the
Central Repository in compliance with
the Rule for large OATS-reporting
broker-dealers would be approximately
26,856 internal burden hours.1561 The
Commission also preliminarily
estimates that these large OATSreporting broker-dealers would, on
average, incur approximately $750,000
in initial external costs for hardware
and software to implement the systems
changes needed to capture the required
information and transmit it to the
Central Repository, and an additional
$150,000 in initial external third party/
outsourcing costs.1562
Therefore, the Commission
preliminarily estimates that the average
one-time initial burden per large OATSreporting broker-dealer would be 26,856
burden hours and external costs of
$900,000,1563 for an estimated aggregate
initial burden of 3,383,856 hours 1564
and an estimated aggregate initial
external cost of $113,400,000.1565
ii. Ongoing, Annual Burden Hours and
External Cost
Once a large OATS-reporting brokerdealer has established the appropriate
systems and processes required for
collection and transmission of the
required information to the Central
Repository, the Commission
preliminarily estimates that the Rule
would impose on each broker-dealer
ongoing annual burdens and costs
associated with, among other things,
personnel time to monitor each brokerdealer’s reporting of the required data
and the maintenance of the systems to
report the required data; and
implementing changes to trading
systems which might result in
additional reports to the Central
Repository.
The CAT NMS Plan provides the
following average ongoing external cost
and FTE count figures that a large
OATS-reporting broker-dealer would
1561 26,856 initial burden hours per large OATSreporting broker-dealer = (14.92 FTEs for
implementation of CAT data reporting systems) ×
(1,800 working hours per year).
1562 See CAT NMS Plan, supra note 3, at Section
B.7(b)(iii)(C)(2)(a).
1563 ($750,000 in initial external hardware and
software costs) + ($150,000 initial external third
party/outsourcing costs) = $900,000 in initial
external costs per large OATS-reporting brokerdealer to implement CAT data reporting systems.
1564 The Commission preliminarily estimates that
126 large OATS-reporting broker-dealers would be
impacted by this information collection. 126 large
OATS-reporting broker-dealers × 26,856 burden
hours = 3,383,856 initial burden hours to
implement data reporting systems.
1565 ($750,000 in initial external hardware and
software costs) + ($150,000 initial external third
party/outsourcing costs) × 126 large OATSreporting broker-dealers = $113,400,000 in initial
external costs to implement data reporting systems.
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expect to incur to maintain data
reporting systems to be in compliance
with Rule 613: $380,000 in ongoing
external hardware and software costs;
10.03 internal FTEs; 1566 and $120,000
in ongoing external third party/
outsourcing costs.1567 Based on this
information the Commission
preliminarily believes that it would take
a large OATS-reporting broker-dealer
18,054 ongoing burden hours per
year 1568 to continue compliance with
the Rule. The Commission preliminarily
estimates that it would cost, on average,
approximately $380,000 per year per
large OATS-reporting broker-dealer to
maintain systems connectivity to the
Central Repository and purchase any
necessary hardware, software, and other
materials, and an additional $120,000 in
external ongoing third party/
outsourcing costs.1569
Therefore, the Commission
preliminarily estimates that the average
ongoing annual burden per large OATSreporting broker-dealer would be
approximately 18,054 burden hours,
plus $500,000 in external costs 1570 to
maintain the systems necessary to
collect and transmit information to the
Central Repository, for an estimated
aggregate burden of 2,274,804 hours 1571
and an estimated aggregate ongoing
external cost of $63,000,000.1572
1566 Approach 1 also provided $4,000,000 in
internal FTE costs related to maintenance. The
Commission believes the $4,000,000 in ongoing
internal FTE costs is the Participants’ estimated cost
of the 10.03 FTEs. (10.03 FTEs) × ($401,440
Participants’ assumed annual cost per FTE provided
in the CAT NMS Plan) = $4,026,443. See CAT NMS
Plan, supra note 3, at n. 192. See also supra note
1487.
1567 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii)(C)(2)(b). The CAT
NMS Plan did not categorize these third party costs.
The Commission preliminarily believes that these
costs may be attributed to the use of service
bureaus, technology consulting, and legal services.
1568 18,054 ongoing burden hours = (10.03
ongoing FTEs for maintenance of CAT data
reporting systems) × (1,800 working hours per year).
1569 See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii)(C)(2)(b).
1570 ($380,000 in ongoing external hardware and
software costs + $120,000 in ongoing external third
party/outsourcing costs) = $500,000 in ongoing
external costs per large OATS-reporting brokerdealer.
1571 The Commission preliminarily estimates that
126 large OATS-reporting broker-dealers would be
impacted by this information collection. (126 large
OATS-reporting broker-dealers) × (18,054 burden
hours) = 2,274,804 aggregate ongoing burden hours.
1572 ($380,000 in ongoing external hardware and
software costs + $120,000 in ongoing external third
party/outsourcing costs) × 126 large OATSreporting broker-dealers = $63,000,000 in aggregate
ongoing external costs.
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(2) Outsourcing Firms
A. Small OATS-Reporting BrokerDealers
i. Initial Burden Hours and External
Cost
Based on data provided by FINRA, the
Commission estimates that there are 806
broker-dealers that report fewer than
350,000 OATS ROEs monthly. The
Commission preliminarily believes that
these broker-dealers generally outsource
their regulatory reporting obligations
because during the period June 15–July
10, 2015, approximately 88.9% of their
350,000 OATS ROEs were reported
through service bureaus, with 730 of
these broker-dealers reporting more than
99% of their OATS ROEs through one
or more service bureaus.1573 The
Commission estimates that these firms
currently spend an aggregate of $100.1
million on annual outsourcing costs.1574
The Commission estimates these 806
broker-dealers would spend $100.2
million in aggregate to outsource their
regulatory data reporting to service
bureaus to report in accordance with
Rule 613,1575 or $124,373 per brokerdealer.1576 These external outsourcing
cost estimates are calculated using the
information from Staff discussions with
service bureaus and other market
participants, as applied to data provided
by FINRA.1577
Firms that outsource their regulatory
data reporting still face internal staffing
burdens associated with this activity.
These employees perform activities
such as answering inquiries from their
service bureaus, and investigating
reporting exceptions. Based on
conversations with market participants,
the Commission estimates that these
firms currently have 0.5 full-time
employees devoted to these
activities.1578 The Commission
estimates that these firms would need to
hire one additional full-time employee
for one year to implement CAT
reporting requirements.1579
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1573 See
Section IV.F.1.c(2)B.i, supra. Because of
the extensive use of service bureaus in these
categories of broker-dealers, the Commission
assumes that these broker-dealers are likely to use
service bureaus to accomplish their CAT data
reporting.
1574 The average broker-dealer in this category
reported 15,185 OATS ROEs from June 15–July 10,
2015; the median reported 1,251 OATS ROEs. Of
these broker-dealers, 39 reported more than 100,000
OATS ROEs during the sample period. See Section
IV.F.1.c(2)B.ii, supra.
1575 Id.
1576 $124,373 = $100,200,000/806 broker-dealers.
This amount is the average estimated annual
outsourcing cost to firms that currently report fewer
than 350,000 OATS ROEs per month. Id.
1577 See Section IV.F.1.c(2)B.ii, supra.
1578 Id.
1579 Id.
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Based on this information, the
Commission preliminarily estimates
that the average initial burden to
implement the needed systems changes
to capture the required information and
transmit it to the Central Repository in
compliance with the CAT NMS Plan for
small OATS-reporting broker-dealers
would be approximately 1,800 burden
hours.1580 The Commission believes the
burden hours would be associated with
work performed by internal technology,
compliance and legal staff in connection
with the implementation of CAT data
reporting. The Commission also
preliminarily estimates that each small
OATS-reporting broker-dealer would
incur approximately
$124,373 in initial external
outsourcing costs.1581 Therefore, the
Commission preliminarily estimates
that the average one-time initial burden
per small OATS-reporting broker-dealer
would be 1,800 burden hours and
external costs of $124,373, for an
estimated aggregate initial burden of
1,450,800 hours 1582 and an estimated
aggregate initial external cost of
$100,244,638.1583
ii. Ongoing, Annual Burden Hours and
External Cost
Small OATS-reporting broker-dealers
that outsource their regulatory data
reporting would likely face internal
staffing burdens and external costs
associated with ongoing activity, such
as maintaining any systems that
transmit data to their service providers.
Based on conversations with market
participants, the Commission estimates
these firms would need 0.75 FTEs on an
ongoing basis to maintain CAT
reporting.1584
1580 This estimate assumes that, based on the
expected FTE count provided, a small OATSreporting broker-dealer would have to hire 1 new
FTE for implementation. The salary attributed to
the 1 FTE would be (1 × $424,350 FTE cost) =
$424,350 per year. To determine the number of
burden hours to be incurred by the current 0.5 FTE
for implementation, multiply 0.5 FTE by 1,800
hours per year = 900 initial burden hours.
1581 See Section IV.F.1.c(2)B.ii, supra. The
Commission preliminarily believes the outsourcing
cost would be the cost of the service bureau, which
would include the compliance and legal costs
associated with changing to CAT Data reporting.
The Commission assumes these costs of changing
to CAT would be included in the cost of the service
bureau because the broker-dealers would be relying
on the expertise of the service bureau to report their
data to CAT on their behalf. See supra note 941.
1582 The Commission preliminarily estimates that
806 small OATS-reporting broker-dealers would be
impacted by this information collection. (806 small
OATS-reporting broker-dealers × 1,800 burden
hours) = 1,450,800 aggregate initial burden hours.
1583 ($124,373 in outsourcing costs) × (806 small
OATS-reporting broker-dealers) = $100,244,638 in
aggregate initial external costs.
1584 See Section IV.F.1.c(2)B.ii, supra.
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30795
Based on this information the
Commission preliminarily believes that
it would take a small OATS-reporting
broker-dealer 1,350 ongoing burden
hours per year 1585 to continue
compliance with the Rule. The
Commission believes the burden hours
would be associated with work
performed by internal technology,
compliance and legal staff in connection
with the ongoing operation of CAT Data
reporting. The Commission
preliminarily estimates that it would
cost, on average, approximately
$124,373 in ongoing external
outsourcing costs 1586 to ensure ongoing
compliance with Rule 613.
Therefore, the Commission
preliminarily estimates that the average
ongoing annual burden per small OATSreporting broker-dealer would be
approximately 1,350 hours, plus
$124,373 in external costs, for an
estimated aggregate ongoing burden of
1,088,100 hours 1587 and an estimated
aggregate ongoing external cost of
$100,244,638.1588
B. Non-OATS Reporters
i. Initial Burden Hours and External
Cost
In addition to firms that currently
report to OATS, the Commission
estimates there are 799 broker-dealers
that are currently exempt from OATS
reporting rules due to firm size, or
excluded because all of their order flow
is routed to a single OATS reporter,
such as a clearing firm, that would incur
CAT reporting obligations.1589 A further
24 broker-dealers have SRO
memberships only with one
Participant; 1590 the Commission
believes this group is comprised mostly
of floor brokers and further
preliminarily believes these firms would
experience CAT implementation and
ongoing reporting costs similar in
magnitude to small equity broker1585 1,350 ongoing burden hours = (0.75 FTE for
maintenance of CAT Data reporting systems) ×
(1,800 working hours per year).
1586 See Section IV.F.1.c(2)B.ii, supra. See supra
note 1581.
1587 The Commission preliminarily estimates that
806 small OATS-reporting broker-dealers would be
impacted by this information collection. (806 small
OATS-reporting broker-dealers × 1,350 burden
hours) = 1,088,100 aggregate ongoing burden hours
to ensure ongoing compliance with Rule 613.
1588 $100,244,638 = $124,373 in ongoing
outsourcing costs × 806 broker-dealers.
1589 See Section IV.F.1.c(2)B.ii, supra. Rule 613
does not exclude from data reporting obligations
SRO members that quote or execute transactions in
NMS Securities and Listed Options that route to a
single market participant. See also CAT NMS Plan,
supra note 3, at Appendix C, Section
B.7(b)(ii)(B)(2).
1590 See Section IV.F.1.c(2)B.ii, supra.
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dealers that currently have no OATS
reporting responsibilities.1591
The Commission assumes these
broker-dealers would have very low
levels of CAT reporting, similar to those
of the lowest activity firms that
currently report to OATS. For these
firms, the Commission assumes that
under CAT they would incur the
average estimated service bureau cost of
broker-dealers that currently report
fewer than 350,000 OATS ROEs per
month, which is $124,373 annually.1592
Furthermore, because these firms have
more limited data reporting
requirements than other firms, the
Commission assumes these firms
currently have only 0.1 full-time
employees currently dedicated to
regulatory data reporting activities.1593
The Commission assumes these firms
would require 2 full-time employees for
one year to implement CAT.1594
Based on this information, the
Commission preliminarily estimates
that the average initial burden to
develop and implement the needed
systems changes to capture the required
information and transmit it to the
Central Repository in compliance with
the Rule for small, non-OATS-reporting
broker-dealers would be approximately
3,600 initial burden hours.1595 The
Commission believes the burden hours
would be associated with work
performed by internal technology,
compliance and legal staff in connection
with the implementation of CAT Data
reporting. The Commission also
preliminarily estimates that each small
non-OATS-reporting broker-dealer
would incur approximately $124,373 in
initial external outsourcing costs.1596
Therefore, the Commission
preliminarily estimates that the average
one-time initial burden per small OATSreporting broker-dealer would be 3,600
burden hours and external costs of
$124,373 for an estimated aggregate
initial burden of 2,962,800 hours 1597
and an estimated aggregate initial
external cost of $102,358,979.1598
1591 Id.
1592 Id.
1593 Id.
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1594 Id.
1595 3,600 initial burden hours = (2 FTEs for
implementation of CAT Data reporting systems) ×
(1,800 working hours per year).
1596 See supra note 1590.
1597 The Commission preliminarily estimates that
823 small non-OATS-reporting broker-dealers
would be impacted by this information collection.
(823 small non-OATS-reporting broker-dealers ×
3,600 burden hours) = 2,962,800 aggregate initial
burden hours.
1598 ($124,373 in outsourcing costs) × (823 small
non-OATS-reporting broker-dealers) = $102,358,979
in aggregate initial external costs.
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ii. Ongoing, Annual Burden Hours and
External Cost
Small non-OATS-reporting brokerdealers that outsource their regulatory
data reporting would likely face internal
staffing burdens and costs associated
with ongoing activity, such as
maintaining any systems that transmit
data to their service providers. Based on
conversations with market participants,
the Commission estimates these firms
would need 0.75 full-time employees
annually to maintain CAT reporting.
Based on this information the
Commission preliminarily believes that
it would take a small non-OATSreporting broker-dealer 1,350 ongoing
burden hours per year 1599 to continue
compliance with the Rule. The
Commission preliminarily estimates
that it would cost, on average,
approximately $124,373 in ongoing
external outsourcing costs 1600 to ensure
ongoing compliance with Rule 613.
Therefore, the Commission
preliminarily estimates that the average
ongoing annual burden per small nonOATS-reporting broker-dealer would be
approximately 1,350 hours, plus
$124,373 in external costs, for an
estimated aggregate ongoing burden of
1,111,050 hours 1601 and an estimated
aggregate ongoing external cost of
$102,358,979.1602
E. Collection of Information is
Mandatory
Each collection of information
discussed above would be a mandatory
collection of information.
F. ConfidentialityC
Rule 613 requires that the information
to be collected and electronically
provided to the Central Repository
would only be available to the national
securities exchanges, national securities
association, and the Commission for the
purpose of performing their respective
1599 1,350 ongoing burden hours = (0.75 FTEs for
maintenance of CAT data reporting systems) ×
(1,800 working hours per year).
1600 The Commission assumes these firms would
have very low levels of CAT reporting, similar to
those of the lowest activity firms that currently
report to OATS. For these firms, the Commission
assumes that under CAT they would incur the
average estimated service bureau cost of firms that
currently OATS report fewer than 350,000 OATS
ROEs per month of $124,373 annually.
1601 The Commission preliminarily estimates that
823 small non-OATS-reporting broker-dealers
would be impacted by this information collection.
(823 small non-OATS-reporting broker-dealers ×
1,350 burden hours) = 1,111,050 aggregate ongoing
burden hours to ensure ongoing compliance with
Rule 613.
1602 ($124,373 in ongoing external outsourcing
costs) × 823 = $102,358,979 in aggregate ongoing
external costs to ensure ongoing compliance with
Rule 613.
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regulatory and oversight responsibilities
pursuant to the federal securities laws,
rules and regulations. Further, the CAT
NMS Plan is required to include
policies and procedures to ensure the
security and confidentiality of all
information submitted to the Central
Repository, and to ensure that all SROs
and their employees, as well as all
employees of the Central Repository,
shall use appropriate safeguards to
ensure the confidentiality of such data
and shall agree not to use such data for
any purpose other than surveillance and
regulatory purposes. The Commission
will receive confidential information.
To the extent that the Commission does
receive confidential information
pursuant to this collection of
information, such information will be
kept confidential, subject to the
provisions of applicable law.
G. Recordkeeping Requirements
National securities exchanges and
national securities associations would
be required to retain records and
information pursuant to Rule 17a–1
under the Exchange Act.1603 Brokerdealers would be required to retain
records and information in accordance
with Rule 17a–4 under the Exchange
Act.1604 The Plan Processor would be
required to retain the information
reported to Rule 613(c)(7) and (e)(6) for
a period of not less than five years.1605
H. Request for Comments
Pursuant to 44 U.S.C. 3506(c)(2)(A),
the Commission solicits comment to:
(1) Evaluate whether the proposed
collections are necessary for the proper
performance of our functions, including
whether the information shall have
practical utility;
(2) Evaluate the accuracy of our
estimate of the burden of each collection
of information;
(3) Determine whether there are ways
to enhance the quality, utility, and
clarity of the information to be
collected; and
(4) Evaluate whether there are ways to
minimize the burden of each collection
of information on those who are to
respond, including through the use of
automated collection techniques or
other forms of information technology.
Persons submitting comments on the
collection of information requirements
should direct them to the Office of
Management and Budget, Attention:
Desk Officer for the Securities and
Exchange Commission, Office of
Information and Regulatory Affairs,
1603 17
CFR 240.17a–1.
CFR 240.17a–4.
1605 17 CFR 242.613(c)(7) and (e)(6).
1604 17
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Washington, DC 20503, and should also
send a copy of their comments to Brent
J. Fields, Secretary, Securities and
Exchange Commission, 100 F Street NE.,
Washington, DC 20549–1090, with
reference to File No. 4–698. Requests for
materials submitted to OMB by the
Commission with regard to these
collections of information should be in
writing, with reference to File No. 4–
698, and be submitted to the Securities
and Exchange Commission, Office of
FOIA/PA Services, 100 F Street NE.,
Washington, DC 20549–2736. As OMB
is required to make a decision
concerning the collections of
information between 30 and 60 days
after publication in the Federal
Register, a comment to OMB is best
assured of having its full effect if OMB
receives it within 30 days of
publication.
VI. Solicitation of Comments
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Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the CAT NMS Plan is
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consistent with the Act. Comments may
be submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number 4–
698 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number 4–698. This file number should
be included on the subject line if email
is used. To help the Commission
process and review your comments
more efficiently, please use only one
method. The Commission will post all
comments on the Commission’s Internet
Web site (https://www.sec.gov/rules/
sro.shtml). Copies of the submission, all
subsequent amendments, all written
statements with respect to the CAT
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30797
NMS Plan that are filed with the
Commission, and all written
communications relating to the CAT
NMS Plan between the Commission and
any person, other than those that may be
withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will
be available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between 10:00 a.m. and
3:00 p.m. Copies of the submission will
also be available for inspection and
copying at the Participants’ principal
offices. All comments received will be
posted without change; the Commission
does not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number 4–698 and should be submitted
on or before July 18, 2016.
By the Commission.
Brent J. Fields,
Secretary.
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EXHIBIT A
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Ul\cUTED LIABILITY COMPAJ\'Y AGREEMENT
01''
CAT NJ\,tS, LLC
a Delaware Limited U1tbility Company
30800
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
/\RTICLE I
DEFIN.ITIONS ................................................................................................. I
Section 1.1.
Definition~ .................................................................................................... l
Section 1.2.
..................................................................... 11
ARTICLE U
EFFECTIVENESS OF AGREEl'vtE.NT; ORGANIZATION ......................... 12
Section 2.1.
EtJectiveness .............................................................................................. l2
Section 2.2.
Formation ................................................................................................... 12
Seclion 2.3.
Nan11:: ......................................................................................................... 12
Section 2.4.
Other
()tl'iccs.........................................................................................
Section 2.5.
Certain
Section 2.6.
and J>O\VCfS ................................................................................... 12
Tcrm ........................................................................................................... l3
Section 2.7.
ARTICt£ III
12
......................................... 12
PARTICIPATION ................ .
Section 3. L
Section 3.2.
Section 3.3.
13
Section 3.4.
15
Section 3.5.
16
Section 3.6.
16
Section 3.7.
16
L<w>f·"'"'~"'"""'"""""""""""''"""""'"""""'""""""""'"'7
Section 3 .8.
Section3.9.
loans.
18
Section 3.1 0.
18
S;:..:tion 3.1 L
........................................................................... 18
i'\RTICLE IV
Section 4.1.
18
Section 4.2.
'nnnnitt,,,.
Chair ..................... 19
Scctiotl 4.3.
Section 4.4.
Committee ....................................................... 22
Section 4.5.
...... 23
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30801
Section 4.7.
Section 4.8.
lndemnif1cation ............................................................... 25
Section 4.9.
Freedom of Action ...................................................................................... 26
Section 4. tO.
Comrnittee .................................................................................................. 27
Action Without a
Section 4.11.
Section 4.12.
Suhcommittee~ ........................................................................................... 27
Section4.l3.
Conrrnittee .................................................................................. 28
ARTICLE V
INITIAL PLAN PROCESSOR SELECTION
.......................... .30
Section 5. 1.
StJ!tJction Committee .................................................................................. 30
Section5.2.
Bid Evaluation and Initial Plan Processor Sdection.................................. 32
ARTICLE Vl
Section 6.1.
Plan ProcessoL ............................................................................................ 37
Section 6.2.
Officer ......... .41
s.x:tion 6.3.
.. .... 4(i
Section 6.4.
........................... 49
Section 6.5.
"'"''"'<"'"'"' .....................................................................................51
Section 6.6.
'l;'rittcn Asse:::smenL .................................................................... 55
Section 6.7.
Section 6.8.
Section 6.9.
.. .... 58
Section 6.10. Surveillance .........
Section 6.11.
Seeti on 6.12. I nfbr ma ti on "-~·-~,..--, "-' l'rr• "'''' m
ARTICIJ~
VII
............................ 61
CAPITAL ACCOUNTS ................................................................................ 61
Accounls ........................................................................................ 6l
Section7.l.
Section 7. 2.
I ntc rest ........................ ..
ARTICLE VIII
Section 8.1.
Periodic A!localion:; ................................................................................... 62
S.:ction 8.2.
Allocations .................................................................................... 62
Section 8.3.
i\.llocation.s Pursuant to §
Section 8.4.
ofl.hc Code .............................................. 62
in
Section 8.5.
Distributions ............... ., .............................................................................. 63
Section 8.6.
Tax Status .......... ..
.. .... 63
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ARTICLE IX
RECORDS AND ,c\CCOtiNTING; REPORTS .............................................. 64
Section 9.l.
Book<> and Records ..................................................................................... 64
Section 9 .2.
·- .... _ ......... _ ___ .............................. 64
--··
......
Section 9.3.
Tax He HUllS ............................................................................................... 65
Section 9.4.
funds ......................................................................................... 65
Section 9.5.
Tax lviattcr:> Partncr .................................................................................... 65
Section 9.6.
.. ....................... 66
ARTICLE X
DISSOLUTION AND TERl\HNATION ......................................................... 67
Section 10.1. Dissolution
Section 10.2.
........................ 67
and Distribution ...................................................................... 67
Section 103. Termination .......................... .
ARTICLE XI
......... 67
FUNDING OF THE COMPAJ\T\' .................................................................... 68
Section 11. l.
.. ............. 68
Section 11 .2.
. ......................................................................................68
Section I 1.3.
.................................................................................................... 69
Sedion .11.4. Collection of Fees .................................................................................... 70
Sedion 11.5. Fee
ARTICLE XII
............................................................................................... 70
!vUSCELLAJ'\!EOUS ........................................................................................ 70
Section 12. J. Notices and Addresses ................................................................................ 70
Lavv; Submission to Jurisdiction ................................................. 71
Section 12.2.
Section 12.3. Amendments
Section 12.4. Successors nnd
Section 12.5.
Section 12.6.
Secti.on 12.7.
Section 12.8.
Section 12.9.
Section 12.1 0. ,. u'""~"~
Section 12.11.
Suction 12.1 2.
\~lai vcr
of Partition .................................................................................... 73
Section 12. 13. Con!\truction ............................................................................................... 73
Section 12.14. "''''"'""'''"'''"
EXHIHIT A
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30803
APPENDIX A
Consolidated Audit Trail National l\Iarket
H.)f
issued
26,
version3.0
l\iarch 3, 2014
"'"""""" ""'""""'" """"""""" .................................................................................................. 1
AJ>PENDL"X B
'"""""""' .................................... """"'"""" .......................... l
APPENDIX C
DISCUSSION OF CONSIDERATIONS ........................................................... !
A.
Features and Details ofthe CAT Nl\fS Plan ........................................................... A
L
2.
Data to the CAT ......................................................................... .4
which CAT Data will be Availabh::to
Rule 61
...................... ,._ ...... 15
Time and lvlethod
3.
4.
5.
...... 34
6.
The
.......................................................... 36
of the CAT MviS Plan: 'These considerations are intended to
B.
the Cotnmission about the cost for
infi:m11
and maintenance
7.
8.
c.
9.
10.
D.
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lL
Implcrnentation, and
and How Sponsors Took
Views Into Account in
Plan
Rule
"""""""'""''""'""""'"''"'''"""""'''""'"'"""''""'"''''"""'"'''"""''l05
Discuss Reasonable Alternativ.::
12.
Considered to Create,
ll7
APPENDIX D
CAT NMS Plan Processor
l.
<'<111it'C>1lli't1f': '"'""''''"'"'"""'"''''"'"'''""'"''"'''"''""I
Central
............................................ 1
u
L2
Technical Environments .......
1.3
1.4
2.
Da111 Retention
Data
2.1
.. .................................................................................................. 5
Data
and Sources ................................. ..
................................... 6
2.2
............................................................................... 7
3.1
" ................ " ........... ,.... " ........................ 9
3.
..................................................... ?
3.2
Oth<lr Ifem:L.........................
4.
CAT
10
........................................................................................................... 10
Data
4.1
............................................................ 10
Data Attributes tbr Order Records Submitted
3.3
(}verview .................................................................................................... 10
4.2
5.
Standards ...................................................................................... 14
BCP /DR Process
5.1
Overview .......................................................................... ., ........................ l.:S
5.2
Standai'ds ...................................................................................... l5
5.3
Business
............... 16
5.4
Disaster
17
Data
18
6.1
6.
18
19
6.2
7.
. ............................................................................ 20
of Data Transmission........
......... 20
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7.2
Data Validation ........................................................................................... 20
73
30805
............................................................ 22
7.4
7.5
Data Ingestion ........ .
of the CAT
8.
.............................................................................. 24
.......................................................................... 24
Access ........................................................................................ 24
8'
8.3
User-Defined Direct
8.4
Technical
to CAT
............................ ,. .................................................................32
SL.~ .............................................................................................. 32
8.5
9.
................................................................................. 32
CAT Ctl<>tomer and Customer Account Int"brn111tion ............................................ 33
9.1
Cn<>tomer and Cn'>tomer Account Information
9.2
Data Attributes tor Customer Information Data
Subt1~ttcd
!vie mbers ................................................................................. 34
9.3
9.4
Error Resolution fbr Customer Data
User
JO.l
.......................................................................................................... 35
..................................................................... 35
CAT
10.2
10.
Custnmer-ID
......... 39
10.3
10.4
CAT
CAT
................................................... 34
Dcsk ......................................................................................... 40
..........................................4{
11.
ll.l
l 1.2
CAT Infrastructure
11.3
ofNew
.... ..42
............................................................................. 43
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30806
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Lll\IDTED Llo\BU,JTY COMPA!':'Y AGREEMENT
(}I<'
CAT Ni\18, UX:'
a Delaware Limited Liability Company
RECITALS
i\.
Pri<n to the t(mll!llion of the
in response to SEC Rtde 613
national
secuntres
and national securities associations to submit a national lll!lrket system
to the Securities and
Commission
or
<md
maintain a consolidated audit trail, such national securities
and national securities
:1.~~:neitalinn~ pursuant to SEC Rule
>vhich autht)fizes them to
in""''"~"'""'
1111J'Ic•n¥::ntntg national market system
the National !vta.rkct
Plan
the Process filr
a Phm Processor and
Consolidated Audit Trail
Tile Selection Plan was am>rm;ca
Commission
21., 2014, amended on June
2015 and
its
terms,. shall
terminate upon the Commission's nm11·am>l
B.
limit~d
!he activities
have heretofore conductt'd as
to the Solcction
f!Jr this
which takes the
of
and have formed the
the Selection Platt. is a National hiarket
in SEC Rule
serves all the National lv!arkt't
Plan """"'"''d
own the
which shall create,
and maintain the CAT and the Central
''"'''<•it'""" ptll'smmr to SEC Rule 608 and SEC Rule 613.
of SEC Rule 613
ParticiP<U1tts to the
ARTICLE I
DEFINUIONS
Seetionl.l.
Recitals and Schedules identified in
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to those circtm1Htances in which an
\:Vith an institution but has not
"tu>~Nhi n
date !he
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Account Effective Date'' mem~:
lvlember has established a
"~''"""~'"'" an accotttll with that
the
relevant
30807
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
the date the first order >vas
if both dates arc
when the
set
date an account was established at the relevant
or via
transft:lr; (d) where !here are
dates assndated with an accQunt established
the
date of the CATNMS Plan
to l.ha ralevant CAT 'J"'"'r'""'
and
the earlie~t available date;
accounts established
to the
the relevant CAT "'"''""''"'r
and
the date established for the account in the
the Industry l\<[ember or
date
date on which the first orders were
fhnn the
the /l.ccount EITectiv<: Dale will be no later than the dat<:
M.;mber or in the
1'v1ember's system.
controIIed
of a Person means any Person
control with such Persotl.
or under common
controlled
or under common
thai
any
exec uled shares are allocated and
the ~,.,,,.,..,.,, *"""
t1rm
tl1<:
the
per sh11rc of
tl1c
shares allocated to each accoLmt, and the time ofthe allocati,m; nn•v,,u~,rl
avoidance of
any such Allocation
shnllnot be
lo be linked to
orderg or executions.
any
nBid.
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'!Hili!i.!.!ll~ml£!Jtll!lJ!" means a
that:
submits a Bid: (b) is an Afiiliate of an
that submits a Bid; or
is ineluded, or is an /\Jilliate of an
that is im:luded, as a
ivlaterial Suhcontrador al'l part of a BicL
SEC Rule 613.
:!\1ember
SIP
Data·• ihnn time to time.
rneat1'l the plan set fbt1h in this
as amended from time to
time.
ex1:hang<~.
national s!lcurities as1iodation
information to the Central Keoo:SJt<)fV
comnmnicatiOJ1'i
and othc:r
or any third
on the
op,er;l,twn ofthe CAT and any related infbnnati~)Jl or
relevant S)'Stems pursuant to this
·gm!l1J~~!!2:ot' tnean~
ret.:mtion of all int1mnatiou
tln· the
the
to the CA.T pursuant to SEC Rule 613 and this
"'"~""''''m.c•nt
means the individual
as tb.::
means the Internal Revenue Code of 1986.
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30809
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
means an:<em
interest in the
tinl!!,
the right to any and all benefits to which a Participant may be entitled ttttdor this
Agreement and the Delaware Act,
with the
of such Participant to comply with
this ""'""''''"'''
or
nlil:ms the lJnited States Scc>uritics and
means, with r,;spcct to a
Commission_
such
the
Section 3, I L
OJ' WOUld
consideration ofthe matter; or
ineoma>:tcmt with the purpose and
ofthe
into account all relevant considerations
to
has a
oflnlcrcsf' in a
each of its
shall be deenl!!d to have a "Conflict oflnterest" in such matter. A. "Conflict
includes the situations set fmth in Sections
.-a•·-m:mam
in SEC Rule
but not be limited to, accmutt number ,
tradet< idetttitier
!\·!ember has established a
in those circumstmtces in w·hich til!! relevant accou11t ·was
oftl1e CAT NiviS
to the relevattt. CAT
and no "date account
is available for
the Account Eflective Date in the
fiCCOlUlt
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30810
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
a
to individuals: name,
addrc5~,
date of
nwnbcr
would not
the Commission.
all Nl\1S Secm·ities and
includes
mean<; the Securities
ai!OTC
Secw·ities.
Act of 1934.
or an altemati ve:
system ("
operates
to Rule 301
does not execute
Pmrtu·m:mt·
has the
tne;~m11g
set tbrth in Recital C.
means Financi:d
means a
account de:st~)1il1ted
where each ~uch
lvfcmbcr tl1r each lm~ines~ datl.l.
;\!embers l(lr purposes
among all identifiers from any
means th.;, fiscal yeru· of the
c·om~>antY
dll:tcnnine:d ptu'Suant to Section
means United States
'!!l!;!!l§ln~!S.!~~···· means a member of a national secutitics cx,;ha:nge or a member of a
national securities association.
has the
set !brth in Section
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30811
means the first Phm Processor selected
Comrnitkc in accordance '"ith SEC Rule 613, Section 6.1 and the Selection Platt
ner1<wted pursuant tQ
the Plan 1\:>r Reporti
Intormation filed with the SEC pursuant to,
and the outcome based upon that
a source sy!ltcm
input In computer networks,
or message, and the destination system
or
means the aftlrmati.vc vote of at kast a
of all of the members of
as
authorized to cast a vote with
or no! such a member is present at any
tt,,,,.,.tmo Committe<: or
Subcommittee, as
Committee or any
to a vote to recuse fi·om such nmtter
means a non-electronic communication of order-related
must record and report the time of the event
set forth in Section
of related contracts,
contract between the
on the
onmy Afliliate ofa
of assets or
or the lease or lice11~e of assels or
contract tbr cost or
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that is ktlO\VIl to the
to be included
as part of a Bid as a vendor, suhconlractor. service nr''v''"''"' or in any other similar
''"""''"~~ or servic<Js ol1ered
the
to one or more Bidders on temlS
nn•nrcn~;•·n by the SEC:
derive 5'lo or more of its annual revenue in
accounts for 5'l·!, or more of the Iota!
shall not be considered a "Material
in SEC
Rule
in SEC
as "National !vfarket
Rule
are
elleelive national market system
meat"" a Bid that does not include a
means
au officer ofthe
as set tbrtb in
Section 4.6.
means the
or automated
or
with respect to
Rule
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other than an N~·iiS "·'···m·•"•
national seeurities a~sociation and ri'f"'riNi
facilities.
has the
to
set fl.1rth in Section
JU;;<U'Illf\2.
"'.E!l!:.i.!Sil!.!!!31" meang each Pergon identified as such on ~~:.u...u.
this
in such Person's
as a
the
Section 18~ Hll (ll) of the
nu·uc!pa,m8.~ha11
has the tneani1ng set t~)lih in Section
has the
m~:fillllng
set iorth in Section
"Permitted Legal Basis"' ll"'lhU1S the "''·rt"''"'"" has become exettlpt
ot othet'\'-'ise has
be
to, SEC Rule 613 or has
to
with SEC Rule 613 in son~
manner other than
the""'"''"'"''"
oftbc Connnission.
ceas~d to
means any
v.::nturc, trus4 business trus4 ""·m·-.,,r.,,.
means
idcntifitlr number or
identiltablc intbnnation,
inf'brmation.
ne•:·snn'"
""'"'""HI'" a social
mmher or tax
'tll!!!Jt!.Q~~r n~ans
the Initial Plan Processor o1· any other Person selected
Commi ttce pursuant to SEC Rule 613 and Sections
Initial
the Selcctim1 Plan, lo
the CAr pn)c~:ssing !l.m.:liO!.\'\
SEC Rule 613 and set tbrth in this l\.grcc:mct.ll.
to an int.:rest, asse4 or
lieu ()f ot~r similar cnetunbr1mce
of an
trean.'> any ll'<ul:Saction other than
11 se~:ondat'\1
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where a l)ers1m
30814
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
in The Wall Street Jouma!
any successor
the prime rale last
prior to such last
"Proceeding" has the
n~ean1tng
set forth in Section
nc•ccs,sal:·y ';apab:lltttcs to create,
nnnw:mc:m. and maintain the CAT so that such Bid can he
the Selection
Commiite<J. \\'hen
vvhetlt<Jr a Bid is a Qualified Bid. each member orthe S<Jlection
Committee shall consider wh~!thcr the Bid
addt·csses the evaluation factors set tbtth in
the
and apply such wc::Hztlllt"t!l' a11d
Committee deems
in his or her
The determination of whether a
Bid is a
shall be detennitt<Jd plll'S\J<\nt to the ptoeess set forth in Section 5.2.
all bids and olTcrs of OTC
market center identifiers (inchuiiJng,
re>!ister<:d as a llliU'kct make!' or electronic communications network l)f
otherwise utilizes l11c fitcilitics ofFINRi~
FINIV\ rules, that ..::ntcred the
quot;Jttlctn), withdrawals and other infonnation
to 4 u<Jt<tttii.Jilli
rc<mit·cd to be
to 1he Phm Processor pursuant to this .4\gr.::crncnt
defined under
means P.~'""''innnt
any validation or otherwise checked
l\,1ember Data that has not
has the
mcat~ing
set forth in Section
has th\: meam,ng set forth in Section
and
!rom time tc> timc.
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30815
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
a Bid submitted
a
Bidder and selected as a
Selection Committee pursuant to Section
and,
pursuant
a
Bidder that ltc'is submitted a Bid selected as a
"SIP Dat<l'' has the me:a1111ng set forth in Section
has the mea111mg set forth in Section 6.
Member that
'l;ffi!l!!L!Jllillllit!::X...M!m!l~:" rneans an
broker-dealer as defintJd in SEC Hu.le 613.
as a small
of
as "I'II'HI"«~cm;;, authorized to cast a
at
Op,cntti 111g Committl~c or any S uibcnnlmlittc:e
any member of the
Committee or any
is recused or
to a vote to recuse fh:nn such matter
that
of <ill of such members authorizBd to cast a
pursuant to Section
vote i~ not a whole number then that number sha.ll he nltu1ded up to the nearest whole number.
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10-
30816
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
the avoidance of doub~ the Operating Committee may establish dil1~rcnt
Stocks (as dcllned in SEC Rule
Listed
OTC
securities that are included as
Section 1.2.
avoidance <>f doub~ the Exhibits,
Attachments, Rceitals and Schedules identified in
1lu~
tn11<lss the cont<lxt otherwis<l
i ucl ude the plural and ~vi ee versa;
words dcltotJtng
include all
all exhibits,
attachments, recitals, and schedules to the
document in which the reference thereto is contained shall, unless the eontex1 othei>vise
con~ti!ute an
part of such document lbr all purposes:
a fCfere!lCe to
<1
f>;)II!IC:t!I>H
or schedule shall be a reference to a
ot·
schedule to, this
Allt'C<!tlll:~nt:
pr<JelatrtatJons, , ..,t.,,,..m~t,Yii'""~ mld ordinances issued or othei>vise "~"P"'""'"'"
in any such ease, otherwise
in any such statute or in
the document in which the reference is
utlder that statute
a definition of or reference to <UlY oo,ournerlt, instrurnent. or agreement
indudcs an <lllhl!Kimcnt or
to, or restatement
modHication or novation
any such
instrument or agreement unless otherwise
ill such detinition ot· in
the eontex1 in which such reference is
a rcfcrenc<: to "$'', "Dollars., (~r ''tJS $''refers to currency of the United
in this
.;;onsent
Person ~~ r.•rmHr»d
Person's sole and absolute'''"""''''"~"'
wherever the
such consent may be withheld in such
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-ll
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30817
words such as "hereunder", ''hereto", "hereof'' and "herein" and other
shall rc.tbr to the whole oftl10 applicable document and not to any
subsection or cl ausc
and
particular
means
a rdl.:rence to "inr.cltldirlg"
"including ·without limitation''
ARTICLE II
Section 2.1.
the Commission and execution
A}!:tc<)llll~nt
shall become efiective upon
by
identified on
and shall continue until
tllis
to the contrary and without. the
and
ofthis
''"rti•''"'"'''~
terminated.
Section2.2.
m1der the Dela,vare Aet
Sec:l'etarv of State.
Section 2.3. ~· 111e mune ofthe
is "CAT Nl\IS. LLC." Tl10 name of the
may be changed at. auy tin10 or ti·om time to time with the
of the
Committee. All
business shall be conducted in that tllilllC: or such other names that
Cmumitice may select &om time to time.
co,mt:>~mv
Sc:ction2.4.
The
ofiiec ofthe "-'J''"•'"'·'}.
of Delaware shall be the ofilce
r·,~m!!rc:d
fl·om time to time in the tuanner
at such
as the un>erltttrt!!'
which need not be in the State of Delaware. 1he
de:~iP,mtJte
l,.:c,mt)lUlY shall
b~~
shall cau~e to be filed such certificates and
'11ith tbc Delaware Act and ru1y otll!!r
<~I>P""'"n"''"'m"''!'.n:"''''t" tor t11c
continuation and
of ll linlitcd
company in accordance with the laws oftl10 State of Delaware and any other
the
slutll conduct
ru1d shall continue to do so tbr so
as the CoJmr><!UV
conducts business therein. Each member ofl11e nn,Pntlit'H> Comnlittee
"authorized
within the
ofthe
Act
Scdion2.5.
documents as may be neeessary or
Section 2.6.
llllJJ!CilWI:Ita!JiO!L and UMilltltCJtllllliCe
co'nllnl.t11Y may engage in:
to SEC Rule 60& and SEC Rule 613; and
"n'''~"'"'t
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12
30818
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
any other btt~iness or
that
advi~able or
convenient 1<>
J)clawarc Act, the
of the powers and
Delavvarc Act
!lOW
the
or hereafter may be necessary,
proper,
purpo~c and that is not prohibited by the
la\V. 11Je Company shall havll and exercisll all
co:mp,anies tbrmed pursuant to the
Section2.7. Tenn. The term of the .. n11r1mmv comnt<lnced on the date the CertiL!cate
was t11ed with th1..' otllce of the
of State
'"'''nr'""'' and shall be
unless
in this Agreement
dissolved as
ARTICLE Ill
PARTICil'ATIO N
The name and address of each
are set forth on
he admitted to the
in accordance with Sc0tion
or \Vithdraw from the
except
sanJC restrictions,
as
Section3.3.
shall be cntitkd to:
one
vote on any matter
written action oflhe
any distribution made
the
Sectioll 10.2, which shall be distributed as
Interest~
shalt not be evidenced
certificates .
Section 3.3.
Person nn•r.rc•v•~n
the Commission as a national securities
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or national se..:nrhies assodation
Act a.ller the Eflt:,:tive Date
becQnJC a
~11l>tnilti•m to the COi!liDiUlV
in the :tbrm
the
As a condi tim; to admission as a
said p,\rson shall: execute a
.Aflre£~m•~nt at which tint<l
shall he amended to ret1ectthe status of said Person as
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30819
said Person's address for purposes of notices delivered pursuant to this
pay a fee to the
in an amount determined
Vote oft he
Operating Committee .as
f()r
costs incurred in
and
such costs incurred
sei.Jetm»' the Initial Plan Processm· and !lll)' su11seunc:nt
11lr the pn•spective
l'"'rtu·.mont rin,"!nrlinl<>
me:r:J1tn<>
the amount ofthe PJn1ie,in'''ti
Committee shall consider the
any
an assessment of costs incurred and lo be incurred
for nw•auyutgthe CAT or any
not othenvisc
other Partil;ipanlts admitted as such after
the Ellectivc Date;
from the Efl:ective Date to the an1ttCIPII1tea date of
and
the
In the event the
CoJtnpl~ny
Committee cot:1te1npJlat~~d
on
mnou:nt of the PartH;matton
Co:nmussion purstlllnt. tn § 1
cm.er,•1in<r
Section
and a nrfiRn,e.ctiv;,
such a.tnount shall be
Act
l>a,,.. ,,.,..,,,.
Co•mt:I<UlV may
for
it<: adn~ssion as a
lin~ ted
access to the
~><>•rt,,~.,,.,,.,t
Limited Access to the CAT
in a
payment of a
in the amount established
refunded as described in such
To be
the SEC as a
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• 14
30820
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
national securities
or nati()Jtal securities association under the r:· ...... ,.."···
'm'""'""' lms not yet become a Participant, or the S,EC must have published such
or Form X-ISAA-l application to bceonl<l a national securiticN •'V''''""'o"
national securities
Sl'ction3.4.
Form
Tmnsfl't' ofContplll'l\' Intl't'I'St
may Transt~r any
Interest
in cmmllmntL:e
\V itll this Section 3.4.
Transfbr or
Transfer in contra vcntion of tlu: t'w''"'""''"
sentence or any other
Agreement shall he null and void ab initio and indlective to
Tr1ttt~fer any
Interest and shall uot bind or be
or on the books of the
and any b·ansJbree in such transaction shall not, to the maximum
be or he treated as ()!' deemed to be a
§ 18-702 of the Dclatvarc Act) for any purpose.
No
nury Tran.'lfer any
Interest except to a national
Aw•""''"""' or national sccudties association that succeeds to the business of such
RS a result of a rn:erger or consolidation with such
()f the Trans ter of a 11 or
all of the assets or
of such
Section
Interest to any trans terce as
such Pennitted Tran<:>ieree executes <l cQunterpart ofthis
='""""""-''"" shall be anll::nded to ret1cct the status of said Permitted
said Permitted Transfert~e 's address fbr purposes of !l()tices
and
anll::ndment to this
the
htterest to a Pernritted Transferee is ""''"'"'m•'''1
accordance \Vith
608 or otherwise becomes ellbctiVtl
such amendment and such
with tlris Section
SEC in accordance with SEC Rule 608 or otherwise becomes e.ffeclive
to SEC Rule 608, as
has
all costs and expenses of the
shall be entitled to treat the record QWner
all
and neither the
has been
without
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'"''''"~""'is
its emmselthat such Translcr:
without ''•><NQ1·•·,.ti '"' under the Securities Act
result in the violatiQn
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
<~IJ!f.IU''"""'" state
securities laws~
would
cmtm:u1v under the investment Company
30821
as an investment
i\cl
of 1940 (lf modit)l the
lrom such
which the
has chosen to
would
the Company to
as an
adviser uuder state or federal securities laws; or
if the
is
taxed as a partnership fbr US_ federal income tax
would result in a termination of
the Company LU1der § 708 of the
or
result in the tn;atnrent
the
as an
associatioll taxable as a
limited
for tax purposes_
or
Section 3.5.
and upon the con~ummation ot: !':uch ""'''IL"'""'"'
as applicable.
virtue
emn"""''""'' \vilh Section 3.3 or Section
Section 3.7.
Tennimltion ofParticimtion.
The
in
tlx~ co.mrnH11V
8llflll tcrmirlate as oftl1e earliest oJ'
rN>i~t,,,-,,t
as a nati(mal securitie8 "'~'·'II"'H~"-'
date oft;;;rmination punuant to Section
"'""'"''"'-'"' shall pay all fees or other anxmnls
after
to be
of an invoice or other notice mdltc<ttn-tg
lesser of:
law. If any such
nar11111mtg ,,.,,.,,,,,,.,,,;,.,,,
tl1e Pn;riH,manl,:;
1ff111iUatt011 ofthe
1'1.~11-JC;!f\jlfl
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• 16
30822
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
''lith the SEC. Such amendment shall be etl;;;ctive
is
the SEC in
accordance vdth SEC Rul!l 608 or otherwi.qe becomes eftcetive pursuant to SEC Rule 608.
(c)
In the event a Participant becmnes subj ed h:1 one or more ofthe events of
barlkntPtc:v enumerated in § 18-304 of the Delaware Act that event
itself shall not cau~e the
in the
oftl1e
::;o long as the
termination of the
continues to be
as a national securities
or national securities-'''"""~'"'"'
From and atlcr the cm~ctivc date oftcnnination of a
in the Conq;,tmy,
and losseR ofthe Company shall cease to he allocated to the
p~,.h,··•"~"t in accordance with A,rticle \11II bdow·. A terminated
AcctHI!ll as ofthc ellccti.vt~ date
t<>r protl!s
within
of the cl1:ective date
rmt1nl111tlm1<ate share of costs and ill\l'Cnscs allocated to it pursuant to
which it was a
fhr
under Section
otherwise becon1es ctlective pursuant to SEC Rule 608.
Section3.8.
Obligation.'! and Li1tbi!itv of Particip:mts.
vote of all the PRrti '''nllnl!'<
to contribute
A.ccount of each P::.,rtu:ift:~nt
No
shall have the
vu.u.>;,"'"''"
Ccrmt)at11Y to observe any formalities or ,.,.,,...i,,..,,.,.,,.,,,~
.::xcrcise of its
ot martagemcm ,;fits business ''~' atlairs under tlus t~ ""'"""""''t
Delaware Act
nol bt~
(()r
Afllliate of a P:n·li,iinc>1nt fix any
company may, under certain circumstances, be
to such member. It is the i ntcnt of the Pl'll1:~<~in~rnt~
to Article Vl!l shall be dct:tncd a return
oftht.1 Delaware i\et 'lllc pa:;,.nl<)n!
~'~'""~''"""t
shall b.:: deemed to be a ·~•1tni'H'<1n·•i~.~
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. 17.
30823
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
any such money or propc11y shall not be
to return any such money or
property to any Person. llowcvcr.
court of competent jurisdiction holds that
tho.l
ofthls
is
to make any such
shall be the
and not of the
shall
St>ction 3.9.
additional funds to carry out its purposes,
to conduct its business, to nJeet its
or to tll(\ke any
authorized
tltis
'-·"'"""'''v may borrow l'unds thmt such one or mor<l oflltc
or from
Committee.
t)')1111•'1"~1llh
01'
partner
venturer
construl.ld to suggest otherwise.
cn[brce
The:
is not intended to be a
purpose, and no
shall be considered to be a
fbr any purpose, and this
shaH not be
as
ofSEC Rule 613 and of this
'11tc
circumstam:..:s and considerations that may
their
l'vlembers with the
ARTICI,J<: IV
:MANAGEl\,JENT OF Till~ COl\IPANY
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actions
SuhcommiUce within the scope
with respect to matters
30824
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Pa.rtii;ipnn1ts hereunder or pursuant to non-wnivable
of applicable law, the
P!\ltiic:in;~nt;~) in accordnnct~ \Vith tltis Awcemcnt shall constituk• dccisimt'l or action~
the
Company and shall he hinding on the
and each
to the cx1cnt
otben,isc
to the
this
shall have au1tho•rity
thereunder, including SEC Rule 613, and under this AwcenJCnt
lo the contrary, the
Committee may
all Qr part of it'>
administrative function~ under this
but not its
the e:l!.1ent
d~Jterminations arc
as
to one or more
and any other Person. A Person to which administrative functiorL'> are so
tht! same as agent for the C0!11JIRITV,
n'"'l'"rn"' administrative function~ on behalf ofthc ''"'""''',''"
rNIII11"<'tl to:
agree tO he hOUI1d
tlle COtltlOel!lWll
and
agree tl1at any
business mt'"'''""'"~" p,ert;mumg
any
or lillY /IJllliatc of such
that becomes known to such .Person shall be
held in co.nl:idenc~: and not shared with the other
tor
information that
shared in connection
Section4.2.
Cmnnosition and Selection of Oper.tting Ctlmmittee; Chair,
represents as set forth in Section 9.6. One individual may serve as the
n1embcr of the
for
Affiliated
and such individual shall have the
to vote on behalf of each such , "'"""'""
No later than the date the CAT
cotl1!11CI1ccs
the
Comrnittce shall
one member thereof to act as the initial chair
Such initial Chair. and each successor thereto. shall
term or until the earliest of his
v ''~'''""' of tllis
TI1e
elect, !rom tilt! rncmbcrs
aS UCCCSS()f to the
may be the Person then
extm·atton oft he then current term
snn'''.,'''""rrl'v Vote, may remove the Chair trom such
va<~lii">C\i ofthe
a SUCCeSS()f
""'~""'"" Vc"1te, fi·om among the
rnemh.:m; thereof who shall serve until U1c end of the then current h::rm. 'l11e Chair shall
at
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• 19-
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30825
record the
Committe.:: may !rom time to time
ofthe
Committee.
A~TC<3tnCl1t I<) the contrary:
Person !'~hall serve as Chail· fbr mm·e than two successive full
b:nns; and
no Person then
to tbc
C<nmnittee
that then
serves. or whose l\ft11iate then sen•es. as the Plan Processor shall be
Section 4.3.
Adion ofOneratine Committee.
as othervvise nnnvt,aca
Chair, shall be authorized to cast one (I) vote fhr each
Commiticc,
or she represent.~ on all mattcrs voted upon
thc
and action <>f the
~<,,,,.,.tmo
Committee shall be a1.rthorizcd
to the
~''"rt"··m,.nt
or in any other
!lr\inrn.nrl
action~
'- "'HII"'"' ' Y shall not !.'ike any
of the SEC
to pn:sent coutraty views
the
ofthe
unless the l)!l>Cnltll'l$t
amhorizes such action:
seleclthe Chair pursuant to Section
select the members of the
Comnlittcc pursuant to Section
the
determine to bold an Executive Session oftlte
ptii'Slk'lllt
to Section
determine the
am~rnnr-ia1<" tUIK!rng·,.reJ
!'l.l1i cl e XI;. or
any olher matter
,.,,,.,~."~"
""'""''"~' as stated in the definition
been authorized
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• 20
30826
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
(i)
select a Plan Processor, othertban the Initial Plan PH1Cessor selected
in accordance with Article V;
terminate a Plan Processor without
(ii)
cau~e
in accordance with
Section 6.l(q);
(iii)
approve the Plan Processor's appointment \)r removal of the Chief
Inl:bnnation Secu:dt;:l ()ft1cct, the Chief Co1npliance Officer, or any Independent Auditorin
accordance with Section 6.1 (b);
:l>faterial Contract (ifthe
(iv)
enter into, modi f)' or tenninate
'1\btcria! Contract is with a Participant or ani\ft1Iiatc of a Participant,
Participant and
i\nlliatcd Participant shall be recn~cd lrom any vote under this Section 4.3(b )(iv));
make
approve the initial Technical Specificatiot:t'l pursuant to Section
An1endment to the Technical Specifications proposed by the Plan Processor
Section
(vii)
!Ulle!KI
Tedmical Speci.fications on it~ own motw•n: or
(viii) any \Jther matter specified el.~e\Vhere in this Agreen1ent (which
includes, as stated in the definition
" the Appendices to this Agreement) as
requiring a vote, approval or other
ofthe Operating Committee
a Supem~<1iority
action required or permitted to be taken at
Operating Committee or any Subcommittee
without a
members
()fthe Operating Cmumittee t)r Subcommittee, as the case may be, then
consent to the
action
or by electronic tra.nsmission. Such
consents atKI hard
transmissions shall filed with the
of the t"'"''"'"""' c:onnnttb:~e
or Subcornmitiee, as applicable.
(d)
Ifamember ofthe. Operating
or
on a matter under consideration the ()pcraling Committee or such
such lllenlber shall recuse himself or ,,,,,.~,.,t
ofthe. fln.At""11im>
Cmnmittee m·
as
Subcommittee shall be
in Seetion4.3(b)(iv) or as •m",,.,,.
(i)
Participant. is a Bidding Participant 'M"'"""
CotlSI<Ier:mc•n n:tenllJeJt'S appointed to the Operating
or
iL'l Affiliated Participants shall
lrmu any \'Ole '"",'""•rnin<>·
Bidder
its Bid; (B) tl1e seleetion a
or (C)
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Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
which such "'"'·ru·•nam or any of its Affiliates W(,>uld be a party in its
30827
''"'"'"'t" as Plan Processor;
and
is (A) then
as Plan Processor,
is an
Person then
as Plan Processor, or (C) is an Atl1liate of an
that is a
!\laterial Subcontmct.or !o the Plan Processor, then in each case n~mbers
or
bysuch
m
shall be recused fhHu any vole
( l.) !he
removal of such Plan Processor: or
any contract between the
Affiliate
oftl~
Section 4.4.
Meetings ofthe Om:n\ting
Committ~~.
a maximum of
t '"·"""'""'
Committee,
and the Plan
or the SEC. or such other Persons
Oi.lrer<ttltl;g Committee may invite to attend. to be present
a:n Executive Session.
Comrnittee to meet in an Executive Session shall be rnadc
Voteand
bendleetedintheminutesofthe
ofthe
Orl.r>r:;fi•·•a Committee shall be hdd not less than once each calendar quaxtcr at such times as shall
time to time be determined
the
Committee, on not less Umn ten (
Committee may he called upon the request of two or
each
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. 22.
30828
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
the
the
shall he rotated llll1mlg the location.'> of the """c' ""'
Pnrtillipant-;. lvicmbers of the
Committe.:: may h.:: present at a
by conl~rence
"-•-y·w··- or other electronic means that enables each of them to hear and be heard
ofthc
to
electronic tran'>mission
time slated in such notice, shall he de<nncd
Operating Committee
a mernher thercof
c,mstitute a waiver of noticc of such
except when such
oftl1e
Conunittee attends any such
tor the e)..']}ress
pt111J<'se of
at the beginning ofthu
to th0 transaction of any business bucausc
the
cal !.ed or convened.
or Fonn X-15/1,}\-1
returned fbr any reason, then such Person shalt no
scheduled
Committee
TI1e
'"'~r.~r11ml in limited instances, to deviate trom !his
\/ote, thai circumstances so warrant.
Section 4.6.
Otlicers ofthe Conmany.
Otlleer and the Chief lnt{mnation
the Plan Pt·oc\lssor and neither of whom shall
Oftlc.::r
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-23-
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30829
(b)
TI1e Plan Processor shall inform the
who has dircd management
with n::spe{~l to the CAT.
Committee shall
C ommi ttce
Vol.::,
detem1ines otherwise. No person
defined in Section
ofth.::
may
..... v ....... tbat the
Section 4.7. Interm!lt:ation of Certain Rithts and J)mies ofParticirnnts, !\tlemhers
ofthe Operating Conlmittee ~md OffKet-s. To the fhllest extent permitted
the Delaware Act
law:
and other
and the members of
arc limited to the c>.'Prcss """"'""'_..
the
that each member
shall act in all
of the
such
II!> <em
pursuant to which ~uch
contract
such
as the Phm Processor or be! ween an Ofl!cer and th.: Plan
Pr1':lCCSSOr;
and each member ofthe
that such Person is
such vote. C(m~ent or
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24·
30830
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
fbr the avoidance
Sedion 4.8.
Exculpation
1tnd
s!mil be entitled to
or
lmlemnification.
Committee shall he liable to the
under Section
or to any
unless such loss is
such as a contract between such
serves as the Plan Processor.
settlements ami reasonable expenses
incurred
such Penon in cmmection with such l>rc>ee,~dimr.
indcmt1i±1caliQ11 is .;:ntitlcd tc)
pursuant to Section
shaH
as to a Pcr!lon who has ceased to Rerve in
lndcmnificat1on under this Section
·which
entitled such PerRon to indemnincation hereunder. i\s a condition
to an indemnified Person's
to be indcnmit1cd pur.suant to this Seetion
such
Pcrnon mtt~t
the
in
fllr which such indemnified Person will or could s.::ek
of\vhich the
therein at its own ~1xpcnse and/or 1n assume the defense thereof at its own expense, with
counse I
to the inden.111itied Person. If the
d"es not assume the
ofwhich the
receives notice under !hill Section
an indemnified Person in connection ·with any such .... ''""""'
in advance of the final
"fsuch
upon
ot: (i) written allirrnation the indenmificd PerRon of such
Pt:rM111'&
faith b-elief that such Person has met the standard of conduct neeessary lt>r such
in the case "fa Pcrs,1n other than
Person to be entitled to indenmi tication
unless otherwise detllrmincd
that such conduct was
such conduct did not constitute
such Person to repay
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• 25
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30831
such <:ll.'J'enscs if it shall
be determined
a court
that such
Person ha,~ not met sueh standard of conduct or is othenlllise not entitled to indemni.fication
the
'I11e Company shall not
an indemnified Person to the extent such Person is
reimbursed fl·om the
and in ihc event the
makes any
reimbursed
and no amendment, modification or
such rights with respect to actions
It is M~, ...,.ooh
indemnification !ilr .. ~~'""·~'"·~
or members ofthe
be made upon the
to the contrary in tltis Section
indemnification under this StJction4.8 shall be
to the extent
asset<;, and no
shall have any
account thereof in the absence of a separate written agreement to the contrary·.
any Pemlitted Person for
reason of the factthat the
direct~ such
1•7 another
Tllis Scction4.9 shall have no effect
than
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• 26
30832
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
'-A'' wtnu,, y such as a
contract
serves as !he Platt Pr<X'cssor.
acl.ion
lnn·s mmt to any
may be taken without a
vvhich consent shall be
Section 4.12. SuiK'onunittee::t
resolution
on.:: ( l ) or more :mbcommittccs
a
fi~rtherance ofthe, management of the business and affairs of the
any m.::mbcr ofth.::
Committee who wants to
sc1·vc.
""'"""''···rl one member to the
Committee
that member serve on the
""''""'··--• member serve on the
such member to serve
also an
on a Subcommittee in !leu oft he
the resolution of the flt1..,,.,,ti""'
"''''''"''"'' in
non-waivablc
Czmunittec in the management ofthe mr.un.~ss
as so
in th"' .resolutiml oftl1e
Committee. Each Subcommittee shall
as the
Committee may from time to time
minutes and make such
as thu
may oll1erwisc
any Subcommittee may
the
Committee or in
for the conduct ofils busim::ss, but unless otherwise
in the sam.c tllllntlCI' as is nt•;•nmu•n
sue h rules. its b\lsiltess shall oo conduct<:d as
""'""' "v of the
·nnm"'"',~
~·w'll"""'·" Subcomrnittee
shall be I<) aid the Chief
:m1'1mlltr"' in accordance with
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- 27-
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30833
the maintenance of the
of infommtion submitted to
!he Plan ProeessororCentral Repositorypur~~uantto SEC Rule 613,
ht\V,orthis
Participants and
Memhcrs;
the timeliness. accuracy. and ""'m"''""'""'"" of il1t()rulation
submitted pursuant to SEC Rule 6 i 3,
by
law, or this
and
lvlemhers; and
(iii)
the m:tnner in and extent to which each t'mmcoln.am
ii~
und(;)r SEC Rule 613, Section 3.1 i, and a:; set l(,rU1 else\v·lrere in this ,,..,,,,""'"' and
the
ofll1is
enforcement as to all
Sl'dion 4.13. Advison' Committee.
he fbrmed and shall tl.metion in aeeonlance with SEC Rule
No member of the
Committee
or any of its Affiliates or taciliti.,;s.
with any
shall serve as an observer of U1e
Conuuitt..::e shall select one
of each categoryr identified in Sectiotlc<> 4.
''"'"'"'""''tni~tv,~"
Committee on behalf ofhimselfor
pursua.nt to Sections 4.
of no fewer than tltrec
Committee:
a broker-dealer with no more than 150
a bn1ker·dealer with 500 or mmc
a broker-dea.ler with a substantial ''·holesale cu~tomer base:.
a lmlker·dealt:r that is annn1vc"1
a nat.im1al securities
to etlect transactio115 on an exc:.llang.;
lllt'Uket maker. or floor
act as an institutional broker on an·'"''!"''""'''
e xcrm'"""'
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• 28-
30834
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
an individual who maintains a securities account 'vvith a
broker or dealer hut who othtltwise has no mah:Jtial ba~incss
with a
with a broktlr or dealer or
a member of academia with
of the C.AT System;
rdevant to the
any other
or
in the securities
au institutional invcst\)f
on behalf of a
an i11stitutional investor
on behalf of a
or
entities;
or
entities: and
an individual with
Four of the 1:\:velve initial members of the
Committee, as
detenui ned
the
tweh'e initial members of the
shall have an initial tenn oftwo
Committee may serve thereon fbr rnore
have a term ofthrell
years. No membllr oftl1e
than lwo consecutive temiS.
Committee shall advise the
and administration ofthe Central l?"''"""t"''""
Members
Committee on such
to vote on any matter
the
Committee or any Subcommittee
Committee or any Subcommittee may meet in Executive Session
Comnlitt.ee or Subcommittee rletemlines that sucll an Executive Session is
Conntlittce
solicit and consider views on the
ofthe
Comnlittee.
it:
i.nionmttiot; \.'VJll~~"u"'~
Comnlittee retains the
Conmuttce, which
c~,1mmi1tee !o fillfi.ll its l:hnctions.
infonnation received members oft1te
Committee in furtherance ofthe nerti>t'm""~'''" of their fimctions n••··~n·mt to this
Aot'''''ln'l't shall remain eo11tldential unless otherwise
the
C{mmuttee .
Ail'\W<nf''V
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• 29-
30835
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
ARTICLE V
INITL<\L PLAN PROCESSOR SI!:LJ<X'TlON
Section5.1.
Selection ConuniUee. Tile
Committee in accordance with this 1\rticlu V lo evaluate and rcvie>v Bids and select the Initial Plan
Processor.
Each
senior
officer
to represt~nt the
as a member ofthe Seledion
Committee. In the case of Affiliated
one ( l) individual Ill.'!)' be
is not
to
th.:
fhr more 1hatHll1C or all ofthe Al1iliated
Senior Officer for more tl1<lll @e i\ffiliated
to vot.:: on behalf of each such Affiliated ,_.H,·ne"""
Unless recused Jltii'Sttal1t to Sections 5.
shall have one vote on all matters considered
5J
\:\/here one (1)
such
or
Committee.
shall vote on whether a Shortlisll:d Bidder
belmv if a Bid
is a Shortlisted Bid.
shall be ""'''""''1,,rl
submitted
shall vote in the process
or
or an AJl:iliatc ofthc.
or
set of
ifa Bid submitted
is a Sh<.1rtlistcd Bid.
shall vote in any round if a Bid submitted
is a part of such round.
the
All votes the Selection Committee shall be confidential and
All such votes shall be tabulated
an
third party
the
individLtal voles ~hall not be disclosed to
Committee, and a
or to tire
a vote the Selection Committee can
be
entitled to vote are present
of the Selection
Committee shall btl held as nl:leded at such tinre~ and locatim1s as shall ft·om time to tinre be
determined
the Selection Committe<l.
may be held
conference .-... ,....-...
clcctroni~~ rneans if all
nrea.ns the Selection Committee deems "'~'·"'P"""
taken at a
in which all
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-30
30836
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
For purposes of
only ifthe Participant's
or jr-; participating b~i eonftlren~'C
attendance
means.
recused ii·om
on a
to Section 5.1
above shaH not be considered "entitled to vote'' f()r purposes of
whether a quorum is present fi)f a vote to be taken on that action.
Senior OHicer is
cril<:ria mtt'>t he met before a
anlCimll:n
and SCIV'C on the Selection Committee:
of
program;
and
ruc:omm•
otlk~r
other than the
Cm111;~el
SClJat'':llt!Otl of tt':!
business or commercial
for any
ofthe
or the Otiice oftl1e Get1Cral
Counsd:
(v)
is tied to the • , ... ~··· ·' eft'cctivcness of the
COll111CI'CiaJ
Senior Oftlcer is not based
nn
the
Senior Ofticer has no""''""""'or formulation of tl1e Bid submitted
Senior Otlieer does not
fQr the
or formulation ol'thc Bid submitted
or an Af'f1liate oftl1e
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- 31 -
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
CEO or similar executive officer
and
such Bid is
execu:iive officc:r cannol share: infimnation ''"''"'"'""
30837
Senior Oftlcer and senior staft'
Participant's CEO or similar
Senior
guch Bid with tl1c
the
Senior Oftieer is not
to income earned iftl1e Bid submitted
IS
and
( x)
tlu:
Senior
:my sta!T
and any similar executive officer or member of an mdlepentletlt <nw••rnm<>
Senior Officer r<::ports may not disclose to
Person any
the review of Bids,
by
Bidders, and sekction process. StaJT
St:nior Officer
Bid
and selection process may
the Bid
not include the staff, contractors, or subcontractors that are
submitted
11
or an AHiliatc ofthe
Section 5.2.
Bid EvaJuat.ion and lnithll Plan Processor Selection.
The Selection Committee shall review all Bids in accordance with
the Selection Comrnittee.
ilic process
Afi<lr revie\V, the Selection Committee shall vote on each Bid to
detennine whethet such Bid is a
Bid. A Bid that is deemed
at least a
two-thirds
vote oftlte Selection Committee shalt not be
Bid and shall
fhnn fillther consideration.
'"'"'"'"'t"'""' to present its
Bidders, tlte Selection
Bid to the Sdection Committee.
Committee shall review and evaluate the
Bids to select the Shott! is ted Bids in
Ifthere are six
shall be Shortlisted Bids.
If thilre are more t11an six
t11e Selection Committee shall select
in Section
bdow. Each
and filth choice from among tl1e
to each choice as
(I)
First choice reeeh·es tlve
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• 32
30838
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Second choice receives four ( 4)
'Third choice receives three
(4)
point<:;
Fourth choice receives two
and
Fifth choice receives one (I)
l1le five
"""''"""'"Bids,..,,,,,..,.,"
scores shnll be Shorilistcd Bids.
cumulative
In the event of a tie to select the five Shortlisted Bids, all
vuau.'""' Bids shall be Shortlistcd Bids.
{D)
To the el\:tent there are Non-SRO Bids that are""'"""'"'~""
the Shottlisted Bids selected pursuant to this Section
include at least h'I:'O Nou-SRO Bids.
vote set
in this Section
no Non-SRO Bid was sel.::cted a.q a
the two Nott-SRO Bids''''''""""""
Shortlisted
votes (or one Non-SRO Bid if a
shall be added as Shortlisted Bids. If one Non-SRO Bid was selected as a
Shortlistcd
the Non-SRO Bid
ctunulative
vote shall be added as a Shortlisted Bid.
It:
Ifthere are eleven ( ll) or more
the Selection
of the
Bids as Shortlisted
t<l the
belmv. Ifthere is an odd munbcr
Shortlisted Bids chosen shall he rounded up to the ne:-.1 \\'hole. number
tl1en seven Slmrtlisted Bids shall he
Each
select as many choices as Short listed Bid'l to be chosen.
Conuni tt<!e shall sdect
ret!Uirement in Section
increments as follows:
l~'lst
receives one (I)
Next-to-last choice receives hvo
Second-thml-h\~t
choice rcc.::iv<)s three
111ird-lrom-last cl1oice receives four
Fourth-lrmn-last choice r~1ccives live:
and
increments,
shall increase in
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-33
30839
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
odd number
of Qual it1ed
Shortlisted Bids.
percent
cumulative scnres shall be
In ll1e event of a tic to select the Shortlisted
lied Qualified Bids shall be Shortlisted Bids.
all such
(D)
T<l tl1e extent there are Ncm-SRO Bid~ that are
the Shortlisted Bids selected pursuant to this Section
"~"'~""~- include at least f.\;,to Non-SRO Bids. If,
fbrth in this Section
rm Non-SRO Bid was selected as a
Shortllsted
the two Non-SRO Bids
the
votes
one Non-SRO Bid if a
Non-SRO Bid is a Vttallt!ed
shall
addcd as Shortlisted Bids. If @C Non-SRO Bid was selected as a
Shortlisted
the Non-SRO Bid
the next
cumulative
vote shall be added as a Sho11listed Bid.
The Selection Committee shall revhew the Shortlisted Dids to
"''''rn'~·'ll
solutions l()r thc CAT and
solution that 1.vere not
will he
'""""'•Tv
all Shortlisted Bidders
to revis..: their Bids one ()fl110I'C tin1es ifthe Selcction Committ..:e detcrmincs,
vote, that such
necessary or ""''rt1nri"1"
and dtltel' before or after
anvneV!ISHms to Shortlisted Bids are ae<;e~>letd, the Selection Committee may detennine,
at !cast
Shortlisted Bids to three
in accordance with the
a two-thirds vote, to natTow· the tmmbcr
process in this Section
Each
Senior Oflicer shall select a
third choice from a.m011g the Shortlisted Bids.
and
fbi lows:
Fin;t receives three
Sccond reccivcs two
and
111ird receives one
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34.
30840
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
cumulative
(C)
Tile three Shortli sted Bids rN"' ""'"'"
scores will be the new set of Slmrtlistcd Bids.
(D)
Shortlisted
In the even! of a lie that would result in more than three !lnal
the votes shall be recounted,
each
Senior
in order to break the tie. lf this recount produces a tic
that would result ina number of final Shortlisted Bids
lh:uwr
to
that from the initial count, the results oftl1e initial count shall constitute the
final set of Short!isted Bids.
To the ell.tent there are Non- SRO Bids that arc Sl:tortlistcd
Sh()rtlistcd Bids selected
to this Section
mtL~t.
includ.:: at lea-;t one Non-SRO Hid. If
the vote
set forth in tlus Section
Non-SRO Bid was selected as a final
Shortlisted Bid, the Non-SRO Hid
th.:
cumulative votes
shall be retained as a Shortlisted Hid.
(F)
The third party
votes, as
in Section
5.
i>hall idcntil)r to the Selection Committee the new set of
Short! istcd
but shall
cou:l1dcntial the individual scores and
!rom the proceNs in this Scctimt
inc:orrmralc infonnation on
solutions in this "' 0 ' ' ' ' ' ' ' " ' ' ' ' " irlch:lditlg cost-benefit infommtion a<;""""'"''""!
"'"'~"'trtNt
to the
to revise its Bid
rectL~al
upon
in Section
that revisions are ne<;cssat)'
Bidder's initial Hid and the m·<wt,,w:n~
in
ofthc content oftl~e Shortlisted
A Sho1tlistcd Bidder nm;· not revise its
Bid unless anr·lrm,•cd
""'''Q ""''f to this Section
·n1e Selection Committee shall review and evaluate all Shortlisted
Shonlisted Bidders. In "'"'rthrmi'"'
the Se]e,:tion Committee may consult with the
Committee
of SEC Rule 613 and
and such other Jlersons
n,,,. ,,;1t,,l'l revisions thereto S\Jbmitted
tl~e
re·vie\v and
pursuantto
cstablisl~ed
as the Selection Comnuttee deems
"'""'"''"''''"t"
'There shall be two rou11ds
the Selection Co,mmittee to
select the Initial Plan Processor fi·om among the Shortlisted Bidders. Each round shall be scored
rounds of
the
to detennine the Shortlisted Bids
Each
shall have one vote in each round.
he entitled t.\1 vote in any round if the
Bid. a
that no
submitted
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Aililiate oft he
is eon.~idcrcd in such round.
(iii)
30841
Participant or an Afliliate of the
First Round Voting by the Sdection Committee.
In the lirst round of
to the
recm~al
in Section
Senior
shall ,select a fit"Rt and
second choice fi·om .:ntl<.)tlg the Shortlistcd Bids.
l\
follows:
(I)
First choice receives two
(2)
and
Second choice receives one
TI1e two Shmtlisted Bids
cumulative
scores in the :lirst round shall advance to the second round.
(D)
ln the event of a tie !hat \vmdd result in nmre than two
Shortlisted Bids
to the second round, the tie shall be broken
""'""'mr•o one
per vote, \Vilh the Shm1listed
number of votes
the second round. 11; at this
tht1
Bids remain
a revote shall be taken >vith each vote
If the I'll Vote results in a
the
shall
areas for !inther discus~ ion
any ~uch
shall continue until two Short.!isted Bids are selected to adv.:n1ce to
the second round.
Secoud Round
the Selection Committee.
In the second round of
Senior Offie.::r,
shall vote ibr
to tl1t1 rtJcus a1
one Shortlisted Bid.
(H)
'l11e Shortlistt1d Hid
the most votes in the second
included in the Shortlisted
round shall be
and the ""'''"'''"Ni
Bid to serve as the Plan Processor shall be selected as the Plan Processor.
In the event of a
a revote shall be taken. Jfthe revote
result<> in a
the
shall
area~ fbr .lllrthcr disctt~sions
with th<J two Shortlistcd
any such disctk'lSionN.
shall continue until one Shot1listed Bid ls selected .
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. 36
30842
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
ARTICLE VI
FlJNCriONS ANO ACTIV.ITmS OF CAT SYSH:l\t
Section 6.1.
Plan P1~essor.
'l11e Initial Plan Processor shall he sch:ded in accordance with Article \'
aud shall serve as the Plan Processor until its
oHemoval t!·om such
in
accordance •with this Sl\Gtion 6.1. The U)t11f1>illlV. under the direction of the Operating Committee
shall enter into onc ormorc agrecmcnts
thc Plan Pro.::essor
the Plan Processorto
functiorw and duties
tlus
the Plan
such otJkers of the Plan Processor as it
i\"r"''"'"'" and SEC Rule
in accordanetl with Seetion6. 2:
the
·nw Pian Processor shall:
V..iJ:ristleblmver Incentives and
congistent with d.p>pemu!s
accuracy oftl1e cot:tsolidation oftl1e CAT Data t·<'tmt4t,,rl
Section 6.3 and Section
and
'v"""'''!S"'''""m, ensure thil
R ''""'"it.>rv
pursuant to
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• 37
30843
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
any material modificatk1n or
and
the Operating Committee.
In addition to other
to the Plan Processor's <;;mptu,ye•:::s
and contra~~tor~ IQ ensure the '"'"'t"r·tt "'n
"'m""""~'m and data ofthe CAT
As lltrthcr
C,
Service Level
D,
Ptoccssor may enter into
service h:vel agreements \Vith third
the Plan Processor's ll.tnetions related lo the C/\T
ofthe
Committee. The Chief
basis and consi11tent with any
system
and
C!a.,.t-t<)-C!a.v u 11,~-··'""'" function of the CAT
on
an as needed basis and consistent with any
m:h material
of the CAT
Section 6.
a securities
as well as necessary
shall include:
control structtu·es and tools to entorce this
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• 38-
30844
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
contractors, of
the Plan Processor to whom the
(ii)
the scope of securities that are allowed or not allowed fQr
the creation and maintenance of restricted
a mechanism for
new or open account
blind
the Plan
review~ and
a mechanism to review
accounts.
associated with "'"cc~M"'E>
all individuals who have access to the Central Repo:sit<Hv
such individuals
TI1e
/\Pcr'~'·'•nc,nl
Committee will review the Plan l'ntccss(w
at least once each year, or n1nrc o.ften than once each year upon the request
nuu~'liJ<IIms
that are not Afliliated
Tile
Committee shall
the
determination made
the
Committee co1t1ce:rni:ng
engagement of the Piau Pro.:essor as a result of the Op>er~tlmtg
Processor and shall
the SEC with a copy
in connection
therewith
the
Committe.::
on the Ci\T .._,,,..•." .."c• nn,,.,,nn,n and maintenance. 'fl1e repor1s shall address:
reports
re<lo~r<ltm"
cm1acrrv and
tire
Such
netrtilrman.~e
reports shall at a minhnum address:
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39
30845
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
issues tor the Plan Processor and the Central
rcq[uir,ettli~llls set forth in
D, Data
p,,,rtir•m:..,1t
'''H"'"'t""" pHiiUllllng
l~emuweJ:llelllli':. as
usage statistics for the Plan Ptocessor and the Cii::ntral
studies and
wdl as business
report'< called l~)f
D,
and disaster
into accQUllt the business .. vJmu.uu'' v
the Plan Processor and the Central
planning and disa11tcr recovery
l(>r
D, BCP l DR Process:
Hnnro,vL~11~l!?:11lt
issues with the Plan Processor and the Central
LICVClOT}Illi~tll
continued
bU<dg~~tat'Y
of New
of the Plan Processor;
stat<L« of any items
internal audit
to Section
and the statu<:. of any intental audit r<:!lated
additional items as re<juested
lndep<md,ent Auditor.
the request oftlte n.,,,r<•''''" Connnittee or any
the
Plan Processor shall atlcnd any
of the
Committee or such Subcommitte<:.
Vote, may remove the Plan
Processor .l.i·otn such
Proc.:ssor !hm1 such
its tlmclions
n,,,.r,•ti•·•<> Committee may,
remove the Plan
at any time if it determines that the Phm Processor has failed to
"'"'~"""'''"' ac<cerltaltHc manner in accordan~.~.:: with the
ofthis
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• 40.
30846
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
,..,,.,..,..,~,, or that the Plan Processor's e;,:penses have become excessive and are not
Cmnmiuee shall congidcr. among other fact<)rs:
such determilllltion, the
reasonableness ofthe Plan Processor's rc:sponsc to
from
or the
or enhancements;
for
Vote, shall fill any vat:ancy in
CIJI1ln1it1ee.
~'"'""vu,
In
the
and shall establish a Plan Processor S.::!cction Subcotmnittce in
accordance with Section 4.!2 to evaluate and rllvicw Bids and make a tecomm.mdalion to the
Commi th:e with respect to the sel.::ction of lh!! successor Planl'rocessor. Any successor
w this Section 6.
shall be
to aU tbc tcmJS and
Plan Processor
conditions of this
lo the Plan
from such
cfle.:tivll date.
and the Commission such
Section 6.2.
Chid Compliance Offteetand Chief Infmtnatlon Secutity Officer.
such service (or
administrative matters related to such
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• 41..
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30847
detract in any mraterial respect from such
Plan
at it~ discretion:
unavailable or unable to serve as th0
illness) for a period not in excess
Processor to
""'""'''",.,,,j,, resm~rce:-t to fill fill the
(i l3
and in this
,,\,•re~'nlfmt
Committee,
Committee, and
Olllcer's annual
revie\V,
omcer shall:
ree\)111111CUdatkms fbr cnhauecn1ent<>
collcclcd and the manner ,in whid1 it is nn'"''~"'"''1<1
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-42
30848
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
minimum include a review or all Plan PnK1ii:SI':Or '"""v'~''•
.:ontrol stru.:tures, and real time tools that monitor and addre:;s data
issues tor tl1e Plan Processor and tll<J Central KePOl>lt(lfV~
(D)
needed
n:::vicws with respect to the matters relcrcnccd in
and on an as need<:d
to the:
such rcvic\:vs;
to the
Committee and conduct any relevant
review of th:; Plan Processor or the Central
the
wtittcn
ass~~ssnlCIU
10 the
613;
ff<>mll•nc:v
program
the Plan Prm:essor pursuant to Section 6J 2
of such ""'"'"''''~'
on,er11tn1ll Con!l:nit1cc any
the Plan Processor with any of the Central
to infom1ation sec:tll'lttv:
Ivfember
to
pursuant to SEC Rule
_"", ..... ~ •., off:icer or
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• 43
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30849
of the
a mechanism to conduct
CAT
develop at1d
renwdiate any
a
or
!\{ember with the mle~ of the CAT, which process will indude
mn·<mn"'"' notification and order of escalation to a
the
Committee, or the Cmnmission;
to
re,~ol ve and
and conduct an annual asscssnwnt of Busitwss
in Section
Clock
have access to the
work on a more
and
basis ·with the
Subcomtnittee or other Subcommittee as may be determined
t':ommittcc; and
oversee the Plan
related to the CA. T
Plan Processor.
with
rules <uld
an
Processor to serve,
the
Committee
the Chief lnllmnation
Ofl!c,;r. '£11.::: Plan l'rocessor shall also
addition to the person then
as Chief lnfbrmation
the
Committee has:
O!licer ifthe """'""""''"
Vote to serve in
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• 44.
30850
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
OU:ker becomes unavailable or unable to
or
fbr a period
Plan Proc{~ssor to
Vote, the Chief
with the Plan Pmcessortcnninates or the Chief Infonnation
Officer
reason
or
.tbr a
in excess
The
Committe.:: shall report any action taken pursuant In Seetion
The Plan Processor,
shall ensure that the Chief [nflmnation
of the Chief Inl(muation
and the SEC.
ofthc Chief
and control structures tn monitor and address data
Centtal
the standards set fbrth in
the standa.rds sd
the standa.rds set
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17MYN2
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da1a access and breach
D, Data Access, and
30851
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
'""'""""- including the standards set fi:lrth in
''"'""'"-""- and
which shall occur at least every
set forth in
At
the
the activities ofthe Financial Services lnh'r"'~t.
to the
or
other "''''"""rn
Sedion6.3. I>ata Recordina and Reporting by Participlmb. 'I11is Section 6.3 shall
become e tlective on the first anniversary oft he Eflective Date and shall remain effective thereafter
until modified or amended in accordance -with the
of this
and
law.
,-,p-~'"'''""A
D. Data
and Sources, each
Ior consolidation and storage in
shall report
a format or formats
\Vith SEC Rule 613.
!he
Committee and
records such
li:OO a.m. Eastern Tinl!! deadline.
(c)
that is a national securities en:nanve
or listed tor
on such exc~'"'''mYe or
admitted to unlisted
that is a national securities association shall
arc
t•) he
submitted lo such association.
to Secti,)n
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the Tee !mica!
30852
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
record and
report to the Central
the
each Reportable Event, as
("Participru1t Data"):
details for each order and
Ihr each Customer:
(D)
date of order
time
pursuant to Section
·~'"*"L>··
~late!'ial
(F)
or
Terms ofthe
date on which the order is routed:
time at which the order is routed
(D)
!\·[ember or
~'"'"''~"
Market l'nrt,,innnt Identifier ofthe
the
l'l)ll'!u•m,un
order·~
and
l\:laterial TcmlS ofthe ()rder:
fbrthe
of aJJ order that has been
in!bnnation:
date on which lhe <>rder is recdved:
time at \Vhich tbe order is r,~,,.~,~n'n
pursuant to Section
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. 47.
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Sii~U·Al;SI:!IDt~d
!v1cmber or
30853
Market Participant Identi.fier ofthe Industry
the order: and
p,.,,1it·mant
Material Terms ofthc:
if the order is modified ot· cancelled:
(A)
date the modification or canc:c:llation is received or
time at which the modification or cancellation is received or
tm1e>:·!an1n.« pursuant to Section
(D)
other
in the Illlaterial Terms oftl1e
if
whether the modification or cancellation instruction \vas
the Customer or was initiated
the
l\1cmber or
(A)
CAT-Order-ID:
execution
und
whether the execution \Vas r.~rlm"11<~<ipu:rsuant to an efl~ctive
or the Plan for
of Co.nsolidated
and
and
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48-
30854
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Each Participant must submit, on a daily basis, all
lvfarket Parlicipa.nt Identifiers used
its Industry Members or itself as well as infbnnation to
the
muket
CRD
or
to the Centl'al
Identillers and
As
m
such methods as nlll)'hc
!he Plan Processor
Committee to transmit
Data to the Central '""~'"·""J'
nata Reporting and ReconJing by lndustn· Members. The
lvlembers under tlris Section 6.4 sba.ll. bec01ne effective on the second
of the Effective Date in the case
l'vfembers other than Sumll
Members, or the third
ofti1Cl E!Iectivc Date in the case or Small
and shall remain etle<::tive thereafter until modified or amended in accordance with the nnYv'"""m"
oftlris
and
law.
Data
and '·"·'""·"""'"
Members to report
and storage in a fbmtal or !hrmat'l
with SEC
meratm» Committee and
Rule 613.
each
tn record Recorded
Event.
8:00 a.m Eastern Ti!ne on the
the
Member records such Recorded
lviember
Member Data to the Central
8:00a.m E<1stem
1\.-(ember receives such Received
its
l\•fembers
8:00a.m Eastern Tin1e
to
deadline.
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• 49.
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30855
Ellch
that is a national securities
Rule, require its lndtL~try Members to report Industry Member Data fbr each N!vfS
or listed t(lr trading on such
or admitted to unli::;tcd trading
its Compliance
that is a national sccuriticl-l association
lvtembers to
Member J)ata (()r
its
lor '''hich tran~action
arc "'"" "''""
association.
report to the C\:mtral
1vlembcrs to record and
Event the information refem::d to in Section
in \'ltl:tolc or in part:
An Allocation
(3)
CAT-Ordcr-U)
iftbe trade is
a cancelled trade indicator; and
fi)r
or
1es"'"'"""" lD, CLL~totrl£lr Account
Information for the relevant Cu,;tomer,
of an order, t11e Firm
and Customer
lvfa kcr with
the time at which a quote in 11 Listed
quote mod!tications am.!lor
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50
30856
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
cancellation time when such modification or cancellation is
Such time infbrmation also shall he repm1ed to the Central
in lieu of
the Options lvlarket ~fakeL
Member must submit an initial set of the Ctl~toll1i':r
intlm11ation requir.:d in Section
lvlember's <..:mm1.:ncement
submit to the Central
the
information required in Section
on a
basis therea.tler. In addition, on a
basis as
by the Plan Processor and approved by the
lvlember will be
to submit to the Central ttenoslt(:lfV
The Plan Processor will correlat.: su.:h
use it to
a Custoll1i':r·ID f{;r each
Events associated with an order 11>r a
Customer.
!Vtember nu~t submit to the Central
Member
CRD, or
in!(mnation sull'icicnt to
Section 6.5.
Centnd Rcpositot'\7.
and consistent with
retain all CAT Data.
Central "'·'""'""'w"
and retain on a current and
Member Data, all data, ""'Jmi,,o
n"""""'· Data and
quotes
NMS
and tr an'lacti on
tiled with the SEC pursuant to, and
SEC Rules 601 and
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• 51
30857
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
and Limit
(D)
sum1nary data or
each ofthc SIPs and disseminated
fbr
(h)
Consistent with
~:~nnt:1rtm"
Central
shall retain the intonnation
pursuant to
of SEC Rule 613 ina convenient and tL<;able standard electronic data fonmt that is
available and searchable
any manual intervention
Plan Ptoecssor tbr
of not less 1l1atu>ix
Such data when available to the Participant
statT
a
and the SEC shall be linked.
~l11c
nu-"c'm'"n"
Plnn Processor shall
and
with the
is reviewed and
ret~nrds
Cnnsistcnt with "-"'"''''"'"
and the SEC access to the Central
all sy-stem~- "..,,,,.,,.,.,.ti
and access to and u<;e ofthe CAT Data stored in !he Central
and
rc!;ul:tul<Jn~ or any contractual
'l11e Plan Pmcessot simi! create and maintain a method of acccs:; to
CAT Data stored in the Central
that includes the
reports. 111e method in which the CAT Data is stored in the Central Keoo:slt<)fV
retum results
that are
in nature,
the status of order book~ at
and
Repo:stfl)ry is controlled .
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• 52
30858
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
shall set and
a
The initial maximum Error Rate
Consistent witl1
the ()pllrating Conm1.ittee shall adopt
sta"'"''n,,s_ requiring Ci\.T Data
to the Central.
and to ensure the
of such CAT Data
an<t Data
(iii)
filr
file
tnmsmi~sion
<tnd
validation of CAT Data; and
validation
"'"'"{)]"''''"also describes the
eom;ctions of CAT Data. The Plan
corrected CAT Data in accordance with rnechanisnlS and
Commi ttce.
of all CAT Data received and
the Plan Processor shall:
all individuals who have access to the Central
and consultants ofthe
the
Commission.::rs ofthc
ensure the COI:lW1el111:!
not to u~e CAT Data stored in the Central
all individual!'! who have access to the Central
the
and consultant<; ofthc
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• 53
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30859
""~~-'""M and th.:: Plan Processor. but "·~'-""""'"' """''W''"''~ and
Commissioners ofthe
to execute a
of
lnfonnation AJllda,riC in a fonn
Committee
nnwidirm tor "'''""""'!!
;.~-·L"'""'''
and maintain a n1eehanism to t:onftrm the
""'"'""'"'" to access the CAT Data stored in the
m~~H<iH-"'"'
and maintain
nmu·,)nr.,lt£!
limitations on
activities of it'S
and \11(fef)rendelrt!
contractors involved \Vith all CAT Data consistent with Seetion6.l(n).
Each
and enforce
shall
that
to access and
persons
de:sig~mlted
access to the CAT Data stored in the Central
Kepmnto,r:y~
no:tH:onrl)lmtlCe with any of its or
to inlormatiou
·n1e Plan Processor shall:
and
all
1'''"'""'"'''~ and the Plan Processor, data
to and fi·mn the
!he Central
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54
30860
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
the establishment ofsecure controls ibr data retrieval
(B)
and query reports by Participant
staff and the Commission; and
(C)
otherwise
database
CAT Data obtained !rom the Central
Ii)r
.,,.,,..,-,.,,,.,,.shall
revie>v the effectiveness of the
take prmnpt action to
A
may LL'>e the Raw Data it repm1s to the Central
stn·veillance, commercial or other purposes a.s otherwise not
law, rule or
Section 6.6.
Regular 'Ytittcn Asscssmf.'nt
At least every two
""''rf;>rm~"''"
years, or more
tr""'"'"t'
tnlder this /\ ut'''''"~-•nl
in connection with
to Section 6.
of the CAT that
Officer sh<lll oversee the assessment
the
a reasonable time to review
to a conmwnt
a
rather, any
""'"'"'""to the SEC at the sanw tinw as tiw written assessnwnt
comment
'The '''ritten assessnwnt
this
Section 6.6 shall include:
of such metrics;
based on the evaluation conducted
nmrm/cnEnts to the
ofthc Ci\T with
t{)
tlw
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55.
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30861
an estimate oftbe costs associated v1rith
ne1rlhrn'tanc:e oftlu:: CAT, including an assessnll:mi oftbe P01tcn1tial
formation; and
an cstilnat.:d
tnllnm''"'"~mems
tim.:linc tor any
poltcl~tt!U
to the n<',rlcYrm:Mtc:<' ofthc Cl\T, if applicabltl.
Sedion 6.7.
Im!llementalion.
Unless (llhcrwis<l ordcnld
the SEC:
rnontlt<> after the Effective
the Participatllts shall
Bid and the Plan Processor pursuant to the pr<lce:,;s ~et forth in
selection ofthe Initial Plan
the
shall file witll the
Conunission a statement
SEC Hulc 608;
shalL and
within one (1) year afier the EtJective
to the Central Kcpo:stt\)t'Y Part1e11na,nt Dat<\:
•·•mrtu"""'" shalluiJpu:m,~m
within fourteen (
months a.fter the EtJective
each
a new or enhanced surveillance
in accordance with Section
6.10;
:years after the Et1ecti ve Date, each
lvfembers
than Small
Member Data~ and
t\ach ""''·tu•mllnt
Members to report to the Central
i\n.m~111m~·
C, i\ Plan to Eliminat<J
D, Data
and Sources, sel
co.nc(lrrlillli2. the elimination of niles and
l\nne1nm~
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56
30862
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Section 6.8.
Timestamm and Syncbronizatign ofBnsiness Clocks.
shall:
Each
other than such nusiness Clocks used
for Manual t)rder
the National Institute of SlandardH and
other than such Business Clocks URcd
its
Members to:
its
ft)r Manual Order
to the Plan Processor and tbe
any
the
it'i BtL~ i ness Cl ocl;:.<;
its
their Business Clocks used
l11e Natior1<11 Institute of
Events at a minimum to within one second ofthe time maintained
Standards and
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. 57.
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30863
Jvlcmber shall be pe:m11ttte<1 to record and
Order Events to
in increments up to and including m1e second, provided that Pm1w1nants
and lndm;try l\-femhcrs shall he
to record and report the time when a lvlanua! Order Event
has been
in an order
and execution system ofsueh
or
lvlember ("Electronic Capture Time") intnilliseconds_
"""pvswc>ry
:imrJ>ronriale lndu1>try Member
groups, the Chief
eva1ttate and make a
recommendation to the c l!1"m:lln1<' Committee a~ to \Vhether
standards have evolved such
that: (i)the
sh<1tlld be shorten.:ld; or
time stamp in Section
should he in finer inerernent~,
nm'"'~'''~"'"
Sedinn 6.9.
Technical Soodticatious.
aril at a minimum COI1Histent \Vith c\nn"~'"h""''
detailed instn<etions
submission of CAT Data
to tf"'il Plan Processor
cntty into lhil Central Repo:~it()i'y'
'11til Technical
shall he made available on a publicly available
web site to be
the Plan Processor, '[11\:l initial Technical
ti<'::>lli\M and any Mat<Jrial Anlilndment'lc thcr<Jto shall be
to the t ll1~<~r:lhl11<>
Committee for
Vom.
of the
the St"~cttica.t!OIIlS for the
of fil<Js :md records subrnittcd to the
the process fl,1r the release ofnew data
the process for
tor any
to data format
the Plan Proce~sor in the counm of
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30864
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
tor all files submitted to the CAT
any
the Plan
any other items rc'"''"'""''"
Committee.
the
!vfember t<) engage in
the Central
pursuant to this
oftbe CAT Data
/H~·c,~menl.
or
the Plan Processor shaH have the sole discretion to amend and
Technical
as needed in fhrtherance ofthe '""""""'~M
AH non-!'vlatcrial Amendrncnts made to the
shall be
to the
time line.
Vote, shall approve
any 1vlaterial Amendments
·n1e n..,,.,,.,,,,,.,,
on its O\Vll motiotl
Technical
may amend the
{',"11'1n1t1U;,,
each
surveillance S)'Stems,
system, or llnhance
con~olidated information contained in the Central
a surveillance
t n make lL~e of the
otherwise
the
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-59
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30865
SEC, witlrin fourteen
1mm<m11~m
rm"'•;>,dmtv
a new or enh.!meed surveillam:e
sentence,
Partil~tpaniLs
coordinate or share surveillance dlbrt"
ag:reenltlnls
pursuant to SEC Rul.::
Con~istent
the
ttHe
nk'iy, but are not
of regulatory ""''\'"""'
j·.-rm"''~'i
D,
ofthe CAT
the
and the SEC with access to all Ci\1' Datlt stored in the
will have access to pnJcesse:u
Data through two difl:ercnt
and user-defined direct
and bulk e:xtracts.
>Vith
l:'at11C!P<IintS
'Il1e online
query tool will
to retrieve CAT Data via an online
to choose fb;,~m a
as \veil
The user-defined
and bulk extracts ·will
authorized u5ers with the
to retrieve CAT Data via a
l<lllgttlge that allows users to quet1' all available attributes
Extraction of CAT Data shall be consistent with all ne1rmirs!':1inn
the
Ptoccssor. A!l CAT Data rctumed shall be en<~t''lc1rltc,ct.
be masked unless users have pelmlJISSIIoll
The Plan Pmce~sorshall
an automated nl<lchanism to
1.11011itor direct query usage. Such
shall include auto1nated alerts to
the Pbn
llrocessor
issues with bottleneck<> or
tor
or CAT Data
Plan Processor shall
the
or its
details
"'""';t,~rii""' will be
and the metries that \Viii be used to
alerts.
·lllo::l Plan Processorshallt'e!11SO:nat1lV
with
desk, aH described in
staJr
CAT Data.
r"' '""''""' v
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. 60
30866
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
ntc•..,,.,.t,·n" with respect to
securities that an:: not NMS Securities or OTC
Securities, including Primary Market Transactim1s in securities tl1at are not Nli.IS Securities or
OTC
Securities and in debt
which document sha.ll include details fbr each order
to be
·which market
may be
Event that 11"!.1Y be
the data, the
rnai.ntain a ,:;~;,~:·,~;::,_,~'f;~~~::~~~~-:;;=-~~
and reviewed at least annually
the
minimum the
detailed in ··'--"~"''"
ARTICLE VII
CAPITAL ACCOUNTS
Section 7.1.
Capital _,\ccounts.
shall be established and
allocatiml"l of
shall be deemed to be z.ero f()r the initial
pursuant to Article VIII
Account shall be <Ie<::reasc~u
nnmt'•rrv
distributed in kind) lo
~ueh
pursuant to Article 'VIII
lbr tax ""'m. ,.es.
lo amortization and loss on
267 or 707 of the
share of liabilities under § 752
e:spcnses not
•w"'"''''"rv whether or n1)t disallowed under
money or property is contributed to the
interest in the
ex\:hatlj4'C fbr an
inherent in the
shall be allocated
nr""''~'-r'"
as ifthcre had been a taxable
at its t1tir market value on such date. The f:!tir n:~<~rket value
property shall be
an
thc
t)f
Committee or, irthcrc is no such agreement,
valuation firm selected
the
Committcc
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• 61 -
30867
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
to the maintenance
§ L 704-1 (b) promulgated under §
manner co115istent \vith such Rcgulatiol11S"
ina
as otherwise provided
its
Account.
ARTICLI~
no Participant shall be
VUI
ALLOCATIONS OF INCOl\'IE AND LOSS; D1'!TRffiUTIONS
Sedlon8.2.
§
Section 8.3. AUocations Pmsmmt to§ 704(c) of the Oxle,
of the Code and !he
Regulations
and deduction vvilh
to any property contributed to
t()r tax
be allocated among the
so as to take account of any variation
lbr federal income tax
basis of such
and
variation b.:tween the
book value in the same manner as
uw'"'~''""'u thereunder. Such
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-62
30868
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
state, and local taxes and shall not <lflcct, or in any way he taken into account in
computing, any
share of distributimt~ pursuant to any
ofthis /\Q1'<X:tn.~nt
rc~ults !rom the admissiolliJf withdrawal or a
the allocation of net
net
or any other item allocable among the
Article VIII shall be made 011 the basis of an interim
of the
date on which <em i~ admitted to or withdraws !rom the
~~·"''""''·' may ttse
of the books as ofthc end ofthe month "r''"''ri"''"
month of the admission or withdrav<aL and prorat<Hhe items Ihr the month of withdrawn! on a
tmless the
Committee detcnnincs that l!Uch an allocation would be
unfair to any
In tbe event that the
in tile
Interests ofthe
resul!s from a Transfer of all or any portion of a
net
or any other items allm:able among the
"~''"'u v. or oti1er basis, as detennined
method under § 706 of the Code and the
thereunder.
Section 8.5..
J)istributions.
to Secti<m 10.2, cash and property of the \..\J•mtJ<utv
distributed to the
unless the
Committee
to § 18-607
Ddaware
reason
must or shmdd be made to the
inc!
the dn:umstam:es
under Section 8.3. Section 8.6, and Section 9.3. To the c;o;.1ent a distl'ibution is made. all
shall
in any such distribution except as otherwise
S.:;~:tion l0.2,
in
N<>
in kind.
ofthc
aNscts ofthe
distributed on the basis ofthcir fait rmtrkct value net
Committ~~c.
entitled to any intt~rcst in such as~cts
the
othenvise determined
the
assets ofl.he ''"""'''"·"
11ot an interest as a tcna.nt-in-common \Vith other
"~'"'"'"'"'so entitled in any asset
distributed.
St~d.ion
8.6.
Cotnmittce
Vote, wil11out the consent of
make an election to be treated as a '"'"'"'"r""
Form 8832 with the Internal Revenue Service: or
be
§
Code .
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30869
RECORDS AND ACCOUl\'TlNG; REPORTS
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Section 9.2.
30870
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
statement of
in Cllch
Capital Account for, or as oftiJ:C end ot; such year. TI1e
Fiscal Year shllll be tb~:~ calendar year unless otherwise dctcnnined by the
Comrnittt\c.
th<l Company as
contributions
at tb::ir ±air market values. and the
Ac0ount maintai.ned tbr each
with
§ }.704-1
under §
event fair market ·valtJ:Cs f(>r certain assel~ of the Co,mrl;u•v are not determined
lltir market value tbr su0h asset:> shall be
to among the
~hall
be recorded
shall
the
the
Section 9.3. Tax Retlmts. Il1c Op,enltilllf\
and lo.,;al income lax retums for
state,
11led \\ith tb:
tl1c
P<llr11etpilrnts to prepare
slate and local tax
return~.
use in the btt~iness of the
or
distribution to the
shall be hdd and/or inv<::sted in
accordance with the then effectiv0 <lash management and investment
the
Up,enllnl.g Connnittee.
tJ1e
Connnittee shall serve as the
all purposes pursuant to§§ 6221-6231 ofthe Code. As
Tax Matters Partner, the Tax Matters Partner shall:
f\lmish to each
aftected
an
audit of the
of each notice or other communication received
from the
SIJCb notices 01·
connulicationq
informed of any
a!low each such
P~•<tit•irmnl an
and
or state
111e Tax Matters
as such, shall not have the
to:
enter
\Vith the Int.:mal Revenue Service th;:tt purports to
any
written consent ofsuch
enter into an agreement
oftlJ:C Code without the
ag~·eelttJ:CJtlt
TI1e
to pay any fees or other co1mpen:sntmn
to the Tax lviatters Pat1ner in its "''"'Q''''t" as such. but rnay pay
to tlJ:C Tax !viat!crs
Partnet fbt services rendered to th..:
in any other
tllc Co,m~!~UJIY
OUl·OI·Il,OeKet costs and c:-.:penses
it in its
as Tax l\Iatt ers
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• 65
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Partner. TI1e Ce,n-q:)an:y
ru¥1
Section 9.(,.
disclosed
30871
m<lertllllty, detend and hold the Tax lvfatters Partner hannless fi·om
m.tujijjg~'. cost~ or e~:pett~e (including reasonable att<)rn:cv~; ·
act or decision
tax matters m¥1 within
re~;po,llSJ:ou.Iw~s as Tax l'v[atters Partner, so long as such act or
"'''"~~"'''"''' or willful misconduct
Confidentiality.
or on
ot any '0tllet PaJrttC~In:ant
but excludes any
mli)n11at1on otherwise disclosed pursuant to IJ1c
of SEC Rule 6]3.
agrees to maintain the Information in
ofcare it holds its otvn confidential information
in any event
confidence with the s<Utle
A
disdost' lnfmTnation to it~
'"""'"ir,,,n,.•nl~
to thos..::
or such
or
disclosure to it pursuant hereto and without recourse to or reliance upon
disclosed to it pursuant h<lreto as establi~h..::d
its written records or other cQnlpCtent
111e
set f{)rth in tlris Section
shall not restrict:
disclosures that are,
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. 66.
30872
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
(b)
any lnfbnnation of a
Coltllp<uw shall not, and shall cause its Reore:setnLTiiv.es not to, disclose
p,,r-~;,.; .. ,.,'11
to an:-•l other
ofti1<.~
without the prior written
ARTICLE X
I>ISSOUJTION ANI> TI<:RJVliNATION
Section 10.1. I>issolu:tion ofConmany. llte Co,nn><UlY
it~ a~set'i and btt'>iness shall be wound up
to the SEC's
oft he
ao;orr1vaL dissolve and
events:
tnll!nitnolt~
wrilten consent
or the
be continued:
the temunation of one or more
Parti<~ipar!JLs
such that there is
one
""''~'""'"" or
the entry of a decree
dissolution under Section 18-802 ofthe
Delaware Act
Section 10.2.
up tlk! allairs of the
associated
t'"'"ttt,.,r with other tlmds held
~~~;;;def~:~ach ofthc
~hall b.:: fhrnislred \Vith a statement
aecotmt:ants,
shall set fbrt:h the assets and liabilities
assets under Section 10.2
as
final distribution ofthe
with the
or net loss t1.lr til!! fiscal
setfbrth in Section !.0.2, the
and the
l!quiclatJmg trustee shall execute,
and cause to be filed a ceti.ificate of cancellation of
of the dissolution,
up,
and distrihutim1ofthc
"'·''''UI"''"'Y shall terminate.
.... vm~nU•my
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30873
ARTICLE XI
'FUNDING OF TIIF: COMPANY
Section 11.1. 1•\mding AuthotitY.
On an annual basis the Or11m:<ht1<>
The
shall include the rwt'''''''l""i
the costs of
the CAT fbr the upcmning year, and the
revenues to cover such costs, as welt as the
reserve that the
re~lsonal,ly deems
for
sm~rccs
of all
Committee
of the
Act any such Ices on
Cornmittee approves, <lnd such fees shall be labeled as
with the SEC under Section
Ot1oen1tirl~>
"Consolidated i\udit Tmil
in~plemetlhlttio'n
)t),,t·~tino
costs, In
tees on PaliH;ipanlts
Committee shall tah:: into account
l'OlilsuHulg fees and
incurred
the P<trtu~\Jpan1ts
Etlective Date in connection with the creation and im:plemf,nt2ttto'n
costs at1d ~onqx:nses shall be
and r~~a,smlably
l'vfembcrs.
bmjg~:\tin:g process,
of
and other related matters, For the
review oft'ees tor· the CAT, the t:lp•cnltutg
·--····<>··---to any
Person pursuant to
will be ctl\:Jctive upon reasonable notice to such Person.
Section 11.2. J<undine; Principles. In cf<tahlishing the
Committee sha.ll seek:
ofthe
Comp•atl'~'.
the
n,,,,,,,,tit~<>
or<~dt,ctatllc
1111d
and
revenue streanlS tor the
that are
administer the CAT and the other costs of
Members that is cott'listent with the r:,x.~'mm~~c
of the CAT and distinctions in the securities
Members and their relative
f~)r m~ph:mc~nt<ltl<>tl
a.nd
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30874
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
ru:umm::•·~
to establish a tiered fee structure in ,,·hich the fees
to: (i) CAT
that are Execution Venues, including
are based upon the level of market share;
l\iembers' non- ATS activi lies an;; based upon message
and
CAT
with the most CAT·related
market share and/or message
for these cotnparability purposes, the tiered fee
structure takes into consideration aJllliations between or among CAT
\Vhelher
Execution Venues and/or
:md other administrative tl.n1ction'l;
to
to avoid any disincentives such as
a reduction in market
and
(t)
bu:tdenon
lo build financial
concern.
(a)
Execution Venues as
executes transactions: or
cas.:: of a national ~,,,,,,.,tt,,~ "·'~'·'""~"'"'''"
its mctnbers to its tradl! t'"'""''""'"''
e\:'c~hatll><'< in NMS
or facilities tor y"''"'·tma
Stock orOTC
Ex.::cuti,;n Venue in
Conlltlittee
~·~'""""'~""'"'at least two and Ito ntore than five tiers of fixed
based on an Execution Venue's
NMS Stock and OTC
Securities rmu·ket share. For these purposes, ln<lrket share will be
ealctdated share volume.
Each Execution Venue that executes trattsactions in Listed
li.,,...,,,,,liino on the Listed
market share of that Execution
"'"'m.>w'"'''"' at lea.~t 1\vo and Ito more than five tiers of fixed
mar kilt share. For these purpos<Js, market share will be
contract vol\lllle.
·nw
Con11nittee ma:;.,·· establish any othl:lr fl:les
"'"·",."'t'"'"ofthe CAT that it
determines
fees: (i)f~1r
inacetn·ate
of information to the C/1. T;
submitted mii"''""''hn:l'r
basl:ld on access and tt'ie of the CA'f tbr r"""'l "''"''"'"
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30875
available a schedule ofcflective tees and
as in effect from time to time. 'l11e Operating
pursuant to this
Committee shall review such ('t::c sch0dule on at l0ast an annual basis and shall mah' any
to such fee schedule that it deem.~
TI1e
Commit:lee is authorized to review
St>ction 11.4. ColleL'tion of' Fees. The <Jp,cntlltllg
the collection of tees authorized under this Article
Committee 111:\~l include
as a llll:lction of the Plan Processor or another administrator.
On"~n•tlni<> Committee may usc the lhcilities of a d••mn""'
Act to
fbr the collection of such
a
when due (as dclcnnincd in accordanct~ with the
pay inhm:stonthe
to the ksser of:
such
tromsuch due date until such fee is
ala per annum rate
300 basis
or (b) the maximum rate "'"'"'"'tt'''n
fe.::s authorized und.::r this Artide XI as
Section 11.5. Fee Ulsputes.
with rt1Spect 10 fees the
pursuant to this J\rtielc XI shall he detennined
the n,.,,,.,tin'''
Subcommittee
Committee. Decisions
Pnrli•'''"'"'ll~
on
lvfemherto seek redress Ii-<m1 the SEC pursuant to SEC Rule 608 or in
ARTICLE XU
~IISO~LLANI':OllS
under this
notices to he sent to
or at such other
C<lnltHilliV
Notices
if hand
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• 7().
30876
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Section 12.2. Governing Law; Submission to JlQisdiction. Tills
shall be
and construed in accordance witl11lle De law are Act and intemallaws and decisions of
the State of Delaware without
etll::ct to any choice or cmillict oflaw
(whether of the State of Delaware or any other
that would cau5e tile "Pl~' "~""·'-'"
laws
other th<m those of the State of Delaware; provided that
Palrtic:ip;anls, lmtu~try ~vlembers and other Persons contract!
tlli s A!!:ree:me 1.1t
nrr•~·"""''~ ofth..o r,.Ncn<tn~lC Act and an:y rul..os and
Each ofth.::
and the
cmt<:.::nts to submit it<>dfto the exdusive "'"'''-«"'"'!
lUr'ISCIICtJ.onofthe Court
New Castle
or, iflhat court
this iXgreement in <my other court Ead1 ofthc
waives any defense of inconvenient forum to the maintena.nce
Pl'<lcceCI!ingso
and waives any bond, surety or other
that
Cn11nr•nn,v
other Person witlt rcspcclthen::to. '11te Co'IIlf)a!liV
Lo,n:u>at:IY or any other P~1rht:i n.:~nt
served at the address and in the manner "'''""_-,.,,-,
in this Section 12.2,
shall affect the
lllllll!ler
as
Section3.4, Section 3.7,
Section
and Section 8.2, this
maybe amended 11-omlino: to tino:
a written
amendment authorized
the afl:irmative vote of not less tlum two-thinLq of all ofthe Parti1::ipanJts
the affinnativll votll of all ofthe
in each case that has
nn1r~n<>nt to SEC Rule 608 or has otherwise hecono: effective under
No,twithsta:nding the
else to the contrary, to the extent the
nrtw''"'""Ofthis
and
such
purstk'\nt to the terms of the
of wfrether tllis
to tile restrictions on Transfers set f()rtll
shall be binding upon, and inure to the hendi1 ot: !he
,.,,:n'''div,suecessors and
and
may not
nc'rtnlft,,ct hereunder.
This
may be executed in
but all ofwhich shall constitute one instrunrent
c1 cctmnic communication in
and the
hereto agree thai
the sano: efleet as
transmitted
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'7l.
30877
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Scdion 12.6. Modifications to be in 'VIiting; 'VaiYct-s. This
constitutes the
entire
of the
hereto with respect to the
matter hereof. nnd no
anllllndnlCnt, n10dification or alteration Rhall b<J binding unless
sanw 1s 111
and
in accordance with Section 12.3. No waiver
oflhis
unless the same shall be in
and
each l\mum
the: waiver. No waiver
any Person of any default or breach hen::under, whether intentional or no~ shall be d.::enlllld to
ell.1end to
or
ddimlt or breach or aflect
of any
~hall
Sedion12.7. Captions. 111e ca),tH)ns are in,;erted thr cQnvenience of reference only and
not aiiect the construction of this i\<>''"''n"""t
Section 12.8. \'aliditv :md Sever.tbilitv.
Aunee:n1<:11t shall be
otllCt'
held invalid or tulenforceable, that shall not affect the
l)flhis
i\Q:re•ml!~nt,
a term or nr!)VISHJ,n
'''""r"·~~inn
the intention ofthe invalid or uncnfbrceablc term or
he enfon.:eable as so modified.
and
or any
enti tied to
to be an e X'Pres s third
indenmil1eation and
aR may be othenvise
A2rc<:m•~nt. 1mau•,mlllol.
to the
in ,i\rticle XL or as may be: otherwise determinlld
tllC
shall bear its own int<Jrnal costs
expen.«es incurred in connection with this lh>>"•''"'~'·nt ..~,,.,..,.,,5 those incurred in c<mnection
with all
of the
or the ..'''""'""' Conunittec. and the transactions
event any
tl.:nn'l or
}\c:eordllll.il:lv, each such Pcrso!l agrees that each other such Person may be
are not
in accordance with tht:ir
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-72
30878
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
and
hereof in any action itl~tituted
ov0r th..:: Parties and the matter, in each case with Ill) need to post
or "'~'"'·'''""'~"
citlmr directly or "''"lir,,.,,tJv
any ofthe assets or
Agrcernent to the contrary, each
of this
accepts the
of the Coltllf"ltW
dissolution and/or
in or
respect to, any aNscfs or nnm•~rh'""
a court for the
Section 1.2.14.lncomomtion of t<:xhiblts, Appendices, Attachurents, Re(•itals and
Schedules. '11te Exhibits, Appendices,
Recitals and Schedules identified i.n this
reference and made a part hereoi~
are
herein
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. 73.
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30879
IN\VITNESS
Agreement as of !he
I'ARTICIPANTS:
BATS
EXCHANGI~,
INC.
BATS Y-EXCIL\NGE, INC.
Name: _ _ _ _ _ _ _ _ _ _ _ _ _ __
BOX OPTIONS E.XCIL\NGF. Ll£
C2 OI'TIONS
EXCHANGJ:t~
INCORI'ORATEU
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CHICAGO HOARD OPTIONS EXCHANGE,
INCOIU>ORATED
30880
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
CIUC':.:\GO STOCK EXCHANGE, INC.
Title: _ _ _ _ _ _ _ _ _ _ _ _ __
EDGA EXCIM.NGE,
L~C.
J~XCHANGE,
INC.
EDGX
I''IN.I\.NClAL lNutJSTRY REGTILATORY AlJTHORITY,
INC.
v3.0
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<B-03-14 CAT
30881
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Title: _ _ _ _ _ _ _ _ _ _ _ _ __
INTERNATIONAL
SEClJRITU~S
EXCHANGI<:, U,C
Name:. _ _ _ _ _ _ _ _ _ _ _ _ __
iVIIAi\IU
INTERt~ATIONAL
SEClJRITIES EXCI:L,\NGE LLC
NASUAQ Ol\IX BX, INC.
NASUAQ OMX PHLX U,C
Tim NASDAQ
STOCK JV14.RKET LLC
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03-03-14 CAT
30882
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Title: _ _ _ _ _ _ _ _ _ _ _ _ __
NATIONAL STOCK EXCHANGF:., INC.
Name: _ _ _ _ _ _ _ _ _ _ _ _ __
Titk _ _ _ _ _ _ _ _ _ _ _ _ __
NEW YORl{ STOCK E.XCI:L\NGE L·LC
NYSE 1\lk"T LLC
N\'SF; ARCA, INC.
v3JJ
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03-03-14 Cl>T
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30883
E.WBIT A
PARTICIPANTS IN CAT NMS, LLC
HATS
Inc.
8050 l\farshall Drive
Lenexa, KS 66214
Lenexa, KS 66214
BOX Options
LLC
101 Arch St., Strite 610
Boston. r•vV\ 021. 10
8050 Marshall Drive
Lenexa, KS 66214
ISE
ILC
60 Bmad Street
New
New York 10004
The
Stock 'tl.larket
LLC
One
]65 Hm,ruh<'!Hf
New 'fork, N'{ 10006
National Stock
Inc.
101 Fl:udson Street Suite 1200
NJ 07302
New York Stock
llC
I .I Wall St.
New
NY 10005
New
NYSE Area, Inc.
ll \Vall St
New 'lork~ NY 10005
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Exhibit A· l
30884
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
APPENDIX A
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Consolidated Audit Tra:il Nationnl lVLuket System Plnn Request for Pmpos:d, issued
Fe hnuuy 26, 2013, ~'ersion 3.0 updated l'illu>ch 3, 2014
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Consolidated Audit Trail
National Market
30885
Ia
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2014
3.0
30886
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Content
6
'""'""'"'"
.... 7
.. '
7
General Conditions
8
Right of Re iection ...
1.3
8
8
8
8
9
9
.... 10
..... 10
... 10
.... 11
11
11
12
.12
13
13
.14
15
15
15
.16
., 16
..... 17
17
.
19
. 20
. 20
20
.. 20
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2
03-03-14 CAT
30887
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
2. 5.1
21
Data Tvoos and Sources. ..
25
Data Feed Managei'Tent .
... 25
... 26
. 26
.. 28
29
.... 31
31
............ 31
31
32
······· 32
. 32
33
. 33
33
34
., 34
35
.. , ' .... 36
36
.. 36
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03-03-14 CAT
30888
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
2.15.4.3
.. 38
Audit and Examination Support Requirements.
40
40
..... 40
.. 40
... 40
Order Lifecycle Assembly ..
~
Data Validation
H
41
42
42
..... 43
.. 43
.. 43
..... 43
45
.... 45
46
.. 46
47
.. 47
... 47
47
.... 47
.... 48
48
48
49
49
50
.. 50
50
.. 51
51
51
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VerDate Sep<11>2014
4
v3.0
03-03-14 CAT
30889
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
52
Company Information
3.11. 1
Corooany Prolile ....
52
3.i12
. 52
3. 11.3
"'"53
53
3.11.5
.. 53
3.11. 5.1
53
Onboarding and Training .
53
54
·····54
' .. 54
.. 54
"54
'' .. 55
56
.. 57
' 59
60
60
61
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03-03-14 CAT
30890
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
The objective of this request for proposal (RFP) document is to oblain detailed information on the Bidder's
abilities and expected cost to build, operate, administer and maintain !he consolidated aucit trail (CAT), as
described herein, and prm~de related services. This document contains the CAT technical, business and
operational requirements, as well as the information that must be provided by Bidders response to the
CAT RFP. In addiban, this document contains the key criteria an which Bidders may be evaluated. The
content and information in this document are the property ofthe self-regutatory organizations
developing the National Market System (NMS) Plan (N!>,lS Plan).
This document provides a roadnlapoflhe technical, business and operational processes that must be put in
place to
with Securities
Act Rule 613 (Rule 613), which vJas adopted by the Securities
and Exchange Commssion (SEC} Juty 2012. The document is organized into three sections covering the
following
•
RFP 0/ervlew: This section provides an overview of the RFP process, evaluation criteria and
instructions for Bidders to respond to !his RFP
• Description of CAT Requirements: Th1s section provides an o\.larview of the govarmmce and
oversight frame;110rk of the CAT and specifies !he leohnical, bus1ness and ongoing operational
requirements ofthe CAT. This section includes:
The functions performed by the SROs,
the governance of
CAT (known hereafter as
the 'NMS Plan Participants") and lhe selected Bidder
The functions to be performed by the selected 84dder
The key data elements (and associated data sources) that must be captured by !he CAT
The processing and data repository requirements
initial launch of the CAT, including
the le'v~al of testing and quality assurance (Oi'l) e:xpected from the Bidder
The ongoing operational requirements of the CAT, including ti!El operational and
compliance reporting mechanisms for SRO regulatory staff and
SEC
•
This section defines the specific items !hat a Bidder is required to provide related
to its proposed solution to meet the requirements ofthe CAT
The SROs are seeking a stand-alone bid that addresses ail of the technology, business and operational
requirernenls included in this RFP. The SROs will consider bids that include subcontractors, provided that
any such subcontractors are directly overseen by !he Bidder. The Bidder will be solely responsible for the
performance and oversight of any subcontractors and vvould assume liability
any actions of arl)l
subcontractors in its role as the CAT service provider. The Bidders trust identify the RFP response all
subcontractors and !heir roles,
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6
03-03-14 CAT
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30891
The SROs are committed to the transparency of !he RFP process and to providing a fair environment for all
potential Bidders. SROs are potential Bidders and some personnel of the potential SRO Bidders mey be
irMJ!ved in both the SROs' joint .efforts as a consortium implementing the CAT and the individual SRO's
RFP response.
Rule 613 requires the SROs to jointly file an NMS Plan vvilhlhe SEC to govern the creation, implementation
and maintenance of the CAT, including a central repository to receive and store CAT data for NMS
securities, as \1\iell as the potentia I for non-N MS securities as the scope of the CAT expends. As described in
more detail later this docurnent, the SROs must include in the NMS Plan a complete technology solution,
as \1\iell as the business, admnislrative and operational infrastructure required to create and oversee the
technology solution. Additionally, the NMS Plan rrust include a process to monitor compliance with Rule
613 by all entities required to subn11 data to the CAT (ie., CAT Reporters).
Rule 613 requires that the NMS Plan filed with the SEC include a cost-benefit anatysis describing all of the
approaches considered by the SROs to create, implement and maintain the CAT In order to effectively
perform this cost-benefil analysis, the S ROs believe it is necessary to solicit bids from interested parties to
create, implement and maintain !he CAT so that all possible technclogy a~ernatves can be identified and
the costs and benefits of each atternative analyzed. While this RFP will contain the core requirements and
include certain specifics, the SROs '<Velcome resp::>nses that reflect ideas and innovations that may net be
raised in !his document or !hal deviate from suggested approaches, as long as they adhere to the
requirements of Rule 613.
Bidders must be mindful that once an enMy is selected as the CAT processor, pending approval by the SEC
of the NMS Plan subrritted by the SROs, the selected Bidder will be required to develop detailed
and interface specifications and subml them to the NMS Plan Participants for approval before
implementation can begin.
Rule 613 tasks the NMS Plan Participants v.i!h the creation of a data repository thai is capable of receiving,
consolidating and retaining a complete record of all transactions relating to each order in an NMS sacurity,
from receipt or origination through execution and/or cancellation. This data repository will be used by SRO
regulatory staff and !he SEC for surveillance, inw:;siigations and other regulatory activities.
While Rule 613 iden!ifies several potential uses of the data (e.g, market reconslrucbon and surveillance),
assigns such tasks to the SROs and the SEC and nctto !he CAT itself. Rule 613 describes these potential
uses of the data to assist Identifying the scope and form data. to be cap!Ured, processed and stored In
the repository, but does not state that these tasks must or will be perfonred
U1e CAT itse~. Further.. data
captured and stored by the CAT will be used only for
purposes by SRO regu~tory staff and the
SEC.
Bidders should note that some sections of Rule 613 will not be a function of the CAT service proVIder;
therefore, there are topics found in Rule 613 that are not covered in this RFP. For example, Rule 613
discusses the synchronization of clocks throughout the industry Although this aspect win apply to the CAT
service provider, the full scope of this requirernent will be covered in !he NMS Plan that applies to the
industry as a whole.
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tor
30892
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Per Rule 613, the NMS Plan must include a plan to elirnna!e existing systems (or components thereof) that
will be rendered duplicative by theCAT. While it is anticipated that the CAT will have significant overlap vvith
existing regulatory reporting systems, such as Electronic Blue Sheets (EBS) and FINRA's Order Audit Trail
System (OATS), complete elirnnation of these systems cannot be achieved until all information and
products captured by these systerns are Included in the CAT The selected Bidder must work closely witt1
the NMS Plan Participants and the industry to identify the information that needs to be captured by the CAT
in orderto
retire EBS, OATS or other systems, The CAT architecture mLISt be flexible and
scalable to efficiently support f!Jiure expansJons to add new data sources andlor new data categories,
The NMS Plan Participants are seeking bids from potential CAT service providers not only to build the CAT
functions described in this docurnsnt but also to perform business and technology operations,
administration and maintenance activities for tt1e CAT on an ongoing basis for at least the minimum period
of lirns as described in this docurnsnt
This RfP is no! an offer to contract Acceptance of a proposal neither comrnts tt1e SROs !o· award a
contract to any Bidder (even all requirernsnts stated in this RFP are rnst), nor limits the SROs' right to
negotiate in their best interest The SROs reserve the right to contract with any Bidder for any reason.
The lirnslines provided herein are subject to clrange at l11e sole discretion of the SROs. The SROs also
reserve the right to communicate with the respondents of this RFP fonmlly and informally and to request
additional information
The SROs reserve the right to accept or reject any
all responses to this RFP, in part or in total, and lo
enter into discussions and/or negotiations with one or more qualified Bidders at the same time, if such
action is in the best interest of the SROs.
incurred in the preparation of responses to this RFP are the sole responsibility of the BiddeL
Bidders responding !his RFP trust have knowledge of securities and market data, order routing, order
events
cancellation and modification), the lifecycle of an order and the data elements associated \\lith
an order. Additionally, Bidders musl be familiar with Rule 613 and understand !he intent of Rule 613.
Bidders must respond to all of the questions contained Section of this document Bidders must follow
the section flow their responses and copy each question, followed by an associated response. Note that
some response sections tray give specific
for the response (e.g., a diagram or flow
Bidders must use Arialltalic 10 pt. font for tt1e question and Arial Normel 10pt font for their responses
The Bidder rnusl indicate that
and system characteristics listed in Section are met in the
RFP
The Bidder nlJst describe any de\Aation
tt1e requirements in the RFP response
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03-03-1 4 CAT
30893
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Bidder must be specific and detailed when responding to each of !he questions. When appropriate, the
Bidder should reference its experience respective to the delivery of the requirements.
Bidders' responses must be prepared in electronic fonml in Adobe PDF Diagrams and process flmvs may
be presented in Microsoft PowerPoint, Microsoft Visio and/or Adobe PDF
Bidders are to submit their response. via email to
by 5:00 PM. Eastern Time on
April25, 2013. When subrnitt.ing !he electronic copy of the response, the Bidder must ens1.1re that the size of
any single subnission does nol: exceed 20 MB (multiple subnissions will be accepted). All supporting
materials and documentation must be included with the response. Bidders will receive an
acknowledgement that their bids have been successfully received.
accordance with !he NMS P~n, !he NMS Plan Participants wi II se lee! a Bidder to perform or oversee the
functions described in this docurnent Fonnel selection of a Bidder is subject to SEC approval of the NMS
Plan. The anticipated RFP lime line is as follows, bUt is subject to change as deemed necessary by !he
SRO!:l:
Intent to Bid submission
March 5,
Bidders Conference
March 8, 2013
RFP response due
APril 25, 2013
RFP seleclioo !)(ocess
A,pril28, 2013 through June2013
Preliminary selection of Bidder
July 2013
NMS Plan filed
December 2013
W~hin
two months of SEC
appr011al of NMS Plan
Formal selection of Bidder
Bidders will be evaluated based on their e.xperience, expertise, industry knowledge and financial strength,
as ~~~ell as the ability to deliver proven solutions. Key evaluation criteria may include the following:
•
•
•
to ctearty and
communicate
requirements to business, regula lory
and technology constituents
Experience and expertise of key personnel used in the Bidder's solution
Experience with, and knowledge of, securities markets, in addinon to order and execulion
practices
Experience with processing large volumes of complex data
relation in bulleted lists in tllis
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•
30894
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•
•
•
Ability to demonstrate proven and robust practices for 111"!intaining data security
Ability to identify information/dam needed to support regulation of new trading practices, market
structure
and new SEC and SRO rules as they evotve
Architecture, design and technical approach(es) that effectively address all slated CAl
requiremants and are adaptable to meet future demands of the CAl
Expected system build, maintenance and operational costs
Expected CAT business and administrati-..e costs
Scalability of the solution to adapt to changes and growth of the CAI in a timely, efficient and
cost-effective manner
Development, integration and quality assurance practices and approaches that demonstrate the
ability lo implement a complete systems and software de~<elopment lifecycle
System and business conlngency plans (e.g., comprehensive disaster recovery)
Ability to expertly,
and effec!f-..ely establish and 111"!nage operational, •~~"--~•M
•
financial, human resource, compliance and legal business functions, among others
Ability tc mitigate/lessen the it-npac! of the solution on the industry
•
•
•
•
creating the CAT pursuant to Rule 613, the SROs have developed the following
•
•
Principles:
The CAT must meet the specific requiremants of Rule 613 and achieve the prirmry goal of
creating a single, comprehensi\!!l audit trail to enhance regulators' ability to surveil the U.S.
markets effectively and efficiently
The reporling requiremanls and technclogy infrastructure de-..eloped must be adaptable to
as well as scalable to increasing
changing market structures and reflecli-..e of trading
market volumes
The costs
developing, implementing and operating the CAT should be minimized to the extent
possible. To !his end, el<isting reporting structures and technology interfaces will be utilized
where practical
•
Industry input is a critical component the creation of
CAT. The SRCs will consider industry
feedback before decisions are made with regard to reporting requirements and cost allocation
models
this dccument have been published on
Additional materials regarding CAT concepts presented
•
All Bidders must indicate their intent to bid by completing an Intent to Bidformand subm!ting it to the SRCs.
No Bidder will be allowed to participate the bid process unless it submits this forrn The form (found in
Appendix I of this document) must ba completed and sent Ilia email no later I han 5 00 PM. Eastern Time on
March 5, 2013 to Q.fl5.lliE:.E.(g~Ql!t~LI!!2m
For transparency purposes,
identified Bidders will ba published on the !l!!!Ui.'lt!!..Y:Lf:~ltlll:Q!J:U:.Q!!l
>~<ebsi!e.
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30895
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Questions receive·d through the CATRFP@deloitte.com mailbox wlll be responded to in writing
five
business days. OJestions subnil:!ed less !han five days prior to the RFP respollSe deadline may no! be
answered. OJestlons received and responses
be proVided to all Bidders via the
http f!vvww. cam rnsplan cmn '1\19 bsite, even if a Bidder has requested !hat its question(s) and
response(s) not be disseminated. The Bidders that asked the questions will not be identified.
As deemed necessary, the SRCis will hcst periodic calls !hroughcul March and April so !hat Bidders may
ask questions QJestions raised during such calls thai have not been responded to preViously by the SROs
in writing and lhal the SROs believe are essential responding to lhe RFP
be dissemnated to all
Bidders in writing within two business days of each call.
is the responsibility of the Bidder to seek c!arifica~on from the SROs on any matter it considers to be
unc!eaL The SROs shall not be responsible for any misunderstanding
the part of the Bidder concerning
the RFP or its process.
Except for the Bidders Conference, all corrmunicatiollS betvveen Bidders and !he SROs
through the CATRFP@deloitte com mailbox.
The RFP responses or parts thereof
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be subject to disclosure in the following circumstances;
The NMS pjan, and related SECfilings connection with SEC approval of the NMS Pian, will
include descriptions of the RFP responses, which may be rrade anonymous
in some cases,
may be specific and include or imply the identity of a Bidder,
To the extent a Bidder is concerned about
the c:onfidentiali ty of proprietary and other
sensitive information (Proprietary Information) contained 1n the RFP response, the Bidder must
a, As part of the RFP response, Include an executed non" disclosure agreement (NDA) with
me SROs in lhe form specified
t11e SROs, The NDA will include, among other things,
provisions pernitting disclosure of the full bids to the SEC on request (which will be
submitted to the SEC pursuant !a a Freedom of lnforma!ion Act request, appropriate),
Bidders must submit signed NDAs to
mailbox no later than
November 15, 2013 so that SROs can countersign and return to Bidders in advance of the
submission of thair bids, Bids
not bs accepted
a fully executed NDA place.
b. Identify clearly, using double square brackets, the Proprietary I nforrnation a copy of the
RFP response submitted along with the RFP response.
the Proprietary
to (a} specific phrases and words to the extent
practicable, and (b) the folklwlng types of inf<um.,.lirln
(i)
confidential personnel information;
(ii)
details of information security architecture other security-related rratters;
(iii)
information prohibited from public disclosure by law; and
(iv)
information containing trade secrets or other confidential commercial financial
information.
d. For each instance of
Information identified by the Bidder, include a notation
identifies the category (as set forth in Section 2.c. above)
which such Proprietary
Information corresponds. Upon request by !he SROs, a Bidder shall also substanliale the
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2.
be facilitated
30896
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
3
4.
specific basis(es) for its position !hat any infonmtion identified as Proprietary Information is
properly classified.
The nature and exrent to which Proprietary Information 'W'ill ha~;€ to be disclosed by Bidders 'W'ill
vary as !he bidding process continues, and the need for disclosure is likely to increase at each
stage in this process The SRC>s rmy, at any tima, request that a Bidder reconsider its
characterization of certain information as Proprietary ln!ormation if !he SROs conclude that !he
Bidders should be aware
il1farrmtion must be disclosed the NMS Plan or in asscciated
that a Bidder's unwillingness to disclose the infomation, lo the extent the SROs deem necessary
and appropriate pursuant to SEC Rule 613 and !he NMS Plan, in the NMS Plan or associated
filings may impact the SROs' ability to select !he Bidder as the CAT processor.
The Bidder selected as the CAT processcr will be subject lo continuing disclosure obligations,
and disclosure of Proprietary Information may be required, not only
connection llvi!h the NMS
Plan and asscciated filings for
of !he NMS Plan, but also on an ongoing basis follo'W'ing
selection and as part of the establishment and operation of the CAT. Bidders should consider this
requirement the preparation of tr1e RFP response. In order to ba eligible to be selected as the
CAT processor, a Bidder must agree to such disclosure of its operations, including the disclosure
of Proprietary Information !hat the SRC>s determne is necessary and appropriate pursuant to
SEC Rule 613 and the NMS Plan.
be scheduled for March 8, 2013 to conduct an open discussion and respond to questions
A meeting
only be open to Bidders who have submilled the Intent to Btd form
related to the RFP This tree!ing
The SROS reserve the right to request clarification of any Bidder's proposal as they see fit Clarification may
take the form of a written request or in-person meeting. Bidders must respond to these requests in a timely
manner in order lo not delay the selection process.
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03-03-14 CAT
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30897
The NMS Plan Participants are seeking to contract with a CAT service provider concerning !he overall
operation and administration olthe CAT, including all technology requirements. Figure 1 represents the
proposed CAT oversight structure. The selected Bidder will operate under the direct oversight of the NMS
Plan Participants, who are ullimalely responsible for colllflliance with Rule 613. As part ofthe oversight
structure, an Advisory Committee will be established by the NMS Plan Participants. The role of the Advisory
Committee will be to advise the NMS Plan Participants on the implementation, operation andadmnlstration
of !he CAT
NMS Plan
Figure • CAT oversight structure
The potential Bidder
have professional staff
staff) that will be responsible, under !he oversight of
the NMS Plan Participants, for the overall administration and operation ol !he
The staff will include a
senior executive level chief compliance officer (CCO), as required under Rule 613, who will regularly re~Aew
the operation ofthe CAT to assure its continued effectiveness in light of market and lechno!ogical
developrrents and make appropriate recornrrendations for enhancements to the nature of the information
routinely interface with a wide variety of
collected and the manner in which is processed. CAT staff
internal and external constituencies and play a key role the development of CAT repor1ing guidance and
education of CAT Reporters on CAT reporting requirements. The responsibilities of !he CAT staff
include, but not be limited to
•
!hat the CAT operates as intended and meets the requirerrents of Rule 613
Developing, obtaining NMS Plan Participants' approval o! and implementing detailed supervisory
and operational written policies and procedures for all CAT functions
to and taking direction from the NMS Plan Participants !hat will oversee tha CAT
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•
•
30898
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•
•
•
•
•
•
•
•
•
Providing reports and other information to the NMS Plan
to support their CAT
o-.ersight responsibility
Working with SROs and the SEC to develop detailed reporting guidance that complies with Rule
613 and reflects current trading practices
SRO and SEC
to
changes that \1\iill affect CAT
requirements and developing new CAT reporting guidance as necessary
Representing the CAT in relevant industry forums
Authoring notices, frequently asked quesl1ons {FAQs), educational materials, technical materials
and interpretive guidance to communicate reporting requirements to CAT Reporters
and coordinating industry events to educate CAT Reporters on CAT changes
Soliciting industry feedback regarding ongoing CAT enhancements and changes
Supporting CAT Reporters, SRO regulatory staff and the SEC \IIIith operational and technical
issues
Monitoring the data qua lily and performance of CAT Reporters
Providing support as necessary to assist the NMS Plan Participants and SEC in overseeing the
performance and compliance of CAT Reporters, including referring CAT Reporters exceeding
maxirrum allowable errors to the relevant SRO for further review and possible enforcernent
actlon
The objective of Rule 613 is to create a comprehensive central repository of order, quote and trade data that
can oo accessed and used by SRO regulatory staff and the SEC to oversee securities markets in the
States. This section describes how order, quote and trade data. from broker-dea!ers, SROs and relevant
industry utilities must be ingested, processed and stored to create the central repository lobe used by SRO
regulatory staff and the SEC. CAT Reporters \1\ii II be required to submit data to the CAT in accordance with
uniform interface and technical specificalions designed by the selected Bidder. It is anticipated that there
will be separate uniform specifications for exchanges, FINRA and broker-dealers.
The following diagram provides a high-level overview of how broker-dealer order events, custorrerfacoounl
information, exchange quote and order events, FINRA transaction data and other supplerrental data (e.g.,
National Best Bids and Cffers (NBBOs) and administrative rnessages) would flow through !he CAT
eniAronrrent and
validated, enriched and stored for regulatory use
staff and !he SEC.
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03-03-14 CAT
30899
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Figure 2: O,;erview of CAT data flows and processing components
Once data is ingested and validated, it must be processed to create the complete lifecycleof each order and
be securely stored a central
a manner lhatfacilitates efficient and effective use of the data by
SRO regulatory staff and the SEC. Required processing must be completed -Mthin established timeframes
so that data is promptly available for regulatory use. This section contains the functional and technical
requirements for !he processing and storage of CAT data
The CAT must capture and store customer and account information required by Rule 613, At a minimum, a
database
information sufficient detail to identify each oustorner must be created and mede
available to enrich order data -Mth customer and account information for use by SRO regulatory staff and
tile SEC in both targeted
and cornprehensive data scans. The SROs have proposed an approach
that would require the CAT to process and store all accounts and associated ClJstomer information from
broker-dealers. 4 Details !his approach are in the
RFP
Document available at
Bidders should assume that
account lists will be periodically submitted in
addition to the daily updates lo ensure the completeness and accuracy of the account database
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Broker-dealers will be required to include in the account and customer informalion submitted to lhe CAT
sufficient detail for the CAT to uniquely and consistently identify each customer across all broker-dealers,
This information will include, at a minimum for natural persons, social security number (SSN) or Individual
Taxpayer lden!ification Number (ITIN), dale of birth, name and addres~t For legal entities this informalion
will include, at a minimum, the Legal Entity Identifier (LEI) if available, tax identifier, full legal narm and
address. The exact data elemen!s and formals !hal must be submitted for the required account and
custorner infonnation
be
by the Bidder and approved by t!~e NMS Plan
TI1e
Bidder will also be required to design and implement a robust data validation process for the submission of
customer and account information Basic customer information, such as name and address, will be
available to the regulatory staff of SROs and the SEC for use routine re\liev;s and ;:maty'sis. Personally
identifiable information (PII), such as customer SSN, date of birth and tax identifier numbers, must have a
separate set of permissions so that only the regulatory staff with entitlements to IAew PII is able to retrieve
and/or IAew PI I.
Tile C.AT processor must have procedures p4ace to handle both minor and material inconsistencies
customer information Minor data discrepancies such as variations in road name abbreviations would be
resolved within the CAT processor. Material inconsistencies such as two different people \\lith the same
SSN must be communicated to the submitting CAT Reporters and resolved within the error correction
timefra111e described in Section 2.2A of this dccument.
Using the proposed approach described above, the Bidder must use
account and customer information
submitted by all broker-dealer CAT Reporters to assign a unique Customer IDforeacl< customer. The
Custon~er ID assigned by the CAT must be unique for each custon-er but consistent across all
broker-dealers !hat nave an account associated with that customer. This unique CAT-assigned Customer
will not be returned !o CAT Reporters and
only be used internally by !he CAT
PII mus! be stored in a highty' secure manner separately from the account and customer database that will
be used for routine review and analysis by SRO regulatory staff and !he SEC. If, during the course of a
regulatory review or investigation, it is necessary for SRO regulatory staff or the SEC to obtain PI I, it will be
onty' to authorized users pursuant to a
review and approval process.
All order, quote and trade data subm tted by CAT Reporters must be processed by !tie CAT and assembled
to create the complete llfecycle of each quote and order from receipt or origination through execuilon or
cancellation. Rule 613 includes three
identifiers that are required to build the complete lifec:ycle of an
order quote
• Customer I D
• CAT-Reporter-ID
• CAT-OrdeHD
The reqclirements
tl!e creation or a Customer ID are explained in Section 2.2,2.2. The lifecycleassembly
requirements include obtaining the customer and account information associated with each
order and storing this information such that can be readity' asscciated wi!h each order lifecycle.
bloker-dealer directly receiving an order
a customer is required !o report the required
account infonnation. Accordingty', assembly of a co111Jiete and accurate lifecycle across all CAT Reporters
if'l\()ived ill
order is crucial to associating customer information with execution information
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!he definition of an order, Rule 613 includes any bid or offer. Accordingly, the original receipt or
origination, modification, cance!~tion, routing and execution (in whole or in part) of a bid or offer must be
reported to !he CAT. All of the lifecycle assembly requirements described below apply equally lo orders and
qllDtes. Broker,dealers that originate qllOtes and transmit such quotes to an ellthange or a quotation
display facility (Le., FINRNs Alternative Display Facility (ADF)) are required to report both the origination
and route of !he quote. In addition,
and SRCs operating display facililies, in their role as CAT
Reporters, will be required to report to the
all events related to any bid or offer received or originated.
Thefollovving sEdans contain !he require~ntsfor CAT-Reporler-ID and CAT-Order-ID lhatare necessary
to assemble each lifecycle so that !he associated Custo~r ID(s) can be obtained.
Rule 613 defines CAT-Reporter-ID as, with respect to each national securities e)(change, national
securities association and member of a national securities ellthange or national securities association, a
code that uniquely and consistently identifies such person for purposes of providing data to the central
repository.
For the initial irrplementation of the CAT, U1e SROs propose that the CAT-Reporter-ID be a single identifier
used by each CAT Reporter to iden~fy itse~ to the CAT Individual CAT reportable events, however, could
be reported to the CAT using existing rnarket participant idenllfiers (e.g., FINRA MPID, NASDAQ MPID,
NYSE Mnemonic, CSOE User Acronym and C H.-'< Acronym), but such identifiers would have to be provided
to !he CAT prior to the submission of any CAT reportable order events containing those identifiers so !hat
!he CAT Reporter's CAT-Reporter-ID The SRCs propose that
the CAT could associate the identifier
the CRD number be the foundation for
but if a broker-dealer has an LEI, it could be used
as long as it is
lo the CAT such that it could be associated with the broker-dealer's CRD number.
The SROs understand that the possibility for duplication exisll:l with identifiers assigned to a broker-dealer
by individual SROs (e. g., two different SROs assign the same identifier to different broker-dealers). The
Bidder must design a ~ohanism that will allow identifiers to be associated with a particular SRO within the
CAT.
Rule 613 defines CAT-Order-10 as a unique order identifier or a series of unique order Identifiers !hat allows
the central repository to efficiently and accurately link all reportable events for an order and all orders !hat
result from the aggregation or disaggregation of such order. The SROs presented two solutions to
CAT-Order-ID fral1'le'Wl:lrk in !he Proposed RFP
docu~nl published on the
nt!l:ril.'!t!1.~Ji'lm:!l:l!l~llilQ!I! website on December 5, 2012. Based on industry feedback and analysis
conducted by the SROs,
SROs are recommending the daisy chain approach for !he CAT-Order-ID
frarnework However, any alternative solutions proposed by Bidders will be considered so long as they fulfill
the requirements of Rule 613 for all order handling scenarios.
The Bidder must develop detailed reporting
and guidance !hat address
order
Reporters
scenarios known to the CAT, as well as any additional scenarios presented to !he CAT by
as order handling and execulion practices evolve.
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The CAT"Order"ID framework must
Allow for l:he accurate and efficient linkage of related order events within a single firm and
ootvveen CAT Reporters
• Guarantee a unique
betvveen all related order events without relying on any form of "fuzzy"
matching
• Prevent information leakage and reduce l:he possibility of "reverse engineering" to identify large
orders or other simlar material market information
• Allow for the accurate and efficient time sequencing of all order events
• Accurately link order events for all order handling scenarios that are currentty or may potentially
be used by CAT Reporters
As notecl, the SROs are recomnending a daisy chain approach to CAT-Order"ID~ In the
chain
approach, a series of unique order identifiers assigned by CAT Reporters to indi\idual order events are
linked together by l:he CAT and assigned a single CAT-generated CAT-Order-ID that is associated with
each individual order even! and used to create the complete lifecycle of an order. Each CAT Reporter would
generate its own unique Order ID but could pass a different identifier as the orc!er is routed and the CAT
would link related order events from all
invowed in the life of the order. A detailed example of
the application of the daisy chain approach to an order routed to an exchange on an agency basis can be
found on page 26 of the Proposed RFP Concepts document published on !he ~W:.'!tit.~~l!!!mru:2.!!!
•
website~
The SRO> believe, based on their analysis to date, the daisy chain approach could handle most common
order handling scenarios, including aggregation and disaggregaton~ Most cornrnon oroor Mndling
scenarios generally apply to bolh equities and options~ Examples of order handling scenarios that must be
addressed incluoo, addition to the agency scenario referenced above: orders Mndled on a riskless
principal be sis, orders routed out of a national securities exchange through broker -dealer router to
another na!iona 1securities exchange, orders executed on an average price basis and orders aggregated for
found on pages 27 through 30
further routing and execution Detailed examples of these scenarios can
of lhe Proposed RFP Concepts doou1nenl published on !he
webeite.
The SRQ; are a lsc considering additional order e~~e nt ly pes that could facilitate representative orders using
the daisy chain approach~ The SRO> recently published a decurrent with proposed representeti~~e order
reporting scenarios~ These scenarios and how the daisy chain approach could be applied, can be found in
the Representative Order Proposal document published on the
website.
Further, there are order handling scenarios sometimes referred to as "corrplex oroors" that are specific to
options and may include an equity component and mu~iple option components (e.g. ,
straddle,
strangle, ratio spread, butterfly and qualified contingent transactions). Typically, these orders are
referenced by exchange systerns on a net creditldebit basis, which can cover betvveen two and twelve
different components. Such "complex orders" must also be handled and referenced within the CAT. The
Bidder must develop, in close consultation l'llth industry participants, a
mechanism that
!he
CAT to link !he opuon leg(s) the related equily leg or the individual options components to each other in a
multi-leg strategy scenario~
Rule 613 also requires that certain sub-account allocations be reported to
CAT.
SROs understand
that this requirement presents significant challenges to broker-dealers and are currently
alternatives based on industry feedback. The SROs de not anticipate that the capture and linkage
sub-account allocations will be materially different to a potential Bidder than other types of linkages to order
lifecycle e~>l;!n!s As such, the SRO> have determned that detailed descriptions of sub-account allocation
n::w~nrr"""' scenarios are not necessary for the purposes
the RFP and~ therefore, are
including such
in it
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Once a lifecycle is assembted by the CAT, individuallifecycle events must be stored so that each unique
event (e.g., route, execution and m:Jdification) can be quickly and easily associated with the originating
customer(s) for both targeted queries and comprehensive data scans. For exarrpie, an execution on an
exchange must be linKed to the originatng customer(s) regardless of how the order may have been
aggregated, disaggregated or routed through mutt! pie broker -dealers before being sent to the eJ«::hange for
execution.
CAT order events must be processed within established timeframes to ensure data can be made available
to SRO regulatory staff and the SEC in a timely manner. The processingtimelines start on the clay the order
event is received by the CAT for processing Most events must be reported to the CAT by 8:00AM. Eastern
llme the trading day after the order event occurred (referred to as transactwn date). The processing
timeframes be!ow are presented in !his context 1-bwever, if an order event was submitted late, the CAT
these ti!refran-es based on the date the e\lent was received by the CAT.
must process that event
Similarly, order events that are not required to be submitted until800 AM, Eastern Time on the trading day
after the information is recerved by the broker-dealer (e.g., sub-account
must also be
processed within these timeframes besed on the date the event was received by the CAT
The SROs anticipate the following timeframes
3} for the identification, communication and
correction of errors from the time an order event is received by the processor:
•
•
•
12:00 PM. Eastern Time T+1 (transaction date+ one day) Initial data validation, lifecycle
linkages and communication of errors to CAT Reporters
8 00 A.M. Eastern llme T+3 (transaction date + three days) Resubmission of corrected data
8:00A.M. Eastern Time T+5 (transaction date five days) Corrected data available to SRO
"'"'"''"'" staff and the SEC
is eXP"cledlhal at any point after data is received by the CAT and passes basic formatwlidations, it will
be available to SRO regulatory slaff and the SEC, wihich may be before 12:00 PM. Eastern Time T+1.
8:00AM ET
T+3
T+4
Reprocessing of
Ermr
Corrections
Figure 3: Anticipated timeframes for data error handling and data resubrr1ssion
TI1e Bidder must pro vi dee detailed description of how the timefra mes described above win be met using the
data validation and error correction approach. To illustrate this, a process flow chart must be provided
reflects !he timeframe that each aspect of the Bidder's data validation an.d error correction process will be
completed.
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03-03· I 4 CAT
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The Bidder rrust perform a detai k=d ana lysis of current industry system and interface specifications in order
to propose and develop its own forll'l!lt. The specifications must be subnit!ed for review and approval by the
NMS Plan Participants. The proposed specifications must address all respective data types collected from
the data sources (CAT Reporters) and address all of the requirements outlined in other sections of this
RFP. The Bidder must consider !he CAT Reporters' adaptability to the proposed specifications, as well as
their ability !o design, develop, test and integrate with the CAT system a timely manner.
The Bidder rnust Identify the communication and message protocols used for transporting the data. The
Bidder may consider !he use of known and widety accepted industry protocols. If common mdustry
protocols are inefficient in processing large volun--es of data or satisfying other CAT requirements, the
Bidder may recommand an alternative protocol implementation The Bidder rrust demonstrate advanta9'!s
of certain message and/or communication protocols in its recommendations. Such pmtioco!s must pro\4de
reliable data transmission, facilitate recoverability and ensure basic session management The CAT must
support balch submisslons furnished via uploaded files The 8idder must provide facilities for accepling
such files as well as provide a reliable feedback mechanism for notification of failures. The Bidder must
support manual data entry and correcti011too!s via a secure website.
The CAr must ensure data is accurate, timely and complete. The validations required include checking to
ensure !hat data is submitted in lhe required formats and that lifecycle events can be accuratety linked
within !he established timeframes outlined in Section 2 2.4 Once errors are identified, they must be
efficiently and effectively communicated to CAT Reportars. CAT Reporters will be required to correct and
resubmit identified errors withm the established timeframes.
The initial data checks required to be performed by the CAT include, but are not limited to:
•
•
•
•
•
Data format validation and syntax check
Data context check
Identification of unlinked lifecycle events
Identification of unregistered accounts
Identification of unregistered lli:lrket
identifiers
data validations rrust be developed by the selected Bidder in
with development of the
interface and technical specifications. The objective
the data validation process is to ensure that data is
accurate and
at !he lime of submission, rather !han to identify submission errors at a later time
after data has been processed and provided to regulators. To achieve this objective, a comprehensive set
of data validations rrust be developed that addresses boU1 data
and corrpleteness.
The Bidder will be required 10 handle data correction and resubmission of the corrected data \vi thin the
established timeframas outlined Section 2. 2. 4 both in a balch process format and via manual Web-based
entry.
Rule 613 requires the creation and maintenance of a central repository for historical retention and
consolidation of all data reported to and any data derived by the system Rule 613 requires that SRO
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regulatory staff and the SEC
unprocessed data.
ha\~
the ability to access all data, which includes both processed and
The central repository will store data and rnake it available to regulators
a convenient and usable
avanable and searchable electronically without any manual
standard electronic format that is
intervention for a period of not less than five years The data in the central repository will include the original
data submitted by the CAT Reporters, data rejected by the system and the rejeclion reasons, corrected
(and resubfritted) data, data accepted by the system and any derivations, surnrnaries (as scheduled or
requested by SRCs or tl:le SEC) and metadata generated by system
The solution must allow timely and accurate retrieval ofthe information by SRO regulatory staff and the
SEC.
The data stored in the central repository will be used for market reconstruction analysis, surveillance and
regulatory purposes by SRO regulatory staff and tl1e SEC.
This section prol>ides a descnption of the data that will be captured by the CAT and includes sources and
data types to be ingested, validated and processed by the CAT The selected Bidder will be responsible for
developing the detailed data and interface specifications for the CAT data submissions that will be
presented to the NMS Plan Participants for approval. TI1e data and interface specifications rnust be
designed to capture all of !he data elements required by Rule 613, as well as other information the NMS
Plan
determine necessary to fully satisfy the objectives of Rule 613,
!he potential
CAT may cause to be unnecessary, such as
and OATS.
reporting systema !hat
The SROs anticipate that data will be submitted by all CAT
in a uniform electronic data formal
be
that
be defined by the CAT. II is posslble thai mere than one format (within practicallimts)
defined to support the various senders throughout the industry.
Tl1e following table represents the number of data sources idenmled
submit data to the CAT:
the SRCs that are anticipated
to
occ
Broker-dealers
Note Wttile there are approximately 5,000 broker-dealers, the anticipated number of broker-dealers
will be engaging in CAT-reportable activity (ie, trading in NMS securities) approximately 2,000. The
SROs anticipate that some broker-dealers
not directly report to the CAT but will rely on other
organizabons to report on their behalf. However, theCAT >'1111 need to have the f!el\i bility to adapt on a timely
basis to changes
number of entities that report information.
The following tables are representative of the data types, the respective sources and expected data counts
that are anticipated !o be subfritted to the CAT.
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22
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30906
30907
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Equities
BDs
11,000,()00
BDs
600,000
BOs
800,000,000
50,000
50,000
2.400.000,000
4Jl00,000,000
100
100
30,000
30,000
800,000,000
Derived
2.400,000,000
1,600,000,000
Exc11anges
100
100
Exchanges
2!),000,000
60,000,000
Exchanges
2.000,000,000
5,400,000,000
12,000,000
17,000,000
500
500
8,000
8,000
1,000
4.000
SIPs
860,000,000
j, 700,000,000
SIPs
24,000,000
96,000,000
SROs
400,000,000
1,100,000,000
SROs
850,000,000
1.700,000,000
20,000
20,000
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Cus!omerl
Account
30908
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
All exchange trades sent to the SIP
24.0{)0,000
DMA relationships
Approximate Total
Opijons
De!initions of all products.
including complex orders with
stock
Market maker quotes submitted
to ex.: han ges
CAT reportable orders and all
related oroor events received or
generated by !he BD
8,500,000,000
Options
Sel!·l'lelp dederations
PBBO
CAT
Derived
Options
Protected NBBO derived by
CAT uSing SIP quote data
Self-help
Exchanges
OpMns
Self-help decleratons
Exchanges
Options
T reportable orders received
by an exchange and all related
order avents
occ
Opijons
All ell!!rclses. assignments,
adjustments and CMTA
transfer slor options
Quotes
SIPS
Options
Trade Data
SIPs
Op~ons
Trade D<ata
Order Data
100
1,800.000
365,000,000
!"15.000.000
9.700.000
7.000,000.000
14.000.000.000
1.000.000
1.800000
9,000.000.000
22,000,000.000
'15,000,000.000
1.800,000
00
BDs
12,600.000,000
00
Self·Mip
100
00
Op~ons
4,500.000,000
6.100.000
BDs
1.500,000.000
1.000.000
Orller Data
44.000.000.000
100
Opljons
18.000.000.000
6,300.000.000
BDs
280.000
100
Market Maker
Quotes
280,000
113,500,000,000
ace EJ~ercisel
Assignments.
Adjustnrents
and CMTA
Transfers
Market Maker
Quotes
SROs
Options
Quotes
SROs
BROs
Options
{OPRA)
Mari<el maKer quote Sides
received and/or generated by
an exchange
Options
Trnde Data
All quotes pu bllshed by !he
SIPs, including appended
NBBOs
All trades published by the SIPs
Alle);!bll
SIP
Notes concerning data types
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•
Certain data sources, most notably those received from the SIPs and O:::C will be received in
pre·existing formats defined by those sources. The CAT will need to update its data ingestion
processes, and possibly data storage layouts, when these providers update their specifications
Tile Bidder is encouraged to research the websites of the SIPs for records layouts for their quote
and trade transrnssions and the website of the O:::C for ilE transmission of
exercise/assignmen!E,
and CMTA transfers These vvebsites will also contain
valuable information conceminglhe maximum message transmission rates possible
CQSandCTS~~~na~~~~
,,
IJQDF and UTOF httpt!www. utpplan.coml
OPRA: tl!'!Q~IJJ'DID@Q1lli!J2Qn::!'§J~
O:::C: ~IJ':!i:!:l~~~:!rJ.gj;:Q!:!1
The Bidder should realize that the rates have histcrically increased with some degree of regularity.
•
•
•
NBBO versus PBSO: Each oft!le SIPs provides an N880 as part of its quote feed.
this N880, the SIPs include manual (or unprotected) as well as automatic (or protected) quotes.
Manual quotes are not protected for the purpcses of
NMS's Order Protection Rule
(NMS Rule 611); consequentty, e>r:cllanges also calculate a version of !he NSBO (the PBBO, or
Protected NBBO) that excludes manual quotes. The CAT processor will need tc calculate and
store the PBBO
data contained in lhe COS, UOOF and CPRA feeds
There is ourrenlly no standarcl for the transmission of self-help messages. Typically, these are
comm.mioated V!a email. The number of self-help messages lransrni!ted wHI be negligible over
time; hmvever, some effort will be required to come up •.vith a standard for capl:uring these
rnessages in the CAT
The Bidder should be a1vare that there
be some fields in order data used to define various
order types tt1at will be specific to each SRO The Bidder must consider how to define this data in
standard data transmission layouts. Identification of the specifics these fields and the values
they contain
be a compcnent of the requirements definition phase to occur later in the project
functions:
•
•
•
•
•
•
Managing connectivity of data feeds (e.g, SIPs, broker-dealers and regulators)
Controlling specific feeds (e. g., start, stop, recovery, retransrnssion and resynchronization)
Managing the securrt:t of data feeds
Identifying data transmission failures or errors
Monitoring capacity Ulilizaljon and perfonnance optimization
Identifying latency and comn<Unicating latency warnings
CAT Repcrters 111.1st subrnit data tc the CAT
use the
symbology formal in the
included in the processing of data submitted by CAT ""'''YlriO>r<:
format. The
must
Issue sym!::ol validation must be
,:;vrr;tYllnrru
The CAT must be able to link issua data across any time period
thai data
be properly displayed arid
linked
of changes to issue syml::ols and/or rnarket
Syrnbcl changes may occur intraday.
The Bidder is required to create and maintain a symbol history and mapping table, as well as to proV!de a
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tool that will display a complete issue syrrbol history that will be accessible to CAT Reporters, NMS Plan
Participants and the SEC.
When all CAT Reporters are required to submit data to the CAT, the system should be sized to receive,
process and load more than 58 billion records or approximately 13 terabytes of data per day. Tilese
numbers represent the clata ta!Jje Sectlon 2. 5.1 as well as expected organic growth during the period
between Bidder selection and tre date of CAT implementation The nurnber of records is expected to grow
approximately 25% annually. II is expected that the central repostory will be required to retain data for a
period of no less than five years resu~ing in a central repository growing to more !han 21 petabytes of data
required for the five years of retention. The system must be designed such that additional capacity can be
quickly and seamlessly integrated while maintaining system access and availability requiremanta. The
system must be able to efficien!ly and effectively handle data ingeslion on days with peak data
submissions.
' Note that tl1e large increase
year twc reflects the introduction of broker-dealer data submissions.
In order to manage the data volume, operational capacity planning must be condLK:ted on a periodic basis.
The CAT processor will be required to keep all the data the central repository online for a rolling five year
period. This includes both corrected and uncorrected (or rejected) data. Soma of the information, such as
slack and options series symbols, used by the market participants may be reused over a period of lime.
Therefore, 111e system should store the data received from CAT Reporters and should not overwrite with
new information, creating a five year historical audit trail. Data must be directly available and searchabta
electronically without any manual interven!ion.
AI a mini mum, the system must accommodate an additional two years of data to be archived. It is expected
that on occasion, additional retention of archived data may be requested support investigations and legal
holds.
The overall data archive and storage solutions must meet both the fixed and variable data retention
requirements.
The CAT must be
and sized to ingest, process and store
volumes of data. The CAT
technical infrastructure needs to be scalable, adaptable to new requirements and operable witl11n a rigorous
require an environment
processing and control en\lironmant As a resu~. the technical infrastructure
with
advanced data management services and robust processing
architecture.
The CAT technology environment must be periodically assessed to evaluate o pportuni~es to accommodate
new processing capabilities, lower the cost operation and irrprove
The technology
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will need to support established processes, data submission standards and other industry dependencies
The architecture must be scalable tc accorrmodate increases data 'V!)Iurnes, users and SRO workload
affecting the sys!em(s).
The solution must pro>Ade all necessary infrastructure, network, hardV~are, components and software
required to rreel the requirernenls outlined the RFP. The Bidder must provide all technology and l1os!ing
services including any vendor provided products, internally developed, open so~wce, leveraged, licensed or
shared with existing solutions.
This includes, but is not limited to, !he following
•
•
•
•
•
•
•
•
Operating systems
HardiNare
Storage, database management systems (DBMS) and in-rnemory databases
Application/Web server technology
Programming
Hosting/firewall architecture
Middleware, message queues and the use of clustering or high-availability features
Other system resources requirements, such as job scheduler and system and seCLifity rronitoring
tools
• Identifying third-party products !hat
ba used in !he build and operation of the CAT and
providing descriptions and details on how they will be used in the solution
Technical architecture must accomrnodate and be optimal for supporting the following key system lifecy'cle
elemsnts
•
Scalability to increase capacity lo handle a
increase in the data volume beyond the
baseline capacity
• Adaptability to support future technology developments and new requirements
• Maintainability to ensure thai
is kept current, supported and operational
The architecture must address the
requirements:
•
Support the necessary system interfaces, including data submission, data access and user
interfaces
processing limeline and resubmissions requiremants
• Support the necessary
• Complete processing and respond to user queries and data requests as described in this RFP
• Include the necessary redundancy and fault tolerance to protect
soft application or
operating system failure (e.g~, operationai'Nith dovmgraded response)
• Pro\4de redundancy to support disaster recovery and business continuity requirements as
defined in this RFP
• Include necessary solution(s) and clear Integration points for CAT Reporters to submit data to the
CAT processor
• Support 24J«) hours of operation including any planned system downtima or maintenance
'Nindows and start-up time requirements
The architecture will need to accomrrodate several environments. The build and Introduction of the
environments msy be phased in to align with the lmplemanta!ion milestcnes:
build, develop and maintain enhancernents and new requirements
Quality assurance: testing and QA for new sofl:\!;are releases, including, but not limited
Application releases
c Fixes or patches
Operating systam upgrades
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•
•
30912
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Introductions of new hardware or software components
aA. will need to support unit testing, system integration testing and !€!$ling against a productlon
simulated environment
Production: fully operational environment t11at supports all CAT receipt, ingestion, processing and
storage of CAT data
• Industry testing: an en~<1ronment to support individual CAT Reporter testing or induslry·\i'Jide
testing against a replica of production data
The architecture and d8$ign must be capable of being expanded and rnodified to accomrrw;)date similar
types of market and transaction data for other securities. Future products may include non·NMS securities
and fixed incorre.
•
Rule 613 requires that the CAT processor ensure lhe security and confidenbality of all information reported
to and maintained by the CAT in accordance
the policies, procedures and standards in the NMS Plan.
The CAT processor must have appropriate solutions and controls in place to ensure data confidentiality and
securil)' during all communication beiJNeen CAT Reporters and the CAT processor, data extraction,
rnanipulation and transformation, loading and from the central repository and data maintenance by the
system. The solution must also address secure controls for data retrieval and query reports by SRO
regulatory staff and the SEC. The solution must provide appropriate tools, logging, auditing and access
controls for different components of the system, such as access to the central repository, access for CAT
Reporters, access to rejected data, processing status and CAT Reporter calculated error rates.
is expacled that access to PII associated with custorrers and accounts will have a much lmvar number of
reoish>n:•d users, an.d access to this data will be limited to SRO regulatory staff and SEC working locations.
PII such as custorrer SSN and tax identifier numbers should not be made available in the query tco!s,
reports or bulk data el<lraction. Instead, the Bidder must provide for a separate limited access query
capability !hat allows this information be retrieved only when required by specific SRO regulatory staff
and t11e SEC, including additional security requirements forthis sensitive data.
The Bidder must provide a solution addressing physical security controls for corporate, data center and any
leased facilities. where any of the above data is transrritted or stored.
•
•
•
•
The solution should anticipate protection of data during transmission, processing and at rest
(stored in the central repository)
Access to t11e data !nisi be controlled and system(s) must hava a mechanism to confirm the
identty of
usemarre/password) who are
to access the data; every
instance of user access must be logged for auditing purposes
The system controls should allow for users to
granted different levels oi access and
capabH!ties depending on their role or function
The solution must propose an additional !e~el of security for populating, storing and retrieving
sensitiva data, such as PI!
The CAT processor must
and maintain a suite of tools !hat will allow SRO regulatcry staff and
SEC to query the data in
central repository and extract targeted segments of data. addition, the CAT
processor must provide the ability for bulk data extractions and downloading of data to SRCJs and !he SEC
so that !hey may use their own tools lor analysis.
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The Bidder must provide details of the tools and the. interfaces they will provide. !c SRO regula !cry staff and
the SEC. The following sulrsec1ion ollllines the tools the NMS Plan Participants expect to see included in
any qualifying bid For basic search crite.ria, minimum acceptabfe response times would be. measured in
time increments of less than one rrinute. Complex queries against large sets of data would be. expected to
take longer, but must generally be available within 2411ours of rmking the request The Bidder must
describe how will accomnodate tTlll~iple sirrultaneous queries from SRO regulatory staff and
SEC.
is not anticipated that a standard interface will be built and maintained to access uncorrected data at this
time, bu! uncorrected data m..JSt be maintained and be mede available to SRO regulatory staff and the SEC
upon request
The solutions provided must altow for targeted queries against data in the central repository across equities
and options, both separately and together. All data fields may be included in the resuH set from targeted
queries. Online queries will requ1re a minimum set of criteria, including date and/or tlme range as well as
one or more of the following
•
•
Symbol(s)
CAT-Reporter-ID(s)
•
Customer ID(s)
•
•
•
•
•
CAT-Order-ID(s)
Product type (equities or options)
All orders, quotes, BBOs or trades above or balow a certain size within a date and/or time range
All orders, quotes, BBOs or trades within a range of prices within a date and/or time range
All orders and/or trades canceled vlithin a specified time range
•
All CAT Reporters exceeding specified volume or percentage oholume thresholds
a single
symbol or market-wide during a specified period of time
II is anticipated that the solution mJSt support approximately 3,000 registered users, including SRO
regulatory staff and SEC staff, authorized to access data representing market activity (excluding !he PII
associated
customers and accounts). It is anticipated that the solution mJSl be capable of proViding
access !o the data from SRO regulatory staff and SEC working locations and other non· office locations
The CAT solution must provide lor the bulk extraction and download of data, based on a specified dstel!ime
addilion, the CAT processor is
range, 1rnrket, security, Customer ID and the size of the resulting data set.
required to generate data sets based on market event dale to the SROs and the SEC. The solution must
to define the logic,
format and distrlt:dion method. The CAT must be built
with operational controls to control access to make requests and to track
data requests to oversee the
bulk usage environment
The solution must have the capability and capacity to provide bulk data necessary for the SROs and the
SEC to run and operate their surveillance processing
and implement disaster recovery and business continuity plans
!hat
The Bidder must
meet the specific requirements of the CAT enVironment. The plan should address the protection of data,
service for !he data subrrissions,
data access, support functions and operatiorls.
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To support !he dala availability requirements and anticipated lfDiurnes, the CAT will require efficient and
coot"effective backup and disaster recovery capability that Wlll ensure no less of data. The Bidder's BCP will
need to be inclusive of !he technical and business activities of the CAT as outlined in !his document A
secondary processing site will need tc be capable of recovery and restoration of ser\Aces at the secondary
site within 48 ~1ours of a disaster event The separate processing sites for disaster recovery and business
continuity must adhere to !he "Interagency Paper on Sound Practices tc Strengthen the Resilience of the U
S. Financial
The Bidder musl provide a comprehensive disaster recovery and backup plan.
The system must be available, at a minimum, during the period between 12 00 AM Eastern Ti rre Monday
and 12:00 AM. Eastern Tirre Sunday to accept dala submissions, corrections, ser\hce queries and data
requests. The Bidder will describe the expected availability for each of these functlons. during the hours of
operation and, based on the described architecture, indicate the expected reliability of the system
The Bidder will be responsible for pro\llding project management services to rrenage the initial
implerrentation of the system, including the planning, execution, monitoring and corilrol!ing of the analysis,
specifications, requirements, infrastructure, testing, change managerren! and solution implerrenlation
acti\llties. To en$ure the success of the project to build and deploy the system, the Bidder mu$1 describe its
project management practices, disciplines and deliverables. The Bidder rrust
the services and
functions outlined in Sections 2.11. 1 that are
lo the build and initial deployment. The Bidder
be required to provide progress reports to tile NMS Plan Participants on a regular basis U1roughout the
irnplementa~on phase to ensure the CAT service prolhder is on schedule and on target for prolhding the
required system.
The build project management services will be responsible for the following:
•
•
•
•
•
•
•
•
•
Documentation offunctional and technical requirerrents
Prioritization and managerrent oftechnical and non"tachnical requirerrents, modification
requests and defect correction
Developrreril and maintenance of a project plan, project status report and risk and issue logs
Maintenance and executon of a communication plan with all stakeholders
Managerrent of scheduled changes
ldentiftcatlon of teams and resources !hat will ba involVed in the various stages of the proJect
Capturing and tracking of issues, problems and defects identified during testing
The initial population
any data (e.g, reference data, customers and accounts)
The initial coordination and testing of CAT Reporters
The Bidders trust provide the following
Information on the loa!s and systems. that wlll be used far managing lhe project
a start date
Project milestones and completion limes relevant
project management practices and processes
of the systarn development rrethodology and
that
be used
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•
•
•
•
30915
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The Bidder must dermnstrate operational capabilities to run the CAT that encompass the requirements in
the following sutrsections:
The Bidder will be responsible for proViding program management services to manage
and maintenance of the CAT and any enhancement projects to the CAT
ongoit~
operation
The program management responsibilities will include the following
•
Managing and coordinating tasks between various projects run by the technical and
administrative functions, addition to the resources responsible lor maintaining and erl!'lancing
the system
Identifying, managing and tracking of business requirements for new or changed funclionalities of
the CAT
Communicating and coordinating priorities and implernenlation acliVilies for identified changes in
requirements
Managing future changes to business, administrative and technical functions as a result of
changes in the requirements of Rule 613
Seeking approval of ct1anges
•
•
•
•
The Bidder will be
for providing project management serVices to manage the CAT processor
soluticm(s) and support the ongoing enhancement operations and support functions,
Project management responsibilities will include the following:
•
•
Documenting changes to functional and technical requirements
Prioritizing and managing technical and non-technical requirements, modification requests and
defect correction
Developing and maintaining a project plan, project status report and risk and issue logs
Maintaining and executing a communication plan with all stakeholders
Developing and irll'lementing a
incident tl'lat1agement program
Managing scheduled changes
managing and tracking functional requirements for new or changed functionalities
!he CAT
Coordinating change managemenl and program management priorities lor the CAT
administrative functions and the CAT proces.sor for system upgrades, system testing, integration
test.ing and industry testing
Producing status reports and perforrrance metrics or project rro:~nagement activities
Capturing and !racking issues, problems and defects identified during tests
Assuring continuous process improvements, including root cause analysis and resuHing benefits
•
•
"
•
•
•
•
•
•
The Bldder will be responsible
nrr>Vlnrnn change management serVices. Changes may include
changes and/or changes
by new industry practices and !rends that may affect the CAT.
management responsibilities will include the following
vHI
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30916
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•
•
•
•
•
•
Managing future changes lo business, administrative anc technical functions as a result of
changes in the requirements of Rule 613
the process to
changes in
and business requirements
Coordinating
project resources
Communicating and coordinating priorities and implementation aclillities for identified changes in
requirements
Seeking approval for change management initiat/vas
Facilitating appropriate training and education for CAT Reporters and other internal functions to
efficiently implement changes
Coordinating, facilitating and communicating testing events With CAT Reporters and users
The Bidder must conduct industry-wide testing for CAT Reporters, both at initial implementation and on an
ongoing basis when there are CAT-related changes or other industry changes that directly affect data
and/or reporting. In addition, !he CAT must participate in other applicable indus!ry·Wide tests conducted by
other parties that are relevant to the CAT, such as industry-wide disaster recovery testing.
QA is a cntic<ll part of the CAT solution. Cornprehensive OA, risk rnanagement and testing practices and
standards are key requirements. QA procedures should be applied to all components of !he CAT processor
and external Interfaces and changes.
The Bidder's response should include both the functional and non-functional testing that includes, but is not
limted to, the
•
•
•
•
•
•
•
"
•
•
•
•
System testing
Integration testing
Regression testing
Sof1ware performance testing
System performance testing
Application programming interface (API) testing
User acceptance testing
IntilJstry tes!J ng
lnteroperablli!y
Security
Load and performance testing
CAT Reporter testing
The Bidder must have a robust operational monitoring program to ensure that !he CAT processor and
central reposilory are functioning as intended, system outages and delays are identified and escalated and
necessary upgrades and enhancements are promptly identified and implemented.
The Bidder wm produce, at a minimum, the following operational and status reports
status reports on a real·time basis
Processing run times
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•
30917
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•
•
•
•
•
Data load status updates
Daily and historical processing volumes
Storage ulilization and available space
Processor and memory lllilization
Data access connections and query resr::onse times
The CAT will be required to prollide support tools and services lo CAT Reporters, SRO regulatory staff and
SEC staff. The following sections outline the specific tools and supp3rt functions that
be required.
The Bidder will pro \!ide operational and business support to CAT Reporters for all aspects of GAT reporting.
A suite of tools must be developed to allow each CAT Reporter to monitor data subrnissions,
and
correct errors, manage reporting relationships and monitor its compliance with CAT reporting requirements.
In addition, communication protocols must be developed to notify CAT Reporters of the CAT system status,
outages and other issues that would affect CAT Reporters' ability to submt data.
At a mnirrum. the following operational and business support tools for CAT Reporters vJil! be required:
•
•
•
•
•
statis~cs for all CAT Reporters, CAT system status,
Secure website containing daily
system notifications, system maintenance and system outages reporting relationship
rnanagement toolS and a Web entry mechanism for
CAT data and
and
resubmit!ing rejections or inaccurate data
Public website containing comprehensive CAT reporting informalion, including, but not limited to:
Technical specifications
Reporting guidance
Pending rule changes affecting CAT reporting
Software/hardware updates
Upgrades and CAT contact information
Communication mechanisrns, such as email messaging and Web announcements, to nohfy CAT
Reporters of system outages, delays and other relevant inforrration lila! would affect CAT
Reporters' ability to submit data and track notifications
Mechanism for assigning CAT-Reporter-IDs and menaging changes to CAT-Reporter-IDs
CAT Reporter Compliance Report Cards to be created and published on a periodic basis lo
assist CAT Reporters in rnonl!oring overall compliance with CAT reporting requirements
is not envisioned that non-SRO CAT Reporters will have access their data submissions through bulk
data exports with the initial imprementation of CAT
SROs and the SEC will have access tofulllifecycle
corrected bulk data exports.
The Bidder will provide operational and business support to CAT users (including SRO regulatory staff and
the SEC). A suite of tools must be developed to allow each CAT user to monitor data requests and
extractions.
addition, communication protocols must be developed to notify users ofthe CAT system
status, outages and other issues that would affectSRO regulatory staff and the SEC's ability to access,
extract and use CAT
At a
SRO regulatory staff and the SEC
each have access to a
secure website where they can monitor data requesis and CAT system status, receive and track system
notifications and submit data requesis.
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30918
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addiliOII to the suite of tools described above, the NMS Plan Participants
require that a CAT Help
Desk be provided to support both broker"dealers and SRO CAT Reporters. The CAT Help Desk must be
able to address business questions and issues, as well as technical questions and issues. The CAT Help
Desk must also be able to assist SRO regulatory staff and the SEC with questions and issues regarding
obtaining and using CAT data for regulatory purposes.
The SRO> will require !hat the CAT Help Desk be available on a 24x7 basis. The CAT Help Desk must
manage large volumes of incoming calls and be able lo handle at minimum, 2,500 calls per rmnth. The
Bidder must create and maintain a robust electronic tracking system for the CAT Help Desk that must
include call logs, incident tracking, issue resolution and volume escalation.
CAT Help Desk support functions must include:
•
•
"
•
•
•
•
Sel:!ing up new CAT Reporters, including tile assignment of CAT-Reporter-IDs, manage1rent of
CAT entitlements and testing prior to submitting data lo CAT
Managing CAT Reporter authentication and entttlements
Managing SRO regulatory staff and SEC authentication and entitlernents lo obtain data for
regulatory purposes
Supporting CAT Reporters with data submissions and data corrections, including submission of
customer and account information
Coordinating and supporting system testing for CAT Reporters to perform individual system tests
based on changes to their respective systems
Responding to questions from CAT Reporters about all aspects of C.AT reporting, including
reporting requirements, technical data transmission questions, potential changes
Rule 613
that may affectlhe CAT, softwarelhardvvare updates and upgrades, entitlements. reporting
relationships and questions about the secure and public websites
Responding 1:o questions from SRO regulatory staff and the SEC about obtaining and using CAT
data for regulatory purposes
The CAT mus! include a comprehensive
program 1o monitor CAT
adherence to Rule
613. This compliance program must be overseen by !he ceo, who will have responsibility lor reporting on
compliance by CAT Reporters to the NMS Plan Participants. The compliance program must cover both
broker-dealer and SRO CAT
J:;>,.,.,rl·"r"
A fundamental component of this program is the requirement to identify on a daily basis all CAT R<>IY>r!l"'r"
exceeding !he maximum allowable error rate established cy the NMS Plan Participants, Once identified, all
CAT Reporters exceeding this threshold must be notified that they have exceeded the maximum allowable
error rate and be informed of the specific reporting requirements that they did not
n'll'!et (e. g.,
timeliness, rejections and metching). In addition to daily notification, CAT Reporters must also be notified of
ongoing issues that may constitute a pattern and practice of CAT reporting violations over a period of ti1ne
via periodic CAT Reporter Corrpliance Reporl Cards,
compliance program must also include revie\NS identify CAT Reporters that mey have
The CAT
failed to submit order events to CAT, as well as to ensure CAT R<>1'\11rl·"'r" correct all identified errors even if
such errors do not exceed the maxim.1m allowable error rate,
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<B-(H-14 CA.T
30919
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The CAT will be required to analyze reporting stanstics and recommend proposed changes to the maxi mum
allowable error rate estaijished by the NMS Plan Participants. It is expected the maximum allowable error
rate will decrease over lime as overall compliance rates improve after initial implementation.
The CAT will be required to produce and provide reports and metrics to each SRO on its members· CAT
reporting compliance rates so that SROs can monitor their members' compliance with CAT reporting
requirerrents and initiate disciplinary action when appropriate. Further, tile CAT must produce and provide
reports and metrics !o the NMS Plan Participants and polenlially tile SEC on each SRO CAT Reporter's
compliance rates sc that the NMS Plan Participants or the SEC may take appropriate action if an SROfails
to comply with its CAT reporting obligations.
The CAT Reporter compliance program must a!So include:
•
•
•
•
•
Reporting to and interfacing with tile NMS Plan Participants
Providing periodic reports, including relevanl metrics, to the NMS Plan Participants !hat allow
tilem to oversee the quality and integrity of the
to the CAT
Providing ad-hoc customzed reports to NMS Plan Participants as requested
Providing information to the NMS Plan Participants on the performance of indiVidual or muttiple
CAT Reporters
Working with the SEC and tile NMS Plan Participants to address CAT Reporter deficiencies
This section describes the business adrrinistration functions that tile NMS Plan Participants believe will be
necessary to operate the CAT. TI1ese functions include the oversight and perforrnance of day-to-day
business operations of the CAT, which inclclde ensl!ring all aspects of the C.AT related to processing data or
CAT administration operate in a coordinated fashion to ensure the overall cohesiveness and effmiency of
the CAT NMS Plan ParUcipants anticipate tilet the CAT will be adrrinistered by senior professional staff of
the selected Bidder under the owrsight and guidance of the NMS Plan Participants. The acti\ities of the
selected Bidder will alsc be subject to !he involvement and approval of NMS Plan Participants concerning.
for e::.ample, contracts of a certain dollar amount or of a certain type, personnel decisions regarding senior
staff and parameters for engaging offshore vendors.
As a general matter, the Bidder will be responsible for ensuring that the following business admnistration
the Bidder) under the
functions are performed (either by !he Bidder itself or by a subcontractor overseen
direcnon and oversight of !he NMS Plan Parncipanls:
perforrna~nce and management of the
functions forlhe CAT:
Reporting and oversight
Finance
Legal
General support
High-level overviews of the GAT's business admnistra~on functions are
in !he following
sub--sections. All of these functions
will be subject to the general oversight the NMS Plan
Participants, and the Bidder must be prepared to report on these functions to the NMS
Participants as
requested. Bidders are alsc invited to identify any additional functional requirements no! listed that
believes may be pertinent to the administration or operation of the CAT
•
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The NMS Plan Participants armcipate that they Will hoid regular meet1ngs as participants in the CAT NMS
P~n uHirrntely approved by the SEC. The selected Bidder will attend these meetings as requested and
proVide regular reports on the opera~ on and rrnintenance ol the CAT for review by the NMS Plan
Participants and the SEC. These reports rrny include, for exarnple, board-level operational and
performance management information on issues such as financial perforrrnnce and the risk rrnnagement
process oflhe CAT
The operations of the CAT will require the establishment and rrninlenance of a finance function for the CAT
itself. The SROs are currently considering formng a limited liability company, although this structure is still
being explored. The finance functions \~till include setting up and maintaining the following:
•
•
•
•
•
•
•
Accounting
separate books and records on behalf of the
Billing, invoicing, accounts receivable and collections
Accounts payable (vendor invoice processing and payment and management ol vendor activities
through coordination with legal and procurement teams}
Periodic
and forecasting
Cost allocation among the CAT Reporters and other possible CAT users
Financial reporting and analysis
Tax preparation and compliance
A process must be established I hat will allow for the allocation of CAT costs. Further, these costs will need
to be billed and collected once allocated. It is anticipated that the SROs
solicit industry feedback on a
cost recovery allocation model prior to !he filing of the NMS Plan, once more visibility into CAT costs and
drivers is obtained from the Bidder its RFP response.
Related acti'v!ties may include the following:
•
•
•
•
•
•
Establish policies and procedures needed !o support invoicing,
accounts receivable and
collections
Implement related systems and toofs with the ability 1o scale as needed
Receive and deposit payments and apply remittances accounts
receivables aging and other relevant reports
Follow up and resolve billing issues
Collaborate 'Nith the NMS Plan Perticipants on cost allocation melhoclologies,
agreed upon allocation models and proViding related reporting
As part of the finance acti\1Ues, the CAT will requ1re the developrnent and managerrnnt
budgets and periodic forecasts, as
as the achievement of cost containment objectives. Budgets will
need to be prepared for review and approval by the NMS Plan Participants.
The Bidder will be required to
Implement a
and create processes and allocation models needed to
develop annual operating budgets and periodic forecasts
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30921
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
•
•
•
•
Provide variance reporting, cos!fbenefit analyses and financial analy:lics needed to support
decision making and reporting !o stakeholders
Provide recorrmendations to support ongoing cost conlainrrrent objectives
Implement tools and systems to carry out budgeting and forecasting activities
Document analysis and allocation of costs
Proactively' report to the NMS Plan Participants any anticipated budget shortfalls or other issues
Financial statements
be a requirement ol the CAT NMS Plan to ensure transparency to the costs,
revenues and operations of the CAT Finance will be required to develop, generate and prepare financial
statements and reports for the NMS Plan Participants.
The finance acti\i!ies will include the following:
•
•
•
•
•
•
•
•
Accounting, inciLKiing establishing and rreintaini ng a genera 1 ledger and other subsidiary ledgers
as deemed necessary to maintain separate books and records on behalf of the CAT
Managing the m:mlh·end closing process, journal entries and account reconciliations
Creating and disseminating financial statements and reports on a periodic besis, including a
balance s!1eet. income staten-ent and lltatement of callh flows, arnong otherll
Providing resources, tools and systems to carry on these functions
Establishing related financial policies and procedures order to ensure compliance
generally accepted in the United States of Arnerica and other statutory
accounting
reporting requirements
Elltablishing internal controls as needed to provide assurance regarding the reliability offinancial
reporting
support to external auditors
reports and financial analyses to the NMS Plan Participants as wsrranted
The CATwllllikely be subject to federal, slate and local taxation and/or filing requirements. The Bidder will
be required to lluppor! tax reporting and comp1iance functions on behalf of the CAT The NMS Pl:an
Participants reserve the right to hire additional outside l:ax acMsers far the CAT as deemed necessary,
As part of the finance actMtes, thelle requirerrrents include:
•
•
•
•
•
•
Preparing tax returns and maintaining supplements! support as required
Understanding and documenting tax
requirements by jurisdiction
Establishing policies and procedures needed to ensure compliance vJith all applicable tax laws
Submitting timely filings and payments to tax authorities
Providing suppcrt for and rmnaging tax audits
Suppcrting tax planning
Providing relevant reports to the NMS Plan Participanl:a as wsrranted
From lime to time, the CAT rney be required to perform legal ac~vities refated to
operation of the CAT These activities rney include the following·
and reviewing
contracts
non-disclosure agreements, non-compete agreements and other
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30922
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•
•
•
Advising and m:maging licensing and maintenance agreements (e.g., sof!\Nare and vendor),
which includes initialing and drafting !he contracts, coordinating with various constituencies and
escalating as needed, and working closely with procurement services
Modifying service level agreeiT!::lnts (SLAs) as necessary
At the direction of the NMS Plan Participants,
\vilh the SEC and providing analysis on
interpretive issues concerning the CAT
The CAT may require the acquisition o! supplies and professional services in order to operate it an
effecljve manner. Examples of such procurement activities that may be required of the CAT include:
•
•
•
•
•
•
•
Identifying and justifying the need lo establish a vendor, supplier or professional services
relalionsllip to satisfy tt1e requiretrents of the CAT
Gathering information about, interviewing and selecting entities who can potentially satisfy the
GAT's reqt,llrements for a product or service
Conducting background revievvs and reference checks concerning the quality of the particular
product or service and identifying any requireiT!::lnts for follow-up products or services,
installation, maintenance and warranty needs
1\!egotiating the price, the availability of customzalion possibilities and delivery requireiT!::lnts, and
executing contracts on that basis, subject to the approval of NMS Plan Participants
Ensuring contract fu~illment and that the preparation, shipment, delivery and payment of the
applicable product or service are completed based on contract terms;
and training with
respect to the use of procured products or services may alsc be required and performed
Evaluating the performance of products or services based on the usage, maintenance and any
accompanying service support as they are consumed
Renawing contracts as they expire or when the product or service is to be re-ordered: additional
consideration should ba given to continuing or changing the existing contractual relationship
based on performance or other relevant consideralions
Producing reports for !he procurement function such as purchase orders, supplier reports and
asset manageiT!::lnt reports
The selected Bidder
provide
management services Ia support the operation of the CAT,
including, for exampte, !he management of office space for the ceo and CAT staff.
The selected Bidder
be required to support internal and external audits of lhe operation of !he CAT, as
well as oversight exam nations by the SROs and the SEC. For example, it anticipated that the CAT will
come under the oversight of the SEC's Automation Review
program
the CAT
may
subject to a contro!s review (e.g., Statement
Standards for Attestation
No.16,
Reporting on Controls at a Service Organization). is also possible !hat an external auditor may be hired by
the NMS Plan
to conduct periodic audits of the CAT, with which the selected Bidder must fully
cooperate,
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The Bidder may also be asked to conducllull or partial internal audits of lis performance of the functions
necessary to operate the CAT.
In support of these audits and exarninations, U1e Bidder's responsibilities could include:
•
interviews and discussions with
Drafting re~nses to questionnaires and participating
auditors, SRO staff and SEC staff
Generatrng specialized reports and preparing written material for audnors, SRO staff and SEC
staff
data and documents to auditors, SRO staff and SEC staff
•
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30924
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
This section describes !he information that must be supplied by the Bidder in response to tihe CAT RFP. The
Bidder must pro\.ide a written response to all informalion and questions !hat are listed in Section 3. The
Bidder must provide requested technical materials, diagrams, customer references and otiher supporting
material as a part of the response. The Bidder must highlight specific experiences and cite examples where
applicable, throughout tt1e sections below.
tihls section of the response, the Bidder
solution as listed below:
•
•
•
•
must
provide a summary of the key aspects of the proposed
Short overview of tihe qualifications of the Bidder
Solution overview that addresses the technology, business and operational requirements of the
CAT
Overview of the team qualifications
Identification of subcontractors
The Bidder must address !he following witih respect to customer information requirements:
(Refer to Section 2.2.2.1 "Customer and Account Database" and Section 2.2.2.2 "Customer
associated requirements)
1.
2
3.
4.
5.
6.
fortne
Describe how customer/account information w.i II be
updated and stored with associated detail
sufficient to identify each custonl:!r
Describe how a unique Customer ID across all broker-dealers would be generated and stored for each
unique customer captured in the account inlorma!ion database
Describe how tihe solution will support different types of customer and account structures
Describe how mnor and material customer/account data information .inconsistencies across
broker-dealers >viii be handled
Describe how PII will be stored
Describe how PII access will be controlled and tracked
The Bidder must address the following with respect to the order lifecycle assembly requirements:
(Refer to Section 2.2.3 "Order Lifecycte Assembly
for tihe associated requirements)
Describe how the Bidder will capture a single
for each CAT Reporter using a CRD
number as the key identlfier with !he option of using LEI. The description should include an explanation
of how the Bidder would associ ale the optional LEI witih the required CRD number
identifiers and associate those with tihe
Describe how the Bidder will capture existing market
single CAT·Reporter-ID (i.e, CRD or LEI)
each CAT Reporter The description should
how
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9.
10
11.
12.
13.
the Bidder will validate identifiers during !he data ingestion process and incorporate CAT-Reporter-tO
and eXisting market participant identifiers !he lifecycle linkage process
Describe how using the daisy chain approach will link all e~.ents in the lifecycle of each order and store
!he linkages so !hat targeted queries and comprehensive data scans can be run starting wilh executed
trades and be quickly and efficiently sumrmrized by Customer I D or account number, and alternatively
can be run startng 1Nilh the initial receipt or origination of an order and be quickly linked to the ultimate
execution, allocation or cancellation
Describe how a single CAT-Order-ID will be created and associated with each individual order event,
regardless of the number of CAT Reporters involved in the
the order or the number of
different order identifiers assigned to individual events by each CAT Reporter involved in the order
during ils lifecycle lfthe Bidder has an attemative to !he daisy chain approach, the same detailed
description describing how a single CAT-Order-ID will be created must be provided addition to !he
daisy chain description so tl1at !he SRCs rnay evaluate tile rnarits of the alternative approach
Describe 11ow a CAT-Order-10 will be assigned, using eitller the daisy chain approach or an atternative
approach recommended by tile Bidder and stored in each of the following scenarios for both equities
and options:
• Agency route to anolher broker-dealer or exchange
• Riskless principal route to another broker-dealer or "'w'"""r~""' capturing witllin the lifecycle both
!he custorrer leg and the street side principal leg
• Order routed from one exchange through a routing broker-dealer to a second exchange
• Order worked through an average price account capturing both the individual street side
executions and !lie average price fill to the customer
• Order aggregated 111itll other orders for further routing and execution capturing bolh the street
side executions for the
order and the fills to each individual custorrer order
• Complex order involving one or more options legs and an equity leg, wlth a linkage between tile
option and equity legs.
• Complex order containing more legs than an exchange's order managen-ent system can accept
causing the original order to be broken into
orders
If a particular scenario does no! apply to either equities or options, provide an explanation, The Bidder
should identify and describe exarnples of any other scenarios !he Bidder is aware of, but
listed
above.
If an alternative approach to !he daisy chain is recommended by the Bidder, address how the approach
guarantees a unique link between all related order events without relying on any
of "fuzzy"
matching and prevents information leakage
Describe how tile Bidder will ensure lhe accurate and efficienttirre sequencing of all order events
within a single CAT Reporter and/or between multiple CAT Reporters
111e Bidder rnust address the following with respect to !he data validation and error handling requiren-ents
(Referto Section 24 "Dais Validation Requirements" forthe associated requirerrents)
14. Describe how data format and context validations
order and quote events submitted by
Reporters
be performed and how rejections or errors
be cornrnunicated to CAT Reporters
15. Provide a system flow diagram reflecting the overall data format, syntax and co11lextvalidaHon process
that includes when each lype ofvalidalion will
completed and errors communicated CAT
Reporters, highlighting any dependencies between
different validations and impacts of such
dependencies on providing errors back to CAT Reporters
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16. Describe how relatEd order lifecycle even!E subm!!ed by separatE CAT ReportErs will be linked and
how unlinked even!E \Viii be identified and communicated to CAT Reporters for correction and
resubmission. Include a description of how unlinked records will be provided to CAT Reporters for
correction (e.g., specific transmssion methods and/or Web· based downloads)
17. Describe how account and customer information submtted by broker-dealers will be validated and how
be communicated lo CAT ReportErs
rejections or errors
18. Describe !he t"!'!eChanisrns that wi II be provided to CAT Reporters for the correction of both market data
(i.e., order, quotes and trades) errors, and account and customer data errors. Include a separate
description for batch resubmissions and manual Web· based submissions
The Bidder must address !he following with respect to the following central repository requirements:
to Section 2. 5 'Central Repository
for !he associated requiremen!E)
19. Describe the strategy for managing fi~ years of data that must be accessible to SRO regulatory staff
and the SEC in a tililf:lty and accurate manner. The strategy must pro>4de for the accessibility of both
processed and unprocessed data
20. Describe the strategy for archiiAng an additional two years of data once it is remo~d from the central
repository (after fi~ years). Indicate the estimated annual cost to maimain the archi~ for each year of
archi~ted data Describe the process for retrieving, storing and accessJng archi~d data
21. Describe the methods lor data
to ensure no data loss, such as backup/recovery and/or
replication adequate to protect the repository from both physical and logical loss of data Include tin1e
estinl'lles for the recovery of data, should loss in !he prirnary data store occur
22. Describe how the central repository can be scaled for growth
following areas:
• The number of issues accepted by the CAT
• The types of messages accepted by 1t1e CAT
• The addibon of fields stored on individual data records
• Increases in any data type due to market growth
23. Describe technical interfaces that will enable litTle~' and accurate retrieval of information by SRO
regulatory staff and the SEC
The Bidder mtiS! address !he following to meet data feed management requirelilf:ln!E
to Section 2.5. u "Data Feed
24. Describe a capacity managelilf:lnt approach for peak periods
25. Describe n1enual data entry melhod(s)
26. Describe how the data ingestion infrastructure
.support changes to data structures, including the
additon of new data types, new data fields, data elements and field values, as well as other technology
changes required to support changing market structures and new regulatory requirements on an
basis
27. Describe the mathods of managing
covering the following feed types:
• Exchange and FINRA C.AT Reporters
• Broker-dealers
• SIPs
• CCC
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staff and the SEC
28. Describe !he pmcequre for the i<:lentification issues, escalation process, corrective action and reporting
paradigm
29. Describe whether feed rnanagement is part of Help Desk case managernent If so, describe l)OW it is
integrated. If not, describe how feed rmnitoring would be accomplished
30. Describe severity levels and expected behavior given those severity levels
31. Describe a method to manage health of balch jobs and real time feeds
The Bidder must address !he following to meet issue symbology requirements:
(Refer to Section 2. 5. t 2 "Issue Symbology" for the associated requirements)
32. Describe how issue symbol validations and error corrections
be perlorrned
for tracking and maintaining an accurate
of issue symbol and/or market
class changes
34. Provide a description of an Issue symbol history tool and how users will access the tool
35. Descnbe how complex orders at different exchanges using different symbology conventions will be
standardized
33. Describe the
The Bidder must address the strategy and approach for scaling the system for increases
data access and provide capacity details of the proposed CAT solution:
data volurnes or
(Refer to Section 2.5.2 "Capacity Perfonmnce Requirements" for the assocrated requirements}
36. Describe how the system was sized and the expected processing times
37. Describe the strategy to support the expected increase in data volumes, including wl1at hardware
ct1anges or upgrades are anticipated to support the increases in data volurms
38. Describe the expected processing performance of the system, including processing times and !he peak
volume the system can handle within llle processing trneline
39. Describe the performence of the system during sim11taneous access
40. Describe the scalability range
increments and rmxi mum possible). Include how the system
can be scaled up for peak periods and scaled down as needed Include any applicable lead times to
scale !he systems
41. Provide estimated costs to add capacity and scale the system
42. Describe the data access response times for various example queries and data requests and how the
svstem
handle concurrent user
including any limits of the system, Include details ol how
system
respond if any of the limits are e>;t:eeded
the following ques~ons, the Bidder
be asked to provide a
description of !he proposed
solution that fulfills the current CAT requirements and addresses the details the hardware, software,
system and data flows.
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The Bidder must address the following
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(Refer to Section 2.6 "Technical Architecture Requiremen!:s" for the associated requiremen!:s)
43. Describe the solUtion's overall technical architecture, vvnich should address:
•
System architecture
•
Applicalion(s)
•
Logical and physical data architecture
44 Describe hardware and software requirements for the proposed solution including the follo\1\ling:
•
Operating systerns
•
Hardware
•
Storage, DBMS and in-memory databases
Application/Web server technology
•
•
45.
46.
47.
48.
49.
50.
51.
•
architecture
•
Middleware, message queues and use of clustering or high-availability features
Describe details of where the technology is sourced, including vendors, internally deveioped, open
source, leveraged, licensed or shared
existing solulions
Describe other system resources requirements, suoh as job scheduler, system and security rnonitoring
tools
Identify third-party products that will be used the build and operation and provide descriptions and
details of how they will be used in the solution
Describe the initial hardvvare requirements and t10w the hardware architecture and design address:
to handle a significant increase in the data volume
the
•
Scalability to increase
baseline capacity
•
to support flllure
developments and new requirements
•
Maintainability to ensure that technology is kept current, supported and operational
Describe the system interfaces. including data submssion, data access and user interfaces
Describe !he network architecture and describe how the solution will handle the necessary throughput,
processing tlmeline and resubmissions
Describe how the architecture and various cornponents \1\lill be used to n'leet the processing, retention
and access requirements and how can
enhanced and expended for future capacity and functional
52. Describe the availability ofthe solution, that addresses the ability of the system to corrplete processing
and respond to user queries and data requests
53. Describe any planned system dovvntime or mamtenance windows and start-up titre requirerrents
54. Describe the different environments reqtJired to support the different system development lifecycles
(e.g., development,
testing and disaster recovery) and sizes and how they are used
55. Describe expected response time for a query. concurrency and supported user load
56. Identify any
technical architectures or solutions used the response and any licensing
arrangements needed
57. Describe any system redundancy and fault tolerance the proposed architecture includes that protects
against soft application or operating system failure (e.g, operational with downgraded response)
58. Describe any han:ll.vare . software or network requirements for CAT
submit data to the CAT
processor. If
methodologies are supported pro\llde the details for each methodology
59. Describe !he proposed messaging and communicaton protocols used in data submssion and retrieval
60. Describe the
of the proposed
and communication protocols over
industry standards and how it addresses the follm11ing poin!:s:
•
Band\1\lidth and
•
Efficient serialization and parsing
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61,
62.
63.
64.
•
protocol's
and backward compatibility
and session management
•
ComiTIJnication protocol's reliability,
Describe the plan for development of the interfaces for the proposed
protocols
Describe the process and associated protocols for accepting batch submissions and delivering balch
retrievals
Describe the process and any associated protocols for supporting manual data submissions
Provide architecture diagrams to illustrate the Bidder's platform design
To ensure that proper security and controls are built into the systern the Bidder is required to:
to Section 2.7 "Security Requirements" for the associated requirements)
65. Describe how the soluuon protects data during transmission, processing and at rest {i.e , when stored
in the central repository}
66. Describe, in detail, the specific security
rnelhodclogies unlized in the
proposed solution
67. Describe how access to the data is controlled and hew the systerr(s) confirms the identity of persons
(e.g., usernarne/password), monitors ;,IIIlo is permitted
access the data and logs every instance of
user access
68. Describe what system controls lor users are place to grant different levels of access depending on
their role or fut,ction
69. Describe the strategy, tools and techniques and operational and management practices that >viii be
used to maintain security of !he system
70. Provide a description of the proposed system controls and operational practices
71 Provide inlorrnation regarding the organizalfon's security auditing practices, including internal audit,
external audit, third-party independent penetration testing and all other forms of audit and testing
72. Describe how security pracllces may differ across system development lifecycles and environments
that support them (e.g., develapmen~ testing and production)
73 Describe detail the data lass prevention program (DLP). Include inforrnalian pertaining to strategy,
tools and techniques and operational and management practices that will be used
7 4, Describe the process of data classification and how it relates to !he DLP architecture and strategy
75. Describe e:xperiences in developing policies and procedures for a robust security environment,
including the protection ol
data
76. Describe the use of monitoring and incident handling tools to log and nlilnage the incident handling
lifecycle
77. Describe the
to secure user access, including secunty features that will pre.vent
unauthorized users from accessing
system TI1is should include necessary protection
both
unauthorized submission of dala and access to da!a
78, Describe the processes/procedures followed security le breached
79. Describe the infrastrl!Cture security arohiteclure, including network, firelfialls, aulhen!ioation,
encryption and protocols
80. Describe the physical security controls for corporate, data center and leased data center locations
The Bidder must address data access tools in the proposed CAT solution
atline Query Tools:
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(Refer to Section 2.8.1 "Online Query Tool Requirements" for the associated requirements)
81. Describe the tools and reports that would be provided to allow for the extraction of data search criteria
outlined
Section 2.8.1
82. Describe how !he solution will accormndate simultaneous users from SRO regulatory staff and U1e
SEC submitting queries
83. Describe !he expected response times for query resulta, the manner in which simultaneous queries
be managed and the maximum number of concurrent queries and users !hat can be supported by the
system within !he described minimum response times
84. Describe !he format in which the result$ of targeted queries will be provided to users (e.g., online,
spreadsheet files, .txt files, .csv files and zip files)
Bulk Data Extraction:
(Refer to Section 2.8.2 "Bulk Data Extraction Requirements" for the associated requirernents)
85. Describe tile methods of data deli"'"ry that would be made available to SRO regulatory staff and tile
SEC
86. Describe any limitations on tile size of data that can be delivered at onetime, such as number of days
or nwilber of terabytes in a single transmission
87 Describe how simu~aneous bulk data requests
be managed to ensure lair and
access to
CAT data by SRO regulatory staff and the SEC
The Bidder is required to provide system availability, disaster reco"'"ry and BCP forthe proposed CAT
solulion. The Bidder must address !he following:
to Section 2 9
asaocialed requirements)
Availability, Disaster Reco\.ery and Businesa Continuity Plans" for the
88. Describe a solution for routing !he data submission processes and the data retrieval requests to !he
secondary data processing site
89. Describe how 111e secondary data procesaing site will be synchronized
90. Describe its redundant components and interfaces. Indicate !low redundancy is achie"'"d and
redundant components and interfaces will be rnanaged
91. Describe its failure detection, operational monitoring and failover processes for an entire site or for
individual components
92. Describe the Bidder's BCP for both staff and technotogy
93. Describe !he Bidder's experience and capabilities to develop a robust BCP
94. Provide description of the geographic location(s) of the disaster reco"'"ry site
The Bidder must address !he
to meet !he build project managenent requirements
(Refer to Section 210 "Build Project Management' for the as$0ciated requirements)
95.
96.
97.
98.
99.
Describe the tools and systems that will be used for
111e project
Describe project milestones and completion times relevant to a start date
Describe !he project check
process
Describe
management practices and processes
Describe the system de"'"lopment methodotogy and approach 111at \Mil be used
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100 Describe project milestones and the associated deliverables and prolllde a high level Gantt chart
(IYI::lnthly) identifying project work streams, work breakdown structures (WBS), dependencies and
effort
101 Describe the expected resources that \NOU!d be applied to !he project msnagement function
The Bidder must provide details of program msnagement practices in the proposed CAT solution:
(Refer to Section 2.11.1 "Program Management' for !he associated requirements)
102. Describe the program management strategy and methodology
The Bidder must provide project management support that Will maximize the successful accomplishment of
all contract requirements. The Bidder must address project management practices the proposed CAT
solulion
In Section 2.1 U 1"Project Management' !orthe associated requirements)
103. Describe the project management methodology
104 Describe information on the tools and systems that will be used
managing the projects
105. Describe project management capability with special reference to large scale softuare and harcMtare
projects, which may include new facilities, new companies, new personnel, numerous competitive
customers and stakeholders including government agencies
The Bidder must address change management practices
the proposed CAT solution
to Section 2. 11.1. 2 'Change Managemenf' for the associated requirerrents)
100. Describe the change management strategy
107. Describe the experiences in change manageman! processes and methodologies used
108. Describe information on change management tools and include samples if available
The Bidder must address industry testing practices in the proposed CAT solulion
(Refer to Section 2.11. 1.3 'Industry Testing" for the associated requirements)
109. Describe how the Bidder
coordinate industry-'Nide tests, including the
environment
where the testing will be conducted, the scope of CAT Reporters to be included in the testing (e.g.,
CAT
subsets of CAT Reporters based on profile information), other data providers that
the industry-><iide test will be communicated to
need to
(e.g., SIPs and
and
testing participants
110. Describe how testing results \IIIII be identified and communicated to testing participants. The
testing
be communicated to CAT Reporters
description should address how errors identified
(e.g., whether errors identified during testing will be communicated to CAT
same
manner as a regular produclion environment)
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The Bidder must address the QA and testing
~masures
of the prop<lsed CAT solution:
(Refer iD Seclion 2.11.1 .4"Quality Assurance" for the a&..<;ociated
require~mnis)
111 Provide an overview ofthe QA approach for the CAT
112. Describe QA melhods with respect to the following test categories:
• System testing
• Integration testing
• Regression testing
• Soft.vare performance testng
• System performance testing
• Application programming interface (API) testing
•
acceptance testing
• lnteroperabillty
• Security
• Load and performance testng
• CAT Rep<lrter tes.~ng
113. Describe the firm's experience INith QA
114 Describe how many QA resources would be assigned lo the CAT
115. Describe the labs and facilities thai will be used by QA group(s), if applicable
116. Describe how load testing will be accomplished
117. If there is an intention to benchmark QA, describe how this benchmarking would occur
118. Describe whether QA is HlSp<lnsible for source code review and control
11R Describe how QA is invotved in the rolloJ.II: of new hardware and sofl:\lv'are
120. Describe the metrics !hat will be used to evaluate the effectiveness of !he QA role
121. Describe the resources assigned to QA in terms of people (Etg., numbers of people and skill sets)
122 Provide e.xamples of sample lest plans and test scripls
The Bidder
must address details of the CAT supp<lrt functions
(Refer to Section 2.13 "CAT Supp<lrt Functions" for the associated requiremenls)
123. Describe the functions of operations staff that
be in place to monitor
and technical
support on a 24>:6 basis
124. Describe the ongoing rronltoring of
CAT,
rnonitoring capacity, thresholds,
access, network infrastructure and
conditions
125. Describe the autotmtion strategy and tools that will be used to analyze the momtoring data provide
meaningful alerts to operations staff
126. Describe procedures !hat will cover testing and maintaining a dissster recovery plan
The Bidder must address the supp<lrt functions for CAT Reporters and CAT users in !he proposed CAT
solution:
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(Refer to Sections
requirements)
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127. Describe the design and content of the secure website, including functionality available for both
broker~dealers and SROS with respect to daily monitoring of data submissions and reporting and
correcting data. The description shcuk:i include who within the Bidder's organization \'YUuk:i be
responsible for the development and ongoing mamtenance of the website
128. Describe the design and content of lhe public website, including who within the Bidder's organization
would be responsible for the development and ongoing maintenance of the 11vebsile
129, Describe how the Bkk:ier
communicate with CAT
for all aspects of CAT reporting,
including, but net limited lo system outages, delays, softwarefhardware updates and upgrades,
pending rule changes, technical specifications, testing and other issues affecting CAT Reporters'
ability to submit data to the CAT
130. Describe how information about CAT Reporters, including contact inforrnalion, would be rmnaged
131. Describe how CAT Reporter entitlemen!s and reporting relationships would be managed
132. Describe the design and content oflhe CAT Compliance Report Cards, including the frequency of
publication
(Refer to Section 2.13. 3 "CAT Help Desk" for the associated requirements)
133. Describe how the Bidder will staff lhe CAT Help Desk, including its planned management structure and
how many full-lime equivalents (FTEs) will be devoted lo the Help Desk as well as !he skill level of the
FI'Es and their locations
134. Describe the te~communications technology that will be used to manage a minimum of 2, 500 calls per
rronth on a :24x7 basis
135. Describe how
Desk staff wi II be trained to ensure they can efficien!~ and effectrvely respond to
inquiries
136. Describe the tools !hat will be available to
Desk staff lo respond to inquiries from CAT Reporters,
SRO regulatory staff and the SEC
137. Provide escalation timetables and escalation procedures
unsolved problems
13a Describe the process for setting up new CAT Reporters, Including the assignment of
CAT entitlements and testing prior to submitting data to the CAT
139. Describe the msnagernent of CAT Reporter authentication and en!!lienl?nts
140. Describe the management of SRO regulatory staff and SEC authentication and entitlements to obtain
data for regulatory purposes
The Bidder must address the
with respect to the CAT
compliance requirements
(Refer to Section 2.14 "CAT Reporter Compliance'' for the associated requirements)
141. Describe the approach and methodology that the Bidder will use to rronitor !he msximum allowable
error rate defined the NMS Plan and lo identify and recommend potential future adjustments
142. Describe the process thai will
used to calculate the dai~
rate, including ol
individual
components that wi II be included in the error rate calculation (e.g., timeliness, rejections and matching)
143. Describe the internal tools and reports that will be developed and used to rronltor daily error rales and
identify all CAT Reporters
the rmximum allowable error rates
dai~ and for specified
periods of time (e. g. , rronthty or quarterly)
144. Describe the tools and mechanisms that
be used to
CAT
they have exceedad the
maximum allowable error rate
on a daily basi~> and over a specified period of lime
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145. Describe the tools and reports that will be provided to CAT Reporters to monitor daily error rates and
aggregate error rates over periods of time, including CAT Reporter Compliance Report Cards
146. Describe the tools and mechanisms that \f\>111 be developed and used to identify CAT Reporters that fail
to submit all CAT reportable events
147 Describe the tools and rnechanisms that will be developed and used to identify CAT Reporters that fail
to correct errors within the established limeframes
146. Describe the tools and reports that will be provided to SROs to monitor their members' compliance Vl>ilh
CAT reporting requirements
149. Describe the tools and reports that \f\>111 be provided to the NMS Plan Participants to monitor the quality
and integrity of CAT reporting by all CAT Reporters
The Bidder must address the administrative practices in the proposed CAT solution:
(Refer to Section 2.15 "Business Adminislrabon Requirements" for the associated requiren<lnts)
150. Describe the methodologies for selling up, perforning and managing !he fallowing administrative
functions:
and
Finance
Legal
• General support
•
•
•
(Refer to Section 2.15.1 "Reporting and Cversight Requirements" for the associated requirements)
151. Describe the rnethcdologies for providing and producing reports on the operation and maintenance of
the CAT solution
may include items such as board-level operational and performance
managen<ln! information on issues such as financial performance and risk management
The Bidder must address the following Vl>ith respect to the finance
(Refer to Section 2.15. 2 "Finance
requiren<lnts)
and sul>sections under Section 2.15.2 lor the associated
152. Describe
tlhe solution meets !he CAT requirements, which should include a minimum of the
following:
•
Cverall
of finance !unctions to support the CAT
•
Systems and tools to be utilized
•
Staffing and qualifications of key personnel tlhal
responsible for tlhis function
Key policies and procedures expected to be impleman!ed
•
•
Internal financial controls
•
Prior firm experience
•
Reporting capabilities
•
Expected service levels
•
Scalability
proposed solution
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•
Ho\1;' tax compliance will be assured
The Bidder must address details ofthe legal frallle\NOrk of the CAT:
(Refer to Section 2.15.3 "Legal Requirements" for the associated requirements)
153. Describe Which tega/ agreemen!lframe~MJrk is recommended. This includes the identification of legal
~MJrk thai ¥11111 be conducted in-house and legal ~MJrk for which outside counsel will be brought in
Contracts and legal agreements wi!h CAT Reporters and others
154. Describe the Bidder's experience advising and managing licensing and maintenance agreements
1&i Provide a sample contract/agreement if possible. different agreements ~MJUid be used for clifferent
types of participants, provide an example of each type. Agreements inclucle, but are not limited to:
• Non-disclosure agreernents
• Non-compete agreements
• Intellectual property (IP) agreements
• Sof!w'are licensing agreements
• SLAs
156. Describe the pro'vlsions that
be inclucled in such agreements to ensure to the satisfaction of users
of the CAT that transaction data VIii/ only be capable of being accessed or used by employees of the
CAT itself {as distinct from any parent company or affiliate), NMS Plan Partcipants and the SEC, and
that under no circumstances may any transaction data be sold to another party by either the CAT itself
or any affiliate of the CAT operator
157. Describe the proposed information barrier that would eXist for the CAT transaction data to ensure that
CAT data would not be improperly shared 'vllith any party not entitled to receive such data
and responding to
regulatory and interpretative issues invoMng regulatory
requirements !o regulatory oversight boarcls ancl the SEC:
158. Describe the Bidder's experience reporting to regulatory oversight bodies, i ncludlng regulatory
oversight ooards (the Bidder will be required to regularly report to oversight bodies, including the NMS
Plan Participants)
159. Describe the Bidder's
regarding interactions with the SEC
addressing interpretive and
regulatory issues
The Bidder is required tc address the following cletails with respect to procurement requirements:
(Re!er to Section 2.15.4.1 'Procure1nent Requirements" for
associated requirements)
1611 Describe the methods for conducting background reviews and reference checks concerning tile quality
of the particular product or service
Describe the methodologies for price negotiation, clelivery requirements and contract execution
(subject to approval from tile NMS Plan Participants)
162. Describe the methodologies for ensuring contract fulfillment
163. Describe the process to renew contracts a.s they expire or when the product or service is to be
re-ordered
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The Bidder is required to address the followmg to meet the facilities management requirements:
(Refer to Section 2.15.4.2 "Facilities Managemen! Requirements" for !he associated requirements)
164. Describe the methodologies to maintain the facilities to supp:.rt the operation of the CAT solution
The Bidder is required to address the following details to meet the audit and examination support
requirements:
(Refer to Sec-tion 2.15.4.3 "Audit and Examination Supper! Requirements" lor the associated requirements)
165. Describe the methods for responding to questionnaires and participating in i nlerviews and discussions
with auditors, SRO staff and SEC staff
166. Describe !he preparation process for providing written material to auditors. SRO staff and SEC staff
This section provides an overview of the Bidder information !hat the SROs will consider when evaluating the
RFP responses. The company information will be broken into several sections to provide specific areas of
focus. The Bidder will be required to supply informelion about its areas of focus, industry expertise, hiring
and management of talent and the processes and methodologies used to deliver services.
The Bidder mu-st include details of current and past experiences of the company, including an overview of
the operating structure, years in operation, experience within !he securities industry and with projects
similar to the scope and scale of the CAT solution and the typical services and clients to \ivhich the company
has pro,1ded its services.
The Bidder must include adcitional relevant information that supports the company's previous and present
day experiences:
be providing
services, including details of relevant
167. Describe the legal entity or enli~es that
jurisdicijons of incorporation
168. Describe the cornpany's ownership structure (privately
publicly owned)
169 Describe the total years of business operations and when the entty was established If the Bidder
intends to establish a separate entity to operate !he CAT, indicate !he equivalent information far the
parent company or companies
170. Provide a summary of the parent corrpany's ownership structures, including affiliates and details of
relevant .iurisdictions of incorporation, etc.
171. Describe the business purpose of the company and the organization responding to the RFP
The Bidder must provide a summary of the company's experience and skills in the securities industry. The
following details should be addressed, in addition to any other relevant 1nforrnalion
highlight past
experience and skills:
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172. Describe details regarding lhe company's past experience \1\'ithin the securities industry, including
relevant projects andlor engagements. Identify any such projects that are sinilar in the size and scope
of the CAT
173. Describe any olher experience the Bidder belie~~es is relevant to its response
174. Describe elG'lrnples of the Bidder's existing technologies and capabilities on such projects
The Bidder must provide details of the conpany's financials that demonstrates the viability and stability of
the conpany !o build and operate the CAT technical infrastructure and operations. Relevant inforrretion
that supports the financial viability ofthe conpany must be provided.
175. Provide Mio years of audited financiais, including, bl!l not limited to, balance sheets, cash flows and
incorre statements
176. Provide the credit rating of the company over the last tiM::l fiscal years
177. Describe any extraordinary financial
that the conpany is comrntted to over the next three
years that might affect its ability to parform
178. List <Jny anticipated regulatory or business changes that may positively or negati~~ely affect!he
financial condition of the corrpany
Provide an o~~er\tiew ofthe Bidder's clients and market focus, as \\/ell as any other relevant information as
described below:
179.
180.
181.
182
clients
Identify high
Describe types of clients and the typical sizes of engagements
Describe typical serVices provlded to the clients
Provide tllree client references for the ssrv1ces provided
This section highlights tile corrpany's approach to
CAT activities.
training and retention, as well as to
The Bidder must address the policies and processes to hire, onooard and train corrpany stsff
183. Provide delails regarding the various criteria considered while
professionals. The
details must include the following inlormetion, in addition to any other relevant points:
• Procedures and criteria for background checks employees
• Details of drug testing the company n .. nrnm'l!<
• Details
current process for fingerprinting Pmnlnv"''""'
• The approximate firrefrarre inwlved in hiring and onooarding of professionals
184. Provide detailed descriptions ofthe training program to ensure
maintain currenttechnical
and industry kno\1\'iedge
The Bidder must provide an overv1ew of !he staffing rmdel, skill sets and an organizational chart !hat
oparations and
describes the team structure, roles and responsibilities in the execution of the
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administration. In addition, !he Bidder must pro\llde detailed biographies of the anticipated key staff of the
engage111ent
185. Specify the resources, includil'lg job title, job description and number of FTEs, !hat are being proposed
to staff !he CAT by completing !he table beklw This should include all staff required by !he Bidder to
111eet the require111ents for proViding all CAT-related serVices. For example, !his should include
operations, support, develop111ent,
project rrenagement and process support staff
186. Provide a job description for each job tille. The job description should include principal job
responsibilities, skilts, job experience and education required for the job
Address detaHs of all vendor relationships !hat the Bidder will directly or indirectly use to deliver the
functions contained in the RFP.
187 Provide a list of third-par!y products and subcontractors that are rraterial to the delivery of !he
functions contained in lha RFP
188. Describe the relationship with each subcontractor, including a description of the role of the
subcontractor
189. Describe how the company will menage the subcontractors
The Bidder must provide details of the proposed
operating models and capabilities. The Bidder
must also provide details and supporting evidence to illustrate the processes and controls that the company
has taken to re111ein in compliance with applicable SEC and other regulatory requiren1ents. Information
details and all other relevant inforl11etion to describe the current and fulure stale
must include the
models:
of
190. Describe any affiliates or subsidiaries the Bidder intends to leverage !o deliver the funcnons contained
in the RFP
191. Describe any offshore services the Bidder intends to use to deliver the functions contained in !he RFP,
including process and co!1ll'lunication protocols between the onshore and offshore staff Describe !he
111easures that will be taken to ensure the safely of IP and data
This section provides an overview of contractual and commercial terrre for which !he Bidder must provide
Information, as well as an overview of ser\llce level terma on which the Bidder must provide inforrretlon. The
be broken into several sections to provide specific areas of focus.
inforrretion
The Bidder must provide inforrre~on regarding the contractual arrange111etll proposed for the
of
CAT services. The Bidder must consider an initial contract term of five years, followed by renewal options of
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three years. The Bidder must be as specific as possible and include all contractual terms that are material
for the Bidder, including clauses that contemplate the partial or full termination of the contractual
relationship with the CAT The Bidder must
192. Provide a draft contract with the material terms and conditions that the organization proposes to use if
selected as the CAT service provider
193. Specify the scenarios and financial terms !hat the Bidder will include in the contract relating lo partial
and full termination of services (e.g., negligence or no paymant)
194. Provide a description of the financial terrrs of the proposed penally clause
Contractual arrangements are subject to negotiations. Further guidance will be issued during the selection
process, (e g, penally clauses that the Bidder will be subjected to in !he event that system, operational
and/or administration SLAs are not mat)
The SRO> expect to retain ownership of all
contnbuted by them to !he CAT processor in connection with
CAT services and to own aiiiP developed on behalf of the CAT or otherwise in connection •'<lith the provision
of CAT services. The SROs also expect to receive a royalty-free license to use, rrodify and sublicense (in
connection with the CA1) any pre-existing IP !hal the CAT processor uses to provide the serlilces.
A~ernative IP ownership and licensing proposals may be considered, with consideration given to costs,
benefits and risks of such alternate proposals.
195. Where relevant, the Bidder must provide details of any a!lernative
and licensing
proposals, as well as the Bidder's assessment of such cost, benefit and risk considerations,
As part of the response to !his RFP, the Bidder must prmhde a schedule of the anlicipeted total cost of
cr.vnership of building, operating and maintaining the CAT that will be passed through to the CAT. The
Bidder must corrplele the Cos! Schedule provided Appendix II and provide cost inronnation for the five
year period following the award of
contract
The ~dder estrnates must be broken down by
technical, operational and administration costs it
anticipates to
develop, deploy, operate and maintain the CAT services described this document
The ~dder must provide as much transparency as possible for the one-lima cost !or the build and
deployment period, populating the items listed
schedule . The Bidder must provide total technology,
operations and administration costs for the operation and maintenance efforts, as appropriate.
Where further transparency is required, the Bidder must provide addi!lonal information on its cost estimates
and clnderlying assurrptions as part of the CAT selection process.
All costs should be quoted in U.S. dollars. Note that the Bidder nl.!St
196. Provide a. descrip!lon of the
used to price the CAT
197, Provide any onetime startup costs required by the Bidder to set up, develop and/or deploy the
necessary technical, operational or business administration capabilities to provide CAT services, if any
198, Provide the annual recurring costs associated with providing CAT servlces for each line item in the
Cost Schedule provided in Appendix II. For each line item, the Bidder must estimate
• Number
FTEs
•
costs
• Hardware/infrastructure costs
Software costs
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•
Other oasis (e.g., real estate costs) not included above
199. Specify any additional material casts that will be pessed through to !he CAT under Section 4, 'Other
Material Costs,'' of the Cos! Schedule
200. Specify key assurnpiions used to dnve the Bidder's Cost Schedule to provide further insigl'1ts into the
solution, if not included etsewhere as part of the response
201. As requested, pro\4de additional cost information as pert of the CAT se~clion process in or~r to
compare the costs associated with enhancement work that might be required to address future
functionality requirements of the CAT
The Bidder must disclose any interest or relationship that it has with any broker-dealer, entity, person or
SRO !hal rmy be an apparent or actual a conflict of interest to the Bidder's ability to fulfill its obligations as
CAT processor. For each such interest
relationship, the 8iddersr1al! provide a writlen statement
indicating !he steps has taken, orvvill !a ke, to mtigate this apparent or actual conflict, prior to assumng !he
role of CAT processor.
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Alternative Display Facility (ADF): An SRO display-only facility operated by FINRA, the ADF provides
melli:Jers with a facility for the display of quotations, the reporting of trades and the comparison of trades
CAT Reportable Event: CAT reportable events include, but are not linited lo, new orders, quotes,
modifications, cancels, order transmittals and executions
CAT Reporter: A national securities exchange, national securities association or a member of a national
securities e.xchange ore national securities association
CAT·Order-ID: A unique order identifier or series of unique order identifiers that allows the central
repository to efficielllly and accurately link all reportable events for an order and all orders !hal result from
the aggregation or disaggregation of such an order
CAT-Reporter-ID: With respect to each national securities exchange, national securities association and
melli:Jer of a national securities exchange or national securities association, a cede that uniquely and
consistently identifies such person for purposes of providing data to the central repository
CMTA: Clearing Member Trade .AgreeiTI'lnt
CQS: Consolidated Quote System
CRD: FINRA operates the Central Registration Depository, the central licensing and registration system for
the US, securities industry and its regulators
CTS: Consolidated Trade System
Customer: The account holder(s) or the accoulll at a registered broker -dealer originating li1e order and any
person from Whom the broker -dealer is authoriZed to accept trading instructions for such an account,
different from the account holder(s); for purposes of corll!llance with Rule 613, a custoiTI'lr is not a
broker-dealer
Customer Account Information: Customer account information shall include, but not be limted to,
account number, account type, customer type, date account opened and large trader identifier
applicable)
Customer 10: A code that
and consistently identifies such custoiTI'lrs for purposes
providing
data to the central repository
Error Rate: The percentage of reportable events collected by the celllral repository for which the data
reported does not fully and accurately reflect the order event that occurred in !he
NIVIS Securities:
security' or class of securities !or which transaction reports are collected, processed
and macle available pursuant to an effec1ive transaction reporting plan, or an effecti-.,e national market
system plan for reporting transactions in listed options
OCC:The
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OPRA: The Cptiom Price Reporting Authority provides last sale information and current options quotations
from a commttee of participants
SIP: Securities Information Processor
Trade Reporting Facility (TRF): Transactions in exr;hange-lisled securities effected by I'"INRA members
olhef'll>ise than on an exchange are reported to a FINRA TRF, While each FINRA TRF is affiliated with a
registered national securities exchange, each FINRA TRF is a FINRA facility and is subject tc FINRA's
registration as a national securities association
UQDF: UTP Quotation Data Feed
UTDF: UTP Trade Data Feed
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Bidder Company Profile
Provide a brlefoverviewotthe company's background, including highlights end relevant information pertaining to the following:
ot tM company's structure, size (number of employees), classification of business entity (e.g., corporaton or
LLC) and location(sj
Overview of thee cor11pany's seNices prooided
Years in operation
Ov~>rview
Prooide information which supports the financial health and stability of the company.
Prooide a brief overview ofthe CQfY\pany's experience within the securfties industry Include highlights and any relevant information
pertaining lo the rollowing:
Past and curran! eng<~gements willhin tile securities industry
Projects similar to the CAT solution
Provide a briel description of all subcontractors that
be invotvecl the CAT soluton.
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Appendix II: COST SCHEDULE FOR BIDDERS ON THE
CAT
White cells: Bidders must enter material costs that will be
through to th" CAT in all relevant white cells. All ffgures
be entered in us $.
The schedule will
calculate all blue cells: total
costs for one-tifll<> and for thl!!
y'ear period.
One-off Costs: Bidders most
as much
as
possible for the onl!!•tirre cost
the buikl and d,.,,lo•;m•nt
period, populating the item; listed in the
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Ongoing costs: BJdders rrust provide ootal
and administrativ<1l costs for the operation
ol'ail1t<manc:e of the CAT, as appropriate.
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The SROs have considered the potential benefits of including OTC equities
they be included in the initial pliase of the CAT implementation.
the CAT and recornrnend that
The SROs believe that the inclusion of OTC equities will have minimal impact on the CAT implementation
timeline, infrastructure and functionality. The inclusion of OTC equities may potentially reduce the amount
of resources and costs to CAT Reporters The SROs believe that including OTC equities could have several
potential benefits, including:
•
Many firms utilize the same order menagemenl and execution systems for both NMS listed
securities and OTC equities, as the order ancl trading data formats for these security types are
similar. The inclusion of OTC
will eliminate the need for firms to filter out OTC
data
when submitting order and execution information to the CAT.
As previously stated in Section .2 of this RFP, it is anticipated that the CAT
have significant
overlap with existing regulatory reporting systems, such as EBS and OATS. The inclusion of OTC
equities will provide a broader coverage of securities information submitted to the CAT; hence
provides the opportunity to more readi iy retire OATS and oU1er systems upon full implementation of
!he CAT The SROs believe that including OTC equiiJes the initial phase of the CAT
implementation, as well as the regulatory information that such systems require in order to address
their respective
needs, will mere quickly allow regulators and the securities industry to
co11$ider retiring redundant systems.
The inclusion of OTC equities in the CAT Is
to have minimal impact on the data storage
requirements that are included in Section 2. 5 of this document. The average daiiy nLlmber of transactions in
OTC equities is approximately 100,000, while the average daily number of reports submitted to OATS for
orders in ore equities is approximately 3 million. These numbers are very small when compared to !he
estimsted average of 58 billion records that will be submitted to the CAT on a daily basis.
The Inclusion of ore equities should cause minimal changes to Bidders' responses to tile RFP, as the data
are similar to NMS stocks. An additional dala
format and order management systems used for
source will need to be considered, however, as the OTC Reporting Facility (CAF) \h~ll provide OTC equities
transaction data to the CAT similar to hew the Fl NRA Trade Reporting Facilities do for NMS stocks. The
questions in Section 3 of the RFP apply to both NMS stocks and OTC equities -the new requirement to
inc lucie OTC equities in the first pl1ase of CAT lmpiementatlon does not affectthe information requested
from Bidders.
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60
03-03-14 CAT
30952
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
The SROa are considering the potential costs and benefits of the requirement for broker -dealers to report
options market maker quotes. As such, the SROa are considering !he specific cost impact of ellninanng the
requirement for broker-dealers to report options market maker quotes In this scenario, exchanges would
submit to the C.AT the options market maker quotes sent to them by broker-dealer market makers. The
elinination of this requirement may also necessitate the addition a dets field for broker-dealers to report
the time market maker quotes were sent to an exchange.
As noted in the "Options" table in Section 2 5.1 of this documen~ !he approximate average daily record
count of options market maker quotes subnilted by broker-dealers is 18 billion. If the requirement to report
such information were elitTiinated, those records would not need to be collected or stored the central
repository.
The SROs are
that the Bidder pwvide in its RFP response, possible, tvvo alternative cost
models: one that includes the assumption that broker-dealers must report options market maker quotes to
the CATand another that does not The Bidder is also encouraged to incl.ude in its response a discussion of
any other impacts elirnination of the broker-dealer reporting requiremant
options market rmker quotes
could have.
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61
03-03· 14 CAT
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30953
APPENDIX B
IReservedJ
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B ·I
30954
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
APPENDIX C
l)ISCliSSION OF CONSIDERATIONS
SEC RULE 61J(a)(l)CONSIDER.4.TIONS
n:quires ihe
propose to
how the
to discuss various "considerations" rulated lo
(!fthe CATN!\fS
cost estimates
ibr the
solution., and a discmsion of the~ costs and bctmfits of altematc solutions
6
considcr<:d but not
·ntis
C discusses the considerations identified in SEC
TI1c fit·st section bdovv
Rule
of the process the
a
undertaken to
and draft the CAT N!viS Plan.
sci f()rth in SEC Rule
choices
have
below addresses the
and
and SEC Rule
"""""""""""-'""below discusses the
the CAT Nl\fS Plan
and
CAT. The information in
below is inte11dcd to aid the Commission in its cconon:ric
orthc CAT and the CAT Nl'viS Plan.
in accordance 1-vith SEC Rule
est:1.blishes
mih:stottes to assess the
toward the unplcntc:nUtllc•n of the CAT in
accordanco with the~ CAT Nlv1S
~"""-'=.J'"'- bdow
addresses how the Pa;ticip~1nts
in ~.~~''H!!Jmng
term<> used and not otherwise defined in this .A"'"'':nrti~ C have the ''"~"'"'"ti\t•~
A<.~r'"''""'''rn to which this
C is attached.
DACKGROllND
tile a nationaln'k'lrket system
and the Central Repo:stt<)t'Y.
UI.IIIJdUI;, C<)llCJuded that the
Of a request fbr nnmn''""
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m~[)lementatmlll,
30955
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
~"'"~'"'"'" Bids from interested
CATN~fS
to serve as the Plan Processor Jor tbe CAT was necessary
Plan to ensure that
U1e
CA.T
cost/benefit
could be peJt·to•nn<ed, both
~,.
consideration.s to be
Ml<:ir<'~'"'tl in the CAT NMS
the
the RFP on •."··''·-··~- 26,
notified the Participants Qftheir intent to bid.
A . . . . . . ., ••
On September 3, 2013, the l'arttcrpar1ts
nationaJ market system
to govern the
response to the RFP, the
tor ev;aluatitl!l:
Processor. Several critical components ofthe
the C/\T NMS Plan were
upon
of the Selection Plan. which occurred on
2014. Bids in response to the RFP were due four weeks
of the
Selection Plan. on .1\•farch 2l, 2014 . Ten Bids were submitted in t·esponse to the RFP.
Tl1e
considered each Bid in great detail to ensure that the
cart
address the considerations enumerated in S.EC Rule 613,
of the cnsts and
hendit~
as W'cllas alternative solutions .:onsidcred bnt not
of the
~o
pn~selli2Ltl\>11S
to learn additional details
tl1c
voted to
nnmr'"'~;rl
detailtld infim11atim1 to
submit Soon
that thtl C\1nnnission and the
will hav.::
considcrall
oflhcCl\TNMSPlantl"te
and pur~uant to !he Selection
pursuant to the Selectt()tl Plan.
and
~elect six
Shortlistcd Bidders.
Under tl1e tcnns ofthe Selection Plan, and as
into the CAT NMS Plan. the
Phm Processor lbr the CAT has not been selected and w iII no! he selected until atl:cr
of
the CAT NMS Plan. 12
one of tire six
Slmrtlisted Bidders could be selected a-; the
Plan Processor, and because each Sbmtlistcd Didder has
diifcrcnt apJprc•ac:ltes
!.ssucs, th0 CAT NMS Plan does not
mandate
technical M''",.,..,.,. ..,,,o·
mandat.::s
thal the Plan Processor must me.::~ r•'"'""'1~<"« <>fmn"''""""'h
this
tcchnicalrc(IUii'0111Cntts
Plan Processor mcds certain
imJDiemenliltg a.~ peel~ of the CAT Nl'vfS Plan
selected <lS the Plan Processor.
?v!arket Sylitem Phm Request
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for
30956
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
as
of
themselves, the
that !lome
certain solutions to he included in the CAT NMS Plan that the
l'artt<:tpan1ts determined advisable to effectuate the most efficient and cost-effective CAT
the l'>ll"l!!:lnHHI~
"'
to their
Rule
quotes.
•
(c)(8)which relate to the
"'
•
Rule
number of My
t.he a.:counl
suhacC()tll1l<~
to which the execution is allocated .
•
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related to the CAT under
,,.,_,,t'<·'~"'''·<em its belief
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nhilio;•ti•m«
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30957
that the CAT "will be an SCI system of er~ch SCI SRO that is a member of an <mrw"'""""ti
under Rule 613, bceatM it will be a
and witll the Plan Proe0ssor, in consultation
and
meet the
of
to determine a way to
duplicating effort<;.
·nw
1.
Reporting Oata to the CAT
tills section describes the
of data to tile
the sources \1f such data and the manner in which the Centtal
ex•~hetnj:l.es, n<~tional
national
securities associations m~ bmker-dealers. Each of these types of
below.
(a)
Sources ofDabt
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C-4
30958
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
orders for OTC
N)v[S Securities.
Securities in addition to 11mse
Industry }.-!embers to report
customer infbm:tation.
to the CAT so that order and c xccution data can be
associated with particular Cttstomen:L However, in the
Letters, the
reliefthal would
CAT Reporters to
information to the Central
Firm
IDs instead of Cu.'>i0!11Cr-IDs. In addition.
Members
"''rm•ll·•·<~to tt~c Data Submitters thrtl ~trc not t:tatioml securities
national securities
or members tll.l!reof to
data to the Central R"'"'~·dku·u on their
be hal[ 'l11e aprll\111Ch nrc1no~~Nt
Data
n."'";,,.,,!,,tl ID fbr
Submitters to provide infbnnation to the Central
information to the CAT.
purposes
'Ilte Centml Ref)osttm·v
'"''"_,,.,,.;,.,, transaetion
to an .:fl'ectivlllransactionret1m·hr1«'
pursuant to SEC Rule 601. and bst Sale
the Phm Processor with issue
JJnJcc:sstng of data
information, <tnd issue
submitted
CAT
A.ftcr rcvte\c\'111"
is a need to dictate tlmt the Pl1m
the Central
monitor meommg
•
•
•
•
Pr'''''"'"'"'~'
functions:
error correction
•
real-tinte and hatch feeds .
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Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
1he Plan Processonvill be
to ensure that each CAT
Rep<J,rt~:~r
30959
is able to access its
submissions for error conccti on purposes ami tran.'lmit their data to the Central
on a
baR is. 111e Plan ProeeRscr nuqt have a rohuqt tile management tool that is commercially
at a minimum, the Plan Processor nm~t be able
management In
available,
to accept data lrom CAT
File Tran:>fer Protocol
!lnd other Data Submitters via automated means (e.g., Secure
as \vel! as manual entry n~ans (e.g., GUI mtllrl!itce).
The Plan Proccss,)rwill be required to ensure that all .tile pn)cc:ssJ,ng
arc handled
'l11is will include the start and stop of data reception, the n::cvvery of
that is
transmitted, the retransmission of d<lta from CAT
and the res,\11\:hr,oniz.ation \1f data
aller any data loss. At a rninimum, this will
that identities
duplication of files. lf transn1ission is "''·''''~'' "''
""'"''"'tJ:,.~
•
data. recovery process t(lr
•
•
and
of
•
'll1e Plat1 Prvccssor i~
to establish a method for
an audit trail of data
the Central
This must include a validation of tiles to
trammtissions. A.s discussed more
below. an
data nuqt he inmsmittcd to CAT
(i)
Sections 6.3 attd 6.4 ofthe CAT Nl\IS Plan
each order and each l?''"'"''~'"hl<' Event to tl1e Central
re<.!III::~Ie:u that th.::
used in data submission
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tnatn~<'ll
30960
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Pur~umnt to SEC Rule
Sections 6.3 and 6.4 ofthe CAT NMS Plan require that
CAT Reporters report certain ordenmd transaction int1mnation recorded pursuant to SEC Rule
613 or the CAT Nl\·1S Plan to the Central
8:00a.m. Eastern Time on the
the
such information is recorded. SEC Rule
notes, however, that
prior to 8:00a.m. Eastern Tiro:, but
the Cl1.T N!viS Plan "rnay accommodate
shall not
" Sections 6.3 <Uld 6.4 ofthe CAT
NMS Phm
hut do not n:9uirc, CAT
to submit inlhrmation to the CAT
Because ofthe amount of data
be
to the CAT, the
P!lrli,•in<>n11~ have decid<ld to
Data Submitters to report data to the CAT as end
files
8:00a.m. Eastem Tin'ltl the
or throughout the
Pmrticip2111ts believe that
Data Submitters to report data
the
tl'ltl total arnount
lL~cd b;·· the Plan Processor to receive data 111es and \:Viii allow CAT
~''"'"rl''''"~ and other Data Submitters to determine which method is tnost c!licicnt and
cost-effective for them
the Plan Processor will still be
to have the
to
volume to ensure that, if CAT Keno1rtm"S
th<l Plan Processor can handle the infltLX of data.
In addition to th.:: submission of order and trade data, broker-dealer CAT
mm;t
also submit customer infbnnationto the CAT so 111<'11 the order and trade data can be matched to the
ctl'lloll'ltlr, SEC Rule
set'\ i'brth data re.:ortltrl~t
mw;t be included iu the CAT N!vtS Plan, Under SEC Rule
.::ach CAT
for each customer" wh.::n
\Vl'ltln
the modifieati on
of "lhe Cu..;loll'ltlr-II) of the
or cancellation of an
Person
tl'ltl modification or cancellation instruction.
In addition, SEC Rule
mandates that
CAT
~'LL'>C the same Customer-In , , lor each cttstQmer and
broker·dcalec
FQr purposes <>f SEC Rule 613, "Cu.<;tmner-lD" m.!1ll1S, ''\-11 ith
""'""'''"" identifies such custoll'ltlr fbr PU11J<.lses "t '""""""''~"''"'
u •'"'"r'"''e~ report "ctL~tmner account
account type, customer type, date account
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Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30961
After
of SEC Rule 6l3 with respect to
and
reporting Ctl~tomcr-IDs, Ctl~lon1Cr Account Inlhnnatimt and infbrmation ofsufl1cicnt detail to
the Cu<>tomer as wd Ias
input and the Commission's reasons t{)r
these
the
that
lvfembers and other
ideas on
tl1C Cu'ltomer-ID requiremenL After carefhl eonsideratiott
nc•un11n• ntlltll!rotL~ disctL~sions with the DAC:L the
cm1eluded that the CAT N!vfS
Plan should use a
model that
detailed account and
a
customer td<mtltti.::r
and tt~e that unique ctt~ton1Cr identitier coJtl'llstcntly
the "Cu~tomcr Information
hmk..:r-dcaicr !o
!l
SEC Rule 613. Forthe Firmue:stg1tlat<~d
number or any other identifier dcttncd
""''w••d•'''1 each identifier is unique across tllc
t1nn f()r ea.:h bu<>iness date (i.e., a
firm may not havll:
sep<trate .:tL~lorncn; witl1 the
same identit1er 011 any
Under the CtL~tomcr hlfortr~<<ttion
broker-dealers
tinder tllc Ctt"lomcr Int{)rmalion
to submit to the Central
lbr
established or revised Firm ucsJg~llllled
rMn"''"'"
rca..::tivated accounts,
Cu<;tonJI!.r inl(mnation.
Wid1in the Central l<c:pm;IH'lrV,
or a combination of identifier~ su.:h as
as<"'""'""'""'·
·n1e Plan Processor would be
to use these
identifiers to map orders to
imstomcrs a.:mss all hroker-dctllers. Broker-dealers would therctlli'C be
to report
Firm Des
ID information on each new order submitted to the
rather than
and the Phm Processorwould assodate
the "Customer-ID" as set tbtth in SEC Rule
cuslon1Crs and their CtL~tomcr-IDs with individual order events based on the
Firm
lll:l'i·ll::TIIllt:l.l
ID.
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other identifier
30962
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
ex<:!l1!Pti<)I1S from the rermi1renrlel11f;;:
Cll'{tomcr Infbrnmti on l\ nnr<\:Wrtl
included in the CAT Nl\iS Plan,
The Plttn Proccssormttsi maintain infon:natimt ofsumcicnt detail to uniquely and
Ctl~tomer m:mss all C/\T
and asso..:iat.::d accounts from .::ach
'I1tc Plan ProccsS\)r tntt.<>t document and
\1vith the
ofthc
carnul~<.:cl to maintain this association.
The CAT Processor mttst maintain valid Customer and Customer Account Intormatio n for
and
a rncfl1od i()r
and fltc SEC to
obtain historical
Titc CAT Processor will
and
a robust data validation process for
submitted Firm
ID, Ctt~tomcr Account InformH.tion and Ctl~tontcr
ln:fhnnati on.
another due to mergers and acr:jUISttwrts, .1,iv"'"t''"""'" and other events. Under the an1nn1ach
the
submit full account list~ tor ail active
accounts to the Plan Processor 11.11<.i
basis 39 In
the Plan Processor mu~t have a process to
coJmpJelcn·~ss and accuracy of tltc accotttlt da1tat)•as.~.
In the
the l'at·hcipant'l
Accmu1t Information
n"'"'"""'''""' of how Customer
and Customer
anti stored with associated detail sufl:icient to
""'·'"'~'"''~'" Custontcr and Custmncr i\ccounl Iniormation
vvhich C.AT KeJ!JOt"lei'S
be set out in the Techtl:!C<itl ,::.p~:,;uJc<nioriS
the Plan Pr(Jccssor in
with Section 6. 9 of the CllT Mv!S Phm.
both file-based and
scretm methods. Data validation would check
J:!;Ct1tcratted fm·
CAT ~< '~'~'w''"'"'
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nr<.'<i<''"''"tnin<•d ~ehedulc.
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30963
the prompt correction <1f errors in data submitted to the
Titne and Metl1od
whk:h CAT Data will be
and comnltlllications of errors to
12:00 p.m. Eastern Time T' l and corrected data will
be
to he resubmitted to the Central
by 8:00a.m. Eastem Time on T+3. Ea<.Jh
of the Bidders indi..:ated that it was able to nte<:t th1:1s<: timefram<:s.
SEC Rule 6
As
disct~<:scd
in
window >viii
constitute a
Securities
tor error correction.
of the Central
that curredcd
believe that it is in~n''''"lii'"'~
data be available to
as soon as
the
ulrcc-·nav window f(lr
11'k'U'Il:ter while
corrections to balance the need tor "'!~"""'v·•~
<.Jo!nside:rin!!' the
concerns.
(b)
The .!Manner in ,·hit:h the Central Repository will
Transf'om1, L<md, and Retain Dahl
Ret~eive,
I!:xhact,
Repo:>itc1ry nu~t
extraet
load, and retain !he data
Rcnn1rtet"s and other Data Submirtots. In addition, tho Plan Processor is
resp0111on !tHe t1lr
that the CAT contains all versions of data submitted a Ci\:T "''""w''-''01'
other Data Submitter
the Central "·'n"'''"'""
intbnnation. incituding
submitted
of
r••<mn·hn!>
suhmis~ion mechanisms and \vbctl:ter then• needs to be a
with verj' small order volumes lo submit their data in a non-automated manner.
dilfcrcnt data
A.s noted above, since the Central Kcpo:ut<>ry
order and trade
to colleet tuld transtbrm cu'l:tolt:tel\
tl1at Bidders dt:seribe:
"'~'~"~"'"
intormalion trmn ""'n"n'''
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Functiomdityoft!~
30964
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
•
•
the
and
how Customer and Customer Account lnfbrmation will be ''"''h"r"'i
each cu>tome:r;
stored with associated detail sufllcient to
Dfi)J}()SC:d HIC~~d)9I~g
in data submission
ad'llaJila!~C(!S)
!Uld
manual datasubmissionH. 51
VariotL<; Bidders
init>n11ation to the Central
whieh Data Reporters could report
secure VPN, direct line access
TCP/IP or at co-location centers, and web-based manual data
"T11e RFP also r~'(jllested that Bidders descrihe:
•
the network architeettu·c and
des~·ribe
how the
will handle
tht~
necessary
tm)eesstngtmr1CIIlle and resubmissions.
Tit.;re are tvvo
intbnna tion.
to the Centta.l Ret>os.itol''Y
Financial Information eXchlm~te
broker-dealers would submit relevant data to the Central
ionnat. such as an
version of OATS.
such as the
~''""'<itrwv
of data
the Plan Processor will be
send an
aci,now l~cd~lC!llCttt of data received t') CAT
and third party Data Submitters. ·nus
will enable CAT
to create an audit trail oftheir data submissions and
of data breakdmvns if data is not received.
tt)f
led;gcn1Cnt are dct.1.ilcd in
D..
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Once the Central
it will e:\iract
individual records fi·om the
validate the data
a review· process that mu<>t be
described in the Tedulical
nvrHvm<> conte:.:t, syntax, and
validations.
TI1e Plan Processor \vill
to validate data and
back to any CAT ""''"''~'"'
has not
validation ch.:::ck'l "'"'''"'"'';;
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
from
To ensure the accuracy and
30965
mr.~rrr·'n"
that doe.~ not pass the basic validation eh.::cks "''"'""'"'~<'•d
the Plan Processor must be
the CAT Rcporh::r m<,nn,n~,h for submitting the data/file. At1cr the
until it has been corrected
Plan Processor has
data, it must
ilystatis1ks
th.o number of
records
and
to each CAT ,.,,,.,,.,.,r
'!11e Plan Processor also will he required to capture
records t<w each CAT
and make them available to the CAT
111c ''M"M·••<·"
statistk:s must also be available via a web
electronic 111e
and the rmt'"''""'"
intertace. The Plan Processor nmqt
f~)r CAT
to amend record>: that
contain
The Plan Proces~or muqt also support hulk error correction so that
indicators !()r n»·•·''''""'
records can be resubmitted a~ a new file
in these
reprocess
records. In a<t•lnton.
available for CAT
to make
corrections. to individual records or
attribu~_cs. 'l11e Plan Processor mtt.;;t maintain a detailed audit trail
corrections to and
relnaceJne:nts of records.
validations. such as S)nta.x
to hav.c access
In order f()f
as soon as
data m;
the Plan Proc1;1ssor will
to accurate and
~"""''''"~'r" with their error n\rmrt~ as
becon11:
and
data has been
and validated. 111c reports will include
each data record was
the Plan Processor.
basis. the Plan Processor should
and
report<>
and
statistics. similar to the report cards
These report.~ should include data to enable CAT
to
co:mprari:sonto the rest nftheir
peers and to
rm""'llll<Y of transmitted data.
ll"''"""'f<>r nPirl<,·nnam···•
will repQrt data t() the Central
either in a unifQnn clet~tronic
or in a nnumer that would allow the Central
to convert the data to a unit<>rm
clccttotlic
for consolidati\)U and
The Technical
will describe the
rl"!!!!l!'t'H fOnl)!l! fbr data
CAT
broker-dealers sho\'lted average
to be lower than those for use of au
Prcmn·«~ll RFP
Dt)cUn'!l'lnf'
memh,.,r« H)f use of the FIX nn)tocol
VerDate Sep<11>2014
18:13 May 16, 2016
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the
11mnats
Bidder chosen as the Plan Prot:essor.
30966
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
submitted to the CAT \'V'ill be loaded into the Central
in accordance with nr''"•'·flnr.~•
to
by the Operating Omnnittec. The Central
will retain
the Raw Data, linked data, and corrected data, Ji)r at least six years. Data submitted
and
must be stored in
designed to hold inl1mnation based on the classilleation ofthe Data Submitter
Data Submitter is a
a
or a third party I:Y.tta Submitter).
by the Central
Raw Data must be transfbrnJed into a tbnnat
tbr data
and
SEC Rule 613 reflects the tact that the
link order
to create an order
execution Aller review ofthe Bids and disctk'lsions with
have determined tbat the
retlects the t!lct that the
CAT-Ordcr-10 that
order 1D
or
canccll ation or
Members, the CAT N!v1S Plan
CAT-Order-IDthat is associated whhct~eh individual order event and ll~ed to create the
of an order. Under this
each CAT
generates it~ {)Wf!
order lD
but can pass a different idctltitier as
order is routed to another CAT
and the C·\Twill
link related order event~ !rom all CAT '"''n""''''"' involved in the lil1: ofthe order.
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18:13 May 16, 2016
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c
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30967
and may include an
straddle,
ratio spread. '""'"'"'""
these orders are referenced
systems on a net crcditldcbit
cover behveentwo and nvelve ditlerent components.
orders" must also be handled
and relercnccd 1vithin the CAT The Bidder n1tt~t
in close consultation >Vith
llil<'""'1"rR a
mechanism that will allow the CAT to link the
or the individual
components to each <)ther in a
scenario.
broker-dealers be 11m:
The Plan Processor tmL'>t transform and load the tbta in a way thai nrc•v"t"s
with the
~~att
to build and
data iu the Central Rcpol,tt<>rv
must he able to create,
and sav<1 ad-hoc
then be used for their mark£~t survci1Il11Jcc purposes.
Because of the size of the Central
online
will
result set from
multiple
data or time
ofihc CAT
Repoi~lt<)ly
Because of the
result sets. the Plan Processor must have
to create an intcrnll;ldiate
count of records bell:1re
fLdl q11ery so thai
the query can be refined if warranted. The Plan Processor must indude a notification process that
intbnns users when
arc
and there should be
methods
\Vhich
re;mlts can b1.1
web download,. batch
lo crl;)ate interim
lbr access i !'itrther
the Plan Processor
away to limit the number of mws trom a result set on screen with ildl restdls
as a file to be delivered via a l'ile transfer rm'l"'"'l
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18:13 May 16, 2016
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tlll;lm to
that would
30968
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
must, at a
be <lble to support
3,000 active
rc:gulatory staif and th.o
authorized to access data rct)resellllti!!:
, ~,,,,~"''"''''5 the PH ll!'mociated with customers and ""'""""'L'•I·
2.
Time and Method by which CAT Data \Viii be Available to ReguL'ltOl'S (SEC
Rule 613(u)(l)(ii))
SEC Rule
the data in the Central
will be made availableto
or for oth<lr purpo.~es as part oftheir
Commission noted,
time and method
t'ilndamental to th.s
l<'<~'"'"'"u,·v bccatt~e the purpose of tho
is to
their re.;:nn:n~•ll1i
to oversee, the securities market'i <md market
(11)
Time I>ntn will be !\lade Available to Regulaton;
Rcpo:slt<)rv and
basic format
and the
Plan
!lll~~~ ensure
have access to corrected and linked order and Customer data by &:00 a,m. Eastern
P>lt'l~<'innnt"
"'IS'"''''"'"
Time on T+5.
As noted above. SEC Rule
correction of data r·etlm·teli to the
established in
D,
each ofthe Bidders
that it \VNtld
data \Vi thin these timefhunes. However, the FIF. an i nrlllu'trv
Central
Data
tneet this
he able to process the
grmtp,
concem that the error
(h)
:Method by which llnta will be Available to Re~ulaton;
;\s
data stored in the Central ''"""'"',"'n
actual mm1lx:r of users may be
VerDate Sep<11>2014
18:13 May 16, 2016
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thlli regulators
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30969
12
the ability to search and e;.,:tract such data. 1b:" utility of the Central
is
on
able to have access to data fbr w;e in market reconstruction, market
'lllO
tlmt
Plan Proct~ssor will
surveillance and
"'"""'"'"' of surveillance
coordinated, SEC
l'fl1:1i<,in~nJs asked
that the Bidders describ":
too
•
the tools an:d reports that would allov11 fbr the extraction of data search
•
how the system will accommodate simultaneml'> users from
75
suhtnit1ling.
•
cx:pc.~te,d
r<!spon!;e 11 me for qu<wy
""""Gi'>~" and
the manner in ·w bich simultaneo Ll~
too n1llxi.mum number of concurrent queries and users that can be
the sys tern:
•
•
that can be delivered at one
such as number of
and
at~CCSS.
search and extraction. The
VerDate Sep<11>2014
18:13 May 16, 2016
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17MYN2
EN17MY16.171</GPH>
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based
that is extracted frt>m
and hardware.·· Adopting Release at
30970
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Tile Bids included a multitude
in
response to their
SAS data set". PDF.
and !hi) SEC with a
1Nill be
ahie to utilize Central
do not endorse any
schemes. 111e
bul rath.:r set torth stand:mis which the Plan Proc.:ssor must meet
of the data rrom the Central
to mahimize the
the Plan Processor to
without
•in·n'li•·nl.;,
which will need to be
ensure that the Bidders l'k'tVe the
Report Building
Analysis Related t.o Usage of Data by Regulaton
to
sta!T
screens !hat \Viii allow them to
'Il1esc~ would be standard
that would
infonnatinn. TI1is could include standard
"~''"'"'r·~llnn
rep<lrt~.
Ruch as
Trader.
re~ponse timlil~ fhr different query types.
""'·"'·""''""' r•'·"'"''·"~'' times \Votdd be measured in tim.c
For
ld,
fd
·~ ld.
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18:13 May 16, 2016
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17MYN2
EN17MY16.172</GPH>
mstockstill on DSK3G9T082PROD with NOTICES2
kl.
ld.
!d.
30971
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
The Central
so that C/\.T
al!tt~ers
R••nn·~l'''r~
support a p<:Jl"UJJ:~sJlvn
data access
to
have access to their ov.m ,.,~r,t>rl<'d data the ,....,.• ,J,,t'"""'
\Viii
staff at the
lor
controls to control access to make
data request<> to
l·'ar·flei nants to
In addition to
need access to bulk data fhr anal
d,) bulk extraction and download
and Cu~tmncr-lD. '111e size ofthe
Central
"For eX!llll!He,
detailed statistics on order
trends and inl!mn F»lrh,·•n:ml
'11lc Plan
PH. 88
R<Jgulaton;
TI1e
and to track
that allows
and rates of eancellatimt, to monitor
Pr<.H.-:,~ssor mt~::;t
standard fimna.t<>.
to define the
and distribution method ofthe data. It mtt'lt be built witb
""'''·"'""""'" controls to track data requests to oversee the bulk tt~lll.:,>e environment and support an
event-based and time-based scheduler f(..,r
that allows
to
on the data
and PI! data should be masked unless tt'lllr.~ ha:v~~
Titc Plan Processor must have the ~·"'""""'··'
ll)r the Pat·llc!puntq
data requests can he vt::ry
requests into smaller data sets ior data pr<)cessing
""'""l"l"'"'J'"' >vorkload manager
is t:ost
while
<li,:rmtm•"·tii"n"!"' amount \lf resourc<:s lbr query
As ti1rtller described in An,nendix
the Plan Processor will ~:nler into ""'"'""";,.,,,
•ir"''"""·ni~ t11r the
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18:13 May 16, 2016
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~ubmit
30972
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
invalid data. and data ret·entlorl)
and DRIBCP m••··lo•·••nM"'" 1
sy-stem
On~<•r>•tm•<>
"''"'"'·di''"' to the terms to he "~l>~hll '"'""'~
the SIAs
Committee will "'"r"''"""'
with the Phm Processor.
The Reliahili.h md Accuracv of tlte Uata <SEC Rule 61J(a)(l)!lli))
3.
As
rermit·;~rl
of the data r''"''"'1tNI
transmission and
at the Central Rcnmnl<J,rv:
ul'::lcKHng:
maink~mmce
at the Central
and data access
'"""''-'ll'""'"" Release, the Commission noted that the
Palr1Ictpa,nts and other "'~''"l'•k·•··~
if it is unreliable orinac.:uratc
"""'""'"' disctl~s in dctail how the Central
and ntonitorcd to cnsutc the
be deslgtlt:•d.
data
collected and maintained in it
Tmnsmissiott. Receipt, and Tnmsfonnation
(1\)
'l11e initial step in'""""'"""
and aco.mracy of data in the Central l{,•n<>·~tt•wv is
the validation checks made
the Plan Processor when data is received and before it is ac,cetJte'd
into the Central
In the RFP, the
stated that validations must include
Once ertors arc id.entified,
on a
ha1lis. CAT
resubmit idctltitled emm; within established timc:lhunes
e!l!llll1tlnicated to
l<dnntrr."·~
to corrcei and
Data
data validations in cotlltulCtltOn with
must be
in tile Technical ,;,.p.:~·.J:ul.:<mvu:>.
is to ensure that datu is !lllettratc,
and cntmJic1tc
s Ull1111rnss:wltl, rather than to
submission etTors at a later time rdler data
achieve this oh~t!ctiVi~.
b.::
that addrcs.~cs both data
these
the Phm Processor will he
rcsut)lt11IS!St<>n within established titncfranres both in a
set of data validations
n1tt~t
mmmal web-based entry,
VerDate Sep<11>2014
To assess di:Hl:rcnt validutionurecha:nisms <\llcl
int'l:mnalion mt the
18:13 May 16, 2016
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to
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
•
hmv data fbrmat and context validations lhr mdcr and quote events submitted
C/\T
!~enn1rtelrs will be
and how
or errors >vill be comnmll·lic:~ted
•
a system 11ow
the overall data formnt, syntax and context validation
ofvalid:ttion will be
and errors
process that includ,.;s when each
communicated to CAT
between the ditlerent
m·,w,,nm">errors back to CAT
•
30973
how· related order
events submitted by separate CAT
and how unlinked events wiil be identified and eon11nunicated to CAT
Ihr
of bow unlinked ret:<)rds will be
a
transmission methods andlor
wcb-basr:d
how Cu~tomer and CtL'ltomer ;\l:eount lnfbrmation submitted broker-dealers will be
validated and how
or "'rrors will be cmrnnunica!ed to C/I.T
and
•
•
order, quotes, and
enrors, and Cu~tomer and ac;.:;ount data
balch rcsuhmissions and lll.'lllUa! wch-bast~d submissions.
errors,
TIN or LEI
\Viii
i\ddilional validation ofCtt~tomcr Account
i>uch as fidl name, str<Jct address, ek:,, \cvotdd occur acmss CAT
and
dUT>Itcatt•cms or other errors w<mld be
.tor
the Cr\T 1<c1nm1erlL
btl validated in the initial
vvt:~•u1rnn
All Bidders re~~ommended that order data validation bc
via. niles
which
allow mlcs to be cteatcd and modified over time in order to meet fbture market data needs.
in the data
all Bidder:.; indicated that data validations will be real-time and
"'~;"~""" component of the system. Standard data validation
data type
litnit and
checks, or data
check~. Some
to schedule tl1e data validath1n ala time other than
Bidd<!rs mcntionc~d the
because there ma.y be a need to have nd"'s
validation in a batch n1ode m
ctl.~tomi zed
schedule
a diffcrctlt time. All Bidd..::rs indicated that when errors arc t"hund, the
Raw Data will be stored in an error database and notifications would lx: ~;.mt to the CAT~<"""'"!"'""
l'vfost Bidders
ermr correction to be submitted
CAT
at any tinltl.
oflbc CAT N~'fS Plan sets H1rth the
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18:13 May 16, 2016
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17MYN2
EN17MY16.175</GPH>
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CO!llPIIet•:ne:~s
30974
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
pursuant to SEC Rule
!\'!embers that arc CAT
accurate,
and
Each Participant and its
mu~t correct and resubmit such errors within established timdhunes. In fhrtherance
and
beginning to report data to the Central
PrQc<:ssor mtt~l mak.::
facilities available for such
In order to val idatc data
the Plan Pmct~ssor will be
to send M
to each CAT l<eJ:'Iorler
of data submi!t.::d to the Central
own submissions and allow for
to enable CAT'"'""''"'"'~
data breakdowns \vhen data is not received. 'Il11.~ data received
validated at both tb.~ li le and individual record levd
validations n'llly h~~ amended based on
Commitke. Reeords that do n•)t pass
and sent back to the CAT
(b)
Enur Communication, Correction, lind Processing
TI1e Plan Processonvill define and
comnmnicatc to CAT
he rer1nr""'
to the
CAT
and other Data Submitters who submitted l.hi:i data to the Central 11''''"'"t"'""
behalf of the CAT
111.:: Central KC!)OSttor·v
eontinuous
error correction at any
the error correction timelhune.
that this \Viti bclier
transactions and alloeations and is more efficient for CAT
D,,.".~''"·'''"' will he able to submit en·or corrections
'Ill.:: Plan Pwcessor must support
and
A
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18:13 May 16, 2016
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17MYN2
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mstockstill on DSK3G9T082PROD with NOTICES2
to
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30975
auto-correction of idcntifkd
a mechanism to
the \Vtongissue symbol
the Plan Processor \ViU
errors and he able to support group
SEC Rule 6
that this rate strikes the balance
While
that the data nr<WHH'fl
statistics and Error Rates and make recommendation~ to the
Committee !hr
to the maximum Em1r Rate,
to the tmxinmm Error Rate \'II ill he :m:nnwe.n
Committee, TI1e maximum Error Rate vvill be reviewed and reset at h.':<4'lt on an mutual
basis.
In order to
the Plan Pn>cessnr will m.:asure the Error
in comll!ction with error
(I)
on a
ner·t!'irmance
and
which will tmahle CAT
1()
them assess the risk related to
Alt CAT
the En·or Rate will he notified each time thai
exct!edl;)d tht: tmxin11.1111 allowable Error Rate and will be inilmncd of the
liUlll C!lllt.CIIt~ that
did fl()t
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18:13 May 16, 2016
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c~
30976
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Error Rates and other metrics as needed on each CAT
the
as Participant<> or the SEC tnay take
TI1resholds so that
action for fi1iling to
under the Ci\T Nl\..·fS Plan and SEC Rule 613.
the
with
.L\s
the prompt correction of data to the Central
SEC Rule 6
discussed in the N!vlS
there are a minimmn of !hrec validation processes that will be
perfbrmcd on data submiUcd to the Central
"ll1e l'lan Prnccssonvill be required to
validations and metrics lo
/\n"''""t1'"
D, Receipt of Data from
TI1c Plan Processor will
!he Data
as
Govcn1ancc
R''"'"rl,>lcQ
ctrorson CAT file Stlbmissions that do not pass the
defin~d
validation ~heck<> ahove and conform to the Data
Rates will he cakulat.::d
!h.:: Ci\T Data and
Error
(hwcrnancc
the
In dctcr11rlillli 11Q
current and historical Oi\TS Error Rates, the nli:lgm.mc•c
CAT
and the tact thaltmn~,r CAT "·"n"'""'~'
data to an audit ttaiL
cmt<:idercd
~n,,n,,n,,,,with
rc11m'ti111!? r;~m!irc:tn<mts 011 the
lo
l;INRA's Oi\TS systemove:rthe last
that timelhunc there have been three
'tlwse
OATS Phase Ut
to
r<'rltn'l<'d to
VerDate Sep<11>2014
18:13 May 16, 2016
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17MYN2
EN17MY16.178</GPH>
mstockstill on DSK3G9T082PROD with NOTICES2
Each of these rclca<:cs was aG<:Ot11lP<!li1H~d
'"'"'"""i OATS reporters to
30977
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
matched to a TRF trade report was 0.86°/o.
OATS Rome Reports uns:ltc<~es:sli!l
the average Interfinn Route
matched to a report retJre~setlt!ing
was 2A4~'''" Although the error rates tor the 1999 initial OATS
·were
than those laid out abQve, t.he Part.icipant.;; believe that technical innovatt(Hl and i nslitutional
~<ll<')Wte1w·e of audit trail creation over the past 15 years makes the more recent statistics a better
that
standard !(Jr the initial Error Rate. 110 Based upon these historical error rates, rmd
to the Central
will involve r.,,m·"""'
rel)>orl:ers (mcludutg b(lth nrct~<et'·ll.•~a
P>lrl"'' nHn:t>: bclieve that the initial Error Rate w.ill
and that ani nitial Error Rate of 5'}h
P~:rti,·•inlln1:«
believe that to achi<:vc this Erwr
with
nt·r•vt<11'11
to
as well as
suflkient level of accuracy
reportR and s:ysten111 whcn:l """"""'"~·
to fitdli!ate the rctir<:n1i:n1 of
a
1.me year after a C/\.T ll"""'"'''r"Q •'M'"''·''"'"'
maximum Error Rate would hecome I '!·'0.
pro,poi;c<t RPi>ro;>~cll '"'ould tl1tl~ be as follows:
"~'""'""'c•'" Jl•nn•rmr>i'l1
Error Rate. CAT I< "n"'''Mt"" will be
will be a CAT
to
investigation into CAT
VerDate Sep<11>2014
18:13 May 16, 2016
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17MYN2
EN17MY16.179</GPH>
mstockstill on DSK3G9T082PROD with NOTICES2
this does not: (I) relieVl\ CAT ~<•'""'r~o,,,.,
set forth in SEC Rule 613; or
30978
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
In order to reduce the maximum Ertor Rate and
·n,n·><:h"lrl~ the Plan Processor mu~t
CA:f
l<e:not"tet·.~
•,.,,nlim·,..,
Seq'W'nclng Orders and Clock Synchronization
(c)
~v'"''l""""'"''' il<?
business clocks that are used fbr the purposes
time maintained
the National Institute of
consistent with
standards." As an initial matter,
an
record of orders cannot he based
mv"'"'"' by CAT
i\s discussed
the CAT ]\1JVIS Plan
l<e:nm·tor·" ~'lmt~hr,tmitze their clocks to within 50 millisec:ond<: of the NIST.
re11m1a111eevenl . . to the
any two scpamlc clockH can vary
H<JcatL<;e of this
100 milliseconds: one dock
can drift fonl,'ard 50 milliseconds while another can drift back 50 milliseconds.
to have. !<.w
one
the route of an order at 10:40:00Jl05 while the
the titne stamps alone indicutc that the
tire muted order reports a
time of 10:39:59.983
routed order was received before it was
For this reason, the
to
tl1<'tt
the Plan Processor
a way to act~ur:~tellv
'lh.:rc were several difi~rcnt
aeeur ate
''~~'""'rl1"w'h'~"'
Sllli;gcsted
~-·"'m'''n<,mlt
relied upon due
on
to derive the event
tcsolvctime stamp
one Bidder
to the event informati<m to
enable
across tlt~;pa.rat.e
he !lev.: d1at this type of ~"''1u"''""""'"
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that will be
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30979
tL'lCd {hr the
to within one second ofthc time maintained
Event Li1at llllt'\1 be
undl'lr SEC
the date and time
Rule 613 to within 50 milliseconds of the titnC maintained
the NIST. and will
a
Furthermore, in order to ensure
and
purposes
As Mt..:d above. Rule
"t:xm.<:istent with
standards_" The
h.::lieve that
drill !oleran.:e included in Section
repr.:sents the
and therefore satisfies th() Rule. To determine the
~,,.hr'"'''-"'1'""
curnmt industry
the
meml·,.,rs as further discussed in
to coo!ititute a
nt>.cunJm.~<u.Jtou recmu·cm.ent of the CAT Nl\fS Plan would be revised to
new
take account of the new standard.
In accordance with SEC Rule
groups, the
standards have evolved such that:
or
the
time stamp
on the then current
date.
,,__.'""'·'.~>~'' millisecond
there is <em wid.:J range nftime
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c. 26
30980
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
from seconds to milliseconds to
'I1le
rli<:nfl>rilv
To the e:..1:cnt that any CAT 1"'''""'"''"'uqcs time stamps in increments finer than the
by the CAT N !viS
each
wilt and ~viii
a rule
11-·lcmbcrs that are CAT l?•"•nmrt'"'~
involve non-electronic communication ofinformatit)tl
it
Manual Order Events to the millisecond would be
CCI1i1TI !YI!I'lnlt:)l'lS and
and
Events occur.
frmu lhc Commission to allo·w the CAT N.MS Plan to
with
of up to and
one second or
report the tinre stamp of wlren a l\·1anual Order Event was ,,~,,.,,."'~
and eRccution system of the party lo the event.
··l~"'tr·,~n·;,,"nv
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Comments on Selected Topics at ll
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30981
Capture Time will be consistent \'l!'ith the SEC Rule
least to the millisecond.
111us, th.:: Participanl'i have determined that
bcnd1cial tor succcssfhl reconstruction of the order"''"'"""'~:>
inihnuati.on about how the Manual Order Events are nn-"'''R~·-"'
<lledmnic system.
Manual. Order Events, wlren r.->r~rw·t"'1
as such.
(d)
])ata 1\Iaintemoce :md Management
R,,."'''"'t''r" "refers to the pro<.~css for
searches, and
access and
Processornu~t create a fbnnal records retention
Committee. AJI of the data
both corrected and
The Pl.an
Ot1..~r,,ti,.,,
nnt·,"·,,·,~t~rt•rt
year
which would create a six
available and searchable
the Plan Proccssm· is
to
and
as \>\tell as lo
that w.ill be accessible to CAT
of'ord<'lr events must be stored in a link<'ld llk'lnnerso that each
and
the
i\·iost Bidders recomnrended
data in the Central
into nodes based on
da tc or a eombinationlhcrctlf in order t<l
t( ucry response ti mcs. The
arc
how the data is divid<'lcl. but will
that it be
in a
access and r<'ltrievaL
All ofthe Bidders addressed data loss
for
Some of
so both sites
tire Bidders
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c
30982
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Data Access by
(e)
Re~ulators
'l'l''"'"u'"" C. Time and 1\~tethod
P:>:rlir·in:>nl'.:
which CAT Data lvill be Available to
and other regulators \Viii have access to raw
data that has
Noon Eastern Time on T + l. 124 Between Nootl
and
iterations
data.
At T 15. the Pal·ticip~tni~
corrected data. 126 'Ihe Plan Processor must adopt
.Parti1cipan1ts and tl1c: SEC of material data correctilms made al'lcr T+5. ·n1c
and other
···""' 1 ·•~n·•·c will he able to build and g<merate
data in the Central
1vtore infbrmation about the report, query, and extraction
can he f(mnd in
lWII''I'lUI)> D.
orthe CAT
Data Reco~·ery and Business Contimtity
(f)
As noted
in addition to
Bidders >Vere ···''""'''".rt to set forth an ant>t'O<lCil
All ofthe Bidders ndt1rc:ssctt
''"'''"'''~" t''""''
necessary in the
solution, and many Bidders
lhr
to a
nr:clm"~''"" thr disask':r recovery and
with
the standards and '"'"m'""""""'t.< set fot1h in
D,
business coJitnlm1ty
BCP / DR Process .
Witl1 rl.lspect to business
the
that the Plan Processor must ml!ct.
re£1Uit:·en,l<lnlts
of data
Contillllli!l:y Plan that is inclusive ofthe technical and business activities of the Central
tbe items
D, BCP /DR Process
bi-annual DR
R,,,,,,~~iM,..,., .,,,. ......... ,5
Hu~incs!l crml!.ntt!tV
Tire Secwity ~md Confidentiality ot'tl1e InfontL<ttion Reool'ted to tire Centml
Rem)sitorv (St•:c Rule 613(n)(l){iv)l
inl·;"'"'~ti'"''"
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Tim~
VerDate Sep<11>2014
18:13 May 16, 2016
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and Mdhcd by
PO 00000
section describes the
and
A"> the Commission noted in
"l't"'"'"'"' ofthe
n;n('>rtcato the Central
whi~h
Frm 00370
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17MYN2
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4.
30983
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Central
~~~OO§~~~Q~~
orders and trades
TI1ere are two separate
other data related to
~
(1) PI!; and
to the CAT" m
included in tho:: RFP mmll::rous
ln the
•
how the Bidder's solution protect<:; data
\llhen stored in the Central
and at rest
•
•
hovv access to the data is controlled and how the
pet·sons
•
what :s.ystem controls .lhr aqers arc
on their role or t"""'h""'
•
of
to access the data and
the st:t· ate g_v, tools and r,.,,nm,~ n··~
lo grant diflbrent levels of access
that will
he used to m:ctintain
•
internal
external
and all other forms of audit and
•
•
•
and nliuJage the incident
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c- 30
30984
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
•
nnomtlilor·t7e·d
to secure uqer access,
users from
the
""""u''""'"
features that will prevent
system
OthGr BiddGrs indicated that
would usc role-based
and redundant and
controls to prevent unauthorized access.
measures to cttslll'c data is not
lo;;atioll:l at which data is stored need
Some Bidders indicated that
controls would include
checks
with the ~>yslem;
nll!a~>ures
all eritica.J areas, and cmnpulcr c<)!11rolled acce~;;;
<l<mlrol pmgrants, CCTV
systen1S with H)
to the trcatnl(;ut and cot;ttol over
• how PIT will be
142
and
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• how PI! acees~> will be controlled and tracked. 143
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30985
TI1e RFP also
intonnation from Bidders on data loss
and
bu,qjness
to enstwe the l'ontitmed
and
the data in the Central
Repository.
the RJ·"P asked Bidders to describe:
• the process of data classification and how it relates to the DLI' architecture and
strategy. 145
Based upon the RFP responses, as well as input frmn the P;u·tk:imlllh<'
teams and discussions with the DAG. infm·n"k'ltion
"lll<~se
defined in Appendix D, Data
,.,,mi1r"'1',""'i"
Genu'lll Srcurity Requinmrents
(11)
SEC Rule 613
lhtti the Plan Processor ensure the
Central R":nn•,itf.rv
Plan. 1Ml
'Ibe Plan Processort111.l:5t
corporate, data center and any leased tacililics where
the Plan Processor nmst
In addition to
uv.:mumg nu. u~'l!J~ll''-"' and the
controls for
rermllr"<Jn·Jen~s
such as role-based user access controls, audit trails ior data access, and additional
m·otcct1on for PII.
Plan Processor ha<: to
and maintain a
"""'~cit.~··" with dedicated stall:
that is
has a mechanism lo confinn tb:
that maintains a record of a11 such
vu••~"''v'~' the CAT N.lv1S
nn"'""''''"'' Officer and a Chiefinfhrmation
VerDate Sep<11>2014
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and techniqws, and
17MYN2
EN17MY16.187</GPH>
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inlbrm!llicm pertaining to stmtegy,
30986
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
:rvfembers. 141 Section
of the CAT N!\lS Plan
Officer ~hall be responsible for
and
pnClc,:dtu·.:::,, stlmdards and control structures to monitor and address
and the CAT
as detailed in
D, Data
that the Plan Processor develop and maintain a
program lor the Central
to be
Con11nittec. To dli:ctuatc these
cte!Hglled to (1) limit access to data stored
ln•'rn1·m<>
lnlxmnati.Otl s ..,;,lrliV
"~"""'1·'~''to
tools that
review and audit on an atmulll basis the
and real time
and addn.:ss data
isstK~s for the Plan Processor and the Central
The Plan Processor rtltl<;t have
to
crt~urc
data
all commmJ.ication hdwcen CAT !.',,...,"''t'''" and the CA.T
ex1mc:tron, ll11a!11pulaWm and
to
trom the Central
In addition, pursuant to SEC Rule
maintain a mechani~m to confirm the
tbr
Processor is
""'"'"""-" pursuant to SEC Rule 61
when.: a person accesses the data.
QC\.'C!C>DaOO
ThcPhm
to access to and use or data in the Central 1\t:pmHtt:•ry,
such
to have access to and usc ofthc
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Plan for tl more
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
a fonnal
30987
incident response
)';U'u"''"'""' and direction during
incidents, and will also dot.:tlll'!Cilt allnllii>n1t\.qt,,("'
mctdc:ni.':l, as detailed in /\ppendix D, Data Security,
(b)
PII
have determined Pll
than other order and
data.
PM·ti•'"''>"k
''"'"'''""!to emmre
processes tor usc
data center considerations and
many Bidders mentioned that a range
'l11Cse
included de·veloon'!Cnt
levds, stu:h as
database, and
such as
~fost Bidders advocated for separate storage of
and use of role-based access and other
for
paramctet~~
ev<:nt'l
t!J
oceur.
In aecordance with SEC Rule
as well
Repo:sit<1ry and not to tL~e such data f(lr any purpm:c
110\VC\/ct. may usc the data that it
-~•"<>"•~·~, c.orrltnt~rcial. or other purposes.
cx.lcctcd that access to PU associated with customers and ac,:ounts will have a
much lower number
tt~crs, and access to this data will be limited to
stair
and the SEC who neecl to know the
of an individuaL For this reason, PII stu:h as
SSN and
reports, or bulk data
l()r a separate
that allows tlris
5,
The .Ficxibiti.tv and Sc1dability ofthcCAT (SEC Rule 613(a)(l)(v))
VerDate Sep<11>2014
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be
using the Cmtomcr.lD
who the individual
accounts of till!I .Person; t!ms, the use
30988
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
and other
<mvironment. As a
throughput
advanced data management services and robust m '·'n'·'·~"'"' Hr<]l1lh~(:turc
'J11c technical inlraslructure should be designed so that in the event of a
hardware
tire Central
can continue to receive data from CAT
with no
ass;;;;ssments <>f tl1e Central
infrastructt~~:·e
'~"''"ltW,'{!
to ensure the
technical
therein continues to me.::t the i'bttctional
cstablishc~d
such assessments to,
and review such assessment'>
the
Committee within one month
with which th.: Plan Proc~~ssor is
'll1c
Committee will set forth tire
to
perii:mn such assessment">. '!l1e
Committee must appmvc; all material
ll1e Plan Processor be.for<l
can be acted
111.::
Cmnmilt.::e tlU1)' solicit tecdback fl·om the
to the
(b)
Approaclu"s pmposed by Ridllel's
lntbnnatlon received :fi·otn Shortlisted Bidders indi.:ated that all six Shortlistcd Bidders
considered
""''""'"'"'•' software,. and fhll-!.ime "'"""'''~"'"~
transaction volumes and retention
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18:13 May 16, 2016
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C- 35
30989
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
amrlm.ac!hes described above will :the iiitate effective nt\magemeut of these factors to
cost-cflectivc and llexihl<: Central
As noted in !he RFP, the Bidders were
for a
comments on how the C<:ntral
'"'''"''"'t'"'"' \'>,'ould be scalable for
in the
the CAT, types
the CA'I~ addition
stor<:d on individual data
records or increases in any data t;,lpe due to market
The Bidders were also
to
describe how the system can be scaled up fbr
links thr,rHtt•h<>:nt
Bidders note access poillls will be load h:<l:<n.~<'tl
not.:: 1he n<:.;:d for conti11ued
to tacilitale
Other Bidders
the
''"'"""''""' is detllnnincd at the in.stanc0 the tool is ·run'
note that the selection
components or features of
Some
prQ•Po~;cd
solution infrastructure was the
in
a scalable sy:;tom, It is further
tbil sdeetion of these dements allows for t;;::c:hno!(Jgtcal
to
ne1Ner
Bidders
the us.;: of additional server and
6.
The Feasibility, Benefits, and Costs for Broker-J)eaJen; Reporting Allocati(!ll.'l
In Plimaty 1\bnket Transaction.'! to the Consolidated Audit Trail (SEC Rule
613( a)( 1)( \'i)}
SEC Rule
or bmker-dcalcrs
benefits and costs
the Ymrt!capan1ts to assess the
trail in a
l'<'fi<U'fin!Y
manner:
mc:IUd'mg broker-dealers and ct~>to1mcrs)
that
l\farket
•
·n~
number of such Nl'viS Securities each such ntarkct
VerDate Sep<11>2014
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mstockstill on DSK3G9T082PROD with NOTICES2
each such allocation.
30990
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Ho,w<;ve"·, based 011 the
directed to be
as part ofthis
l'a:rtH:tpan1ts lu'lve
lvfarkct
concluded Umt it is nnn'''"'"rin:l" to limit CAT submissions related to allocations in
Joc:anofl!;, as described below,
based on connncnts t'cccivcd
on this and other
related to the consolidated audit trail, m the
suh·accountailocations t11e allocation ofshares in a
market
to the accounts that
cUJrrt!nU·v is tn.'tintained
broker-dealers in tl manner that would allow
gnillic:antly more costs
at tlris time. These issues are discussed
llrthcr below.
As a
mailer, the
to this section is limited to
lvlarkct Ttrutsaction.<> in Nl:vlS Securities that involve alloeatiotts. As the Cotnllission has noted,
market transaction is an,Y tran,;action other than a ~e.~otldatrY
to any transaction wl1ert: a p.::rson nu,r·cha,~,,~
understand that
!).farket
allocation of shares.
Pmrl"''n,Hnl-:: Utldtwstand tha1 these arc
account"' allocations
institutional clients or r.::tail
and that such allocations ar.:: conditional and may
fluctuate until the
terminates. Sub-account allocations occur
and
arc made
account institutim1s and brokcr-dcal<Jrs
settlement Sub-account
all\)Cations
all ocat:ion of Il'O shares to the actual accmmt
shares and are
is ~im.iiar to se,:o.lld!try
(11)
F'tmsibility
mstockstill on DSK3G9T082PROD with NOTICES2
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In tl1.::
ha.ndle
18:13 May 16, 2016
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for c,;,mmcnt, tl1c
infonm\tio11 on how
J\.Jarkct Transaction<:. In rcsponstllo the rtJquest., FIF, SIFMi\ and 'I1mmson
Rcut.:rs submitted cmnmcnts
current
with respect to
Mru·ket
finn~
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30991
Transactions.
Both SlFlvi.A and FIF noted that brok~r-dealers
maintain top account
allocation infbrmation in hook
systcnt'l that are separate !}om their sy'Stcms for
market tran,.<;actimt'> and that diffcr across the
including the usc
third
for small i1rms.
TI1e
understand that the investment
li11D!I•:teo sy'Stems differ across the
lvfarkct Transactions
upon the structure oftl1c deal, and
s:ystems with
levels of
eustom-buHt systems, and
spl·eadsllle<~ts.
account allocations in an accurat~ and ctmsi$tenl manner across the
believe that it would be more feasible to
inH:lm1at1on
lvlarket Transactions. '1l1c
understand
that sub-account alt!.)eatiom are received in a nmnner and level of dct1\il similar to allocations in
eC<:Jtl!Jat"v market transaction~. and that the same middle and back otltce S)-'Stent'l that are tt'lcd
contrast. the
to :mb-accounl atlocatimll'l in
of sub-account alhlcations fbr
market
arc also
sub-account allocations tbr
lv1arkct Transactions.
allocations fbr
arc nmintaino::d in an eh::ctronic t(mlmt that
tllr the CAT
'l11ercfbre, these
could he converted into a n''""''"''' !11rmat
systems could more
intbrn:1'<11ion about sulNtccotll1t aii<)C<ttions to the Central
infhmmtion
top-account allocations.
(b)
Benefits
A..; the Commission notes, data about the final allocation."> of NMS Securities in
and market
the
inform nu..,mcui\.Jmg
decisions.
For
~Jflhe allocations in
fimnation process, when and h\JW investors
sell tl1cir
Securities and how allocation~ differ anJJ:mg broker-dealers.
VerDate Sep<11>2014
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38
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mstockstill on DSK3G9T082PROD with NOTICES2
c
30992
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
could assist the Commission and
in
ltl\lcsbgatt,on.~ rdatcd to Pritnary l\vlarkct. Transactions. 166
their
t·esne.~thre
examinations and
benefits could be achi<rved through the
to sub-acco1.mt allocations rathcf than
accooot intbnnation.
f'n,n11·11i ~Q i "'" and th.:: Parii ci pants
""'~''"''·~hmdlin<>Qfhm;v shares allocated in
l\·brkct Tran.'>actions arc sold
or how allocations difl.er across broker-dealers.
contrast, because top
account infbnnation ofeonditinnal1md interim allocations fhr NMS Sccuriti<:s Jluctuates
fl,.···~"""''"'' the
process and may vary
arnong finns, the
bene fits of
such infonnation over tina! sub-account allocations are much less clear.
'l11e Participants believe that most oftln:se
(c)
Costs
of
he
necessary to repot1 such ini:'bnnation to the Cerrtral
Based on the response of
Cot1m1Cntcrs. the
believe that
top account int1,rmation about conditional
allocations to the Central
would
.:nhancen1ents. i\s
noted
,;:ap1l.l!'e top account allocations
systems and data.
sources that are dit1erent
separate !rom thos<: tL<;ed in
market lransactionq.
Commenters also noted that tb::re may he
the s:;stcms and
used to
The DAG
cost estimates associated with the
of
l\'iarket
TI1ese estimates indicated that to
initial and sub-account allocations
as a \'v'hole at least $234.8
and
36
The DAJT's estimate to report sub-account allocations
and would
12
for the
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'"'~'""1ir11o
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
B.
30993
AJ~AL YS!S 0.1!' THE
inform the
CAT Nl\·IS PLAN: TI1ese cott<>iderations are intended to
Cmnrnissi011 about the cost fbr devellopu:t<:nt, implementation and maintennnce ofth" CAT
and to
d<Jtennine if such
is in tho public interest
7.
Aualni'l of Exmcted Benefits and l't:stinlilted Costs for Ct"eating,
Jmplegtenting, nnd Maintaining the Consolidated Audit Trail (SEC Rqle
613(a)(t)(vii))
pr<$ eme<t here i;; i nlhrrncd
the
in cm~jtu1ction with SEC
economic
with a statemeut of the need for
action, describes
the sources of inf(lrmation tL~ed in the
ofthe economic
·nle
then
ha.<>eline tt<;ed to evaluate the
associated
m'tm,.,,~~ estimates of the costl; to build. unp!.::cnll:;ut,
cotltcrnplatcd, and
of the a!tcrnntives considered.
(a)
Need for Regulatory Action
SEC Rule 61.3 tln·tht'r
""''"JR"""' to
Plan detailed estimated costs for en'"""" lll1J[llementlng.
the CATNl\iS Plan.
emt~idc:r and disctl'>S
in the CAT N!vrs
the CAT as
model.
(b)
Economic Analysis
"'"'''"'"'~ relied on t'I.VO
costs associated >vith the economic ba:selme),
>i"'''~"'"'l·~ of SEC Rule 61.3 for both tile Parttc!pat'lts
associated with the <.:rt:'<urviL mJ~:l'len'!Slntllrtlon
costs associated with Patii<:inant
l'eSpt)tlSCS from r
<til m;q.><tlllr~, broJ,;.et-dl~alet'S
are tile
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to assess tile costs associated with .,;r·~:aur~
relics on estimated costs submitted
30994
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
(I)
costs, and third party m'""'",'~t'
int"brmation abom costs associated with
systems that vvould b<J rendered redundant
the C/\T
tt~(JUCstca
111c Cost<> to
Pal'ttCIP~tnts
'l11c initial due date fin· responses wa~
the due date i<lrthe
ll, 2014.
25, 20!4; however due to the
extendedto
2014.
of the data
Discu~siomnvith
their choice
such as the
a scenario in ·which broker-dealers 'vould submit data to the
such as an
version of OATS.
f¥rE
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17MYN2
as a
EN17MY16.196</GPH>
mstockstill on DSK3G9T082PROD with NOTICES2
r<~<mi:rN1t'lt~I11T~
over two
TI1c
in SEC Rule 613 .
30995
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
to the DAG in
2014, and was discussed in two additional
\Vith the DAG until
mid-June 2014. In addition., 011 June 4, 2014, the
received and subsequently
''"'''''"""''"h··rl detailed written
DJ\G members on the Cm;t'llo Cli.T Reporters
<1nd associated
'l11c study link was sen! on June 23, 2014, to the
Reporter identified by the applicable d""'""'''"'"
to receive
and
Cli.'f
wasAugust6,20I4. OnJunc25.,20l4and
9,2014,tbe
to review the materials associated with the Costs to Ci\T
and to
answer al\v
from thll CAT
On
17,2014, July 30, 2014, and
4
2014, remindllrs \Verc sent to the CAT Reporters to submit their final responses to the CoR Is to
CAT
6, 2014. 1n
the
that
associations that arc part of the DAG encouragll Utllir tllllltlbers to
6, 2014. the first ..:xtcnsion was
2iH4. On
Seo,ten"lhei' 3, 2014.
for the Costs to CAl'
2014, an additional extension >Val-l
C/\T
tl"r,1.n~•·hr
any
facilitator, as necessary, to enhat1c..: the overall
An additional
the responscs had
t''~"~~''~"'"',
FTEs m· other costs \''as so
cxeluded these
and
of 167 responses lh!lt was
~''.""'"""to
the\ Ccntml
the content ofthe Costs to Vendors
cont..:nt of the Costs to CAT
The distribution
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Consolidated
30996
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
the DAG, and vvas distributed to 13 service bureat't<: and
vendors on
J 3, 2014. 'll1c initial due date fbr responses was September I, 201 4; howevet·, due to the
COJtl1Piel\:!ly oftht\ data collection
the due date f()r the
was extended lo
12,
2014. TI1e
responses to the Costs to Vendors
was
Augt~<;t
To estimate the costs to
in their Bid doctnnent'l total ot1e-yt1ar and annual
cost
RFP process, the Bidders were asked to
a schedule ofthe
ltllJ)IcltllCl1tit1tg and
the ~T. A.s noted above in the
""'~"'~""''~'u total cost of
Bidders ·were asked to
estimates. As part
c.
fln'lfl<1St'·d "'' "" '""' :itrmr-naeh,~s
t·Nmit'<'n"'~""'
and
]) and may hcl
Plan Pmcessor.
to VariOtL~ iSSUCS,
set forth in the Pbm
that the cost estimates to create,
ltll!Dlement and maintain the CAT nmy differ trom what is set forth below.
ln ils final rule for the Consolidated Audit Trail, the Commission amended il:s pnlpo,sat
and
SEC Rule
indudc enl:mnced
cost,; were embedded in the Bids as
a component of the total
cost~.
'I11c RFP also req.ues:ted
maintenance: costs for
average
Central
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tltis analysis section have been round~!
30997
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
the Shortlisted Bids. TI1ese
as Bidders may
update their cost estimates,
Maintemmee
Ctlf!ts
(Annual)
Maintenance
r·o. . ts (5
year)
To
are
thr the five year
Estimates oftotal costs range trom
into the economic drivers of the cost estimates from the
"'-'J'f'"""' asked each Shortlisted Bidder to
the
number and
costs that
costs:
into the Central
nutnber ofteclmieal
environments thai \VOtild be have to be built to report to the Central
rate of increase of
data archival
desk r.:;,souree
In
intrastn1cture on
outdated and rrm,uem.~:ue
national ma:rket system.
a
that
filture
the Commission slated that it "believes that the
and th.: Com.missiou
is
automated
build and maintain
ov.:rsee the national
1he discount fm:torrepresents an estittnlte
27,
to
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primru-ilyconsistedofFTE
30998
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
market S)'Stem in its current state and
financ~ial market innovations.
fbr ftnure
Such a system will
impact the C\l•llllllls.st\)n
entrants. hrok.::r-dealcrs and other market
may derive costs, benefits and other economic impacL'>,
the rdevanl economic activities Qf each
and the alklcatiQn of costs and
across those entities. 'lh::se cstimat<ed costs, bcnctlts, and other economic
must b<l assessed
the cummt economic baseline,
the
audittrail
i 11 the market~. The economic bas<lline
in grca!~lt detail bclmv.
member
to record OATS data and rcoport to F!NRA
••w•h<>·~·~···
request
creates it'! own audit trail Jbr each order ""'''""n•n that it receives and
various
l\S
noted,
the National Best Bid and Natkmal Best
Offl::rat the tim<l of the trade is included inth.: COATS
data tlmtt.he
utilizes
fbrmatled audit trails,
entry
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c. 45
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
30999
accuracy,
audit trai I
the sanl<:l customer, i:; another
In
the Int.:nmrkcl Survcillan.:.:
audit trail
combines lmn,qaclion data from all
and is used by all
purposes. Hm.vcver. the ISG audit trail is limited because it contains
and
CRD
but does mJt contain infbrma ti on about the ben.: tidal owner to a
trade. It also does not contain order detail intl:m11alion such a.~ a
order entry time or
markev'cross
current data
audit trails arc utilized to gcn.:ratc various
rep(1rts, such as
and
unable to drHI down tt) bcncllcial owner or order in!;"''""'''
number of false
lb:re arc 19
cross
Since the
si:z.:s that have establish1.1d audit trail
of
llrl'"'"''k tor Nl\·IS Securities.
'"'<'"'t•·•rP•rl securities association. The other 18
and transactions in
transactionq and
to maintain and
systems.
Costs to
current
arc estimated to be
arc
TotalaJnmal costs lor curretlt surveillanec programs .lhr all
Broker-dealers benefit tl·om tlte current
the Comnlission and
to monitor
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c
31000
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
ensures increased market
and supports
in financial!rtarkcts.
if investors believe that
'"L"""''''h'and
monitor activities in
market
broker-dealers bear some of the cost in the form of lower market
nJl!r1if"n'uirH>
Bmker·dealers thai are FINRA members must have s,ystems and processes in
FINRi\. with t11e
data in the
fbrmat 'I11ese systems also
:are rrnliml""'"'"l
systems ~end orders and quol~tikms
turn, each
mu<;t stnre and convert the data J()r the purposes
audit trails.
also commit staff to
to
fbr additional data and related infbmmtion based upon surveillance.
their "'"'''"'"'""" ,.,.,,,w;,,.,,
ae·veton internal systems for the
fi>rnl..'ll. In thes<) instances, the
data into a
dls:pal'<l1e system<;. Oth<lr broker-dealers typically lM third
r•'•~·n·tinr" """~'"""""· These third
to
rnay include scrvk~e bureaus that
with order management systems. Firms may also contract with their
and submi!. order data tiles on their behalf
request process
"'"''...''"~~ (1) the member firm has total
revenue of less than
member
finn and current control at1iliates and associated persons ofthe member have not been
within the last t1ve years to
1111al
and within the last 10
to
"'"nl<mu~·aclion
the
docs not conduct any
fbr other
the member does not c(mdud any market
Stocks and OTC
the mernber does not execute tmnmnal
ex•~mptt.on
member.
oA·rs
but will be
Thes<) brok!:!r·dealers an~ included in th.:: eslinmte
ex·~c\:tting trades in NMS Securities andlor listed viJ•uu''"'·
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or excluded from
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
F\GGltiOilillllY. the
course
0 ATS rules do not
ord.:rs, there
111.1.y
gcJner·ated i 11 the norn1<1.l
that
188
W'hilc some firm.<em have chosen to
be current gaps in the audit traiL
,.,r><wiNI
processes
the
31001
report such
nccc~sary
timeline~s
also requirl;l resources to en;.;ure data
Broker-dealers that are members of more than one Partl,ao;antmus t
maintain and manage
system~
which
each
that
the relevant audit trail data to each
t;>r
to rep<lrt such data, in the manoor and the rules proscribed by
Pmrtit~i n:mt
brok.::r·dealers must submit Electronic Blue Sheet
the
due date. which is
after
l\11 EBS request is made
and trade date range, with tb:1 data
nr<w,,m,,;, """"·""" information about the
accounts tl1at transacted in the rt;lllllested
EBS re<jl~sts
be made for settled transactions in
nrtu111d<: and
inelude inlormation on allocations and executions
and
may cover a time
tel seven ;.~ears from the datlil
are
similar to EBS reports, except
arc
only tl~\ Commissi011.
may
be
for NMS Securities, which may include unsettled trans!tctllOI1fL
and trade date range, a
Trader request may be made
a
An LTID is an SEC identifier tt'ied to
entities under the
Broker-dealers must have systems and processes in
to
ret'><1r1to1h!Je data in the
format. ll1ese systems
and timeliness
mrc
and
am met As >vith
broker-dealers must commit statTto
trader data and may take varied
to
their
PHIX Rule 1022
members to ~ubmit ~P'"'"''""u
accounts, however this rule was amended in
2014 to !11<Jre
A..RCA Rule 639, and CBOE Rule 8.9, and to
the accounl'> for which
a..:tivilies or which
exercise investment
"'""ti•nui•·•obasi!L PHLX Rule 1022 was in
and
and OCCtn,,<,;,,;,.,,,
data upon request is to enable a revkw
to be reti.l"ed once aH (\,\T l{e0t)'rlelrs
sulnnitt.ing data to the CAT as the infimuation would be obtainable !rom
rather !han l'i·om
!\[embers,
purpose~,
!lmlil to submit on a
basis and in a manner
execut.ed order entered
llttrket llJ<tk<Ors tor securities nn.tier·lv'",''
traded on CBOE <Jr convertible into such securities or tor securities traded on
in all such scm~ritk1s hc:id in c:ac:h market maker account
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<OV<Ory
31002
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
To th~ extent that
do not repo11 such orders and
the market maker \vho
~"'""'3""'~ lilrTcnn1r1n112' the order inf(,rtnation. These data l'ilcs arc''"'"'"'"""'
and Market
~·1aker
Stock Position
to other
CBOE Rule
ts
to be amended once all Ci\T
data to the CAT as th..z information would be obtainable from CAT rather
Members.
''"'""r-ti"'" neq11il'•~ment tbr market makers is
r.~'" ~l,ln''<em
broker-dealers that were members of at
as of July 3 !, 2014, .:mrlr•v,imate!lv
or executed transactions in NMS Securities, Listed
Ofthesc 1,800
1,700 arc
f<'l'IOrtlfll:l' to oxrs or w~re
as
firms in OATS
r.,;,m·ht1'"' broker-dealers, but arc otherwise excluded trom the
!he OATS rules. In dU\""'""·
members. 'Ibis determination wa~ made through a revie1N of the number ofbroker-dcalcrs that
messages to a
transmitted order inl{>rmation to OATS,
tran.
.;;aclion information Qr
t':ltmc:m:antfor each
over the
18 months. The
also reviewed message
2014 was a reasonable
tra!llc data in the same month in the
r<lflrc:set1ttatmn of such
Co!il con1poncnts considered in this process included
FTE costs
tec~h111Cllo,g~,'
sotlwarc
and any
alsn contained
costs that arc intended to capture the bal4clinc cost~ to brokcr-de:llc~ ft\r , "~'uumn v '""'''"'t'""'
",..''"''m''~ co~ Is r~;lated to
with OATS. the EBS and
Trader <•''""·tin'<'
rcqtlir<~ments,suehas NYSE Rule
PHLXRule 1022, FESCiNYSE
Of the
associated
of costs
stnall firms.
costs are 11'11 mutually exclusive, and msp<mdentsmay have
im.,Jud~da
cmnbim;ti,)n
acnJSsal!
tmteot1ntl~.
W(lfC requested lo sclf-sck;ct as ·'small" ift.hcy
wm.1m <CJUa.UIY
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small
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
31003
.~lW"f"c'l'ltlv have o,"\TS r•'"'""'''""'
and 30 \Vurc small broker-d{~alcrs, with one Hrm '"""""'"ti
26'%
a combination of in-house stalling and 'm'""'w'""""
and the
26<:J•o
their
re,-r,•inint<:r i 16 broker-dealers, self-identified as non-OATS reporturs,
tor .oach
category have been
1t)r
28 were
reierence to support the cost
and include the average,
and
number
reeuivcd equal to zero
or blank 1''5
C<)St~
to CAT
in some eases, tlus may result h1 averages or medi<1US
In addition, a
t1urnhcr offtrms, in na''"'"'"n
eummt eosl for
is $0. It is the Parti,)ipaniL<>
due to current
among broker-dealers
"'"''""'"""''-' and headeount costs that support bu<~inilss turtcUon:!l!
As a
or towertha,n may be
mstockstill on DSK3G9T082PROD with NOTICES2
Tables l and 2 describe the costs aSS<)cJ:tted with current re~[Llhillm-y
Current costs for
consisted of hardware i
de'velopment i maintenance,
costs. Current averagl:l'
to $310,000
and the 118 small firms were
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timnd responses
was
E:\FR\FM\17MYN2.SGM
costs, FTE
17MYN2
EN17MY16.205</GPH>
responses to the
to
to he outliers_ However, if the overall response from that
otherwise deemed to be
th<J respons<J wa1'i .inGiuded in the
31004
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Tilird party./ nut""'",.'''"" costs were also \~lried by firm size. '"" ,. ~"""'"
firm'> was $l80J)(J()
and $130,000
1 ''"""'''"''
l outsourcing costs fbr
finn~
co~ts associated with current
average cost of $'t290.000. and small .tlrms
Based on the
nrc.vHtcd an
f(Jr
CUIT<.lnt
an average cost of
10,000
COSts, With a ttltldian llStimate of${) for both
0.00
Minimum
~linimum
0.13
(non-zero)
Maximum
Comtt of Zcm
Responses
Cowt of Bl1ulk
Responses
190.00
25
0
CLOO
1\/llilimmn
(L 15
(non-zero)
68.00
(:ount of '7.1! m
Res uses
Comtt of Blntlk
Respon..'les
96
89
89
93
0
0
()
0
Tables 3 to 6 describe the current
rll~(l.li~Llor·y cost~
fbr
rc~.n<ll!ld.emtl':
OATS I'Ct)iOI11ll~ vv""''~'""w
For the 2 i
with a median cost of·""''""""·
tltcmselvcs as
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17MYN2
EN17MY16.206</GPH>
mstockstill on DSK3G9T082PROD with NOTICES2
av.;,ragc hardware / softwar.: cost of
mn·nrl,,ln: cum:mt hard,varc i solhvan:: costs "''''r"'""'' '".,.""··"uv.
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
with the 88 small non-OATS reporters
median cost of $0.
average
hard\'~~" lire/
31005
software cost of$900 and a
Ol\TS reporters stated
on average, 17.88
with a median value
of7.00 FTEs.
the FTE rate described above. this translates into a:n average FTE cost of
.Luu.uuu. and a median value
non-OATS reporters indicated an
of
into an average cost
FTE requirement Clf 3.32 and a m.::dlan
and a median cost of$0. On the other side ofthe
small Ol1.TS rcr•ortilrs
required, on average, 6.!1
wilh a median value of3.50 FTEs.
rate
this translates into ~m average FTE cost of
value of$1,400,000. Small non-OATS reporters indicated
FTE
a median
translating into an average cost
Tilird party i
llledian value of$0;
costs for
non-OATS reporters
average third pat1y i
costs of
'""'·"·"'""· with a. n1edian value of $0. For small OATS reporters, third party / mttsmrrc1m<> costs
$510.000 vvitb a median value
small non-OA.TS ···~··"''1'f'N
with n1edian costs of $it
OATS rcpot1crs cstitnatcd <Ul average
while
non-OATS
estimated an average
Small OATS
~'stinl!lted an average
cost
res.nonm:ms cstinlllted an avcmgc
Minimum
l\il.ininmm
(non-zero)
!\:la:dmum
Count of Zem
Res mses
Comtt of Bl:utk
0.13
190.00
2
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18:13 May 16, 2016
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E:\FR\FM\17MYN2.SGM
17MYN2
EN17MY16.207</GPH>
0
Responses
31006
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
l\'linimum
$5,000
LOO
$400,000
$50,000
60.00
$24,100,000
25
23
23
25
0
(non-zero)
l\L<tximum
Count of 7..en'
Responses
Count of Blank
Rt•sportses
0
0
0
Minimmn
Minimmn
(non-zero)
Maximum
Count of Zero
Respon'l:es
Comit of Blank
Res nses
$60,000
~~on
non
0.15
$1,000
29.00
$6500,000
6
8
0
0
0
0.00
0.00
l\ifinimmn
l\·finimum
(non-zero)
3.00
l\1a:dmum
68.00
Comtt of z.t.m
Res llt'!es
85
83
83
85
0
0
0
0
Count of Blank
Responses
and estim<tte the direct
To understand the current costs associated
the
costs asso.::iated with ihi! CAT N1v1S
C~A.T IU•t'\I'WIAt'Q
l'"'t"'"""'rt~ nl.'lY augment their
the services of one or more
1t ts
to understand the current
vendor. As a
of SEC Rule 613 on these vendors and to include them
economic
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c
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
31007
l'a:rtt~:iparnts
received five
responses to the Costs to Vendon::
One of
indicated that the vendor did not
have any
expen'lcs on hchalf
and did not expcctto !aecmw eo~;ts under the CAT_ OflilC
three
res;pc,tKien1ts ~Jmrlm-ted more than I 00
and one
between 50 and 99
Two
oftilC re~pondcnL~ ~upportcd up to 25 nlillion account~, and two ~upported up to 50 rnillion
accounL'l. Two ofthe respondent<; serviced client;; with institutional and retail
while
the
clients vvitb institutional businesses
the
For equity order
two respondents indicated that
on behalf oftheir
and two res,poJnacmt~
process up
three
on behalf ()f their
behalf
orders per
betwee11 3 million and 100 million
clients. Three of the f~)ltr rc!;pcmdcni!N
with t\vo stltlt'nittitlg up to 200 responses per month and
,.,,,~m·tu'"'
clients, and one
of it~ clients. ldl Ibur
OATS
order events
submitted EBS report~ for their
one
up to 400 responses per mcmth.
ll·'"'''rt"" costs for cttrnmt
dollar costs and FTE rctiUU'ements.
FTE r<\flnm,m<'tnt~· th•''''"!i"r''
nurllber of client<;
the
with the number nf clients tor nther timL'>.
the
and interaction with
review of
the
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Pa.J"tlcip<ltnt<> have identified the sources of the costs associated with the Ci\ T NMS Plan. These
indudc direct costq associated with
Ci\T necessary to
31008
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
recmilr<m"~e111t:>:
of the CAT NMS Plan. There are also direct costs associated with
''""''"~"''nt" oftlJC CAT
those systems overtime.
In order to meet the
outlined in SEC Rule
have
accrued, and will continue lo accrue, direct cost..,; associated with tlJC
ofthc C/I.T
NlvfS Plan. These co,<;t~ include stafftime contributed each
to, among other
re<mi:renrlcrrts (br the Central
the RFP, evaluate
and collect tl1e data necessary In evaluate costs and other economic
!vfembcrs to solicit
and
the CAT NMS Plan submitted to
tbc Commission for considerati<m. 'I11e
estimate that
contributed 20 FTEs in the first 30 montllS of !he CAT Nl\i!S Plan ""'''•·•Inn·""'"'
'""."'"'"' the
have incurred
nr<:•mrrat1ton of tlw CAT Nl\.IS Platt The "~'''""'"'"'"~ estirnale the costs of these services to be
""'"''·""u"' costs are cmlSidercd re<tsonal>lv
llw CAT upon the Commission's
associated ·with
uu''P"'"" of 111C CAT N1viS Plan.
Given the si7~ and scope ofthc CAT m1hahve:~ <::sm:!lf<n:mg
and maintcnatwe of1l1c CAT is a
and one that ,.,,,,,.,,,,,.r,
from
not
under SEC Rule 613 with the ~~'t>pc>tL~IDlll
file the CAT Nl\.fS Plan. In
1l1e
assess the !lU''""'""'
many cost-relatcdcmnmcnt'< received
to the Commission's rule
613 and
the CAT NMS Plan
process. In
the
have
amlt:otl.sidcrations
Bidders as \1/~~11 as l11c
tmd related
the: DAG and written feedback from the SlFI\IA. and the FIF.
stock nm!ual
or stocks
continues to grow.
ill
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identified scvcr:d way;; that the CAT would enhance
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Con1111i~sion
31009
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
thc
tips,
to nnrket structure,
and data request<;.
and elllcicncies !rom a
For insta111::c, as shown in academic literature, surveillance has been demonstrated to
surveillance with greater "''"'~""'''"'
with
market
CAT~is
surveillance. A more recent
evidence that be!tcr
as it would he harder lo hide such trades.
reduced insider
should also benefit
lr\)lll
the
For
ll1Castu·cs evidenced
r.u1m''"'"" Union emmtric:> that h<wt• nmre
and enhance transpanmcy
market
Investors nny also bear the costs associated with
andillrail systems. In some cases, broker-dealers nny pass on
such as with respect to Section 31 fees.
may cover some of their
cmnmissions and other
s.::ek to pass on to investors their costs to build and nnintain the CAT, which
11'~<'1Y include their 0\Vll costs and
Oil. to them
nus
docs
no! n1easure either the likelihood
cost~
dollar
on invcston;. 'l11e extent to which these costs are
on to inwstors
the
of the costs and the ease with which investors ..:an substitulc a\vay from any
bmker-dcalcr.
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c- 56
31010
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
and equitable
regulating, ""'""'"''~
in securith:s ''as set forth in Section 6
would also incur din.Jct costs associated with
and
CAT i ntral':tructurc, TI1e full coM associated with the build
maintenance of the
lvfcmbcrs, consistent with the CAT NMS
their
(l)
As dcseribcd in
will be
pay their allocated
of these
e~)sts
to
on an annual basis.
'!11e CAT NlviS Plan also
may
based on their tl'>e ofinfommtion in the
umy take the form
and
may
more resources fh)m the Central
recover its costs in a manner consistent with the '"''"'"""'~~
which in1.1ludc both the need to allocat;: 'losts in a manm:r consistent with the cost to "'"''rP•tum~
that the CAT N!I,·IS Plan not create
disincentives to
As
the CAT Nlv!S
assodated with !heir u<>e ofthe Central
tlwilitic:s as it d..::ems necessary.
Cent:nd
w·ere estitn.'lted to be a total
Included in this cost
as total FTE costs
fi.lllclions,
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c
31011
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
l\'Iaintemmce costs associated with
to Central Reposit\)f)'
estimated to be a total of
across all ten Participants_ lnell!ded in this estimate are
and other costs a,<;socia!cd with
a total
and
reg_aramg the
!he cost.,; associated with the imnleme:nl;:Jttio•n
'I11c estimated total costs across all ten
·-''.l'U.l.l\1\1
to
~"'"'""'~"in the creation of
surveillancil programs.
The estimated total costs associated with the J:tlaintcnancc of surveillance programs wet·e
. ., , , __ \J'l\J fbr
and other cos tt-L Of tltc total cost, the
would allocate a total
to FTEs to m"~<~rallonal
staf[
\'Vith more efticicnt
lbc Costs to
to broker-dealers.
·nle CAT is
to
:1 more resilient audit trail
broker-dealers. For iustauce, as noted above, more cftbctive ""'"'<,,.,r,,t
ITh'l)'
increase investor contldcncc and
the investntcnl mlnm·turutv
increased
Broker-dealers may bene tit frmn increased in:vesl.or conttdenc<l. "''""'""ir.,.r~
i I results in
In
hrokcr-dca!,ers may CXJPCI1ertec
to the cx1cnt
account
would access that int;;w"'""'
Blue Sheet request
l'vfotc
mlC benefit identified to hroket-dealcrs ofthc CAT may ari!4c from
~'v'"'"" ""ume; the collection and transmission of audit trail data into a unifbrm
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and
31012
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
as
the cost estimates
he low.
may
here do not include consideration that such cost
Broker-dealers would also incur costs associated with ,,_,,,.11,.,, impl.:rm<mting
tn<11int.aitlin.g the CAT intrastructurc. Illese costs would arise i:l"om v"''"""""
CAT and
and
their own systems to
r"'""·tin<>
nhli<>»li"'··~
(I)
Broker-dealers will also be ~'""''·-~"• to Gontribut.e their
ofthe direct costs associated \\•ith
btnldnlg and
the
SEC Rule 613 and
the CAT
Broker-dealers with CAT repott1mg"m"'~""'"~
allocated
TI1e
Execution \lenues are
Therdbre, the ''"'""'""
ditl'erent f<le
structures f\1r bmker-dea.lers and ExecutiotJS Venues.
which are
•·Nrisl""''"''"i broker-dealers pmo;uant to Re:tJ,ul:att(m ATS. are considered Execution
Venues. for purposes of the CAT Nl'viS Plan.
estimates of the direct cost~ to
Tite
nll<•di'""~ related to future costs related to both the
with
of SEC Rule 613.
,.,.,.·mi'''"'l"''"'t~
broket-dealers associated with
Costs to CAT '~"r'"'1'""'
retirement of
to report to the Central
Hesp<mdlents vvere asked to evaluate the future costs under two separate anlnrc.,lche''each mltrll"n,~cih_ nesrmrldents were asked to estimate both for CAT mlpi<O:ni<:nt£ttlc•n
nmintenm1ce: (I) the associated hardware and sothvare eos1s~
costs.
and
Tables 7 and 8 describe the eosts associated with the li11PI<~menl.attr>t1
on the 167
for the
of ,._"'"" '"a.c:~ ,
''"'',;'""'''hardware i sofl:wan.:,.:;ol>t
cost estimates
an average
FTE ,.:;ount of 11.00
the Commission in SEC Rule 613 as
cO"t.. '11JIJ.U'UV.Wtth a median FTE cost of$0. Smalllin:ns
nr,·w,.,1,>t1
W'IVH.tli:U
,.:;ount
lor
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c. 59
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
estimate a dollar cost for the small respotl«elilt FTE
$470JJ00, witl1 a Jnt\dian estimated cost of $0.
31013
to be on average
Participants estimate large firms \Vould incur average (median) third party/
<tnd small firms would incur an estimated avcrag<:
cost of $76,000
cost-s of
arc csti mated to be
0,00
0.00
lVDnimum
().()2
(non-zero)
JVlin:imum
Count of11.'m
Responses
Comd of Blunk
Response.s
142.00
27
()
()
Nfmimoot
.Minimum
()
0.20
(non-zero)
lVI'ax itnmn
Comtt ofli.'m
Responses
Comtt of Ulnnk
Responses
20.00
95
94
2
0
95
94
()
Tables 9 and lO describe the costs assodatcd with the
res.po:n!.l,mts with current OATS and non-OATS
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c. 60
31014
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
OATS reporters "r'"'".,..,,
into estimatt\d costs of
provided an average (median) fTE
estimated cost of
0/\TS
while
estimated an average (median) third party / <musoun;
provided an average
non· OATS
·~bble 9: Appro~c It t ·lm:Pie1tletd~ti6n (:'()sts: ·l~q~ OA'I'S Respotld~nts Snlumary {2:1
l''imJS)
0.00
l\·linimum
Minimum
0.02
(non-zero)
M:O.:dmmn
63.00
Com1t of 'ZN ro
5
Responses
Connf of Blank
Responses
()
0
Minimum
Minimum
LOO
(non-zero)
Maximum
142.00
Comtt. of hro
22
22
22
26
0
llespon:~es
0
0
0
Count of' IJiank
Responses
Small OATS reporhm; nr<lVHWn
l'<'l11llir<'n1"nt
intQ estimated an average
of 3.51
while small
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c- 61
31015
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
of0.38
esLirnated an average (median) third party i mu"'"u"'
Finally, small 0<\TS
cost of $300.000
estimate of $1. l 00
an average , ..... ~.-·,
while small non-OATS
() '(l(l
0.20
(non-zero)
20. ()()
:M:n:imum
Count of l..ero
12
l\iliuimmn
(non-zero)
1\ila:dtwm
Count of 'h ro
12
12
0
Respon..<;es
Cow1t of Blank
Responses
0
3.00
$1,000
15.00
$72.000
83
82
&2
83
0
Responses
0
0
Count of' B.lank
Res mes
h.
Tables 13 m1d 14 describe the costs associated with the maintenance of CAT ,.,,r.mimo
fbr the full set
responses under
L Based <lnlhc 167
I,
finns r•mnrh•rt
and small firms ,..,,,,M,,,1
with th.:: medhrn rcspnnqe
the rate
the
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c. 62
31016
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
a median FTE cost or $0. Small firms
by small
the median response
average dollar cost for the small
of $0.
$52,000
FTE costs are estimated to be
an average FTE count requirement ~)f I. 12, with
rcspo1:m~'m m1ual to 0.00. Participants estimated the
I to be
and a median cost
tirms estimated that the average
and small HmlS estimated average
to
third party
cost is
costs to be equal to $24,000
Total average (median) co~ts fbr
l !'viaintenance are estimated to be
($0) for
t1rms and $475,600
fot small t1mlS.
l\ilinimmn
(n(ln-zero)
lVIaximnm
c::onnt of :t.e I'()
Rt•sponses
Count of' Blank
Responses
J\tinimwn
Minimum
(non-z t• r'O)
J\.fa:dmum
Comtt of l.kro
Responses
Comtt ot' Blank
Responses
0.15
uwo
96
93
93
96
0
0
(}
0
·rabies 15 and 16 show the cost<> associated with the maintenance of CAT rer1orl.ilm
[i)r
I t!.n
with t~LUTcnt OillrS and mn-Oilll'S
OATS
es ti rnated
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C- 63
31017
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
reoum~m<~nt~
OATS rcpo1tcrs nr'~"'"""'"
translating to .::stimat.::d costs
FTE
n•on"""""'t~
estimated
avemgt~
non·Oi\TS
(median) third party/
estimates
<.10SL'>
or
of
(100
Minimum
i\ilinimnm
0.02
(non-zero)
1\ilaximum
50.00
Cotmt of Zem
Responses
Cooot of Blank
Responses
5
0
:Minimum
l\'llnimum
0
LOO
(non-zero)
Maximum
('mmt ot' 7..t>t'tl
Res
of 10.Q3
non-OATS rcspond.::nt<;
translating to estimated costs of
$900J.l00
$61 ,000,000
$35,000
22
22
22
27
0
uses
152.00
0
()
0
Cotmt of BL'lltk
Rcsp<mses
.::stitTltltcd average
with small nvn-OA.:rs
estimatcd average
Small OATS reporters
to cstinu\ted costs
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c
31018
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
to estimated costs of
of0.3l
e~limated
small OATS
costs of$90.000
wllik small non-OATS
'fa:l!~ 17: Approach 1.1\llai~euance
I<'it'ID!i).
.
average (median) third party l outsourcing
estimates of$1,100
:c(lst:s: $mall .OA'fS R.es(l(mdeltts< ~Umrtlilfl' .(30
..
Miuimum
1\ilinimum
0.15
(nou-nro)
l\ila xilmun
18.00
Comtt of Zero
l~es mses
Comtt of Blank
10
()
Responses
Minimum
{non-zero)
~'laxil1mm
Comtt of Zero
Responses
Cmmt of Blank
Responses
0
0
0
c.
Tables 19 and 20 show the cost'i associated with the
tbr the full set
or
2_
and S!llllll fif\l1S OTC\\!HlNl
of 10.15. with th~~ m..:dian response
the rate
these count<;
FTE costs can be estimated to be
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c
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65
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17MYN2
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a
to
Connnission in SEC Rule 613 as described
31019
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
with a mcdianFTE cost of$0. Sn:t<1ll firms
the median response
a small rcsporldcni
cost f(>r the small rcspond.:mt FTE
with
finns estimated that average
to
and sman llmJS estimated average
Total average
$4]18,000
lhr
'1)\ble J9: Appr~:mch
Fimis.
1ln~enrentatiun
·
0.0()
lVIinbnmn
l\·JJnimnm
0.00
().02
(non-zero)
1\'hn:inmm
Count of 'l.i! n)
H.espon:ses
Count of Blnnk
Responses
tl6.00
28
0
l\i[inimum
Minbmun
(non-zero)
l\:Lubtmm
Comtt of Ze1-o
Responses
:28
()
0
1.0()
:20.00
98
96
()
97
96
()
Count of Blank
Res nses
Tables 21 and 22 sho\v ihc costs associated with the
res!loltKI~·nts with cumml OATS and non-OATS
hardvvarc ./software
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c- ()6
31020
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
of 14.81
non-OATS n:spondent'l
tmnslating to estimated costs of
recJum~m;•nt~
OATS reporters nu"'"'•'"
to estimated cost<>
provided average (nllldian) FTE requirements of6.66
0.00
l\'linimum
Minimum
(non-zero)
1\·faximum
Comtt of Z..:.m
Responses
Count of Blank
Responst's
(l.02
63.00
5
0
]\fininmm
l\fittimwn
(non-zero)
.Maximum
Count of 7.1! ro
Responses
Count of Blank
Responses
0
0
ll6.00
22
23
23
26
0
()
()
()
Tables 23 and 24 show the costs associated with the
with current OA.TS and non-OATS
rcSPOl'ld~ruts
FTE
while smaU non-OATS
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c- 67
31021
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
to estimated costs of
of0.32
small OATS
estimated average (median) third party i otllsourcing
costs of$60,000
while smaH non-OATS
estimates
Ta.ble: 23: Appniaeh
(30 l)lftm) ·
21JnplenmnbttronC~ts:Small OATs . aespondtutts..·Soonm.F.Y.'
•· · ·
·· ·
··· · ·.
Minimum
(non-zero)
l\ihninm m
Com1t of :l£ro
Responses
Comt of' Blank
Responses
·· ·· ·
· ·· ·
LOO
20.00
13
()
$0
l\llinimmn
l\·linimum
3. ()(}
$1 ,000
$5,000
15.00
$72,000
84
83
83
84
0
0
0
0
(nm,., ze t'O)
Maximum
Count of 'l.e 1:'()
Res ·uses
Count of Blunk
Responses
d.
Tables 25 and 26 show the costs associated 1vvith the maintcnatlcc of CAT •."'."""'u'"
2 fbr the fltH set
Based on the 167
responses
of
2,
average
hardware /
software costs
estimates o:f$1,500
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31022
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
of 7.27, with the median response
"""'"'""average FTE count
provided
a
to (l.OO. l\·Iultiplying these counts
the rate
the
Commission in SEC Rule 613 as described above, FTE costs can be estimated to he
with a median FTE cost of$0. Small flrms
the median'""'~""""""
with a. 111edian cost <>I" $0.
cos! for the
iinns estimated tha.t average
and small firms estimated average
2 Maintenance arc estimated t<> be $3,148,000
0.00
lVIinimum
l\.Jinimum
().()()
0.00
(non-zem)
Maximnm
102.00
Cmmt of 7.cm
Res mses
Comtt of Blank
Responst'S
28
0
1.00
M11ximum
Cmmt of' Zetx)
$500
18.00
Minimum
(non-z em)
0
$1Jl00,000
94
Responses
Comtt of Blnnk
Responses
94
()
0
2
5
the cost<> associated with the maintenance of CAT
res.oo:nd,~nts
with current OATS and non-OATS ,.,,,.,"""'o
estimated
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31023
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
OATS reporters nrr•vutea
translating to estimated costs
provided averagu (median) FTE reqniren10nts of 5.3R
J>,£ ..,VU.9\N
translating to elltimatcd cost'> of
($(}).
res;pond<:nts estimated avernge (maximum) third party / mt11~"'"r''im>
non-OATS respondents
e~tim<ttes of $1.300
5.60
0.00
l\linimum
lVIininmm
(non-zero)
Maximum
Count of 7A< J'o
O.Q2
50.00
5
l\linimwn
5
14
()
Responses
Count of Blank
Res )nSeS
0
0
l.OO
(non-zero)
l\fadnmm
102.00
22
23
23
27
0
Responses
Count of Blunk
Responses
()
()
0
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rcspo111dc:nt.'> "''y""'i"'t estimated average
with small non-0..<\TS
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Count of Zero
31024
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Small OATS reporters
to estimated
provided average
cost~
translating to estimated cost'l of
FTE requirements of 03 l
estimated average
rcspolat1ctnL'>
while small non-OATS r"""'""ri''
cost<>
Table 29: Appt"'ach 2 :M~intenanee. COiSts:
Jil~}
(i.OO
lVIinimum
(non-zero)
1\fadmum
Count of l.cro
LOO
lROO
ll
Responsrs
Count of Blank
Rrspo.nses
()
0
OJlO
0.00
Minimum
(non-zer<J)
Maximum
$1,000
$2Jl00
14.00
$5,600,000
$72.000
83
83
83
81
0
Count of 7..c ro
Res nses
Comtt of Bla.nk
Responses
:wo
0
3
c.
1 and
cost-; than
to
2, a cost difference of $314,000. From
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c
31025
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
a maintenance
nel'l<n,~ctive
versus $3,148,000 for
"'nnnmcn
1 would be ll!Ote
that it vvouid cost $55
I\ll·llf\.Htc:n
2,
itK!icating a cost diflerenec of $9lUOO.
w Q u! d cost
f\)r
between these hvo
would
2
conclude that there
are not
be no incremental
CQsts
associ<tted with either
Hnnn"""n~
Retiremet11 ofSvsten"l'l Costs
[
the
sonlC components of their cum::nt systenlS. TI1e costs
associated with retiring current S:!t"Sicn"l'l were considered as part ofthe impacts assoeiak;d with the
CAT NJ'v(S Plan.
Tables 31 and 32 describe the cost associated with retircn11mt
rcsporu;cs. Based on the 167
rcspm1;<1cs fbr the rctircn-wnt of syslcn"l'l
firnlS
'"~"'"''"'hardware/ software costs of
and small firms "''·'"'ucu
:md a 111edian cost of
firms estimated thai average
and small tim"l'l estink'tted average
costs lo he
ar<:.\ ~\S ti mated to be
Totalaverag<:.\
fim"l'l and
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for
31026
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
;\ilinimum
(non-zero)
Maximum
Count of l..et•o
Responses
Comt of Blank
Responses
0.06
206.00
37
32
0
0
l\ilitlinunn
(11011-:t:el'O)
Count ot' 7..ero
Responses
Count ot' Blank
Res nses
OATS reporters """'""'""'
to estimated cost-;
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(mcdia,Jll) FTE
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0
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irnn~l,,.h,,•o
0
0
31027
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
l\lininuun
Minimum
(non-zero)
Maximum
Count of l.ero
Responses
$Ht000
24.00
$60,000
$110,000
206.00
$75,000
26
26
26
26
0
0
0
Com1t of Blnnk
Responses
Tables 35 and 36 show the costs associated with the retirement of systems for small
Ibr the fill! set
resvolrtclernts with current OATS and noncO.ATS
Small OATS "''~'''"''''''
.::stimat..::d average:
Small Oi\TS reporters "'"''"m'""'
to estimated costs
FTE
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resoo1:tde:nts estimated average
s.tnall non-OATS restlOI!lcl~rnts nrT"'"''"n
31028
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
'fal>le. 36: ReUrement.•.>f~ysteln'l C(lSt;'I:Sn1aU<Non~OA'I'S Re!ll!<lmfents
(88J<lm1S)
.:
·..
··
. ..•
·. ·•
<
U~rdwa'nt ·l
Fl'Jl'; .Counts
FrE (;'(lilts
SoI'm; are
•··.
•··
..· ··· •.·.·
•>
~40
AYet'llge
·Median
..
non
.• ·.
$Ui~Jlln~lty
.
..
....
.. ..·.
Third Party J
Outsoun.:illg
•>· ·..
onn
$0
$0
$3,000
$0
$0
?nfl tlM
$3.000
~4nn
~lfu:li:mmn
$0
$0
LOO
0.00
0.00
~fininmm
$1.000
3.00
nnn
68..00
83
84
84
84
0
0
0
0
(DOil-Zt'l'O)
'!:·~ 'iOO
Mnxinmm
Count of Zem
Respotl!lt'S
Cmmt of Blank
Responses
f()r srnall fim1.<:, \Vhile
for srnall
maint~Jn:mcc
$27, <nn om
'f;J?n nnn
costs of Hnnrt)nc•n
cost
for small t'inns. For maintenance costs related to .Annt'<>nc•h
or $3,148,000 with an
of
while sn11.1ll finns est.i1wttcd maintcnancll
costs of
with
of
there arc di!Tercnce~ in the current ~md
l'<UtlCltl!llllts condudll tlmt there \Voold be no statistical
witb the maiutetmnce of the
nmimcna.nce co~ts disclL'lscd
in costs associated
ditl~rence
to maintenance costs for
arrive at
conclusion 011 the basis of a ~•~nm•rn
twtmtJI!ests that the ditlerence in costs to broker-d~Jalers betweeu Ao,tm::>ac:ll
11·om zero. The t-test is unable to
null hyyJ<.)tl:lesis
cost~ between the two
is not
from
fbr estimates of hardware i sofhvare costs, Fll~ costs, vendor ~:osts, and total costs across
Oi\TS reporten, small OATS repot1el~,
non-OATS reporte1·s, and small non-OATS
reporters.
p,.,rti<•inn1nt~
g.
tllll~ierstand1ing
of broker-dealer co~ts has been cnham:ed
!vlembcl's. 'Il1c DAG has
writtlltl tecdb:ick
ustlt'y!:tsS()Ci:~lio,nmembllrs. In l\[arch 2013, SIFMA m·•·w ..1;>t!
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31029
costs in its Consolidated Audit Trail \Vhite
TI1e association group stated tlmtthe
to face costs related to upgrading the
reporting infrastructure. SIF!vfi\.
is
highlighted that additional costs home will be distributed across the front
middle
customer master
and risk and data management
tbc FIF conducted a study to assess the costs associated with tho.l
FIF
that "future estimates of cost should consider the Fif cost
lll()St
as part of the
imph;mcntation dlort. One
\Viii
likely redu.:e CO!-;l~ to the
their redundancies \Vith the CAT However, the FIF
that
time lines do trot take into account costs associated with concurrent
reporting and new r"""'!"'l"''" r'""'''''''·m<'•nlc
i\dditional detail around the
''!!'~'"'"'"'"' C, Section C. 9.
(D)
111c Costs to Vendors
nrr>Vl<~"r
variot~'>
r<:<Hlcstcd infomu\tion
r,~nuin:~m•mi<:
and vendor costs to
service
third
of SEC Rule 6 l3.
Based upon the r<:sponscs to the Costs to Vendors
'"''"m""" and mai ntenanee of the CAT are
the same
between SO and
fbr
and $50.000 and
>-l>"·'"J"'·'''""
t(lr
maintenance, One t1rm did indicate that
nnnr<Jac:n 1 versu~
1 would have sul>st;antiallv
mai trtcnancc
For headcount and cost~
$50,000 i(lr -'"'"' '"'''·:"
resomtl!lents indicated that
of
unotenll:':nt ,.~..,~..,.,from 14
to 45
cosl~, but number
ext>ectcu costs lor the other firms.
correlate
would incur cost'> to
"·'''"'''""to
with
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to c<lS t 1cs s than the
31030
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
and the tina! t1rm
maintcn<me~~
costs to be greater. All tinns "v''"'''"''~
ofthe CAT to be le~s than under current
Issuers also benefit from an cftectivc
a reliable and
audit trail.
iRsuern may benefit !rom enhanced investor confidence
assoeiatcd with better and more cftieient
The increase in investor confidence may draw
more investors into the market, relative 1'1 other inve.~tmcnt opportunitie.~ that do not
the
the pool of inve~tors willing to invest in a primary
Increased
market as the increased interest would be associated with
lower adverse selection costs. To the .::xtent that the issuers d~> not
to the Central
are tll)t otherwise CAT
to incur dir.:ct cost<> associated with the CAT NMS Plan.
that in addition to direct costs, there may he indirect costs horne
oft he CAT NMS Plan. As dism~sed fhrther below, it
thes.:: costs, and as
we present a
discuss ion.
have identified at least three distinct wrrys tor indi1·ect costs to arise as a
The
result of the
of the CAT NrvtS Plan. First all CAT
to direct
with other direct
fees to pay tor the "' ~""''""'
costs to meet CAT NlvlS Plan
and
these
other cost~ to tlldr clients. Where CAT ,."'""'"'.:'~can do lW
the client<; bear an
frmn the CAT Nl'vfS Plan.
to the ex1ent that the Conmlission and the
tc"'s
associated with
their services to tlle
indirect cost on the
The
of
an
'h'""'"'~"""
cmt,;idered the
to shift fbes and other costs
their members to eovcrthe CAT
assoeiatcd \vitb the CAT Nfv1S Plan,
docs not measure either the likelihood of £~osts
broker-dealers or fi·om the broker-dealers to their
revenue availablcto the CNr
ofthos.: costs, and the m1se w·ith which
or broktlr-dealer.
note,
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31031
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
and broker-dealers may
have incentives and
to
costs to their cu~tomers and that nothing in the CAT NlviS Plan alters
likcl ihood of those costs
on
In
indirect costs to broker-dealers
the Ci\T NrvtS Plan_ First, bmkcr-dcalcrs may ineur
cost.<; related to
to equip the staff with the nccessal)'
with the SEC Rule 613. Broker-dealers were
the enhanced and standardi:r.cd data to he ''"''tin-,,,,
to increase the effectiveness of surveillance
programs.
may
In ot·dcr to create the
and maintain the CAT
liabilities accrued
the
attributable to the C.'\T N!viS Plan.
model described in Article XI of the CAT NlvtS Plan.
In z)rdcr to calculate to the
and annual ttl.'lintcnanec eo£>ts of the
considered the relevant cn.s! ll1ctors tbr the
broker·dea!ers
and
and vendors. All '"~"'"""'"t~,t.n.n
,,,..,,,,,,,.,n to be incurred. wllile all maintenance
below are in dollar costs for
of the CAT N~v!S
when all CAT
are estimated fbr the fi !lh :y-ear
are
to be live.
Fm
costs associated with the Plan
CI:>St~
the
reviewed the build cost<~ received tlom the Shortlisted Bidders and identif1ed the
and lo\v costs to u~e as a con1poneut of the overall
WJ,,,,,...,,,,vuvand the
estitnate received\Vas
A.fainten,mce Costs. For maintenance costs associated with the Plan
the
also r<Jviewedthe cost schedules rec<Jived from the Shortlisted Bidders to build the
n1nge.
define the tange of mainte:nance costs, the
n:viewed the
year
maintenance costs fi·onl the Shortlisted Bidders. In addition to the cost~ received from the
Shortlisted Bidders associated with the maintenance of
the CAT. the
a.lso included a
take into account
111ese additional
year five of
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31032
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
the annuaJ maintenance costs are esti!llllled to rru1ge from
to
review ofthe
idenli lied that
MctintenanceCosts. To estimate the maintenance costs f\)rthe
revievved the results fhnn the Costs to
for
.,,.,,.,.,.,~,
"'"~waan
and
estima1ed that nnnual. aggreg,-:~te
and that aruma! ag_gregate surveillance maintenance
The
cost
tor
"~·''"'""""
revie\Vedlhe results fh:m1 the Costs to
TI1e
estitmted tbat costs associated with retirement of
and maintenru1ce cost~ related to the CAT for broker-dealers were
!rom the rt~sull'> oftht~ CosL~ iQ CAT
As described
the
believe there to be
1,800
that \vould be CAT ~<"'''"rl''""
to the Costs to CAT
and 118 v•tere
a
to small finn ratio in the overall
of 29~·il tQ 71%.
this ratio to tbe total
of 1.800 broker-dealers, results in 522
stnall firms. In
the
identified that
than th<:J
form the upper
ofthe broker-dealer cost range, and An"'''""~'"
the broker·d<:Jaler cost range.
~'"·""''~u
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C-79
31033
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
$740 million 113 For
2,
firm
estirnated that
would be
to $4, 73&.000 per firm, for a total estimated
~:osts for
2 to be
to
$2.5 billion. while small firms estimated
114
per
for a total cost of$619
This results in a cost range of$2.5 billion to
$2.6 bi 11 ion fbr
fiml!l, and a cost range of $619 million to $740 million {hr small flrnlS fhr the
implementation ofthtl C,c\'f.
rc,:pa.naenl:s estin1atcd that maintenance
y~Jar,
fix a total cstitnatcd annual mainhmance cost
'"'''""''"n"'n1t« estimated that maintenance cost<; t\1r
per firm per year. 11)r a total csti mated annual rnai ntcnance
For
2.
firm
estimated that
firm per year, tor a total estimated atl!lUal
while small firnl!l estimated maintenance costs
to
per linn per year, t{Jr a total annual cost
an annual cost range
$2.0 billion to $2.3 billion tor
tlnm. and an annual cost range
firnlS tllr maintenan~.:e
the Central
These maintemm..:e costs are discrete
and are not intended to show incremental costs
current
Ba~ed on the Costs to CAT"'".""''"''''""
l:lstimate thl:lse incremental costs to be
Cosrs. To estimate the C(}sts related to the retirement
retirement
fbr
reviewed the results .fhnn the Cost!> to CAT
f(lr
tirm
estimated eo.<;ts to he
a total retirement
cost
to
costN related to the retirement of ll}'Stems would cost
$1.10 hillkm.
cost of
tor
to
$1 A7 billion. Small !inns estimated that
fi)r a total rt:tiremcnt
Costs. For
associated with
reviewed the aggregate build costs received fh)!111he Co~ts to Vendors
.~u,.nr<1,lf'n l would COf->t $1
to
wllile it would cost
AP·tJ!'<)a<'ll
2.
an annual cost per FTE of$40 1.440, consistent with the n1te applied
the
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c. 80
31034
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
reviewed the cost schedules received H·om the Cost.<> to Vendors Study. ·vendors indicated an
ag_gregate estimated annual ~~ost
J()r
I, and annual
tor A\n-m·<)ac:n
estimated mainterniJlce costs
Vendors indicated an aggrcgatl:l cost
S)'Sterns.
rcliren:Jent
rN1<>t'lin,<>
respons,;~s
to the studies
and cost estimates
Pa:rtil:ipan1ts estimate the initial aggregate cost to the
thl:l CAT would rang.:: from $3.2 billion to $3.6
age.re:aR!e costs fhr the maintenance and enhancement oftl1e CAT would
bi Ilion.
costs to retire
systcrns would be
l'at"'.tctpants submitted a letter to request that the Commission
nnthm·itv under Section 36 ofthe
Act, from the
maker quotes
additional costs ofbetween $2 million and $16 million for data
over a fi vc year
lead to
<md technical infrastructure
estimated vendor maintcniJJ!Ce costs include act'lllJX'I.tnd
nmm1twnal costs
applied for
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Eio"k.i~~:~~-~Cil!~;i·ckfie
31035
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
for 1he Plan Processor. In
to the resulls of a cost
three
assm::iatiott'l. 221 the cm;t to
nh!hm<titms
market makers to meet their
ranges lrom $307 million to $3&2 million over a fiw: year
Second, Rule
~~ltqtomer''
when
order
or
information to the Central
lh: Commission HlJted that including a
customer identiHer could enhance thtJ
"'"'""'"''·' ofsurveilhmce <md
Tbe raJrm;tpam.s, however, favor the
Customer Tnll.mnation
that would
broker-dealers to
detailed account
and Cu~tomer inthrmation to the CAT. and hav.o the Plan Proc.os.~orcorre!ate too Customer
int'bm1ation across broker-dealers,
Cu~tomer idcnti.ticr to each Custol11Cr and ll8C
that unique Customer identifier consistc:ntliyacross all C/\T Data, The
believe that the
Customer-ID
a
cost burden on market
and 011 the Pian
Processor_ Accordtm:rto cost estimates nr<:)Vl.dctthy ll:te DAG} 22 the cost
the top 250 CAT
r,.,.,.-w·t.,r·" In unn"'""''" the Ctlfltomcr-ID as
in SEC Rule 613 would be at least $195
111c Participant<> believe that this cost estimate is '""'Q''rv'""""
for each
rc!~tu<nurs
1"crrm4ho<em lo the Central
can dclenninc which market
as th<J lbrmcr is deemed
bclicv~'
llle
and
would be $78 million,
l'<'r>no'r~<'•"l<> record and report the ''the accmmt
nm1lhcr fhr any subaccmtnt'!l to which the execution is allocated
whole or
if an order is
exccub::d. 111e
that thi1< infl:,rn1ation is uscthl to
to fulfill their
""'''"''ti . ,n, to protect investors.
the
the
the Rule would he
burdensome and
or
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siE;nitic;ant costs. -"'""u'cu""
l<enn·rtc~ lo link ldlocaiions t() cxc..:mtions would be\ $525 million,
31036
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
.Events to the Central Repository with time stamps at least to th.:: milliscconcL 'fl1<: Pnr·ti.,·inllnl~
understand that time stamp
t\) the millisecond rcfkc~.s current indm;try standards with
respect to
n'"'"~"""'n
in the order
However, due to the lack of
\:vith respect to manual order~ i~ to
the level of one s.:cond. The Participants hdieve that
with the time
m-;lmnllllrttv re•·•mre•nent~ oftbe Plan for ]vfanual Order Events •vould result in added costs to
the
time Rtamp
$1(1.5 m.illion. 'l11is estimate is based on a cum;nt cost of
which
to the second, ·with
clocks ·~'""•"'·~ "~''"',..''""'"'" across the
up>gnuung this to millisecond granularity would
add to th.: t.XJst to the::
as n1east1.1'ed
m.:ssagc tmtlk for mm-ATS adi viti.:s of
where, lbr these N\mr>»r:>lhl
nnmc>~es. !l1c tiered H::e structure takes into cmt'>ideration affiliatiolt~ between or among CAT
l<eno11<'r·~" wl1ether Execution Ve11ues and/or
l'vfembers:
to
ease of
administrative functions:
to avoid disincentives such as burd.::ns on
and ""'h"''1"''"
in market
and
to build Jlnancial
for the L"<1•nw>:mv
lihano:
based on message ttatlic
!bcs
lVtcmher~
pursuant 1<l this ""'""'""''h
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Plan.
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
31037
include message traffic
(i) an ATS that docs not execute
such
1vft~mber; (ii)routing orders to and from any ATS
su..~h Industr::l'
and
fees
fees fbr late or inaccurate
11
cotTectton~, and access and use ofthe CAT for
and
~
The Operating Committee will use two dill:crent criteria to establish tees market share 226
l{n Execution
ATSs, and message trall'ic ll)r Industry Members' non·i\'l'_')
acunttes due l<> the tundamcntal dificrenecs between the two types of entities. \Vhile there arc
multiple factors that contribut\:l to the cost oflmilding,
and
the CAT, Hidden!
the
that
stated
and in response t(1
pr,>ccsslng and $lomge of incoming message traflie is one ofthe n1ost
cost drivers t'br
the
believetha!
Ices on
tratlic for non-Execution
"<~'·"'"''"~' allocation
costs of the CAT. On the
instrumcnls
trade.
of execution
disseminate si.milar amounts "f'""'·~'"""'
ac•:uratc:lv delineates the different levels ·' ··-~"''"·~
p,,Ji<•in,ud!~ believe thai market share i~ the '"''"'"'nri
the
Pnrii•"inaniL~
l~1r
believe that 1\'I'Ss should be treated in the same manner as the CX1c!u:mg:e Parlieinants
the purposes
the level of lees associated with the CAT.
Costs arc allocated across !ht' ditl'Crent t)'p.:s ofCl\1' t<<',nme~,.,•.~
on a tiered ba::lis, in order to
allocate costs to those CAT t<e:nm·mr·s
contribute more to the costs of
the CAT.
assessed at each tier arc ealcnlatcd rm at! to
trallie it·nm firms in each tier.
message
will be in the
hroker-dea.lcrs with low levels
trallle will be in lower tiers and \Vii! be assesst:d a
mini mal fee fbrthc CAT. The P'""'"'"'""t" estimate thal up to 75'N) ofbroker-deal<lrs will he in the
!ower tiers ofthe
1\.fodeL
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c. 84
31038
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
""ill adopt rules
resolved
that
with respect to fees
the
Committee or a Subcommittee,
to seek n::dress lhm1thc SEC mnr""n'ml
Industry
Section 8.5 nfthe CAT NMS Plan address(ls the very limited gituations in which tlw
nrc>rwrlv ofthe
to the
SU!>"nnajorilty Vote ofthe Op1crating
to he made to them except in two
l'atttcmaJl't~ incurtaxliahilities due to th.::ir
of
Ce>!lll'artv generates
Parth:ipanjls even if the
arc nol distributed to
Pat·ticinaJlts could be taxed on amounts
have .oot
recel v.:d, in which case the
would mtk<l distributions to the
hut
Lo the
ext.:nl to
each
to pay its incurred tax
As
do
not ex'P"!ct the
to get'!¢rate
and rather
break-even basis. 111c other situation that may require di~:trihultio1ns
the
dissolves. ln that
the
assets would he distributed firs! to the
creditors such as the Plan Proces~or <)f other third
second to a reserve tor
and third
Account \Vould be limited to the nominal amount ·····-•··''--..'·"'
the
do not
the Co:nliJ:iUW
SltiLi.atiiOns.
'l11e Ci\T NMS Plan eoJr1tCII11Plat,c1s that. the Plan Processor will he
fbr
prc)cecttDrcs to et1ectuate the smooth
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Platt
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
tnlp!<~m<em
to
the administration of fee allocation and collection among CAT
connnent
impacted
before au•l>PiciOJ:l.
31039
Reno1rtet·~
considerations.
dli:"lllllOp!ttlilnt process,
assurance
in
C, D. 12, below, describes
fbr each technical
consideration and the ultitTh'tte choice ofthe CAT N~IS Plan based on fllctors that consider
'""'~""'"'"·~'' cost and ewl,,,nm.. y.
described above
t)e!r-mtttc;d the
to evaluate cost considerations to
'1\fembet's associated with two
different technical
fhr
audit trail data to the Central K,epo:>~u>ry,
broker-dealers to submit intbrmation data to the Central
their
relevant data to the Central •w""'"""'
version of OATS.
au~),llltmtt:d
A.rticle XI of the CAT N.t\·l'S Plan sets forth the
ofthc
w ""
u"v''"""
comp:anv
Pa:rti1:ipan1ts considered altematives to cost allocation
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rcf,I[<U'<Ilc!>s of the
31040
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
into consideration feedback from the DAG, the
determined that a tiered fixed fee structure would be t1tir and
"I11e
discussed sev0ra! approaches to
tee tiers based on such factors as size
message traff:ic or
a review of OATS data Jbr a recent m()nth shows the W'idc nmge in
among
1.vith a number ofbroker-dealers suhmil1ing fewer ihan 1,000 orders i()r the
month and other broker-dealers
and even billiort~ of orders in the same
'lltc
also considered a tiered model where C/\T
would be
ditl\:o:rcnl
variable fee~ based on ticr
the
lUtcr el\."'ensive
a variable model because a variable model would lack the
TNIJ1~1r>ar·"
a reliable revenue stream for the
their
takcn
beliewthat revenues
to the costs of
the CAT, and if revcmtofl collt~ctcd an:: in execs::; of co::;t<;
"""·'"''··-- and
considered in
iees forthe
year.
easy to understand and administer. The
so that
Members will have
CAT NMS Plan
Committee shall not make any
any tees ()11 more than a semi-annual basis
pursuan! to a
\'Qte, the
Committee concludes that such
is necessary tbr the
of the
8.
An Analysis oftlw Ianmct <m Con11:~etition 1 }!:ftide!lcy, a!ld Capitall..mtJation
!SEc Rule 6130l)(l)hihll
the
infom1ation derived from three cost studies described in the
section on cost<>. Based on a
ofth~Csc
the
believe that the CA'l' NMS Plan, as
formation.
(a)
Impad o!l Competithlll
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C- 87
31041
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
the market
cconomic base !inc, described abovc.
·n1e
have identified a series
as a result ofthc tcrrns and conditions oflhe CAT N!vtS Phm 'Il1csc l'"''"'"'m'
related to:
the
the CAT and ditll,rences across CAT
their efforts t1Cces1;ary to 111eet the CAT NMS Plan's
the method of cost
in
and their
in the U.S. securities ll"litrket.<;. 111e discussion
and brokcr-deak'r ''On.llntntiti..:s, \Vh..:rc the
for
on
costs to maintain and survc1il an audit trail of
ad~:l!tton,
because the CAT NMS Plan seeks to allocate costs ina manner consistenhvith
do n<>l bclicvc that it would
new
costs und.~r the CiltT N1v!S Plan
a-.,ti vitics. the
tm1n''~''''1
h.::rc, the
,,..,,,.,tl'"''it acted as an A.TS or as an ex~~hH1ngc.
adt)ptmn ol'lhc C/1.'1'
N~[S
Plan would favor
or types
or
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conm,ctltm·s in a \vay that would
availabli: Execution
l:'al:ttclpant<> also do not believe that the costs of
31042
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
the CAT NJ\iiS Plan would distort the marketpliace for
associations.
"'''"'"''"" ifthe direct and indirect cosl'l associated with
oftheir servie<:s to the
the
"~'"''·'•nl•a· class or group ofbtoker-dealcrs bears
and as a result, investors have more limited choices or increased costs
of broker-dealer services.
have an adverse
broker-dealets would be assessed
build and maintenance of the CAT.
also incur eoSL':l to
and mu.uu.um
pmcesses necessary to submit and retain their own infonnation to the Central Kepol>mlry
p,.,rtit··inlu'll•<· dl1lrts lt1
cost\> vvilh market
leads to an outconl:) where dollar costs arc
entities.
broker-dealers may view· tllemscivcs as direct eOJliV•~titot-s
simi lar cx.::cutiou services. '!11<: CAT NlvfS Plan
seeks comp•an1b1
'\"···m·r!;.,,., to the Costs to CAT l<<'lt)ot'1ters
decrease in maintenance costs associated vvith the CAT
firms
tile current 0con<nnic
w,mtd h0
1md the average decrease in
maintenance costs fbr small finns \Vould be $726,216
l. For
2,
broker-dealers would see a decrease in maintenance costs "''"'v''""·"" witll the CAT of S 1.170,548,
and small. firnlS vvould sec a decrease in the same costs
'11msc averages could suggest
a benefit to both
and smaJ!
that the decreased cm:ts
the CAT would
'llle
that the CAT NlviS
'>Votlld not
For small
cotlSidered their contribution to market
nm;<WIJnttdetcrminant of tile amount
Sl~:mltie;mt
bear. While
cost oft he CAT that
tor some small
their btLqiness
l'<u:'tictP~lnts
have m1t
identified a \'\'ay lo fllr!her minimize the costs to these firnlS
establisll:)d as part of the CAT NMS Plan.
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C- 89
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
31043
Tile
v:vere
of1he CAT NMS Plan
to the pot.::ntial burdens it e<)Uld
Il1ese broker-dealers may incur
audit trail
beeat~se
or excluded
minimal co$IS under
broker-dealers or limited purpose broker-dealers, TI;e
note that the CAT NJvfS Plan
COJrtleJmplat,ss steps to ditTu~e the
cost dillbrenti al between
at1d small firms, For
""~'"""~c, small broker-dealers
will have an additimtal ~/ear before
are
start
data under the CAT NMS Plan to the Central
Tins will
firms greater time to
to their own systent~ necessary to
with the
l'lan. Furth~:rmore, the
have
time shtmps R)r
the time ofl\,fanual Order Events.
,.,,ani'""'"l that the method
implica1tiOJit~
nt:ru•apun•-~
(b)
\Vhich costs are allocated to
for their business models that
than others. 'l11e
be alleeted ll1<1f~\
elumging these incentives 111.1y
int<Jnd to mmitor
to ov0rall nrtark.:t activity and market
to the cost alh:>eation m(mel when: merited.
hupact on EfftdetK'Y
c)f the data and infonnation deHcribed ahove. th..:
~hC~N~~aoo
~
resources and
needed to
vari mL~
and other functiott'l.
P:u·l"'m>lnis bdieve that the CAT N!\IS Phm should have a net
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c. 90
31044
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
TI1e CAT could also create more focused efficiencies for broker-dealers and
nv,,n;mnn•" s:ystems and requirement~ identified above. For all
t.~c:hn,"ln,,,_, systems wi II
over tin.::,
the
of outdated
reductions_ Standardization of
IW<">I<<er.,rtc::;u,-,,n,_ in the fbrm of resource
systems and processes and con~olidated
may n.::duc<: the number of ad hoc
overall burden and
!he op,eralwnal
Ci\T
also
various
term eflieieneies from the increase in
such as greater efficiencies related to administrative function.~ vr•:wi:ded
and reduced system downtht1e. Morcovct\
l'a:rtHJ!p>ants Ci\cp<Jet to have more fulsome aceess to '"""r"'"'''""''tl
~\nd accurate infonnation on market
thus or,ov,idinf!'
~<'<•nnrt.,r«may
surveillance
enhanced
the
also may
mechanisms in conm::ction
~cvith
the transmission ofPII data
wil!nnnrt>\,',,
··nonii·"""t
that the method
which costs are allocated to
ltl'lJ)Jlc:atlons tor their business models that
investors to transact ,'\s a
selection of the cost allocation rnodd. 'l11c '''"r'"'"'""''t~
best understand h\)W cost allocation models may
nnpo:rta:nu•v.
ll1c
nnn'n<>t·''''
v~r·t"'"'""~~
to
ln<trkct outcomes.
intend to monitor
to ovcm.ll market
and market
to the cost allocation model where merited.
Imptct on C1tpital I?ormntion
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of tl;e data and information described
have
o fihc CAT NMS Plan on
investments and the tbrmation of additional
CAT N.t-IS Plan vvill ha·ve no deleterious eft\::et on
31045
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
believe that the enhanced surveillance of the markets
In
greater investor eonfid.:nce in the market~, which, in turn, may prompt greater participation in the
nk'lrket<;, It is
that greater investor
in the market<; could holster capital
fom1ation
the environment in which
mise
Moreover, the
believe thai the CAT NMS Plan would not
the Participants have
the
which the CitT NMS Plan should cover
Marl\.ct Transactions. Based on this
Participants bclicv.:: that the CATNM.S Plan has b<len ,m,~m.rw•
undue burden on the
issuances that ''''""'""''"'"
t~)mmtion.
i\s discLL~sed in greater detail
In addition, the Participant~ do not believe that the cost<; ofth.: CAT NMS Plan wmtld
come to bear on investors in a way that \Vould
limit thdr ac.:<:ss to or
in the
marl\.cts.
the CAT Nl\·tS Plan's
Keloosnot'V tbe CAT NMS Plan should
to seem·e the
not"'~"'""""'"'
described mom
the Intonnati on
Processor will be,.,,,,..,,,.,~,,.,
transmission and
of
'TI1c Plan Processor must include in these n11easurcs
sensitive data such as Pll.
a dedicated staff incl
and
review
Prm:essor a!sQ \.\··ill bll
of
any data
(d)
reports to tlle
Committee on a number
issues lor th.:: Plan Processor and Central Kcpmmt)ry.
Implds oftbe CAT Nl\•IS Pbm (iovet1181l('e on F~fticienr)·,
Competition, and Capital :Foutmtion
of the CAT Ni:v!S Plan governance un
that without effective 0 '"·'"r'"'''··•,> it
Committee atl.:r the
advis;)rs within the contc:\1 t)f CAT N!viS Plan governance.
thai
undorstand !hat there may be detrimental
the eftective adnrinistration ofthe CAT
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c. 92
31046
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
threshold for
may limit the
upon
The eJdreme fonn of1his would have been Jhr the CAT Nl\·!S Plan to require
,...,,.,,,,..,,;., on all malh::rs. ln such case, one
could
derail th<: entire
TI1e
to act in a
\Vay may create con~equences for
threshold that is too
to be heard or value to ""'~~·nun 15
pmvi~ions.
thresholds
in the context ()feflt>rts ofthc
in the context of the
unnccegsary deadlock in the decision
that usc of a
Vote should be fhr '"~'""''"'"
direct and sigi1ificant
9.
A Plan to Flhnilmte Existing Rules ami S''stems <SEC Rule 6l3<al(1)(b))
SEC Rule
that
\'1 ill
this seetion set~ thrth a
to eliminate rules and
be rendered
the consoli<L11ed audit
rules or systems rciat!ld to n1""'''''mimr
thll consolidated audit
whether the collection of such inlbrmatiot1 remains ltnlt~r(mriatc:
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that is not rendered
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
~erl>lronellvco!lected
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c
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or should instead be
mc:nr1nm·Me'd
94
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17MYN2
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infonnation should continue to be
CAT; orifno
terminated.
31047
31048
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
should include a determination as to
whether the dUIPll1catrve
INhetber the duplicative infonnation
made available in !he Central ""~'""'v""
be used
the Participant 1vithout
the eft0ctiveness ofthe
Sy'SICI11!l; and
inf(1rn1ation should continue to btl collected
the
or,
should be
the
•
•
NYSE Rule 410B which
the
of transactions clli::ctcd in
N'{SE listed securities
NYSE
rc~t1m1'm1>r
the consolidated
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c
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
such informati.on should continue to be
~"'""w"''"'l1 " collected or shi)Uld instead be
31049
such data,
it'>
atl:er the
the Central
will
it'>
rules and systems to determine whether any
tnodillcations arc necessary
delete
to
references to outdated SEC rules,
support data l'cquests made pursuant to such
SEC rules.
ofrulcs the SEC
eliminab: or
~'aeh
•
t"N>flt'<rt"''"
will coordinate with the
modification oftbc CAT
SEC Rule 17a-25 which
brokers and dealers to
the SEC information
on Custotni:I'S and firms s.::curities
•
to SEC Rule 17a-25, such
among other
will
consideration ofEBS data
elcnlC!lt'> and asset dasscs that would
n!led to be indudcd in the
as well as
the
of'when all
Members
to tl1e Plan,
at
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C- 96
31050
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
be eliminat<:d via the CAT. "l11e same
broker-dealer
~"'"""v"l
of relevant rule
p,.,.·ti"i"""''t
will tmlolement
rules and systems can be
eli mimte d.
Onli"'r Audit Tnul
'"''"~'.'"""'"' on
FINRA members to record in electronic tl)rm and
to orders
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members
31051
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Nl\IS Securities. 241 OATS captures tllis order information and
it >vith quote and
infbrmation to create a
record of orders, quotes, and tra.n~actions. This
of member
infonnation is then tt~ed by FINRA staff to conduct surveillance and
fimlS for
violations of FINRA rules and federal securities hnvs. In
the OATS
Rules
to any FINR/1. nlflmbcr that is a
" which is dct111tld in Rule 7410
an order and
to record and report
as "a m<!mber that recel ves or
intlmnation under Rules 7440 and 7450."
trmt~aciion
Although FTNKc\ is committed to
OATS in as et11cil'l1t and
itq
to retire OATS is
on a number 11f events. l\fost im1n..~rt,.,,~hr
hefbre OA'TS can be
the Central
nu~t contain CAT Data ~umcienl to ensure
that FINR/1. can
conduct sta·veil!ancc and
for pollcnllial
violations ofFINRi\ rules and federal laws and
tl«'lt the CAT
Data is c:mnulete
tmict!ca.bh~,
to 1.hc Cmnmission 'Within six
Participants could
~"•·n•·mp·~tlu'lt
into
are not N!vfS
the
under SEC Rule 613 and concluded that there arc 42 data
elements
in both OATS and SEC Rule 613;
there are 33 data elcments cmTertllv
car>tut.·ed i11 OATS that are not
in SEC Rule 6ll 11le
believe it is
>lf'lt,,."'w'"t'' to
data
that are necessary to retire
OATS and the
Hulc~. lhil
additional data dtlments will
increase the likelihood that the Central
will inc hide s:ufiicie11t order inforn1.'\tion to
enlnu·c FINRA can continue to
i t'l surveillance with CAT Data ratl1cr than OATS data and
e!iminattl Oi\TS and the OATS Rules.
can,
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of OATS is to eo!lecl data to be lt~ed
FINRA s!a IT to conduct surveillance
of member fimlS t(>r
violati on.'l of FINRA rules and tedcral sccuriticl-1
and
31052
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
lavvs and
to include in the CAT Nl:vfS Plan a
requirement that all
!viemhers report inlhm1ation to the Central
within three
under the terms of Sections 6.4 and
years after the Effective Date. Con<;istt:mt with this
some
!\!embers will trot be
information to the
6. 7 of the CAT NMS
Central
until three years after the Eflbctive Dat.:. Bec;m~e FINRA mn~t cKmtitllltl to
perform its surveillam:c
witlmut
OATS cannot be
eliminated
CAT Data to the Central
until all FINRA members
report to OATS are
However, FINRA will monitor it~
to
determine w·hetlter it can continue to
"'""""'"'" the data in a
FlNRA will consider
firms ll·otn the OATS Rules r.n""''""'
pursuant to the CAT N!vfS 1'1:\n and any imlr11eltnelrlhtl"~
Central
FINRJ\.'s
the Phm Processor and FlNRA to work
OATS. FINRA is cornmitted to ~'mt·k"'''"
occurs in a
manner; hm:vever. it is
both OATS and tlte Central
..... ,,....._,
for surveillance purposes and iliat aU
meet lhc established
state Error Rates set fbrth in SLlction
is to minimiz.e the dm•l.,-·,,.-,,r~rtiino r••nrnir<>m<ml'
ptnrsuum to Sc1ction 19 of the
Act the
amendment or elimination of the 0;\TS Rule~ can
be done ·with Co,mmission '"""'""'...
de]pet11de111t upon a number
the Commission hefbr<J it can approve any :lm,~n,iln'lt':nrs
~!"'""'''"" how
this process may
take.
10.
ObJective iMilestones to Assess Progress <SEC Rule 613h't)(l)(x))
this ~eetion set<; forth a series of dctail~~d
toward
of the consolidated audit
traiL
(a)
Pulllic;Jtion and Implenrentation oftlre lVldhods for Pnniding
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Int'onnation to the Custonrer-ID Database
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
(b)
31053
Submission of Order and 1\riM Quot~: Data to Centml Repository
As needed hefhre
Small broker-dealers
defined
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c- HJ(J
31054
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
final docurnent
of Technical Specification( s)
6 nmnths before
are
rcporti ng data to the
arc
final docunl<:lnt
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(\J)TJtC11d.IX
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ofTecbni.cal
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
(c)
31055
Linkage of Lifecycle of Onlcr Events
4 months after efl:¢ctiveness of the
CAT Nl\18 Phm
4 montbs alter e!lectiveness oflhe
CAT Nl'vfS .Plan
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c
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lvlemhers nu~t
Business Clocks in accordance witb
31056
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Section 6.8 of the CAT N1v1S Plan
!\1cmbcrs must
Business Clocks in accordance ~tith
Section 6.8 ofthe CAT NMS Plan
4 months !lftcr d't\:cti vcncss of the
CATNMS Plan
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c. 103
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
(d)
31057
Access to the Central Repository for Regulators
en•:ls ttorv f()r
any relevant .:\PTs, (l:lJI
etc. that will be
are
data to the
Central
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c. Hl4
31058
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Integration of Other Data ("Other Data" includes, but is not limited to,
SIP quote and trade data, OC(' dat;t, trade and quote information
from Participants ~uld reference. daht)
1).
PROCJ~:ss
11.
t<'m;LO\\'ED TO J)Ji::VEJ£JP TilE NMS PLAN: These considerations
lvfembers and other
Prot•ess hv \\1hich Part.lclpnts Solicited Views of MemheJ'S 1\fid Other
Appropriat.e Parties Reganling C1vation, InJJlll'mentaUon. and 1\ilainl:l'tl!lllCl'
of CAT; Smlllll!llJ' ofViews; and llow Sp<msol'S Took Views hlto Act•omtt in
Pl'l'J!.!Uing NIMS Plan fSl<:C Rule 613{1t)(1)!:d})
(a)
Process Used to Solicit Views:
ofSEC Rule 613 and achieve tbe
audi1 trail to enhat~ee
VerDate Sep<11>2014
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1ir~'"''''"t~ and
market structures and re.tlective
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ii
31059
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
iii.
CAT should be minimized to
and tec:hnolo,gy nl<'rln,,"~
is a critical component in the creation of the CAT. 111c
iv.
.l~edback
bl::l{>n.:: decisions arc made
r"'"''''"""'"'l~ and cost allocation models.
reCl).gt'U:<:<:d in the Guiding
to the successt'il] creation and
l'al:1Icip~lllts have taken m111tcrous steps
and lhe public have a voiee in the process.
the
Par11cm:~nt.::
will
to r."""'rtim>
Prll1<'1nlf:~1.hat nli'rlrltnotill
of the CAT, and as
this pmccss to ensut'e the
SEC R nlc 6 J3 was
in the Federal
I, 20 12, and the
the
launched the CAT N!v[S Plan
which includes a dedicated email
to submit views on any aspect of the CAT. Tite CAT Nr.,IS Plan
address for finllS or the
and the
at
Website has been tt~tld as a ntcmts to conl!mtnicate infhm1ation to the
2012, the
hosted several events
since that time. /\!so
the CAT N1viS Plan. A stttunmty oftltc events is
imcnded to
nuu"'l'"""·' nnwH1ed an overview of
,,,~'"'l•'•na C.:\.T NlviS Plan as
•
tecdb;wK session so
"'"''"''""''"and share feedbnck on
m~plr.::ntc:nt<ltHl•n isstres. Two
scssimlS were
on ()ctober 15, 2012 fi·om
2:00p.m. !o4:00p.m. and 1)!1 October 16, 2012 from 10:00 a.m. to 12:00 p.m.
total
of 89
11embers attended the C>ctober 15 event in
and a total of 162
!\[embers attelld,.-d it
A. total of 130
Mcmben; attended the
()ctoher 16 Client in person,
•
•
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3:
31060
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
t•N\ru,:~n.t
,::vent in person., a tid a total of 123
1(ltal of46 Industry lviemh.::J-s attcnded the
Mcmbers attended it
•
Members attended the
att.:mded it b)'
/'\
event in person, and a total of 76
~'lctnbers
CAT
•
011 Swnt''""'">r
documents additional re<lUi1re!111erltS
Por lh'"~
abovt~ ~wents,
documentation '"as ttevRtnr'"" and pn)sented to attendees, as well as
on the CAT NIVIS Plan \:llebsite.
In addition to the above events., some P:u·t"'"'"'"N
additional
events, such as SIFl'vfl\ conlcrences and FIF
groups, where
on the status of Ci\T NMS Phm
and discussed areas of eln:lee'ted
feedback from broker-dealers and software
and addressed as
while
tcedback in response to solicitation.s
th~
"'·"''"'"''"''nl" as fbllows:
•
•
Related to
Plan
\>,Tebsite on four components ofthe CAT N1v1S Plan:
Ci\.T NMS Plan
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Consolidated1\udit Trail
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•
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
31061
respon~es.
SIF?\'li\, and 'Ilmmson Reuters suhmitlcd detailed
rcspmt~es
to the
FIF,
!iJr
commcnts .
•
correction.
•
on
S\)licitcd tecdback via the DAG
associated \vith a 50 mitt isecond clock dril1
''"'"'··•·rnin<>
for electronh: orders and
executio!l~ .
•
•
Cost
teedback via the DACr
lVfembers in the absence of the '"""""'"t.'n
•
report to the Central
market transacti<>ns in NMS securities .
•
microsecond clock dri.ll
Feedhackonlhese
of the
Di\0.
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critical to the success of the CAT NMS Plan.
m:::dium. and sn!<\ll broker-dealets, the
ass\)eiations: the
~t~rvicc bureau and thre..::
and FIF.
31062
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
l'alrttc!p~mts invited additional fim1S to
tl1a1 it rcllectcd a
i\t this time, the
increased the
n""'mh"'''""hmofthe DAG to include 12additional firms, As ofJanuary2015, the DAG consistcd of
Pmrttcipatnts and
from 24 f'irms and
associations.
cn.~ure
'The DAG bas bad 49 n"'"'l"'""' sin.::c
2013.
disctt%ed with the DAG have
included:
•
'"'"''!'""""' shared drall versinns of the CAT NMS Platt.
t'm·tu::tp~mts
""'"''""n''"\Nith the DAG, who
tccdba.::k to
reviewed and discu.~sed this ieedback with thl:) DAG,
of it into the CAT N'lviS Platt
•
The DAG discussed the
to
data to the CAT.
•
Customer-11).
Custorr!!i!r·ID. 11le
l'alr!JcJp~tllt.~ nmrno!<e<1
a CtL~tonk:r
I<irm
Ctt~ton1er-lll
in
broker-dealers
ID t() each Ctt.:;tonJCr and the Plan Processor creates
'I11is concept was
the DAG and the
"""''~'""'""included in the
relief
related to the Custonli:r·ID to
•
discussed as well as th~~ '""'~ ""'"'J'
with lh.! DAG and the FlF co:mu.tcu1ng
rcliefrdatcd to manual th11e
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•
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
31063
AUocations to Executi,1ns and Account Effective
3, 2015 and
2, 201 5
•
A.farkels. At the fC<lliCSt ortbe
the n~\G disctt<;st:d with the
p,.,··hcm,nt" the lea;;ihility, costs, and b,m.:fit<> assodated with reporting alh.Jcation," of
Nl\fS Securities in
Markel Transactions. The DAG
estimated
costs associated with
allocations of NMS Securities in
lvlarkd
Transactions at the
and sub-account
into
the: Ci\T NMS Plan.
•
(kder
Scenarios.
fbr certain order
scenarios and additional co;rrcso•tm<.ling
riskless~'"''"·';""
•
Error
and Correction Process, TI1c DAG discussed ermr '"""'""'t>
correction process.
lvtemhers ofthe DAG rm;wided rec•:m1r11"':ndati
the CA.T error correction processes more
t'evicwed and
these recommended solutions fbr error corrccllonnr<lcc:sscls and
""'"<~nnm'Mt•ti them in the
for the Phm Processor.
•
J:.,'limination
'l11e D/1.0 discussed the
and EBS. i\ll OATS-EBS-CAT gap
was
NMS Plan \Vchsitc 11)
between CAT and both OATS
and
ontheCAT
also
arc not limited to: CBOE Rule 8,9, PHlX Rule
and f!NRA Rule 4560.
•
that was
how and whether the orders are
the orders within the CAT
(b)
Summary ot'Vie\'I'S
l~:.::pl't'ssed
by Membetli and Other Ptnties and
Hout Partidp:mts Took. Thost• VIews Into Ac,:ount in Preparing tbe
CAT Nl\IS PL1.n
infomtcd the
ofthe CAT
available
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Appit:JldiX
31064
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
NMS Plan. Jn addition to the
calls and events noted
above, the Participant~ conducted multiple group
to di~WtL<:s the~ indtt~try's unique
peJt-spectJvt:s on CAT-related
and technical issues. 'l11<:sc sessions included
'll''"u:s~•·m~ of
and
order scenarios and the RFP
and re(:rutrctneJnts.
an:ilysc~;.
cost studies,
outreach cvcnL'>.
cmnmcnt leiters and active discussion in Di\G m"o>ti'n'"'
011 which the
input include:
r•~<nlllrt'm""'n~~ such as
overall time line for de•velop;ment
account for additional
discmscd risk "'"m''"""' ~·r~'""·"'"''~
Par1tctpa!lrts '""'"w1<>f1 relevam excerpts of the Rl'P to DAG
the
and anrlronriatc
quote infbrmation to the CAT will he
the
worked
with DAG members to
of SEC Rule 613, and which is detailed in
Plll'lH:m,,nls submitted to the Commission r.::latcd to m::unml
Customer-1!). Extensive DAG
SEC Rule 613. 'Ilw
discu~sions
reviewed the Cu~lomer-ID retmn·en1Ct11s
concern that. the coltlJplexJtH!S
"''""""''"" would introd~tcc sig~tifieant
a
ID to .::ach Customer
the Plan Proeesst)r would retain_ f\dditional
the DAG for the use ofthe
euston1er identifier as an altcmative to Tax ldlmt:ttt<:at:ton
person accounts. 'I11is Ctmtom.::r lntlxmation
is included in the
Letters tlmt the
submitted to the Commission.
J.JC;Hg:nmtc'O
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breaks.
17MYN2
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Error Correction. DAG l11Cttlhcrs dbcu'!st•d the
surveillatJce and reconstruction., as well as the t:teed fhr a robust
identification and correction of crNt'S.
Menlbers
mcludm~ the n»nr>•·• '"'""'
31065
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
access to their
be
submitted dtHllL Participant~ disctt~sccl the data security and cost considerations ofthis request. and
dctennined that it was not a cost-efl:cctive requirement fl:lr the CA.T
!\;!embers into the governance oftllC CAT, including an
ofthe
Committee to include industry associations such as HF and SlFl'vli\. IndLL~lry
Mernbers also recommended a
term with one-third turnover per year is reeomm.mded to
ofCA.T
have discussed CAT govemm1ce considerations with the DAG at several
feedback i11to the CAT N.\1S Phm lo the extent
under the
Committee
Oflleer, all of whom are involved \Vith the Cilt;T
basis.
on a more
·n1e CAT NlviS Plan sets forth a sln~eturc for decisions that the
make after
ofthe CAT N1·1S Plan
occur in the Ii.tture as a result of the nom1al "''"~'a"''"
contributions
3.8 ofthe CATNJ\!S
oftbe CAT
anl!.Hlllt of the L'a.r·ttC!DrliH~•n
NMS
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c
3.9
31066
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
lneratin~>
Committee will need to ll'l<'tke its detennination based on the facts and
<l~te•~n•ningft~an•~"nri~te
the !acts
Members.
Committee
Committee then has the
1\l determine tl1e
l\PIPrc>acill, which sets fbrth standards
future iacis and circtmtstances,
to aid its
future.
on,er:lhntl>
will usc in
an an~ndment to the Cli.T N:v!S Plan, such as
of the
NMS
termination of a P:•..ti,·in:<nl '~'····•'~SEC
12.3 ofthe CAT N1vfS
Ci\T Ni\lS Plan),
tl~ tmmagement oftl1e business and allairs of the CcllllflalliY
other Persons~ ho'ivever, tile CAT N!viS Plan
the timeliness, accuracy and '"""Q'"~"'~u""·~
manner and e:-.1entto which each
613 and the CA.T Nr.1S Plan
nls() hus dellcgtl1ed
is
obli~JJati•~ms
iL'i
ofthe CAT NM.S
As to Subcommitt~1cs that thll
CommiUee may !()ml in the
the
have detem1ined that the
Committee will establish a Selection
Subcommittee to select a successor Plan Processor when the titre arises
oft he CAT
l'mrt1cm21nts
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18:13 May 16, 2016
In the
Jkt 238001
the
Committ~lll will take a similar llnlnniM~h
::>ul1Cil)nJmJIIe,es or other Persons with rhs,cr<~tlrm
nnfhm·ii'v to UJlprove decisions related to
Comp::my and the CAT
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and other
17MYN2
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NMS
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
31067
~m,n•·•rv to
Persons, as provided in the CAT Nlv!S Plan is similar to that of
including the I .imited
of the
ILC. II also is based on rules and
under the
i\ct, and
principle.~ 'vVilh respect to the governance of a limited liability
Ali decisions made by 111.::
Committee will be
the
oftbe CAT N?viS Plan and SEC Rule 613.
TI1e role oftbe
Commitlee: "!his section describes the
criteria for
which consist~ of a r"'"'""~"'~t:>li' tbr each
in the managctnent and
A
Vote
Commitiec or any Subcommittee authori:r,(ccl to vote on a
nl!llter) is the del1mlt standard
for dedsim1s U1at are
considere·d
course nutters fbr a.
like a
or that addtcss the
govcmatiC<: and function ofthe
board of directors or boat·d
a vote
th0
Committee or any Subcommittee
auUmrization
a
Vote e:-;cept for
in certain sections ofthc C/\.T N!viS Phmdcscribcd below, which matters
Vote (an allirmativc voto;1 of at lea:st two-thirds of all ofthe members of
Committee or an;.· Sub~.:ommittee authorized to vote on
is
to authorize decisions on lll!ltters that arc outside
course of business and arc
nn.,n,tir•<>
a unanimous vole in many similar
of a
Vote bccatL'le OVCfUSI:l
This
takes into
CAT N!v1S Plal"l and
believe that certain decisions tlt.ilt
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should be
31068
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
fee schedules should be
is intended to operate on a
thosc rnatters should also reqtrin1 the
break-even basis.
standard ofa
Supcrmajority Vote.
First, a
A l.lttaniroous vote of all
is
decision to
to make a loan or
of the. Ci\'f N!v[S Plan).
is an event that
each
decide to take an action by wriUen CO.tl'!cnt in lieu of a
Plan). In that case. because
\viii not have the opportunity to disctt<~s and '''tt'h"'""'~
ideas on the matter under consideration, aU
must
the w-ritten consent. This
similartothc
Law 111r
decisions made
and
one individual to serve as a
mcnllhcr
an:nrc~:1ch does not
the standard rule that each
to
or to
votes cast
HecatL~e
tl1cre is
Cllst the same vote for
&n·"r'">M•·l>
and
!ill
all
llnll"ll'<'tllilh
result in Jess
because of a reduced number
It\:ach gmup of Alliliated
were to choose
there would be still he lO individuall> on the
I. New York Stod< '"'···''""'""'
2. 'TI1e
Stock l\larket
NYSE Area, lnc.; N1/SE l\'1KI' l..LC
n.u.vnv
Ol\IX
OlvLX PHLX
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LLC
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
31069
Exc:llmtge, Inc.; BATS Y·Excl1altlge, Inc.; EDGX Ex<:hm1ge, Inc.: EDGA
4.
6.
Inc.
7.
Inc.
8.
ILC
9. Ivfiami International Securities
I0. Financial Industry
Authority, Inc.
""'"'"'""~ arrived at the definition of Conflicts of
Interest set filrlh in Article I of the Cii..T Nll.fS Plan based m1 a revic\V of
standards of securities
other
Senior Officer of a
non-rlropri1ell1rv a;;pecls oft he n.:sponses to the RFP should be available to
to inform tire discussion
the costs and benefits of variou.~ Ci·\T features and
the
counsel, determined
that such information could be
with DAG members pursuant to the
of a non-disclosure agreenrent
that was consistent with the terms oftlre NDA. executed
between the
and the Bidders. Aller extensive di.~ctL~sitm, DA.(i member!~ declined to
such an NDA.
continued to shan.: non· hid
information and to solicit
the views and
ofDAG members as it
related solutions.
Members
the
millisee(md tinre stan1p
current OATS rule of a one second clock drill tolcratlcc fbr elcclronic order and execution events,
burden to
!\·!embers[()
with a
to the current <me-st:cond
l\·!embers on tllis
and
induded in the
Lelter a request f()J' ex<:n'IJtnre
'""""'""'''" for Manual Order Events.
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31070
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
it within the
that \Vere discussed with the
'll1e DAG formed an order scenarios
group to discuss
ofSEC Rule6l3. Onthe
ofalloeations.
E'limination
and mles is a critical aspect of the CAT
SlF\\,fA and FIF
broad based and
10
th!!
"I1liN was in addition to numerous video·eont<:rem:e •n~<'l"'""
U>.Th'>'l'~f'ot1 "'IU'K~ llf\T\~
discussed and
11.
the Rl1P document
where
"'"~rt,,w,,,,,
Discuss Reasonable Alternative Apm·oadtes that the P;utidnants COilSidett'd
1tnd i'vlalntnln the CAT (SJ<:c Rule 613(a)(t)(xi,i))
to Crente.lmplement,
of
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technical and
the nineteen
tllil
17MYN2
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'Tile
their {Wvn extett~ive
with
securities issues in
and
the CAT Nl\fS Plan.
to focus <'m
formed vat'ious
of the CAT N'l\fS Plan. 111e Subcommittees included:
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
•
a (Jnvcrnance Committee. \Vhich
nr<)tncc•ls and
criteria critical to
31071
in
addition to cte•vci·OP!ilR
""'''"'''"''" structures for the CAT Nl\.fS
requin~m~:nts
•
of the CAT,
recommendations on effective
'"'''1'1'"'" to
involvement in
dc,lck)pll'!Cnt of the CAT NlvfS Plan and the
•
a Press Comn1ittec as a Subcommittee oftllc
coordinated interaction~:> witl1 th0 press;
•
lndtt~try
Outreach Committee, \Vhich
which dratlcd a framework for
•
the costs
oftl1c CAT {br both
which is ll•"'"""',''ll to assist the SEC, as ncccsgary, wh.::n
nn'"""''" should he added to the
l?enn~'"~:nhlh\.re,::
initiative
from all Subcommittees met to discu~s the <JVera.ll pmgress ofthe CAT
Committee.
Hale am! Dorr I J.P to s0rve as
ofwhieh hav.:: extensive ··'~'""'"'-"'li'•~
relations and
press engagement in
ln1Jplenll:}llt<ltH)l"4 and ll.laintenance
Into Account in
NMS
other
CFTC
be<1ddecl
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31072
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
internal and e:-,."ternal
evaluate and resolve issues so as to finalize the CAT NI\IS Plan.
C, the
the Selection Plan to descrihc the proe>.lss
an
evaluated
and chosen a
have dratl:ed the Plan set .forth herein to
reHect the recommendations that have resulted limn the appr<)ach and
described above.
and maintenance ofthc Ci\T that
did not
do not
mandat.;
(a)
To
mrtttcr
the
*""'Tuomam~
and then hosted a Bidder conference on ?vfarch 8, 2013 to
additional eontext h' the
Bidders. Two
on the: RFP wer.:: held on
25,2013
also established an e-mail
on the
RFP were received.
m-ne1rso'n """''"'"""'
were reduced to six
the Con:n11ission in
Bidders on
the CAT N~IS
\Vith each
accordance with the
In accordance with the Selection
the Cmnnussion on June 23, 20 t5. th1.1
14. 20.15 to revise their bids to account Ihr the
inciud.;:d in
Plan as filed on ~'<!l)ruarv
additional
C. the
the CAT.
fi·om tet<Diddcrs that were dcen~;;:d
firnl>. The open
As stated above. the
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c
31073
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
ended nature of1be
contained in the RFP allowed Bidders to
to all
oftlm
creative responses Vllith
'J11c RFP
also resul1t~d in the sutJmttsstton
build and the first live years ofmainten~mee cost'>, have ranges between $165 millhm and $:556
million, and encompass a number of innovative
to meeting the
of SEC
such as use of non-traditional database architectures and
Rule
~o!utions.
1l1e
conducted the RFP proce>:s and the review of Bids pur!:uant to the
apor<wc:d by the Commission, v,•hieh was
the conflicts of
interest associated with
that are
in <M'w•l<mm<>
becmne the Plan Processor and to ensure a level
he considered on a iair and
Or~anizatimml
(b)
Pa:rti<)inanll~ con~idcred
Structure
'1/arious
structure!> of !he Bidders to assess
of a Bidder to
whether a
structure would bcr a material .llwtor in the
three
as 1he Plan Process of. Of the Bids
stn11.~turcs
tbr
"'""''''"''"!' ( l) con~ortiums
of more !han one unatiiliatcd
that would
would be the Plan Processor and that
\>riltllu'Y Storage
Pil•"~•,~·n~,nr«
nr<>nr>'«'li ~olutlon,
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(d)
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will take
Such COI1.'>!dcratwrls include the
Customer and Account Data
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31074
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
which broker-dealers would rcpm1 a
Firm
ID for each Cnstmrur to the Plan
ProcBssor and thll Plan
create and store the CAT Cu~tomer-ID without
tins information back to the broker-dealer. TI1e tt'>e
identifiers
firm customer
could minimize
htrge overhead in the CAT
otherwis<: would be required to create and transmit back to CA.T
a CAT
identifiers.
multiple identifiers
will be more bene:l:1cial to
CAT
would still
of identifiers to connect all
associated with a
Customer across multiple accounL<;, but it \Vmdd also ease tbt: burden on
CAT
because each CAT
would
identifiers it
,,,.,,.r''"fl''lt~es in it~ internal sy'Stcms. Moreover, beeatt~e the CAT
'""'''"'"'1.-tl Custmuer-ID back!() the CAT
CA.T Ueno1rle•c~
t<enm11m·" beeau~e
would not n<K~d to build an additional process to
that idcnti lier to each order
or cancellation.
tlk1Y also
storage and
reduce the
risk ortransmission ofthe Ctl~lomer-lD to the CAT t<ein(wTnr
receive a
'llus
Ctt~tmner-ID and
Par~tieip<1111t~
support the usc oftl1e Customer Information
T.etlcr so that the Central Kcoo:>~!<lfV
'"''n""'""'" to link Ctt~tmner and Customer Account lntlmn>tion. 'lhe p, .... ;,,;,.,,..,1'«
'I11e
"'"nrrHw],
,n,,,.,~,..ch
would be the most eft! dent
(e)
tor both the
Plan Processor
l'ersomd1y Identifying lnfonmtion (PU)
or data should be
the poor choice of
even without
to Pit These controls
of at~ce!ls can add
Some Bidders also rmm>o\~C"I
enhances
''"•mi•·i"'" mu!ti-fl1ctor authentication and Ro.le Based Access Control
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\vitll a
and an auditable record of all access to PU dala contained in the
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from other CAT Data, restricted access to PII
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
31075
TI1e l'a:rW:tpan1ts believe
increased costs to the Plan Processor and
ac<:essmg Pll are balanced by !11c need lo proted PIL
{f)
Oata Ingestion l<'ommt
""''""r'"'" formal fbr CAT Data: unHhnn
anon>acrh \,,h,,,.,,h,v data can be
ll~C
of
submitted in a tutifonn defined format or
defined
the
under any of the three fbrmats. /1.
reports to
OJ\TS in a uni.t1mn defined t\.mnat. "I11ese firms have invested lime and nesources to
process for
0.'\fS. The uniform t\.mnats recommended
Biddet·s would '·~~,.,,,.,,"",
the OATS format and enhance it to meet the
of SEC Rule 613. 'l11is uniform
therre1tc1rt':. may redtiCI;) the burdl;)!l on certain CA.T
and
~<•'"'''rr,,,,.~ to
the C l~T. Ho\1
vevcr. some firms use "'"'M''!>"' n.-,.,t,.,,y,,
a ~tandard point of rcfercnc~~ with
Jviemhcr:s that is
and within a firm's order management processes.
-·'"'"·'--Ab could result in
times and
Pmrti"tm11111~ CAT Rt~inm•i<•t·c~
l\.m1ml~ may nel;)d to
The
an: not
the data
tor mat fhr the CAT The ~''"'t"'m"'"'"
bdieVt1 that the nature of the data ing;estinn
to the architecture of the CAT A cos!
of
tl1"Cl1er·cnt~e f()f
11!c format
members ofthc
did
However. F!F did indicate there was an
the FIX urntoc<)l.
PIXII.'ess to Develop the CAT
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ApJpC!ldiX C • 122
31076
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
a.,·velnnn,.,nr process. TI1e
believe that
<)r waterfall m~~thod or even a combination of both methods
ofCi\T.
either
(h)
bldustry Testing
Dedicated
and
eJ<.-pen~e.
as disaster recovct)1
dedicated test environments would entail additional
Such e:;.lJen~es may be
in hosted architecture s;.cstems \Vhere
would be needed, but
used.
TI1e re·u~e
such as disaster
and lower administrative costs. However, it could
the test enviromnent to he available at
tlntil a
dedicated time wind(JW is open.
would allow users to test the CAT
as often as needed. However,
the test cnvi1·onmcnt to be available at all times. It also ma.y lead to
at any
time, which may lead to less
tllis
a. dedicated test environment that is
environment and available 011 a 24:,;6 basis. 'I11e
model will be more
to the
are
Quality Asswnnce (QA)
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'l11e
considered a number of
the Bidder's
Some ofthe am1roac111cs
intt) the master and tested several time~ a
standards sue has ISO 20000/TTIL The
the
detaih:d in the
31077
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
One
component ofthe
by the Bidders \'l'as the
levels
associated with QA. Initial QA proposals from Bidders included
ranges from b~\tween 2
and 90 FTEs, altl10ugh some Bidders indit:ated that their
function was
into their
.tillletion. Some Bidders
QA resources after the third
number
resources may facilitate structured,
Howcv.,r, a
s"'t
resources eQuid lead to
administrative overhead.
ntmlbers varied in the Bids beeau~c
ofthe Bidder as vvell as the "r"""''"'Mi
(j)
are
User Support and Help nesk
and that it be able
Desk he available on !l 24x7
manage 2,500 calls per 111emth. To
with these
also nr<cono;,ca
support
ranges fhm1 five to 36 FTEs.
support teams shared with other groups.
ttJ
mnnber of .FTE li.'ler support stafi could
nunlbcr of staff·would
support
grows, it may bceonlll less
team, which could decrease support eflectiveness.
team would Htcilitate
11te
FTEs for n~er suppo11
are not
will consider each
tt~cr support
and the selected Bidder nu'!t en'!tn·e that it'l
the CAT NMS Plan. Tile
howe>'er, the
in the context of £he
tire
ofFTEs
a greater level of
However, a U.S.-based
desk may bave
have lower labor costs. but could
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c-
31078
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
'l11e
are not requiring a specilk location for the
as !he Bidder's solution meets the service and
it is not n.::cessary to
(k)
lo.::ation.
CAT User l\lanagement
Bidders
to uqer
deslu:rcation oft•qer
creation of accounts, and multi-role.
desk creation of
and validation of user creation. However, it would
increase administrative cost~,
in 111.::
stag<ls ofthc CAT
an FTE mw;t setup
each user). User creation of accounts would
levels but would
less
a11d va!idati{m of tL'!cr creation.
''lmuld allow for a blended
in which the Plan Processor
set up an administrator at each broker-deal~"1·, and then allow tiKI broker-dealer
to set up additional account'\ as nt~edcd. ·n1is
could allow users with dillercnt levels of
access to be
with those
greater
However. it would add
to the user creation system. and would
less
A multi-role
~'"""•J·~·
information into the
cach u~cr bc
arc
the Plan Processor to set· up access to !he sy1>iem However, l·br
at
that will he
the infbnnatkm fbr
thil Plan Processor
can establish a set-up adnlinistrator vvho has the
access to other users \Vi thin its
Howcvt\1', such administrators cannot set up access t"l1r PU inH.mnation. Stafl' at
who r!iled access to PII it1tonnation mu~t go
an authentication
the Plan Processor. 'l11c
bclicvetl1at tllis
balances the
statl' at ilic Phm Processor \Vith the need to en<;u:rc proper
and validation t"l1r lt~ers of the
CAT
considered
order event types tor inclusion in the Plan Of the
the results order event type and the CA. T feedback order event were
determined that a results order event
would not
method. A CAT teedbi,lck
,..,~,n.~m ''" the "''~'~'~''~"' ,,,.
11 •'"'"'.~,,,." to
data .tbr these two event
order events are listed in Section
User management is a
controls, and maintains
to a system.
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c. 125
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
31079
re••mlr-es data to be available and searchable for a
of !l<:,1t less
SEC Rule
rNn m·,u1 to retain data for six years under the
than five years~ Broker-dealers arc
l':J.t1cha1nge Act Rule
the use of a six yeat retention time:frame as it
with
arc nx1uiring data .fbr six year~ to be
online i11
lo have access to six years of audit trail matllrials
]1tc
The
an
accessible f(mnat to enablll
ibr purposes of its re~,_!U1t1on.
Dte
Ll!ld<lrstand that
this six1h y-ear of data slorag<J may iucr<Jase the
cost to nm the CAT; ho\vcvct',
believe the incremental cost would be
needs
re<nmun•·~ to have access to the infhrmatimL i\_n
indicated tl1at thll aVIlrage
year-on·yllar annual cost increase
to the Central
was
4";,;).
once all rcportcts "vcrc
I<'vJ;,,,,.,,,,, this increase to another year would result in ineremental annual costs to the Plan
Procll~>sor
from
$1.15 million to $4.44 million
upon thll Bidder.
B;\sed on the
that tltc cumulative ammal cost increase< from year t1ve to year six will
all the
mc:re:•~e
the Bidder~> in their
cost
l()r data rlltention for an additional year \vould be 4'}\;.
,.,~'m",~,1rl to report order i nt()l"!lll:lti on on a ne ;~t-<lav
Plan Processor have real-time SIP cmme,ctnntv
(o)
Oismder Reeover·y
A hot-\:V'<trm structure meets
''"''miri111o
(p)
were considered to be
than
a hot-wann disaster r.:.covery structure,
BCP /DR Process.
Synchronization of Business Clot1ks
the bt1ckup
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i\pp,Cild!X C • 126
31080
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
the clock S)11tcllr·onizatlon
'l11e
that an initial clock
In order to
their own internal tectlllil)lO,ll'\'
Protocol ("PTP"), 261 m"'""m"
l'<ll"ttctpacnt.<: determined that this
can
Offset
demonstrated tlmt GO<l'i>
ncrtd"'''"1''"•·' their clock~ \Vith an o!lsct of 50ms or greater, with
anoflset of50ms.
18'\ilof
ofthese reviews and the ~'"'""'"'"1M"
Pnrlii•inHnl!~ concluded that a dock onset of 50ms represent':! an
standard.
fn addition to
FIF Clock onset
<l•~t.~rm1,nlt11<'
current
indicated that !he
C()Sl<;
lo survey I'Cll!)!'mdlcn!ts
Wt\fe as
Estitnated A1mual
Maintenance Cost
50m,<;
5nli'
lms
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into
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
31081
.dl,.s indicated in the above
atlntt<1l maintenance costs
for a 50n1:S
standard would he on average 31'!\l
than current cost~, and \Vou!d escalate to 102'"<•, 123%•.
and 242'!'o increas0s over curn:mt maintenance costs as clock
standards move to
Sms, ln1:S, and
that maintenance
SOtn$.
a S111:S clockoilSetwould
to PTP. ll1e
lx:licve, based on the FIF Clock Offset
tlrnlS
GPS
that Jewer t11an balf of
or PTP for dock sV!CICllr<>m
As noted in A,rtick \•1, Section 6Js, the
with tl1C Prm::cssor's Chief
shall
evaluate and make recmnn1<:ndations as to \Nhcthcr
standards have evolved such that
to the clock
standards should be
lt is the beliefofthe
of
5ms lower than 50 IllS may be
it does not mn'r<'''"'nr
may be
with small broker-dealers'
and small broker-dealers
1;tandards bccmnc n"Kme mature, the
nn··m·,,mon standards to reflect
(q)
Reporbtble Securities
not NlvfS Sectu·itics can be
conHidcrcd whether to
ofthc Ci\T Nl\iS Plan, as
OT(~
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and nmtic the determination to include
Plan.
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APPENDIX D
CAT NMS Plan Pmcessur Requirements
outlines minimum fbnctional and
of the CAT NiViS Plan for the Plan
Processor.
that some may
ol~
and a collaborative
ensure the C/\ T achieves its mt.0nr11'rt
rnana gcme 111, and
in these and other areas
of this
1.
Centr-al Repository Requirements
1.1
Tedmka1 Ar'l:'hltecture Regub-entellts
111e Central
must be
and sized to
volumes of data. The technical inlhtstructure needs to be scalable, !ldiWtabl
and
within a
and control cnvirotml<mt.
infrastruc!un:: will
an .::mdronn1ent \Vi1.h
nJa.tk'lgement services and mbu.<;t
architecture.
advanced data
'llle technical architecture must be scalable and able to
increases in data vohm1es
the baseline ""'J""''"·
m,,.,,,.,,,,.,t~ are ddined in this docmneut ()nee the CAT Nl\IS Plan is '""'""'·"'rt
v>ill de.!lt1C the basel illC metrics on an
basis. CAT
OPRA and ,,,..,,"""'o"
Proec~sort:nusl
short
be
TI1e
!llld
TI1e Central
•
Accommodate data stomge and query compute, such as:
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o
31083
Scalable .11>r grm>.rili data storage and
including bm not
Iimitcd to,
data redistribution acroHs nodes, and
of network: h"'"hvi.1~h·
minimum nn.>e~J:ss1ng standards as described in the CAJ' RFP and that will be
filliher defin.;,d in
•
•
Handle an e1.tensiblc architecture that is
initial scope ofNl\IS Securities and OTC
•
asset classes
with the
and
Handle an exten:sible data lllOdel and me:ss:ag1ng
fl.rture
such as. btl!. not
•
rwt1t•1•~•YI«
that are able to suppott
and
o
o
1.2
•
Sessions fbr se•;urnl•~s ~ and
New a,;set
as debt securities or derivative in.~trtnrents.
Tedmical Environments
the
and maintain enhancements and n<rw ""'"'ir"'""""t" This enviromnent must
be separate trom thos.:- listed below .
•
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'Ibe QA environment shall be able to sinmlate end-to-end l"<m••cu:un
lUrtcuona!llY and perform with the same
characteristics,
as the
environment
o
environment shall support
such as, but not
limited to, the
•
•
•
•
•
•
..
•
and
•
o
•
A ''"''"".,.''h"'"" '"'" test
docunrented.
f(1r
each build and
nn'~"''r''"'""' environment that supports
and storage of CAT Da:ta.
recovery components
as part of the
environment
H1$~esltlOlll. pro•:e~,smg
m;;:lt:~ele(t
•
•
•
•
data
correction and r"""~''1"''" nJech!llnism)
m~~estwn to output, sized to meet the stamhu·ds of the P''·"" .... uvu
PcJrfl.1nnruli:e metrics that mitTot' tb~
environment and
to support
0
•
•
II
•
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31085
etc.);
ofthdr
mu<;t he a discn::tc environment separate from the
of data submitted
Results oftl1e
processes must be conmmnica1ed back to Part.i1;ipan1ts as well as to the
Commi ltee.
o
palrtiC:lp:nc,ll, and amount of data reported and
dn:rat11nn as the C1~T
data.
The Plan Processor must
for ""iln~:tntt.><;tlrm
test data.
t.J
eharaetcri s tics .
•
.LX''"!>''"" such that additional caJ)acttv
system aecess and
•
with
and
•
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TI1e Plan Processor must:
•
with
•
a robust process to add
including both the
l:llivirm:nnmt to meet the ~'~'A'''d"' annual increases as well as to
C11Vif01:1mell( Should
in data VOlllllle$ bfCUCh the ddlned CillmL'IL\1
Ibrceasls !rom s;r~tems,
lJTP, and erA, mu~l also
planning purposes,
""'"'"'''"' planning process must be
the Operating Committee.
1.3.1
Monit(uing CaJXlcity l.itilization and
Perlnmmm~e
Optimization
In order to manage the data volume, on<lra!ttmnl
basis. The Plan Processor nut<: I submit
to
in
as~urrmu
the costs
amount of data received and
the
Committe<!.
1.4
D11ta Retention Requirements
a Hmnal tccord retention
and program 11lr the
which
at a minimum:
The Plan Pmccssormusl
the
CAT, to be
•
and
Contain
holds:
•
•
SEC
Have a record hold program vvhcrc
CAT Data can be archived offline for as
as necessary;
•
•
2.
Store and retain both raw data submitted
Make data
available and searchable
tbr at least six years.
CAT
and
and
manual intervention
Data l\lhmagrmcnt
·n1e Phm Processor nnt'lt
data management
manage CAT Data, reference data, and metadata contained in and tiSed
'lb.: CAT
nu~t
intbmu1tion.
to,
store, and maintain ~~urrent and historical reference dal.ll
reference database will include data elements such as. but not limited
unit
trade i
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minimum
corporate
.:enter. The Plan Proc,essor tlltL<;t support
oftlm reference data.
31087
market
h•-lt"Mrmr>r.<~l
·will stJbmit data to the Cc11tral
CAT
fbnmt 'l11c Central
must lLSe the
output Qf the linked data. lnstmment validation must be included in the
subrnitted
CAT KetJon!crs
must be able to link .instmment data across any time
so that
and linked
to issue
or market class.
m:tnn1rtH> table, as well
'l11is li.st mtL~t
a.m. on each
to create a
CAT
list of securities fin· use
CAT
be available \)nline and in a machine readable (e.g.,
fl>rmat
6
report':~,
and searches fbr data thai span dates whem there are
to r.::lllrenee
include data witlliu the
date range. For~'"''""'·"'"' if a query is
run fhr a
three issue
the time window !he query
parameters, !Ill! .result set mu~t
include data f()r all three
!hat >verc in uqe
the time window ofthe query.
T'hll Plan Processor must also
lm<:itmss and
meta.data..
an c:nd-to-cud proccs~ and framework li.lr
that the CA.T may catt~e to be redundant,
sources such as
news may be added to the
system~
~<-'"'"rt.,rro
and Data Submitters will transmit data in an electronic data
the Plan Processor. The Technical
must include details
retransmission and
It is
the various senders
11le
""'~,.,-,.,~
that some broker-dealers will not
the CAT but
to rerport on their behalf: However, tile CAT
need to have the
basis to
in tile number of entities tbat r.::port CAT Data.
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and
The Plan Processor must monitor and manage
minimum, the
•
Full and
•
data feeds fbr, nt a
Full and
file submissions that contain corrections
•
<Uld uw"~'""'ts
Tite Plan Processor mlL'lt also
uu:vu'""'·"filc submissions. It must creatt.l
store
titilun'l reason<; in order to create
for CAT
data teeds mttst be
and
metadata
SlK.~ccss,
and
and the SEC.
ei<Jn~nts
2.;u l\funaging comlt'cthcity for data feeds
nutst be monitored and
em>fln:·,·d
SIPs, brokcr-dea.lel'S and
1-e gulntoi'S)
to ensure that it nnrvi,des
transmit CAT Data to the Central
f~,,nn•<ilr>rv
to a maximum record ''
l:'r<>cessc>r in consultation with the
Committee.
0
3.
crellt.O.
Reporting and
the
elen~nts
Linkng<~
''
0
''''"·'
pelt'Ionn:am::e metrics.
managen~ nt, etc.
via a G1JI interface or the
detit~d
the Plan
Requirerm•nts
CO!IllPi)ete
sutlicient to ensure the same
coverage ""'''''"'"'" tJI'O'>'!CileO
''"'""'';,,.,systems thal have been identified as c;tndidates
•
submitted to the system based on
lL~ed
CAT
between the Participants and the Plan Processor,
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•
Handle duplicate suh-ichmtifiers
tl~ed
n1enlbcrs of different
to be
associated with ea.ch
•
C':renerate and associate one or rnore Ctt~tomer· IDs with all
Events
new orders received tl·om a
of a C/\T Reporter. 'I11e
will be
trom a Fim1
1D provided !he CAT
'h"""'...''" for each such event, which will be included on all ne·w order events.
•
!he tluest level of
the CAT must he abh: to
the time stamp field to accept time stamps to an even finer
S)"lltcms
must
to capture iin1e stan1ps in ever J1ner
all
date/ii!re CAT Data into a standard tin1e z.one!t{>rmat
will include all t~vents and data clements
to build the:
In addition, the data
fromCA.T
th~~ Plan Proc.ossor in tile Technical
•
Lite
•
Life
•
State of all orders aemss all CAT
of an order for
del1n~:ld event~
i nlra-CAT
and
in time.
to link and create the order
·n'IC Plan Processor must usc the
In ih.::
of an order.
of an order. At a
•
.c\11 order events handled within an individual CAT
internal d<:sks or
witl1 different fhnctions
•
Clt~to!ller
orders to
a cu~tomer order
to tl'IC street-;;ide
routed to
orders created in firm account'! fhr ti1e
•
Orders routed fi·om broker-dealers to
•
E~"Ceuted
of
a customer order handled on a
orders and trade
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•
Various
•
or
o
"
route to another broker-dealer or ""'''"'"'"'0·
Riskless
U1e
o
o
Orders worked through an average
street side
and the
(>rdcrs
both the street side exet•utionl' f{lr the
"'"''"'"''""'!"''
cust<>mer order;
'With a
orders
o
()
o
system can aceepl
Orders
over the
system;
,, Orders routed on an agency basis to a
o Execution of ctL~tomcr order via allocation of shares fi·om a
•
Link each order
•
link reports
by the CAT due to a failure to meet a
•
records that ar(l
en·ors not identified in
the data validation pmcc1ss;
•
•
3.1
CAT-Ordcr-ID to all events contained within the
can
all ev~nts contained therein; and
of an order
Pwcess and link Manual Order Events with tht: remainder ofthe associated order
Timel!nes f?r Rep91tipg
Ci\T Dat<t Ibr the
<\.m Eastern Time on the
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h"'"""''"r the Plan Processor must accept data
submission$.
3.2
Other Items
and manage !)rdcr data nn""''"'""'" over
market dm;ures and both
and unanticipated market closures. 'll1c Plan Processor lllllllt
allow and cnabk entities that arc not CAT
to report on behalf of
CA'T
appropriate
3.3
Required Data Attributes forOtder Records Submitted by CAT Rel!9l1et'S
the Plan Processor must he able to receive the data. elements as detailed in
At
the CAT NMS Plan.
4.
Dnta Scctuity
SEC Rule613
that the Plan Processor ensure tJ1e
inti..>nnation
to and maintained
the CAT in accordance with the
and standard<> in the CAT NMS Plan.
The Plan Processor must have ,n,•m·n.rw•
all communication between CAT
to
solution tru~t
ofthe CAT
center, and leased tac:ilities \vhere
data is transmiUed m stored. 'l11e Plan Processor must have documented
for S)?Stems that will store, process, or tran.<smit CAT Data or PII data.
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4.1.1
Co:nnt'ctivity and Data Tnmsfer
The CAT
nn~t have cncr)'[lted internet
CAT R,·•na.rt''''~
connect to the Ci'\T infrastructure
secure n~thods such as private lines or
Virtt1al Private Network connections over
lines. Rcn10te access to the
Kepmsm)ry mtL"t he limited to authorized Plan Processor staff and must u"e secure
multi·lactor authentication that meeL-; or exceeds the Federal F'inanciallns,tillLiti1)!1S
Council
authentication best "'"'"u""'"
~l11e
CAT databases mLL~I b<J
within the network infl·astructure so that
not
accessible fi·om c11.1cmal end-user networks. If
cloud intl-astructurcs at·e used.
neJ:w<n·Kmg and fin;wall!::laccess control lists or
cm11ro!s such as
tenant
mtL~t h.:: U.'ied to isolat.:~ CAT Data JhHll
4.1.2
U·.tta Encryption
methods such as tape
11Cih!)dOlOJl:J' !11tl~t include a secure
management strategy such as the
The Plan Processor nmqt describe how PH
is
and the
n11umgemcnt
CAT Dftta stored in a
a Plan Processor
'"''crvnt,>,<em
tL~e
Non-PII CAT Data stored in
at rest,
inl"1enmtJly have <'Ceess to the d<'ta
surrmltlding the
nf that data
nr if the: Plan
docuJne:nted, as wdl as a
address instances '"'here tttl<lttthod1,.cd access to CAT Data detected.
lllllitl!lgetnentrrotati,on"revo,cation ~lr:atem eos and
chain of
must also be doetl!llCtrted in
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Stl~lplemcnt
31093
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4.1.3
Data Storage a.nd En,•iromll('Rt
Data center;:
Cl\T
SOC 2 certi!led
an independent
public or privat.:) must, at a minil:mnn. be
auditor. The
of the audit must be at least
once per year.
CAT compute infrastmcture may not be commingled with other
tenets, in the case
rnll·l-r.~mlllllorv S)iSMms
for any
cloud
In
'Il1e Plan Processor must i ncludc
(and
code audit
defined in the
Committee as well as remediation
third party
of the audit will be nrc""'''~"
ne,netra!iton tt:st reviews of the Central
network.
ami production systems should help the C/\T evaluate the
i.n the tl\cc of
and successful. syste1m intrusions.
4.1.4
l)~tta
Aecess
The Plan Processor nu'lt
an overview ofhO\v access to Pll and other CAT Data
is restricted. '11tis overview mu'>l inclucle items 5 uch
as. but not limited to. how the Plan Processor will
access to the systems, intemal
scl:rtn~ntatt.on. multi-factot·
entitlement management,
Plan
and
!lillCk~'l UI..IHU
CheCkS, etC.
•
!Vl<>tll1torml! proecsses to detect unauthorized access to or usage t1f data itt the Central
•
Escalation,,.,.,,,,,,,,.,," .in the event tl1<1t unauthorized access to or tL~age of data is
detected.
and
model must be used to
A Role Based Access Control
access to diflerent areas of the CAT
CAT
must
an
number
<lfroles 'vith access to dift'immt types CA.T Data, down to the attribute level. The administration
and
of roles mu~t be docunk!nted. Periodic
the current list of
users and the date of!lwir most recent access must be
the SEC
and the SEC will include
their
Committee. The report<> ofthe
or
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listofu<>ers. TI1e
contlm1ing that the list ofw;ers is accurate. The
tl11::
Conm1it1ee. "Ill.:J Plan PmcesRor mu;:;t
users.
Pass'~<vords stored
Reasonable
limited to,
a response to the report
of this report will he defined
every instanc;:: of acceRs to Central
in the CAT S}'Slem must be stored
mles should be docurnented and ..nti"-'''~d
and
on the reuse of the
Passwotd recovery mechanisms must
a one-time, time~- limited
token to a tw•'-tl<'t<•rtnrmc"l
that user.
mechanisms tl1at allow
used
reset, such as
cmailaddres~
associak'd with
or email the actual
to the system that is able to access PU data mu<>t l(l!low non-PH ""'""""m·tt
and mu<:t he i'hrther secured via multi-factor authentication
The m~f)lenll::nt!litl
l\'iF/'1.. muqt be documented
the Plan Processor. i\.fFA authentication
~~
to be
the Phm Processor.
4.1.5 Bl'each Management
nrC\<'''rl111F.>~ "'"'TAI't>U'IO itS feSp0!1SCS tO
Th..:: Plan Processor must
nr<)ce·nures wi.ll include a formal
incident
or data breaches. Such
and documentation of ail int:hrmati011 rdcvant to breaches.
inci d..::nts.
include items snch as:
•
Guidance on crisis co1rnnmnJc
•
Cusl.omer notifications~
•
or
inl:bnuati \)ll:
•
ln.;;urancc
•
Ret1;1ntion
•
Rebmtion of a Public Relations linn to
nmnagt~
rnedia coverage.
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Docmnentati(m of infonnation relevMt to breaches should include:
31095
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•
the duration of the
Relevant information related to the breach
and details ofthc
•
•
summary
involvement orthird
and
•
11w
of the breach, including an assessment of data accesKed
and i111pact on CAT
4.1.6
calls,
the breach
I'll l>ata Requit-ements
PU data mus 1not be included in the result
ttqcrs entitled to query CAT Data arc not authorized fbr PH access. lllc process
then
about
PII
son1eonc bccou1es entitled :l:or PII access, and how
the Phm Processor. The
11t each
and the Commission must, at least
with PU access have the >m•·,rn,nri
PH data mu~t be stored
trom other CAT Data. It cannot be slort~d with tl1c
transactional CAT Data, and it mtL~t not be accessible from
internet
A fi11l
audit trail of PII access
accessed \Vhat
and
must be maintained. TI1e Chief
Officer and the Chief InJhrmation
P!I
reports that list alltt~ers who are ent1tltJd for PIT access, as well as the audit trail of all PII access
that has occurred for the
on.
4.2
lndusto' Shmda.rds
must be followed as such shtndards and
•
800-23 ~Guidelines to Federal
Assurance and
/ Use of Test/Evaluated Prodtlets
Controls for Federal Infbrmation
and
and
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D- 14
31096
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
o 800-115 ~Technical Guide to Information
800-11 8 Guide to Enterprise Password lvlanagcmcttt
and Assessment
o
o
"
800-133
800-137
RecomnJCndation for
OctlCralion
for Federal
Infom1ation
Infbnnation
and
•
Authentication Best Practices
•
o
ISO/IEC 2700 I - Infonnation
bodies as the
The
nn,>rroli•·•o
best
'l11e FS- ISAC
to work with the entire finatJCial
up to date with the latest information
activities.
the purposes
5.
BCP I OR Pr-oeess
'I1le Plan Proces,qor tUit~l
that arc tailored to the
and business
of the CAT
em.:ir.·onn·k'nl
and
data access, support
refers to how the
htt<::illCss
will contim~e in the event of a
disruption and the DR
relcr h) how the CAT infi·astn~etur1.1 will be u"'"·"''"u to support a filll data c..::nter mrtage. In
Plan Processor must h.we SLA.s
to
no
of critical aspects oftht~ CAT
redundant proc1.1ssors.
tu1its,
and must haw an architecture to support and meet the
SLi\
SLAs between the Plan Processot· and third
must be
thll
5.2
Jndnshy Standnn:ls
Natimml Institute of Standards and
standards, at a minimum.
The
must be followed in association vvith Disast1.1r ""'''"'"•"'" in ead1 '\ase as such standards and
1~a.uvu,.. or modified, am~1nded. or
be
successor
Committee:
•
Ibr Fcd1.1mllnfbrmation
800-34
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D· 15
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
•
the
sections as mm1mtnn
BCPandDR
31097
and
which idcnti !les
which outlines
0
0
'Warrante&
In
the Plan Processor will need to
a process to manage and report aU
hrcaeheoL
Busbu•ss Contiooih' Plannjng
5.3
'Ill~,) Plan Proce~sor will
rerm!t·ed of the CAT intl1e event of a
a C()lltinuation of the business activities
With respect to the team xwm'" "'""
sele~:ted that
~:ritical statl' necessary ft)f CAT bu.~ !ness
to allow for inuncdiate usc. The selection of the site must tak.:: into
and tclecommunieatiot!l;
tor CAT
account
in
staff to access the sile in the evllnl oftransit •' 1"'''1'""''''''
that may ailbct stall~
of stair
is
t:uun:•ncu
'"'''•·,:r'""'~
where CAT sta:t:I ()pcrates the
fi·om the
ensure that
s:y'Stcn'!'l,
,,..,,,.,,.fi and the Planl'rocessor still fimcti<ms as tL~ttal even in the event
of a
TI1c BCP nut~t
coordinate with criti~'<ll
Tile Plan Proccssorwill
an annual basis, Critical third
and
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D 16
31098
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
The Plan Processor mu-;t conduct third party risk assessments
intervals to
that
eontm!s implememed are il:l accordance with NIST SP 800-53. 'IlJCse risk
assessments mtllll include assessment
and
'I11e
Plan Processor should
"'"·"u'"' test a detailed crisis management plan to be
circumstances.
invoked
pr<lccssing sites fbr business
mw;t adhere to the
str'""rth~'n the Resilience oflh.e U.S. Financial
Sound
'Ib.~
Plan Processor will conduct an atJUual
BtL~iness '-unu1uu1LY
tire
ltxl.eptmdent Auditor
document all
5.4
''h·•l<'r'll<riNll''v
l>is~tstl'l' Recoven·
will
Requil'l'tnents
lhe Plan Processor ·willunrm~m,em
support the data
cat,at•tirtvtllat will ensure no loss of data and will
volumes of the CAT.
""''"''tuiiMl
'''""""''·vand restoration of services at the
,,f.llt'lr)it''Vill<r t!Cl\.1.
the sanre
pr<>Cesstng sites for disaster r.:::covery and
on Sound Practices to
the Resilience of the tJ.S. Financial
The
DR test which must
and a critical mass of non· Plan
CAT
and Data
and
Submitters. '01e tests mtL'lt be stmctured such that all CAT
the CAT Data toaders.
to the DR site and the data be
the \VQrst-case scenario.
p~,rl ;,,;n:mt·~
Failovet· processes mu~t be transparent to CAT ll"'"'."''l"'''"' as well as fi1ilback. In the event
or a site lailover, CAT
lllll.'it be able to deliver their
!11es with<mt ch>mPmr>
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Resiliellce
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
31099
which is an
TI1is avoids
error-prone cflhrt
site must be made available as
as
>vithin 48
site must be returned to
will have
SLAs. The DR plan must
For short duration
site or th.:: introducti<m of a new
site as the event dictates and
6.
1111
i11dication of the time
for this re-introduction.
J}.ata Availahitity
6.1
Dahl Processing
nn'""~""'"
within established timeframes to ensure data can be
staff and the SEC in a
the order event is rcct~ived
the Central "'''"'"'''+<"""'
to the Ci\..T
8:00a.m Eastem Time the
order cvet1t occuned
to as transaction
TI1e m··)""'~~i
"~'~''""""''" in this context i\11 event'> submitted allcr T+ 1
late or submitted later
because not all ofthe information was
nm~tbe
on the date
were received.
made available to
11le
the
timeframes
for the '""'"''"'{'"""'"
correction of errors fi·om the lime an order event is received
•
•
8:00a.m. Eastern Time Tl3
corrected data: and
•
that
date one
Noon Eastern Time T+ I
and conmll.u'lieation of errors to CAT
8:00a.m. Eastern Time T+5
date..,._ five
statr and the SEC.
date
····· Resubmission of
·~Corrected
data available to
may be CO!lsidered tO be nn>ce~sc"'
Late submissious or re-subtnissiotLs
if it falls within a
after the cutoff Tlris tln·eshold will be detennined
n.,,.,,.,,ti,·oo Committee. In the event that
the Plan Processor, the Plan Pro.;~cssor
m1:ty decide to halt
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D- 18
31100
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Figure A: CAT Central Repository Data Processing Timelines
6.2
Data Availability Requirements
Prior to 12:00 p.m. Eastern Time on T+1, raw unprocessed data that has been ingested by
the Plan Processor must be a'railable to Participants' regulatory staff and the SEC.
Between 12:00 p.m. Eastern Time on T+1 and T+5, access to all iterations of processed
data must be availableto Participants' regulatory staff and the SEC.
The Plan Processor must provide reports and notifications to Participant regulatory statT
and the SEC regularly during the five-day process, indicating the completeness of the data and
errors. Notice of major en·ors or missing data must be reported as early in the process as possible.
If any data remains un-linked afl:erT+5, it must be a•Jailable and included with all linked data with
an indication that the data was not linked.
If corrections are received after T+5, Participants' regulatory staff and the SEC must be
notified and infom1ed as to how re-processing will be completed. The Operating Committee will
be involved with decisions on how to re-process the data; however, this does not relieve the Plan
Processor of notifying the Participants' regulatory staff and the SEC
Figure B: Customer and Account Information (Including Pll)
S:OOAMI:T
5:00 PM(i
S:OOPP.HT
5:00 I'M 111
>I:OOAM£1'
T+l
T+1
T+;!
T+4
T+S
flell FQt\!S$11!g
QI"Err.:tr
Ulrrectioos
Data fi:eady
lniL!,;t D~ta
lt~l!!al
$ o.ll~mbsio>l
\lal'd~llM,
(.!lt!'U!UirliC<ttil:l!!
I
II-El$11lllti!S$lCI1
<>f Err.:>rs Oue
i
I
oi Etrors
for
Regulators
)
It!I
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Appendix D- 19
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
31101
CAT PII data must be
within established timeftames to ensure data can be llk"lde
available to
regulatory stall' and the SEC in a timel:<em manner. Industry .l'vlembers
submitting ne·w or modiflt~d CLL'ltomer infbrmation nnL'>t provide it to t11e Central
later than 8:00a.m. Eastern Time 011 Tt L Tile Central
must validate the
generate error repMt~ no later than 5:00 p.nt Ea~tern Time 011 T+3. The Central Repo:~tl<lry
proces::; l.h<l resubmitted data no later than 5:00p.m Eastern Time on T 14.
resubmitted no laterthan 5:00p.m. Eastem Time on T !3. TI1e Central
must process
the resubmitted data no later than 5:00p.m Eastem Time on T+4. Corrected data mtL~t be
no later than 8:00a.m. Eastern Time on T 15.
available to
7.
Re<'eipt of Data from Report u-s
7.1
Rel:'eipt ot'llab1 Tpmsntlssion
th<.) CAT
or Data Submitter, the Plan
aelKn<'lWiledlgemcnt of data rec<!ived to
the CAT
aclmo•wled!;ment will enable CAT .Re1rJorters
and Data
mini mum•
•
•
Date of
7.'2
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111e Plan Processor will
data va.Jidations at the t1le and individual record level
for data
the Phm l1 rocessor
cu"tomer data. If a record does not pass basic
then it must be
and sent back to the CAT Ke1nm-rer
31102
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
TI1e data validations must include the *"'h...,, .. ~ ca:tcqon1es and must be "}\,"'"""""in the
Technical
document:
•
arc in the com~ct
File 1/alidations Confirmation of fi lc transmission and
1l1is indudes validation \Jf header and trailers on th.:: submitted repQrt,
lvlarkct
Idetnificr, and verification
confirmation of a valid
ofib.:: munhilr of records in the file.
f~mnalo;.
o
Format checks:
• Check that the data is entered in the
format
Data
check~:
• Check that the data type of each attribute is as per
checks:
• Check that all attributes tor a record of a
type are consistent
o
Validate that tlach attribute t~)r tlvery recQrd has a valu.::
"F'"'-''11"" limits
•
o
Validate that the values rw•w•ti•''1
are associated with 100 event type
represent
each attribute
checks:
Data
• Validate that C!Wh attribute fi:)r every record has an !WiCCJl!:UIIJie valtte
~"'"'!"~'''~"'"''~ checks:
that l:laeh .llll1Llldat<lry attribute for every record is not null
Tirneliness che.ck"l:
•
that records were submitted within the submission time lines
•
or delete records that have
initial validations within the C/..:T
the Plan Pn)cessor must
After the Central
statistics,
•
•
Date of Submission~
•
Number of Iiies ltc!:epitCtl;
Reporter that the PJan Processor ckltermines ttl hav.:
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D 21
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
•
Number llffiles
•
Number oftotal ordcrevents
•
Number of order events
•
Number of each t:ype
•
Number of each type
•
Number
•
Nurnber of;.;ustomcr record:~ received:
•
Number oftotal
•
Number ofunknown accounts:
•
Number oflate submissions:
•
Order-IDs
•
Number oft·ecords
31103
\)f each
type
ctt~lon:Jer
record..,
and
•
mtL~t nnl he
Once a file
the
records
contained therein may d1en be
for
validation. Individual records that do not pass
the data validation processes \vii! not he includ0d in the final audit trail but l111.t'll be retain<.Jd.
records not
the validations will not be included tor
processes,
Individual records contai.ned in 111e~ that do no!
included for filrther
7.3
The Phm Processor mtL<>t capture
'I he
statistics mtL~t be available via a web interli:tcc, '111.:: Plan Processor
fo.r CAT
to amend mw cx<:ct•tlo·ns,
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31104
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
TI1e Plan Processor must support bulk error correction.
resubmittc:d as a new file with
indicators to identi()·' the
The Plan Processor will thc:n rcpmc.:ss repaired records.
A GlJl must be availablcfor CAT Kctlontcrsto tnakc
record, which is
to individual records or
attributes and must include, a! a minimum,
•
Count of
•
Reason fbr each
•
Firm
•
Details of each
•
order ID of each
status.
The Plan Processor must
records. TI1e Plan Processor must
with
process how to amend and
records that tail the validations that ar<.l outlined as
Section 7A, Tile Plan Processor must maintain a detailed audit trail ,,,,r.tnrm'"
""''"'''"''~ ofrccords.
of
to and
statistics
Plan Processor. TI1e Plan Processor must support a continuous validation and feedback model so
that CAT
can
and correct
111e
dctai Is. or codes
was
the Plan Processor must
stati~tics tor CAT h~er>ot1crs_
'Il1is vvill enable CAT
and
c;,m~e
a
Breaks in intermittent
the Ci\T
to break nor
C, Error Communication, Correction, and Processing,
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D- 23
31105
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Error corrections l11tl~t he able to be submitlccl and
al. any time, including
in order to :make
Ci\T
timcJrames a!ler the standard
mtL~t be abl<! to submit error correctiom for data errors identified
format validations.
C/\T R"""''t''''"
CAT
Additionally, the Plan Processor mu~t
•
Provide feedback as to the reason(s) fhr errors;
•
Preveni. a
•
A.llow broken
reports:
•
Allow error con·ectiotJS to be submitted both via online and bulk
break bet\C~leen rep01ts from
in additional ev<:nts
to submit or resubmit additional
•
or via file
repm1ers of any
•
the wrong issue
7.5
Dat11 Ingestion
and corrections, must be
based on the classification ofthe CAT ~.>."'""+·"·
a l~r''"'''r-<1<':>
Data
a format
the Raw Data must be tr"·"~'r'~""'~"1
~"'""'v •. ' output
8.
Fnnetionality ofthe CAT
8.1
111e Plan Processor mtl<:t.
all CAT Data tllr
CAT Data to
stafl' and the SRC with acce;;s to
staiT and the SEC will access
market
'Ill.:! CAT mu~t he able to
ala minimum.
users within the sy"Stem.
It is estimated that
20'?'0 of alltt~ers will tL~e !he S)"Siem on a
or
basis
10~~ of all users \'II' ill
advanced
access, as described
\'Vhilc
he low.
it is t:lsthnatcd that !here may he
600 eoncurn:ml tmers
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D· 24
31106
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
cc<~>:~·in;r the CAT at any
system without an umlceen!Lanle
in time. TI1ese users must be able to access and use the
2?3
As stated in Appendix D, Data
the Plan Processor must be able to support an
"'''"'""n1number of user roles. Def1ned roles must h1<:lude, at a minimum:
•
to usc the Central
stock
a
•
t1vo different
extracts.
8.1.1
an
Online Tat·geted Qul"ry Tool
authotized usct·s with the
to
•
with for the
•
Related instmments
•
Data type
•
Product
•
Processed data, unlinked data or
•
•
•
and
C/\T
•
•
•
ISO
•
Put/call;
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D 25
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
•
Strike
•
31107
Size;
•
•
Side;
•
Shnrt-"ale
•
•
Tirnc-in-tbrcc
Orders,
•
Orders. <JliOtcs, BBOs or trades within a range
•
Canceled orders andlor trades;
•
CAT
GTC, etc.);
BBOs ''r trades above ()f below a certain size;
n<:!L:L;riH>.g<;
OfVOIUfi1C
lhtC.!\holdz.; in li
of time;
•
CAT
•
Audit trail of order
•
Others to be defined.
TI1e tool
nrrWlli"'t1
the date and time the query request is
to the LL~ers. In
the toolmu~t
to these identifiers can be PaiiJelred
PII I>ata
111e Phm Processor must de line the maximum number
of records that can be viewed in the online tool as wei I as the maximum number of records tlmt can
be downloaded. Users must have the
downhmd the results to .csv.. txt, and other fbrmats,
111ese tiles will also need to be available in a
fbnnat
sets that exceed the tlk<tximum vie>vable or download limits must return lo users a
of the size of the result set and the
to c boose to have the result set
via au altemate method.
TI1e Plan Processor must define a maximum number of records that the online
tJUCfY tool is able to process. 'fl1e minimum l1Uil1her of records that tht:: online
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D ·· 26
31108
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
is able to process is 5,000
downloadable
within the online query
via a
are available for dmvnload, U!:;ers are l<J be
the t<)tat file size of the
to download the results in a
or
Users that select the
multiple file
will be
to de!lne the rnaxinmm file size oftbe downloadable files_
'Inc application will then pnwide users with the
to d\>wnload the files. 'l11is
IS
nr<1Vll1eLt to address limitations of end-user oot\vork environment that may o..:cur when
large Illes_
Once
The tool must
oftlk~
SEC <7flts
}n,,.•-qtnm Committee
tl~age
and parameters used in tl1e query, the user lD of the
submitted
the date and time
l'rocessonvilluse this
submission, as \Vel! a!! the
ofrcsull!l. 'l11c Phm
and the
monthly reports to each
and data usage ofthe online
tooL Tile
reports in order to revic\v
user
and system pnJce:sstng nc:rl<lnllllUl<ce.
the minimum
response times will be incren111:nts of
that either scan
vol untes ofdata
result sets
For
trade
or return
within24 hours of1hc submissionofthe request
within the online C(Uery tool,
query request for
must rctum
result~
3 hours.
Pedbm1ancc rclmirctncJnts listed below
to data:
•
trade data
in
0
0
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•
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tool searches tbat include
and
National Best (.)ffer data itl scateh
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17MYN2
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0
~~"''""'t"''in a sp•ectfled
12-month duration fh1m the most recent 24 ... ~ ........ "
results ibr the filii 6 years or data tbr
and HlliUH''''"lll
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
31109
,,
from a
Participant could have
window not to exceed I 0
in a
for a
within 5 minutes tl'r all orders, caneelatiore, and the Natiotllll
Best Bid and Nati<mal Best O!Ter
and
at lhe time
o
the order is created tor a
exee<:d lO minutes for a
r,.;sults within 5 minut,.;s for all equity and
'"'""""''"'''""'""' ;md executions fhnn a
in a
time window not to exceed lO minutes for
0
results within 5 minutes for all
and trades
all
series li>r the same
10 minutes tor
time window not to exceed
must retum results in a ~"'~'~'t.""
10 mimr!es j(}r a
and
result~ within 5 minutes for all
and quotes entered
a
a
list of instruments nu<>t return res nits in a
lime window not to exceed l 0 minuL<ls for a
date.
window not to
o
~~xeeed
query tool architecture must include an automated
resource
'll1is feature mtt~t manage query requests to bahmce the
W()fkload to ensure the response times for
and
meet the de tined response
and
query requests based on
times. 'Il1e resource tnanagemen! fimction will
<Jf the query, a.nd the vollUlle of data lo be
in the quer,y.
the source of the query may also be used to
the
111e Plan
Processor must
details on th.::
defined solution
online query
requests.
Tl1e online
At a minimum,
must
query tool mlt~t be able to process up to 300 simultaneou'> query requests with
8.1.3
Acees.~
Online Targeted Query Tool Aeeessand Adminisbation
to CAT Data is limited to authorized
users from the
and the
and the SEC may t!L'l~ess all CAT Dam, with the
lromthc
.fi·om the
and the SEC will
The Plan Processor must
an administmtivc and authorizati<m process t<)
'The Plan Pn1ccssor must .have
and a process in
to
a
basis.
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1). 28
31110
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
A, t\Vo-tactor authentication is
tor access to CAT Data, PII data must oot be
query tool m· the mer-dcllncd direct query interlace.
available via the online
8.2
lJser-Uetined Di.rect Queries and Bglk J::xtraction ofUab
must
fbr direct
and download of
tmcrs. Both the uscr-ddincd direct
and bulk t'Kiracts will be tL~t:d
set'l of data that. can then be tlScd in internal surveillatlCC or market
The data extracts tl1Ll~t u~c cmnmou indtL~tl)' formats.
TI1e
demonstrate mbust
and market
'"'v'"'V'"·~
tt~ag.:
query. SlU'Veilhmcc,
tasks such as
and croslHnttrket surveillance.
lllill"k.:t nJt"nn"rn
The
Ibr
this
is
upon the architecture ofthc CAT
and will be defined
the final solution. The CAT cannot be web-based due to the volumes of
data that could be extracted.
mtlqt conmin the same
query tooL The Plan
date and at least or1e other t1eld
r<><mi:>t "''''~ must tL~C in direct
as the online
"'''""""'"'"and
TI1e Plan Pmcessor n1.~y choose to
users
that will use the
to
that user-defined direct query
sessions.
Tile btdk eJ~:tract feature will
ECAT and COATS
current lntennarket
data tiles that are
and
to many su:rve ill ance
exist to
the contlilnt and
of in:tormatio11 avaHable in these data files.
Plan Processor will need to \vork with ISG to
define new
that will include additional data elements that ·will be available in the CAT
Data.
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1).
31111
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
TI1e Plan Processor is
nr<"~"~'"''1
and unlinked CAT Data,
8.1.1
User-lletined Oirect Query l'etfomumce Requirements
'!11c u~er-d~lfined direct query t')o] is a controlled component of the
environment made available to alhnvthc
sta!T and
'I11c user-dctincd
•
tool mu~t:
Provide query result~ that are extractable / d<lwnloadable and can be Ll~ed to refine
•
•
a certain time
more than 5'~o away frmn the National &st Bid and ""u"""'
•
u~er-defined
•
ftmetions are
sets
data:
•
Provide (]uery owners with the
to schedule
•
Provide tjUet')' owners with the
scheduled
of a query;
to cancel a qullry
•
•
execution or
to the
mvned
that htt'VC
Pmvide an automated
method of scheduled query result'> In
methods muqt
tht.~ Hm1r<JnnJlle
with all informtition
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D 30
31112
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
•
Provide technical
about lh.:.~ content
•
Include workload balancer to allow
and/or functionality
and
results; and
the tt~er-defined direct query
query rcquesl:;c witl1 no
For bulk e.\.iracts of an entire
data is fi>ur oottrs. This
ow1u1etwork envirom1~11t
tranHter time of
asstuncs that there arc no limitations within tl1C
that will prevent the Plan Processortrom
tills
A consideration was made to
that could be
upon request The
would
and lh<i: SEC. Due to the added
'·'""'"·'""' del<:rmincd that !his was
that may be
CAT. 'I11is will he n:msscssed when broker-dealers
and launch ofthe
data to the CAT
It is envisioned that
will be unable to access their data
of CAT.
submissions
bulk data
and the SEC will have access to
Extraction of data must be coJtlSl:~tent
Plan Processor. Data rcturncd nm~t he
of transmission. In
PU data must be
data that has been
"l11e Plan
Proces~;ormll'>t
have an automated
n~ch<lnism
in
usage. This
must include automated alerts to
"'"''"'"'" issu.::s with botllct~cks or
0x1ractions. 'I11c
and th<J me tri cs
Plan Proc.:ssor must
that will be used to
'111<: ltqcr-ddincd direct query and bulk cxtmcti~m tool mu'lt
suhmi!icd
and
used in th.:
the user lD ofthe
th..: date and tin~ of the submission and
'""'""'''t''''~
tl~c this
inlormation to
and the SEC oftheir
'!11c Plan Processor will
ll~agc
of the online query tooL
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31113
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
The bulk e l>1ract tool must support
A.la
extract tool mm;t be able t<) process up to ](){) simultaneoll" query requests with no
dll!o,'radation.
8.3
"·"""'"'~""''
Identifying LateJlC)' and Conmumkating Latency Wammgs to C'AT
Rl>nm'ters
The Phm Processor will measure and mNlitor
within the CAT network.
'l11rcsholds fbr
Commi ltcc 11lr
The Plan Processor will al~o define
and the communication of data teed
to CAT
the
and tools to monitor and manage the
Committee. Such
•
to include both
•
of query tool u<>age
•
from
8.5
will be established for
and
areas,
•
and order event
•
•
•
•
User
network. and data
•
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D 32
31114
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
Tile actual tenns oftlle SLAs ''"ill be
l'lan I)rocessor.
9.
!lei~OtJ.ate'd
and the eventual
bet,veen the Plan
CAT Customer a.nd Customer Account lnfonnat.ion
TI1e CAT must capture and store Customer and Customer Account Information in a secure
±rom the transactional database. 11le Plan Processor will maintain
database
in!'(mnrtion
to Lmiquel
and associated accounts :li:otn each CAT
each Custmtler across all Ci\'r
at a
mlnimmn. must be cat1tn1md
number
•
Social
•
Current
•
Previm1'l name: and
•
Identification Nun1ber
Date
•
or Individual
Previou<:; address.
the CAT nttl<:l capture tht:
For
•
Tax
•
Full
•
attributes:
Address.
name; and
·n1e Plan Processor must maintain valid Customer and Customer Account hlfonnation fbr
and
stair and the SEC to
~''""'"·~·", address
submitted finn
II), Ctt'ltomcr Account lnfi.mnrtion
<md nnL~t continue to process orders while
mismatcht\S. \lalidati<)ns should:
•
Con:11rm the number
•
Custon11::r in[brmation
on a
Confirm date of birth. and
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D· 33
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
•
,•\ccmmnodatc the situation vvhcrc a
31115
rnore than one individuaL
'Ute Plan Processor will usc the Ctt~tomcr information submitlcd by all broker-dcak'l' CAT
ll""'"t-1''''"" tn
a
Customcr-JD lt)r each Cu~tomcr. 'l11e Cw;tomcr-ID must he
consistent across all broker-dealers that have an account associated \Vith that CtL~tmner. TI1is
CAT-Cu~t(llncr-10 will not he returned to Cl\T
1111d will only be tl~cd
the Ci\T.
submit full account lists :tor all active accotults to the Pial!
and
basis. In addition, the Phm
Processor and
have
account owners aml associated Customer infonnation
accot111l'>, '""'"'"'"'<'~
account<:, etc.), and must he able to link accounts tl1at mov.:: fmm on.:: CAT
to anoth.::r
due to mergers and "'"'·•"''""·""'•
9.2
Required J)at:t Att.rilmtes for Customer lnfotmation Oata Submitted by
Itl(lmh·y l\·IembeJ:S
Ctt~tomer
At a minimum, the
Central Kelr:>m;nor'
•
Accm111t Owner
•
Account O..vncr
•
Account Tax Identifier
•
]l•iarkct ldentillets
·rradcr !D.
•
of Accmnrt.;
•
Firm Identifier Nmnbe1..
o
11Je number that the CAT
Account;
•
Ba11k
will
Prime Brok.:r !D;
•
ID; and
Custome1·-ID
Tnu~king
'H1e Plan Processor will
Pt·ocessor \Viii determine a
a
CAT·Cu~tomcr·ID
tl1r tJach
Ctt~tomcr. '!11tJ Plan
in:l:onnation such as SSN and DOB for natural
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9.3
VerDate Sep<11>2014
by the
information data attributes must be
31116
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
identifiers tor Customers that are not natural persons and will resolve
Once a Ci\T-Cttstom.:r.ID is
it will be added to mwh linked
unlinked)
order record for that Ctmionwr.
scr·cpatl<~tes.
trom any Ctt'\ tmrer or &>roup of Customers, ,.,,,,,,.m,·~~
the order.
l11e Plan Processor mu~t
and mechanisms to handle both
and
minor and n1aterial inc<lttsistencies in Customer intortuation. The Central
needs to be
able to accommodate minor data
such as variatkm:> in road name abbreviations in
searches. Material incmtsisteneies such as two dift(mmt
the same SSN must be
communicated to the
CAT
and
the established error
in Section 8.
correction time frame as
Tite Central
audit trail
mu~t, <lt
Rc,polsit<~ry 111ust
have an audit trail ""''"''m" the resolution of all en·ors. "flle
include the:
a
•
InitiaL submission date and
•
Data in qu,~stJton <lr the ID of the record in qu<~suon;
•
Reason identified as the source oftbc issue, such as:
tlnM,J;,,,,.,,
SSN,
SSN,.
rhlt.•r·,mt
isc1rcpan~:ies
in t:nD; or
others as determined
th<: Phm Processor:
•
Date and time the issue was transmitted to the Ci:\T Jtcnoru:r.ineludcd each time the
issue was
if more than once;
one, or the record
of the eorrcctcd data or a
resolved and corrected data was n<JI
and
•
10.
Corrected
the record
that the issue was
or a link to the corrected data.
User Suppnt
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31117
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
TI1e Plan Processon11il!
and business support to CAT
f(lr all aspects of reporting Such support will include, at a minimum:
R"'"'"rt"'r~
•
Se(f:.hcJp through a web
•
Direct support
•
Support contact information available
•
email and
the
and
Direct interface with
calls,
Members and Data Submitters via
group n1<:cti1rtgs and informational and
sessions.
ev.::nt<; and
'!11c PI, an Processor mu.<;t
•
lV!onitor its submissions~
•
View submitted transactions in a non· bulk format
error corrccti ons:
•
•
and com:;ct en·ors;
and
•
lli[onitor system status.
and maintain communication nr'"'""'"l~
CAT
informed as to their current ,.,,,,,uil""'
statuq, as well as issues with the CAT that may
CAT R''"'"rt•''''~
data. 111e website will use user authentication to prevent u~ers ft)f
other tlmn their own, m1d will contain:
·n1e l'lan Processor will
mess<tglltlgJ and a secure website to
•
o
Number oftiles accepted;
Number oftiles "'"'""""'"
Nu111ber oftotal
Number of order events re.tect.ed:
Number of each type of report received:
o Number of each type of report ac,~eJlte,cl;
only be able to view ils own data ll!ld data it submits on
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31118
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
"
Number of each type
Number oftota! eLL'itomer
re(~ords
o
Number oftotal
ctt~tomcr
records
o
()rder• JI)s
Reason for
()
"
o
ofrccords matched;
Number of customer records n''"'''''.'''''
o
o Number oftulkno\V!l accounts;
o
Latest view of statistics incltt<:iv.:: of rc-submissions to get a trade-date view of
and .:onection statistics available fi,r CAT
to know when
cornpl·eteJi; and
''""*''~'"no tor a
Most rect~nt CAT ~<•~•nnr1,,.
Report Card, as defined in section 12.4;
•
CA.T
and
•
A mechanism tor
inaceurate data.
or
and ll1.:1intain a
•
T1:1chnieal
•
•
•
•
to the
Fee schedule.
The Plan Processor will
and maintain a mechanism for
CAT
IUJilOIIll::l-
>vill not have a':cess to their data submissions
of the Centml
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Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
31119
and the SEC will have access to filii
corrected bulk data exports.
CAT
will he able to view their submissions online in a
nn1t1-<'·xn<wlnnt.~ l~mnat to fiwililate crroridentification and correction_ Data Submitters will be
for
and error correction purposes.
able to e:..port. bulk file
'Ill<: Plan Processor will define methods
Reporters and
and
which it will consult \Vith and inform CAT
to tL~er supporL
'l11e Plan Procc~sor will define pre- and po~t-pr<>duction support programs to minimize the
Error Rate and hdp Ci\T
to tneet their
thresholds. Such nr~·-nt·Nfili'l 1
support program shall
but arc not limited to. the
activities:
•
of the
0
Technical
•
·""""'·'·'•··"" usages for each value in field format
•
o
attribute values
f<lt'
cad1 Held
Establishment of a dedicated
o
to contact
in order
•
Include infot111ation on ne\V order/ tt·ade t)pes;
•
all 11rms to:
0
0
Establish internal controls to capture
and
Work with the Plnn Pmcessor to understand scenario-based'""'"''·"'" <md
'"'''''''t""l outputs.
•
A strong communications
of the timlll ine to
Include con11nt11tieation on ll\)W Error Rates and
and
Describe how enors will be con11mtnicated back to CAT
•
test resull'l
mtL~t
Till'eslrolds arc
be available for all CAT
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D- 38
31120
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
o
including all three validation processes,
shall he establi~hed.
A separate test environment tor CAT
that mirrors the
environment sha.ll h0
but are not limited to the
pr<-1grmn activities shall
•
with inl:(>rmation on how
•
•
•
and oth..::1· intbnl'k"ttionai notices to be
as necessary;
•
•
•
standards;
•
•
•
the test envirotllll!::nt
to
new code to
10.2
1uld business
'l11c CAT
desk
to CAT tt~crs,
technical
to
contcm and structure ofthc CAT query
and/or
the
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Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
TI1e Plan Processor ">Vill
and/or rcp<lrt~.
well as !he curmnt fltatu~ and estitw1ted
statu~
31121
ofthcir
time of each qucryirllport
11te Plan Processor will
status, outages and other issues that would all'cct "'"."''"'"
SEC's
to access, extract, and use CAT Data. AJ a minimum,
and the SEC nuiSt each have access to a secure website where
can tnonitor Cl\.T
statu~. receive and track sy"Stcm
1md submit and
data requests.
<U1d maintain documentation and other materials as
The Phtn Proecssorwill
necessary to train
documentation on how
to build and run
10.3
CAT Help Desk
1h:l Plan Processor will
third party CAT
and
Help Desk will
and issues.
SEC with ""'"'"v•~
The CAT
live >vithin a
upon reasonable timcfh1nre
after the Plan Processor is
and must be available on a 24x7
support both email and
and be stalled to handle at minimum 2,500 calls per month.
Desk must be
an increased call volume at least tor the first few
ll:lllintain a robust electronic
system for the
years.
ClcT
issue re~olution escalatio!l.
CAT
Desk support fhnction~ must include:
•
the
and
•
•
and third party Data Submitters
and
•
•
with data submissions and data ''"'"'""•''"''"Q
of Customer and Ctt~tomcr Account
•
lnt.·u·n"'"''
s:y1>tem
•
data !l'ait'ISrtliSSIOU
'''""''"''""'•
to SEC Rult: 613 that may atre.:t the C/\T, S()ftware/hardware
VerDate Sep<11>2014
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l)-
31122
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
•
re11lll1ttm:-v
statf and the SEC about
the building and
•
lOA
CAT Reporter CmllJ!Ii>mce
The Plan Proccssortntl.'>t includ0 a colmnrcl~etL<>i,,•e "''""P"'"''""
adherence to SEC Rule 613. '!11e Chief ~''""l·""u"'"
COilll!)Ot:li~llt
of this program, the Plan Processor will
on a
allowable Error Rate established.
the
be set the CAT Nl\·18 Plan, and will be reviewed and
n •.,.,.,,tirlo Committee. Error Rates will be based on
Repo:t'tc1rs exe~:cdmg the maximum
,_J, ·-··- ••
ou an
timeliness, correctness. and
llle Plan Pr<'>cc~.~<'>n:t'l
and recommend to
established the rar·uctpanrs.
have exceeded the maximum allowable
rct11ortm~r rc(mi1rcnrlC1111s that
did not !ltlly meet
lhe Plan Processor will also recommend critc.ria and processes
tor
or late submission~. TI1e '-'11'"""""'"""
R""'"rt'''''~ will be fined
•
Number ofinaccurate transaction5 submitted;
•
Number
•
Number oftnutsactions submitted laterthan
mc:onDI•ete
tnmsac1ion~
sutmntte<:t; and
deadlines.
The CAT
program will indude reviews to
that may have failed to submit order events to the
as well as to ett5ure CAT KCPOI!iCirs
all identified e!Tors even ifsuch errors do not exceed the maximum allowable'-·"""!}"''"'~'"
·nm:sho Id.
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TI1e Plan Pn1cess!1r ~:vi
""'''"''""''""''" and t~nt1m:u•t!;()n
31123
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
can monitor their members'
with
and initiate
action when appropriate. The Plan Processor
requ..::sl !rom the
and the SEC, reports containing
as needed on each CAT
thresholds
reports ior all CAT
similar peers. '1l1e
to detem1inc th.:1 members ofthe peer
statistics
'l11e Plan l'rm:essm·v.dll
and make available to
on a
basis a
Error Rates. transaction vollnnes, and other metrics as needed to allow
and
of CAT
to the Central
11.
Upgnule Proeess and Developmellt of Ne'ft' Fnncti.ooolit;y
1hz Plan Processor must
which process must
process must, at a rninimum:
•
Contain a nkJchanism
""''''"r-nn-oo
the detennination to
ne-.v
the
Committee. The
which
Comrni.ttcc members,
•
Contain a defined pmeess for
fbr '"''""'~~,(!
•
Contain a nkJchanism
undct1ak~~
which functional
can be rcvie\vcd a11d
or
any
of
'""r"'~""' Committee.
or modifications
11.2
nnL~t
'll1c Plan Processormust
lbr:
a proeess to govern
k• CAT 'I1Jif; process
contain
•
!sol ated i ntl-astructun:
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]]>Agencies
[Federal Register Volume 81, Number 95 (Tuesday, May 17, 2016)]
[Notices]
[Pages 30613-31124]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-10461]
[[Page 30613]]
Vol. 81
Tuesday,
No. 95
May 17, 2016
Part II
Securities and Exchange Commission
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Joint Industry Plan; Notice of Filing of the National Market System
Plan Governing the Consolidated Audit Trail; Notices
Federal Register / Vol. 81 , No. 95 / Tuesday, May 17, 2016 /
Notices
[[Page 30614]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77724; File No. 4-698]
Joint Industry Plan; Notice of Filing of the National Market
System Plan Governing the Consolidated Audit Trail
April 27, 2016.
Table of Contents
I. Introduction
II. Background
III. Description of the Plan
A. Statement of Purpose and Request for Comment
1. Background
2. Request for Exemption from Certain Requirements under Rule
613
3. Requirements Pursuant to Rule 608(a)
B. Summary of Additional CAT NMS Plan Provisions and Request for
Comment
1. Reporting Procedures
2. Timeliness of Data Reporting
3. Uniform Format
4. Clock Synchronization
5. Time Stamp Granularity
6. CAT-Reporter-ID
7. Customer-ID
8. Order Allocation Information
9. Options Market Maker Quotes
10. Error Rates
11. Regulatory Access
12. Security, Confidentiality, and Use of Data
IV. Economic Analysis
A. Introduction
B. Summary of Expected Economic Effects
C. Framework for Economic Analysis
1. Economic Framework
2. Existing Uncertainties
3. Request for Comment on the Framework
D. Baseline
1. Current State of Regulatory Activities
2. Current State of Trade and Order Data
3. Request for Comment on the Baseline
E. Benefits
1. Improvements in Data Qualities
2. Improvements to Regulatory Activities
3. Other Provisions of the CAT NMS Plan
4. Request for Comment on the Benefits
F. Costs
1. Analysis of Expected Costs
2. Aggregate Costs to Industry
3. Further Analysis of Costs
4. Second-Order Effects and Other Security-related Costs
5. Request for Comment on the Costs
G. Efficiency, Competition, and Capital Formation
1. Competition
2. Efficiency
3. Capital Formation
4. Related Considerations Affecting Competition, Efficiency and
Capital Formation
5. Request for Comment on Efficiency, Competition, and Capital
Formation
H. Alternatives
1. Alternatives to the Approaches the Exemption Order Permitted
to be Included in the Plan
2. Alternatives to Certain Specific Approaches in the CAT NMS
Plan
3. Alternatives to the Scope of Certain Specific Elements in the
CAT NMS Plan
4. Alternatives to the CAT NMS Plan
5. Request for Comment on the Alternatives
I. Request for Comment on the Economic Analysis
V. Paperwork Reduction Act
A. Summary of Collection of Information under Rule 613
1. Central Repository
2. Data Collection and Reporting
3. Collection and Retention of NBBO, Last Sale Data and
Transaction Reports
4. Surveillance
5. Participant Rule Filings
6. Written Assessment of Operation of the Consolidated Audit
Trail
7. Document on Expansion to Other Securities
B. Proposed Use of Information
1. Central Repository
2. Data Collection and Reporting
3. Collection and Retention of NBBO, Last Sale Data and
Transaction Reports
4. Surveillance
5. Written Assessment of Operation of the Consolidated Audit
Trail
6. Document on Expansion to Other Securities
C. Respondents
1. National Securities Exchanges and National Securities
Associations
2. Members of National Securities Exchanges and National
Securities Association
D. Total Initial and Annual Reporting and Recordkeeping Burden
1. Burden on National Securities Exchanges and National
Securities Associations
2. Burden on Members of National Securities Exchanges and
National Securities Associations
E. Collection of Information is Mandatory
F. Confidentiality
G. Recordkeeping Requirements
H. Request for Comments
VI. Solicitation of Comments
I. Introduction
Pursuant to Section 11A of the Securities Exchange Act of 1934 (the
``Act'') \1\ and Rule 608 thereunder,\2\ notice is hereby given that on
February 27, 2015, BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX
Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board
Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA
Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory
Authority, Inc., International Securities Exchange, LLC, ISE Gemini,
LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc.,
NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock
Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE
Arca, Inc. (collectively, ``SROs'' or ``Participants''), filed with the
Securities and Exchange Commission (the ``Commission'' or ``SEC'') a
National Market System Plan Governing the Consolidated Audit Trail (the
``CAT NMS Plan'' or ``Plan'').\3\ On December 24, 2015, the SROs
submitted an Amendment to the CAT NMS Plan.\4\ A copy of the CAT NMS
Plan, as modified by the Amendment, is attached as Exhibit A hereto.
The Commission is publishing this Notice to solicit comments on the CAT
NMS Plan. The Commission also is publishing notice of, and soliciting
comment on, an analysis of the potential economic effects of
implementing the CAT NMS Plan, as set forth in Section IV of this
Notice, and the collection of information requirements in the CAT NMS
Plan as required by the Paperwork Reduction Act, as set forth in
Section V of this Notice.
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\1\ 15 U.S.C. 78k-1.
\2\ 17 CFR 242.608.
\3\ See Letter from Participants to Brent J. Fields, Secretary,
Commission, dated February 27, 2015. Pursuant to Rule 613, the SROs
were required to file the CAT NMS Plan on or before April 28, 2013.
At the SROs' request, the Commission granted exemptions to extend
the deadline for filing the CAT NMS Plan to December 6, 2013, and
then to September 30, 2014. See Securities Exchange Act Release Nos.
69060 (March 7, 2013), 78 FR 15771 (March 12, 2013); 71018 (December
6, 2013), 78 FR 75669 (December 12, 2013). The SROs filed the CAT
NMS Plan on September 30, 2014 (the ``Initial CAT NMS Plan''). See
Letter from the SROs, to Brent J. Fields, Secretary, Commission,
dated September 30, 2014. The CAT NMS Plan filed on February 27,
2015, was an amendment to and replacement of the Initial CAT NMS
Plan (the ``Amended and Restated CAT NMS Plan''). On December 24,
2015, the SROs submitted an Amendment to the Amended and Restated
CAT NMS Plan. See Letter from Participants to Brent J. Fields,
Secretary, Commission, dated December 23, 2015 (the ``Amendment'').
On February 9, 2016, the Participants filed with the Commission an
identical, but unmarked, version of the Amended and Restated CAT NMS
Plan, dated February 27, 2015, as modified by the Amendment, as well
as a copy of the request for proposal issued by the Participants to
solicit Bids from parties interested in serving as the Plan
Processor for the consolidated audit trail. See Exhibit A and infra
note 29. Unless the context otherwise requires, the ``CAT NMS Plan''
shall refer to the Amended and Restated CAT NMS Plan, as modified by
the Amendment. The Commission notes that the application of ISE
Mercury, LLC for registration as a national securities exchange was
granted on January 29, 2016. See Securities Exchange Act Release No.
76998 (January 29, 2016), 81 FR 6066 (February 4, 2016). The
Commission understands that ISE Mercury, LLC will become a
Participant in the CAT NMS Plan and thus is accounted for as a
Participant for purposes of this Notice.
\4\ See Amendment, supra note 3.
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II. Background
The Commission believes that the regulatory data infrastructure on
which the SROs and the Commission currently must rely generally is
outdated and inadequate to effectively oversee a complex, dispersed,
and highly automated national market system. In performing their
oversight responsibilities, regulators today must
[[Page 30615]]
attempt to cobble together disparate data from a variety of existing
information systems lacking in completeness, accuracy, accessibility,
and/or timeliness--a model that neither supports the efficient
aggregation of data from multiple trading venues nor yields the type of
complete and accurate market activity data needed for robust market
oversight.
Currently, FINRA and some of the exchanges maintain their own
separate audit trail systems for certain segments of this trading
activity, which vary in scope, required data elements and format. In
performing their market oversight responsibilities, SRO and Commission
Staffs today must rely heavily on data from these various SRO audit
trails. However, as noted in Section IV.D below, there are shortcomings
in the completeness, accuracy, accessibility, and timeliness of these
existing audit trail systems. Some of these shortcomings are a result
of the disparate nature of the systems, which make it impractical, for
example, to follow orders through their entire lifecycle as they may be
routed, aggregated, re-routed, and disaggregated across multiple
markets. The lack of key information in the audit trails that would be
useful for regulatory oversight, such as the identity of the customers
who originate orders, or even the fact that two sets of orders may have
been originated by the same customer, is another shortcoming.\5\
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\5\ The Commission notes that the SROs have taken steps in
recent years to update their audit trail requirements. For example,
NYSE, NYSE Amex LLC (n/k/a ``NYSE MKT LLC'') (``NYSE Amex''), and
NYSE ARCA, Inc. (``NYSE Arca'') have adopted audit trail rules that
coordinate with FINRA's OATS requirements. See Securities Exchange
Act Release No. 65523 (October 7, 2011), 76 FR 64154 (October 17,
2011) (concerning NYSE); Securities Exchange Act Release No. 65524
(October 7, 2011), 76 FR 64151 (October 17, 2011) (concerning NYSE
Amex); Securities Exchange Act Release No. 65544 (October 12, 2011),
76 FR 64406 (October 18, 2011) (concerning NYSE Arca). This allows
the SROs to submit their data to FINRA pursuant to a Regulatory
Service Agreement (``RSA''), which FINRA can then reformat and
combine with OATS data. Despite these efforts, however, significant
deficiencies remain. See Section IV.D.2, infra.
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Though SRO and Commission Staff also have access to sources of
market activity data other than SRO audit trails, these systems each
suffer their own drawbacks. For example, data obtained from the
electronic blue sheet (``EBS'') \6\ system and equity cleared reports
\7\ comprise only trade executions, and not orders or quotes. In
addition, like data from existing audit trails, data from these sources
lacks key elements important to regulators, such as the identity of the
customer in the case of equity cleared reports. Furthermore, recent
experience with implementing incremental improvements to the EBS system
has illustrated some of the overall limitations of the current
technologies and mechanisms used by the industry to collect, record,
and make available market activity data for regulatory purposes.\8\
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\6\ EBSs are trading records requested by the Commission and
SROs from broker-dealers that are used in regulatory investigations
to identify buyers and sellers of specific securities.
\7\ The Commission uses the National Securities Clearing
Corporation's (``NSCC'') equity cleared report for initial
regulatory inquiries. This report is generated on a daily basis by
the SROs and is provided to the NSCC in a database accessible by the
Commission, and shows the number of trades and daily volume of all
equity securities in which transactions took place, sorted by
clearing member. The information provided is end-of-day data and is
searchable by security name and CUSIP number.
\8\ See Securities Exchange Act Release No. 64976 (July 27,
2011), 76 FR 46960 (August 3, 2011) (``Large Trader Release'').
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Recognizing these shortcomings, on July 11, 2012, the Commission
adopted Rule 613 of Regulation NMS under the Act.\9\ Rule 613 required
the SROs to submit a national market system (``NMS'') plan to create,
implement, and maintain a consolidated audit trail (``CAT'') that would
capture customer and order event information for orders in NMS
securities, across all markets, from the time of order inception
through routing, cancellation, modification, or execution in a single,
consolidated data source.\10\ On February 27, 2015, the SROs submitted
the CAT NMS Plan.\11\
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\9\ See Securities Exchange Act Release No. 67457 (July 18,
2012), 77 FR 45722 (August 1, 2012) (``Adopting Release''); see also
Securities Exchange Act Release No. 62174 (May 26, 2010), 75 FR
32556 (June 8, 2010) (``Proposing Release'').
\10\ See 17 CFR 242.613(a)(1), (c)(1), (c)(7).
\11\ See supra note 3.
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The SROs also submitted a separate NMS plan and an exemptive
request letter related to the CAT NMS Plan. Specifically, on September
3, 2013, the SROs filed an NMS Plan pursuant to Rule 608 governing the
SROs' review, evaluation, and ultimate selection of the Plan Processor
\12\ for the consolidated audit trail (the ``Selection Plan'').\13\ The
Selection Plan was published for comment in the Federal Register on
November 21, 2013 and approved by the Commission on February 21,
2014.\14\ Subsequently, the SROs filed three amendments to the
Selection Plan, two of which were approved by the Commission on June
17, 2015 and September 24, 2015 \15\ The CAT NMS Plan reflects the
process approved by the Commission for reviewing, evaluating and
ultimately selecting the Plan Processor, as set forth in the Selection
Plan, as amended. Second, on January 30, 2015, the SROs filed an
application,\16\ pursuant to Rule 0-12 under the Act,\17\ requesting
that the Commission grant exemptions from certain requirements of Rule
613. The Commission granted the exemptions on March 1, 2016.\18\ The
CAT NMS Plan
[[Page 30616]]
published for comment in this Notice reflects the exemptive relief
granted by the Commission.
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\12\ As set forth in Section 1.1 of the CAT NMS Plan, the Plan
Processor ``means the Initial Plan Processor or any other Person
selected by the Operating Committee pursuant to SEC Rule 613 and
Sections 4.3(b)(i) and 6.1, and with regard to the Initial Plan
Processor, the Selection Plan, to perform the CAT processing
functions required by SEC Rule 613 and set forth in [the CAT NMS
Plan].''
\13\ See Securities Exchange Act Release No. 70892 (November 15,
2013), 78 FR 69910 (November 21, 2013) (``Selection Plan Notice'').
\14\ See id.; see also Securities Exchange Act Release No.
71596, 79 FR 11152 (February 27, 2014) (``Selection Plan Approval
Order'').
\15\ See Securities Exchange Act Release Nos. 75192 (June 17,
2015), 80 FR 36028 (June 23, 2015) (Order Approving Amendment No. 1
to the Selection Plan); 75980 (September 24, 2015), 80 FR 58796
(September 30, 2015) (Order Approving Amendment No. 2 to the
Selection Plan); Letter from SROs to Brent J. Fields, Secretary,
Commission, dated March 29, 2016; see also Securities Exchange Act
Release Nos. 74223 (February 6, 2015), 80 FR 7654 (February 11,
2015) (Notice of Amendment No. 1 to the Selection Plan); 75193 (June
17, 2015), 80 FR 36006 (June 23, 2015) (Notice of Amendment No. 2 to
the Selection Plan).
\16\ See Letter from Participants to Brent J. Fields, Secretary,
Commission, dated January 30, 2015 (``Exemptive Request Letter'').
Specifically, the SROs request exemptive relief from the Rule's
requirements related to: (1) The reporting of Options Market Maker
quotations, as required under Rule 613(c)(7)(ii) and (iv); (2) the
reporting and use of the Customer-ID under Rule 613(c)(7)(i)(A),
(iv)(F), (viii)(B) and 613(c)(8); (3) the reporting of the CAT-
Reporter-ID, as required under Rule 613(c)(7)(i)(C), (ii)(D),
(ii)(E), (iii)(D), (iii)(E), (iv)(F), (v)(F), (vi)(B), and (c)(8);
(4) the linking of executions to specific subaccount allocations, as
required under Rule 613(c)(7)(vi)(A); and (5) the time stamp
granularity requirement of Rule 613(d)(3) for certain manual order
events subject to reporting under Rule 613(c)(7)(i)(E), (ii)(C),
(iii)(C) and (iv)(C). On April 3, 2015, the SROs filed a supplement
related to the requested exemption for Rule 613(c)(7)(vi)(A). See
Letter from Robert Colby, FINRA, on behalf of the SROs, to Brent J.
Fields, Secretary, Commission, dated April 3, 2015 (``April 2015
Supplement''). This supplement provided examples of how the proposed
relief related to allocations would operate. On September 2, 2015,
the SROs filed a second supplement to the Exemptive Request Letter.
See Letter from the SROs to Brent J. Fields, Secretary, Commission,
dated September 2, 2015 (``September 2015 Supplement''). This
supplement to the Exemptive Request Letter further addressed the use
of an ``effective date'' in lieu of a ``date account opened.''
Unless the context otherwise requires, the ``Exemption Request''
shall refer to the Exemptive Request Letter, as supplemented by the
April 2015 Supplement and the September 2015 Supplement.
\17\ 17 CFR 240.0-12.
\18\ See Securities Exchange Act Release No. 77265 (March 1,
2016), 81 FR 11856 (March 7, 2016) (``Exemption Order''). The
Commission requests comment specifically on the advantages and
disadvantages of each aspect of the relief granted in the Exemption
Order and whether the approaches permitted by the Exemption Order to
be included in the CAT NMS Plan are preferable to those originally
permitted by Rule 613. See Request for Comment Nos. 168-170 (Options
Market Maker Quotes), 135-161 (Customer ID), 128-134 (CAT-Reporter-
ID), 162-167 (Linking Order Executions to Allocations) and 114-127
(Time Stamp Granularity), infra.
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III. Description of the Plan
As described further in this Section III of this Notice, the SROs
propose to conduct the activities of the CAT through CAT NMS, LLC, a
jointly owned limited liability company formed under Delaware state
law; and to that end, the SROs submitted the CAT NMS, LLC's limited
liability company agreement (the ``LLC Agreement''), including exhibits
and appendices attached thereto, to the Commission as the CAT NMS Plan.
The SROs also submitted a cover letter that included a description of
the CAT NMS Plan, along with the information required by Rule 608(a)(4)
and (5) under the Act,\19\ which is set forth below in Section III.A of
this Notice as substantially prepared and submitted by the SROs. Set
forth in Section III.B is a summary of additional CAT NMS Plan
provisions and requests for comment.\20\
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\19\ 17 CFR 242.608(a)(4) and (a)(5).
\20\ All capitalized terms not otherwise defined herein shall
have the meaning ascribed to them in Rule 613, the Adopting Release,
or the CAT NMS Plan, as applicable.
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The LLC Agreement, attached hereto as Exhibit A, sets forth a
governing structure, whereby the Operating Committee will manage the
CAT NMS, LLC, and each SRO will be a member of, and have one vote
within, the Operating Committee.\21\ The LLC Agreement details the
Operating Committee's procedures for selecting the Plan Processor,\22\
who will be contracted to build the CAT, as well as the functions and
activities of the Plan Processor. The LLC Agreement also sets forth the
responsibilities of the Central Repository which, under the oversight
of the Plan Processor, will receive, consolidate and retain the CAT
Data.\23\ The LLC Agreement also lists the requirements regarding the
recording and reporting of CAT Data by the SROs as well as by broker-
dealers, the security and confidentiality safeguards for CAT Data,
surveillance requirements, fees and costs associated with operating the
CAT, as well as other reporting and Technical Specifications and
requirements.\24\
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\21\ See CAT NMS Plan, supra note 3, at Article IV.
\22\ See id. at Article V; see also Order Approving Amendment
No. 1 to the Selection Plan and Order Approving Amendment No. 2 to
the Selection Plan, supra note 15.
\23\ See CAT NMS Plan, supra note 3, at Article VI.
\24\ See id.
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In Appendix C to the LLC Agreement, the SROs address the
considerations listed in Rule 613(a)(1), providing information and
analysis regarding the specific features, details, costs, and processes
related to the CAT NMS Plan. Appendix D to the LLC Agreement provides
an outline of the CAT's minimum functional and technical requirements
for the Plan Processor.
A. Statement of Purpose and Request for Comment
The following statement of purpose provided herein is substantially
as prepared and submitted by the SROs to the Commission.\25\ Throughout
the statement of purpose, the Commission has inserted requests for
comment. The portion of this Notice prepared by the Commission will re-
commence in Section III.B.
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\25\ See CAT NMS Plan, supra note 3.
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* * * * *
1. Background
On July 11, 2012, the Commission adopted Rule 613 \26\ to require
the national securities exchanges and national securities association
to jointly submit a national market system plan to create, implement,
and maintain a consolidated audit trail and central repository.\27\
Rule 613 outlines a broad framework for the creation, implementation,
and maintenance of the consolidated audit trail, including the minimum
elements the Commission believes are necessary for an effective
consolidated audit trail.\28\
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\26\ 17 CFR 242.613.
\27\ 17 CFR 242.613(a)(1).
\28\ See Adopting Release, supra note 9, at 45743.
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Since the adoption of Rule 613, the Participants have worked to
formulate an effective Plan. To this end, the Participants have, among
other things, developed a plan for selecting the Plan Processor,
solicited and evaluated Bids, and engaged diverse industry participants
in the development of the Plan. Throughout, the Participants have
sought to implement a process that is fair, transparent, and consistent
with the standards and considerations in Rule 613.
a. The Request for Proposal and Selection Plan
On February 26, 2013, the Participants published a request for
proposal (``RFP'') soliciting Bids from parties interested in serving
as the Plan Processor.\29\ The Participants concluded that publication
of an RFP was necessary to ensure that potential alternative solutions
to creating the Plan and the CAT could be presented and considered, and
that a detailed and meaningful cost-benefit analysis could be
performed. The Participants asked any potential bidders to notify the
Participants of their intent to bid by March 5, 2013. Initially, 31
firms submitted intentions to bid, four of which were Participants or
affiliates of Participants. In the following weeks and months, the
Participants engaged with potential bidders with respect to, among
other things, the selection process, selection criteria, and potential
bidders' questions and concerns.\30\
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\29\ See Appendix A of the CAT NMS Plan for the Consolidated
Audit Trail National Market System Plan Request for Proposal (issued
February 26, 2013, version 3.0 updated March 4, 2014). Other
materials related to the RFP are available at https://catnmsplan.com/process/.
\30\ In an effort to ensure Bidders were aware of all
information provided in response to Bidders' questions related to
the RFP, the Participants published answers to questions received
from Bidders available at https://catnmsplan.com/process/.
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On September 4, 2013, the Participants filed with the Commission a
national market system plan to govern the process for Participant
review of the Bids submitted in response to the RFP, the procedure for
evaluating the Bids, and, ultimately, selection of the Plan Processor
(the ``Selection Plan'').\31\ The Commission approved the Selection
Plan as filed on February 21, 2014.\32\ On March 21, 2014, the
Participants received ten Bids in response to the RFP.
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\31\ See Selection Plan Notice, supra note 13.
\32\ See Selection Plan Approval Order, supra note 14.
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The Selection Plan divides the review and evaluation of Bids, and
the selection of the Plan Processor, into various stages, certain of
which have been completed to date.\33\ Specifically, pursuant to the
Selection Plan, the Selection Committee reviewed all Bids and
determined which Bids contained sufficient information to allow the
Participants to meaningfully assess and evaluate the Bids. The ten
submitted Bids were deemed ``Qualified Bids,'' \34\ and so passed to
the next stage, in which each Bidder presented its Bids in person to
the Participants on a confidential basis. On July 1, 2014, after
conducting careful analysis and comparison of the Bids, the Selection
Committee voted and selected six Shortlisted Bidders, thus eliminating
four Bidders from continuing in the process.\35\ The Selection
Committee,
[[Page 30617]]
subject to applicable recusal provisions in the Selection Plan, will
determine whether Shortlisted Bidders will be provided the opportunity
to revise their Bids. After the Selection Committee further assesses
and evaluates the Shortlisted Bids, including any permitted revisions
to the Bids, the Selection Committee will select the Plan Processor via
two rounds of voting by the Senior Voting Officers as specified in the
Plan.\36\
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\33\ See, e.g., id. at 11154.
\34\ A list of Qualified Bidders is available at https://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p493591.pdf. The Commission notes that this Web site address has
been updated to https://www.catnmsplan.com/process/p493591.pdf.
\35\ The announcement and list of the Shortlisted Bidders is
available at https://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p542077.pdf. The Commission notes that this
Web site address has been updated to https://www.catnmsplan.com/pastevents/p542077.pdf. Additionally, the Commission notes that the
Selection Committee further narrowed the list of Shortlisted Bidders
to three Shortlisted Bidders. See Participants, SROs Reduce Short
List Bids from Six to Three for Consolidated Audit Trail (November
16, 2015), available at https://www.catnmsplan.com/pastevents/catnms_release_downselect_111615.pdf.
\36\ See Selection Plan Approval Order, supra note 14, at 11154.
The SEC published a notice of an amendment to the Selection Plan,
which proposed to amend the Selection Plan in two ways. First, the
Participants proposed to provide opportunities to accept revised
Bids prior to approval of the CAT NMS Plan, and second, to allow the
list of Shortlisted Bids to be narrowed prior to Commission approval
of the CAT NMS Plan. See Notice of Amendment No. 1 to the Selection
Plan, supra note 15. In addition, the Participants filed a second
amendment to the Selection Plan, which would require the recusal of
a Bidding Participant in a vote in any round by the Selection
Committee to select the Plan Processor from among the Shortlisted
Bidders if such Bidding Participant's Bid, a Bid submitted by an
Affiliate of such Bidding Participant, or a Bid including such
Bidding Participant or its Affiliate is also considered in that
round. See Notice of Amendment No. 2 to the Selection Plan, supra
note 15. The prior Selection Plan required recusal of a Bidding
Participant under such circumstances in the vote in only the second
round by the Selection Committee to select the Plan Processor from
among the Shortlisted Bidders. The Commission notes that Amendment
Nos. 1 and 2 have been approved. See Order Approving Amendment No. 1
to the Selection Plan and Order Approving Amendment No. 2 to the
Selection Plan, supra note 15.
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b. Selection Plan Governance and Operations
The Selection Plan established an Operating Committee responsible
for formulating, drafting, and filing with the Commission the Plan and
for ensuring that the Participants' joint obligations under Rule 613
were met in a timely and efficient manner.\37\ Each Participant
selected one individual and one substitute to serve on the Operating
Committee, with other representatives of each Participant permitted to
attend Operating Committee meetings.\38\ In formulating the Plan, the
Participants also engaged multiple persons across a wide range of roles
and expertise, engaged the consulting firm Deloitte & Touche LLP as a
project manager, and engaged the law firm Wilmer Cutler Pickering Hale
and Dorr LLP to serve as legal counsel in drafting the Plan. Within
this structure, the Participants focused on, among other things,
comparative analyses of the proposed technologies and operating models,
development of funding models to support the building and operation of
the CAT, and detailed review of governance considerations. Since July
2012, the Participants have held approximately 608 meetings related to
the CAT.\39\ These governance and organizational structures will
continue to be in effect until the Commission's final approval of the
Plan.\40\
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\37\ Id.
\38\ Id.
\39\ Additional information regarding these meetings can be
found at https://catnmsplan.com/. The Commission notes that the
number of meetings in the SROs' statement is as of February 27,
2015. See CAT NMS Plan, supra note 3.
\40\ See Selection Plan Approval Order, supra note 14, at 11155.
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c. Engagement With Industry Participants
Throughout the process of developing the Plan, the Participants
consistently have been engaged in meaningful dialogue with industry
participants with respect to the development of the CAT. From the
outset of this process, the Participants have recognized that industry
input is a critical component in the creation of the Plan. To this end,
the Participants created a Web site \41\ to update the public on the
progress of the Plan, published requests for comment on multiple issues
related to the Plan, held multiple public events to inform the industry
of the progress of the CAT and to address inquiries, and formed, and
later expanded, a Development Advisory Group (the ``DAG'') to solicit
more input from a representative industry group.
---------------------------------------------------------------------------
\41\ The Web site is available at https://catnmsplan.com/.
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The DAG conducted 43 meetings \42\ to discuss, among other things,
technical and operational aspects the Participants were considering for
the Plan. The Participants twice issued press releases soliciting
participants for the DAG, and a wide spectrum of firms was deliberately
chosen to provide insight from various industry segments affected by
the CAT.\43\ The DAG currently consists of the Participants, and 27
diverse firms and organizations (including broker-dealers of varying
sizes, the Options Clearing Corporation, a service bureau and three
industry trade associations) with a variety of subject matter
expertise.\44\ The DAG meetings have included discussions of topics
such as Options Market Maker quote reporting, requirements for
capturing Customer-IDs, time stamps and clock synchronization,
reporting requirements for order handling scenarios, cost and funding,
error handling and corrections, and potential elimination of Rules made
redundant by the CAT.\45\
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\42\ In addition to these meetings, DAG subcommittee meetings
also were held. The Commission notes that the number of meetings in
the SROs' statement is as of February 27, 2015. See CAT NMS Plan,
supra note 3.
\43\ For a list of DAG members, see Summary of the Consolidated
Audit Trail Initiative at 13 (Jan. 2015), available at https://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p571933.pdf. The Commission notes that the list of DAG members
appears on page 6 of the linked document, which is dated May 2015.
\44\ The list of current DAG members is available at https://catnmsplan.com/PastEvents/.
\45\ See, e.g., Summary of the Consolidated Audit Trail
Initiative, supra note 43, at 14.
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In addition, the CAT Web site includes a variety of resources for
the public with respect to the development of the CAT. The site
contains an overview of the process, an expression of the guiding
principles behind the Plan development, links to relevant regulatory
actions, gap analyses comparing the requirements of Rule 613 with
current reporting systems, the CAT implementation timeline, a summary
of the RFP process, a set of frequently-asked questions (updated on an
ongoing basis), questions for comment from the industry, industry
feedback on the development of the Plan, and announcements and notices
of upcoming events. This Web site, along with the requests for comments
and many public events (announced on the site), have been a venue for
public communication with respect to the development of the Plan.
2. Request for Exemption From Certain Requirements Under Rule 613
Following multiple discussions between the Participants and both
the DAG and the Bidders, as well as among the Participants themselves,
the Participants recognized that some provisions of Rule 613 would not
permit certain solutions to be included in the Plan that the
Participants determined advisable to effectuate the most efficient and
cost-effective CAT. Consequently, on January 30, 2015, the Participants
submitted to the Commission a request for exemptive relief from certain
provisions of Rule 613 regarding: (1) Options Market Maker quotes; (2)
Customer-IDs; (3) CAT-Reporter-IDs; (4) linking of executions to
specific subaccount allocations on Allocation Reports; and (5) time
stamp granularity for manual order events.\46\ Specifically, the
Participants requested that the Commission grant an exemption from:
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\46\ See Exemptive Request Letter, supra note 16.
[[Page 30618]]
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Rule 613(c)(7)(ii) and (iv) for Options Market Makers with
regard to their options quotes;
Rule 613(c)(7)(i)(A), (c)(7)(iv)(F), (c)(7)(viii)(B) and (c)(8)
which relate to the requirements for Customer-IDs;
Rule 613(c)(7)(i)(C), (c)(7)(ii)(D), (c)(7)(ii)(E),
(c)(7)(iii)(D), (c)(7)(iii)(E), (c)(7)(iv)(F), (c)(7)(v)(F),
(c)(7)(vi)(B) and (c)(8) which relate to the requirements for CAT-
Reporter-IDs;
Rule 613(c)(7)(vi)(A), which requires CAT Reporters to record
and report the account number of any subaccounts to which the
execution is allocated; and
The millisecond time stamp granularity requirement in Rule
613(d)(3) for certain manual order events subject to time stamp
reporting under Rules 613(c)(7)(i)(E), 613(c)(7)(ii)(C),
613(c)(7)(iii)(C), and 613(c)(7)(iv)(C).
The Participants believe that the requested relief is critical to the
development of a cost-effective approach to the CAT.\47\
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\47\ The Commission notes the Participants' request for
exemptive relief was granted on March 1, 2016. See Exemption Order,
supra note 18.
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3. Requirements Pursuant to Rule 608(a)
a. Description of Plan
Rule 613 requires the Participants to ``jointly file . . . a
national market system plan to govern the creation, implementation, and
maintenance of a consolidated audit trail and Central Repository.''
\48\ The purpose of the Plan, and the creation, implementation and
maintenance of a comprehensive audit trail for the U.S. securities
market described therein, is to ``substantially enhance the ability of
the SROs and the Commission to oversee today's securities markets and
fulfill their responsibilities under the federal securities laws.''
\49\ It ``will allow for the prompt and accurate recording of material
information about all orders in NMS securities, including the identity
of customers, as these orders are generated and then routed throughout
the U.S. markets until execution, cancellation, or modification. This
information will be consolidated and made readily available to
regulators in a uniform electronic format.'' \50\ The SROs note that
the following summarizes various provisions of the Plan, which is set
forth in full as Exhibit A to this Notice.
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\48\ 17 CFR 242.613(a)(1).
\49\ See Adopting Release, supra note 9, at 45726.
\50\ Id. Note that the Plan also includes certain recording and
reporting obligations for OTC Equity Securities.
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(1) LLC Agreement
The Participants propose to conduct the activities related to the
CAT in a Delaware limited liability company pursuant to a limited
liability company agreement, entitled the Limited Liability Company
Agreement of CAT NMS, LLC (``Company''). The Participants will jointly
own on an equal basis the Company. The Company will create, implement
and maintain the CAT. The limited liability company agreement (``LLC
Agreement'') itself, including its appendices, is the proposed Plan,
which would be a national market system plan as defined in Rule
600(b)(43) of NMS.
(2) Participants
Each national securities exchange and national securities
association currently registered with the Commission would be a
Participant in the Plan. The names and addresses of each Participant
are set forth in Exhibit A to the Plan. Article III of the Plan
provides that any entity approved by the Commission as a national
securities exchange or national securities association under the
Exchange Act after the Effective Date may become a Participant by
submitting to the Company a completed application in the form provided
by the Company and satisfying each of the following requirements: (1)
Executing a counterpart of the LLC Agreement as then in effect; and (2)
paying a fee to the Company in an amount determined by a Majority Vote
of the Operating Committee as fairly and reasonably compensating the
Company and the Participants for costs incurred in creating,
implementing and maintaining the CAT (including such costs incurred in
evaluating and selecting the Initial Plan Processor and any subsequent
Plan Processor) and for costs the Company incurs in providing for the
prospective Participant's participation in the Company, including after
consideration of certain factors identified in Section 3.3(b) of the
Agreement (``Participation Fee''). The amendment of the Plan reflecting
the admission of a new Participant will be effective only when: (1) It
is approved by the SEC in accordance with Rule 608 or otherwise becomes
effective pursuant to Rule 608; and (2) the prospective Participant
pays the Participation Fee.
A number of factors are relevant to the determination of a
Participation Fee. Such factors include: (1) The portion of costs
previously paid by the Company for the development, expansion and
maintenance of the CAT which, under GAAP, would have been treated as
capital expenditures and would have been amortized over the five years
preceding the admission of the prospective Participant; (2) an
assessment of costs incurred and to be incurred by the Company for
modifying the CAT or any part thereof to accommodate the prospective
Participant, which costs are not otherwise required to be paid or
reimbursed by the prospective Participant; (3) Participation Fees paid
by other Participants admitted as such after the Effective Date; (4)
elapsed time from the Effective Date to the anticipated date of
admittance of the prospective Participant; and (5) such other factors,
if any, as may be determined to be appropriate by the Operating
Committee and approved by the Commission. In the event that the Company
and a prospective Participant do not agree on the amount of the
Participation Fee, such amount will be subject to review by the SEC
pursuant to Section 11A(b)(5) of the Exchange Act.
An applicant for participation in the Company may apply for limited
access to the CAT System for planning and testing purposes pending its
admission as a Participant by submitting to the Company a completed
Application for Limited Access to the CAT System in a form provided by
the Company, accompanied by payment of a deposit in the amount
established by the Company, which will be applied or refunded as
described in such application. To be eligible to apply for such limited
access, the applicant must have been approved by the SEC as a national
securities exchange or national securities association under the
Exchange Act but the applicant has not yet become a Participant of the
Plan, or the SEC must have published such applicant's Form 1
Application or From [sic] X-15AA-1 Application to become a national
securities exchange or a national securities association, respectively.
All Company Interests will have the same rights, powers,
preferences and privileges and be subject to the same restrictions,
qualifications and limitations. Once admitted, each Participant will be
entitled to one vote on any matter presented to Participants for their
consideration and to participate equally in any distribution made by
the Company (other than a distribution made pursuant to Section 10.2 of
the Plan). Each Participant will have a Company Interest equal to that
of each other Participant.
Article III also describes a Participant's ability to Transfer a
Company Interest. A Participant may only Transfer any Company Interest
to a national securities exchange or national securities association
that succeeds to the business of such Participant as a result of a
merger or consolidation with such Participant or the Transfer of all or
substantially all of
[[Page 30619]]
the assets or equity of such Participant (``Permitted Transferee''). A
Participant may not Transfer any Company Interest to a Permitted
Transferee unless: (1) Such Permitted Transferee executes a counterpart
of the Plan; and (2) the amendment to the Plan reflecting the Transfer
is approved by the SEC in accordance with Rule 608 or otherwise becomes
effective pursuant to Rule 608.
In addition, Article III addresses the voluntary resignation and
termination of participation in the Plan. Any Participant may
voluntarily resign from the Company, and thereby withdraw from and
terminate its right to any Company Interest, only if: (1) A Permitted
Legal Basis for such action exists; and (2) such Participant provides
to the Company and each other Participant no less than thirty days
prior to the effective date of such action written notice specifying
such Permitted Legal Basis, including appropriate documentation
evidencing the existence of such Permitted Legal Basis, and, to the
extent applicable, evidence reasonably satisfactory to the Company and
other Participants that any orders or approvals required from the SEC
in connection with such action have been obtained. A validly
withdrawing Participant will have the rights and obligations discussed
below with regard to termination of participation.
A Participant's participation in the Company, and its right to any
Company Interest, will terminate as of the earliest of: (1) The
effective date specified in a valid resignation notice; (2) such time
as such Participant is no longer registered as a national securities
exchange or national securities association; or (3) the date of
termination for failure to pay fees. With regard to the payment of
fees, each Participant is required to pay all fees or other amounts
required to be paid under the Plan within thirty days after receipt of
an invoice or other notice indicating payment is due (unless a longer
payment period is otherwise indicated) (the ``Payment Date''). If a
Participant fails to make such a required payment by the Payment Date,
any balance in the Participant's Capital Account will be applied to the
outstanding balance. If a balance still remains with respect to any
such required payment, the Participant will pay interest on the
outstanding balance from the Payment Date until such fee or amount is
paid at a per annum rate equal to the lesser of: (1) The Prime Rate
plus 300 basis points; or (2) the maximum rate permitted by applicable
law. If any such remaining outstanding balance is not paid within
thirty days after the Payment Date, the Participants will file an
amendment to the Plan requesting the termination of the participation
in the Company of such Participant, and its right to any Company
Interest, with the SEC. Such amendment will be effective only when it
is approved by the SEC in accordance with Rule 608 or otherwise becomes
effective pursuant to Rule 608.
From and after the effective date of termination of a Participant's
participation in the Company, profits and losses of the Company will
cease to be allocated to the Capital Account of the Participant. A
terminated Participant will be entitled to receive the balance in its
Capital Account as of the effective date of termination adjusted for
profits and losses through that date, payable within ninety days of the
effective date of termination, and will remain liable for its
proportionate share of costs and expenses allocated to it for the
period during which it was a Participant, for obligations under Section
3.8(c) regarding the return of amounts previously distributed (if
required by a court of competent jurisdiction), for its indemnification
obligations pursuant to Section 4.1, and for obligations under Section
9.6 regarding confidentiality, but it will have no other obligations
under the Plan following the effective date of termination. The Plan
will be amended to reflect any termination of participation in the
Company of a Participant, provided that such amendment will be
effective only when it is approved by the SEC in accordance with Rule
608 or otherwise becomes effective pursuant to Rule 608.
Request for Comment
1. Do Commenters believe that the process for a national securities
exchange and national securities association to become a Participant
pursuant to and under the CAT NMS Plan is clearly and adequately set
forth in the CAT NMS Plan? Do Commenters believe that the process for,
and the circumstances under which a Participant could voluntarily
terminate its participation as a Participant to the CAT NMS Plan is
clearly and adequately set forth in the CAT NMS Plan? If not, what
additional details should be provided? Do Commenters believe that these
two processes are appropriate and reasonable?
2. Do Commenters believe that the process and enumerated factors
for determining the Participation Fee are clear and reasonable under
the CAT NMS Plan? If not, what additional modifications, if any, should
be considered in the Participation Fee determination process?
3. Are restrictions on the transfer of a Company Interest
appropriate and reasonable? If not, why not? What additional
limitations or factors, if any, should be imposed on such transfers?
Please explain.
4. Do Commenters believe that permitting the termination of a
Participant that continues to be a registered national securities
exchange or national securities association from participation in the
Company is an appropriate recourse for failure to pay Participant fees?
If not, can Commenters recommend an alternative remedy? Please explain.
5. Are there other circumstances that should trigger termination of
participation in the Company? If yes, what are they?
(3) Management
Article IV of the Plan establishes the overall governance structure
for the management of the Company. Specifically, the Participants
propose that the Company be managed by an Operating Committee.\51\
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\51\ The Operating Committee will manage the Company except for
situations in which the approval of the Participants is required by
the Plan or by non-waivable provisions of applicable law.
---------------------------------------------------------------------------
The Operating Committee will consist of one voting member
representing each Participant and one alternate voting member
representing each Participant who will have a right to vote only in the
absence of the Participant's voting member of the Operating Committee.
Each of the voting and alternate voting members of the Operating
Committee will be appointed by the Participant that he or she
represents, will serve at the will of the Participant appointing such
member and will be subject to the confidentiality obligations of the
Participant that he or she represents as set forth in Section 9.6. One
individual may serve as the voting member of the Operating Committee
for multiple Affiliated Participants, and such individual will have the
right to vote on behalf of each such Affiliated Participant.
The Operating Committee will elect, by Majority Vote, one of its
members to act as Chair for a term of two years. No Person may serve as
Chair for more than two successive full terms, and no Person then
appointed to the Operating Committee by a Participant that then serves,
or whose Affiliate then serves, as the Plan Processor will be eligible
to serve as the Chair. The Chair will preside at all meetings of the
Operating Committee, designate a Person to act as Secretary, and
perform such other duties and possess such other powers as the
Operating Committee may from time
[[Page 30620]]
to time prescribe. The Chair will not be entitled to a tie-breaking
vote at any meeting of the Operating Committee.
Each of the members of the Operating Committee, including the
Chair, will be authorized to cast one vote for each Participant that he
or she represents on all matters voted upon by the Operating Committee.
Action of the Operating Committee will be authorized by Majority Vote
(except under certain designated circumstances), subject to the
approval of the SEC whenever such approval is required under the
Exchange Act and the rules thereunder. For example, the Plan
specifically notes that a Majority Vote of the Operating Committee is
required to: (1) Select the Chair; (2) select the members of the
Advisory Committee (as described below); (3) interpret the Plan (unless
otherwise noted therein); (4) approve any recommendation by the Chief
Compliance Officer pursuant to Section 6.2(a)(v)(A); (5) determine to
hold an Executive Session of the Operating Committee; (6) determine the
appropriate funding-related policies, procedures and practices
consistent with Article XI; and (7) any other matter specified
elsewhere in the Plan (which includes the Appendices to the Plan) as
requiring a vote, approval or other action of the Operating Committee
(other than those matters expressly requiring a Supermajority Vote or a
different vote of the Operating Committee).
Article IV requires a Supermajority Vote of the Operating
Committee, subject to the approval of the SEC when required, for the
following: (1) Selecting a Plan Processor, other than the Initial Plan
Processor selected in accordance with Article V of the Plan; (2)
terminating the Plan Processor without cause in accordance with Section
6.1(p); (3) approving the Plan Processor's appointment or removal of
the Chief Information Security Officer, Chief Compliance Officer, or
any Independent Auditor in accordance with Section 6.1(b); (4) entering
into, modifying or terminating any Material Contract (if the Material
Contract is with a Participant or an Affiliate of a Participant, such
Participant and Affiliated Participant will be recused from any vote);
(5) making any Material Systems Change; (6) approving the initial
Technical Specifications or any Material Amendment to the Technical
Specifications proposed by the Plan Processor; (7) amending the
Technical Specifications on its own motion; and (8) any other matter
specified elsewhere in the Plan (which includes the Appendices to the
Plan) as requiring a vote, approval or other action of the Operating
Committee by a Supermajority Vote.
A member of the Operating Committee or any Subcommittee thereof (as
discussed below) shall recuse himself or herself from voting on any
matter under consideration by the Operating Committee or such
Subcommittee if such member determines that voting on such matter
raises a Conflict of Interest. In addition, if the members of the
Operating Committee or any Subcommittee (excluding the member thereof
proposed to be recused) determine by Supermajority Vote that any member
voting on a matter under consideration by the Operating Committee or
such Subcommittee raises a Conflict of Interest, such member shall be
recused from voting on such matter. No member of the Operating
Committee or any Subcommittee will be automatically recused from voting
on any matter except matters involving Material Contracts as discussed
in the prior paragraph, as otherwise specified in the Plan, and as
follows: (1) If a Participant is a Bidding Participant whose Bid
remains under consideration, members appointed to the Operating
Committee or any Subcommittee by such Participant or any of its
Affiliated Participants will be recused from any vote concerning: (a)
Whether another Bidder may revise its Bid; (b) the selection of a
Bidder; or (c) any contract to which such Participant or any of its
Affiliates would be a party in its capacity as Plan Processor; and (2)
if a Participant is then serving as Plan Processor, is an Affiliate of
the Person then serving as Plan Processor, or is an Affiliate of an
entity that is a Material Subcontractor to the Plan Processor, then in
each case members appointed to the Operating Committee or any
Subcommittee by such Participant or any of its Affiliated Participants
shall be recused from any vote concerning: (a) The proposed removal of
such Plan Processor; or (b) any contract between the Company and such
Plan Processor.
Article IV also addresses meetings of the Operating Committee.\52\
Meetings of the Operating Committee may be attended by each
Participant's voting Representative and its alternate voting
Representative and by a maximum of two nonvoting Representatives of
each Participant, by members of the Advisory Committee, by the Chief
Compliance Officer, by other Representatives of the Company and the
Plan Processor, by Representatives of the SEC and by such other Persons
that the Operating Committee may invite to attend. The Operating
Committee, however, may, where appropriate, determine to meet in
Executive Session during which only voting members of the Operating
Committee will be present. The Operating Committee, however, may invite
other Representatives of the Participants, of the Company, of the Plan
Processor (including the Chief Compliance Officer and the Chief
Information Security Officer) or the SEC, or such other Persons that
the Operating Committee may invite to attend, to be present during an
Executive Session. Any determination of the Operating Committee to meet
in an Executive Session will be made upon a Majority Vote and will be
reflected in the minutes of the meeting. In addition, any Person that
is not a Participant but for which the SEC has published a Form 1
Application or Form X-15AA-1 to become a national securities exchange
or national securities association, respectively, will be permitted to
appoint one primary Representative and one alternate Representative to
attend regularly scheduled Operating Committee meetings in the capacity
of a non-voting observer, but will not be permitted to have any
Representative attend a special meeting, emergency meeting or meeting
held in Executive Session of the Operating Committee.
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\52\ Article IV also addresses, among other things, different
types of Operating Committee meetings (regular, special and
emergency), frequency of such meetings, how to call such meetings,
the location of the meetings, the role of the Chair, and notice
regarding such meetings.
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The Operating Committee may, by Majority Vote, designate by
resolution one or more Subcommittees it deems necessary or desirable in
furtherance of the management of the business and affairs of the
Company. For any Subcommittee, any member of the Operating Committee
who wants to serve thereon may so serve. If Affiliated Participants
have collectively appointed one member to the Operating Committee to
represent them, then such Affiliated Participants may have only that
member serve on the Subcommittee or may decide not to have only that
collectively appointed member serve on the Subcommittee. Such member
may designate an individual other than himself or herself who is also
an employee of the Participant or Affiliated Participants that
appointed such member to serve on a Subcommittee in lieu of the
particular member. Subject to the requirements of the Plan and non-
waivable provisions of Delaware law, a Subcommittee may exercise all
the powers and authority of the Operating Committee in the management
of the business and affairs of the Company as so specified in the
resolution of the
[[Page 30621]]
Operating Committee designating such Subcommittee.
Article IV requires that the Operating Committee maintain a
Compliance Subcommittee for the purpose of aiding the Chief Compliance
Officer as necessary, including with respect to issues involving: (1)
The maintenance of the confidentiality of information submitted to the
Plan Processor or Central Repository pursuant to Rule 613, applicable
law, or the Plan by Participants and Industry Members; (2) the
timeliness, accuracy, and completeness of information submitted
pursuant to Rule 613, applicable law or the Plan by Participants and
Industry Members; and (3) the manner and extent to which each
Participant is meeting its obligations under Rule 613, Section 3.11,
and as set forth elsewhere in the Plan and ensuring the consistency of
the Plan's enforcement as to all Participants.
Article IV also sets forth the requirements for the formation and
functioning of an Advisory Committee, which will advise the
Participants on the implementation, operation and administration of the
Central Repository, including possible expansion of the Central
Repository to other securities and other types of transactions.
Article IV describes the composition of the Advisory Committee. No
member of the Advisory Committee may be employed by or affiliated with
any Participant or any of its Affiliates or facilities. The Operating
Committee will select one member from representatives of each of the
following categories to serve on the Advisory Committee on behalf of
himself or herself individually and not on behalf of the entity for
which the individual is then currently employed: (1) A broker-dealer
with no more than 150 Registered Persons; (2) a broker-dealer with at
least 151 and no more than 499 Registered Persons; (3) a broker-dealer
with 500 or more Registered Persons; (4) a broker-dealer with a
substantial wholesale customer base; (5) a broker-dealer that is
approved by a national securities exchange: (a) To effect transactions
on an exchange as a specialist, market maker or floor broker; or (b) to
act as an institutional broker on an exchange; (6) a proprietary-
trading broker-dealer; (7) a clearing firm; (8) an individual who
maintains a securities account with a registered broker or dealer but
who otherwise has no material business relationship with a broker or
dealer or with a Participant; (9) a member of academia with expertise
in the securities industry or any other industry relevant to the
operation of the CAT System; (10) an institutional investor trading on
behalf of a public entity or entities; (11) an institutional investor
trading on behalf of a private entity or entities; and (12) an
individual with significant and reputable regulatory expertise. The
members selected to represent categories (1) through (12) above must
include, in the aggregate, representatives of no fewer than three
broker-dealers that are active in the options business and
representatives of no fewer than three broker-dealers that are active
in the equities business. In addition, upon a change in employment of
any such selected member, a Majority Vote of the Operating Committee
will be required for such member to be eligible to continue to serve on
the Advisory Committee. Furthermore, the SEC's Chief Technology Officer
(or the individual then currently employed in a comparable position
providing equivalent services) will serve as an observer of the
Advisory Committee (but not be a member). The members of the Advisory
Committee will have a term of three years.\53\
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\53\ Four of the initial twelve members of the Advisory
Committee will have an initial term of one year, and another four of
the initial twelve members of the Advisory Committee will have an
initial term of two years.
---------------------------------------------------------------------------
Members of the Advisory Committee will have the right to attend
meetings of the Operating Committee or any Subcommittee, to receive
information concerning the operation of the Central Repository, and to
submit their views to the Operating Committee or any Subcommittee on
matters pursuant to the Plan prior to a decision by the Operating
Committee on such matters. A member of the Advisory Committee will not
have a right to vote on any matter considered by the Operating
Committee or any Subcommittee. In addition, the Operating Committee or
any Subcommittee may meet in Executive Session if the Operating
Committee or Subcommittee determines by Majority Vote that such an
Executive Session is advisable.\54\ Although members of the Advisory
Committee will have the right to receive information concerning the
operation of the Central Repository, the Operating Committee retains
the authority to determine the scope and content of information
supplied to the Advisory Committee, which will be limited to that
information that is necessary and appropriate for the Advisory
Committee to fulfill its functions. Any information received by members
of the Advisory Committee will remain confidential unless otherwise
specified by the Operating Committee.
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\54\ The Operating Committee may solicit and consider views on
the operation of the Central Repository in addition to those of the
Advisory Committee.
---------------------------------------------------------------------------
Article IV also describes the appointment of Officers for the
Company. Specifically, the Chief Compliance Officer and the Chief
Information Security Officer, each of whom will be employed solely by
the Plan Processor and neither of whom will be deemed or construed in
any way to be an employee of the Company, will be Officers of the
Company. Neither such Officer will receive or be entitled to any
compensation from the Company or any Participant by virtue of his or
her service in such capacity (other than if a Participant is then
serving as the Plan Processor, compensation paid to such Officer as an
employee of such Participant). Each such Officer will report directly
to the Operating Committee. The Chief Compliance Officer will work on a
regular and frequent basis with the Compliance Subcommittee and/or
other Subcommittees as may be determined by the Operating Committee.
Except to the extent otherwise provided in the Plan, including Section
6.2, each such Officer will have such fiduciary and other duties with
regard to the Plan Processor as imposed by the Plan Processor on such
individual by virtue of his or her employment by the Plan Processor.
In addition, the Plan Processor will inform the Operating Committee
of the individual who has direct management responsibility for the Plan
Processor's performance of its obligations with respect to the CAT.
Subject to approval by the Operating Committee of such individual, the
Operating Committee will appoint such individual as an Officer. In
addition, the Operating Committee by Supermajority Vote may appoint
other Officers as it shall from time to time deem necessary. Any
Officer appointed pursuant to Section 4.6(b) will have only such duties
and responsibilities as set forth in the Plan, or as the Operating
Committee shall from time to time expressly determine. No such Officer
shall have any authority to bind the Company (which authority is vested
solely in the Operating Committee) or be an employee of the Company,
unless in each case the Operating Committee, by Supermajority Vote,
expressly determines otherwise. No person subject to a ``statutory
disqualification'' (as defined in Section 3(a)(39) of the Exchange Act)
may serve as an Officer. It is the intent of the Participants that the
Company have no employees.
[[Page 30622]]
Request for Comment
6. Do Commenters believe that the organizational, governance and/or
managerial structure of CAT NMS, LLC is in the public interest? Why or
why not?
7. Do Commenters believe that the organizational, governance, and/
or managerial structure set forth in the CAT NMS Plan, including the
role of the Operating Committee, is appropriate and reasonable? If not,
please explain.
8. The CAT NMS Plan specifies the corporate actions that require a
Majority Vote and the corporate actions that require a Supermajority
Vote. Do Commenters believe that such voting procedures are appropriate
and reasonable? Should any corporate actions require a higher or lower
voting threshold than specified in the Plan? Are there any corporate
actions that should require a Supermajority Vote? Please explain.
9. Do Commenters believe that the CAT NMS Plan should explicitly or
more clearly specify who should determine whether a systems change or
amendment is ``material''? If so, who? Please explain.
10. Do Commenters believe that two successive full terms is an
appropriate and reasonable term limit for a Person to serve as chair of
the Operating Committee? If not, please explain.
11. Section 1.1 defines Conflict of Interest to mean that the
interest of a Participant (e.g., commercial, reputational, regulatory,
or otherwise) in the matter that is subject to the vote; (a)
interferes, or would be reasonably likely to interfere with that
Participant's objective consideration of the matter; and (b) is, or is
reasonably likely to be, inconsistent with the purpose and objectives
of the Company, and the CAT, taking into account all relevant
considerations, including whether a Participant that may otherwise have
a conflict of interest has established appropriate safeguards to
eliminate such conflicts of interest and taking into account the other
guiding principles set forth in the LLC Agreement. Do Commenters
believe this definition of ``Conflict of Interest'' is appropriate and
reasonable? Please explain.
12. Do Commenters believe that the definition of Conflict of
Interest of the CAT NMS Plan properly reflects the business interests
of each Participant and the Operating Committee? If not, please
explain. Do Commenters believe that the CAT NMS Plan governing
procedures on Conflicts of Interest and recusals contained in Section
4.3(d) of the CAT NMS Plan, reasonably and adequately address Conflicts
of Interest? If not, please explain. Are there other conflicts of
interest that may arise for any Participant that are not addressed in
the CAT NMS Plan definitions or governing procedures? If so, what?
13. Is the CAT NMS Plan clear and reasonable regarding whether it
permits the Operating Committee to delegate the authority to vote on
matters to a Subcommittee? If so, in what circumstances? Are there any
circumstances in which a Subcommittee would or should be prohibited
from voting in place of the Operating Committee? Please explain.
14. Do Commenters believe that the Advisory Committee structure and
provisions set forth in the CAT NMS Plan are appropriate and
reasonable? Is the size of the Advisory Committee as contemplated by
the Plan appropriate and reasonable? Are the Advisory Committee member
categories reasonable and adequately representative of entities
impacted by the CAT NMS Plan? Would expanding membership on the
Advisory Committee to any additional types of entities enhance the
quality of the input it would provide to the Operating Committee?
Please explain.
15. Is the mechanism for determining who serves on the Advisory
Committee (i.e., selection by the Operating Committee) appropriate and
reasonable? Should Participants be required to publicly solicit
Advisory Committee membership interest? Should the Advisory Committee
be able to self-nominate replacement candidates? Please explain.
16. Do Commenters believe that the CAT NMS Plan's requirement that
Advisory Committee members serve on the Advisory Committee in their
personal capacities, and that the Operating Committee members serve on
the Operating Committee as representatives of their employers who are
the Plan Participants create different incentives for members of the
Advisory Committee and members of the Operating Committee? If so, in
what ways? Do Commenters believe that these differing incentives would
impact the regulatory objective of the CAT? If so, in what ways?
17. The CAT NMS Plan outlines the size, tenure and membership
categories of the Advisory Committee members. Do Commenters believe
there are any additional or alternative factors that should be taken
into consideration in structuring the Advisory Committee that would
benefit the operation of the CAT? If so, what are those additional or
alternative factors? How would these factors benefit the operation of
the CAT?
18. Are the roles and responsibilities of the Advisory Committee
clearly and adequately set forth in the CAT NMS Plan? If not, why not?
Should additional details on these roles and responsibilities be
provided? If so, what additional details should be provided?
19. Are there any alternatives for involvement by the Advisory
Committee that could increase the effectiveness of the Advisory
Committee? For example, should the Advisory Committee be given a vote
in connection with decisions regarding the CAT NMS Plan, equivalent to
the vote each Participant has? If so, please specifically identify the
alternatives for involvement and how those alternatives could increase
the effectiveness of the CAT.
20. Do Commenters believe that the Advisory Committee is structured
in a way that would allow industry to provide meaningful input on the
implementation, operation, and administration of the CAT? If not,
please explain and/or provide specific suggestions for improving the
Advisory Committee structure. Should additional authority be given to
the Advisory Committee, for example allowing it to initiate its own
recommendations? Should additional mechanisms through which the
industry or others could provide input be included in the CAT NMS Plan?
\55\ Should the Operating Committee be required to respond to the
Advisory Committee's views, formally or informally, in advance of or
following a decision by the Operating Committee? Should the Operating
Committee be required to include Advisory Committee views in filings
with the Commission? Please explain.
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\55\ See Section IV.E.4, infra, for additional requests for
comment on the Advisory Committee.
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21. Do Commenters believe that the Plan's provision that prohibits
the Advisory Committee from attending any Executive Session of the
Operating Committee is appropriate and reasonable?
22. Do Commenters believe that the CAT NMS Plan adequately sets
forth provisions regarding the scope, authority, and duties of the
Officers of the CAT, as well as the scope and authority of the Plan
Processor generally? If not, what further provisions should the CAT NMS
Plan set forth with respect to Officers and the Plan Processor and why?
23. Do Commenters believe that the Operating Committee and the
proposed CAT NMS Plan governance structure would ensure effective
corporate governance, process and action? Why or why not?
[[Page 30623]]
24. The CAT NMS Plan provides that emergency meetings of the
Operating Committee may be called at the request of two or more
Participants, and may be held as soon as practical after such a meeting
is called. Do Commenters believe that there should be a different
method for the Operating Committee to meet and take action in the event
of an emergency? Should the CAT NMS Plan denote certain emergency
situations in which the Operating Committee must be required to take
action on an expedited basis? If so, what time period would be
reasonable to require action by the Operating Committee and what
mechanisms or processes should the Operating Committee be required to
follow?
25. What, if any, impact on the Operating Committee's governance
and voting do Affiliated Participant groups have? Do Commenters believe
that the Operating Committee's governance and voting provisions set
forth in the CAT NMS Plan, including the definitions of Supermajority
Vote and Majority Vote, are appropriate and reasonable in light of
these Affiliated Participant groups? What, if any, additional
governance and voting provisions or protections should be included? Is
there an alternative model for voting rights that would be more
appropriate and reasonable, for example distributing votes using a
measure other than exchange licenses?
26. Do Commenters believe the use of Executive Session is
appropriate and reasonable? Is a Majority Vote the appropriate
mechanism for the Operating Committee to go into Executive Session?
Should the CAT NMS Plan specify particular scenarios for which an
Executive Session is or is not appropriate?
27. Do Commenters believe that the provisions in the CAT NMS Plan
regarding the mechanics of voting by the Operating Committee, the
Selection Committee, or other entities are appropriate and reasonable?
Does the CAT NMS Plan include sufficient detail on when voting should
be carried out openly (e.g., in the presence of other attendees at a
committee meeting) as opposed to when voting may be conducted by secret
ballot or by some other confidential method? What are the advantages
and disadvantages of different voting methodologies? Would particular
actions or decisions regarding CAT be better suited to one voting
methodology over others? Please explain.
28. Are there any other matters relating to the operation and
administration of the Plan that should be included in the Plan for the
Commission's consideration? If so, please identify such matters and
explain why and how they should be addressed in the Plan.
(4) Initial Plan Processor Selection
Article V of the Plan sets forth the process for the Participants'
evaluation of Bids and the selection process for narrowing down the
Bids and choosing the Initial Plan Processor. The initial steps in the
evaluation and selection process were and will be performed pursuant to
the Selection Plan; the final two rounds of evaluation and voting, as
well as the final selection of the Initial Plan Processor, will be
performed pursuant to the Plan.\56\
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\56\ By its terms, the Selection Plan will terminate upon
Commission approval of the Plan.
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As discussed above, the Selection Committee has selected the
Shortlisted Bids pursuant to the Selection Plan. After reviewing the
Shortlisted Bids, the Participants have identified the optimal proposed
solutions for the CAT and, to the extent possible, included such
solutions in the Plan.\57\ The Selection Committee will determine, by
majority vote, whether Shortlisted Bidders will have the opportunity to
revise their Bids. To reduce potential conflicts of interest, no
Bidding Participant may vote on whether a Shortlisted Bidder will be
permitted to revise its Bid if a Bid submitted by or including the
Participant or an Affiliate of the Participant is a Shortlisted Bid.
The Selection Committee will review and evaluate all Shortlisted Bids,
including any permitted revisions submitted by Shortlisted Bidders. In
performing this review and evaluation, the Selection Committee may
consult with the Advisory Committee and such other Persons as the
Selection Committee deems appropriate, which may include the DAG until
the Advisory Committee is formed.
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\57\ As noted above, the Participants stated their belief that
certain exemptive relief is necessary to include in the Plan all of
the provisions the Participants believe are part of the optimal
solution for the CAT. The Commission notes that the request for
exemptive relief was granted on March 1, 2016. See Exemption Order,
supra note 18.
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After receipt of any permitted revisions, the Selection Committee
will select the Initial Plan Processor from the Shortlisted Bids in two
rounds of voting where each Participant has one vote via its Voting
Senior Officer in each round.\58\ No Bidding Participant, however, will
be entitled to vote in any round if the Participant's Bid, a Bid
submitted by an Affiliate of the Participant, or a Bid including the
Participant or an Affiliate of the Participant is considered in such
round.\59\ In the first round, each Voting Senior Officer, subject to
the recusal provision in Section 5.2(e)(ii), will select a first and
second choice, with the first choice receiving two points and the
second choice receiving one point. The two Shortlisted Bids receiving
the highest cumulative scores in the first round will advance to the
second round.\60\ In the event of a tie, the tie will be broken by
assigning one point per vote to the tied Shortlisted Bids, and the
Shortlisted Bid with the most votes will advance. If this procedure
fails to break the tie, a revote will be taken on the tied Bids with
each vote receiving one point. If the tie persists, the Participants
will identify areas for discussion, and revotes will be taken until the
tie is broken.
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\58\ If the proposed amendment to the Selection Plan is
approved, the Selection Committee may determine to narrow the number
of Shortlisted Bids prior to the two rounds of voting.
\59\ This recusal provision is included in the Plan, as well as
in an amendment to the Selection Plan. See Order Approving Amendment
No. 2 to the Selection Plan, supra note 15.
\60\ Each round of voting throughout the Plan is independent of
other rounds.
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Once two Shortlisted Bids have been chosen, the Voting Senior
Officers of the Participants (other than those subject to recusal) will
vote for a single Shortlisted Bid from the final two to determine the
Initial Plan Processor. If the tie persists, the Participants will
identify areas for discussion and, following these discussions, revotes
will be taken until the tie is broken. As set forth in Article VI of
the Plan, following the selection of the Initial Plan Processor, the
Participants will file with the Commission a statement identifying the
Initial Plan Processor and including the information required by Rule
608.
(5) Functions and Activities of CAT System
A. Plan Processor
Article VI describes the responsibilities of the selected Plan
Processor. The Company, under the direction of the Operating Committee,
will enter into one or more agreements with the Plan Processor
obligating the Plan Processor to perform the functions and duties
contemplated by the Plan to be performed by the Plan Processor, as well
as such other functions and duties the Operating Committee deems
necessary or appropriate.
As set forth in the Plan, the Plan Processor is required to develop
and, with the prior approval of the Operating Committee, implement
policies, procedures, and control structures related to the CAT System
that are consistent with Rule 613(e)(4), Appendix C and Appendix D. The
Plan
[[Page 30624]]
Processor will: (1) Comply with applicable provisions of 15 U.S. Code
Sec. 78u-6 (Securities Whistleblower Incentives and Protection) and
the recordkeeping requirements of Rule 613(e)(8); (2) consistent with
Appendix D, Central Repository Requirements, ensure the effective
management and operation of the Central Repository; (3) consistent with
Appendix D, Data Management, ensure the accuracy of the consolidation
of the CAT Data reported to the Central Repository; and (4) consistent
with Appendix D, Upgrade Process and Development of New Functionality,
design and implement appropriate policies and procedures governing the
determination to develop new functionality for the CAT including, among
other requirements, a mechanism by which changes can be suggested by
Advisory Committee members, Participants, or the SEC. Such policies and
procedures also shall: (1) Provide for the escalation of reviews of
proposed technological changes and upgrades to the Operating Committee;
and (2) address the handling of surveillance, including coordinated,
Rule 17d-2 under the Exchange Act or Regulatory Surveillance
Agreement(s) (RSA) surveillance queries and requests for data. Any
policy, procedure or standard (and any material modification or
amendment thereto) applicable primarily to the performance of the Plan
Processor's duties as the Plan Processor (excluding any policies,
procedures or standards generally applicable to the Plan Processor's
operations and employees) will become effective only upon approval by
the Operating Committee. The Plan Processor also will, subject to the
prior approval of the Operating Committee, establish appropriate
procedures for escalation of matters to the Operating Committee. In
addition to other policies, procedures and standards generally
applicable to the Plan Processor's employees and contractors, the Plan
Processor will have hiring standards and will conduct and enforce
background checks (e.g., fingerprint-based) for all of its employees
and contractors to ensure the protection, safeguarding and security of
the facilities, systems, networks, equipment and data of the CAT
System, and will have an insider and external threat policy to detect,
monitor and remedy cyber and other threats.
The Plan Processor will enter into appropriate Service Level
Agreements (``SLAs'') governing the performance of the Central
Repository, as generally described in Appendix D, Functionality of the
CAT System, with the prior approval of the Operating Committee. The
Plan Processor in conjunction with the Operating Committee will
regularly review and, as necessary, update the SLAs, in accordance with
the terms of the SLAs. As further contemplated in Appendix C, System
Service Level Agreements (SLAs), and in Appendix D, System SLAs, the
Plan Processor may enter into appropriate service level agreements with
third parties applicable to the Plan Processor's functions related to
the CAT System (``Other SLAs''), with the prior approval of the
Operating Committee. The Chief Compliance Officer and/or the
Independent Auditor will, in conjunction with the Plan Processor and as
necessary the Operating Committee, regularly review and, as necessary,
update the Other SLAs, in accordance with the terms of the applicable
Other SLA. In addition, the Plan Processor: (1) Will, on an ongoing
basis and consistent with any applicable policies and procedures,
evaluate and implement potential system changes and upgrades to
maintain and improve the normal day-to-day operating function of the
CAT System; (2) in consultation with the Operating Committee, will, on
an as needed basis and consistent with any applicable operational and
escalation policies and procedures, implement such material system
changes and upgrades as may be required to ensure effective functioning
of the CAT System; and (3) in consultation with the Operating
Committee, will, on an as needed basis, implement system changes and
upgrades to the CAT System to ensure compliance with applicable laws,
regulations or rules (including those promulgated by the SEC or any
Participant). Furthermore, the Plan Processor will develop and, with
the prior approval of the Operating Committee, implement a securities
trading policy, as well as necessary procedures, control structures and
tools to enforce this policy.
In addition, the Plan Processor will provide the Operating
Committee regular reports on the CAT System's operation and
maintenance. Furthermore, upon request of the Operating Committee or
any Subcommittee, the Plan Processor will attend any meetings of the
Operating Committee or such Subcommittee.
The Plan Processor may appoint such officers of the Plan Processor
as it deems necessary and appropriate to perform its functions under
the Plan and Rule 613. The Plan Processor, however, will be required to
appoint, at a minimum, the Chief Compliance Officer, the Chief
Information Security Officer, and the Independent Auditor. The
Operating Committee, by Supermajority Vote, will approve any
appointment or removal of the Chief Compliance Officer, Chief
Information Security Officer, or the Independent Auditor.
The Plan Processor will designate an employee of the Plan Processor
to serve, subject to the approval of the Operating Committee by
Supermajority Vote, as the Chief Compliance Officer. The Plan Processor
will also designate at least one other employee (in addition to the
person then serving as Chief Compliance Officer), which employee the
Operating Committee has previously approved, to serve temporarily as
the Chief Compliance Officer if the employee then serving as the Chief
Compliance Officer becomes unavailable or unable to serve in such
capacity (including by reason of injury or illness). Any person
designated to serve as the Chief Compliance Officer (including to serve
temporarily) will be appropriately qualified to serve in such capacity
based on the duties and responsibilities assigned to the Chief
Compliance Officer and will dedicate such person's entire working time
to such service (or temporary service) (except for any time required to
attend to any incidental administrative matters related to such
person's employment with the Plan Processor that do not detract in any
material respect from such person's service as the Chief Compliance
Officer). Article VI sets forth various responsibilities of the Chief
Compliance Officer. With respect to all of his or her duties and
responsibilities in such capacity (including those as set forth in the
Plan), the Chief Compliance Officer will be directly responsible and
will directly report to the Operating Committee, notwithstanding that
she or he is employed by the Plan Processor. The Plan Processor,
subject to the oversight of the Operating Committee, will ensure that
the Chief Compliance Officer has appropriate resources to fulfill his
or her obligations under the Plan and Rule 613. The compensation
(including base salary and bonus) of the Chief Compliance Officer will
be payable by the Plan Processor, but be subject to review and approval
by the Operating Committee. The Operating Committee will render the
Chief Compliance Officer's annual performance review.
The Plan Processor also will designate an employee of the Plan
Processor to serve, subject to the approval of the Operating Committee
by Supermajority Vote, as the Chief Information Security Officer. The
Plan Processor will also designate at least one other employee (in
addition to the person then serving as Chief Information Security
Officer), which employee the Operating
[[Page 30625]]
Committee has previously approved, to serve temporarily as the Chief
Information Security Officer if the employee then serving as the Chief
Information Security Officer becomes unavailable or unable to serve in
such capacity (including by reason of injury or illness). Any person
designated to serve as the Chief Information Security Officer
(including to serve temporarily) will be appropriately qualified to
serve in such capacity based on the duties and responsibilities
assigned to the Chief Information Security Officer under the Plan and
will dedicate such person's entire working time to such service (or
temporary service) (except for any time required to attend to any
incidental administrative matters related to such person's employment
with the Plan Processor that do not detract in any material respect
from such person's service as the Chief Information Security Officer).
The Plan Processor, subject to the oversight of the Operating
Committee, will ensure that the Chief Information Security Officer has
appropriate resources to fulfill the obligations of the Chief
Information Security Officer set forth in Rule 613 and in the Plan,
including providing appropriate responses to questions posed by the
Participants and the SEC. In performing such obligations, the Chief
Information Security Officer will be directly responsible and directly
report to the Operating Committee, notwithstanding that he or she is
employed by the Plan Processor. The compensation (including base salary
and bonus) of the Chief Information Security Officer will be payable by
the Plan Processor, but be subject to review and approval by the
Operating Committee, and the Operating Committee will render the Chief
Information Security Officer's annual performance review. Consistent
with Appendices C and D, the Chief Information Security Officer will be
responsible for creating and enforcing appropriate policies,
procedures, standards, control structures and real time tools to
monitor and address data security issues for the Plan Processor and the
Central Repository, as described in the Plan. At regular intervals, to
the extent that such information is available to the Company, the Chief
Information Security Officer will report to the Operating Committee the
activities of the Financial Services Information Sharing and Analysis
Center (``FS-ISAC'') or comparable bodies to the extent that the
Company has joined FS-ISAC or other comparable body.
The Plan Processor will afford to Participants and the Commission
such access to the Representatives of the Plan Processor as any
Participant or the Commission may reasonably request solely for the
purpose of performing such Person's regulatory and oversight
responsibilities pursuant to the federal securities laws, rules, and
regulations or any contractual obligations. The Plan Processor will
direct such Representatives to reasonably cooperate with any inquiry,
investigation, or proceeding conducted by or on behalf of any
Participant or the Commission related to such purpose.
The Operating Committee will review the Plan Processor's
performance under the Plan at least once each year, or more often than
once each year upon the request of two Participants that are not
Affiliated Participants. The Operating Committee will notify the SEC of
any determination made by the Operating Committee concerning the
continuing engagement of the Plan Processor as a result of the
Operating Committee's review of the Plan Processor and will provide the
SEC with a copy of any reports that may be prepared in connection
therewith.
The Operating Committee, by Supermajority Vote, may remove the Plan
Processor from such position at any time. However, the Operating
Committee, by Majority Vote, may remove the Plan Processor from such
position at any time if it determines that the Plan Processor has
failed to perform its functions in a reasonably acceptable manner in
accordance with the provisions of the Plan or that the Plan Processor's
expenses have become excessive and are not justified. In making such a
determination, the Operating Committee will consider, among other
factors: (1) The reasonableness of the Plan Processor's response to
requests from Participants or the Company for technological changes or
enhancements; (2) results of any assessments performed pursuant to
Section 6.6; (3) the timeliness of conducting preventative and
corrective information technology system maintenance for reliable and
secure operations; (4) compliance with requirements of Appendix D; and
(5) such other factors related to experience, technological capability,
quality and reliability of service, costs, back-up facilities, failure
to meet service level agreement(s) and regulatory considerations as the
Operating Committee may determine to be appropriate.
In addition, the Plan Processor may resign upon two year's (or such
other shorter period as may be determined by the Operating Committee by
Supermajority Vote) prior written notice. The Operating Committee will
fill any vacancy in the Plan Processor position by Supermajority Vote,
and will establish a Plan Processor Selection Subcommittee to evaluate
and review Bids and make a recommendation to the Operating Committee
with respect to the selection of the successor Plan Processor.
Request for Comment
29. The CAT NMS Plan, Section 6.1 (Plan Processor) sets forth
details regarding the Plan Processor's responsibilities. Do Commenters
believe that the enumerated responsibilities of the Plan Processor are
appropriate and reasonable? Please explain.
30. Do Commenters believe that the CAT NMS Plan provides the
Operating Committee with sufficient authority to maintain oversight of
the Plan Processor? Is the Plan Processor given too much discretion?
Too little? Please explain.
31. The CAT NMS Plan provides in Section 6.1(s) that a Plan
Processor may resign upon giving two years notice of such resignation.
Do Commenters believe that two years is a sufficient amount of notice
to ensure a replacement Plan Processor could be selected? Is two years
too long a period to require notice of resignation? Why or why not?
32. The CAT NMS Plan includes two provisions governing removal of
the Plan Processor. Section 6.1(q) allows the Operating Committee to
remove the Plan Processor at any time by a Supermajority Vote. Do
Commenters believe it is appropriate for the Operating Committee to
have authority to remove the Plan Processor without cause upon a
Supermajority Vote? Why or why not?
33. Section 6.1(r) of the CAT NMS Plan allows the Operating
Committee to remove the Plan Processor by a Majority Vote if it
determines that the Plan Processor has failed to perform its functions
in a reasonably acceptable manner in accordance with the provisions of
the CAT LLC Agreement or that the Plan Processor's expenses have become
excessive and are not justified. Do Commenters believe it is
appropriate and reasonable for the Operating Committee to have the
authority to remove the Plan Processor on these bases using a Majority
Vote? Why or why not, and with respect to which of these bases? Do
Commenters believe there are other grounds upon which the Operating
Committee should have the ability to remove the Plan Processor upon a
Majority Vote?
34. The CAT NMS Plan states that the Plan Processor must implement
policies and procedures consistent with Rule
[[Page 30626]]
613(e)(4). Further, Rule 613(e)(4) requires that the CAT NMS Plan
include policies and procedures to be used by the Plan Processor to
ensure: (1) The security and confidentiality of all information
reported to the Central Repository; (2) the timeliness, accuracy,
integrity, and completeness of the data provided to the Central
Repository; and (3) the accuracy of the consolidation by the Plan
Processor of the data provided to the Central Repository. Do Commenters
believe that such policies and procedures are adequately described in
Appendix D of the CAT NMS Plan? Do Commenters believe such policies and
procedures are appropriate and reasonable? Do Commenters believe that
additions or deletions should be made to the policies and procedures?
If so, please describe.
35. The CAT NMS Plan provides that the CCO and CISO, while Officers
of CAT NMS, LLC, would be employees of the Plan Processor. Do
Commenters believe that this arrangement creates any conflicts of
interest that could undermine the ability of the CCO and CISO to
effectively carry out their responsibilities under the CAT NMS Plan?
Please describe any such conflicts of interest and explain how they
could affect the performance of the CCO or CISO's CAT-related duties.
36. The CAT NMS Plan provides that the Operating Committee must
approve the CCO and CISO selected by the Plan Processor by
Supermajority Vote, that the CCO and CISO shall dedicate their entire
working time to their service as CCO or CISO, that the Operating
Committee shall have oversight over the Plan Processor's compensation
of and provision of resources to the CCO and CISO, and that the CCO and
CISO shall report directly to and receive annual performance reviews
from the Operating Committee.\61\ Do Commenters believe that these
provisions adequately address any conflicts of interest resulting from
the CCO and CISO being employees of the Plan Processor? Are there
additional steps that could be taken to insulate the CCO and CISO from
being unduly influenced by the Plan Processor?
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\61\ See CAT NMS Plan, supra note 3, at Sections 6.2(a)(i)-(iv),
b(i)-(iv).
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37. The CAT NMS Plan provides that the CCO and CISO would not, to
the extent permitted under applicable law, have fiduciary or similar
duties to CAT NMS, LLC, but that they may have fiduciary or similar
duties to the Plan Processor to the extent that their employment with
the Plan Processor entails such duties.\62\ Do Commenters believe that
these provisions could affect the ability of the CCO and CISO to carry
out their CAT-related duties? Would any alternative provisions be
preferable? For example, should the Plan remain silent regarding the
CCO and CISO's fiduciary or other duties to the Plan Processor and CAT
NMS, LLC? Should the Plan require the CCO and CISO to affirmatively
undertake fiduciary or similar duties to CAT NMS, LLC? Should the Plan
Processor be required to select individuals who do not have fiduciary
or similar duties to the Plan Processor to be the CCO or CISO? What are
the advantages and disadvantages to each approach?
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\62\ See id. at Section 4.6(a), 4.7(c).
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38. Is the mechanism by which changes to CAT functionality can be
suggested to the Plan Processor by the Advisory Committee members,
Participants, or the SEC appropriate and reasonable? Why or why not?
39. Is the Operating Committee's role in the hiring of the CCO,
CISO, and Independent Auditor appropriate and reasonable? Should the
Advisory Committee be consulted on these decisions? Why or why not?
B. Central Repository
The Central Repository, under the oversight of the Plan Processor,
and consistent with Appendix D, Central Repository Requirements, will
receive, consolidate, and retain all CAT Data. The Central Repository
will collect (from a SIP or pursuant to an NMS Plan) and retain on a
current and continuing basis, in a format compatible with the
Participant Data and Industry Member Data, all data, including the
following: (1) Information, including the size and quote condition, on
quotes, including the National Best Bid and National Best Offer for
each NMS Security; (2) Last Sale Reports and transaction reports
reported pursuant to an effective transaction reporting plan filed with
the SEC pursuant to, and meeting the requirements of, Rules 601 and
608; (3) trading halts, LULD price bands and LULD indicators; and (4)
summary data.\63\
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\63\ In the CAT NMS Plan as attached hereto as Exhibit A,
Section 6.5(a)(ii)(D) was amended to clarify that ``summary data''
refers to ``summary data or reports described in the specifications
for each of the SIPs and disseminated by the respective SIP.''
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Consistent with Appendix D, Data Retention Requirements, the
Central Repository will retain the information collected pursuant to
paragraphs (c)(7) and (e)(7) of Rule 613 in a convenient and usable
standard electronic data format that is directly available and
searchable electronically without any manual intervention by the Plan
Processor for a period of not less than six years. Such data when
available to the Participant regulatory Staff and the SEC will be
linked. In addition, the Plan Processor will implement and comply with
the records retention policy contemplated by Section 6.1(d)(i).
Consistent with Appendix D, Data Access, the Plan Processor will
provide Participants and the SEC access to the Central Repository
(including all systems operated by the Central Repository), and access
to and use of the CAT Data stored in the Central Repository, solely for
the purpose of performing their respective regulatory and oversight
responsibilities pursuant to the federal securities laws, rules and
regulations or any contractual obligations. The Plan Processor will
create and maintain a method of access to the CAT Data stored in the
Central Repository that includes the ability to run searches and
generate reports. The method in which the CAT Data is stored in the
Central Repository will allow the ability to return results of queries
that are complex in nature including market reconstruction and the
status of order books at varying time intervals. The Plan Processor
will, at least annually and at such earlier time promptly following a
request by the Operating Committee, certify to the Operating Committee
that only the Participants and the SEC have access to the Central
Repository (other than access provided to any Industry Member for the
purpose of correcting CAT Data previously reported to the Central
Repository by such Industry Member).\64\
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\64\ See CAT NMS Plan, supra note 3, at Appendix C, The Security
and Confidentiality of Information Reported to the Central
Repository, and Appendix D, Data Security, describe the security and
confidentiality of the CAT Data, including how access to the Central
Repository is controlled.
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Request for Comment
40. Do Commenters believe that the requirements presented in
Appendix D, Central Repository Requirements, are sufficiently detailed
to guide the Plan Processor in how to build and operate the Central
Repository with regard to receiving, consolidating, and retaining data?
If not, what additional information should the requirements contain?
Are there any requirements that should be eliminated? Will such
provisions give the Plan Processor too much discretion or flexibility
in how to build and operate the Central Repository with regard to
receiving, consolidating, and retaining data? Please identify and
explain why such requirements are not necessary or appropriate.
41. Do Commenters believe that the information provided in Appendix
D, Data Access, is sufficiently detailed to
[[Page 30627]]
inform the Plan Processor and regulators how access to data will be
granted? Are the controls and security provisions related to regulatory
access to data appropriate and reasonable? Should additional provisions
be included? If so, please identify and explain why such provisions are
necessary. Should any provisions be modified or eliminated? Will such
provisions give the Plan Processor too much discretion or flexibility
in how to build and operate the Central Repository with regard to
regulator access to the data? If so, please identify and explain why
such provisions should be modified or not included in the CAT NMS Plan.
42. The CAT NMS Plan does not mandate a specific method for primary
data storage of CAT Data, but does require that the storage solution
would meet the security, reliability, and accessibility requirements
for the CAT, including storage of personally identifiable information
(``PII'') data, separately. The CAT NMS Plan also indicates several
considerations in the selection of a storage solution including
maturity, cost, complexity, and reliability of the storage method. The
Commission requests comment on whether the CAT NMS Plan should mandate
a particular data storage method. Why or why not? What are the
advantages and disadvantages for CAT of the various storage methods?
C. Data Recording and Reporting by Participants
The Plan also sets forth the requirements regarding the data
recording and reporting by Participants.\65\ Each Participant will
record and electronically report to the Central Repository the
following details for each order and each Reportable Event,\66\ as
applicable (``Participant Data''; also referred to as ``Recorded
Industry Member Data'', as discussed in the next Section):
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\65\ Participants may, but are not required to, coordinate
compliance with the recording and reporting efforts through the use
of regulatory services agreements and/or agreements adopted pursuant
to Rule 17d-2 under the Exchange Act.
\66\ The CAT NMS Plan defines ``Reportable Event'' as
``includ[ing], but . . . not limited to, the original receipt or
origination, modification, cancellation, routing, execution (in
whole or in part) and allocation of an order, and receipt of a
routed order.'' See CAT NMS Plan, supra note 3, at Section 1.1.
for original receipt or origination of an order: (1) Firm Designated
ID(s) (FDIs) for each customer; (2) CAT-Order-ID; (3) SRO-Assigned
Market Participant Identifier of the Industry Member receiving or
originating the order; (4) date of order receipt or origination; (5)
time of order receipt or origination (using time stamps pursuant to
Section 6.8); (6) the Material Terms of the Order; \67\ and (7)
other information as may be determined by the Operating
Committee.\68\
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\67\ For a discussion of the Material Terms of the Order
required by Rule 613, see Adopting Release, supra note 9, at 45750-
52. The Commission notes that the Participants include in the Plan a
requirement for the reporting of the OTC equity security symbol as
one of the ``Material Terms of the Order.'' See CAT NMS Plan, supra
note 3, at Section 1.1.
\68\ In the CAT NMS Plan as attached hereto as Exhibit A, the
provisions of Section 6.3 enabling the Operating Committee to
require Participants to record and report ``other information'' were
removed.
for the routing of an order: (1) CAT-Order-ID; (2) date on which the
order is routed; (3) time at which the order is routed (using time
stamps pursuant to Section 6.8); (4) SRO-Assigned Market Participant
Identifier of the Industry Member or Participant routing the order;
(5) SRO-Assigned Market Participant Identifier of the Industry
Member or Participant to which the order is being routed; (6) if
routed internally at the Industry Member, the identity and nature of
the department or desk to which the order is routed; (7) the
Material Terms of the Order; and (8) other information as may be
determined by the Operating Committee.\69\
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\69\ Id.
for the receipt of an order that has been routed, the following
information: (1) CAT-Order-ID; (2) date on which the order is
received; (3) time at which the order is received (using time stamps
pursuant to Section 6.8); (4) SRO-Assigned Market Participant
Identifier of the Industry Member or Participant receiving the
order; (5) SRO-Assigned Market Participant Identifier of the
Industry Member or Participant routing the order; (6) the Material
Terms of the Order; and (7) other information as may be determined
by the Operating Committee.\70\
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\70\ Id.
if the order is modified or cancelled: (1) CAT-Order-ID; (2) date
the modification or cancellation is received or originated; (3) time
at which the modification or cancellation is received or originated
(using time stamps pursuant to Section 6.8); (4) price and remaining
size of the order, if modified; (5) other changes in Material Terms,
if modified; (6) whether the modification or cancellation
instruction was given by the Customer, or was initiated by the
Industry Member or Participant; and (7) other information as may be
determined by the Operating Committee.\71\
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\71\ Id.
if the order is executed, in whole or in part: (1) CAT-Order-ID; (2)
date of execution; (3) time of execution (using time stamps pursuant
to Section 6.8); (4) execution capacity (principal, agency or
riskless principal); (5) execution price and size; (6) the SRO-
Assigned Market Participant Identifier of the Participant or
Industry Member executing the order; and (7) whether the execution
was reported pursuant to an effective transaction reporting plan or
the Plan for Reporting of Consolidated Options Last Sale Reports and
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Quotation Information; and
other information or additional events as may be determined by the
Operating Committee \72\ or otherwise prescribed in Appendix D,
Reporting and Linkage Requirements.
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\72\ Id.
As contemplated in Appendix D, Data Types and Sources, each
Participant will report Participant Data to the Central Repository for
consolidation and storage in a format specified by the Plan Processor,
approved by the Operating Committee and compliant with Rule 613. As
further described in Appendix D, Reporting and Linkage Requirements,
each Participant is required to record the Participant Data
contemporaneously with the Reportable Event. In addition, each
Participant must report the Participant Data to the Central Repository
by 8:00 a.m. Eastern Time on the Trading Day following the day that the
Participant recorded the Participant Data. Participants may voluntarily
report the Participant Data prior to the 8:00 a.m. Eastern Time
deadline.
Each Participant that is a national securities exchange is required
to comply with the above recording and reporting requirements for each
NMS Security registered or listed for trading on such exchange or
admitted to unlisted trading privileges on such exchange. Each
Participant that is a national securities association is required to
comply with the above recording and reporting requirements for each
Eligible Security for which transaction reports are required to be
submitted to the association.
D. Data Reporting and Recording by Industry Members
The Plan also sets forth the data reporting and recording
requirements for Industry Members. Specifically, subject to Section
6.4(c), and Section 6.4(d)(iii) with respect to Options Market Makers,
and consistent with Appendix D, Reporting and Linkage Requirements,
each Participant, through its Compliance Rule, will require its
Industry Members to record and electronically report to the Central
Repository for each order and each Reportable Event the information
referred to in Section 6.3(d), as applicable (``Recorded Industry
Member Data'')--that is, Participant Data discussed above. In addition,
subject to Section 6.4(c), and Section 6.4(d)(iii) with respect to
Options Market Makers, and consistent with Appendix D, Reporting and
Linkage Requirements, each Participant, through its Compliance Rule,
will require its Industry Members to record and report to the Central
Repository the following (``Received Industry Member Data'' and,
[[Page 30628]]
collectively with the Recorded Industry Member Data, ``Industry Member
Data''): (1) If the order is executed, in whole or in part: (a) An
Allocation Report that includes the Firm Designated ID when an
execution is allocated (in whole or in part); \73\ (b) SRO-Assigned
Market Participant Identifier of the clearing broker or prime broker,
if applicable; and (c) CAT-Order-ID of any contra-side order(s); (2) if
the trade is cancelled, a cancelled trade indicator; and (3) for
original receipt or origination of an order, information of sufficient
detail to identify the Customer.
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\73\ In the Amendment to the CAT NMS Plan, language in Section
6.4(d) that read, ``that includes the Firm Designated ID when an
execution is allocated (in whole or in part)'' was removed because
the definition of ``Allocation Report'' includes this information.
---------------------------------------------------------------------------
With respect to the reporting obligations of an Options Market
Maker with regard to its quotes in Listed Options, Reportable Events
required pursuant to Section 6.3(d)(ii) and (iv) will be reported to
the Central Repository by an Options Exchange in lieu of the reporting
of such information by the Options Market Maker. Each Participant that
is an Options Exchange will, through its Compliance Rule, require its
Industry Members that are Options Market Makers to report to the
Options Exchange the time at which a quote in a Listed Option is sent
to the Options Exchange (and, if applicable, any subsequent quote
modifications and/or cancellation time when such modification or
cancellation is originated by the Options Market Maker). Such time
information also will be reported to the Central Repository by the
Options Exchange in lieu of reporting by the Options Market Maker.\74\
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\74\ See Section III.B.9, infra, and accompanying requests for
comment.
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Each Participant will, through its Compliance Rule, require its
Industry Members to record and report to the Central Repository other
information or additional events as prescribed in Appendix D, Reporting
and Linkage Requirements.
As contemplated in Appendix D, Data Types and Sources, each
Participant will require its Industry Members to report Industry Member
Data to the Central Repository for consolidation and storage in a
format(s) specified by the Plan Processor, approved by the Operating
Committee and compliant with Rule 613. As further described in Appendix
D, Reporting and Linkage Requirements, each Participant will require
its Industry Members to record Recorded Industry Member Data
contemporaneously with the applicable Reportable Event. In addition,
consistent with Appendix D, Reporting and Linkage Requirements, each
Participant will require its Industry Members to report: (1) Recorded
Industry Member Data to the Central Repository by 8:00 a.m. Eastern
Time on the Trading Day following the day the Industry Member records
such Recorded Industry Member Data; and (2) Received Industry Member
Data to the Central Repository by 8:00 a.m. Eastern Time on the Trading
Day following the day the Industry Member receives such Received
Industry Member Data. Each Participant will permit its Industry Members
to voluntarily report Industry Member Data prior to the applicable 8:00
a.m. Eastern Time deadline.\75\
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\75\ See Section III.B.2, infra, and accompanying requests for
comment.
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Each Participant that is a national securities exchange must
require its Industry Members to report Industry Member Data for each
NMS Security registered or listed for trading on such exchange or
admitted to unlisted trading privileges on such exchange. Each
Participant that is a national securities association must require its
Industry Members to report Industry Member Data for each Eligible
Security for which transaction reports are required to be submitted to
the association.
Request for Comment
43. Sections 6.3(d) and 6.4(d) of the CAT NMS Plan set forth the
details that Participants and Industry Members must report to the
Central Repository. Do Commenters believe that these details will be
sufficient to allow the Central Repository to link information to
accurately reflect the lifecycle of an order? If not, what additional
information should be required to be reported for this purpose?
44. Sections 6.3 and 6.4 of the CAT NMS Plan require Participants
and Industry Members to record and report to the Central Repository
other information or additional events as may be prescribed in Appendix
D, Reporting and Linkage Requirements. Do Commenters believe that the
CAT NMS Plan is sufficiently clear regarding the ``other information or
additional events as may be prescribed in Appendix D'' that may be
required? Please explain. Are these ``other information or additional
events prescribed in Appendix D'' appropriate and reasonable? Please
explain.
45. The CAT NMS Plan does not specify the format in which CAT
Reporters must submit data, and states the Plan Processor will specify
the format. Do Commenters believe that the CAT NMS Plan should specify
a particular format? If so, what format? Please explain.
E. Regular Written Assessment
As described in Article VI, the Participants are required to
provide the Commission with a written assessment of the operation of
the CAT that meets the requirements set forth in Rule 613, Appendix D,
and the Plan at least every two years or more frequently in connection
with any review of the Plan Processor's performance under the Plan
pursuant to Section 6.1(m).\76\ The Chief Compliance Officer will
oversee this assessment and will provide the Participants a reasonable
time to review and comment upon the written assessment prior to its
submission to the SEC. In no case will the written assessment be
changed or amended in response to a comment from a Participant; rather
any comment by a Participant will be provided to the SEC at the same
time as the written assessment.
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\76\ The Commission notes that the applicable provision in the
Amendment is Section 6.1(n).
---------------------------------------------------------------------------
Request for Comment
46. Do Commenters believe that the details and requirements
regarding the regular written assessment of the operation of the CAT
provided in Section 6.6 of the CAT NMS Plan are appropriate and
reasonable? Would additional details or requirements for this
assessment be beneficial?
47. Do Commenters believe that the Chief Compliance Officer should
oversee the regular written assessment, as is required by Section 6.6?
If not, would another party be better suited to this role?
F. Time Stamps and Synchronization of Business Clocks
Section 6.8 of the Plan discusses time stamps and the
synchronization of Business Clocks. Each Participant is required to
synchronize its Business Clocks (other than such Business Clocks used
solely for Manual Order Events) at a minimum to within 50 milliseconds
of the time maintained by the National Institute of Standards and
Technology, consistent with industry standards. In addition, each
Participant must, through its Compliance Rule, require its Industry
Members to: (1) Synchronize their respective Business Clocks (other
than such Business Clocks used solely for Manual Order Events) at a
minimum to within 50 milliseconds of the time maintained by the
National Institute of Standards and Technology, and maintain such a
synchronization; (2)
[[Page 30629]]
certify periodically that their Business Clocks meet the requirements
of the Compliance Rule; and (3) report to the Plan Processor and the
Participant any violation of the Compliance Rule pursuant to the
thresholds set by the Operating Committee. Furthermore, each
Participant is required to synchronize its Business Clocks and, through
its Compliance Rule, require its Industry Members to synchronize their
Business Clocks used solely for Manual Order Events at a minimum to
within one second of the time maintained by the National Institute of
Standards and Technology, consistent with industry standards, and
maintain such synchronization. Each Participant will require its
Industry Members to certify periodically (according to a schedule
defined by the Operating Committee) that their Business Clocks used
solely for Manual Order Events meet the requirements of the Compliance
Rule. The Compliance Rule of a Participant shall require its Industry
Members using Business Clocks solely for Manual Order Events to report
to the Plan Processor any violation of the Compliance Rule pursuant to
the thresholds set by the Operating Committee. The Participants stated
their belief that pursuant to Rule 613(d)(1) that these synchronization
standards are consistent with current industry standards.
Each Participant shall, and through its Compliance Rule require its
Industry Members to, report information required by Rule 613 and this
Agreement to the Central Repository in milliseconds. To the extent that
any Participant utilizes time stamps in increments finer than the
minimum required by the Plan, the Participant is required to make
reports to the Central Repository utilizing such finer increment when
reporting CAT Data to the Central Repository so that all Reportable
Events reported to the Central Repository could be adequately
sequenced. Each Participant will, through its Compliance Rule: (1)
Require that, to the extent that its Industry Members utilize time
stamps in increments finer than the minimum required in the Plan, such
Industry Members will utilize such finer increment when reporting CAT
Data to the Central Repository; and (2) provide that a pattern or
practice of reporting events outside of the required clock
synchronization time period without reasonable justification or
exceptional circumstances may be considered a violation of SEC Rule 613
and the Plan. Notwithstanding the preceding sentences, each Participant
and Industry Member will be permitted to record and report Manual Order
Events to the Central Repository in increments up to and including one
second, provided that Participants and Industry Members will be
required to record and report the time when a Manual Order Event has
been captured electronically in an order handling and execution system
of such Participant or Industry Member in milliseconds. In conjunction
with Participants' and other appropriate Industry Member advisory
groups, the Chief Compliance Officer will annually evaluate and make a
recommendation to the Operating Committee as to whether industry
standards have evolved such that the required synchronization should be
shortened or the required time stamp should be in finer increments. The
Operating Committee will make determinations regarding the need to
revise the synchronization and time stamp requirements.
Request for Comment \77\
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\77\ See Sections III.B.4 and III.B.5, infra, for additional
requests for comment on clock synchronization and time stamp
granularity.
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48. Do Commenters believe that the CAT NMS Plan's requirement that
Participants and Industry Members synchronize their Business Clocks to
within 50 milliseconds of the time maintained by the National Institute
of Standards and Technology (``NIST'') is appropriate and reasonable?
Do Commenters agree with the Participants that this clock offset
tolerance represents current industry standards? Would a tighter clock
offset tolerance be feasible?
49. Do Commenters believe that the CAT NMS Plan's requirement that
Participants and Industry Members report information to the Central
Repository in milliseconds is appropriate and reasonable? Would a more
granular time stamp requirement be feasible? Do Commenters agree with
the Participants that time stamp granularity to the millisecond
represents current industry standards?
50. How should ``industry standard,'' for purposes of the CAT NMS
Plan's clock synchronization and time stamping requirements, be
determined? Do Commenters believe that ``industry standard'' should be
based on current industry practice? If not, how should ``industry
standard'' be defined? What other factors, if any, should be considered
in defining such ``industry standards''?
G. Technical Specifications
Section 6.9 of the Plan establishes the requirements involving the
Plan Processor's Technical Specifications. The Plan Processor will
publish Technical Specifications that are at a minimum consistent with
Appendices C and D, and updates thereto as needed, providing detailed
instructions regarding the submission of CAT Data by Participants and
Industry Members to the Plan Processor for entry into the Central
Repository. The Technical Specifications will be made available on a
publicly available Web site to be developed and maintained by the Plan
Processor. The initial Technical Specifications and any Material
Amendments thereto will require the approval of the Operating Committee
by Supermajority Vote.
The Technical Specifications will include a detailed description of
the following: (1) The specifications for the layout of files and
records submitted to the Central Repository; (2) the process for the
release of new data format specification changes; (3) the process for
industry testing for any changes to data format specifications; (4) the
procedures for obtaining feedback about and submitting corrections to
information submitted to the Central Repository; (5) each data element,
including permitted values, in any type of report submitted to the
Central Repository; (6) any error messages generated by the Plan
Processor in the course of validating the data; (7) the process for
file submissions (and re-submissions for corrected files); (8) the
storage and access requirements for all files submitted; (9) metadata
requirements for all files submitted to the CAT System; (10) any
required secure network connectivity; (11) data security standards,
which will, at a minimum: (a) Satisfy all applicable regulations
regarding database security, including provisions of Regulation Systems
Compliance and Integrity under the Exchange Act (``Reg SCI''); (b) to
the extent not otherwise provided for under the Plan (including
Appendix C thereto), set forth such provisions as may be necessary or
appropriate to comply with Rule 613(e)(4); and (c) comply with industry
best practices; and (12) any other items reasonably deemed appropriate
by the Plan Processor and approved by the Operating Committee.
Amendments to the Technical Specifications may be made only in
accordance with Section 6.9(c). The process for amending the Technical
Specifications varies depending on whether the change is material. An
amendment will be deemed ``material'' if it would require a Participant
or an Industry Member to engage in significant changes to the coding
necessary to submit information to the Central Repository pursuant to
the Plan, or if it is required to safeguard the
[[Page 30630]]
security or confidentiality of the CAT Data. Except for Material
Amendments to the Technical Specifications, the Plan Processor will
have the sole discretion to amend and publish interpretations regarding
the Technical Specifications; however, all non-Material Amendments made
to the Technical Specifications and all published interpretations will
be provided to the Operating Committee in writing at least ten days
before being published. Such non-Material Amendments and published
interpretations will be deemed approved ten days following provision to
the Operating Committee unless two unaffiliated Participants call for a
vote to be taken on the proposed amendment or interpretation. If an
amendment or interpretation is called for a vote by two or more
unaffiliated Participants, the proposed amendment must be approved by
Majority Vote of the Operating Committee. Once a non-Material Amendment
has been approved or deemed approved by the Operating Committee, the
Plan Processor will be responsible for determining the specific changes
to the Central Repository and providing technical documentation of
those changes, including an implementation timeline.
Material Amendments to the Technical Specifications require
approval of the Operating Committee by Supermajority Vote. The
Operating Committee, by Supermajority Vote, may amend the Technical
Specifications on its own motion.
Request for Comment
51. Do Commenters believe that the list of items to be included in
the Technical Specifications, as set forth in Section 6.9(b) of the CAT
NMS Plan, is appropriate and reasonable? Do Commenters believe that
detailed descriptions of any of the listed items should be included in
the CAT NMS Plan rather than in the Technical Specifications? Do
Commenters believe that the list addresses all of the areas that should
be included in the Technical Specifications? Are there other aspects of
the CAT that require Technical Specifications? If so, please identify
and explain why the additional Technical Specifications are needed.
52. Do Commenters believe the Plan Processor should have sole
discretion to amend and publish interpretations regarding the Technical
Specifications, except for Material Amendments? Why or why not? What
discretion or input, if any, should the Operating Committee or other
parties, including the Advisory Committee, have in amending and
publishing Technical Specifications interpretations?
53. How should Technical Specifications be communicated to the
industry? Why?
54. What are the incentives for the Operating Committee to review
the Plan Processor's interpretation of Technical Specifications and
verify that the interpretation is consistent with the regulatory
objectives of the Plan? What are the best practices to ensure
sufficient review by the Operating Committee? What provisions of the
Plan are in place to ensure that the Operating Committee follows these
practices? What provisions, if any, could be strengthened? Please
explain and provide supporting examples and evidence, if available.
55. The CAT NMS Plan provides that non-Material Amendments and
published interpretations will be deemed approved ten days following
provision to the Operating Committee, unless two unaffiliated
Participants call for a vote to be taken on the proposed amendment or
interpretation. Do Commenters have any views on this process? If so,
please explain.
56. Do Commenters have any views regarding the definition of
Material Amendments? Is the definition too broad? Too narrow? Please
explain. Do Commenters have any views on who should be responsible for
determining whether an amendment to the Technical Specifications is a
Material Amendment? Do Commenters believe the CAT NMS Plan clearly
states who shall have the responsibility to make the determination? Do
Commenters have any views on how the determination should be made?
Please explain.
57. The CAT NMS Plan requires that Material Amendments be approved
by the Operating Committee by Supermajority Vote and allows the
Operating Committee to amend the Technical Specifications on its own
motion by Supermajority Vote. Do Commenters have any views on these
processes? If so, please explain.
58. The CAT NMS Plan provides that the Plan Processor's business
continuity planning must include a secondary site for critical staff,
capable of recovery and restoration of services within 48 hours, with
the goal of next day recovery. Should the CAT NMS Plan provide
additional details regarding ``the goal of next day recovery''? Do
Commenters believe a 48-hour recovery and restoration period is too
long? Too short? Please explain. Should the CAT NMS Plan impose any
other requirements on the Plan Processor to better assure the Plan
Processor is able to transition to the secondary site within the
specified time frames? If so, what?
H. Surveillance
Surveillance issues are described in Section 6.10. Using the tools
provided for in Appendix D, Functionality of the CAT System, each
Participant will develop and implement a surveillance system, or
enhance existing surveillance systems, reasonably designed to make use
of the consolidated information contained in the Central Repository.
Unless otherwise ordered by the SEC, within fourteen months after the
Effective Date, each Participant must initially implement a new or
enhanced surveillance system(s) as required by Rule 613 and Section
6.10(a) of the Plan. Participants may, but are not required to,
coordinate surveillance efforts through the use of regulatory services
agreements and agreements adopted pursuant to Rule 17d-2 under the
Exchange Act.
Consistent with Appendix D, Functionality of the CAT System, the
Plan Processor will provide Participants and the SEC with access to all
CAT Data stored in the Central Repository. Regulators will have access
to processed CAT Data through two different methods: (1) An online
targeted query tool; and (2) user-defined direct queries and bulk
extracts. The online targeted query tool will provide authorized users
with the ability to retrieve CAT Data via an online query screen that
includes the ability to choose from a variety of pre-defined selection
criteria. Targeted queries must include date(s) and/or time range(s),
as well as one or more of a variety of fields. The user-defined direct
queries and bulk extracts will provide authorized users with the
ability to retrieve CAT Data via a query tool or language that allows
users to query all available attributes and data sources.
Extraction of CAT Data will be consistent with all permission
rights granted by the Plan Processor. All CAT Data returned will be
encrypted, and PII data will be masked unless users have permission to
view the PII contained in the CAT Data that has been requested.
The Plan Processor will implement an automated mechanism to monitor
direct query usage. Such monitoring will include automated alerts to
notify the Plan Processor of potential issues with bottlenecks or
excessively long queues for queries or CAT Data extractions. The Plan
Processor will provide the Operating Committee or its designee(s)
details as to how the monitoring will be accomplished and the metrics
that will be used to trigger alerts.
The Plan Processor will reasonably assist regulatory Staff
(including those of Participants) with creating queries. Without
limiting the manner in which
[[Page 30631]]
regulatory Staff (including those of Participants) may submit queries,
the Plan Processor will submit queries on behalf of regulatory Staff
(including those of Participants) as reasonably requested. The Plan
Processor will staff a CAT help desk, as described in Appendix D, CAT
Help Desk, to provide technical expertise to assist regulatory Staff
(including those of Participants) with questions about the content and
structure of the CAT Data.
Request for Comment
59. What features of the CAT NMS Plan will facilitate the creation
of enhanced surveillance systems? Are the minimum functional and
technical requirements for the Plan Processor set forth in Appendix D
consistent with the creation of enhanced surveillance systems? What, if
any, additional requirements or details should be provided in the CAT
NMS Plan to ensure that the Plan facilitates the creation of enhanced
surveillance systems?
60. Under the CAT NMS Plan, will regulatory Staff have appropriate
access to the Central Repository? Specifically, do Commenters believe
that the online targeted query tool and user-defined direct queries and
bulk extracts described in Sections 8.1 and 8.2 of Appendix D will
enable regulatory Staff to use the data in the Central Repository to
carry out their surveillance, analysis, and other regulatory functions?
If not, why not and what should be added? Does the CAT NMS Plan provide
sufficient detail to determine if regulators will have appropriate
access? If not, what additional details should be provided?
61. Do Commenters believe that the provisions in Section
6.10(c)(ii) of the CAT NMS Plan regarding permission rights granted by
the Plan Processor, encryption, and masking of PII are appropriate and
reasonable? Would these provisions affect the ability of Commission or
SRO regulatory Staff to access and use the data in the Central
Repository? If so, what additional or different provisions would
mitigate the impact on regulatory access to and use of the data?
62. Do Commenters believe that the query monitoring mechanism to be
implemented by the Plan Processor, as described in Section 6.10(c)(iii)
of the CAT NMS Plan, is appropriately designed to help enable
regulators to carry out their regulatory functions? If not, what
additional details or functionality should be provided? Will the
provisions regarding Plan Processor assistance of regulatory Staff and
submission of regulatory Staff queries (Sections 6.10(c)(iv)-(v) of the
CAT NMS Plan) and the CAT user support functionality (as described in
Section 10.2 of Appendix D) provide sufficient assistance to regulators
in carrying out their regulatory functions?
I. Information Security Program
As set forth in Section 6.12, the Plan Processor is required to
develop and maintain a comprehensive information security program for
the Central Repository that contains, at a minimum, the specific
requirements detailed in Appendix D, Data Security. The information
security program must be approved and reviewed at least annually by the
Operating Committee.
Request for Comment
63. Do Commenters believe the CAT NMS Plan should include a
discussion of policies and procedures applicable to members of the
Advisory Committee to ensure the security and confidentiality of the
operation of the CAT (for example, requiring members of the Advisory
Committee to enter into a non-disclosure agreement with the Company)?
If so, what additional measures should be considered?
64. Do Commenters believe the CAT NMS Plan should detail the
policies and procedures applicable to regulatory users of the CAT that
would ensure the security and confidentiality of the CAT Data and the
operation of the CAT? If so, what measures should be considered? Do
Commenters have any views on how such policies and procedures should be
enforced? Please explain.
(6) Financial Matters
Articles VII and VIII of the Plan address certain financial matters
related to the Company. In particular, the Plan states that, subject to
certain special allocations provided for in Section 8.2, any net profit
or net loss will be allocated among the Participants equally. In
addition, subject to Section 10.2, cash and property of the Company
will not be distributed to the Participants unless the Operating
Committee approves by Supermajority Vote a distribution after fully
considering the reason that such distribution must or should be made to
the Participants, including the circumstances contemplated under
Section 8.3, Section 8.6, and Section 9.3. To the extent a distribution
is made, all Participants will participate equally in any such
distribution except as otherwise provided in Section 10.2.
Article XI addresses the funding of the Company. On an annual basis
the Operating Committee will approve an operating budget for the
Company. The budget will include the projected costs of the Company,
including the costs of developing and operating the CAT System for the
upcoming year, and the sources of all revenues to cover such costs, as
well as the funding of any reserve that the Operating Committee
reasonably deems appropriate for prudent operation of the Company.
Subject to certain funding principles set forth in Article XI, the
Operating Committee will have discretion to establish funding for the
Company, including: (1) Establishing fees that the Participants will
pay; and (2) establishing fees for Industry Members that will be
implemented by Participants. In establishing the funding of the
Company, the Operating Committee will seek to: (1) Create transparent,
predictable revenue streams for the Company that are aligned with the
anticipated costs to build, operate and administer the CAT and the
other costs of the Company; (2) establish an allocation of the
Company's related costs among Participants and Industry Members that is
consistent with the Exchange Act, taking into account the timeline for
implementation of the CAT and distinctions in the securities trading
operations of Participants and Industry Members and their relative
impact upon Company resources and operations; (3) establish a tiered
fee structure in which the fees charged to: (a) CAT Reporters that are
Execution Venues, including ATSs, are based upon the level of market
share, (b) Industry Members' non-ATS activities are based upon message
traffic, and (c) the CAT Reporters with the most CAT-related activity
(measured by market share and/or message traffic, as applicable) are
generally comparable (where, for these comparability purposes, the
tiered fee structure takes into consideration affiliations between or
among CAT Reporters, whether Execution Venues and/or Industry Members);
(4) provide for ease of billing and other administrative functions; (5)
avoid any disincentives such as placing an inappropriate burden on
competition and a reduction in market quality; and (6) build financial
stability to support the Company as a going concern. The Participants
will file with the SEC under Section 19(b) of the Exchange Act any such
fees on Industry Members that the Operating Committee approves, and
such fees will be labeled as ``Consolidated Audit Trail Funding Fees.''
To fund the development and implementation of the CAT, the Company
will time the imposition and collection of all fees on Participants and
Industry Members in a manner
[[Page 30632]]
reasonably related to the timing when the Company expects to incur such
development and implementation costs. In determining fees for
Participants and Industry Members, the Operating Committee shall take
into account fees, costs and expenses (including legal and consulting
fees and expenses) incurred by the Participants on behalf of the
Company prior to the Effective Date in connection with the creation and
implementation of the CAT, and such fees, costs and expenses shall be
fairly and reasonably shared among the Participants and Industry
Members. Consistent with Article XI, the Operating Committee will adopt
policies, procedures, and practices regarding the budget and budgeting
process, assignment of tiers, resolution of disputes, billing and
collection of fees, and other related matters. As a part of its regular
review of fees for the CAT, the Operating Committee will have the right
to change the tier assigned to any particular Person pursuant to this
Article XI.\78\ Any such changes will be effective upon reasonable
notice to such Person.
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\78\ The Commission notes that Section 11.1(b) of the CAT NMS
Plan states that the Participants would file fees for Industry
Members approved by the Operating Committee with the Commission. The
Operating Committee may only change the tier to which a Person is
assigned in accordance with a fee schedule filed with the
Commission.
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The Operating Committee will establish fixed fees to be payable by
Execution Venues as follows. Each Execution Venue that executes
transactions, or, in the case of a national securities association, has
trades reported by its members to its trade reporting facility or
facilities for reporting transactions effected otherwise than on an
exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee
depending on the market share of that Execution Venue in NMS Stocks and
OTC Equity Securities. The Operating Committee will establish at least
two and no more than five tiers of fixed fees, based on an Execution
Venue's NMS Stocks and OTC Equity Securities market share. For these
purposes, market share will be calculated by share volume. In addition,
each Execution Venue that executes transactions in Listed Options will
pay a fixed fee depending on the Listed Options market share of that
Execution Venue. The Operating Committee will establish at least two
and no more than five tiers of fixed fees, based on an Execution
Venue's Listed Options market share, with market share calculated by
contract volume. Changes to the number of tiers after approval of the
Plan would require a Supermajority Vote of the Operating Committee and
Commission approval under Section 19(b) of the Exchange Act, as would
the establishment of the initial fee schedule and any changes to the
fee schedule within the tier structure.\79\
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\79\ The Commission notes that the Participants could choose to
submit the proposed fee schedule to the Commission as individual
SROs pursuant to Rule 19b-4 or jointly as Participants to an NMS
plan pursuant to Rule 608 of Regulation NMS. Because the proposed
fee schedule would establish fees, whether the Participants
individually file it pursuant to Section 19(b)(3)(A)(ii) of the Act,
or jointly file it pursuant to Rule 608(b)(3)(i) of Regulation NMS,
the proposed fee schedule could take effect upon filing with the
Commission. See 15 U.S.C. 78s(b)(3)(A)(ii); 17 CFR 242.608(b)(3)(i).
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The Operating Committee also will establish fixed fees payable by
Industry Members, based on the message traffic generated by such
Industry Member. The Operating Committee will establish at least five
and no more than nine tiers of fixed fees, based on message traffic.
For the avoidance of doubt, the fixed fees payable by Industry Members
pursuant to this paragraph will, in addition to any other applicable
message traffic, include message traffic generated by: (1) An ATS that
does not execute orders that is sponsored by such Industry Member; and
(2) routing orders to and from any ATS system sponsored by such
Industry Member.
Furthermore, the Operating Committee may establish any other fees
ancillary to the operation of the CAT that it reasonably determines
appropriate, including: Fees for the late or inaccurate reporting of
information to the CAT; fees for correcting submitted information; and
fees based on access and use of the CAT for regulatory and oversight
purposes (and not including any reporting obligations).\80\
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\80\ As it relates to any fees that the Operating Committee may
impose for access and use of the CAT for regulatory and oversight
purposes, the Commission interprets the provisions in the Plan
relating to the collection of fees as applying only to Participants
and Industry Members, and thus the Commission would not be subject
to such fees.
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The Company will make publicly available a schedule of effective
fees and charges adopted pursuant to the Plan as in effect from time to
time. Such schedule will be developed after the Plan Processor is
selected. The Operating Committee will review the fee schedule on at
least an annual basis and will make any changes to such fee schedule
that it deems appropriate. The Operating Committee is authorized to
review the fee schedule on a more regular basis, but will not make any
changes on more than a semi-annual basis unless, pursuant to a
Supermajority Vote, the Operating Committee concludes that such change
is necessary for the adequate funding of the Company.
The Operating Committee will establish a system for the collection
of fees authorized under the Plan. The Operating Committee may include
such collection responsibility as a function of the Plan Processor or
another administrator. Alternatively, the Operating Committee may use
the facilities of a clearing agency registered under Section 17A of the
Exchange Act to provide for the collection of such fees.
Each Participant will require each Industry Member to pay all
applicable fees authorized under Article XI within thirty days after
receipt of an invoice or other notice indicating payment is due (unless
a longer payment period is otherwise indicated). If an Industry Member
fails to pay any such fee when due, such Industry Member will pay
interest on the outstanding balance from such due date until such fee
is paid at a per annum rate equal to the lesser of: (1) The Prime Rate
plus 300 basis points; or (2) the maximum rate permitted by applicable
law. Each Participant will pay all applicable fees authorized under
Article XI as required by Section 3.7(b).
Disputes with respect to fees the Company charges Participants
pursuant to Article XI will be determined by the Operating Committee or
a Subcommittee designated by the Operating Committee. Decisions by the
Operating Committee on such matters shall be binding on Participants,
without prejudice to the rights of any Participant to seek redress from
the SEC pursuant to SEC Rule 608 or in any other appropriate forum. The
Participants will adopt rules requiring that disputes with respect to
fees charged to Industry Members pursuant to Article XI be determined
by the Operating Committee or a Subcommittee. Decisions by the
Operating Committee or Subcommittee on such matters will be binding on
Industry Members, without prejudice to the rights of any Industry
Member to seek redress from the SEC pursuant to SEC Rule 608 or in any
other appropriate forum.
Request for Comment
65. Do Commenters believe that the provisions in the CAT NMS Plan
regarding the funding and budget of the Company to operate the CAT (as
described in Article XI) are appropriate and reasonable? Specifically,
do Commenters believe that the tiered funding model described in
Section 11.2(c) of the CAT NMS Plan and the fixed-tier funding model
described in
[[Page 30633]]
Section 11.3 of the CAT NMS Plan are appropriate and reasonable?
66. What are Commenters' views regarding the methodology in the CAT
NMS Plan to establish and impose fees on Participants and the industry?
Do Commenters believe that the fee system described in Sections 11.2
and 11.3 of the CAT NMS Plan will result in an equitable and fair
allocation of CAT-related fees between Participants, other types of
Execution Venues, and Industry Members? Will the fee system in the
Plan, including consideration of the distinctions in securities trading
operations, impose higher costs upon or result in any competitive
advantage to some types of Execution Venues or Industry Members as
opposed to others? If yes, are those differences in fees appropriate
and reasonable? Will this proposed fee system create incentives to
execute orders in certain Execution Venues over others? What
alternative fee systems, if any, would be more appropriate?
67. Do Commenters believe that assessing fees based on market share
and message traffic, as described in Sections 11.2 and 11.3 of the CAT
NMS Plan, is appropriate and reasonable? Specifically, is it
appropriate and reasonable to base Industry Member fees on message
traffic and Execution Venue fees on market share? Will this method of
calculating fees impose higher costs upon or result in any competitive
advantage to some types of Execution Venues or Industry Members as
opposed to others? What fee calculation method, if any, would be more
appropriate?
68. Are the tier levels appropriate and reasonable? Why or why not?
Is the number of tiers contemplated (2-5 for Execution Venues and 5-9
for Industry Members) appropriate and reasonable? Why or why not?
69. Do Commenters believe that giving the right to the Operating
Committee to change the fee tier assigned to any particular Person as
set forth in Section 11.1(d) of the CAT NMS Plan is appropriate and
reasonable? If not, why not? What alternative process, if any, would be
more appropriate?
70. Do Commenters believe that giving the right to the Operating
Committee to change the fee tier assigned to any particular Person as
set forth in Section 11.1(d) of the CAT NMS Plan conflicts with the
tier structure of fees as set forth in Section 11.2(c) of the CAT NMS
Plan, which will be based on the market share for Execution Venues, and
message traffic for Industry Members? Why or why not?
71. Section 11.1(d) of the CAT NMS Plan also provides that any
change to a Person's fee tier will be effective upon reasonable notice
to such Person. Do Commenters believe that a notice to any such Person
is necessary, given that the CAT NMS Plan provides that a Person will
change fee tiers based on market share or message traffic, as
applicable? Why or why not? What should constitute reasonable notice?
72. Do Commenters believe the Operating Committee's ability to
establish additional fees for ``access and use of the CAT for
regulatory and oversight purposes'' (as described in Section 11.3(c) of
the CAT NMS Plan) is appropriate and reasonable? Would this provision
affect the ability of regulatory Staff to access and use the data in
the Central Repository? If so, what additional or different provisions
would mitigate the impact upon regulatory access to and use of the
data?
73. Do Commenters believe that the funding provisions in Section
11.1 of the CAT NMS Plan provide sufficient authority and guidance to
the Operating Committee to establish and maintain such reserves as are
reasonably deemed appropriate by the Operating Committee for the
prudent operation of the Company? If not, why not?
74. Do Commenters believe that the provisions in the CAT NMS Plan
regarding the collection of fees (Section 11.4 of the CAT NMS Plan) and
fee disputes (Section 11.5 of the CAT NMS Plan) are appropriate and
reasonable? If not, what alternatives do Commenters suggest?
75. Do Commenters believe the CAT NMS Plan provides sufficient
detail regarding the proposed cost allocation among the Plan Processor
and regulators with respect to hardware and software costs that may be
required in order to use CAT Data? If not, what are the risks of not
providing sufficient detail and what requirements should be set forth
in the CAT NMS Plan? For example, since there will only be one Plan
Processor, what are the risks of significant costs for regulators to
the extent regulators will need to contract with the Plan Processor for
additional computing resources, storage costs and data transfer costs?
76. Should the Operating Committee be required to consult the
Advisory Committee when setting fees and performing regular reviews of
fees? Please explain.
(7) Amendments
Section 12.3 of the CAT NMS Plan, which governs amendments to the
Plan, states that, except with respect to the addition of new
Participants (Section 3.3), the transfer of Company Interest (Section
3.4), the termination of a Participant's participation in the Plan
(Section 3.7), amendments to the Selection Plan (Section 5.3 [sic]) and
special allocations (Section 8.2), any change to the Plan requires a
written amendment authorized by the affirmative vote of not less than
two-thirds of all of the Participants, or with respect to Section 3.8
by the affirmative vote of all the Participants. Such proposed
amendment must be approved by the Commission pursuant to Rule 608 or
otherwise becomes effective under Rule 608. Notwithstanding the
foregoing, to the extent that the SEC grants exemptive relief
applicable to any provision of this Agreement, Participants and
Industry Members will be entitled to comply with such provision
pursuant to the terms of the exemptive relief so granted at the time
such relief is granted irrespective of whether the LLC Agreement has
been amended.
(8) Compliance Rule Applicable to Industry Members
Under Article III, each Participant agrees to comply with and
enforce compliance by its Industry Members with the provisions of Rule
613 and the Plan, as applicable, to the Participant and its Industry
Members. Accordingly, the Participants will endeavor to promulgate
consistent rules (after taking into account circumstances and
considerations that may impact Participants differently) requiring
compliance by their respective Industry Members with the provisions of
Rule 613 and the Plan.
(9) Plan Appendices
The Plan includes three appendices.\81\ Appendix A provides the
Consolidated Audit Trail National Market System Plan Request for
Proposal, as issued February 26, 2013 and subsequently updated. In
addition, Rule 613(a)(1) requires that the Plan discuss twelve
considerations that explain the choices made by the Participants to
meet the requirements specified in Rule 613 for the CAT. In accordance
with this requirement, the Participants have addressed each of the
twelve considerations in Appendix C. Finally, Appendix D describes the
technical requirements for the Plan Processor.
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\81\ Appendix B is reserved for future use.
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b. Governing or Constituent Documents
Rule 608 requires copies of all governing or constituent documents
relating to any person (other than a self-regulatory organization)
authorized to implement or administer such plan on behalf of its
sponsors. The Participants will submit to the Commission such
[[Page 30634]]
documents related to the Plan Processor when the Plan Processor is
selected.
c. Development and Implementation Phases
The terms of the Plan will be effective immediately upon approval
of the Plan by the Commission (the ``Effective Date''). The Plan sets
forth each of the significant phases of development and implementation
contemplated by the Plan, together with the projected date of
completion of each phase. These include the following, each of which is
subject to orders otherwise by the Commission:
Within two months after the Effective Date, the Participants
will jointly select the winning Shortlisted Bid and the Plan
Processor pursuant to the process set forth in Article V. Following
the selection of the Initial Plan Processor, the Participants will
file with the Commission a statement identifying the Plan Processor
and including the information required by Rule 608;
Within four months after the Effective Date, each Participant
will, and, through its Compliance Rule, will require its Industry
Members to, synchronize its or their Business Clocks and certify to
the Chief Compliance Officer (in the case of Participants) or the
applicable Participant (in the case of Industry Members) that it has
met this requirement;
Within six months after the Effective Date, the Participants
must jointly provide to the SEC a document outlining how the
Participants could incorporate into the CAT information with respect
to equity securities that are not NMS Securities,\82\ including
Primary Market Transactions in securities that are not NMS
Securities, which document will include details for each order and
Reportable Event that may be required to be provided, which market
participants may be required to provide the data, the implementation
timeline, and a cost estimate;
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\82\ In the Amendment to the CAT NMS Plan, Section 6.11 excludes
OTC Equity Securities from the document the Participants would
submit to the Commission, since the Participants plan to include OTC
Equity Securities as well as NMS Securities in the initial phase in
of CAT.
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Within one year after the Effective Date, each Participant must
report Participant Data to the Central Repository;
Within fourteen months after the Effective Date, each
Participant must implement a new or enhanced surveillance system(s);
Within two years after the Effective Date, each Participant
must, through its Compliance Rule, require its Industry Members
(other than Small Industry Members) to report Industry Member Data
to the Central Repository; and
Within three years after the Effective Date, each Participant
must, through its Compliance Rule, require its Small Industry
Members to provide Industry Member Data to the Central Repository.
In addition, Industry Members and Participants will be required to
participate in industry testing with the Central Repository on a
schedule to be determined by the Operating Committee. Furthermore,
Appendix C, A Plan to Eliminate Existing Rules and Systems (SEC Rule
613(a)(1)(ix)), and Appendix D, Data Types and Sources, set forth
additional implementation details concerning the elimination of rules
and systems.
The Chief Compliance Officer will appropriately document objective
milestones to assess progress toward the implementation of this
Agreement.
Request for Comment
77. Under the CAT NMS Plan, the SROs' rules would require that
their members become CAT Reporters. What mechanism should there be to
ensure that all CAT Reporters would participate in all pre-
implementation activities, including connectivity and testing? Please
explain.
78. Do Commenters believe that the CAT NMS Plan allows for
sufficient pre-implementation testing support for CAT Reporters,
including providing CAT Reporter feedback and accuracy reports? If not,
what requirements should be added to the CAT NMS Plan?
79. Do Commenters believe that full implementation of the CAT would
allow for the retirement of OATS? Please explain. Are any identified
gaps with respect to OATS' data elements not addressed in the CAT NMS
Plan? If yes, what are they?
80. The CAT NMS Plan provides for a single Plan Processor. As such,
do Commenters believe there are adequate and appropriate incentives for
continuous CAT innovation and cost reductions by the Plan Processor and
the Participants? If not, explain and describe what additional
incentives may be implemented in the CAT NMS Plan or related
documentation. What competition might be encouraged to lead to further
innovations and reduced costs for future CAT technologies?
81. Do Commenters believe that the proposed CAT NMS Plan sets forth
acceptable milestones to measure the progress of developing and
implementing the CAT? Why or why not?
82. The CAT NMS Plan sets forth significant phases of development
and implementation and a projected timetable for each stage. Are these
projections appropriate and reasonable? If not, why not, and what is a
more appropriate and reasonable timeline?
83. The CAT NMS Plan's ``Access to the Central Repository for
Regulators'' Section \83\ sets forth a milestone requiring the
publication of the finalized document detailing methods of access to
the Central Repository one (1) month before Participants are required
to begin reporting. Do Commenters believe this allows sufficient time
for Participants to build applications to access the Central Repository
when CAT goes live? If not, please explain and describe any related
modifications to this Section.
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\83\ See CAT NMS Plan, supra note 3, at Appendix C, Section
C.10(d).
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d. Analysis of Impact on Competition \84\
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\84\ The Commission reiterates that Section III.A of this
Notice, including this subsection III.A.3.d, is substantially as
prepared and submitted by the SROs to the Commission. The
Commission's Economic Analysis in respect of the Plan's impact on
competition is set forth in Section IV of this Notice.
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The Plan states that it does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Exchange Act. Section 8 of Appendix C, An Analysis of the Impact on
Competition, Efficiency and Capital Formation, discusses the
competition impact of the Plan in detail.\85\ In addition, the
Participants do not believe that the Plan introduces terms that are
unreasonably discriminatory for the purposes of Section 11A(c)(1)(D) of
the Exchange Act.\86\ As noted in Section III.A.3.a, supra, the
Participants are aware that potential conflicts of interest are raised
because a Participant, or an Affiliate of a Participant, may be both
submitting a Bid (or participating in a Bid (e.g., as a subcontractor))
and participating in the evaluation of Bids to select the Plan
Processor. As described in Section III.A.3.a, the Selection Plan
previously approved by the Commission and incorporated in the Plan
includes multiple provisions designed to mitigate the potential impact
of these conflicts by imposing restrictions on the Voting Senior
Officers and by requiring the recusal of Bidding Participants for
[[Page 30635]]
certain votes taken by the Selection Committee.
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\85\ The Commission notes that as required under Rule
613(a)(1)(viii), the SROs set forth in the CAT NMS Plan a discussion
of their analysis of the impact on competition, efficiency and
capital formation of creating, implementing, and maintaining the CAT
NMS Plan. See 17 CFR 242.613(a)(1)(viii) and CAT NMS Plan, supra
note 3, at Appendix C, Section B.8. The SROs' analysis in Section
B.8 of Appendix C to the CAT NMS Plan, which is more detailed than
as set forth in this Section III of this Notice, is organized as
follows: (a) Impact on Competition--both for Participants and
Broker-Dealers, (b) Impact on Efficiency, (c) Impact on Capital
Formation, and (d) Impacts of the CAT NMS Plan Governance on
Efficiency, Competition, and Capital Formation. See CAT NMS Plan,
supra note 3, at Appendix C, Section B.8. The Commission's analysis
in respect of the Plan's impact on competition, efficiency and
capital formation includes discussions of the SROs' analysis
regarding the same and is in Section IV of this Notice. See Section
IV.G, infra.
\86\ 15 U.S.C. 78k-1(c)(1)(D).
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e. Written Understanding or Agreements Relating to Interpretation of,
or Participation in, the Plan
The Participants have no written understandings or agreements
relating to interpretations of, or participation in, the Plan other
than those set forth in the Plan itself. For example, Section
4.3(a)(iii) states that the Operating Committee only may authorize the
interpretation of the Plan by Majority Vote, Section 6.9(c)(i)
addresses interpretations of the Technical Specifications, and Section
8.2 addresses the interpretation of Sections 8.1 and 8.2. In addition,
Section 3.3 sets forth how any entity registered as a national
securities exchange or national securities association under the
Exchange Act may become a Participant.
f. Dispute Resolution
The Plan does not include a general provision addressing the method
by which disputes arising in connection with the operation of the Plan
will be resolved. The Plan does, however, provide the means for
resolving disputes regarding the Participation Fee. Specifically,
Article III states that, in the event that the Company and a
prospective Participant do not agree on the amount of the Participation
Fee, such amount will be subject to the review by the SEC pursuant to
Section 11A(b)(5) of the Exchange Act.\87\ In addition, the Plan
addresses disputes with respect to fees charged to Participants and
Industry Members pursuant to Article XI. Specifically, such disputes
will be determined by the Operating Committee or a Subcommittee
designated by the Operating Committee. Decisions by the Operating
Committee or such designated Subcommittee on such matters will be
binding on Participants and Industry Members, without prejudice to the
rights of any Participant or Industry Member to seek redress from the
SEC pursuant to Rule 608 or in any other appropriate forum.
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\87\ 15 U.S.C. 78k-1(b)(5).
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* * * * *
This marks the end of the statement of purpose as set forth above
and as substantially prepared and submitted by the SROs.
B. Summary of Additional CAT NMS Plan Provisions and Request for
Comment
The Commission requests and encourages any interested person to
comment generally on the proposed CAT NMS Plan. In addition to the
specific requests for comment throughout the release, the Commission
requests general comment on all aspects of the proposed CAT NMS Plan.
The Commission encourages Commenters to provide information regarding
the advantages and disadvantages of each aspect of the proposed CAT NMS
Plan. The Commission invites Commenters to provide views and data as to
the costs and benefits associated with the proposed CAT NMS Plan. The
Commission also seeks comment regarding other matters that may have an
effect on the proposed CAT NMS Plan.
1. Reporting Procedures
The CAT NMS Plan requires CAT Reporters to comply with specific
reporting procedures when reporting CAT Data to the Central
Repository.\88\ Specifically, CAT Reporters must format CAT Data to
comply with the format specifications approved by the Operating
Committee.\89\ CAT Reporters must record CAT Data contemporaneously
with the applicable Reportable Event \90\ and report such data to the
Central Repository by 8:00 a.m. Eastern Time on the next Trading
Day.\91\ The obligation to report CAT Data applies to ``each NMS
Security registered or listed for trading on [a national securities]
exchange or admitted to unlisted trading privileges on such exchange,''
and ``each Eligible Security for which transaction reports are required
to be submitted to such [national securities] association.'' \92\
Further, the Participants are required to adopt Compliance Rules \93\
that require Industry Members, subject to their SRO jurisdiction, to
report CAT Data.\94\
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\88\ See CAT NMS Plan, supra note 3, at Sections 6.3-6.4;
Appendix D, at Section 2.1.
\89\ See id. at Sections 6.3(a), 6.4(a). The CAT NMS Plan also
requires that the Operating Committee-approved format must be a
format specified by the Plan Processor and Rule 613 compliant.
\90\ See id. at Section 6.3(b)(i) and Section 6.4(b)(i).
\91\ See id. at Section 6.3(b)(ii), Section 6.4(b)(ii), and
Appendix C, Section A.1(a)(ii). Participants may voluntarily report
CAT Data prior to the 8:00 a.m. Eastern Time deadline. Id. The CAT
NMS Plan defines ``Trading Day'' as the date ``as is determined by
the Operating Committee.'' The CAT NMS Plan also provides that ``the
Operating Committee may establish different Trading Days for NMS
Stocks (as defined in SEC Rule 600(b)(47), Listed Options, OTC
Equity Securities, and any other securities that are included as
Eligible Securities from time to time.'' Id. at Section 1.1.
\92\ See id. at Section 6.3(c)(i)-(ii) and Section 6.4(c)(i)-
(ii).
\93\ The CAT NMS Plan defines the ``Compliance Rule'' to mean
``with respect to a Participant, the rules promulgated by such
Participant as contemplated by Section 3.11.'' Id. at Section 1.1.
Section 3.11 of the CAT NMS Plan provides that ``each Participant
shall comply with and enforce compliance, as required by SEC Rule
608(c), by its Industry Members with the provisions of SEC Rule 613
and of [the LLC Agreement], as applicable, to the Participant and
its Industry Members. The Participants shall endeavor to promulgate
consistent rules (after taking into account circumstances and
considerations that may impact Participants differently) requiring
compliance by their respective Industry Members with the provisions
of SEC Rule 613 and [the LLC Agreement].'' Id. at Section 3.11.
\94\ See id. at Section 6.4(c)(i)-(ii).
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The CAT NMS Plan requires specific data elements of CAT Data that
must be recorded and reported to the Central Repository upon: (i)
``original receipt or origination of an order,'' \95\ (ii) ``routing of
an order,'' \96\ and (iii) ``receipt of an order that has been
routed.'' \97\ Additionally, the CAT NMS Plan requires that a CAT
Reporter must record and report data related to an ``order [that] is
modified or cancelled,'' \98\ and an ``order [that] is executed, in
whole or in part,'' \99\ as well
[[Page 30636]]
as ``other information or additional events as may be prescribed in
Appendix D, Reporting and Linkage Requirements.'' \100\ The CAT NMS
Plan also requires Industry Member CAT Reporters to report additional
data elements for (i) an ``order [that] is executed, in whole or in
part,'' \101\ (ii) a ``trade [that] is cancelled,'' \102\ or (iii)
``original receipt or origination of an order.'' \103\ Further, each
Participant shall, through Compliance Rules, require Industry Members
to record and report to the Central Repository information or
additional events as may be prescribed to accurately reflect the
complete lifecycle of each Reportable Event.\104\
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\95\ For ``original receipt or origination of an order,'' the
CAT NMS Plan specifies the following data elements: (i) Firm
Designated ID(s) for each Customer; (ii) CAT-Order-ID; (iii) SRO-
Assigned Market Participant Identifier of the Industry Member
receiving or originating the order; (iv) date of order receipt or
origination; (v) time of order receipt or origination (using time
stamps pursuant to Section 6.8 of the CAT NMS Plan); and (vi)
Material Terms of the Order. Id. at Section 6.3(d)(i).
\96\ For ``routing of an order,'' the CAT NMS Plan specifies the
following data elements: (i) CAT-Order-ID; (ii) date on which the
order is routed; (iii) time at which the order is routed (using time
stamps pursuant to Section 6.8 of the CAT NMS Plan); (iv) SRO-
Assigned Market Participant Identifier of the Industry Member or
Participant routing the order; (v) SRO-Assigned Market Participant
Identifier of the Industry Member or Participant to which the order
is being routed; (vi) if routed internally at the Industry Member,
the identity and nature of the department or desk to which the order
is routed; and (vii) Material Terms of the Order. Id. at Section
6.3(d)(ii).
\97\ For ``receipt of an order that has been routed,'' the CAT
NMS Plan specifies the following data elements: (i) CAT-Order-ID;
(ii) date on which the order is received; (iii) time at which the
order is received (using time stamps pursuant to Section 6.8); (iv)
SRO-Assigned Market Participant Identifier of the Industry Member or
Participant receiving the order; (v) SRO-Assigned Market Participant
Identifier of the Industry Member or Participant routing the order;
and (vi) Material Terms of the Order. Id. at Section 6.3(d)(iii).
\98\ For an ``order [that] is modified or cancelled,'' the CAT
NMS Plan specifies the following data elements: (i) CAT-Order-ID;
(ii) date the modification or cancellation is received or
originated; (iii) time at which the modification or cancellation is
received or originated (using time stamps pursuant to Section 6.8 of
the CAT NMS Plan); (iv) price and remaining size of the order, if
modified; (v) other changes in the Material Terms of the Order, if
modified; and (vi) whether the modification or cancellation
instruction was given by the Customer or was initiated by the
Industry Member or Participant. Id. at Section 6.3(d)(iv).
\99\ For an ``order [that] is executed, in whole or in part,''
the CAT NMS Plan specifies the following data elements: (i) CAT-
Order-ID; (ii) date of execution; (iii) time of execution (using
time stamps pursuant to Section 6.8 of the CAT NMS Plan); (iv)
execution capacity (principal, agency or riskless principal); (v)
execution price and size; (vi) SRO-Assigned Market Participant
Identifier of the Participant or Industry Member executing the
order; and (vii) whether the execution was reported pursuant to an
effective transaction reporting plan or the Plan for Reporting of
Consolidated Options Last Sale Reports and Quotation Information.
Id. at Section 6.3(d)(v).
\100\ See id. at Section 6.3(d)(vi).
\101\ For an ``order [that] is executed, in whole or in part,''
the CAT NMS Plan specifies the following additional data elements:
(i) An Allocation Report; (ii) SRO-Assigned Market Participant
Identifier of the clearing broker or prime broker, if applicable;
and (iii) CAT-Order-ID of any contra-side order(s). Id. at Section
6.4(d)(ii)(A).
\102\ For a ``trade [that] is cancelled,'' the CAT NMS Plan
specifies the following additional data element: A cancelled trade
indicator. Id. at Section 6.4(d)(ii)(B).
\103\ For ``original receipt or origination of an order,'' the
CAT NMS Plan specifies the following additional data element(s): The
Firm Designated ID, Customer Account Information, and Customer
Identifying Information for the relevant Customer. Id. at Section
6.4(d)(ii)(C).
\104\ Id. at Appendix D, Section 3.
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Request for Comment
84. Do Commenters believe that the data recording, reporting, and
formatting procedures described in the CAT NMS Plan are appropriate and
reasonable? Would providing additional details or requirements on these
procedures enhance the quality of CAT Data reported to the Central
Repository or the efficiency and cost-effectiveness of the CAT?
85. Do Commenters believe that the CAT NMS Plan, including Appendix
D thereto, requires sufficient outreach, support, training, guidance
and/or documentation to ensure that CAT Reporters are able to make data
transmissions to the Central Repository that are complete and timely?
If not, please explain. Describe what, if any, further requirements may
be needed.
86. Do Commenters believe that the CAT NMS Plan should have a
formal communications plan, other than the public Web site, to provide
CAT Reporters the information they would need in order to set-up or
configure their systems to record and report CAT Data to the Central
Repository? If so, how, when, and by whom should such information be
disseminated to CAT Reporters?
87. Do Commenters believe the Plan should require a specific method
for entering CAT Data upon each CAT Reportable Event or upon updates
and corrections to CAT Reportable Events? If so, what method? Please
explain.
88. Do Commenters believe that the CAT NMS Plan should include a
requirement that the Participants and the Plan Processor set forth a
more detailed schedule, with milestones, for CAT Reporters to adhere to
in setting-up or configuring their systems to become CAT Data reporting
compliant? If so, please explain and describe what details and
milestones should be included in the schedule (e.g., publication of
Technical Specifications and announcements of CAT Reporter-facing
technology changes).
2. Timeliness of Data Reporting
Section 6.3(b)(ii) of the CAT NMS Plan requires each Participant to
report Participant Data to the Central Repository by 8:00 a.m. Eastern
Time on the Trading Day following the day the Participant records such
data.\105\ Additionally, a Participant may voluntarily report such data
prior to this deadline.\106\ Section 6.4(b)(ii) states that each
Participant shall, through its Compliance Rule, require its Industry
Members to report Recorded Industry Member Data to the Central
Repository by 8:00 a.m. Eastern Time on the Trading Day following the
day the Industry member records such data, and Received Industry Member
Data to the Central Repository by 8:00 a.m. Eastern Time on the Trading
Day following the day the Industry Member receives such data.\107\
Section 6.4(b)(ii) of the CAT NMS Plan also states that each
Participant shall, through its Compliance Rule, permit its Industry
Members to voluntarily report such data prior to the applicable 8:00
a.m. Eastern Time deadline.\108\
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\105\ See CAT NMS Plan, supra note 3, at Section 6.3(b)(ii); see
also id. at Appendix C, Section A.1(a)(ii); Appendix D, Sections
3.1, 6.1.
\106\ Id. at Section 6.3(b)(ii).
\107\ Id. at Section 6.4(b)(ii).
\108\ Id.
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Request for Comment
89. The CAT NMS Plan requires that all Participants report
Participant Data to the Central Repository by 8:00 a.m. Eastern Time on
the Trading Day following the day the Participant records such
data,\109\ and that Industry Members report Recorded Industry Member
Data to the Central Repository by 8:00 a.m. Eastern Time on the Trading
Day following the day the Industry Member records such data \110\ and
Received Industry Member Data to the Central Repository by 8:00 a.m.
Eastern Time on the Trading Day following the day the Industry Member
receives such data.\111\ Do Commenters believe that the CAT NMS Plan
provides sufficient detail and information to determine whether the
applicable 8:00 a.m. Eastern Time data reporting deadlines provided in
the CAT NMS Plan are achievable? If not, why not?
---------------------------------------------------------------------------
\109\ Id. at Section 6.3(b)(ii).
\110\ Id. at Section 6.4(b)(ii).
\111\ Id.
---------------------------------------------------------------------------
90. Do Commenters believe that CAT Reporters will submit their
reports at or about the same time? If all or most of the CAT Reporters
would report at or just before 8:00 a.m. Eastern Time, what, if any,
impact would there be on the necessary CAT infrastructure? Would this
place an excessive burden on the Plan Processor? Do Commenters believe
this would increase operational risk and/or increase costs? If so,
please explain. Are there alternative reporting mechanisms that could
reduce such risks?
91. The CAT NMS Plan provides that the Plan Processor must be able
to handle two times the historical peak data to ensure that, if a
significant number of CAT Reporters choose to submit data at or around
the same time, the Plan Processor could handle the influx of data.\112\
Do Commenters believe that the SROs' estimate of capacity is
sufficient? If not, why not and what capacity should be required?
---------------------------------------------------------------------------
\112\ Id. at Appendix C, Section A.1(a)(ii); see also id. at
Section IV.H.2.g., infra.
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92. Do Commenters believe that the CAT NMS Plan allocates, or
requires the Plan Processor to have, sufficient resources to work with
the approximately 1,800 CAT Reporters that would, under the CAT NMS
Plan, have to establish secure connections over which CAT Data will
flow from their systems to the Central Repository? Do Commenters
believe that the Plan Processor could implement the CAT Reporters'
Central Repository connections nearly simultaneously without
compromising testing periods and implementation timelines?
3. Uniform Format
The CAT NMS Plan does not mandate the format in which data must be
reported to the Central Repository.\113\ Appendix D states that the
Plan
[[Page 30637]]
Processor will determine the electronic format in which data must be
reported, and that the format will be described in the Technical
Specifications.\114\ Appendix C specifies that CAT Reporters could be
required to report data either in a uniform electronic format, or in a
manner that would allow the Central Repository to convert the data to a
uniform electronic format, for consolidation and storage.\115\
Similarly, Sections 6.3(a) and 6.4(a) of the CAT NMS Plan require that
CAT Reporters report data to the Central Repository in a format or
formats specified by the Plan Processor, approved by the Operating
Committee, and compliant with Rule 613.\116\
---------------------------------------------------------------------------
\113\ See CAT NMS Plan, supra note 3, at Appendix C, Section
D.12(f); see also id. at Appendix C, Section A.1(a).
\114\ Id. at Appendix D, Section 2.1. Appendix D states that
more than one format may be allowed to support the various market
participants that would report information to the Central
Repository. Id.; see also id. at Section 6.9.
\115\ Id. at Appendix C, Section A.1(b).
\116\ Id. at Section 6.3(a) and Section 6.4(a).
---------------------------------------------------------------------------
The CAT NMS Plan requires that data reported to the Central
Repository be stored in an electronic standard format.\117\
Specifically, Section 6.5(b)(i) of the CAT NMS Plan requires the
Central Repository to retain the information collected pursuant to Rule
613(c)(7) and (e)(7) in a convenient and usable standard electronic
data format that is directly available and searchable electronically
without any manual intervention by the Plan Processor for a period of
not less than six (6) years.\118\ Such data must be linked when it is
made available to the Participant's regulatory Staff and the
Commission.\119\
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\117\ Pursuant to the Plan, for data consolidation and storage,
as noted above, such data must be reported in a uniform electronic
format or in a manner that would allow the Central Repository to
convert the data to a uniform electronic format. Id. at Appendix C,
Section A.1(b).
\118\ Id. at Section 6.5(b)(i).
\119\ Id.
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Request for Comment
93. The CAT NMS Plan provides that CAT Reporters could be required
to report data either in a uniform electronic format, or in a manner
that would allow the Central Repository to convert the data to a
uniform electronic format, for consolidation and storage. Do Commenters
believe that if data is reported to the Central Repository in a non-
uniform format, the proposed CAT NMS Plan includes sufficient
requirements or details to determine whether the Central Repository
could reliably and accurately convert such data to a uniform electronic
format, for consolidation and storage, without affecting the quality of
the data? If not, what additional requirements or details should be
provided in the CAT NMS Plan prior to the Commission's approval of such
plan?
94. If Commenters believe that it is not necessary to provide
additional requirements or details, if any, in the CAT NMS Plan, what
additional requirements or details should be included in the Technical
Specifications to determine whether the Central Repository could
reliably and accurately convert such data to a uniform electronic
format, for consolidation and storage?
95. Do Commenters believe the CAT NMS Plan's lack of a mandated
uniform format in which data must be reported to the Central Repository
would affect the accuracy of CAT Data collected and maintained under
the CAT? If so, how? Would reporting data in a uniform format result in
greater accuracy? If so, please explain.
96. Do Commenters believe the CAT NMS Plan's lack of a mandated
uniform format in which data must be reported to the Central Repository
would affect the completeness of CAT Data collected and maintained
under the CAT? If so, how? Would reporting data in a uniform format
result in more complete CAT Data? If so, please explain.
97. Do Commenters believe the CAT NMS Plan's lack of a mandated
uniform format in which data must be reported to the Central Repository
would affect the accessibility of CAT Data collected and maintained
under the CAT? If so, how? Would reporting data in a uniform format
result in a different level of accessibility? If so, please explain.
98. Do Commenters believe allowing CAT Reporters to report data to
the Central Repository in a non-uniform format would affect the
timeliness of data collected and maintained under the CAT? How would
the requirement that the Central Repository convert non-uniform data to
a uniform format affect the timeliness of the data collected and
maintained under the CAT? Would reporting data in a uniform format
result in a different level of timeliness of data reporting? If so,
please explain.
99. Do Commenters believe that allowing CAT Reporters to report
data to the Central Repository in a non-uniform format is more
efficient and cost-effective than requiring data to be reported in a
uniform format? Would allowing CAT Reporters to report data to the
Central Repository in a non-uniform format merely transfer the costs
from individual CAT Reporters to the Central Repository? Would
centralization of the costs of converting data to a uniform format
reduce costs? Please explain.
100. Do Commenters believe that allowing CAT Reporters to report
data to the Central Repository in a non-uniform format would affect the
security and confidentiality of CAT Data? If so, how? Would reporting
data in a uniform format create different security or confidentiality
concerns? If so, please explain.
4. Clock Synchronization
Pursuant to Section 6.8(a) of the CAT NMS Plan, each Participant
and Industry Member, (through the Compliance Rule adopted by every
Participant), must synchronize its Business Clocks,\120\ at a minimum,
to within 50 milliseconds of the time maintained by the NIST,
consistent with industry standards.\121\ The Participants believe that
a 50-millisecond clock offset tolerance represents the current industry
clock synchronization standard.\122\ Industry Members must maintain
such a clock synchronization standard; certify periodically (according
to a schedule to be defined by the Operating Committee) that their
Business Clocks meet the requirements of the Compliance Rule; and
report to the Plan Processor and the Participant any violation of the
Compliance Rule pursuant to the thresholds set by the Operating
Committee.\123\ Pursuant to Section 6.8(c) of the CAT NMS Plan, the
Chief Compliance Officer, in conjunction with the Participants and
other appropriate Industry Member advisory groups, annually must
evaluate and make a recommendation to the Operating Committee as to
whether the industry standard has evolved such that the clock
synchronization standard should be tightened.\124\
---------------------------------------------------------------------------
\120\ The CAT NMS Plan defines a ``Business Clock'' to mean ``a
clock used to record the date and time of any Reportable Event
required to be reported under SEC Rule 613.'' Id. at Section 1.1.
\121\ Id. at Section 6.8(a)(i)-(ii).
\122\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(c).
\123\ Id. at Section 6.8(a)(ii).
\124\ Id. at Section 6.8(c).
---------------------------------------------------------------------------
Appendix C describes the process by which Participants determined
that a 50-millisecond clock offset tolerance was consistent with
industry standards.\125\ To that end, the Participants and Industry
Members reviewed their respective internal clock synchronization
technology practices,\126\ and reviewed the results of The Financial
Information Forum (``FIF'') Clock Offset Survey, a clock
synchronization survey conducted by FIF.\127\ In light of their
internal reviews
[[Page 30638]]
and the FIF Clock Offset Survey, the Participants concluded that a
clock offset tolerance of 50 milliseconds represented an aggressive but
achievable standard.\128\
---------------------------------------------------------------------------
\125\ Id. at Appendix C, Section D.12(p).
\126\ Id.
\127\ Id. at Appendix C, n.236. See Financial Information Forum,
FIF Clock Offset Survey Preliminary Report (February 17, 2015),
available at https://www.catnmsplan.com/industryfeedback/p602479.pdf
and https://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p602479.pdf. (``FIF Clock Offset Study'').
\128\ Id. The Participants note in Appendix C that according to
the FIF Clock Offset Survey, annual maintenance costs would escalate
to 102%, 123% and 242% if clock synchronization standards moved to 5
milliseconds, 1 millisecond and 100 microseconds, respectively,
indicating that maintenance costs rapidly escalate as clock
synchronization standards increase beyond 50 milliseconds. Id.
---------------------------------------------------------------------------
Appendix C discusses mechanisms to ensure compliance with the 50-
millisecond clock offset tolerance.\129\ The Participants anticipate
that they and Industry Members will adopt policies and procedures to
verify the required clock synchronization each trading day before the
market opens, as well as periodically throughout the trading day.\130\
The Participants also anticipate that they and Industry Members will
document their clock synchronization procedures and maintain a log
recording the time of each clock synchronization performed, and the
result of such synchronization, specifically identifying any
synchronization revealing any clock offset between the Participant's or
Industry Member's Business Clock and the time maintained by the NIST
exceeding 50 milliseconds.\131\ The CAT NMS Plan states that once both
large and small broker-dealers begin reporting to the Central
Repository, and as clock synchronization technology matures further,
the Participants will assess, in accordance with Rule 613, tightening
CAT's clock synchronization standards to reflect changes in industry
standards.\132\
---------------------------------------------------------------------------
\129\ See id. at Appendix C, Section A.3(c).
\130\ See id.
\131\ See id. It was noted that such a log would include results
for a period of not less than five years ending on the then current
date. Id.
\132\ See id. at Appendix C, Section D.12(p).
---------------------------------------------------------------------------
Request for Comment \133\
---------------------------------------------------------------------------
\133\ See Sections IV.D.3, IV.E.4 and IV.H.5, infra, for further
clock synchronization related requests for comment.
---------------------------------------------------------------------------
101. Do Commenters believe that a clock offset tolerance of 50
milliseconds is appropriate and reasonable, in light of the increase in
the speed of trading over the last several years? If not, what would an
appropriate and reasonable standard be?
102. What are current clock synchronization practices? Do
Commenters believe that current industry clock synchronization
practices are sufficiently rigorous in light of current trading speeds?
If not, please explain.
103. Would a smaller clock offset tolerance be reasonably
achievable? If so, please identify such tolerance and any incremental
additional costs that achieving that smaller clock offset tolerance
might entail.
104. If Commenters believe that, in light of the current speed of
trading, the clock offset tolerance should be more rigorous, what, if
any transition period would be reasonable and appropriate for reducing
the clock offset tolerance standards of CAT?
105. What is the range of clock synchronization practices across
the industry?
106. Do Commenters believe the range of clock synchronization
practices should be considered when considering the appropriate clock
synchronization standard?
107. If an SRO or broker-dealer can or does synchronize its clocks
to an offset tolerance more rigorous than 50 milliseconds, do
Commenters believe that that SRO or broker-dealer should be required to
synchronize its clocks to that standard? Why or why not? If so, how, if
at all, would that affect sequencing of Reportable Events in CAT?
108. Do Commenters believe that certain categories of market
participants should be held to a smaller or larger clock offset
tolerance? If so, what category of market participant and why? How, if
at all, would that affect sequencing of Reportable Events in CAT?
109. Do Commenters believe a 50-millisecond clock offset tolerance
would materially impair the quality and accuracy of CAT Data? If so,
please explain. Would such a standard undermine the ability of the
Central Repository to accurately and reliably link order and sequence
event data across venues, or combine it with other sources of trade and
order data? If so, please explain. Is there a benefit from applying the
same uniform clock offset tolerance to all market participants, or
would a variable clock offset tolerance approach be preferable? For
example, should a high-volume market participant trading on multiple
exchanges and ATSs have the same clock offset tolerance as a small
retail-focused regional office? Would the benefits of a smaller clock
offset tolerance for service bureaus that report but do not record
order events be lower than for other types of CAT Reporters? Would the
benefits of a smaller clock offset tolerance for clearing brokers that
record and report information available only after an execution be
lower than for other types of CAT Reporters? Please explain.
110. The CAT NMS Plan provides that as time synchronization
standards evolve, the Participants would assess, on an annual basis,
the ability to tighten the clock synchronization standards for CAT to
reflect changes in industry standards. Do Commenters believe that this
would establish an appropriately rigorous process and schedule for the
Participants to evaluate whether the clock synchronization standard
should be tightened? Are there any other factors that should affect
when and how to tighten the clock synchronization standard?
111. Do Commenters believe the CAT NMS Plan provides adequate
enforcement provisions to ensure CAT Reporters synchronize Business
Clocks within the proposed 50-millisecond clock offset tolerance? If
not, what additional enforcement provisions should the CAT NMS Plan
provide?
112. Do Commenters believe that sufficient detail has been provided
in the CAT NMS Plan concerning the reasonable justification or
exceptional circumstances that would permit a pattern or practice of
reporting events outside of the specified clock synchronization
standard?
113. The CAT NMS Plan generally requires CAT Reporters to record
and report Reportable Events with a time stamp of at least to the
millisecond but provides for a 50 millisecond clock offset tolerance.
Do Commenters believe the time stamp granularity requirement and the
clock offset tolerance should correspond more closely or even
identically? If so, please explain, including what such time stamp
granularity requirement and clock offset tolerance should be.
5. Time Stamp Granularity
The CAT NMS Plan requires CAT Reporters to record and report the
time of each Reportable Event using time stamps reflecting current
industry standards, which should be at least to the millisecond, except
with respect to events that involve non-electronic communication of
information (``Manual Order Events'').\134\ Furthermore, the Plan
requires
[[Page 30639]]
Participants to adopt rules requiring that CAT Reporters that use time
stamps in increments finer than milliseconds use those finer increments
when reporting to the Central Repository.\135\ For Manual Order Events,
the Participants determined that time stamp granularity at the level of
a millisecond is not practical.\136\ Accordingly, the CAT NMS Plan
provides that each Participant and Industry Member shall be permitted
to record and report Manual Order Events to the Central Repository in
increments up to and including one second, provided that Participants
and Industry Members shall be required to record and report the time
when a Manual Order Event has been captured electronically in an order
handling and execution system of such Participant or Industry Member
(``Electronic Capture Time'') in milliseconds.\137\
---------------------------------------------------------------------------
\134\ See CAT NMS Plan, supra note 3, at Section 1.1. The SROs
requested exemptive relief from Rule 613 so that the CAT NMS Plan
may permit CAT Reporters to report Manual Order Events with a time
stamp granularity of one second, in lieu of a time stamp granularity
of one millisecond. See Exemptive Request Letter, supra note 16, at
34. The Commission granted exemptive relief on March 1, 2016 in
order to allow this alternative to be included in the CAT NMS Plan
and subject to notice and comment. See Exemption Order, supra note
18.
\135\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(c).
\136\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(c). The Participants state that they received industry feedback
through the DAG that suggests that the established business practice
with respect to Manual Order Events is to manually capture time
stamps with granularity at the level of a second because finer
increments cannot be accurately captured when dealing with manual
processes which, by their nature, take longer to perform than a time
increment of under one second. Id. The Participants agree that, due
to the nature of transactions originated over the phone, it is not
practical to attempt granularity finer than one second, as any such
finer increment would be inherently unreliable. Id.
\137\ See CAT NMS Plan, supra note 3, at Section 6.8(b).
---------------------------------------------------------------------------
Request for Comment \138\
---------------------------------------------------------------------------
\138\ See Section IV.D.3, infra, for further time stamp
granularity related requests for comment.
---------------------------------------------------------------------------
114. Are the time stamp granularity standards for both electronic
and non-electronic reportable events appropriate and reasonable? If
not, why not and what would be a better alternative?
115. Do Commenters believe the CAT NMS Plan's time stamp
granularity requirement is precise enough to reliably and accurately
sequence Reportable Events? If not, why not? Is there a better time
stamp approach and what should the requirement(s) be?
116. To what degree does the millisecond or less time stamp
granularity requirement enable or prevent regulators' ability to
sequence events that occur in different execution venues? Please
explain.
117. Are certain CAT Reportable Events more time-sensitive than
other CAT Reportable Events? If so, what events are more time-sensitive
and why? What systems are more likely to process these more sensitive
events and to what level of time stamp granularity are such events
processed? Where are those systems located (i.e., within broker-
dealers, service bureaus, execution venues)? Please explain.
118. What market participant systems, if any, should have less
granular time stamp requirements? Why? What time stamp granularity
standard should these systems have? Why?
119. What market participant systems, if any, should have more
granular time stamp requirements? Why? What time stamp granularity
standard should these systems have? Why?
120. The Commission granted an exemption from Rule 613 in order to
allow the alternative of permitting CAT Reporters to report Manual
Order Events with a time stamp granularity of one second, in lieu of
the Rule 613 requirement that the CAT NMS Plan require CAT Reporters to
report with a time stamp granularity of one millisecond, to be included
in the CAT NMS Plan and subject to notice and comment.\139\ Do
Commenters believe that the CAT NMS Plan's one-second time stamp
granularity standard for Manual Order Events is appropriate and
reasonable? If not, why not? Would a more granular time stamp
requirement for Manual Order Events be feasible?
---------------------------------------------------------------------------
\139\ See Exemption Order, supra note 18.
---------------------------------------------------------------------------
121. What alternative approach with respect to Manual Order Events
may be preferable? Could the provisions in the CAT NMS Plan related to
Manual Order Events be more narrowly tailored to, for example, only
apply to CAT Reporters who are unable to record and report Manual Order
Events with a time stamp granularity of one millisecond?
122. The SROs note in the Exemption Request that recording and
reporting Manual Order Events with a time stamp granularity of at least
one second would result in little additional benefit, and, in fact,
could result in adverse consequences such as creating a false sense of
precision for data that is inherently imprecise, while imposing
additional costs on CAT Reporters. Do Commenters agree? Why or why not?
123. If Manual Order Events are recorded and reported with a time
stamp granularity of one second, what, if any, challenges do Commenters
believe would arise with respect to the sequencing of order events (for
the same order) and orders (for a series of orders)? Would the one
millisecond standard originally provided for in Rule 613 be preferable?
Please explain.
124. Do Commenters believe the CAT NMS Plan's requirement that time
stamp granularity (other than for Manual Order Events) should be to at
least the millisecond is granular enough in light of current practices?
If not, why not?
125. The CAT NMS Plan provides that as time stamp standards evolve,
the Participants would assess, on an annual basis, the ability to
require more precise time stamp granularity standards for CAT to
reflect changes in industry standards. Do Commenters believe that this
establishes an appropriately rigorous schedule for the Participants to
evaluate whether time stamp granularity requirements could potentially
be set to finer increments? Are there any other factors that should
affect when and how the requirements for time stamp granularity
increments could be made more precise?
126. Do Commenters believe the CAT NMS Plan provides adequate
enforcement provisions to ensure CAT Reporters time stamp Reportable
Events to a granularity of one millisecond (and for Manual Order Events
to a granularity of one second)? If not, what additional enforcement
provisions should the CAT NMS Plan provide?
127. Do Commenters believe that the CAT NMS Plan's requirement that
Participants and Industry Members synchronize Business Clocks used
solely for Manual Order Events to within one second of the time
maintained by the NIST is appropriate and reasonable? Would a tighter
clock synchronization standard for Business Clocks used solely for
Manual Order Events be feasible?
6. CAT-Reporter-ID
Sections 6.3 and 6.4 of the CAT NMS Plan require CAT Reporters to
record and report to the Central Repository an SRO-Assigned Market
Participant Identifier \140\ for orders and certain Reportable Events
to be used by the Central Repository to assign a unique CAT-Reporter-ID
\141\ for purposes of identifying each CAT Reporter associated with an
order or Reportable Event (the ``Existing Identifier Approach'').\142\
The CAT NMS Plan
[[Page 30640]]
requires the reporting of SRO-Assigned Market Participant Identifiers
of: The Industry Member receiving or originating an order; \143\ the
Industry Member or Participant from which (and to which) an order is
being routed; \144\ the Industry Member or Participant receiving (and
routing) a routed order; \145\ the Industry Member or Participant
executing an order, if an order is executed; \146\ and the clearing
broker or prime broker, if applicable, if an order is executed.\147\ An
Industry Member would report to the Central Repository its existing
SRO-Assigned Market Participant Identifier used by the relevant SRO
specifically for transactions occurring at that SRO.\148\ Similarly, an
exchange reporting CAT Reporter information would report data using the
SRO-Assigned Market Participant Identifier used by the Industry Member
on that exchange or its systems.\149\ Over-the-counter (``OTC'') orders
and Reportable Events would be reported with an Industry Member's FINRA
SRO-Assigned Market Participant Identifier.\150\
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\140\ The CAT NMS Plan defines an ``SRO-Assigned Market
Participant Identifier'' as ``an identifier assigned to an Industry
Member by an SRO or an identifier used by a Participant.'' See CAT
NMS Plan, supra note 3, at Section 1.1.
\141\ Rule 613 defines a CAT-Reporter-ID as ``a code that
uniquely and consistently identifies [a CAT Reporter] for purposes
of providing data to the central repository.'' 17 CFR 242.613(j)(2).
\142\ The SROs requested exemptive relief from Rule 613 so that
the CAT NMS Plan may permit the Existing Identifier Approach, which
would allow a CAT Reporter to report an existing SRO-Assigned Market
Participant Identifier in lieu of requiring the reporting of a
universal CAT-Reporter-ID. See Exemptive Request Letter, supra note
16, at 19. The Commission granted exemptive relief on March 1, 2016
in order to allow this alternative to be included in the CAT NMS
Plan and subject to notice and comment. See Exemption Order, supra
note 18.
\143\ See CAT NMS Plan, supra note 3, at Section 6.3(d)(i) and
Section 6.4(d)(i).
\144\ Id. at Section 6.3(d)(ii) and Section 6.4(d)(i).
\145\ Id. at Section 6.3(d)(iii) and Section 6.4(d)(i).
\146\ Id. at Section 6.3(d)(v) and Section 6.4(d)(i).
\147\ Id. at Section 6.4(d)(ii)(A)(2). Industry Members are
required by the CAT NMS Plan to record and report this information.
See CAT NMS Plan, supra note 3, at Section 6.4(d)(ii).
\148\ See Exemption Order, supra note 18, at 31-41.
\149\ See id. at 20.
\150\ Id.
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The CAT NMS Plan requires the Plan Processor to develop and
maintain the mechanism to assign (and to change, if necessary) CAT-
Reporter-IDs.\151\ For the Central Repository to link the SRO-Assigned
Participant Identifier to the CAT-Reporter-ID, each SRO must submit, on
a daily basis, all SRO-Assigned Market Participant Identifiers used by
its Industry Members (or itself), as well as information to identify
the corresponding market participant (for example, a CRD number or
Legal Entity Identifier (``LEI'')) to the Central Repository.\152\
Additionally, each Industry Member shall be required to submit to the
Central Repository information sufficient to identify such Industry
Member (e.g., CRD number or LEI, as noted above).\153\ The Plan
Processor would use the SRO-Assigned Market Participant Identifiers and
identifying information (i.e., CRD number or LEI) to assign a CAT-
Reporter-ID to each Industry Member and SRO for internal use across all
data within the Central Repository.\154\ The Plan Processor would
create and maintain a database in the Central Repository that would map
the SRO-Assigned Market Participant Identifiers to the appropriate CAT-
Reporter-ID.\155\
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\151\ See CAT NMS Plan, supra note 3, at Appendix D, Section
10.1. Changes to CAT-Reporter-IDs must be reviewed and approved by
the Plan Processor. Id. The CAT NMS Plan also requires the Central
Repository to generate and assign a unique CAT-Reporter-ID to all
reports submitted to the system based on sub-identifiers that are
currently used by CAT Reporters in their order handling and trading
processes (described in the Exemption Request as SRO-assigned market
participant identifiers). See CAT NMS Plan, supra note 3, at
Appendix D, Section 3; see also Exemption Order, supra note 18, at
31-41.
\152\ See CAT NMS Plan, supra note 3, at Section 6.3(e)(i).
\153\ Id. at Section 6.4(d)(vi).
\154\ See Exemption Order, supra note 18, at 31-41.
\155\ Id. at 20.
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The consolidated audit trail must be able to capture, store, and
maintain current and historical SRO-Assigned Market Participant
Identifiers.\156\ The SRO-Assigned Market Participant Identifier must
also be included on the Plan Processor's acknowledgment of its receipt
of data files from a CAT Reporter or Data Submitter,\157\ on daily
statistics provided by the Plan Processor after the Central Repository
has processed data,\158\ and on a secure Web site that the Plan
Processor would maintain that would contain each CAT Reporter's daily
reporting statistics.\159\ In addition, data validations by the Plan
Processor must include confirmation of a valid SRO-Assigned Market
Participant Identifier.\160\
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\156\ See CAT NMS Plan, supra note 3, at Appendix D, Section 2.
\157\ See id. at Appendix D, Section 7.1.
\158\ See id. at Appendix D, Section 7.2.
\159\ See id. at Appendix D, Section 10.1.
\160\ See id. at Appendix D, Section 7.2. The CAT NMS Plan also
notes that both the CAT-Reporter-ID and the SRO-Assigned Market
Participant Identifier would be data fields for the online targeted
query tool described in the CAT NMS Plan as providing authorized
users with the ability to retrieve processed and/or validated
(unlinked) data via an online query screen. See id. at Appendix D,
Section 8.1.1.
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Request for Comment
128. The Commission granted an exemption from Rule 613 in order to
allow the Existing Identifier Approach to be included in the CAT NMS
Plan and subject to notice and comment. The Existing Identifier
Approach would allow a CAT Reporter to report an existing SRO-Assigned
Market Participant Identifier in lieu of Rule 613's requirement that a
CAT Reporter must report a universal CAT-Reporter-ID.\161\ Do
Commenters believe that allowing the Existing Identifier Approach would
be more efficient and cost-effective than the Rule 613 approach of
requiring a CAT-Reporter-ID to be reported for each order and
reportable event in accordance with Rule 613(c)(7)? \162\ Why or why
not? Or do Commenters believe that the Rule 613 approach is preferable?
Why or why not? Would implementation of the Existing Identifier
Approach merely transfer costs from CAT Reporters to the Central
Repository?
---------------------------------------------------------------------------
\161\ See Exemption Order, supra note 18.
\162\ See supra note 142.
---------------------------------------------------------------------------
129. Do Commenters believe that the Existing Identifier Approach
would affect the accuracy of CAT Data? Would the Rule 613 approach
result in greater accuracy? If so, please explain.
130. Do Commenters believe that the CAT NMS Plan's proposed
Existing Identifier Approach would affect the accessibility of CAT
Data? If so, how? Would the Rule 613 approach result in a different
level of accessibility? If so, please explain.
131. Do Commenters believe that the CAT NMS Plan's proposed
Existing Identifier Approach would affect the timeliness of CAT Data?
If so, how? Would the Rule 613 approach result in greater timeliness?
If so, please explain.
132. Do Commenters believe the Existing Identifier Approach would
affect the security and confidentiality of CAT Data? If so, how? Would
the Rule 613 approach result in a different level of security and
confidentiality? If so, please explain.
133. What challenges or risks do Commenters believe the Plan
Processor would face in linking all SRO-Assigned Market Participant
Identifiers to the appropriate CAT-Reporter-IDs? What, if anything,
could be done to mitigate those challenges and risks?
134. The CAT NMS Plan does not require that an Industry Member
provide its LEI to the Plan Processor as part of the identifying
information used to assign a CAT-Reporter-ID. The CAT NMS Plan permits
an Industry Member to report its CRD number in lieu of its LEI for this
purpose. Do Commenters believe that the CAT NMS Plan should mandate
that Industry Members provide their LEIs, along with their SRO-Assigned
Market Participant Identifiers, to the Plan Processor for purposes of
developing a unique CAT-Reporter-ID? Why or why not?
7. Customer-ID
a. Customer Information Approach
Rule 613(c)(7)(i)(A) requires that for the original receipt or
origination of an order, a CAT Reporter report the ``Customer-ID(s) for
each Customer.'' \163\ ``Customer-ID'' is defined in Rule 613(j)(5) to
mean ``with respect to a customer, a code that uniquely and
[[Page 30641]]
consistently identifies such customer for purposes of providing data to
the Central Repository.'' \164\ Rule 613(c)(8) requires that ``[a]ll
plan sponsors and their members shall use the same Customer-ID and CAT-
Reporter-ID for each customer and broker-dealer.'' \165\
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\163\ See 17 CFR 242.613(c)(7)(i)(A).
\164\ See 17 CFR 242.613(j)(5).
\165\ See 17 CFR 242.613(c)(8).
---------------------------------------------------------------------------
In Appendix C, the Participants describe the ``Customer Information
Approach,'' \166\ an alternative approach to the requirement that a
broker-dealer report a Customer-ID for every Customer upon original
receipt or origination of an order.\167\ Under the Customer Information
Approach, the CAT NMS Plan would require each broker-dealer to assign a
unique Firm Designated ID to each Customer.\168\ As the Firm Designated
ID, broker-dealers would be permitted to use an account number or any
other identifier defined by the firm, provided each identifier is
unique across the firm for each business date (i.e., a single firm may
not have multiple separate customers with the same identifier on any
given date).\169\ According to the CAT NMS Plan, broker-dealers would
submit an initial set of Customer information to the Central
Repository, including, as applicable, the Firm Designated ID, the
Customer's name, address, date of birth, individual tax payer
identifier number (``ITIN'')/social security number (``SSN''),
individual's role in the account (e.g., primary holder, joint holder,
guardian, trustee, person with power of attorney) and LEI,\170\ and/or
Large Trader ID (``LTID''), if applicable, which would be updated as
set forth in the CAT NMS Plan.\171\
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\166\ The SROs requested exemptive relief from Rule 613 so that
the CAT NMS Plan may permit the Customer Information Approach, which
would require each broker-dealer to assign a unique Firm Designated
ID to each trading account and to submit an initial set of
information identifying the Customer to the Central Repository, in
lieu of requiring each broker-dealer to report a Customer-ID for
each Customer upon the original receipt or origination of an order.
See Exemptive Request Letter, supra note 16, at 12. The Commission
granted exemptive relief on March 1, 2016 in order to allow this
alternative to be included in the CAT NMS Plan and subject to notice
and comment. See Exemption Order, supra note 18.
\167\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.1(a)(iii).
\168\ Id. at Appendix C, Section A.1(a)(iii). The CAT NMS Plan
defines a ``Firm Designated ID'' as ``a unique identifier for each
trading account designated by Industry Members for purposes of
providing data to the Central Repository, where each such identifier
is unique among all identifiers from any given Industry Member for
each business date.'' See id. at Section 1.1.
\169\ Id. at Appendix C, Section A.1(a)(iii).
\170\ The CAT NMS Plan provides that where a validated LEI is
available for a Customer or entity, this may obviate a need to
report other identifier information (e.g., Customer name, address,
EIN). Id. at Appendix C, Section A.1(a)(iii) n.31.
\171\ The CAT NMS Plan states that the Participants anticipate
that Customer information that is initially reported to the CAT
could be limited to Customer accounts that have, or are expected to
have, CAT Reportable Event activity. For example, the CAT NMS Plan
notes accounts that are considered open, but have not traded
Eligible Securities in a given time frame, may not need to be pre-
established in the CAT, but rather could be reported as part of
daily updates after they have CAT Reportable Event activity. Id. at
Appendix C, Section A.1(a)(iii) n.32.
---------------------------------------------------------------------------
Under the Customer Information Approach, broker-dealers would be
required to report only the Firm Designated ID for each new order
submitted to the Central Repository, rather than the ``Customer-ID'' as
defined by Rule 613(c)(j)(5) and as required by Rule 613(c)(7)(i)(A),
and the Plan Processor would associate specific Customers and their
Customer-IDs with individual order events based on the reported Firm
Designated IDs.\172\ Within the Central Repository, each Customer would
be uniquely identified by identifiers or a combination of identifiers
such as an ITIN/SSN, date of birth, and, as applicable, LEI and
LTID.\173\ The Plan Processor would be required to use these unique
identifiers to map orders to specific Customers across all broker-
dealers.\174\ To ensure information identifying a Customer is updated,
broker-dealers would be required to submit to the Central Repository
daily updates for reactivated accounts, newly established or revised
Firm Designated IDs, or associated reportable Customer
information.\175\
---------------------------------------------------------------------------
\172\ See id. at Appendix C, Section A.1(a)(iii). The CAT NMS
Plan also requires broker-dealers to report ``Customer Account
Information'' upon the original receipt of origination of an order.
See CAT NMS Plan, supra note 3, at Section 1.1, Section
6.4(d)(ii)(C).
\173\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.1(a)(iii).
\174\ Id.
\175\ The CAT NMS Plan notes that because reporting to the CAT
is on an end-of-day basis, intra-day changes to information could be
captured as part of the daily updates to the information. To ensure
the completeness and accuracy of Customer information and
associations, in addition to daily updates, broker-dealers would be
required to submit periodic full refreshes of Customer information
to the CAT. The scope of the ``full'' Customer information refresh
would need to be further defined, with the assistance of the Plan
Processor, to determine the extent to which inactive or otherwise
terminated accounts would need to be reported. Id. at Appendix C,
Section A.1(a)(iii) n.33.
---------------------------------------------------------------------------
Appendix C provides additional requirements that the Plan Processor
must meet under the Customer Information Approach.\176\ The Plan
Processor must maintain information of sufficient detail to uniquely
and consistently identify each Customer across all CAT Reporters, and
associated accounts from each CAT Reporter, and must document and
publish, with the approval of the Operating Committee, the minimum list
of attributes to be captured to maintain this association.\177\ In
addition, the Plan Processor must maintain valid Customer and Customer
Account Information \178\ for each trading day and provide a method for
Participants and the Commission to easily obtain historical changes to
that information (e.g., name changes, address changes).\179\ The Plan
Processor also must design and implement a robust data validation
process for submitted Firm Designated IDs, Customer Account Information
and Customer Identifying Information, and be able to link accounts that
move from one CAT Reporter to another due to mergers and acquisitions,
divestitures, and other events.\180\ Under the Customer Information
Approach, broker-dealers will initially submit full account lists for
all active accounts to the Plan Processor and subsequently submit
updates and changes on a daily basis.\181\ Finally, the Plan Processor
must have a process to periodically receive full account lists to
ensure the completeness and accuracy of the account database.\182\
---------------------------------------------------------------------------
\176\ See id. at Appendix C, Section A.1(a)(iii).
\177\ Id. Section 9.1 of Appendix D also addresses, among other
things, the minimum attributes that CAT must capture for Customers
and the validation process for such attributes. Id. at Appendix D,
Section 9.1.
\178\ Id. at Appendix D, Section 9.1. In relevant part,
``Customer Account Information'' is defined in the Plan to include,
but not be limited to, account number, account type, customer type,
date account opened, and large trader identifier (if applicable).
See id. at Section 1.1.
\179\ See id. at Appendix C, Section A.1(a)(iii).
\180\ Id. at Appendix C, Section A.1(a)(iii). The CAT NMS Plan
defines ``Customer Identifying Information'' to mean ``information
of sufficient detail to identify a Customer, including, but not
limited to, (a) with respect to individuals: Name, address, date of
birth, individual tax payer identification number (``ITIN'')/social
security number (``SSN''), individual's role in the account (e.g.,
primary holder, joint holder, guardian, trustee, person with the
power of attorney); and (b) with respect to legal entities: name,
address, Employer Identification Number (``EIN'')/LEI) or other
comparable common entity identifier, if applicable; provided,
however, where the LEI or other common entity identifier is
provided, information covered by such common entity identifier
(e.g., name, address) would not need to be separately submitted to
the Central Repository.'' See id. at Section 1.1.
\181\ Id. at Appendix C, Section A.1(a)(iii).
\182\ Id.
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b. Account Effective Date vs. Account Open Date
Rule 613(c)(7)(viii)(B) requires broker-dealers to report to the
Central Repository ``Customer Account Information'' upon the original
receipt or origination of an order.\183\ The CAT
[[Page 30642]]
NMS Plan defines ``Customer Account Information'' to include, in part,
the Customer's account number, account type, customer type, date
account opened and LTID (if applicable).\184\ The Plan, however,
provides that in two limited circumstances, a broker-dealer could
report the ``Account Effective Date'' in lieu of the date an account
was opened.\185\ The first circumstance is where a relationship
identifier--rather than an actual parent account--has been established
for an institutional Customer relationship.\186\ In this case, no
account open date is available for the institutional Customer parent
relationship because there is no parent account, and for the same
reason, there is no account number or account type available.\187\
Thus, the Plan provides that in this circumstance, a broker-dealer
could report the ``Account Effective Date'' of the relationship in lieu
of an account open date.\188\ Further, the Plan provides that where
such an institutional Customer relationship was established before the
broker-dealer's obligation to report audit trail data is required, the
``Account Effective Date'' would be either (i) the date the broker-
dealer established the relationship identifier, or (ii) the date when
trading began (i.e., the date the first order is received) using the
relevant relationship identifier, and if both dates are available and
differ, the earlier date.\189\ Where such relationships are established
after the broker-dealer's obligation to report audit trail data is
required, the ``Account Effective Date'' would be the date the broker-
dealer established the relationship identifier and would be no later
than the date the first order was received.\190\ Regardless of when the
relationship was established for such institutional Customers, the Plan
provides that broker-dealers may report the relationship identifier in
place of Rule 613(c)(7)(viii)(B)'s requirement to report the ``account
number,'' and report ``relationship'' in place of ``account type.''
\191\
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\183\ 17 CFR 242.613(c)(7)(viii)(B). ``Customer Account
Information'' is defined in Rule 613(j)(4) to ``include, but not be
limited to, account number, account type, customer type, date
account opened, and large trader identifier (if applicable).'' 17
CFR 242.613(j)(4).
\184\ See CAT NMS Plan, supra note 3, at Section 1.1.
\185\ Id. The SROs requested exemptive relief from Rule 613 so
that the CAT NMS Plan may permit broker-dealers to report to the
Central Repository the ``effective date'' of an account in lieu of
requiring each broker-dealer to report the date the account was
opened in certain limited circumstances. See Exemptive Request
Letter, supra note 16, at 13. The Commission granted exemptive
relief on March 1, 2016 in order to allow this alternative to be
included in the CAT NMS Plan and subject to notice and comment. See
Exemption Order, supra note 18.
\186\ See Exemption Order, supra note 18; see also September
2015 Supplement, supra note 16, at 4-5.
\187\ See September 2015 Supplement, supra note 16, at 6.
\188\ See CAT NMS Plan, supra note 3, at Section 1.1.
\189\ See id.
\190\ See id.
\191\ See id.
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The second circumstance where a broker-dealer may report the
``Account Effective Date'' rather than the date an account was opened
as required in Rule 613(c)(7)(viii)(B) is when particular legacy system
data issues prevent a broker-dealer from providing an account open date
for any type of account (i.e., institutional, proprietary or retail)
that was established before CAT's implementation.\192\ According to the
Plan, these legacy system data issues may arise because:
---------------------------------------------------------------------------
\192\ See id.; see also September 2015 Supplement, supra note
16, at 7-9.
---------------------------------------------------------------------------
(1) A broker-dealer has switched back office providers or clearing
firms and the new back office/clearing firm system identifies the
account open date as the date the account was opened on the new system;
(2) A broker-dealer is acquired and the account open date becomes
the date that an account was opened on the post-merger back office/
clearing firm system;
(3) Certain broker-dealers maintain multiple dates associated with
accounts in their systems and do not designate in a consistent manner
which date constitutes the account open date, as the parameters of each
date are determined by the individual broker-dealer; or
(4) No account open date exists for a proprietary account of a
broker-dealer.\193\
---------------------------------------------------------------------------
\193\ See CAT NMS Plan, supra note 3, at Section 1.1.
---------------------------------------------------------------------------
Thus, when legacy systems data issues arise due to one of the four
reasons above and no account open date is available, the Plan provides
that broker-dealers would be permitted to report an ``Account Effective
Date'' in lieu of an account open date.\194\ When the legacy systems
data issues and lack of account open date are attributable to above
reasons (1) or (2), the ``Account Effective Date'' would be the date
the account was established, either directly or via a system transfer,
at the relevant broker-dealer.\195\ When the legacy systems data issues
and lack of account open date are attributable to above reason (3), the
``Account Effective Date'' would be the earliest available date.\196\
When the legacy systems data issues and lack of account open date are
attributable to above reason (4), the ``Account Effective Date'' would
be (i) the date established for the proprietary account in the broker-
dealer or its system(s), or (ii) the date when proprietary trading
began in the account, i.e., the date on which the first orders were
submitted from the account.\197\
---------------------------------------------------------------------------
\194\ Id.
\195\ Id.
\196\ Id.
\197\ Id.
---------------------------------------------------------------------------
c. Modification/Cancellation
Rule 613(c)(7)(iv)(F) requires that ``[t]he CAT-Reporter-ID of the
broker-dealer or Customer-ID of the person giving the modification or
cancellation instruction'' be reported to the Central Repository.\198\
Because the Customer Information Approach no longer requires that a
Customer-ID be reported upon original receipt or origination of an
order, and because reporting the Customer-ID of the specific person
that gave the modification or cancellation instruction would result in
an inconsistent level of information regarding the identity of the
person giving the modification or cancellation instruction versus the
identity of the Customer that originally received or originated an
order, Section 6.3(d)(iv)(F) of the CAT NMS Plan modifies the
requirement in Rule 613 and instead requires CAT Reporters to report
whether the modification or cancellation instruction was ``given by the
Customer or was initiated by the Industry Member or Participant.''
\199\
---------------------------------------------------------------------------
\198\ 17 CFR 242.613(c)(7)(iv)(F) (emphasis added).
\199\ See CAT NMS Plan, supra note 3, at Section 6.3(d)(iv)(F).
The SROs requested exemptive relief from Rule 613 so that the CAT
NMS Plan may permit CAT Reporters to report whether a modification
or cancellation instruction was given by the Customer associated
with the order, or was initiated by the broker-dealer or exchange
associated with the order, in lieu of requiring CAT Reporters to
report the Customer-ID of the person giving the modification or
cancellation instruction. See Exemptive Request Letter, supra note
16, at 12-13. The Commission granted exemptive relief on March 1,
2016 in order to allow this alternative to be included in the CAT
NMS Plan and subject to notice and comment. See Exemption Order,
supra note 18.
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Request for Comment
135. The Commission granted an exemption from Rule 613 in order to
allow the Customer Information Approach to be included in the CAT NMS
Plan and subject to notice and comment. The Customer Information
Approach would require each broker-dealer to assign a unique Firm
Designated ID to each trading account and to submit an initial set of
information identifying the Customer to the Central Repository, in lieu
of Rule 613's requirement that a CAT Reporter must report a Customer-ID
for each Customer upon the original receipt or
[[Page 30643]]
origination of an order. Do Commenters believe that allowing broker-
dealers to report a Firm Designated ID to the Central Repository is
more efficient and cost-effective than the Rule 613 approach of
requiring broker-dealers to report a unique Customer-ID upon original
receipt or origination of an order? Would allowing CAT Reporters to
report a Firm Designated ID to the Central Repository merely transfer
the costs from individual broker-dealers to the Central Repository? Or
do Commenters believe that the Rule 613 approach is preferable? Why or
why not?
136. If broker-dealers are permitted to report a Firm Designated
ID, do Commenters believe the proposed CAT NMS Plan includes
sufficiently detailed requirements to determine whether the Plan
Processor could use the Firm Designated ID to identify a Customer?
137. Do Commenters believe the CAT NMS Plan's proposal to permit
reporting a Firm Designated ID would affect the accuracy of CAT Data
collected and maintained under the CAT compared to the Rule 613
approach that requires a unique Customer-ID? If so, how? Would
permitting reporting a Firm Designated ID result in more complete CAT
Data? If so, please explain.
138. Do Commenters believe the CAT NMS Plan's proposal to permit
reporting a Firm Designated ID would affect the accessibility of CAT
Data collected and maintained under the CAT compared to the Rule 613
approach? If so, how? Would permitting reporting a Firm Designated ID
result in CAT Data being more accessible? If so, please explain.
139. Do Commenters believe allowing broker-dealers to report a Firm
Designated ID to the Central Repository would affect the timeliness of
data collected and maintained under the CAT compared to the Rule 613
approach? Would permitting reporting a Firm Designated ID result in
more timely CAT Data? If so, please explain.
140. Do Commenters believe there are any increased risks related to
allowing a broker-dealer to report a Firm Designated ID rather than a
unique Customer-ID to the Central Repository? How difficult would it be
for the Central Repository to utilize a Firm Designated ID for each
account?
141. Do Commenters believe that the CAT NMS Plan has provided
sufficient information to determine whether the Central Repository
could use a Firm Designated ID to efficiently, reliably and accurately
link orders and Reportable Events to a Customer?
142. Do Commenters believe that the CAT NMS Plan includes
sufficient safeguards or policies to assure that the same Firm
Designated ID would not be used for multiple Customers?
143. The CAT NMS Plan does not require that a broker-dealer provide
an LEI to the Plan Processor as part of the identifying information
used to assign a Customer-ID at the Central Repository. The CAT NMS
Plan provides that a broker-dealer must report its LEI, if available,
but allows a broker-dealer to report another comparable common entity
identifier, if an LEI is not available. Do Commenters believe that the
CAT NMS Plan should mandate that broker-dealers provide an LEI as part
of the information used by the Plan Processor to uniquely identify
Customers? Why or why not?
144. Do Commenters believe that reporting the Firm Designated ID,
rather than a unique Customer-ID, would affect the security and
confidentiality of CAT Data? If so, how? Would permitting reporting a
Firm Designated ID result in a different level of security and
confidentiality of CAT Data? If so, please explain.
145. The CAT NMS Plan provides that an initial set of Customer
Account Information and Customer Identifying Information would be
reported to the Central Repository by broker-dealers upon the
commencement of reporting audit trail data to the Central Repository by
that broker-dealer, and that such Customer Identifying Information
would be updated as set forth in the CAT NMS Plan. Do Commenters
believe that the approach for reporting an initial set of Customer
Account Information and Customer Identifying Information and updates to
such information thereafter as set forth in the CAT NMS Plan would
affect the quality, accuracy, completeness, accessibility or timeliness
of the data? If so, what additional requirements or details should be
provided in the CAT NMS Plan?
146. Do Commenters believe that allowing broker-dealers to report
an initial set of Customer Account Information and Customer Identifying
Information and updates to such information thereafter is more
efficient and cost-effective than the Rule 613 approach for identifying
Customers under Rule 613? Or do Commenters believe that the Rule 613
approach is preferable? Why or why not?
147. Do Commenters believe there are any increased risks as a
result of allowing a broker-dealer to report an initial set of Customer
Account Information and Customer Identifying Information and updates to
such information thereafter to be reported to the Central Repository?
How difficult would it be for the Central Repository to ingest the
Customer Account Information and Customer Identifying information, and
any updates thereafter?
148. Do Commenters believe that the CAT NMS Plan provides
sufficient information to determine whether the Central Repository
could use the initial set of Customer Account Information and Customer
Identifying Information and updates to such information thereafter to
efficiently, reliably and accurately link orders and Reportable Events
to a Customer?
149. Do Commenters believe that reporting an initial set of
Customer Account Information and Customer Identifying Information and
updates to such information thereafter would affect the security and
confidentiality of CAT Data? If so, how? Would reporting an initial set
of Customer Account Information and Customer Identifying Information
and updates to such information result in a different level of security
and confidentiality? If so, please explain.
150. As part of the Customer Identifying Information reported to
the Central Repository, the CAT NMS Plan requires a broker-dealer to
report PII such as the Customer's name, address, date of birth, and
ITIN/SSN. Do Commenters believe there is data that could be reported by
broker-dealers and used by the Central Repository to identify Customers
that is not PII? What types of data would this be? If data other than
PII is used to identify a Customer, do Commenters believe that such
data would be sufficiently unique to ensure that Customers can be
accurately identified by the Central Repository?
151. If data other than PII is used by the Central Repository to
identify a Customer, would the use of such data affect the quality or
completeness of the CAT audit trail, as compared to the use of PII to
identify a Customer?
152. Do Commenters believe that if broker-dealers reported data
other than PII to identify Customers, the accessibility and timeliness
of the data collected and maintained under the CAT would be affected?
If the data would be affected, in what way(s)?
153. Would relying on data other than PII to identify a Customer be
a more efficient and cost-effective way to identify Customers, as
compared to relying on PII to identify a Customer?
154. Do Commenters believe that there would be increased risks to
the reliability of the CAT audit trail data if broker-dealers were
required to identify a Customer with data that does not include PII?
155. If broker-dealers report data other than PII to identify
Customers, do Commenters believe that the Central Repository could
efficiently, reliably
[[Page 30644]]
and accurately link orders and Reportable Events to a Customer?
156. Do Commenters believe that the proposed CAT NMS Plan provides
sufficient information to determine when broker-dealers would report
the ``Account Effective Date'', rather than the date the Customer's
account was opened as required by Rule 613? Is there any ambiguity in
the circumstances under which a broker-dealer would report an ``Account
Effective Date'' rather than the date a Customer's account was opened?
157. Do Commenters believe reporting of the ``Account Effective
Date'' rather than the account open date for a Customer's account under
the Rule 613 approach would affect the quality, accuracy, completeness,
accessibility or timeliness of the CAT data? If it does, what
additional requirements or details should be provided in the CAT NMS
Plan prior to the Commission's approval of such Plan? Or do Commenters
believe that the Rule 613 approach is preferable? Why or why not?
158. Do Commenters believe that reporting the ``Account Effective
Date'' would provide sufficient information to the Central Repository
to facilitate the ability of the Plan Processor to link a Customer's
account with the Customer?
159. Do Commenters believe that allowing the reporting of the
``Account Effective Date'' would be more efficient and cost-effective
than requiring the Rule 613 approach of reporting of a Customer's
account open date? Or do Commenters believe that the Rule 613 approach
is preferable? Why or why not? Would allowing CAT Reporters to report
the ``Account Effective Date'' rather than the date a Customer's
account was opened merely transfer the costs from individual CAT
Reporters to the Central Repository?
160. Do Commenters agree that the proposed approach for reporting
the ``Account Effective Date,'' which differs depending on whether the
account was established before or after the commencement of reporting
audit trail data to the Central Repository as set forth in the CAT NMS
Plan, is a reasonable approach? Why or why not?
161. The Commission granted an exemption from Rule 613 to permit
the alternative of allowing CAT Reporters to report whether the
modification or cancellation of an order was given by a Customer, or
initiated by a broker-dealer or exchange, in lieu of requiring the
reporting of the Customer-ID of the person giving the modification or
cancellation instruction, to be included in the CAT NMS Plan and
subject to notice and comment. To what extent does the approach
permitted by the exemption affect the completeness of the CAT? Would
the information lost under the approach permitted by the exemption
affect investigations or surveillances? If so, how?
8. Order Allocation Information
Section 6.4(d)(ii)(A)(1) of the CAT NMS Plan provides that each
Participant through its Compliance Rule must require that Industry
Members record and report to the Central Repository an Allocation
Report that includes the Firm Designated ID when an execution is
allocated in whole or part.\200\ The CAT NMS Plan defines an Allocation
Report as ``a report made to the Central Repository by an Industry
Member that identifies the Firm Designated ID for any account(s),
including subaccount(s), to which executed shares are allocated and
provides the security that has been allocated, the identifier of the
firm reporting the allocation, the price per share of shares allocated,
the side of shares allocated, the number of shares allocated to each
account, and the time of the allocation.'' \201\ The CAT NMS Plan
explains, for the avoidance of doubt, that an Allocation Report shall
not be required to be linked to particular orders or executions.\202\
---------------------------------------------------------------------------
\200\ See CAT NMS Plan, supra note 3, at Section
6.4(d)(ii)(A)(1); see also April 2015 Supplement, supra note 16. The
SROs requested exemptive relief from Rule 613 so that the CAT NMS
Plan may permit Industry Members to record and report to the Central
Repository an Allocation Report that includes the Firm Designated ID
when an execution is allocated in whole or part in lieu of requiring
the reporting of the account number for any subaccount to which an
execution is allocated, as is required by Rule 613. See Exemptive
Request Letter, supra note 16, at 26-27. The Commission granted
exemptive relief on March 1, 2016 in order to allow this alternative
to be included in the CAT NMS Plan and subject to notice and
comment. See Exemption Order, supra note 18.
\201\ See CAT NMS Plan, supra note 3, at Section 1.1; see also
April 2015 Supplement, supra note 16.
\202\ See CAT NMS Plan, supra note 3, at Section 1.1.
---------------------------------------------------------------------------
Request for Comment
162. The Commission granted an exemption from Rule 613 in order to
allow the alternative of permitting the CAT NMS Plan to provide that
Industry Members record and report to the Central Repository an
Allocation Report that includes the Firm Designated ID when an
execution is allocated in whole or part. This alternative is in lieu of
the requirement in Rule 613 that Industry Members must report the
account number for any subaccount to which an execution is
allocated.\203\ Do Commenters believe that providing the information
required in an Allocation Report as a means to identify order events
and information related to the subaccount allocation information (the
``Allocation Report Approach'') would be more efficient and cost-
effective than the Rule 613 approach requiring the reporting of the
account number for any subaccount to which an execution is allocated?
Or do Commenters believe that the Rule 613 approach is preferable? Why
or why not?
---------------------------------------------------------------------------
\203\ See Exemption Order, supra note 18.
---------------------------------------------------------------------------
163. Do Commenters believe that the Allocation Report Approach
would affect the completeness of CAT Data? If so, how? Would the
Allocation Report Approach result in more complete CAT Data? If so,
please explain.
164. Do Commenters believe that the Allocation Report Approach
would affect the accessibility of allocation information? If so, how?
Would the Allocation Report Approach result in more accessible CAT
Data? If so, please explain.
165. Do Commenters believe that the Allocation Report Approach
would affect the timeliness of allocation information? If so, how?
Would the Allocation Report Approach result in more timely CAT Data? If
so, please explain.
166. Do Commenters believe the Allocation Report Approach would
affect the security and confidentiality of CAT Data? If so, how? Would
the Allocation Report Approach result in a different level of security
or confidentiality? If so, please explain.
167. Do Commenters believe that the Allocation Report Approach
described by the SROs is feasible? What challenges or risks would CAT
Reporters face in providing such information? What challenges or risks
would the Plan Processor face when ingesting such information and
linking it to the appropriate Customers' accounts?
9. Options Market Maker Quotes
Section 6.4(d)(iii) of the CAT NMS Plan states that, with respect
to the reporting obligations of an Options Market Maker under Sections
6.3(d)(ii) and (iv) regarding its quotes \204\ in Listed Options, such
quotes shall be reported to the Central Repository by the relevant
Options Exchange in lieu of reporting by the Options Market Maker.\205\
Section
[[Page 30645]]
6.4(d)(iii) further states that each Participant that is an Options
Exchange shall, through its Compliance Rule, require its Industry
Members that are Options Market Makers to report to the Options
Exchange the time at which a quote in a Listed Option is sent to the
Options Exchange (and, if applicable, the time of any subsequent quote
modification and/or cancellation where such modification or
cancellation is originated by the Options Market Maker).\206\ Such time
information also shall be reported to the Central Repository by the
Options Exchange in lieu of reporting by the Options Market Maker.\207\
---------------------------------------------------------------------------
\204\ Rule 613(c)(7) provides that the CAT NMS Plan must require
reporting of the details for each order and each Reportable Event,
including the routing and modification or cancellation of an order.
17 CFR 242.613(c)(7). Rule 613(j)(8) defines ``order'' to include
``any bid or offer.'' 17 CFR 242.613(j)(8).
\205\ See CAT NMS Plan, supra note 3, at Section 6.4(d)(iii).
The SROs requested exemptive relief from Rule 613 so that the CAT
NMS Plan may permit Options Market Maker quotes to be reported to
the Central Repository by the relevant Options Exchange in lieu of
requiring that such reporting be done by both the Options Exchange
and the Options Market Maker, as is required by Rule 613. See
Exemptive Request Letter, supra note 16, at 2. In accord with the
exemptive relief requested, the SROs committed to require Options
Market Makers to report to the Exchange the time at which a quote in
a Listed Option is sent to the Options Exchange. Id. at 3. The
Commission granted exemptive relief on March 1, 2016 in order to
allow this alternative to be included in the CAT NMS Plan and
subject to notice and comment. See Exemption Order, supra note 18.
\206\ See CAT NMS Plan, supra note 3, at Section 6.4(d)(iii).
\207\ Id.
---------------------------------------------------------------------------
Request for Comment
168. The Commission granted an exemption from Rule 613 in order to
allow the alternative of permitting Options Exchanges to report Options
Market Maker quotes to the Central Repository in lieu of requiring such
reporting by both the Options Exchange and the Options Market Maker as
is required by Rule 613, to be included in the CAT NMS Plan and subject
to notice and comment.\208\ Do Commenters believe that permitting
exchanges to report quote information sent to them by Options Market
Makers, including the Quote Sent Time, to the Central Repository would
affect the completeness or quality of CAT Data? If so, what information
would be missing?
---------------------------------------------------------------------------
\208\ See Exemption Order, supra note 18.
---------------------------------------------------------------------------
169. Under Rule 613, Options Market Makers would report their
quotes to the Central Repository and time stamps would be attached to
such quotes. Under the exemption, Options Market Makers would include
the Quote Sent Time when sending quote information to the Options
Exchanges. What, if any, are the risks of permitting the Options
Exchanges to report information Options Market Makers otherwise would
be required to report?
170. Do Commenters believe that the cost savings from permitting
Options Exchanges to report information Options Market Makers would
otherwise have to report makes this a preferable approach than Rule
613?
10. Error Rates
The CAT NMS Plan defines Error Rate as ``the percentage of
[R]eportable [E]vents collected by the [C]entral [R]epository in which
the data reported does not fully and accurately reflect the order event
that occurred in the market.'' \209\ Under the CAT NMS Plan, the
Operating Committee sets the maximum Error Rate that the Central
Repository would tolerate from a CAT Reporter reporting data to the
Central Repository.\210\ The Operating Committee reviews and resets the
maximum Error Rate, at least annually.\211\ If a CAT Reporter reports
CAT Data to the Central Repository with errors such that their error
percentage exceeds the maximum Error Rate, then such CAT Reporter would
not be in compliance with the CAT NMS Plan or Rule 613.\212\ As such,
``the Participants as Participants or the SEC may take appropriate
action for failing to comply with the reporting obligations under the
CAT NMS Plan and SEC Rule 613.'' \213\ The CAT NMS Plan, however, does
not detail what specific compliance enforcement provisions would apply
if a CAT Reporter exceeds the maximum Error Rate.
---------------------------------------------------------------------------
\209\ See CAT NMS Plan, supra note 3, at Section 1.1; see also
Rule 613(j)(6).
\210\ See id. at Section 6.5(d)(i).
\211\ See id. at Appendix C, Section A.3(b).
\212\ See id. at Appendix C, Section A.3(b) and Rule 613(g) and
(h).
\213\ See id. at Appendix C, Section A.3(b).
---------------------------------------------------------------------------
The CAT NMS Plan sets the initial maximum Error Rate at 5% for any
data reported pursuant to subparagraphs (3) and (4) of Rule
613(c).\214\ The SROs highlight that ``the Central Repository will
require new reporting elements and methods for CAT Reporters and there
will be a learning curve when CAT Reporters begin to submit data to the
Central Repository'' in support of a 5% initial rate.\215\ Further, the
SROs state that ``many CAT Reporters may have never been obligated to
report data to an audit trail.'' \216\ The SROs believe an initial
maximum Error Rate of 5% ``strikes the balance of making allowances for
adapting to a new reporting regime, while ensuring that the data
provided to regulators will be capable of being used to conduct
surveillance and market reconstruction.'' \217\ In the CAT NMS Plan,
the Participants compared the contemplated Error Rates of CAT Reporters
to the error rates of OATS reporters in the time periods immediately
following three significant OATS releases in the last ten years.\218\
The Participants state that for the three comparative OATS releases:
\219\ An average of 2.42% of order events did not pass systemic
validations; an average of 0.36% of order events were not submitted in
a timely manner; an average of 0.86% of orders were unsuccessfully
matched to a trade reporting facility trade report; an average of 3.12%
of OATS Route Reports were unsuccessfully matched to an exchange order;
and an average of 2.44% of OATS Route Reports were unsuccessfully
matched to a report by another reporting entity.\220\
---------------------------------------------------------------------------
\214\ See id. at Section 6.5(d)(i).
\215\ See id. at Appendix C, Section A.3(b).
\216\ See id.
\217\ See id.
\218\ See id. The SROs note that the three comparative releases
are known as ``(1) OATS Phase III, which required manual orders to
be reported to OATS; (2) OATS for OTC Securities which required OTC
equity securities to be reported to OATS; and (3) OATS for NMS which
required all NMS stocks to be reported to OATS.'' Id.
\219\ See id. The SROs note that the calculated ``combined
average error rates for the time periods immediately following [the
OATS] release across five significant categories for these three
releases'' was used in setting in the initial maximum Error Rate.
Id.
\220\ See id.
---------------------------------------------------------------------------
The Participants, moreover, anticipate reviewing and resetting the
maximum Error Rate once Industry Members (excluding Small Industry
Members) begin to report to the Central Repository and again once Small
Industry Members report to the Central Repository.\221\
---------------------------------------------------------------------------
\221\ See id.
---------------------------------------------------------------------------
The Participants thus propose a phased approach to lowering the
maximum Error Rates among CAT Reporters based on the period of time
reporting to the Central Repository and whether the CAT Reporters are
Participants, large broker-dealers or small broker-dealers.\222\ The
Plan sets forth a goal of the following maximum Error Rates \223\ where
``Year(s)'' refers to year(s) after the CAT NMS Plan's date of
effectiveness:
---------------------------------------------------------------------------
\222\ See id.
\223\ See id.
[[Page 30646]]
Table 1--Maximum Error Rates Schedule
----------------------------------------------------------------------------------------------------------------
One year % Two years % Three years % Four years %
----------------------------------------------------------------------------------------------------------------
Participants.................................... 5 1 1 1
Large Industry Members.......................... N/A 5 1 1
Small Industry Members.......................... N/A N/A 5 1
----------------------------------------------------------------------------------------------------------------
The CAT NMS Plan requires that the Plan Processor to: (i) Measure
and report errors every business day; \224\ (ii) provide CAT Reporters
daily statistics and error reports as they become available, including
a description of such errors; \225\ (iii) provide monthly reports to
CAT Reporters that detail a CAT Reporter's performance and comparison
statistics; \226\ (iv) define educational and support programs for CAT
Reporters to minimize Error Rates; \227\ and (v) identify, daily, all
CAT Reporters exceeding the maximum allowable Error Rate.\228\ To
timely correct data-submitted errors to the Central Repository, the
Participants require that the Central Repository receive and process
error corrections at all times.\229\ Further, the CAT NMS Plan requires
that CAT Reporters be able to submit error corrections to the Central
Repository through a web-interface or via bulk uploads or file
submissions, and that the Plan Processor, subject to the Operating
Committee's approval, support the bulk replacement of records and the
reprocessing of such records.\230\ The Participants, furthermore,
require that the Plan Processor identify CAT Reporter data submission
errors based on the Plan Processor's validation processes.\231\
---------------------------------------------------------------------------
\224\ See id. The CAT NMS Plan sets forth that the Plan
Processor shall provide the Operating Committee with regular Error
Rate reports. Id. at Section 6.1(o)(v). The Error Rate reports shall
include each of the following--if the Operating Committee deems them
necessary or advisable--``Error Rates by day and by delta over time,
and Compliance Thresholds by CAT Reporter, by Reportable Event, by
age before resolution, by symbol, by symbol type (e.g., ETF and
Index) and by event time (by hour and cumulative on the hour)[.]''
Id.
\225\ See id. at Appendix C, Section A.3(b).
\226\ See id.
\227\ See id. at Appendix D, Section 10.1. The CAT NMS Plan sets
forth support programs that shall include educational programs,
including FAQs, a dedicated help desk, industry-wide trainings,
certifications, industry-wide testing, maintaining Technical
Specifications with defined intervals for new releases/updates,
emailing CAT Reporter data outliers, conducting annual assessments,
using test environments prior to releasing new code to production,
and imposing CAT Reporter attendance requirements for testing
sessions and educational and industry-wide trainings. Id.
\228\ See id. at Appendix D, Section 10.4.
\229\ See id. at Appendix C, Section A.3(b).
\230\ See id.
\231\ See id. At a minimum, the processes would include
validating the data's file format, CAT Data format, type,
consistency, range, logic, validity, completeness, timeliness and
linkage. See id. at Appendix D, Section 7.2.
---------------------------------------------------------------------------
Request for Comment \232\
---------------------------------------------------------------------------
\232\ See Section IV.E.4, infra, for further Error Rate related
requests for comment.
---------------------------------------------------------------------------
171. Do Commenters believe the CAT NMS Plan's initial maximum Error
Rate of 5% for CAT Data reported to the Central Repository is
appropriate in light of OATS' current error rate of less than 1%? \233\
Why or why not?
---------------------------------------------------------------------------
\233\ See Section IV.E.1.b(1), infra.
---------------------------------------------------------------------------
172. Please provide examples of error rates that are generally
accepted with respect to other regulatory data reporting systems. At
what error rate should data be considered materially unreliable? Please
explain.
173. Do Commenters believe the CAT NMS Plan's initial maximum Error
Rate of 5% would negatively affect the quality of CAT Data? Why or why
not? In explaining why or why not, please address each quality
(accuracy, completeness, timeliness and accessibility) separately.
174. Do Commenters believe that it was reasonable for the
Participants to compare the contemplated Error Rates of CAT Reporters
to the error rates of OATS reporters in the time periods immediately
following three significant OATS releases in the last ten years? Why or
why not?
175. If not 5%, what initial maximum Error Rate do Commenters
believe Participants and Industry Members should be subject to and why?
176. What impact, if any, do Commenters believe a 5% initial
maximum Error Rate would have on Industry Members' costs of compliance?
Please describe the costs of correcting audit trail data. Given the
costs of correcting audit trail data, do Commenters believe that
establishing a lower maximum Error Rate could be less costly to
Industry Members? Why or why not? How much less costly?
177. What impact, if any, do Commenters believe a 5% initial
maximum Error Rate would have on the timing of the retirement of any
redundant audit trail systems and any related costs? Please explain.
Should the actual Error Rate for CAT Data affect the timing of the
retirement of any redundant audit trail systems? If so, why? If not,
why not?
178. Do Commenters believe the CAT NMS Plan's target maximum Error
Rate of 1% for CAT Data reported to the Central Repository pursuant to
the CAT NMS Plan's phased approach is the appropriate target maximum
Error Rate in light of current industry standards? If not, why not? If
not 1%, what target maximum Error Rate do Commenters believe
Participants and Industry Members should be subject to and why?
179. Do Commenters believe there are any increased risks as a
result of allowing CAT Data subject to an initial maximum Error Rate of
5% to be reported to the CAT? How difficult would it be for the Central
Repository to process and analyze CAT Data based on data reported
subject to an initial maximum Error Rate of 5%? Specifically, what are
the increased risks, if any, of CAT Data reported subject to an Error
Rate of 5% in respect of combining or linking data within the Central
Repository or across other sources of trade and order data currently
available to regulators?
180. Do Commenters believe there are any increased risks as a
result of allowing CAT Data subject to a target maximum Error Rate of
1% to be reported to the CAT? How difficult would it be for the Central
Repository to process and analyze CAT Data based on data reported
subject to a target maximum Error Rate of 1%? Specifically, what are
the increased risks, if any, of CAT Data reported subject to an Error
Rate of 1% in respect of combining or linking data within the Central
Repository or across other sources of trade and order data currently
available to regulators?
181. The CAT NMS Plan provides that the Participants would review
and reset, at least on an annual basis, the maximum Error Rate. Do
Commenters believe that this establishes an appropriately rigorous
schedule for the Participants to evaluate whether the maximum Error
Rate could potentially be set to a lower rate? Are there any other
factors that should affect when and how the maximum Error Rate is set?
182. The CAT NMS Plan provides as a goal a four-year phased
approach schedule to lower the maximum Error
[[Page 30647]]
Rate segmented by Participants, large broker-dealers and small broker-
dealers. Do Commenters believe a phased schedule is appropriate and
reasonable? Do Commenters believe establishing segments is appropriate
and reasonable, and if so are these the appropriate Error Rate
groupings? What alternative groupings, if any, do Commenters believe
are the appropriate Error Rate groupings?
183. Do Commenters believe that the CAT NMS Plan is clear whether
the four-year phased approach is a goal? Should it be more than a goal?
Please explain.
184. Do Commenters believe the phased approach for CAT
implementation, whereby SROs would begin reporting CAT Data one year
prior to other CAT Reporters and two years prior to small CAT
Reporters, would affect the quality of the CAT Data and the number of
available CAT Data items in the audit trail?
185. Do Commenters believe the CAT NMS Plan provides adequate
enforcement provisions to ensure CAT Reporters submit data to the
Central Repository no higher than the maximum Error Rate? If not, what
additional enforcement provisions should the CAT NMS Plan provide?
186. Do Commenters believe that there should be a lower initial
maximum Error Rate and/or a more accelerated or slower reduction of the
target maximum Error Rate? Would an accelerated reduction of the target
maximum Error Rate facilitate the earlier retirement of any redundant
audit trail system? What should the initial maximum Error Rate and/or
what should be the schedule for reducing the target maximum Error Rate?
187. What framework and criteria should regulators adopt when
determining whether to retire potentially redundant regulatory data
reporting systems? Please explain when and how such retirement should
take place.
188. Do Commenters believe the CAT NMS Plan sets forth sufficient
consequences for a CAT Reporter exceeding the maximum Error Rates? If
not, what should be those consequences?
189. Do Commenters believe that some errors are of greater concern
than others? If so, what types of errors are more or less problematic?
Should the type of error be considered when calculating Error Rates? If
so, how should the Plan Processor take into account different types of
errors when calculating Error Rates? How should the Participants take
into account different types of errors when setting Error Rates?
11. Regulatory Access
Under Section 6.5(c) of the CAT NMS Plan, the Plan Processor must
provide regulators access to the Central Repository for regulatory and
oversight purposes and create a method of accessing CAT Data that
includes the ability to run complex searches and generate reports.\234\
Section 6.10(c) requires regulator access by two different methods: (1)
An online targeted query tool with predefined selection criteria to
choose from; and (2) user-defined direct queries and bulk extractions
of data via a query tool or language allowing querying of all available
attributes and data sources.\235\ Additional requirements concerning
regulator access appear in Section 8 of Appendix D.\236\
---------------------------------------------------------------------------
\234\ See CAT NMS Plan, supra note 3, at Section 6.5(c).
Appendix C provides objective milestones to assess progress
concerning regulator access to the Central Repository. See id. at
Appendix C, Section C.10(d).
\235\ Id. at Section 6.10(c). Section 6.10(c) also requires the
Plan Processor to reasonably assist regulatory staff with queries,
submit queries on behalf of regulatory staff as requested, and
maintain a help desk to assist regulatory staff with questions
concerning CAT Data. Id.
\236\ See id. at Appendix D, Section 8.
---------------------------------------------------------------------------
The CAT NMS Plan requires that CAT must support a minimum of 3,000
regulatory users and at least 600 such users accessing CAT concurrently
without an unacceptable decline in performance.\237\ Moreover, CAT must
support an arbitrary number of user roles and, at a minimum, include
defined roles for both basic and advanced regulatory users.\238\
---------------------------------------------------------------------------
\237\ Id. at Appendix D, Section 8.1.
\238\ Id.
---------------------------------------------------------------------------
a. Online Targeted Query Tool
Sections 8.1.1, 8.1.2, and 8.1.3 of Appendix D contain further
specifications for the online targeted query tool.\239\ The tool must
allow for retrieval of processed and/or validated (unlinked) data via
an online query screen that includes a choice of a variety of pre-
defined selection criteria.\240\ Targeted queries must include date(s)
and/or time range(s), as well as one or more of a variety of fields
listed in Section 8.1.1 (e.g., product type, CAT-Reporter-ID, and
Customer-ID).\241\ Targeted queries would be logged such that the Plan
Processor could provide monthly reports to the SROs concerning metrics
on performance and data usage of the search tool.\242\ The CAT NMS Plan
further requires that acceptable response times for the targeted search
be in increments of less than one minute; for complex queries scanning
large volumes of data or large result sets (over one million records)
response times must be available within 24 hours of the request; and
queries for data within one business date of a 12-month period must
return results within three hours regardless of the complexity of
criteria.\243\ Under the CAT NMS Plan, regulators may access all CAT
Data except for PII data (access to which would be limited to an
authorized subset of Participant and Commission employees) and the Plan
Processor must work with regulators to implement a process for
providing them with access and routinely verifying a list of active
users.\244\
---------------------------------------------------------------------------
\239\ Id. at Appendix D, Sections 8.1.1-8.1.3.
\240\ Id. at Appendix D, Section 8.1.1.
\241\ Id.
\242\ Id.
\243\ Id. at Appendix D, Section 8.1.2. Appendix D, Section
8.1.2 contains further performance requirements applicable to data
and the architecture of the online query tool. Id.
\244\ Id. at Appendix D, Section 8.1.3.
---------------------------------------------------------------------------
b. User-Defined Direct Queries and Bulk Extraction of Data
Section 8.2 of Appendix D outlines the requirements for user-
defined direct queries and bulk extraction of data, which regulators
would use to obtain large data sets for internal surveillance or market
analysis.\245\ Under the CAT NMS Plan, regulators must be able to
create, save, and schedule dynamic queries that would run directly
against processed and/or unlinked CAT Data.\246\ Additionally, CAT must
provide an open application program interface (``API'') that allows use
of analytic tools and database drivers to access CAT Data.\247\ Queries
submitted through the open API must be auditable and the CAT System
must contain the same level of control, monitoring, logging, and
reporting as the online targeted query tool.\248\ The Plan Processor
must also provide procedures and training to regulators that would use
the direct query feature.\249\ Sections 8.2.1 and 8.2.2 of Appendix D
contain additional specifications for user-defined direct queries and
bulk data extraction, respectively.\250\
---------------------------------------------------------------------------
\245\ Id. at Appendix D, Section 8.2.
\246\ Id.
\247\ Id.
\248\ Id. Direct queries must not return or display PII data but
rather display non-PII unique identifiers (e.g., Customer-ID or Firm
Designated ID). The PII corresponding to these identifiers could be
gathered using the PII workflow described in Appendix D, Data
Security, PII Data Requirements. See id. at Appendix D, Section
4.1.6.
\249\ Id. at Appendix D, Section 8.2.
\250\ Id. at Appendix D, Sections 8.2.1 and 8.2.2.
---------------------------------------------------------------------------
c. Regulatory Access Schedule
Section A.2 of Appendix C addresses the time and method by which
CAT
[[Page 30648]]
Data would be available to regulators.\251\ Section A.2(a) requires
that data be available to regulators any point after the data enters
the Central Repository and passes basic format validations.\252\ After
errors are communicated to CAT Reporters on T+1, CAT Reporters would be
required to report corrected data back to the Central Repository by 8
a.m. Eastern Time on T+3.\253\ Regulators must then have access to
corrected and linked Order and Customer data by 8:00 a.m. Eastern Time
on T+5.\254\ Section A.2(b) generally describes Bidders' approaches
regarding regulator access and use of CAT Data and notes that although
the SROs set forth the standards the Plan Processor must meet, they do
not endorse any particular approach.\255\ Section A.2(c) outlines
requirements the Plan Processor must meet for report building and
analysis regarding data usage by regulators, consistent with, and in
addition to, the specifications outlined in Section 8 of Appendix
D.\256\
---------------------------------------------------------------------------
\251\ Id. at Appendix C, Section A.2.
\252\ Id. at Appendix C, Section A.2(a). Appendix C, Section
A.3(e) indicates this would be no later than noon EST on T+1. Id. at
Appendix C, Section A.3(e).
\253\ Id. at Appendix C, Section A.1(a)(iv); Appendix D, Section
6.1.
\254\ Id. at Appendix C, Section A.2(a).
\255\ Id. at Appendix C, Section A.2(b).
\256\ Id. at Appendix C, Section A.2(c). Appendix C, Section
A.2(d) addresses system service level agreements that the SROs and
Plan Processor would enter into. Id. at Appendix C, Section A.2(d).
---------------------------------------------------------------------------
Request for Comment \257\
---------------------------------------------------------------------------
\257\ See Section IV.H.5, infra, for further regulatory access
related requests for comment.
---------------------------------------------------------------------------
190. Do Commenters believe the CAT NMS Plan's ``Functionality of
the CAT System'' Section (Section 8 of Appendix D) describes with
sufficient detail how a regulator would access, use and analyze CAT
Data? If not, describe what, if any, additional requirements and
details should be provided and how.
191. Do Commenters believe the CAT NMS Plan's ``Functionality of
the CAT System'' Section sufficiently addresses all regulators' end-
user requirements? If not, please explain. Describe what, if any,
additional requirements and details should be provided and how.
192. If Commenters believe that the CAT NMS Plan's ``Functionality
of the CAT System'' Section does not cover all regulators' end-user
requirements, please describe how regulators would integrate their
applications in a timely and reasonable manner.
193. The CAT NMS Plan permits the CAT to be implemented in a way
that would (1) require regulators to download entire data sets and
analyze such data within the regulator or the regulators' cloud or (2)
permit regulators to analyze sets of data within the CAT using
applications or programs selected by the Commission. What do Commenters
believe are the advantages and disadvantages to each approach?
194. Do Commenters believe the CAT NMS Plan's T+5 schedule for
regulatory access to corrected and linked Order and Customer data is
the appropriate schedule in light of current industry standards? If
not, why not? Do Commenters believe that the SROs' determination of
current industry standards is reasonable or appropriate? Do Commenters
believe that it is appropriate to base the timing for regulatory access
on industry standards? Why or why not?
195. If the T+5 schedule is not appropriate, when do Commenters
believe regulatory access to corrected and linked Order and Customer
data should be provided and why? Do Commenters believe the SROs' should
include in the CAT NMS Plan detailed provisions with milestones in
achieving a more accelerated regulatory access schedule to corrected
and linked Order and Customer data?
196. Do Commenters believe the Plan's proposed error correction
timeframe--i.e., communication of errors on T+1, corrected data
resubmitted by CAT Reporters by T+3, and corrected data available to
regulators by T+5--is feasible and appropriate in light of current
industry standards? If not, why not, and how long do Commenters believe
these error correction timeframes should be and why? Are shorter
timeframes feasible and appropriate in light of current industry
standards? Why or why not?
197. To what extent do Commenters believe the CAT NMS Plan's T+5
regulatory access schedule to corrected and linked Order and Customer
data would affect the accuracy, completeness, accessibility and/or
timeliness of CAT Data collected and maintained under the CAT? How?
198. To what extent do Commenters believe the Plan's three-day
window of error correction would affect the accuracy, completeness,
accessibility and/or timeliness of CAT Data collected and maintained
under the CAT? How?
199. Regulators' technology teams would be required to work with
the Plan Processor to integrate their applications under the CAT NMS
Plan. What, if any, are the risks to this approach? Should the Plan
Processor be required to enter into support contracts with regulators?
If so, please explain. Describe what, if any, service contract terms
should be set forth in the CAT NMS Plan or set forth in any related
documents. Do Commenters have any concerns about the security or
confidentiality of CAT Data resulting from a service contract between
the Plan Processor and the regulators? If so, please explain. If
Commenters have any security or confidentiality concerns resulting from
a service contract between the Plan Processor and the regulators,
please specify any appropriate service contract terms that would
address the concerns.
200. How do Commenters believe the Plan Processor should set
pricing for a regulator seeking additional functionality from the Plan
Processor under the CAT? What, if anything, do Commenters believe
should govern pricing for additional functionality by the Plan
Processor? For example, should pricing or contract standards (e.g.,
reasonable, commercially reasonable, etc.), agreed-upon profit
margins--or minimums and maximums, etc.--be included under the CAT NMS
Plan or any related documentation? If so, please explain.
201. Do Commenters believe the CAT NMS Plan appropriately
encourages or incentivizes the Participants and the Plan Processor to
incorporate new technology and to innovate? Does the CAT NMS Plan
appropriately encourage or incentivize the Plan Processor to have a
flexible and scalable solution? Do Commenters believe that the CAT NMS
Plan would result in a CAT that has adequate system flexibility and
scalability to incorporate improvements in technology and future
regulatory, analytic and data capture needs? Why or why not?
202. Does the regulatory access approach set forth in the CAT NMS
Plan provide regulators with sufficient tools to maximize their
regulatory activities, actions, and improve their surveillances? If
not, why not and what should be added?
203. The CAT NMS Plan provides that targeted queries and data
extractions would be logged so that the Plan Processor can provide the
Operating Committee, the Participants, and the Commission with monthly
performance and usage reports including data such as the user ID of the
person submitting the query and the parameters of the query. Do
Commenters believe that the data to be recorded in these logs and
provided in these reports to each Participant and to the SEC would be
appropriate and useful? Should any data elements be added or removed
from these reports?
204. Do Commenters believe it is appropriate for the Plan Processor
and the Operating Committee to also have access to these logs and
monthly performance and usage reports? How should the Plan Processor
and
[[Page 30649]]
Operating Committee be permitted to use these logs and reports? To the
extent that these logs and reports are accessible by the Plan Processor
and the Operating Committee, should any data elements be added or
removed? Should additional details or requirements be added to the CAT
NMS Plan to clarify what the content of these logs and reports would be
and which parties would have access to them?
12. Security, Confidentiality, and Use of Data
The CAT NMS Plan provides that the Plan Processor is responsible
for the security and confidentiality of all CAT Data received and
reported to the Central Repository, including during all communications
between CAT Reporters and the Plan Processor, data extraction, data
manipulation and transformation, loading to and from the Central
Repository, and data maintenance by the Central Repository.\258\ The
Plan Processor must, among other things, require that individuals with
access to the Central Repository agree to use CAT Data only for
appropriate surveillance and regulatory activities and to employ
safeguards to protect the confidentiality of CAT Data.\259\
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\258\ See CAT NMS Plan, supra note 3, at Section 6.5(f)(i),
(iv).
\259\ Id. at Section 6.5(f)(i).
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In addition, the Plan Processor must develop a comprehensive
information security program as well as a training program that
addresses the security and confidentiality of all information
accessible from the CAT and the operational risks associated with
accessing the Central Repository.\260\ The Plan Processor must also
designate one of its employees as Chief Information Security Officer;
among other things, the Chief Information Security Officer is
responsible for creating and enforcing appropriate policies,
procedures, and control structures regarding data security.\261\ The
Technical Specifications, which the Plan Processor must publish, must
include a detailed description of the data security standards for
CAT.\262\
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\260\ Id. at Sections 6.1(m), 6.12.
\261\ Id. at Section 6.2(b).
\262\ Id. at Section 6.9.
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Appendix D of the CAT NMS Plan sets forth minimum data security
requirements for CAT that the Plan Processor must meet.\263\ For
example, Appendix D enumerates various connectivity, data transfer, and
encryption requirements such as that the CAT System must have encrypted
internet connectivity, CAT Reporters must connect to CAT infrastructure
using secure methods such as private lines or virtual private network
connections over public lines, CAT Data must be encrypted in flight
using industry standard best practices, PII data must be encrypted both
at rest and in flight, and CAT Data stored in a public cloud must be
encrypted at rest.\264\ Additional requirements regarding data storage,
data access, breach management, and PII data are also specified in
Appendix D.\265\
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\263\ Id. at Appendix D, Section 4.
\264\ Id. at Appendix D, Section 4.1.1, 4.1.2.
\265\ Id. at Appendix D, Section 4.1.3-4.1.6.
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In addition, the Participants must establish and enforce policies
and procedures that ensure the confidentiality of the CAT Data obtained
from the Central Repository, limit the use of CAT Data obtained from
the Central Repository solely for surveillance and regulatory
purposes,\266\ implement effective information barriers between each
Participant's regulatory and non-regulatory Staff with regard to CAT
Data, and limit access to CAT Data to designated persons.\267\ However,
a Participant may use the Raw Data \268\ it reports to the Central
Repository for ``commercial or other'' purposes if not prohibited by
applicable law, rule or regulation.\269\
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\266\ The Commission notes that regulatory purposes includes,
among other things, analysis and reconstruction of market events,
market analysis and research to inform policy decisions, market
surveillance, examinations, investigations, and other enforcement
functions.
\267\ Id. at Section 6.5(f)(ii), (g).
\268\ Raw data is defined as ``Participant Data and Industry
Member Data that has not been through any validation or otherwise
checked by the CAT System.'' Id. at Section 1.1.
\269\ Id. at Section 6.5(f)(i).
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Request for Comment
205. Do Commenters believe that the CAT NMS Plan appropriately
allocates responsibility for the security and confidentiality of CAT
Data among the Participants, the Plan Processor, and other parties? If
not, how should these responsibilities be allocated?
206. Do Commenters believe that the data security requirements set
out in Appendix D are appropriate and reasonable? Should any additional
details or requirements be provided?
207. What, if any, specific details or requirements regarding data
security and confidentiality do Commenters believe should be included
in the information security program, training program, and Technical
Specifications to be developed by the Plan Processor? Should additional
details on the content of these programs and specifications be
provided?
208. What, if any, specific details or requirements regarding data
confidentiality do Commenters believe should be included in the
policies and procedures to be developed by the Participants? Should
additional details on the content of these policies and procedures be
provided?
209. Do Commenters believe that the CAT NMS Plan includes
sufficient safeguards to prevent the misuse of CAT Data by employees or
agents of the Participants or other persons with access to the Central
Repository? For example, do Commenters believe that requiring
information barriers between regulatory and non-regulatory staff \270\
and permitting the use of CAT Data only for regulatory, surveillance,
and commercial or other purposes as permitted by law \271\ are
effective measures to prevent the misuse of CAT Data? Should the CAT
NMS Plan set forth additional detail regarding the distinction between
regulatory and non-regulatory staff and between the appropriate and
inappropriate use of CAT Data for commercial or other purposes? Should
the CAT NMS Plan prescribe any specific information barriers? If so,
what should be prescribed in the CAT NMS Plan?
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\270\ See id. at Section 6.5(f)(ii)(A).
\271\ See id. at Section 6.5(f)(i)(A).
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210. Do Commenters believe the data access and breach management
provisions described in Appendix D of the CAT NMS Plan \272\ are
effective mechanisms for monitoring and preventing the misuse of CAT
Data? Why or why not? Would any additional details or requirements make
these provisions more effective?
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\272\ See id. at Appendix D, Sections 4.1.4, 4.1.5.
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211. Which persons or entities should have the responsibility to
monitor for and prevent the misuse of CAT Data? For example, should the
Chief Compliance Officer or the Chief Information Security Officer have
this responsibility? Why or why not? Should additional details be
provided to clarify where this responsibility lies?
212. Do Commenters believe it is appropriate for Participants to be
permitted to use all Raw Data reported to the Central Repository for
commercial purposes? If not, what particular types of Raw Data would be
inappropriate to use for commercial purposes?
213. Do Commenters believe that the CAT NMS Plan adequately
addresses the protection and security of PII in CAT? If not, why not
and what should be added to the CAT NMS Plan? For example, should the
CAT NMS Plan provide that PII is accessible only when required, that
PII be properly masked,
[[Page 30650]]
and/or that it be safeguarded such that it would not be improperly
accessible?
214. Do Commenters believe that there are alternative methods or
information that could be used in lieu of requiring the reporting of
Customer PII to the Central Repository that, without diminishing the
quality of CAT Data available to regulators or impairing regulators'
ability to use CAT Data to carry out their functions, would create less
risk of a breach of the security or confidentiality of the personal
information of Customers? If so, what methods or information,
specifically, could serve as such an alternative to PII? \273\
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\273\ See Section III.B.7, supra, for additional PII related
requests for comment.
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215. Do Commenters believe that the CAT NMS Plan includes adequate
requirements regarding the operational security of the CAT System?
What, if any, additional details or requirements should be provided?
Should the CAT NMS Plan require the Plan Processor to have the ability
to monitor for threats, attacks, and anomalous activity on a 24/7 basis
through a Security Operations Center (``SOC'') or a similar capability?
What would be the costs and benefits of such a requirement?
216. Appendix C of the CAT NMS Plan discusses solutions for
encrypting data at rest and in motion. Appendix D of the CAT NMS Plan
states that all CAT Data must be encrypted in flight, and PII Data must
encrypted in flight and at rest. Do Commenters believe that the Plan's
data encryption requirements are adequate for CAT Data and PII Data?
Why or why not? Do Commenters believe that the CAT NMS Plan provides
sufficient information and clarity regarding data encryption
requirements? Do Commenters believe that there is a particular method
for data encryption, in motion and/or at rest, that should be used?
217. Appendix D, Section 4.1.1 of the CAT NMS Plan states that the
CAT System must have ``encrypted internet connectivity.'' What are the
risks, if any, of allowing Internet access from the Central Repository,
even if encrypted? Please explain. Do Commenters believe that the
encrypted connection requirement in the CAT NMS Plan should apply to
communication paths from the Central Repository to the Internet and/or
connections from CAT to/from trusted parties? What challenges would the
Plan Processor face in implementing either option? Does one option
provide more robust security than the other? Why or why not?
218. To the extent the requirement for ``encrypted internet
connectivity'' applies to connectivity between the Central Repository
and trusted parties such as the Commission and the Participants, do
Commenters believe that the CAT NMS Plan should require that these
parties and the Plan Processor enter into formal Memoranda of
Understanding or Interconnection Security Agreements that document the
technical, operational, and management details regarding the interface
between the CAT System and these parties? Why or why not?
219. With respect to industry standards, do Commenters believe that
the CAT NMS Plan should be updated to include standards and
requirements of other NIST Special Publications (``SPs'') that were not
mentioned in Appendix D (e.g., NIST SP 800-86 for incident handling,
800-44 for securing public-facing web servers, 800-146 for cloud
security)? Why or why not?
220. Do Commenters believe that the Plan should be updated more
broadly to include the NIST family of guidance documents? Why or why
not?
221. Throughout the Plan, there are numerous references to
leveraging ``industry best practices'' pertaining to compliance
subjects such as system assessments and disaster recovery/business
continuity planning. How do ``industry best practices'' compare to NIST
guidance in these areas? Do Commenters believe that the Plan Processor
should implement NIST guidance for the Plan rather than industry best
practices? Why or why not?
222. The CAT NMS Plan states that the Plan Processor must conduct
third party risk assessments at regular intervals to verify that
security controls implemented are in accordance with NIST SP 800-
53.\274\ Do Commenters believe that the CAT NMS Plan should adopt the
meaning and terminology of Security Assessment and Authorization as
defined by the NIST and/or other NIST guidance in the CAT NMS Plan,
particularly within the requirements set forth in Appendix D to the CAT
NMS Plan? Why or why not?
---------------------------------------------------------------------------
\274\ See CAT NMS Plan, supra note 3, at Appendix D, Section
5.3.
---------------------------------------------------------------------------
223. Do Commenters believe that the CAT NMS Plan should include
requirements regarding how the Plan Processor should categorize data
from a security perspective? For example, should the Plan Processor be
required to implement data categorization standards consistent with
Federal Information Processing Standard (``FIPS'') 199 or NIST SP 800-
60? Why or why not? Would including data categorization requirements in
the CAT NMS Plan improve data integrity, availability, segmentation,
auditing, and incident response? Why or why not?
224. The CAT NMS Plan provides that CAT must follow NIST SP 800-
137--Information Security Continuous Monitoring for Federal Information
Systems and Organizations in addition to a limited number of related
monitoring provisions.\275\ Do Commenters believe that the CAT NMS Plan
provides sufficient and robust information related to continuous
monitoring program requirements? Why or why not?
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\275\ See id. at Sections 6.1(g), 6.10(c), Appendix C, Section
A.4, Appendix D, Sections 2.2, 4.1.2, 4.1.4, 4.2, 8.3, 8.4.
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225. Do Commenters believe the CAT NMS Plan adequately sets forth
the roles and responsibilities of independent third party risk
assessment functions, including the consistent description of their
specific functions and performance frequency? For example, are the CAT
NMS Plan independent third party risk assessment provisions consistent
with ``industry best practices''? Or should the CAT require a greater
or lesser performance frequency than as described in the CAT NMS Plan?
As another example, do the technical assessments described in Section
6.2, Appendix C, Section A.5, and the NIST SP 800-53 requirements noted
in Appendix D, Section 4.2, adequately and clearly establish the roles
and responsibilities of the parties assessing the technical aspects of
the CAT?
226. Do Commenters believe the CAT NMS Plan should specify the
general audit and independent assessment requirements and the proper
timeframes for when those assessments should occur? For instance, are
there assessments that may need to occur on an annual basis? If so,
what are those assessments? Are there assessments that may need to
occur more frequently? If so, what are those assessments and why do
they need to occur more frequently?
227. Do Commenters believe that the CAT NMS Plan requirements for
conducting ad hoc penetration testing and an application security code
audit by a reputable third-party in Appendix D, Section 4.1.3 ``prior
to launch'' and periodically as defined by SLAs are consistent with
industry best practices? Should additional testing or audits be
required? Why or why not? Should testing or audits be required to occur
more frequently than required by the CAT NMS Plan and SLAs? Why or why
not?
228. Do Commenters believe that the third party risk assessments
and penetration tests required by the CAT
[[Page 30651]]
NMS Plan could themselves compromise the security or confidentiality of
CAT Data? Please explain.
229. In Section 6.2(b)(vi) of the CAT NMS Plan, the Chief
Information Security Officer is required to report to the Operating
Committee the activities of the Financial Services Information Sharing
and Analysis Center (``FS-ISAC'') or other comparable body. Do
Commenters believe there are other cyber and threat intelligence
bodies, in addition to FS-ISAC, that the Plan Processor should join?
Why or why not?
230. Do Commenters believe the CAT NMS Plan effectively describes
the verification process when CAT Reporters connect to the Central
Repository network? For example, which specific individual(s) at a CAT
Reporter would be allowed access to CAT for reporting and verification
purposes? Should there be a public key exchange process?
231. Do Commenters believe the CAT NMS Plan provides sufficient
detail regarding the ability of CAT to determine whether a regulator's
queries are shielded from the Plan Processor (including its staff,
officers, and administrators) as well as other regulators and users of
CAT? If not, what specifically should be added to the CAT NMS Plan?
232. Do Commenters believe that the CAT NMS Plan should require an
audit of all CAT Reporters' data security? If so, which person or
entity should have responsibility for such an audit, and what should
the scope and elements of the audit be? Please estimate the cost of
such audits. What other changes, if any, should be made to the CAT NMS
Plan to provide for the allocation of sufficient resources whereby such
an audit could be carried out?
233. Do Commenters believe the CAT NMS Plan should require the Plan
Processor to provide a ``blanket'' security authorization to operate
(``ATO'') document (or its equivalent) prior to CAT Reporters sending
CAT Data?
IV. Economic Analysis
A. Introduction
When adopting Rule 613, the Commission noted that the adopted Rule
permitted the SROs to consider a wider array of solutions than did the
proposed Rule. The Commission stated its belief that, as a result,
``the economic consequences of the consolidated audit trail now will
become apparent only over the course of the multi-step process for
developing and approving an NMS plan that will govern the creation,
implementation, and maintenance of a consolidated audit trail.'' \276\
In particular, the Commission noted its belief that ``the costs and
benefits of creating a consolidated audit trail, and the consideration
of specific costs as related to specific benefits, is more
appropriately analyzed once the SROs narrow the expanded array of
choices they have under the adopted Rule and develop a detailed NMS
plan.'' \277\ The Commission also noted that a ``robust economic
analysis of . . . the actual creation and implementation of a
consolidated audit trail itself . . . requires information on the
plan's detailed features (and their associated cost estimates) that
will not be known until the SROs submit their NMS plan to the
Commission for its consideration.'' \278\ Accordingly, the Commission
deferred its economic analysis of the actual creation, implementation,
and maintenance of the CAT until after submission of an NMS plan.
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\276\ See Adopting Release, supra note 9, at 45725-6.
\277\ Id.
\278\ Id. at 45726.
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To assist in that analysis, Rule 613, as adopted, requires that the
SROs: (1) Provide an estimate of the costs associated with creating,
implementing, and maintaining the consolidated audit trail under the
terms of the NMS plan submitted to the Commission for its
consideration; (2) discuss the costs, benefits, and rationale for the
choices made in developing the NMS plan submitted; and (3) provide
their own analysis of the submitted NMS plan's potential impact on
competition, efficiency and capital formation.\279\ The Commission
stated that it believed that these estimates and analyses would help
inform public comment regarding the CAT NMS Plan and would help inform
the Commission as it evaluates whether to approve the CAT NMS
Plan.\280\
---------------------------------------------------------------------------
\279\ Id.; see also 17 CFR 242.613(a)(1)(vii), (viii), (xi),
(xii).
\280\ See Adopting Release, supra note 9, at 45726. Rule
613(a)(5) requires that ``[i]n determining whether to approve the
national market system plan, or any amendment thereto, and whether
the national market system plan or any amendment thereto is in the
public interest under [Rule] 608(b)(2), the Commission shall
consider the impact of the national market system plan or amendment,
as applicable, on efficiency, competition, and capital formation.''
17 CFR 242.613(a)(5).
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The Commission is sensitive to the economic effects of the CAT NMS
Plan,\281\ including its costs and benefits and its impact on
efficiency, competition and capital formation. In the Adopting Release
for Rule 613, the Commission considered the economic effects of the
actions the SROs were required to take upon approval of the adopted
Rule, specifically the requirement that the SROs develop an NMS plan,
utilizing their own resources and undertaking their own research, that
addresses the specific details, cost estimates, considerations, and
other requirements of the Rule.\282\ As noted in the Adopting Release,
however, Rule 613 provided the SROs with ``flexibility in how they
[chose] to meet the requirements of the adopted Rule,'' \283\ allowing
the SROs to consider a number of different approaches in developing the
CAT NMS Plan.
---------------------------------------------------------------------------
\281\ See CAT NMS Plan, supra note 3.
\282\ See Adopting Release, supra note 9, at 45726.
\283\ Id. at 45725.
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In accordance with the approach articulated by the Commission in
the Adopting Release, the Commission is hereby publishing its economic
analysis of the CAT NMS Plan and is soliciting comment thereon. This
Section reflects the Commission's preliminary analysis and conclusions
regarding the economic effects of the creation, implementation and
maintenance of the CAT pursuant to the details proposed in the NMS plan
submitted to the Commission for its consideration. The analysis is
divided into eight topics: (1) A summary of the expected economic
effects of approving the CAT NMS Plan; (2) a description of the
economic framework for analyzing the economic effects of approving the
CAT NMS Plan; (3) a discussion of the current, or ``Baseline,'' audit
trail data available to regulators, and the sources of such data; (4) a
discussion of the potential benefits of the CAT NMS Plan; (5) a
discussion of the potential costs of the CAT NMS Plan; (6) an economic
analysis of the CAT NMS Plan's impact on efficiency, competition, and
capital formation; (7) a discussion of alternatives to various features
of the CAT NMS Plan and to the CAT NMS Plan itself; and (8) a request
for comment on the Commission's preliminary economic analysis.
B. Summary of Expected Economic Effects
As the Commission explained in the Adopting Release, the Commission
believes that the regulatory data infrastructure on which the SROs and
the Commission currently must rely is outdated for effective oversight
of a complex, dispersed, and highly automated national market
system.\284\ In performing their oversight responsibilities, regulators
today must attempt to cobble together disparate data from a variety of
existing information systems, each lacking in completeness,
[[Page 30652]]
accuracy, accessibility, and/or timeliness--a model that neither
supports the efficient aggregation of data from multiple trading venues
nor yields the type of complete and accurate market activity data
needed for robust market oversight.\285\ The Commission has analyzed
the expected economic effects of the CAT NMS Plan in light of these
existing shortcomings and the goal of improving the ability of SROs and
the Commission to perform their regulatory activities to the benefit of
investors.\286\
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\284\ See id. at 45723.
\285\ See id.
\286\ The Commission noted current SRO audit trail limitations
in the Proposing Release and the Adopting Release. See Proposing
Release, supra note 9, at 32563-68; Adopting Release, supra note 9,
at 45726-30. Rule 613 is designed to address these limitations.
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In general, the Commission preliminarily believes that, if
approved, the CAT NMS Plan would result in benefits by improving the
quality of the data available to regulators in four areas that affect
the ultimate effectiveness of core regulatory efforts--completeness,
accuracy, accessibility and timeliness.\287\ The Commission
preliminarily believes that the improvements in these data qualities
that would be realized from approval of the CAT NMS Plan would
substantially improve regulators' ability to perform analysis and
reconstruction of market events, and market analysis and research to
inform policy decisions, as well as perform other regulatory
activities, in particular market surveillance, examinations,
investigations, and other enforcement functions. Regulators depend on
data for many of these activities and the improvements in the data
qualities would thus improve the efficiency and effectiveness of such
regulatory activities. As explained further below, these improvements
could benefit investors by giving regulators more and better regulatory
tools to provide investors with a more effectively regulated trading
environment,\288\ which could increase capital formation, liquidity,
and price efficiency. Data improvements could enhance regulators'
ability to provide investors and the public with more timely and
accurate analysis and reconstruction of market events, and to develop
more effective responses to such events.\289\ Improved understanding of
emerging market issues resulting from enhanced market analysis and
research could inform regulatory policies that improve investor
protection through better market quality, more transparency, and more
efficient prices.
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\287\ See Adopting Release, supra note 9, at 45727 (discussing
four ``qualities'' of trade and order data that impact the
effectiveness of core SRO and Commission regulatory efforts:
Accuracy, completeness, accessibility, and timeliness); see also
Section IV.E, infra, for a detailed discussion of the expected
benefits of the CAT NMS Plan.
\288\ See Section IV.E.2, infra.
\289\ See Section IV.E.2.a, infra.
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In terms of completeness, the Plan requires the reporting of
certain additional data fields, events, and products.\290\ More
importantly, the CAT NMS Plan requires certain data elements useful for
regulatory analysis to be available from a single data source. Having
relevant data elements available from a single source would simplify
regulators' data collection process and facilitate more efficient
analyses and surveillances that incorporate cross-market and cross-
product data.
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\290\ See CAT NMS Plan, supra note 3, at Sections 6.3, 6.4; see
also 17 CFR 242.613(c)(7).
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With respect to the accuracy of available data, the Commission
preliminarily believes that the requirements in the Plan would improve
data accuracy significantly. For example, the Commission expects that
the requirements to store the CAT Data in a uniform linked format and
the use of consistent identifiers for customers and market participants
would result in fewer inaccuracies as compared to current data sources.
These accuracy improvements should significantly reduce the time
regulators spend processing the data and finding solutions when faced
with inaccurate data. The Commission preliminarily believes that the
requirements in the Plan for clock synchronization and time stamp
granularity would improve the accuracy of data with respect to the
timing of market events, but the improvements would be modest. The
Commission preliminarily believes that the Plan would improve
regulators' ability to determine the sequence of a small percentage of
market events relative to all surrounding events.\291\
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\291\ The CAT NMS Plan would also require that CAT Reporters'
business clocks be synchronized to within 50 milliseconds of the
time maintained by the NIST, which would increase the precision of
the time stamps provided by the 39% of broker-dealers who currently
synchronize their clocks with less precision than what is called for
by the Plan. See supra note 125. Independent of the potential time
clock synchronization benefits, the order linking data that would be
captured in CAT should increase the proportion of events that could
be sequenced accurately. This reflects the fact that some records
pertaining to the same order could be sequenced by their placement
in an order lifecycle (e.g., an order submission must have occurred
before its execution) without relying on time stamps. This
information may also be used to partially sequence surrounding
events.
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The Commission also preliminarily believes that the Plan would
increase the accessibility of data for SROs and the Commission, because
regulators would be able to access the CAT Data directly.\292\ This,
coupled with the improvements in completeness, would vastly increase
the scope of information readily available to regulators and
significantly reduce the number of data requests from the several
hundred thousand requests regulators make each year. The increased
scope of readily available information should facilitate more data-
driven regulatory policy decisions, broaden the potential
surveillances, expand the opportunities for SRO and Commission analysis
to help target broker-dealers and investment advisers for examinations
and help to perform those examinations.
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\292\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.2, Appendix D, Section 8.1; see also 17 CFR 242.613(e)(2).
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Finally, the Commission preliminarily believes that the CAT NMS
Plan would improve the timeliness of available data. Because regulators
would be able to access uncorrected data the day after an order event
and would be able to access corrected and linked data five days after
an order event,\293\ many data elements would be available to
regulators more quickly than they are currently and the amount of time
regulators would need to acquire and process data before running
analyses would be reduced. For example, the corrected and linked data
available on T+5 would identify the customer account associated with
all order events, information that currently takes ten days or longer
for regulators to obtain and then need to link to other data sources
for use. These improvements in timeliness, combined with improvements
in completeness, accessibility, and accuracy discussed above, would
improve the efficiency of regulatory analysis and reconstruction of
market events, as well as market analysis and research that informs
policy decisions, and make market surveillance, examinations,
investigations, and other enforcement functions more efficient,
allowing, for example, the SROs and the Commission to review tips and
complaints more effectively.
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\293\ CAT Data would be reported by 8:00 a.m. Eastern Time on
day T+1 and made available to regulators in raw form after it is
received and passes basic formatting validations with an error
correction process completed by 8:00 a.m. Eastern Time on day T+5.
While the Plan does not specify exactly when these validations would
be complete, the requirement to link records by 12:00 p.m. Eastern
Time on day T+1 gives a practical upper bound on this timeline. See
CAT NMS Plan, supra note 3, at Appendix C, Sections A.2(a), A.3(a),
Appendix D, Section 6.2.
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The Commission notes that the Plan lacks information regarding the
details of certain elements of the Plan likely to affect the costs and
benefits associated
[[Page 30653]]
with it, primarily because those details have not yet been determined,
and this lack of information creates some uncertainty about the
expected economic effects. As discussed further below, lack of
specificity surrounding the processes for converting data formats and
linking related order events creates uncertainty as to the anticipated
improvements in accuracy because such processes have the potential to
create new data inaccuracies. Lack of specificity surrounding the
process for regulators to access the CAT Data also creates uncertainty
around the expected improvements in accessibility. For example, while
the Plan indicates that regulators would have an on-line targeted query
tool and a tool for user-defined direct queries or bulk
extraction,\294\ the Plan itself does not provide an indication for how
user-friendly the tools would be or the particular skill set needed to
use the tools for user-defined direct queries. However, the Commission
has analyzed the expected economic effects of the Plan to the extent
possible with the information available, noting areas of uncertainty in
its analysis where applicable. The Commission has also considered
whether certain provisions related to the operation and administration
of the Plan could mitigate some of the uncertainties.\295\
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\294\ See CAT NMS Plan, supra note 3, at Appendix D, Sections
8.1.1, 8.1.2.
\295\ See Section IV.E.3.d, infra.
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The Commission also preliminarily believes that more effective and
efficient regulation of securities markets and market participants
resulting from approval of the CAT NMS Plan could significantly benefit
investors and the integrity of the market. For example, the Commission
preliminarily believes that more effective and efficient surveillance
and enforcement would detect a higher proportion of violative market
activity. This additional detection could not only reduce violative
behavior through potential enforcement actions, but through deterrence
if market participants believe violative activities are more likely to
be detected. Because violative activity degrades market quality and
imposes costs on investors and market participants, reductions in
violative activity would benefit investors and market integrity.
Likewise, more effective and efficient risk assessment and risk-based
examinations should more effectively facilitate the selection of market
participants for examination who have characteristics that elevate
their risk of violating the rules. Decreasing the amount of violative
activity by targeting exams in this way would provide investors with a
more effectively regulated trading environment and hence better market
quality. Further, access to audit trail data that is comprehensive,
accurate, and timely could improve regulatory reconstruction of market
events, market analysis, and research resulting in an improved
understanding of emerging market issues and regulatory policies that
better encourage industry competition, thus improving investor
protection through better transparency and more efficient prices.\296\
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\296\ See Section IV.E.2.a, IV.E.2.b, infra.
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Further, regulatory initiatives that are based on a more thorough
understanding of underlying events and their causes, and that are
narrowly tailored to address any market deficiency, could improve
market quality and thus benefit investors. Moreover, access to more
complete and linked audit trail data would improve regulators' ability
to analyze and reconstruct market events, allowing regulators to
provide investors and the public with more accurate explanations of
market events, to develop more effective responses to such events, and
to use the information to assist in retrospective analyses of their
rules and pilots.
The Commission has also evaluated the potential costs that would
result from approval of the CAT NMS Plan. In particular, using
information included in the Plan, information gathered from market
participants through discussions, surveys of market participants, and
other relevant information, the Commission has preliminarily estimated
the potential costs associated with building and maintaining the
Central Repository as well as the costs to report data to the Central
Repository. Currently, the 20 Participants spend $154.1 million
annually on reporting regulatory data and performing surveillance,
while the approximately 1,800 broker-dealers anticipated to have CAT
reporting responsibilities spend $1.6 billion annually on regulatory
data reporting, for total current industry costs of $1.7 billion
annually for regulatory data reporting and surveillance by SROs. The
Commission preliminarily estimates the cost of the Plan as
approximately $2.4 billion in initial aggregate implementation costs
and recurring annual costs of $1.7 billion.\297\ The primary driver of
the annual costs is the data reporting costs for broker-dealers, which
are estimated to be $1.5 billion per year. For both large and small
broker-dealers, the primary driver of both current $1.6 billion
reporting costs and projected $1.5 billion CAT reporting costs is costs
associated with staffing. Estimates of the costs to build the Central
Repository are based on Bids that vary in a range as high as $92
million. Current estimates of annual operating costs are based on Bids
that vary in a range up to $135 million. The eventual magnitude of
Central Repository costs is dependent on the Participants' selection of
the Plan Processor, and may ultimately differ from estimates discussed
above if Bids are revised as the bidding process progresses.
Furthermore, the Plan anticipates a period of duplicative reporting
responsibilities preceding the retirement of potentially duplicative
regulatory data reporting systems; these duplicative reporting costs
are likely to be significant.\298\
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\297\ See Section IV.F.2, Table 9, infra.
\298\ The economic analysis discusses duplicative reporting
costs in Section IV.F.2, infra.
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Drawing from the discussion in the CAT NMS Plan,\299\ the
Commission expects that, if approved, the Plan would have a number of
additional economic effects, including effects on efficiency,
competition, and capital formation. The Commission preliminarily
believes that the Plan generally promotes competition. However, the
Commission recognizes that the Plan could increase barriers to entry
because of the costs to comply with the Plan. Further, the Commission's
analysis identifies several limiting factors to competition but Plan
provisions and Commission oversight could address such limiting
factors. The Commission preliminarily believes that the Plan would
improve regulatory analysis and reconstruction of market events, as
well as market analysis and research that informs policy decisions. In
addition, the Plan would improve enforcement related activities,
including the efficiency of regulatory activities such as market
surveillance, examinations, investigations, and other enforcement
functions that could enhance market efficiency by reducing violative
activity that harms market efficiency. Finally, the Commission
preliminarily believes that the Plan could have positive effects on
capital formation and allocative efficiency and that the threat of a
security breach at the Central Repository is unlikely to significantly
harm capital formation. The Commission recognizes that the Plan's
likely effects on competition, efficiency and capital formation are
dependent to some extent on the
[[Page 30654]]
performance and decisions of the Plan Processor and the Operating
Committee in implementing the Plan, and thus there is necessarily some
uncertainty in the Commission's analysis. Nonetheless, the Commission
believes that the Plan contains certain governance provisions, as well
as provisions relating to the selection and removal of the Plan
Processor, that mitigate this uncertainty by promoting decision-making
that could, on balance, have positive effects on competition,
efficiency, and capital formation.
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\299\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8; see also Section IV.G, infra.
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The Commission notes that while the Participants developed the Plan
in compliance with Rule 613 by considering information from industry
representatives, the Commission has discretion to approve the Plan
subject to changes or conditions that the Commission deems necessary or
appropriate.\300\ Therefore, as a part of this economic analysis, the
Commission analyzed numerous alternatives to provisions of the CAT NMS
Plan and to the CAT NMS Plan itself. The Commission analyzes
alternatives to the approaches the Exemption Order permitted the
Participants to include in the Plan; \301\ alternatives to certain
specific approaches in the Plan; alternatives to the scope of certain
specific elements of the Plan; and the broad alternative of modifying
OATS or another existing system to meet the requirements of Rule 613
instead of approving the Plan. Finally, the Commission requests comment
on alternatives discussed in this economic analysis, alternatives
considered in the Plan, and on whether the Commission should consider
any additional alternatives.
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\300\ See 17 CFR 242.608(b)(1) (``No national market system plan
. . . shall become effective unless approved by the Commission . .
.''); 17 CFR 242.608(b)(2) (``Within 120 days of the date of
publication of notice of filing of a national market system plan . .
. the Commission shall approve such plan . . . with such changes or
subject to such conditions as the Commission may deem necessary or
appropriate, if it finds that such plan or amendment is necessary or
appropriate in the public interest, for the protection of investors
and the maintenance of fair and orderly markets, to remove
impediments to, and perfect the mechanisms of, a national market
system, or otherwise in furtherance of the purposes of the Act.'').
\301\ See Exemption Order, supra note 18.
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C. Framework for Economic Analysis
As discussed above, the Commission is conducting an economic
analysis of the CAT NMS Plan filed by the SROs on February 27, 2015, as
amended, as anticipated in the Adopting Release for Rule 613.\302\ In
particular, the Commission has carefully evaluated the information in
the CAT NMS Plan, including the twelve considerations required by Rule
613 \303\ and the details of the decisions left to the discretion of
the SROs. The Commission has also considered information drawn from
outside the Plan in order to assess potential economic effects not
addressed therein. To provide context for this analysis, this Section
describes the economic framework for the analysis and seeks to identify
uncertainties within that framework.
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\302\ See Adopting Release, supra note 9, at 45789.
\303\ See 17 CFR 242.613(a)(1).
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1. Economic Framework
a. Benefits
The CAT NMS Plan would create a new data source that could replace
the use of some current data sources for many regulatory activities. As
such, the economic benefits of the CAT NMS Plan would come from any
expanded and more efficient regulatory activities facilitated by
improvements to the data regulators use. Therefore, the framework for
examining benefits in this economic analysis involves first considering
whether and to what degree the CAT Data would improve on the Baseline
of current trading and order data in terms of the four qualities of
accuracy, completeness, accessibility, and timeliness.\304\
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\304\ See Adopting Release, supra note 9, at 45727.
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Through these improvements in the data, the economic analysis then
considers the degree to which the Plan would result in improvements to
regulatory activities such as the analysis and reconstruction of market
events, in addition to market analysis and research conducted by SROs
and Commission Staff, as well as market surveillance, examinations,
investigations, and other enforcement functions. These potential
improvements, based on the regulatory objectives of the CAT NMS Plan
described in the Adopting Release,\305\ relate to the overall goal of
substantially enhancing the ability of the SROs and the Commission to
oversee securities markets and fulfill their regulatory
responsibilities under the securities laws. The economic analysis
explores how the improvements to these regulatory activities provide
economic benefits to investors and the market. Among other things,
potential benefits that could result from the CAT NMS Plan include
benefits rooted in changes in the behavior of market participants. For
example, requirements to report certain data elements or events to the
CAT could have the beneficial effect of deterring rule violations
because the inclusion of certain data fields and improvements in the
ability to surveil for violations could increase the perceived costs of
violating rules and regulations. Potential benefits could also stem
from improved investor protection, such as from more effective
surveillance and more informed, data-driven rulemaking.
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\305\ See id. at 45730.
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(1) Data Qualities
In the Adopting Release, the Commission identified four qualities
of trade and order data that impact the effectiveness of core SRO and
Commission regulatory efforts: Accuracy, completeness, accessibility,
and timeliness.\306\ In assessing the potential benefits of the CAT NMS
Plan, the Commission's economic analysis compares the data that would
be available under the Plan to the trading and order data currently
available to regulators to determine whether and to what degree the
Plan would improve the available data with respect to those four
qualities.
---------------------------------------------------------------------------
\306\ See id. at 45727. Accuracy refers to whether the data
about a particular order or trade is correct and reliable.
Completeness refers to whether a data source represents all market
activity of interest to regulators, and whether the data is
sufficiently detailed to provide the information regulators require.
While current data sources provide the trade and order data required
by existing rules and regulations, those sources generally do not
provide all of the information of interest to regulators in one
consolidated audit trail. Accessibility refers to how the data is
stored, how practical it is to assemble, aggregate, and process the
data, and whether all appropriate regulators could acquire the data
they need. Timeliness refers to when the data is available to
regulators and how long it would take to process before it could be
used for regulatory analysis. As explained in the Baseline, Section
IV.D, infra, the trading and order data currently available to
regulators suffers from deficiencies in all four dimensions.
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(2) Regulatory Activities
Any economic benefits would derive from how such improved data
would affect regulatory activities. Therefore, to analyze the potential
benefits of the CAT NMS Plan, the economic analysis also evaluates the
potential of the CAT NMS Plan to meet the regulatory objectives set out
in the Adopting Release for Rule 613. The objectives are: Improvements
in the analysis and reconstruction of broad-based market events;
improvements in market analysis in support of regulatory decisions; and
improvements in market surveillance, investigations, and other
enforcement activities.\307\
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\307\ See Adopting Release, supra note 9, at 45730.
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A. Analysis and Reconstruction of Broad-Based Market Events
The economic analysis considers whether and to what extent the CAT
NMS Plan would facilitate regulators'
[[Page 30655]]
performance of analysis and reconstruction of market events,
potentially helping to better inform both regulators and investors
about such market events and speeding the regulatory response following
market events. Regulators perform reconstructions of market events so
that they and the public can be informed by an accurate accounting of
what happened (and, possibly, why it happened). As discussed in the
Benefits Section,\308\ market reconstructions can take a significant
amount of time, in large measure due to various deficiencies in the
currently available trading and order data in terms of the four
qualities described above.\309\ The sooner regulators complete a
reconstruction and analysis of a market event, the sooner investors can
be informed and the sooner regulators can begin reviewing the event to
determine what happened, who was affected and how, and whether the
analysis supports potential regulatory responses.\310\ In addition, the
improved ability for regulators to generate prompt and complete market
reconstructions could provide improved market knowledge, which could
assist regulators in conducting retrospective analysis of their rules
and pilots.
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\308\ See Section IV.E.2.a, infra.
\309\ See Section IV.C.1.a(1), supra.
\310\ See Adopting Release, supra note 9, at 45732.
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B. Market Analysis in Support of Regulatory Decisions
The economic analysis considers whether and to what extent the CAT
NMS Plan would enhance the ability of the SROs and the Commission to
conduct market analysis and research, including analysis of market
structure, and the degree to which it would improve regulators' market
knowledge and facilitate consideration of policy questions of interest.
The SROs and Commission Staff conduct data-driven analysis on market
structure, in direct support of both rulemaking and other regulatory
decisions such as SRO rule approvals. The Commission also relies on
such analysis to improve understanding of market structure in ways that
could inform policy. Finally, SROs conduct market analysis and research
on their own regulatory initiatives. Improvements in the ability to
conduct market analysis could further improve analysis related to
regulatory decisions and potentially influence those regulatory
decisions to the benefit of investors and the markets more generally.
C. Market Surveillance and Investigations
The economic analysis examines whether the CAT NMS Plan would
improve market surveillance and investigations, potentially resulting
in more effective oversight of trading, better investor protection, and
deterrence of violative behavior. As described in more detail in the
Baseline Section,\311\ both SROs and the Commission conduct market
surveillance, examinations, investigations, and other enforcement
functions targeting illegal activities such as insider trading, wash
sales, or manipulative practices. Improvements in market surveillance
and investigations could come in the form of ``facilitating risk-based
examinations, allowing more accurate and faster surveillance for
manipulation, improving the process for evaluating tips, complaints,
and referrals . . ., and promoting innovation in cross-market and
principal order surveillance.'' \312\
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\311\ See Section 0, infra.
\312\ See Adopting Release, supra note 9, at 45730.
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b. Costs
The economic analysis evaluates the costs of building and operating
the Central Repository; the costs of CAT reporting for Participants,
broker-dealers, and service bureaus; and other CAT-related costs. Where
the CAT NMS Plan provides estimates of these costs, the economic
analysis evaluates those estimates and re-estimates them when
necessary. The economic analysis also discusses the drivers of these
costs, and whether broker-dealers may or may not pass these costs down
to their customers. In addition, the economic analysis assesses whether
the CAT NMS Plan has the potential to result in cost savings. Rule 613
requires the Plan to discuss ``[a] plan to eliminate existing rules and
systems (or components thereof) that would be rendered duplicative by
the consolidated audit trail.'' \313\ As a part of its consideration of
the costs of the CAT NMS Plan, the economic analysis considers costs
from duplicative reporting for some period of time as well as potential
cost savings from the retirement of duplicative regulatory reporting
systems.
---------------------------------------------------------------------------
\313\ 17 CFR 242.613(a)(1)(ix).
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The economic analysis also considers whether the CAT NMS Plan could
result in second order effects, such as changes to the behavior of
market participants, that impose certain costs. For example, the CAT
NMS Plan's tiered funding model could lead to costly efforts by market
participants to try to control their tiers in order to affect their fee
payments, such as reducing activity levels near the end of an activity
level measuring period to avoid being classified as a higher activity
level firm. In addition, Participants, their members, and investors
could incur costs if their private information were accessed in the
event of a security breach of the Central Repository. The economic
analysis considers these and other elements of the Plan that could lead
to distortions in behavior by market participants.
2. Existing Uncertainties
The Commission has carefully analyzed the information in the CAT
NMS Plan, as well as other relevant data, in order to assess the
economic effects of the Plan. As discussed throughout the analysis, in
certain cases the Commission lacks information needed to evaluate all
of the potential economic effects of the CAT NMS Plan, creating
uncertainty in some potential benefits and costs. The primary drivers
of uncertainty include the fee schedule applicable to funding the
Central Repository (the ``Funding Model''), which has not yet been
finalized, the deferral of decisions on certain discretionary elements
including the Technical Specifications applicable to the CAT, and a
lack of detailed information that would enable the Commission to assess
certain economic effects with greater precision. The implications of
each primary area of uncertainty for the Commission's economic analysis
are discussed below.
First, as noted above, the economic analysis evaluates information
provided in the CAT NMS Plan on the economic effects of the Plan, as
well as information drawn from outside of the Plan. However, the
Commission lacks detailed information regarding some of the individual
costs and discretionary decisions in the Plan, including the Funding
Model. Specifically, the Plan does not outline the proportion of CAT
costs that would be allocated to Participants versus broker-dealers.
This uncertainty limits the Commission's ability to evaluate the
economic effects of the Plan in some cases. However, the Commission has
analyzed the expected economic effects of the Plan to the extent
possible with the information available, and where the Commission can
identify such areas of uncertainty, the economic analysis addresses
this uncertainty. In addition, the Commission requests comments to help
resolve such uncertainties during the consideration of the CAT NMS
Plan.
Second, certain elements of the CAT NMS Plan would not be finalized
until after the selection of a ``Plan
[[Page 30656]]
Processor.'' \314\ Among these are the security and confidentiality
procedures of the Central Repository,\315\ the precise methods by which
regulators would access data in the Central Repository,\316\ and the
complete Technical Specifications.\317\ The Plan also provides the Plan
Processor the ``sole discretion'' to publish interpretations of the
Technical Specifications, including interpretations of permitted values
in data elements.\318\
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\314\ See CAT NMS Plan, supra note 3, at Article VI. The Plan
Participants have engaged in a bidding process to select a Plan
Processor, and the leading candidate bidders have proposed different
solutions. In certain instances, the Plan Participants have decided
to adopt the solutions proposed by whichever bidder they select.
\315\ See Section 0, infra, for additional discussion of risks
and uncertainties related to data security.
\316\ Rule 613(e)(1) requires the CAT NMS Plan to create a
Central Repository to collect, link, and store CAT Data and to make
that data available to regulators. See 17 CFR 242.613(e)(1).
\317\ The CAT NMS Plan contains minimum standards and principles
for setting many of Technical Specifications, see CAT NMS Plan,
supra note 3, at Section 6.9, and the Commission's economic analysis
reflects those minimum standards and principles. However, because
the detailed Technical Specifications are not yet finalized by the
Participants, the Commission cannot fully assess any corresponding
costs and benefits.
\318\ See id. at Section 6.9.
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Because these and other elements of the Plan have not yet been
finalized, the Commission cannot assess how and to what extent they
could affect the overall economic effects of the Plan. The Commission's
economic analysis is therefore limited to the extent that the economic
effects of the Plan depend on decisions that would be made after
approval of the Plan. However, the Commission has identified these
areas of uncertainty and has assessed the economic effects of the Plan
to the best of its ability in light of these existing uncertainties.
Given the range of possible outcomes with respect to both the costs
and benefits of the CAT NMS Plan that depend on future decisions, the
Commission also recognizes the importance of provisions of the Plan
related to the operation and administration of the CAT. In particular,
governance provisions of the Plan related to voting by the Operating
Committee and the involvement of the Advisory Committee may help
promote better decision-making by the relevant parties. Such provisions
could mitigate concerns about potential uncertainty in the economic
effects of the Plan by giving the Commission greater confidence that
its expected benefits would be achieved in an efficient manner and that
costs resulting from inefficiencies would be avoided. As part of this
economic analysis, the Commission therefore considers these features of
the Plan.\319\
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\319\ See Section 0, infra.
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3. Request for Comment on the Framework
The Commission requests comment on all aspects of the Framework for
the Economic Analysis on the CAT NMS Plan. In particular, the
Commission seeks responses to the following questions:
234. Do Commenters believe that the general economic framework
applied in this analysis is appropriate? If not, which considerations
should be added or removed?
235. Do Commenters agree with the approach to identifying benefits
of the CAT NMS Plan? Are there important sources of benefits that are
not discussed here? Are the data qualities important for regulatory
uses? Are there additional data qualities that the Commission should
consider? Are the regulatory objectives important and beneficial for
investors? Are there additional regulatory objectives that the
Commission should consider?
236. Do Commenters agree with the approach taken in this analysis
for examining the costs of CAT? Please explain.
237. Do the Commenters agree with the approach for analyzing second
order effects? Are there other sources of economic effects that the
Commission should consider?
238. Do Commenters agree with the Commission's characterization of
uncertainties in the economic analysis? How important are these
uncertainties to the Commission's consideration of the CAT NMS Plan?
Are there other sources of uncertainty that the Commission should
consider?
239. Do Commenters agree with the Commission's preliminary
assessment that governance provisions of the Plan related to voting by
the Operating Committee and the involvement of the Advisory Committee
may help promote better decision-making by the relevant parties and
thus mitigate concerns associated with uncertainties in the economic
effects of the Plan? Please explain.
D. Baseline
The CAT NMS Plan would create a new regulatory dataset that SROs
and the Commission would use to supplement or replace their current
data sources. The Adopting Release states that ``improvements [in the
quality of audit trail data] should have the potential to result in the
following: (1) [I]mproved market surveillance and investigations; (2)
improved analysis and reconstructions of broad-based market events; and
(3) improved market analysis.'' \320\ To assess the overall economic
impact of the CAT NMS Plan, the economic analysis uses as the Baseline
the current state of trade and order data and the current state of
regulatory activity that relies on that data. The Baseline discusses
the currently available sources of data, limits in available data that
could impact regulatory activity, how regulators currently use the
available data, and the burden that producing that data imposes on SROs
and broker-dealers.
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\320\ See Adopting Release, supra note 9, at 45730.
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1. Current State of Regulatory Activities
The SROs and the Commission use data to analyze and reconstruct
market events, conduct market analysis and research in support of
regulatory decision-making, and conduct market surveillance,
examinations, investigations, and other enforcement functions. The
trend in this area is to use more automated and data-intensive methods
as regulators' activities adjust to the data and technology available.
The following Sections describe these regulatory activities and how
regulators currently use data.
a. Analysis and Reconstruction of Market Events
In the Adopting Release, the Commission described how it expected
CAT Data to significantly improve the ability of regulators to
reconstruct market events so that the public might be informed by an
accurate and timely accounting of the events in question.\321\ In a
market reconstruction, regulators seek to provide an accurate and
factual accounting of what transpired during a market event of interest
by conducting a thorough analysis of the available market data. These
events often encompass activity in many securities across multiple
trading venues, requiring the linking and analysis of data from
multiple sources. Examples of recent market reconstructions include the
Commodity Futures Trading Commission (``CFTC'') and SEC's analysis of
the May 6, 2010 ``Flash Crash,'' \322\ analysis of equity market
[[Page 30657]]
volatility on August 24, 2015,\323\ and the multi-agency report on the
U.S. Treasuries market on October 15, 2014.\324\
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\321\ See id. at 45732-33.
\322\ See Findings Regarding the Market Events of May 6, 2010:
Report of the Staffs of the CFTC and SEC to the Joint Advisory
Committee on Emerging Regulatory Issues (September 30, 2010)
(``Flash Crash Analysis''), available at https://www.sec.gov/news/studies/2010/marketevents-report.pdf.
\323\ See Staff of the Office of Analytics and Research,
Division of Trading and Markets, Research Note: Equity Market
Volatility on August 24, 2015 (Dec. 2015) available at https://www.sec.gov/marketstructure/research/equity_market_volatility.pdf;
see also Austin Gerig and Keegan Murphy, The Determinants of ETF
Trading Pauses on August 24th, 2015, White Paper (February 2016)
available at https://www.sec.gov/marketstructure/research/determinants_eft_trading_pauses.pdf.
\324\ See U.S. Department of the Treasury, Board of Governors of
the Federal Reserve System, Federal Reserve Bank of New York, U.S.
Securities and Exchange Commission, and U.S. Commodity Futures
Trading Commission, Joint Staff Report: The U.S. Treasury Market on
October 15, 2014 (July 13, 2015), available at https://www.sec.gov/reportspubs/special-studies/treasury-market-volatility-10-14-2014-joint-report.pdf.
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b. Market Analysis and Research
In the Adopting Release, the Commission described how it expected
CAT Data to improve the ability of regulators to monitor overall market
structure and better understand its relationship with market behavior,
so that the Commission and the SROs could be better informed in their
policy decisions.\325\ The Commission and SRO Staffs conduct data-
driven analysis on market structure, in direct support of both
rulemaking and other regulatory decisions such as SRO rule approvals as
well as retrospective analyses of rules and pilots. The Commission also
relies on data analysis to inform its market structure policy. SROs
also conduct market analysis and research on their own regulatory
initiatives. Examples of data-driven market analysis include reports on
OTC trading,\326\ small capitalization stock trading,\327\ the Limit
Up-Limit Down Pilot,\328\ short selling,\329\ and high frequency
trading.\330\
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\325\ See Adopting Release, supra note 9, at 45733.
\326\ See Laura Tuttle, Alternative Trading Systems: Description
of ATS Trading in National Market System Stocks (October 2013)
available at https://www.sec.gov/divisions/riskfin/whitepapers/alternative-trading-systems-10-2013.pdf; Laura Tuttle, OTC Trading:
Description of Non-ATS OTC Trading in National Market System Stocks
(March 2014), available at https://www.sec.gov/dera/staff-papers/white-papers/otc-trading-white-paper-03-2014.pdf.
\327\ See Securities Exchange Act Release No. 74892, Order
Approving the National Market System Plan to Implement a Tick Size
Pilot Program (May 6, 2015), 80 FR 27514, 27534, 27541 (May 13,
2015); see also Charles Collver, A Characterization of Market
Quality for Small Capitalization US Equities (September 2014),
available at https://www.sec.gov/marketstructure/research/small_cap_liquidity.pdf.
\328\ See SRO Supplemental Joint Assessment, available at https://www.sec.gov/comments/4-631/4-631.shtml; Memo to File from the
Division of Economic and Risk Analysis regarding the Cornerstone
Analysis of the Impact of Straddle States on Options Market Quality
(February 8, 2016), available at https://www.sec.gov/comments/4-631/4631-42.pdf; see also Gerig and Murphy, supra note 323.
\329\ See Memo to Chairman Christopher Cox from Daniel Aromi and
Cecilia Caglio regarding an Analysis of Short Selling Activity
during the First Weeks of September 2008, (December 16, 2008)
available at https://www.sec.gov/comments/s7-08-09/s70809-369.pdf;
Memo to Chairman Christopher Cox from Daniel Aromi and Cecilia
Caglio regarding an Analysis of a Short Sale Price Test Using
Intraday Quote and Trade Data (December 17, 2008) available at
https://www.sec.gov/comments/s7-08-09/s70809-368.pdf; Memo from the
Office of Economic Analysis regarding an Analysis of the July
Emergency Order Requiring a Pre-borrow on Short Sales (January 14,
2009) available at https://www.sec.gov/spotlight/shortsales/oeamemo011409.pdf.
\330\ See Austin Gerig, High-Frequency Trading Synchronizes
Prices in Financial Markets, available at https://www.sec.gov/dera/staff-papers/working-papers/dera-wp-hft-synchronizes.pdf; see also
Staff of the Office of Analytics and Research, Division of Trading
and Markets, Research Note: Equity Market Volatility on August 24,
2015 (December 2015) available at https://www.sec.gov/marketstructure/research/equity_market_volatility.pdf.
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c. Market Surveillance and Investigations
Regulators perform market surveillance and investigation functions
that rely on access to multiple types of market data. In the Adopting
Release, the Commission discussed how data limitations impact
surveillance and investigations, including risk-based examinations,
market manipulation investigations, tips and complaints, and cross-
market and principal order surveillance.\331\ The following Sections
update and broaden the discussion from the Adopting Release to describe
the current state of SRO surveillance and SRO and Commission
examinations and enforcement investigations.
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\331\ See Adopting Release, supra note 9, at 45730-32.
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(1) Current SRO Surveillance
Rule 613(f) requires the SROs to develop and implement a
surveillance system, or enhance existing surveillance systems,
reasonably designed to make use of the CAT Data.\332\ For the purposes
of this economic analysis, the Commission considers surveillance to
involve SROs running automated processes on routinely collected or in-
house data to identify potential violations of rules or regulations. As
such, surveillance does not include processes run on data that the SROs
request only when needed. SRO surveillance can help protect investors
by having systems in place that can be used to detect fraudulent
behavior and anomalous trading. For instance, SROs use surveillance
systems, developed internally or by a third party, to detect violations
of trading rules, market abuse, or unusual behavior, in real time,
within one day, or within a few weeks of the activity in question. The
exchanges are responsible for surveillance of their own exchanges, and
FINRA is responsible for off-exchange and cross-market surveillance.
FINRA also provides surveillance services to U.S. equity and options
exchanges through regulatory services agreements with nearly every
equity market and all options exchanges.\333\ FINRA also currently
conducts several cross-market surveillance patterns, such as
surveillance focused on wash sales, front running, relationship
trading, and high frequency trading.
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\332\ See 17 CFR 242.613(f).
\333\ See Richard G. Ketchum, FINRA Chairman and CEO, Testimony
Before the Subcommittee on Capital Markets and Government Sponsored
Enterprises Committee on Financial Services (May 1, 2015), available
at https://www.finra.org/newsroom/speeches/050115-testimony-subcommittee-capital-markets-and-government-sponsored-enterprises;
Richard G. Ketchum, FINRA Chairman and CEO, Testimony Before the
Subcommittee on Securities, Insurance and Investment, United States
Senate (March 3, 2016), available at https://www.finra.org/newsroom/speeches/030316-testimony-subcommittee-securities-insurance-and-investment-united-states.
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FINRA has responsibility to oversee and regulate OTC trading of
exchange-listed and non-exchange-listed securities, as well as trading
in corporate and municipal debt instruments and other fixed income
instruments. Also, FINRA conducts cross-market surveillance for
approximately 99% of the listed equity market and approximately 70% of
the listed options market.\334\ To conduct cross-market surveillance,
FINRA uses a variety of online and offline surveillance techniques and
programs to reconstruct market activity, using trading data and quote
information that is captured throughout the trading day, as well as
order audit trail data reported daily. FINRA's cross-market
surveillance is able to identify a single broker-dealer's manipulative
activity across multiple markets, as well as manipulative activity of
multiple market participants acting in concert across multiple
markets.\335\
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\334\ See Richard G. Ketchum, FINRA Chairman and CEO, Testimony
Before the Subcommittee on Securities, Insurance and Investment,
United States Senate (March 3, 2016), available at https://www.finra.org/newsroom/speeches/030316-testimony-subcommittee-securities-insurance-and-investment-united-states.
\335\ See FINRA 2015 Regulatory and Examinations Priorities
Letter, at 14, available at https://www.finra.org/sites/default/files/p602239.pdf; see also FINRA 2016 Regulatory and Examinations
Priorities Letter, at 12, available at https://www.finra.org/sites/default/files/2016-regulatory-and-examination-priorities-letter.pdf.
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Additional surveillance is conducted by exchange-operating SROs,
some of it
[[Page 30658]]
conducted as trading activity occurs. This surveillance can include
detection of market manipulation, violations of trading rules, and
other unusual behavior.
(2) Examinations
In the Adopting Release, the Commission explained how it expected
CAT Data to facilitate risk-based examinations.\336\ SROs currently
conduct exams of broker-dealers for violations of trading-related
federal laws, rules, and regulations and for violations of SRO rules
and regulations.\337\ In 2015, FINRA's Member Regulation Department
conducted approximately 2,400 broker-dealer examinations.\338\ The
Commission currently conducts exams of broker-dealers, transfer agents,
investment advisers, investment companies, municipal advisers, clearing
agencies, the national securities exchanges, other SROs such as FINRA
and the Municipal Securities Rulemaking Board, and the Public Company
Accounting Oversight Board (``PCAOB''). The Commission conducted 493
broker-dealer examinations in 2014 and 484 in 2015, 70 exams of the
national securities exchanges and FINRA in 2014 and 21 in 2015. In
addition, the Commission conducted 1,237 investment adviser and
investment company examinations in 2014 and 1,358 in 2015. Virtually
all investment adviser examinations and a significant proportion of the
Commission's other examinations involve analysis of trading and order
data.
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\336\ See Adopting Release, supra note 9, at 45730-31.
\337\ SEC Rule 17d-2 permits SROs to propose joint plans among
two or more SROs for the allocation of regulatory responsibility.
Where 17d-2 agreements are in place, SROs have joint plans with
respect to their common members (i.e., members of both/all the SROs
party to an agreement under Rule 17d-2) for common rules (i.e.,
rules that are identical or substantially identical). Commission
approval of a plan filed pursuant to Rule 17d-2 relieves an SRO of
those regulatory responsibilities allocated by the plan to another
SRO. See 17 CFR 240.17d-2. Exchanges also enter into Regulatory
Services Agreements (``RSAs'') whereby one SRO contractually agrees
to perform regulatory services for another. However, RSAs do not
relieve the contracting SRO from regulatory responsibility for the
performance of any regulatory services allocated pursuant to the RSA
and are not filed with the Commission for approval.
\338\ This estimate is based on Staff discussions with FINRA.
See also FINRA overview of Member Regulation available at https://www.finra.org/industry/member-regulation.
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Examinations of broker-dealers and investment advisers involve
intensive analysis of trading data. Examinations seek to determine
whether the entity being examined is: Conducting its activities in
accordance with the federal securities laws, rules adopted under these
laws, and SRO rules; adhering to the disclosures it has made to its
clients, customers, the general public, SROs and/or the Commission; and
implementing supervisory systems and/or compliance policies and
procedures that are reasonably designed to ensure that the entity's
operations are in compliance with the applicable legal
requirements.\339\
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\339\ See SEC, Examination Information for Entities Subject to
Examination or Inspection by the Commission (June, 2014), available
at https://www.sec.gov/about/offices/ocie/ocie_exambrochure.pdf.
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The Commission and certain SROs, such as FINRA, use a risk-based
approach to select candidates and to determine exam scope and
focus.\340\ ``Risk-based examinations'' seek to increase regulatory
efficiency by using preliminary data analysis to direct examination
resources towards entities and activities where risks of violative or
illegal activity are the highest. The Commission uses risk and data
analysis before opening an exam to identify broker-dealers and
investment advisers for areas of focus such as suspicious trading, as
well as during an exam to identify the particular activities of a
broker-dealer or investment adviser that could trigger certain
compliance and supervisory risks.
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\340\ FINRA conducts regulatory examinations by contract on
behalf of all the options and equities exchanges, except for the
Chicago Stock Exchange, Inc. (``CHX'') and the National Stock
Exchange, Inc. (``NSX''). Accordingly most exchanges also employ a
risk-based approach to examination selection and scope. CHX examines
members on a cycle basis. NSX recently resumed operations in
December, 2015. See Securities Exchange Act Release No. 76640
(December 14, 2015), 80 FR 79122 (December 18, 2015).
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Because of the data-intensive nature of examinations, the
Commission and SROs have systems, such as the Commission's National
Exam Analytics Tool (``NEAT''), to combine, standardize, and analyze
exam data. The NEAT system allows examiners to import trade blotter
data to conduct commission analysis, cross trades analysis, bunch price
analysis, trading pattern analysis, and restricted trade analysis.
However, as discussed further below, there are limitations on the trade
blotter data imported by the NEAT system.\341\
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\341\ See Section IV.D.2.b, infra.
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(3) Enforcement Investigations
The Adopting Release details how the Commission expects the CAT
Data to aid in the analysis of potential manipulation.\342\ The
Commission and SROs undertake numerous investigations to enforce the
securities laws and related rules and regulations, including
investigations of market manipulations (e.g., marking the close, order
layering, spoofing,\343\ wash sales, trading ahead), insider trading,
and issuer repurchase violations. As noted below, the Commission
estimates that 30-50% of enforcement investigations use trade and order
data, and any of these types of investigations, in addition to numerous
other investigations, could potentially utilize CAT Data.\344\
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\342\ See Adopting Release, supra note 9, at 45731.
\343\ Layering and spoofing are manipulations where orders are
placed close to the best buy or sell price with no intention to
trade in an effort to falsely overstate the liquidity in a security.
\344\ See infra note 345 and accompanying text. The percentage
of enforcement investigations that could be expected to utilize CAT
Data depends on the percentage of investigations that involve
broker-dealers, investment advisers and investment companies.
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SROs rely primarily on surveillance to initiate investigations
based on anomalies in the trading of securities. The Commission
initiates enforcement investigations when SROs or others submit
reliable tips, complaints, or referrals, or when the Commission becomes
aware of anomalies indicative of manipulation. After the detection of
potential anomalies, a tremendous amount of time and resources are
expended in gathering and interpreting trade and order data to
construct an accurate picture of when trades were actually executed,
what market conditions were in effect at the time of the trade, which
traders participated in the trade, and which beneficial owners were
affected by the trade. In 2015, the Commission filed 807 enforcement
actions, including 39 related to insider trading, 43 related to market
manipulation, 124 related to broker-dealers, 126 related to investment
advisers/investment companies, and one related to exchange or SRO
duties. In 2014, the Commission filed 755 enforcement actions,
including 52 related to insider trading, 63 related to market
manipulation, 166 related to broker-dealers, and 130 related to
investment advisers/investment companies, many of which involved trade
and order data.\345\ Similarly, FINRA brought 1,397 disciplinary
actions in 2014 and 1,512 in 2015.\346\
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\345\ See Year-by-Year SEC Enforcement Statistics, available at
https://www.sec.gov/news/newsroom/images/enfstats.pdf. The total
number of actions filed is not necessarily the same as the number of
investigations. An investigation may result in no filings, one
filing, or multiple filings. Additionally, trade and order data may
be utilized in enforcement investigations that do not lead to any
filings.
\346\ See FINRA statistics available at https://www.finra.org/newsroom/statistics.
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[[Page 30659]]
(4) Tips and Complaints
The Adopting Release discussed how the Commission expected CAT Data
to improve the processes used by the SROs and the Commission for
evaluating tips and complaints.\347\ Market participants or those with
experience in analyzing market data sometimes notice atypical trading
or quoting patterns in publicly available market data, and these
observations sometimes result in a tip or complaint to a regulator.
Regulators investigate thousands of tips and complaints each year. In
fiscal years 2014 and 2015, the Commission received around 15,000
entries in its Tips, Complaints and Referrals (``TCR'') system,
approximately one third of which related to manipulation, insider
trading, market events, or other trading and pricing issues.
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\347\ See Adopting Release, supra note 9, at 45731-32.
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Analysis of tips and complaints follows three general stages.
First, regulators ensure that the tip or complaint contains sufficient
information to facilitate analysis. The second stage involves a
triaging effort in which regulators may use directly accessible data or
make phone calls and other informal queries to determine if the tip or
complaint is credible. For tips and complaints that seem credible, the
third stage involves a more in-depth investigation or examination,
which follows the processes described above for examinations and
enforcement investigations.
2. Current State of Trade and Order Data
To assess how and to what degree the CAT NMS Plan would affect the
trade and order data available to regulators, the economic analysis
considers what data regulators use currently and the limitations in
that data.
a. Current Sources of Trade and Order Data
The SROs and the Commission currently use a range of trading and
order data sources for the regulatory activities discussed above. The
types of data and ease of use can vary widely from one source to the
next. Some data sources provide access to in-depth information on a
narrow slice of the market, while others reveal more limited
information but with broader market coverage. This Section reviews the
primary sources of data currently available to regulators, describing
the content of the data provided and examples of their specialized
uses. There are limitations on each of the data sources discussed below
that reduce their usefulness for regulatory purposes. These limitations
and their impact on the ability of the SROs and the Commission to use
the data sources for regulatory purposes are explained in Section
IV.D.2.b below.
(1) SRO Data
Most SROs maintain audit trails that contain the trade and order
data that they obtain from members. Regulators have access to at least
three sources of audit trail data. First, the National Association of
Securities Dealers (``NASD'') \348\ established its Order Audit Trail
System (``OATS'') \349\ in 1998, which required NASD (n/k/a FINRA)
members to report certain trade and order data regarding NASDAQ-listed
equity securities.\350\ OATS was later expanded to include OTC equity
securities and all NMS stocks.\351\ Second, beginning in 2000, several
of the current options exchanges implemented the Consolidated Options
Audit Trail System (``COATS'').\352\ Finally, each equity and options
exchange keeps an audit trail of orders and trades that occur on its
market.\353\
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\348\ In 2007, NASD and the member-related functions of NYSE
Regulation, Inc., the regulatory subsidiary of New York Stock
Exchange LLC (``NYSE''), were consolidated. As part of this
regulatory consolidation, the NASD changed its name to FINRA. See
Securities Exchange Act Release No. 56146 (July 26, 2007), 72 FR
42190 (August 1, 2007). FINRA and the National Futures Association
(``NFA'') are currently the only national securities associations
registered with the Commission; however, the NFA has a limited
purpose registration with the Commission under Section 15A(k) of the
Exchange Act. 15 U.S.C. 78o-3(k); see also Securities Exchange Act
Release No. 44823 (September 20, 2001), 66 FR 49439 (September 27,
2001).
\349\ See Securities Exchange Act Release No. 39729 (March 6,
1998), 63 FR 12559 (March 13, 1998) (order approving proposed rules
comprising OATS) (``OATS Approval Order'').
\350\ The FINRA Web site states: ``FINRA has established the
Order Audit Trail System (OATS), as an integrated audit trail of
order, quote, and trade information for all NMS stocks and OTC
equity securities. FINRA uses this audit trail system to recreate
events in the life cycle of orders and more completely monitor the
trading practices of member firms.'' FINRA, OATS, available at
https://www.finra.org/industry/oats (listing further information on
OATS).
\351\ See Securities Exchange Act Release No. 63311 (November
12, 2010), 75 FR 70757 (November 18, 2010) (order approving proposed
rule change by FINRA relating to the expansion of OATS to all NMS
stocks).
\352\ See, e.g., In the Matter of Certain Activities of Options
Exchanges, Order Instituting Public Administrative Proceedings
Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934,
Making Findings and Imposing Remedial Sanctions, Securities Exchange
Act Release No. 43268 (September 11, 2000) (``Options Settlement
Order''); Securities Exchange Act Release No. 50996 (January 7,
2005), 70 FR 2436 (January 13, 2005) (order approving proposed rule
change by Chicago Board Options Exchange, Incorporated (``CBOE'')
relating to Phase V of COATS).
\353\ See, e.g., infra notes 358-364 and accompanying text. For
example, the NYSE tracks counterparties on every trade in its
Consolidated Equity Audit Trail Data (``CAUD'') system, and records
electronic order events in a System Order Data (``SOD'') database.
See Proposing Release, supra note 9, at 32564-68 (proposing
Consolidated Audit Trail and discussing equity exchange audit
trails). The SROs provided data in various proprietary formats to
the Commission in support of the investigation of the May 6th, 2010
``Flash Crash.'' These data sources are briefly discussed in the
Flash Crash Analysis, supra note 322.
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Specifically, for each of these stages in the life of an order,
FINRA Rule 7440 requires the recording and reporting of the following
information, as applicable, including but not limited to: For the
receipt or origination of the order, the date and time the order was
first originated or received by the reporting member, a unique order
identifier, the market participant symbol of the receiving reporting
member, and the material terms of the order; \354\ for the internal or
external routing of an order, the unique order identifier, the market
participant symbol of the member to which the order was transmitted,
the identification and nature of the department to which the order was
transmitted if transmitted internally, the date and time the order was
received by the market participant or department to which the order was
transmitted, the material terms of the order as transmitted,\355\ the
date and time the order was transmitted, and the market participant
symbol of the member who transmitted the order; for the modification or
cancellation of an order, a new unique order identifier, original
unique order identifier, the date and time a modification or
cancellation was originated or received, and the date and time the
order was first received or originated; \356\ and for the execution of
an order, in whole or in part, the unique order identifier, the
designation of the order as fully or partially executed, the number of
shares to which a partial
[[Page 30660]]
execution applies and the number of unexecuted shares remaining, the
date and time of execution, the execution price, the capacity in which
the member executed the transaction, the identification of the market
where the trade was reported, and the date and time the order was
originally received. FINRA Rule 7440 also requires reporting of the
account type,\357\ the identification of the department or terminal
where an order is received from a customer, the identification of the
department or terminal where an order is originated by a reporting
member, and the identification of a reporting agent if the agent has
agreed to take on the responsibilities of a reporting member under Rule
7450.
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\354\ The specific information required to be reported includes:
The number of shares; designation as a buy or sell or short sale;
designation of the order as market, limit, stop, or stop limit;
limit or stop price; date on which the order expires and if the time
in force is less than one day, the time when the order expires; the
time limit during which the order is in force; any request by a
customer that a limit order not be displayed, or that a block size
limit order be displayed, pursuant to Rule 604(b) of Regulation NMS;
any special handling requests; and identification of the order as
related to a program trade or index arbitrage trade. See FINRA Rule
7440(b).
\355\ The specific information required includes the number of
shares to which the transmission applies, and whether the order is
an intermarket sweep order. See FINRA Rule 7440(c).
\356\ For cancellations or modifications, the following
information also is required: If the open balance of an order is
canceled after a partial execution, the number of shares canceled;
and whether the order was canceled on the instruction of a customer
or the reporting member. See FINRA Rule 7440(d).
\357\ ``Account type'' refers to the type of beneficial owner of
the account for which the order was received or originated. Examples
include institutional customer, individual customer, employee
account, market making, and proprietary. See FINRA, OATS Reporting
Technical Specifications, at 4-2, available at https://www.finra.org/sites/default/files/OATSTechSpec_01112016.pdf.
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A majority of options exchanges require their members to provide
the following information with respect to orders entered onto their
exchange: (1) The material terms of the order; \358\ (2) order receipt
time; \359\ (3) account type; (4) the time a modification is received;
(5) the time a cancellation is received; (6) execution time; and (7)
the clearing member identifier of the parties to the transaction.\360\
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\358\ The specific information required includes option symbol;
underlying security; expiration month; exercise price; contract
volume; call/put; buy/sell; opening/closing transaction; price or
price limit; and special instructions. See, e.g., BATS Exchange,
Inc. (``BATS'') Rule 20.7; BOX Options Exchange LLC (``BOX'')
Chapter V, Section 15; CBOE Chapter VI, Rules 6.24 and 6.51; NASDAQ
Options Market (``NOM'') Rule Chapter V, Section 7; NYSE Amex Rules
153, Commentary .01, and 962; NYSE Arca Rules 6.67, 6.68, and 6.69;
and NASDAQ OMX PHLX LLC (``Phlx'') Rules 1063 and 1080.
\359\ The required information also includes identification of
the terminal or individual completing the order ticket. See id.
\360\ See id.
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Although SROs that operate exchanges collect much of their audit
trail information directly from their internal systems, broker-dealers
also have the responsibility to report regulatory data to SRO audit
trails. Some broker-dealers perform nearly all of these data reporting
requirements in-house, whereas others contract with service bureaus to
accomplish this data reporting.\361\ This reporting can represent a
significant burden on broker-dealers.
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\361\ See Section IV.F.1.c(2), infra, for a discussion of how
broker-dealers decide whether or not to outsource their regulatory
reporting.
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Audit trail data have become more useful to regulators over time.
As noted above, FINRA expanded OATS from covering only NASDAQ listed
securities to include OTC equity securities and all NMS stocks.\362\
Commission Staff understands that FINRA has also begun collecting
additional SRO audit trail data, provided voluntarily from most
exchanges, to supplement OATS data. In addition, NYSE, NYSE Amex LLC
(n/k/a ``NYSE MKT LLC'') (``NYSE Amex''), and NYSE ARCA, Inc. (``NYSE
Arca'') eliminated their OTS audit trail requirements and replaced them
to coordinate with the OATS requirements, so that members who are also
members of either FINRA or NASDAQ (and therefore subject to OATS
requirements) are able to satisfy their reporting obligations by
meeting the OATS requirements.\363\ As a result of all of these
changes, the combined data from these different audit trails \364\ now
cover most order events in equities.
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\362\ See supra note 351.
\363\ See Securities Exchange Act Release No. 65523 (October 7,
2011), 76 FR 64154 (October 17, 2011) (concerning NYSE); Securities
Exchange Act Release No. 65524 (October 7, 2011), 76 FR 64151
(October 17, 2011) (concerning NYSE Amex); Securities Exchange Act
Release No. 65544 (October 12, 2011), 76 FR 64406 (October 18, 2011)
(concerning NYSE Arca).
\364\ Other SRO audit trails have varied reporting requirements.
Some exchanges have detailed audit trail data submission
requirements for their members covering order entry, transmittal,
and execution. See CHX Article 11, Rule 3(b); NASDAQ Rules 6950-6958
(substantially similar to the OATS rules); NASDAQ OMX BX Rules 6950-
6958 (substantially similar to OATS rules). The audit trail rules of
the other exchanges incorporate only standard books and records
requirements in accordance with Section 17 of the Exchange Act, 15
U.S.C. 78q. See, e.g., NSX Chapter VI, Rule 4.1.; BATS Chapter IV,
Rule 4.1; CBOE Rule 15.1 (applicable to CBOE Stock Exchange
(``CBSX'')); International Securities Exchange, LLC (``ISE'') Rule
1400; NYSE Arca Equities Rule 2.24. One exchange only requires its
members to make and keep books and records and other correspondence
in conformity with Section 17 of the Exchange Act and the rules
thereunder, with all other applicable laws and the rules,
regulations and statements of policy promulgated thereunder, and
with the exchange's rules. See NSX Chapter VI, Rule 4.1. Though not
an audit trail, the Large Options Position Report (``LOPR'') is also
a source of SRO data that is used for surveillance, examination, and
enforcement purposes by SRO and Commission staff. The data is
collected pursuant to FINRA Rule 2360(b)(5), Reporting of Options
Positions, under which each member must file a report for each
account in which they have an interest in a position of 200 or more
options contracts, on the same side of the market. Any increases or
decreases in this position must also be reported. The Options
Clearing Corporation (``OCC'') is the service provider for the
processing of these reports, which are used at will by the SROs for
surveillance purposes. The Commission also frequently uses LOPR for
enforcement investigations of insider trading and market
manipulation cases.
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SRO audit trail data is used for market reconstructions and market
analyses, and to inform policy decisions, both by the Commission and by
SROs. Regulators also use SRO audit trail data extensively for
surveillance, examinations, investigations, and other enforcement
functions. Current SRO market surveillance relies primarily on data
from the SRO audit trails, generated directly from the exchange servers
and from OATS. Likewise, SRO examinations and investigations pull
information from their own audit trails before seeking data from
others. Commission examinations and investigations also rely heavily on
SRO audit trails to start the process of tracing a particular trade
from its execution to the order initiations and customer information,
and the audit trails can be useful for manipulation investigations or
other regulatory activities that require analyses of microcap
securities trading activity. There are, however, limitations on SRO
audit trail data that reduce their usefulness to regulators. For
example, for the examinations mentioned above, Commission examination
Staff may undertake a laborious process of linking SRO audit trail data
with EBS data, because SRO audit trail data does not contain customer
information.\365\ These and other limitations are discussed in Section
IV.D.2.b, infra.
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\365\ See Section IV.D.2.b, infra.
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(2) Equity and Option Cleared Reports
The SROs and Commission also have access to equity and option
cleared reports. Clearing broker-dealers report their equity and option
cleared data on a daily basis and the NSCC and the OCC aggregate the
data across the market and generate the reports.\366\ The reports show
the number of trades and daily cleared trade and share volume, by
clearing member, for each equity and listed option security in which
transactions took place. Regulators can query these reports directly
through an internal online system that interfaces with the Depository
Trust and Clearing Corporation (``DTCC'') data by security name and
CUSIP number.\367\ The
[[Page 30661]]
originating source of the DTCC cleared equity data is the Securities
Information Automation Corporation (``SIAC'') and the originating
source of the cleared options data is the OCC.
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\366\ NSCC provides clearing, settlement, risk management,
central counterparty services and a guarantee of completion for
certain transactions for virtually all broker-to-broker trades
involving equities, corporate and municipal debt, American
depositary receipts, exchange-traded funds, and unit investment
trusts. See DTCC, About DTCC, NSCC, available at https://www.dtcc.com/about/businesses-and-subsidiaries/nscc.aspx. The OCC is
an equity derivatives clearing organization that is registered as a
clearing agency under Section 17A of the Act, 15 U.S.C. 78q-1, and
operates under the jurisdiction of both the Commission and the CFTC.
See OCC, About OCC, available at https://www.optionsclearing.com/about/corporate-information/what-is-occ.jsp.
\367\ A CUSIP number is a unique alphanumeric identifier
assigned to a security and facilitates the clearance and settlement
of trades in the security. See SEC, Fast Answers, CUSIP Number,
available at www.sec.gov/answers/cusip.htm.
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Equity and option cleared reports provide a way for regulators to
directly access a dataset to see how much trading volume is accounted
for by a particular clearing broker. As such, these data are often used
at the beginning of an examination or investigation to start
identifying the market participants that may have additional data
needed to pinpoint a particular activity. But there are limitations on
these reports that reduce their usefulness to regulators. For example,
the information available on the reports is limited to the date, the
clearing firm, and the number of transactions cleared by each clearing
firm on each SRO. These and other limitations are discussed in Section
IV.D.2.b, infra.
(3) Electronic Blue Sheets
Broker-dealers provide detailed data to regulators in the form of
EBS. The EBS data, provided pursuant to Rule 17a-25 under the Act,\368\
facilitate investigations by the SROs and Commission Staff,
particularly in the areas of insider trading and market manipulations.
The EBS system provides certain detailed execution information in its
electronic format \369\ upon request by SRO or Commission Staff. This
information often includes the employer of the beneficial owner of an
account,\370\ which can be important to insider trading investigations,
and in some cases, a tax identification number.\371\
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\368\ 17 CFR 240.17a-25. Rule 17a-25 codified the requirement
that broker-dealers submit to the Commission, upon request,
information on their customer and proprietary securities
transactions in an electronic format. The Rule requires submission
of the same standard customer and proprietary transaction
information that SROs request through the EBS system in connection
with their market surveillance and enforcement inquiries.
\369\ For a proprietary transaction, Rule 17a-25 requires a
broker-dealer to provide the following information electronically
upon request: (1) Clearing house number or alpha symbol used by the
broker-dealer submitting the information; (2) clearing house
number(s) or alpha symbol(s) of the broker-dealer(s) on the opposite
side to the trade; (3) security identifier; (4) execution date; (5)
quantity executed; (6) transaction price; (7) account number; (8)
identity of the exchange or market where the transaction was
executed; (9) prime broker identifier; (10) average price account
identifier; and (11) the identifier assigned to the account by a
depository institution. See Rule 17a-25(a)(1), (b)(1)-(3), 17 CFR
240.17a-25(a)(1), (b)(1)-(3). For customer transactions, the broker-
dealer also is required to include the customer's name, customer's
address, the customer's tax identification number, and other related
account information. See Rule 17a-25(a)(2), 17 CFR 240.17a-25(a)(2);
see also infra note 372 and accompanying text (discussing additional
information on ``large traders'' reported through EBS).
\370\ Employer information is required by some SRO EBS rules.
See, e.g., NYSE and FINRA Rule 8211. While employer information is
not required under Rule 17a-25, Commission staff sometimes request
and receive this information.
\371\ Tax identification numbers are not required to be reported
in EBS for average price, allocation, riskless principal, foreign
accounts, and subaccounts.
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The EBS system also provides additional information on market
participants who meet the definition of ``large traders'' and have
self-identified to the Commission as required by Rule 13h-1.\372\ Large
traders who file Form 13H with the Commission are assigned a ``large
trader identification number'' by the Commission and must provide that
number to their brokers for inclusion in the EBS records that are
maintained by the clearing brokers. Rule 13h-1, subject to relief
granted by the Commission,\373\ requires that execution time be
captured (to the second) for certain categories of large traders. Large
trader data provide the Commission with a way to acquire information
about the activities of large traders and allow the activities of large
traders to be more readily aggregated across or partitioned by multiple
broker-dealers. Regulators generally use data from the EBS system
extensively in enforcement investigations, for which EBS data are
vital, particularly insider trading investigations. But again, there
are limitations on EBS data. For example, EBS data are cumbersome to
use for broad analyses, such as analysis and reconstruction of market
events, market analysis and research, and some examinations, because of
the fragmentation of the data. These and other limitations are
discussed in Section IV.D.2.b, infra.
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\372\ See Securities Exchange Act Release No. 64976 (July 27,
2011), 76 FR 46960 (August 3, 2011). A ``large trader'' is defined
as a person whose transactions in NMS securities equal or exceed 2
million shares or $20 million during any calendar day, or 20 million
shares or $200 million during any calendar month. SEC Rule 13h-1, 17
CFR 240.13h-1, requires those market participants who meet the
definition of ``large traders'' to comply with a number of
requirements, including filing Form 13H with the Commission to
receive a large trader identification number. Id.
\373\ See Securities Exchange Act Release No. 76322 (October 30,
2015), 80 FR 68590 (November 5, 2015).
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(4) Trade Blotters and Order Tickets
Investment advisers and broker-dealers maintain data in the form of
order tickets and trade blotters that regulators can obtain on
request.\374\ Order tickets are in-house records maintained by
investment advisers and broker-dealers that provide order details,
including time stamps of order initiation and placement, special order
types, any special instructions for the order, and plans for the
allocation of shares and prices across accounts and subaccounts. Order
tickets also identify account owners. Commission Staff collects order
tickets regularly for examinations, and occasionally also for market
manipulation investigations.
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\374\ Rule 204-2 requires investment advisers to maintain a
memorandum of each order given by the investment adviser for the
purchase or sale of any security. 17 CFR 275.204-2(a)(3). Rule 17a-
3(a)(1) requires broker-dealers to maintain a trade blotter. 17 CFR
240.17a-3(a)(1).
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Broker-dealers maintain data in trade blotters that are similar to
EBS. However, the trade blotters also contain more information,
including the commissions paid in executing each order, time stamps of
when an order is received and when it is executed (and the number of
fills), and the pricing information for all executions in the
order.\375\ SROs use trade blotters in examinations of their members.
Commission Staff uses trade blotters frequently for examinations,
including in almost every broker-dealer, investment adviser, and hedge
fund examination, as well as for insider trading and market
manipulation investigations. Regulators use trade blotter data to
determine the order entry time and execution time for trades by a
particular customer in examinations and enforcement investigations.
Trade blotters are also the primary data source used in regulatory
investigations for which subaccount allocation information is important
for determining violative behavior, such as cherry-picking and front-
running cases. There are limitations on trade blotter and order ticket
data that reduce their usefulness to regulators, however. For example,
regulators lack direct access to these data; in order to acquire trade
blotter and order ticket data, regulators need to send a request to
each individual broker-dealer to obtain its data, which can be a
lengthy and cumbersome process. These and other limitations are
discussed in Section IV.D.2.b, infra.
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\375\ Regulators could also request a trade confirmation instead
of a trade blotter. A trade confirmation shows the customer, the
symbol, execution price, trade date, settlement date and commission.
A trade blotter is more detailed than a trade confirmation. A trade
blotter is what a firm itself records and the exact information
recorded varies by firm. Typically, regulators look to the trade
confirmation when they have questions about the veracity of a firm's
blotter, but generally prefer to request the trade blotter due to
its greater detail.
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[[Page 30662]]
(5) Trading and Order Handling System Data
Broker-dealers and exchanges also collect and maintain records of
activity in their order handling systems and internal matching
systems.\376\ This data may include order receipt, modification or
routing information not otherwise reported to SROs. Some elements of
these data exceed the scope of information captured in EBS, SRO audit
trail, trade blotter, or order ticket data; for example, SRO audit
trail data sometimes excludes market-making activity. But certain
market making activity is included in the data that broker-dealers and
exchanges are required to maintain pursuant to Section 17(a) of the Act
\377\ and Rule 17a-3 thereunder.\378\ Regulators use these trading and
order handling system data in investigations and examinations to
further analyze issues discovered during their analysis of data from
other sources. Like other current sources of data, there are
limitations on trading and order handling system data that reduce their
usefulness to regulators. For example, a lack of standardization
results in variations in trading and order handling system data across
broker-dealers. These and other limitations are discussed in Section
IV.D.2.b, infra.
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\376\ Internal matching systems of broker-dealers may include
Alternative Trading Systems (``ATSs'') or automated trading systems
that provide liquidity to received orders without interacting on a
registered exchange. The Commission understands that some broker-
dealers rely on their clearing firms to collect and maintain records
relating to routed orders on their behalf. Broker-dealers that
operate their own internal matching systems are more likely to
collect and maintain their own records.
\377\ 15 U.S.C. 78q(a).
\378\ 17 CFR 240.17a-3. For example, market makers are only
required to report information on orders that are executed.
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(6) Public Data
Exchanges and SROs also make data available to the public, in some
cases on a commercially-available basis,\379\ that regulators could
access for their regulatory activities. One type of public data is
``consolidated'' data feeds that are disseminated by registered
Securities Information Processors (``SIPs'') pursuant to joint SRO
plans.\380\ For a fee, the SIPs distribute consolidated market data on
recent equity and option transactions and the prevailing best quotes at
each exchange to market data subscribers. In addition, all exchanges
also make data available through direct data feeds. These feeds contain
all data included in the SIP feed, but also include depth of book
information \381\ and, depending on the exchange, may include
additional data, such as the submission, cancellation and execution of
all displayed orders and auction imbalance information on the exchange,
among other things.
---------------------------------------------------------------------------
\379\ In other words, the exchanges and SROs sell the data
publicly and regulators can purchase it.
\380\ ICE serves as the operator for the Consolidated Tape
Association (``CTA'') Plan SIP and the Consolidated Quote System
(``CQS'') Plan SIP. These SIPs collect and disseminate information
on quotes and trades in listed securities, other than NASDAQ listed
securities. The NASDAQ Stock Market LLC serves as the operator for
the Unlisted Trading Privileges (``UTP'') Plan SIP, which collects
and disseminates quote and trade information in NASDAQ listed
securities.
\381\ An exchange's order book consists of all unexecuted orders
at each price. Order book data typically includes the depth
(aggregated number of shares) of the displayed orders at each price
and might include all prices in the order book or the depth at each
price over a range of prices. Displayed orders consist of any order
in which the submitter did not instruct that some or all of the
order be hidden from display.
---------------------------------------------------------------------------
The SEC's Market Information Data Analytics System (``MIDAS'') uses
information disseminated by the SIP feeds, as well as exchange direct
feeds consisting of data that individual exchanges choose to sell to
subscribers. In addition, at the request of Commission Staff, most
equities exchanges produce and make public two datasets with
information on short sales: A file of short selling volume by stock,
which contains the short selling and total volume on that exchange by
symbol, and a file of short selling transactions, which contains trade
information such as time, volume, and price for each transaction
involving a short sale.\382\
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\382\ See Short Sale Reporting Study, infra note 413, for more
information on available short selling data and the demands for
additional short selling data. This study also describes information
regarding data from Form SH filings. For ten months starting during
the financial crisis, the Commission required certain institutional
investors to submit weekly reports of their short selling activity
and positions.
---------------------------------------------------------------------------
The Commission and SROs use these publicly available trade and
order data to conduct market analyses, market reconstructions,
examinations, and investigations. Because of the accessibility and ease
of use of the public data, regulators often use it as a starting point
or a basis of comparison to other data sources. For example, real-time
surveillance can rely on SIP data, and some insider trading
surveillance relies on information from other publicly available
sources such as news sources. Further, investigations into short sale
market manipulation sometimes start with an analysis of the short
selling data. Some market analyses by regulators rely on public data
alone.\383\ However, there are limitations on these data that reduce
their usefulness to regulators. For example, they do not provide
customer information, order entry time, information about special order
handling codes, counterparties, or member identifiers. These and other
limitations are discussed in Section IV.D.2.b, infra.\384\
---------------------------------------------------------------------------
\383\ See Collver, supra note 327.
\384\ See also Staff of the Office of Analytics and Research,
Division of Trading and Markets, Research Note: Equity Market
Volatility on August 24, 2015 (December 2015) available at https://www.sec.gov/marketstructure/research/equity_market_volatility.pdf.
---------------------------------------------------------------------------
b. Current Limitations of Trade and Order Data
Although regulators have access to trade and order data from the
sources described above,\385\ the available data are, for various
reasons, limited in terms of the four qualities discussed above. In
terms of completeness, current sources do not represent all of the
market activity of interest in sufficient detail in one consolidated
audit trail. In terms of accuracy, current sources may reflect data
errors, insufficiently granular clock synchronization and time stamps,
errors introduced in the process of combining data from different
sources, a lack of consistent customer and broker-dealer identifiers,
and data that is too aggregated at the record level to provide the
information regulators need. With respect to accessibility, the SROs
and Commission lack direct access to most of the data sources described
above, and with respect to timeliness, obtaining trade and order data
from current sources and converting the data into a form in which they
can be analyzed can involve a significant delay from the time of a
particular event of interest.\386\ The qualities of market data are
important to the Commission's ability to fulfill its statutory mission
in an efficient and effective manner. As a result of the limitations on
current data sources, regulators are limited in their ability to
perform the activities outlined in Section IV.D.1, above. Table 2:
Currently Available Data Sources summarizes the key characteristics of
the currently available data sources, which are discussed in more
detail below.
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\385\ See Section IV.D.2.a, supra.
\386\ As discussed above and in the Adopting Release, accuracy
refers to whether the data about a particular order or trade is
correct and reliable; completeness refers to whether the data
represents all market activity of interest or just a subset, and
whether the data is sufficiently detailed to provide the required
information; accessibility refers to how the data is stored, how
practical it is to assemble, aggregate, and process the data, and
whether all appropriate regulators could acquire the data they need;
and timeliness refers to when the data is available to regulators
and how long it would take to process before it could be used for
regulatory analysis. See supra note 306.
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[[Page 30663]]
[GRAPHIC] [TIFF OMITTED] TN17MY16.327
[[Page 30664]]
(1) Completeness
``Completeness'' refers to whether the data represents all market
activity of interest or just a subset, and whether the data is
sufficiently detailed to provide the required information.\391\ While
current data sources provide trade and order data specified by existing
rules and regulations, those sources do not contain all market activity
that might be required for certain market inquiries, in sufficient
detail, within one consolidated audit trail. To obtain information
regarding a particular market event, regulators may have to piece
together information from different data sources. Further, some data is
not required to be reported at all under existing regulations.\392\
Therefore, current data sources either cover only a limited number of
events and products, or lack some data fields that would be useful to
regulators, each of which impedes effective market surveillance.
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\391\ See supra note 306.
\392\ See, e.g., Adopting Release, supra note 9, at 45726-30,
45741, 45750 n.286, 45756 n.361 (discussing the incompleteness of
the data recorded by existing audit trail systems such as OATS,
acknowledging that ``certain elements are not collected by existing
audit trails,'' and noting that ``existing SRO audit trails do not
require customer information to be reported''); see also Proposing
Release, supra note 9, at 32564-66, 32603 (discussing gaps in
current required audit trail information and stating that the
proposed rule would require ``national securities exchanges,
national securities associations, and their members to capture . . .
information that is not currently captured under the existing audit
trail or other regulatory requirements'').
---------------------------------------------------------------------------
A. Events and Products
There is currently no single data source that covers all market
activities. EBS data contains executed trades but does not contain
information on orders or quotes (and thus does not provide information
on routes, modifications, or cancellations). Similarly, trade blotters
and order tickets contain only information recorded by that particular
broker-dealer or investment adviser and may contain limited information
about full order lifecycles. SRO audit trail data are limited to
identifying the activity of their members, can have incomplete
information concerning their members, lack order lifecycle information
occurring prior to receipt by an exchange, and may not contain
information regarding principal trading. Furthermore, public
consolidated and direct data feeds provide data about the entire
market, but lack information regarding non-displayed orders and do not
provide sufficient information to identify the different lifecycle
events of a single order.
Individual SRO audit trails are extensive but still incomplete in
their coverage of the activities of the market participants they cover;
they contain only activity of their own members and many do not
necessarily contain all activity by their members. For example, FINRA's
OATS data does not include proprietary orders originated by a trading
desk in the ordinary course of a member's market making activities, or
options data. And while OATS collects data from FINRA members with
respect to orders and trades involving NMS and OTC stocks, OATS does
not include trade or order activity that occurs on exchanges or at
broker-dealers that are not FINRA members.\393\ In addition, while
broker-dealers who are not members of FINRA must be members of an
exchange SRO, an individual exchange SRO's audit trail data is
generally limited to activity taking place on that exchange.\394\
Because broker-dealers who are not members of FINRA may engage in
trading activity in off-exchange markets, a substantial portion of the
trading activity that an exchange SRO supervises is not reported to the
supervising SRO.\395\
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\393\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(ii)(A). OATS includes records showing the routing of an order
to an exchange, but not the outcome of that routing. In performing
its regulatory oversight of the markets, FINRA has created an
internal process in which it augments the data it collects via OATS
with trade execution data from other exchanges with which it has
regulatory service agreements. This process provides FINRA with a
wider view of the markets than OATS previously provided, but linking
data across these sources does not yield fully accurate results. See
Section IV.D.2.b(2), infra for a discussion of the accuracy of
linking across data sources. See infra note 1060 for a discussion of
FINRA's RSAs.
\394\ Currently, Rule 15b9-1 offers an exemption from FINRA
membership that applies if the firm is a member of a national
securities exchange, carries no customer accounts, and has annual
gross income of no more than $1,000 that is derived from securities
transactions effected otherwise than on a national securities
exchange of which it is a member (the `de minimis allowance').
Income derived from transactions for that dealer's own account with
or through another registered broker-dealer do not count toward the
$1,000 de minimis allowance. However, the national securities
exchanges have not generally supervised their members' activity
outside of the markets they operate. The Commission has proposed
modifications to Rule 15b9-1 that would require a dealer to be a
member of a registered national securities association to conduct
most off-exchange activity. See Securities Exchange Act Release No.
74581 (March 25, 2015), 80 FR 18035, 18042 (April 2, 2015)
(``Exemption for Certain Exchange Members'') (proposing to amend
rule 15b9-1 and noting that ``[n]on-Member Firms are not subject to
oversight by [FINRA] and their off-exchange transactions typically
are not overseen by the exchanges of which they may be members,''
and that ``[e]xchanges traditionally have not assumed the role of
regulating the totality of the trading of their member-broker-
dealers . . .'').
\395\ Id. at 18043 n.85. Broker-dealers that are not FINRA
members accounted for 48% of orders sent directly to ATSs in 2014.
Therefore, OATS includes incomplete information on a substantial
portion of off-exchange trading. As of March 2015, 125 of the
approximately 4,209 registered broker-dealers were not members of
FINRA. Id. at 18052. Orders from non-FINRA members accounted for 40%
of orders sent directly to ATSs in 2013, and 32% in 2012. Id. at
18038 n.21.
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Further, not all FINRA members are obligated to report to OATS.
FINRA's rules exempt from reporting certain members that engage in a
non-discretionary order routing process.\396\ Additionally, FINRA has
the authority to exempt other members who meet specific criteria from
the OATS recording and reporting requirements, and has granted
approximately 50 such exemptions.\397\
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\396\ See FINRA Rule 7410 (Definitions). The Rule specifically
excludes from the definition of ``Reporting Member'' members that
(1) engage in a non-discretionary order routing process and route
all of their orders either to a single receiving Reporting Member or
two Reporting Members, provided orders are routed to each receiving
Reporting Member on a pre-determined schedule and the time period
for the schedule does not exceed one year; (2) do not direct or
maintain control over subsequent routing or execution by the
receiving Reporting Member; and (3) have a written agreement with
the receiving Reporting Member that specifies the respective
functions and responsibilities of each party to effect full
compliance with the OATS recording and reporting rules. Finally, the
receiving Reporting Member must record and report all required
information pertaining to the order.
\397\ See FINRA Rule 7470 (Exemption to the Order Recording and
Data Transmission Requirements). The Rule provides that, for good
cause shown, FINRA may exempt a member from its recording and
reporting requirements if: (1) The member and current control
affiliates and associated persons of the member have not been
subject within the last five years to any final disciplinary action,
and within the last ten years to any disciplinary action involving
fraud; (2) the member has annual revenues of less than $2 million;
(3) the member does not conduct any market making activities in NMS
stock or OTC securities; (4) the member does not execute principal
transactions with its customers; and (5) the member does not conduct
clearing or carrying activities for other firms. This authority
sunsets on July 10, 2019. Approximately 799 firms that are excluded
or exempt from OATS would incur CAT reporting obligations if the
Plan were approved; see also infra note 931, Section IV.F.1.c(2)B.i,
infra.
---------------------------------------------------------------------------
Exchange audit trails also lack information on the order lifecycle
events that occur prior to receipt at the exchange.\398\ SRO audit
trail data available from the Intermarket Surveillance Group (``ISG'')
\399\ does not
[[Page 30665]]
capture quotes/orders away from a market's inside market (i.e., those
quotes/orders below the best bid or above the best offer); currently
identify market participants in a trade only to the clearing broker
level; do not provide information on the executing broker; and contain
certain data fields that are not mandatory.\400\
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\398\ The Commission understands that exchange routing broker-
dealers, which route orders from exchanges to other Execution
Venues, do substantial business, but it is very hard in current data
sources to track orders sent to one exchange that are then sent to
another exchange or off-exchange venue by the exchange routing
broker-dealer.
\399\ The ISG was established in the early 1980s and is
comprised of over 50 international exchanges, market centers, and
market regulators that perform market surveillance in their
respective jurisdictions. The purpose of the ISG is to provide a
framework for the sharing of information and the coordination of
regulatory efforts among exchanges trading securities, options on
securities, security futures products, and futures and options on
broad-based security indexes, to address potential inter-market
manipulations and trading abuses. In effect, the ISG is an
information-sharing cooperative governed by a written agreement. ISG
also provides a forum for ISG members to discuss common regulatory
concerns, thus enhancing members' ability to efficiently fulfill
their regulatory responsibilities. As a condition to membership,
every ISG member must represent that it has the ability to obtain
and freely share regulatory information and documents with other ISG
members, generally unencumbered by rules, nationally imposed
blocking statutes or bank secrecy laws. Regulatory information is
only shared on an as-needed basis and only upon request, and any
information shared through ISG must be kept strictly confidential
and used only for regulatory purposes. The SEC is not a member of
ISG, nor is ISG subject to regulatory oversight by the SEC.
\400\ See Comment Letter from FINRA and NYSE Euronext regarding
Proposing Release (August 9, 2010), available at https://www.sec.gov/comments/s7-11-10/s71110-46.pdf.
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Additionally, some SRO audit trails do not include and are not
required to include activity associated with principal trading, such as
market-making activity. This may result in the exclusion of a
significant amount of activity, particularly for firms with substantial
market-making business activities. Principal trading activity
represents a significant portion of market activity and there are
aspects of the current market regime that may result in the
underreporting of this trading activity. Indeed, an analysis by
Commission Staff estimates that principal trading accounted for 40.5%
of all reported transactions and principal activity accounted for 67%
of all exchange message traffic.\401\ And, because these figures do not
capture principal activity done by trading on-exchange through other
broker-dealers, these estimates are likely to be biased downwards.\402\
---------------------------------------------------------------------------
\401\ The analysis used audit trail data (where orders are
identified at the broker-dealer level), from 10 exchanges, excluding
CHX, and OATS reported off-exchange activity. Message traffic was
defined as order placement, cancellation, or amendment.
\402\ The fact that off-exchange principal trading of non-FINRA
member broker-dealers is not fully reported in OATS, may also bias
these estimates downwards.
---------------------------------------------------------------------------
Finally, no single current data source integrates both equities and
options. The lack of any combined equity and options audit trail data
is a significant impediment to regulators performing cross-product
surveillance.\403\
---------------------------------------------------------------------------
\403\ Likewise no single audit trail combines futures with NMS
Securities either. See Adopting Release, supra note 9, at 45744 for
a discussion of the potential inclusion of futures in CAT Data.
---------------------------------------------------------------------------
B. Data Fields
Each of the available data sources discussed above \404\ is missing
certain data fields that are useful for conducting a variety of
regulatory activities. Furthermore, certain valuable data fields are
not contained in any of the data sources discussed above. For example,
the lack of completeness in the data sources makes it impossible to use
certain key information, such as customer identifiers and allocation
information, in market surveillance. Further, even for single-security
events within a single trading venue, regulators may need to seek data
from multiple sources such as an SRO audit trail and EBS.\405\
---------------------------------------------------------------------------
\404\ See Section IV.D.2.a, supra.
\405\ See Section IV.D.2.a, supra, and Section IV.D.2.b(3)
infra, for a discussion of how regulators access such data.
---------------------------------------------------------------------------
Most notably, the identity of the customer is unavailable from all
current data sources that are reported to regulators on a routine
basis. A unique customer identifier could be useful for many types of
investigations and examinations such as market manipulation
investigations and examinations of investment advisers. As noted above,
some data sources--specifically Large Trader, EBS, trade blotters, and
order tickets--identify customers.\406\ But these data sources are not
reported on a routine basis, provide only one part of the order
lifecycle, and have other inherent limitations.
---------------------------------------------------------------------------
\406\ Trade confirmation data also identifies customers, but
trade confirmation data are much more basic than a trade blotter.
See supra note 375.
---------------------------------------------------------------------------
Because there is currently no data source that includes customer
identities across multiple parts an order lifecycle,\407\ regulators
must engage in a process of linking EBS, trade blotters and order
tickets with SRO audit trails, which can be a burdensome and imperfect
process.\408\ For example, trade blotter and order ticket data that
identifies customers from one broker-dealer may only include customer
names and thus may not be readily matched to similar data from another
broker-dealer, or may require substantial effort and uncertainty to
reconcile across firms. Further, EBS data's limited coverage of trading
activity and lack of some detailed trade information creates
inefficiencies in insider trading investigations. These investigations
often begin with a request for EBS data of trades before a significant
corporate news event that affected a company's stock price. After
identifying accounts that made suspicious trades, investigators often
request additional EBS data of all trades by the accounts during the
same period. If the additional data reveal suspicious trades by the
accounts of the securities of other companies, investigators often must
make a third round of EBS requests for data of trades by all accounts
in those securities. If trading is done in an omnibus account,
Commission Staff must ask firms to provide the identity of the account
holder, and then request account information. To investigate for
manipulation (e.g., marking the close, order layering, spoofing,\409\
wash sales, trading ahead), Commission Staff may also link data from
multiple sources. First, Commission Staff obtains equity and option
cleared reports from an internal online system that interfaces with
data provided by the DTCC. Because the equity and option cleared
reports do not have trade details, Commission Staff may also request
trade information through EBS submissions from one or multiple firms.
If a trade was executed on behalf of another firm, Commission Staff may
then contact the other firm, until Staff can find out who placed the
trade and the account holder. The Commission may then obtain granular
trade information that contains order entry time and order execution
time from firms or brokers via request or subpoena.\410\
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\407\ The Commission approved a FINRA rule that would require
broker-dealers to report to OATS the identity of U.S. registered
broker-dealers that are not FINRA members and broker-dealers that
are not registered in the U.S. but have received an SRO-assigned
identifier in order to access certain FINRA trade reporting
facilities, from whom they receive or route an order. See Securities
Exchange Act Release No. 77523 (April 5, 2016), 81 FR 21427 (April
11, 2016) (Order Approving FINRA Rule to Report Identity of Certain
Broker-Dealers to OATS). CAT would similarly capture this
information upon full implementation.
\408\ For further discussion of the problems associated with
linking, see Section IV.D.2.b(2)C, infra.
\409\ See supra note 343.
\410\ The process to obtain detailed trade information from
firms and brokers via requests or subpoenas generally takes anywhere
from two to four weeks depending on the size of the request.
---------------------------------------------------------------------------
The methods for obtaining such information significantly reduce its
utility, particularly for surveillance and market reconstruction
purposes. Market reconstructions, for example, cannot take advantage of
the detail in the EBS and trade blotter data because of the resources
required to link so many data sources, lack of necessary elements (such
as time stamps in milliseconds) needed to link data sources (for
example, matching large trader reports to activity on a particular
exchange), or the absence of standardized format. To examine a tip or
complaint, regulators may consolidate data from each affected
[[Page 30666]]
market participant to determine the identities of those responsible for
the atypical activity in question. To the extent that the activity
originates from several market participants, regulators must request
data from each of those market participants, and possibly other market
participants, to obtain information that could identify the customer(s)
originating the orders that created the atypical activity.
For many regulatory activities, lack of completeness results in
regulators initially relying upon the most accessible data sources,
with significant information contained only in data sources made
available by request. Starting regulatory functions with incomplete
data sources requires regulators to later make data requests and link
such data request responses. More importantly, however, incomplete or
unconsolidated data interferes with effective surveillance. Access to
data through non-routine means makes investigations and examinations
less efficient, and makes automated surveillance less accurate and less
effective. For example, the publicly available data discussed above
\411\ identify exchanges but lack most of the fields found in some SRO
audit trails or EBS, such as customer information, order entry time,
order execution time, information about special order handling codes,
counterparties, and member identifiers. Similarly, equity cleared
reports contain only the date, the clearing firm, and the volume
cleared by each clearing firm and not the trade size, trade time, or
trade location. Option cleared reports contain only the date, the
clearing firm, number of customer contracts, and number of firm
contracts for the options.
---------------------------------------------------------------------------
\411\ See Section IV.D.2.a(6), supra.
---------------------------------------------------------------------------
Some valuable data fields, such as modifications that make an order
non-displayed and other special handling instructions are consistently
available on only a few data sources or require linking different data
sources.\412\ The lack of direct, consistent access to order display
information and special handling instructions creates inefficiencies in
surveillances, examinations, and investigations that examine hidden
liquidity and the treatment of customer orders. Data that are not
directly accessible by regulators at all include buy-to-cover
information and subaccount allocation information, including the
allocation time. For example, no current data source allows regulators
to directly identify when someone is buying to cover a short sale.
Regulators could use this information to better understand short
selling and for investigations of short sale manipulation. Indeed, the
absence of this information during the financial crisis in 2008 reduced
the efficiency of the reconstruction of investor positions in financial
companies.\413\
---------------------------------------------------------------------------
\412\ Order display information (i.e., whether the size of the
order is displayed or non-displayed) is indicated in the ``Customer
Instruction Flag'' and special handling instructions are indicated
in the ``Special Handling Code'' of an OATS report. The Customer
Instruction Flag is mandatory if a limit or stop price is provided.
A Special Handling Code is required for order modifications, reserve
size orders, when the order is routed electronically to another
member, or when the terms and conditions of the order were derived
from a related options transaction. See FINRA, OATS Reporting
Technical Specifications, at Appendix A (June 26, 2015), available
at https://www.finra.org/sites/default/files/TechSpec_20150825.pdf.
This data is not directly available to all regulators. The
Commission must request this data from FINRA.
\413\ Having access to buy-to-cover information was also one of
the subjects of a Dodd-Frank-mandated study on short sale reporting.
See SEC, Short Sale Position and Transaction Reporting (June 5,
2014) (``Short Sale Reporting Study''), available at https://www.sec.gov/dera/reportspubs/special-studies/short-sale-position-and-transaction-reporting.pdf.
---------------------------------------------------------------------------
Subaccount allocation information needed for regulatory activities
can be difficult for regulators to collect and compile. SRO audit
trails currently do not require allocation reports and broker-dealers
may not have records of the time of a subaccount allocation. When
regulators require an understanding of subaccount allocations for a
regulatory task, they generally request and sift through trade blotter
or EBS data in an attempt to identify allocations and the details of
those allocations. Current trade blotter data contains limited customer
information on allocations and is not required to contain allocation
time information at the subaccount level. While the Commission is
sometimes able to acquire allocation time on trade blotters, not all
broker-dealers keep records in a manner that facilitates efficient
regulatory requests for allocation time information.
The difficulty in obtaining allocation information and the
difficulty in reconstructing allocations with data from broker-dealers
limits the efficiency of certain surveillances and examinations.
Allocation time at the subaccount level is critical for determining
whether some customers are systematically given more favorable
allocation treatment than others. For example, when a broker-dealer
places an order or series of orders for multiple customer accounts that
generates multiple executions at multiple prices, it is possible that
different customers receive different prices in the allocation process.
However, if some customers systematically receive less favorable prices
than others when they should be receiving the same prices for their
executions, this could indicate that the broker-dealer is handling
allocations improperly.\414\
---------------------------------------------------------------------------
\414\ If a group of orders are bundled together for execution,
when those same orders are allocated, they should receive the same
(usually average price) allocations. However, if executions are for
orders that are not bundled together, it might be appropriate that
customers for those separate orders would receive differently-priced
allocations.
---------------------------------------------------------------------------
(2) Accuracy
In the Adopting Release, the Commission noted that while ``to some
extent, errors in reporting audit trail data to the central repository
will occur,'' the CAT NMS Plan would improve the quality of data
including improvements to accuracy.\415\ Therefore, the economic
analysis carefully considers the Baseline of the accuracy of data
regulators currently use in order to consider whether and to what
degree the CAT NMS Plan would provide more accurate data.
---------------------------------------------------------------------------
\415\ See Adopting Release, supra note 9, at 45730.
---------------------------------------------------------------------------
The prospect of inaccurate data can result in regulators expending
extra resources to run additional quality checks to ensure reliable
data and conclusions in enforcement investigations, or being unable to
draw reliable conclusions at all. In addition, risk-based analysis may
not properly identify a potential risk that justifies further
examination if the underlying data suffers from inaccuracies.
Ultimately, inaccurate data results in less efficient investigations as
well as less effective surveillance and risk analyses. This economic
analysis considers several forms of data inaccuracy, including data
errors, inaccurate event sequencing, the inability to link data
accurately, inconsistent identifiers, and obfuscating levels of
irreversible data aggregation.
A. Data Errors \416\
Based on Staff experience, the Commission preliminarily believes
that data errors affect most current data and can persist even after
corrections. For
[[Page 30667]]
example, Commission Staff has investigated instances where information
was inaccurately reported by broker-dealers, most notably in EBS data
given to the Commission.\417\ In addition, the Commission believes that
data sources that depend on data translated from back-office systems
can be less accurate than those that come from trading systems, such as
trade blotters and data sourced from exchanges' electronic trading
systems, because the data translation process creates an additional
source of potential errors in code that may not work as intended. Data
from trading systems can also contain errors resulting from a coding
error in the query pulling the data. Such coding errors can affect any
data including trade blotters. For example, trade blotters are stored
using the ticker symbol in effect at the time of the trade. If the
ticker symbol changes between the trade and the data request, the
coding may fail to take the ticker symbol change into account and fail
to retrieve the correct data. The Commission has found that trade
blotter data can often be inaccurate due to improper inclusion of
cancelled orders or corrections, making accurate reconciliation
difficult. Furthermore, trade blotter data can lack security
information including CUSIP, symbol, or description at the subaccount
level, which are important features for helping regulators determine
potential violations.\418\
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\416\ As used herein, the term ``data errors'' refers to
instances where data reflect false information or are missing
information such that they do not reflect order events that occurred
in the market fully and accurately. Under this definition of ``data
errors,'' a trading error or an order entry error would not be a
``data error.'' For example, if a trader submitted an order to an
exchange with an order size of 100,000, an accurate order record
would contain an order size of 100,000. If the trader actually
intended to enter the order size as 1,000, the accurate order record
would still be 100,000 because that would reflect the actual state
of the market at the time. In other words, the 100,000 order size is
not a ``data error.'' If the trader later corrected the order size,
accurate data would reflect the subsequent corrections while still
preserving the accurate state of the market at the time.
\417\ For example, Commission staff have experienced frequent
errors in EBS data such as omitted variables, decimals in the wrong
places, blank account information, and data for the wrong
securities. The Commission has instituted actions against entities
in connection with inaccurate EBS data. See, e.g., Securities
Exchange Act Release No. 75445 (July 14, 2015), In the Matter of OZ
Management, LP, Administrative Proceeding File No. 3-16686 (OZ
Management, LP admitted submitting inaccurate data to four of its
prime brokers); see also Section IV.D.2.b(4), infra, for a
discussion of one impact of inaccurate data.
\418\ In cases where Commission staff has used these data, it
has found that the frequent omission of these important fields in
trade blotter data is generally due to the manner in which the data
is queried by broker-dealers. There are a variety of reasons why
these fields may be excluded from a query. For example, over time
firms make changes to their software systems; records stored by
previous versions, particularly when the records are archived in a
secondary location, may not be fully compatible with software that
is written to access more current versions of this data.
Additionally, sometimes when a broker-dealer or clearing firm merges
or is acquired, its trade data may be compromised due to
incompatible systems or inadequate data storage issues. This problem
was particularly relevant following the financial crisis.
Consequently, staff does not currently believe that this missing
information is caused by a failure of broker-dealers to collect and
retain these variables, but rather that over time this data becomes
less accessible by software tools and may require hand processing by
broker-dealers providing this information.
---------------------------------------------------------------------------
Audit trail data contain errors, as well. The CAT NMS Plan reports
that 2.42% of order events submitted to OATS fail validation
checks,\419\ resulting in the rejection of almost 425,000 reports per
day, on average.\420\ While FINRA sends these records back to its
members to correct, not all data errors are identified because OATS
limits error correction requests to records with internal
inconsistencies within a given member's submission. In particular,
significant error rates in event linking are common because there is no
cross-participant error resolution process; FINRA estimates that 0.5%
of OATS routing reports directed to another FINRA member broker-dealer
cannot currently be linked.\421\ The CAT NMS Plan reports that,
following the rollouts of three major updates to OATS, 0.86% of Trade
Reporting Facility (``TRF'') reported trades could not be matched to
OATS execution reports, 3.12% of OATS route reports could not be
matched to exchange orders, and 2.44% of inter-firm routes could not be
matched to a record of the receiving firm's receipt of a routed
order.\422\
---------------------------------------------------------------------------
\419\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(b). When FINRA receives an end-of-day OATS file from a member,
it performs over 152 validation checks on each order event reported
to OATS. Each of these checks can result in rejecting an OATS data
submission and generating an error message. In addition to
validation checks, FINRA determines whether a file that is
syntactically correct nevertheless contains errors in content
related to internally inconsistent information about processing,
linking, and routing orders. For some errors, FINRA requires the
member to provide corrections within five business days after
rejections are available. See OATS Reporting Technical
Specifications, supra note 357, at 6-1--6-10. Duplicate records and
records with symbols that are not reportable to OATS may result in
rejections that do not require repair. Id. at 6-4. Validation checks
refer to tests of whether data is consistent with a set of rules
that specify conditions that should be met by valid data. Validation
checks are typically limited to detecting errors that can be
discovered by a concise set of logical rules using data within scope
at the time the validation test is run. An incorrect price that is
negative would likely be detected by a validation check, while a
price that was a few cents too low may not. Validation checks that
apply across multiple records may be difficult to apply across data
that is submitted at different times.
\420\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(b); see also Adopting Release, supra note 9 at 45729.
\421\ See Section IV.D.2.b(2)C, infra.
\422\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(b).
---------------------------------------------------------------------------
Other audit trail data may also contain errors. For example, the
Commission notes that exchange SROs populate most of the information
with data from their in-house order and trading records, but a few of
these exchange SROs also rely on members to complete their audit
trails.
B. Event Sequencing
The ability to sequence market events is crucial to the efficacy of
detecting and investigating some types of manipulation, particularly
those involving high frequency trading, those in liquid stocks in which
many order events can occur within microseconds, and those involving
orders spread across various markets. In today's market, high frequency
and algorithmic traders can react to changes in the market in a few
milliseconds or less.\423\ Investigations involving algorithmic
trading, therefore, can require the ability to sequence the order and
trade events to within a few milliseconds; however, regulators relying
on currently available data may have difficulty sequencing events that
occur within a second on different trading venues or broker-dealer
systems.\424\ In addition, in one type of trade-based manipulation, a
manipulator might build a short position in a stock, submit sell orders
designed to decrease the stock price, and finally buy at an
artificially low price. To analyze this activity, except when cover
orders precede the sell activity, it would be necessary to determine
whether the orders intending to create an artificial price came before
the orders intending to profit from the artificial price, which becomes
difficult when the systems on which order events occurring close in
time to each other have clocks that are not synchronized. Further,
insufficiently granular time stamps can make sequencing events across
venues impossible.
---------------------------------------------------------------------------
\423\ See, e.g., Joel Hasbrouck and Gideon Saar, Low-Latency
Trading, 16 Journal of Financial Markets 646 (2013) in which the
authors report apparent HFT response times to market events of 2-3
milliseconds. Given technology advances, it is likely that response
times have decreased since their sample period, which ends in June
2008.
\424\ Regulators can sequence events occurring on the same venue
or on the same systems at broker-dealers, but sequencing across
venues or broker-dealer systems that could have clocks that are not
synchronized with each other is more difficult.
---------------------------------------------------------------------------
Thus, the sequencing of order events requires both sufficient clock
synchronization across market participants and time stamps that are
granular enough for accurate sequencing.\425\ As discussed below,
[[Page 30668]]
current clock synchronization standards make this process difficult.
---------------------------------------------------------------------------
\425\ For example, if two market participants report that two
non-simultaneous events happened at 10:15:45, then the time stamps
are not granular enough to sequence the events and regulators would
need sub-second time stamp granularity to distinguish them. If the
two market participants each have up to one-second clock drift from
the actual time, the 10:15:45 time stamps only show that the event
happened between 10:15:44 and 10:15:46. Only when regulators have
both adequate time stamp granularity and sufficient clock offset
tolerances can events be sequenced using time stamps.
---------------------------------------------------------------------------
i. Clock Synchronization
Clock synchronization refers to the synchronization of the business
clocks used by market participants for the purposes of recording the
date and time of market events to a centralized benchmark clock, often
that maintained by the NIST. Clock synchronization helps to ensure that
the time stamps used by various participants are consistent, thereby
allowing regulators to compare time stamps across participants and to
use multiple time stamps to determine the sequence of market events.
The ability of regulators to accurately sequence events can be limited
by the permitted ``offset'' between the clocks--i.e., the length of the
gap that is permitted between a participant's clock and the time
maintained by a centralized benchmark clock.\426\ For example, if the
offset between the clocks is one second, regulators cannot accurately
determine the correct sequence of events in the market occurring within
a two-second period, because each clock may be up to one second fast or
slow.
---------------------------------------------------------------------------
\426\ For example, if a participant's clock records a point in
time as 11:00:00 and the NIST clock records the same point in time
as 11:00:01, then the offset between the clocks is one second.
---------------------------------------------------------------------------
Current rules require most broker-dealers to synchronize their
system clocks to within one second. In particular, FINRA specifies a
clock offset tolerance of one second,\427\ and the NASDAQ Stock Market
and NASDAQ OMX BX require members to comply with FINRA clock
synchronization rules.\428\ CHX specifies a clock offset tolerance of
500 milliseconds.\429\ NYSE MKT and NASDAQ OMX PSX require members to
synchronize their clocks relative to a time source designated by the
Exchange, but do not specify the standard.\430\ NYSE Arca allows
options traders to use any time provider source for clock
synchronization as long as the business clocks it uses on the Exchange
are accurate to within three seconds of the NIST clock or the United
States Naval Observatory Master Clock in Washington DC.\431\
---------------------------------------------------------------------------
\427\ See FINRA Rule 7430 (requiring each member to
``synchronize its business clocks that are used for purposes of
recording the date and time of any event that must be recorded
pursuant to the FINRA By-Laws or other FINRA rules, with reference
to a time source as designated by FINRA, and shall maintain the
synchronization of such business clocks in conformity with such
procedures as are prescribed by FINRA.''). Section 2 of the OATS
Technical Specifications states that all computer system clocks and
mechanical time stamping devices must be synchronized to within one
second of the NIST clock and must be synchronized every day. See
OATS Reporting Technical Specifications, supra note 357, at 2-1. In
November 2014, FINRA issued a Regulatory Notice seeking comment on a
proposal to change the clock offset tolerance to be 50 milliseconds.
This proposal also proposed to move the clock offset tolerance from
the OATS Technical Specifications to FINRA's books and records rules
so that the requirements apply to the recording of the date and time
of any event that FINRA By-Laws or Rules require, not just OATS
requirements. See FINRA, Equity Trading Initiatives: Synchronization
of Business Clocks, Regulatory Notice 14-47, available at https://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_14-47.pdf. On February 9, 2016, FINRA filed a
proposed rule change with the Commission. The proposal would reduce
the clock offset tolerance for members' computer clocks that are
used to record events in NMS securities, including standardized
options, and OTC Equity Securities, from within one second of the
NIST atomic clock to within a 50-millisecond tolerance of the NIST
atomic clock. FINRA would require firms with systems that capture
time in milliseconds to comply with the new 50-millisecond clock
offset tolerance within six months of the effective date; remaining
firms that do not have systems which capture time in milliseconds
would have 18 months from the effective date to comply with the 50-
millisecond standard. The proposal would not change the current one-
second clock offset tolerance of the NIST clock requirement for
mechanical clocks or time stamping devices. The proposal would
consolidate and codify the clock synchronization requirements in new
FINRA Rule 4590. The Commission has published notice of this
proposed rule change. See Securities Exchange Act Release No. 77196
(February 19, 2016), 81 FR 9550 (February 25, 2016).
\428\ See NASDAQ Rule 7430A (``(a) Nasdaq members shall comply
with FINRA Rule 7430 as if such Rule were part of Nasdaq's rules.
(b) For purposes of this Rule, references to `the FINRA By-Laws or
other FINRA rules' shall be construed as references to `the Nasdaq
Rules'); NASDAQ OMX BX Rule 6953 (``(a) Exchange members shall
comply with NASD Rule 6953 [superceded by FINRA Rule 7430] as if
such Rule were part of the Exchange's rules. FINRA is in the process
of consolidating certain NASD rules into a new FINRA rulebook. If
the provisions of NASD Rule 6953 are transferred into the FINRA
rulebook, then Equity Rule 6953 shall be construed to require
Exchange members to comply with the FINRA rule corresponding to NASD
Rule 6953 (regardless of whether such rule is renumbered or amended)
as if such rule were part of the Rules of the Exchange. (b) For
purposes of this Rule, references to `the By-Laws or other rules of
the Association' shall be construed as references to `the Rules of
the Exchange.' '').
\429\ See CHX Rule 3, Interpretations and Policies .03 (``These
rules shall not apply to orders sent or received through the
Exchange's matching system or through any other electronic systems
that the Exchange expressly recognizes as providing the required
information in a format acceptable to the Exchange. The Exchange
will not recognize a non-Exchange system as providing information in
an acceptable format unless that system has synchronized its
business clocks for recording data with reference to a time source
designated by the Exchange and maintains that synchronization in
conformity with procedures prescribed by the Exchange.''); Rule 4,
Interpretations and Policies .02 (``Each Participant or layoff
service provider shall synchronize its business clocks that are used
for purposes of recording the date and time of any event that must
be recorded pursuant to this provision with reference to a time
source as designated by the Exchange, and shall maintain the
synchronization of such business clocks in conformity with such
procedures as are prescribed by the Exchange.''); Rule 5,
Interpretations and Policies .01(a) (``Clock synchronization and
timing of the determination of improper trade-throughs. The
Exchange's systems shall routinely, throughout the trading day, use
processes that capture the time reflected on the atomic clock
operated by the National Institute of Standards and Technology and
shall automatically make adjustments to the time recorded in the
Exchange's Matching System to ensure that the period between the two
times will not exceed 500 milliseconds. The Exchange shall determine
whether a trade would create an improper trade-through based on the
most recent NBBO that has been received and processed by the
Exchange's systems.'').
\430\ See NYSE Rule 123, Supplementary Material .23 (``Any
vendor or proprietary system used by a member or member organization
on the Floor to record the details of an order or report for
purposes of this rule must be synchronized with reference to a time
source as designated by the Exchange.''); NYSE MKT Rule 7430 (``Each
member organization shall synchronize its business clocks that are
used for purposes of recording the date and time of any event that
must be recorded pursuant to the Rules of the Exchange, with
reference to a time source as designated by the Exchange, and shall
maintain the synchronization of such business clocks in conformity
with such procedures as are prescribed by the Exchange.''); NASDAQ
OMX PSX Rule 3403 (``Each member organization shall synchronize its
business clocks that are used for purposes of recording the date and
time of any event that must be recorded pursuant to the rules of the
Exchange, with reference to a time source as designated by the
Exchange, and shall maintain the synchronization of such business
clocks in conformity with such procedures as are prescribed by the
Exchange.'').
\431\ See NYSE Arca Options Rule 6.20 (``(a) Each OTP Holder and
OTP Firm must synchronize, within a time frame established by the
Exchange, the business clocks that it uses for the purpose of
recording the date and time of any event that must be recorded
pursuant to the Rules of the Exchange. OTP Holders and OTP Firms may
use any time provider source. Each OTP Holder and OTP Firm must,
however, ensure that the business clocks it uses on the Exchange are
accurate to within a three-second [sic] of the National Institute of
Standards and Technology Atomic Clock in Boulder Colorado (`NIST
Clock') or the United States Naval Observatory Master Clock in
Washington DC (`USNO Master Clock'). This tolerance includes all of
the following: (1) The difference between the NIST/USNO standard and
a time provider's clock; (2) transmission delay from the source; and
(3) the amount of drift of the OTP Holder or OTP Firm's business
clock. For purposes of this Rule, `business clocks' mean an OTP
Holder or OTP Firm's proprietary system clocks. OTP Holders and OTP
Firms must set forth in their written supervisory procedures,
required by Rule 11.18, the manner in which synchronization of
business clocks will be conducted, documented and maintained.'').
---------------------------------------------------------------------------
In practice, some broker-dealers currently synchronize their clocks
to smaller clock offset tolerances. FIF surveyed market participants to
gather information on current broker-dealer clock synchronization
practices.\432\ The
[[Page 30669]]
survey found that 29% of respondents currently synchronize their clocks
to permit a maximum clock offset of one second from NIST time.\433\ The
survey further found that 10% of market participants permit a maximum
offset from NIST time that is between 50 milliseconds and one second,
21% of respondents permit a 50-millisecond maximum offset, and 18% of
respondents permit a maximum offset that is less than 50 milliseconds.
The remaining 22% of survey respondents utilize multiple clock offset
tolerances across their systems, ranging from five microseconds to one
second. FIF noted that 69% of firms that achieve a maximum clock offset
of 50 milliseconds or less are large firms reporting more than three
million OATS records per month.
---------------------------------------------------------------------------
\432\ See FIF Clock Offset Survey, supra note 127. The
Commission notes limitations to the survey that could result in
downward bias and imprecision. Specifically, the broker-dealers
represented by the survey are primarily complex and large broker-
dealers in terms of market activity levels; consequently, smaller
broker-dealers are underrepresented. But, as discussed below, the
exclusion of small broker-dealers is unlikely to materially affect
industry costs because smaller broker-dealers are unlikely to incur
significant clock-synchronization costs because the majority of
broker-dealers rely on service bureau clocks to time stamp their CAT
Reportable Events.
\433\ Id.
---------------------------------------------------------------------------
Certain exchanges, the SIPs, and FINRA synchronize their clocks for
their trading, recordkeeping, and other systems. According to FIF, all
exchange matching engines meet a clock offset tolerance of 50
milliseconds.\434\ However, NASDAQ recently stated that all exchanges
trading NASDAQ securities synchronize their matching engines and
quotation systems to within 100 microseconds.\435\ The Commission
understands that the NYSE, the options exchanges, and the SIAC SIP have
comparable clock synchronization standards. In conversations with
Commission Staff, the Participants stated that absolute clock offset on
exchanges averages 36 microseconds.\436\
---------------------------------------------------------------------------
\434\ Id.
\435\ See NASDAQ, UTP Vendor Alert #2015-7 (April 24, 2015),
available at https://www.nasdaqtrader.com/TraderNews.aspx?id=UTP2015-07 (describing additional time stamps to
be reported to the SIP, including information on exchange clock
synchronization, and stating that ``[e]xchanges use a clock sync
methodology ensuring that timestamps are accurate within tolerances
of 100 microseconds or less.'').
\436\ In response to questions from Commission Staff, the
Participants surveyed the exchanges to establish their current
average clock offset. All exchanges that currently operate matching
engines responded to the survey, which measured the offset from the
exchange clock to NIST. The Participants noted that the frequency
with which exchanges measure their clock offset ranges from once per
second to once per fifteen minutes, and the procedures to correct
for clock offset vary. Some exchanges correct by slewing, in which
the offset is gradually corrected, while others use stepping, in
which the offset is immediately corrected. The process by which
clock offset is corrected can impact the ability to order events
time stamped by a single clock because stepping could result in a
backwards adjustment in recorded time.
---------------------------------------------------------------------------
Because multiple order events can occur within timeframes of less
than one second, current clock synchronization requirements and
practices greatly limit the ability of regulators to accurately
sequence order events. To examine, among other things, how many events
can be synchronized with current clock offset tolerances, Commission
Staff conducted an analysis of the frequency of events using MIDAS
data.\437\ In the analysis, events are all real-time messages,
consisting of trades, orders, modifications, cancellations and updates
from exchange direct feeds and trades from the FINRA TRFs. The analysis
focused on identifying whether, for each order event, an event at
another venue occurred within a given time range.\438\ For the purposes
of the analysis, events at another venue were called an ``unrelated
event.'' The Commission recognized that order events occurring on the
same venue have sequence numbers that allow sequencing even if orders
have the same time stamp. Therefore, the analysis considered only
whether any unrelated orders existed within a given time range that
could complicate the sequencing across the market.\439\
---------------------------------------------------------------------------
\437\ The MIDAS system does not contain all of the events in a
given security that would be in CAT. Therefore, the analysis is
limited, but still provides useful insights.
\438\ The methodology to calculate these percentages starts with
sorting all event messages for every day chronologically by exchange
time stamp. (MIDAS does not report the exchange time stamp; but it
provides the difference between the MIDAS time stamp and the
exchange or TRF time stamp; the analysis uses this value to derive
the exchange time stamp.) For each event, it calculates the
difference (Delta) between the current time stamp (t0)
and the last time stamp (t-1) in the same security on a
different venue.
Deltanearest last = t0,venue A -
maximum(t-1,venue B, t-1,venue C,
t-1,venue D, t-1,venue E)
This is the shortest time difference
(Deltanearest last) between an event on venue A and a
preceding event on any venue, except for venue A. Next, the analysis
calculates the time difference (Deltanearest next)
between the current time stamp (t0) and the next time
stamp (t1) in the same security on a different venue.
Deltanearest next = minimum(t1,venue B,
t1,venue C, t1,venue D, t1,venue E)
- t0,venue A
Finally, the analysis uses the shorter of the time differences
to evaluate whether an event occurs within a particular time period
of another event in the same security on a different venue.
Deltanearest = minimum(Deltanearest last,
Deltanearest next)
Values are aggregated over one week (June 15, 2015 through June
19, 2015) for the equities analysis; and the options analysis data
is from one day (June 15, 2015).
\439\ Within the analysis, events reported to the TRF are
treated as occurring on a different trading venue than other recent
events because TRF data comprises many separate venues (such as ATSs
and off-exchange market makers). While events within a single
exchange with identical time stamps can potentially be sequenced
through record identifiers recorded by the exchange, for TRF trades
this is often untrue because many venues with independent clocks
contribute to the aggregate TRF data.
Table 3--Percentage of Events Close to Unrelated Events
------------------------------------------------------------------------
Percent of unrelated
events
Nearest event time stamped within ---------------------
Equities Options
------------------------------------------------------------------------
2 seconds......................................... 98.69 93.03
1 second.......................................... 97.95 90.99
100 milliseconds.................................. 92.16 81.17
50 milliseconds................................... 89.12 76.59
10 milliseconds................................... 83.49 64.46
5 milliseconds.................................... 81.28 58.26
2 milliseconds.................................... 77.92 49.30
1 millisecond..................................... 74.31 41.13
200 microseconds.................................. 57.53 21.58
100 microseconds.................................. 48.09 14.51
10 microseconds................................... 21.42 3.13
5 microseconds.................................... 14.44 3.12
------------------------------------------------------------------------
Table 3 shows that 97.95% of the order events for listed equities
and 91% of order events for listed options in the samples occurred
within one second of another unrelated order event in the same
security. At the other extreme in Table 3, 14.44% of the unrelated
order events for listed equities and 3.12% of the unrelated order
events for listed options in the same security occurred within 5
microseconds of another order event in the same security. The
Commission notes that Table 3 underestimates the true frequency of
unrelated events within the given time frames because it includes only
order events that are included in the MIDAS data. As such, the analysis
is unable to include events such as the placing of hidden orders on
exchanges, the placing of orders on an ATS, order originations, order
routes, order receipts, and order cancellations and modifications for
any order not displayed on an exchange order book. Despite this
limitation, Table 3 illustrates how the current frequency of order
events makes sequencing unrelated order events difficult.
ii. Time Stamps
Given the frequency with which order events can occur, regulators
need sufficiently granular time stamps to sequence events across orders
and within order lifecycles. As noted above, even if the clocks
recording time stamps have no clock offset, the granularity of the time
stamp can limit regulators' ability to sequence events accurately.\440\
---------------------------------------------------------------------------
\440\ In addition, Craig W. Holden and Stacey Jacobsen,
Liquidity Measurement Problems in Fast, Competitive Markets:
Expensive and Cheap Solutions, 69 Journal of Finance 1747 (2014),
shows that using time stamps in seconds instead of milliseconds can
yield liquidity measurement problems.
---------------------------------------------------------------------------
Current data sources have different time stamp granularity
standards. Many public data sources report time in seconds or
milliseconds and some,
[[Page 30670]]
including direct data feeds, report time in microseconds or
nanoseconds. For example, the Options Price Reporting Authority
(``OPRA'') allows for time stamps in nanoseconds and the other SIPs
require time stamps in microseconds for equity trades and quotes,
whereas the short sale transactional data released by exchanges
contains time stamps in seconds.\441\ Currently, OATS requires time
stamps in milliseconds for firms that capture time in milliseconds, but
does not require members to capture time in milliseconds.\442\ EBS
trade times are recorded only to the second; other EBS records must
contain time stamps containing only the transaction date. The lack of
uniform and granular time stamps can limit the ability of regulators to
sequence events accurately and to link data with information from other
data sources.
---------------------------------------------------------------------------
\441\ See OPRA Option Price Reporting Authority Binary
Participant Interface Specification Version 1.7 (January 2015),
available at https://www.opradata.com/specs/opra_binary_part_spec.pdf; see also NYSE, Modified Timestamps and
Additional Timestamp Information for Daily TAQ (June 22, 2015),
available at https://www.nyxdata.com/nysedata/default.aspx?tabid=993&id=2784; UTP Vendor Alert #2015-7, supra note
435, regarding additional time stamps to be reported to the SIP.
\442\ See FINRA Rule 7440 (providing that ``[e]ach required
record of the time of an event shall be expressed in terms of hours,
minutes, and seconds; provided that the time of an event shall be
expressed in hours, minutes, seconds, and milliseconds if the
member's system captures time in milliseconds.''). The Commission
approved the requirement that time be expressed in milliseconds if
the member's system captures time in milliseconds on February 27,
2014. See Securities Exchange Act Release No. 71623 (February 27,
2014), 79 FR 12558 (March 5, 2014); see also, FINRA, Equity Trade
Reporting and OATS, Regulatory Notice 14-21 (May 2014), available at
https://www.finra.org/sites/default/files/NoticeDocument/p506337.pdf.
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C. Linking and Combining Data
Sometimes one order or market activity event may be reflected in
information contained in various data sources or in different fields
within the same data source, and fully understanding that activity
requires linking information across the different data sources.
Therefore, regulators analyzing an event or running a surveillance
pattern often need to link data. For example, cross-market examinations
require the cumbersome and time-consuming task of linking many
different data sources.\443\ Regulators combine trading data from
sources such as public feeds, SRO audit trails, EBS data, and trade
blotters when reviewing surveillance alerts to determine whether
violations of rules such as Rule 611 of Regulation NMS occurred \444\
or to examine, for example, whether an entity availing itself of a
market maker exemption is engaging in bona fide market making. In fact,
the data needed for an examination often consist of many audit trails
and are stored in non-uniform formats.\445\ In addition, the analysis
and reconstruction of market events could require linking many
different data sources, such as a dozen SRO audit trails.
---------------------------------------------------------------------------
\443\ Such linking is typically conducted electronically with an
algorithm unless the size of the data set is small. This requires
the person attempting to combine and link the data to write computer
code to identify and match the records that need to be linked. This
task involves extensive testing and debugging the first time that
person tries to combine and link those specific data sources.
Further, given the variation in formats across broker-dealers and
other data sources, the code may need to change for each
investigation, requiring a repeat of the extensive testing and
debugging process.
\444\ 17 CFR 242.611.
\445\ In the context of the CAT NMS Plan, the Commission does
not distinguish data format from data taxonomy. See Section III.B.3,
supra. In discussing data format, the Commission combines data
format with data taxonomy. Id. The distinction between format and
taxonomy is not significant in the context of the CAT NMS Plan
because the Plan does not specify either for incoming data and the
Plan effectively requires uniformity in both for regulator access.
Id. SRO audit trails currently differ in both format and taxonomy as
do many other trading and order data sources.
---------------------------------------------------------------------------
Regardless of whether order lifecycle reports are reflected in the
same or different data sources, the process of linking lifecycle events
is complex and can create inaccuracies. Merging different data sources
often involves translating the data sources into the same format,\446\
which can be a complex process that is prone to error. Linking records
within or across data sources also requires the sources to share ``key
fields'' that facilitate linkage, along with a successful linking
algorithm. Regulators may be unable to link some data source
combinations accurately because the data sources do not have key fields
in common or the key fields are not sufficiently granular. For example,
regulators cannot always link trade records accurately to EBS records.
The EBS records contain a symbol and date, but the price and size on
the records may reflect multiple trades spread over a period of time.
Sometimes, different data sources may have key fields in common but the
relationship between the fields is not straightforward. In these cases,
the algorithm to link them may be necessarily complex and not entirely
successful. Further, within a single order lifecycle, the order number
may change when a broker-dealer routes the order to another broker-
dealer or exchange or even to another desk at the same broker-dealer.
The inability to link all records affects the accuracy of the resulting
data and can force an inefficient manual linkage process that would
delay the completion of the data collection and analysis portion of the
examination, investigation, or reconstruction.
---------------------------------------------------------------------------
\446\ For example, different data sources can format dates and
times differently or may use different notations to signify that the
field contains no value.
---------------------------------------------------------------------------
D. Customer and Broker-Dealer Identifiers
The data sources described in Section IV.D.2.a also lack consistent
customer and broker-dealer identifiers, which limit regulators' ability
to track the activity of one client or broker-dealer across the market.
There is no standard convention for how broker-dealers identify
customers.
Regulators face challenges in tracking broker-dealers' activities
across markets due to inconsistent identifiers and a lack of a
centralized database. These challenges occur primarily in the context
of regulatory activities that require manual or ad hoc data analysis,
as is often the case in particular investigations, examinations, and
market studies. In the case of broker-dealers, SROs generally identify
their members within their data using market participant identifiers
(``MPIDs''). However, the MPIDs that identify broker-dealers on
Execution Venues are not standardized across venues; consequently, a
broker-dealer identified as ``ABCD'' on one venue may be identified
differently on another venue, where ``ABCD'' may refer to a different
broker-dealer entirely. Therefore, aggregating a broker-dealer's
activity across venues requires verifying the MPIDs assigned to a
broker-dealer on each venue, usually referencing the broker-dealer by
its Central Registration Depository (``CRD'') number.\447\ In the
course of manual data analysis, the Commission notes that its Staff
have experienced challenges in identifying broker-dealers using CRD
numbers. These challenges can be due to the fact that, although every
broker-dealer has a CRD number, a broker-dealer that routes an order
seldom, if ever, provides a CRD number to the broker-dealer that
accepts the order.\448\
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\447\ The CRD is an automated database operated by FINRA that
stores and maintains information on broker-dealers and their
registered persons relating to their licensing, registration,
complaints, professional background, and disciplinary history. Each
broker-dealer and their registered persons are assigned a CRD number
for identification.
\448\ The Commission and the SROs have generally overcome these
challenges in the context of automated regulatory data analysis, and
found ways to reduce these challenges in some manual data analysis
and can efficiently track broker-dealers across venues. The
Commission understands that FINRA can track broker-dealers across
venues pursuant to its responsibilities under a plan for allocating
regulatory responsibilities pursuant to Rule 17d-2. On September 12,
2008, the Commission declared effective a plan for allocating
regulatory responsibilities pursuant to Rule 17d-2 filed by the
American Stock Exchange, LLC, Boston Stock Exchange, Inc., CBOE
Stock Exchange, LLC, CHX, FINRA, ISE, NASDAQ, NSX, NYSE, NYSE Arca,
NYSE Regulation, Inc., and Philadelphia Stock Exchange, Inc. (the
``Participating Organizations,'' which have since been updated to be
the following SROs: BATS, BYX, CBOE, CHX, EDGA, EDGX, FINRA, NASDAQ
OMX BX, NASDAQ OMX PHLX, NASDAQ, NSX, NYSE, NYSE MKT [f/k/a NYSE
Amex], and NYSE Arca) (``Insider Trading Rule 17d-2 Plan''). The
Insider Trading Rule 17d-2 Plan allocates regulatory responsibility
over common FINRA members (members of FINRA and at least one of the
Participating Organizations) (collectively ``Common FINRA Members'')
for the surveillance, investigation, and enforcement of (i) Federal
securities laws and rules promulgated by the Commission pertaining
to insider trading, and (ii) the rules of the Participating
Organizations that are related to insider trading (``common insider
trading rules''). Under that Plan, the Participating Organizations,
other than FINRA, have been relieved of regulatory responsibility
over Common FINRA Members (i.e., the broker-dealer and its
associated persons) for surveillance, investigation, and enforcement
of the common insider trading rules over such persons with respect
to ``Listed Stocks'' (as defined in that Plan). Accordingly, FINRA
retains regulatory responsibility for Common FINRA Members with
respect to the common insider trading rules--irrespective of the
market(s) on which the relevant trading may occur. Separately, FINRA
performs investigations and enforcement with respect to non-Common
FINRA Members pursuant to a regulatory services agreement between
FINRA and several of the other Participating Organizations. See
Securities Exchange Act Release No. 58536 (September 12, 2008), 73
FR 54646 (September 22, 2008); see also Securities Exchange Act
Release Nos. 58806 (October 17, 2008), 73 FR 63216 (October 23,
2008); 61919 (April 15, 2010), 75 FR 21051 (April 22, 2010); 63103
(October 14, 2010), 75 FR 64755 (October 20, 2010); 63750 (January
21, 2011), 76 FR 4948 (January 27, 2011); and 65991 (December 16,
2011), 76 FR 79714 (December 22, 2011).
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[[Page 30671]]
Regulators sometimes find it necessary to analyze trading activity
at the customer level instead of the broker-dealer level. Consistently
identifying customer account owners across the multiple broker-dealers
with whom they transact is difficult and prone to error. Although, for
example, the EBS system provides the names associated with each account
traded, these names are drawn from the separate records of each broker-
dealer providing data to the EBS system, and the same party may be
identified by a different name across multiple broker-dealers. Further,
the lack of tax identification numbers in many EBS records limits the
ability for regulators to trace the trading activity of customers
across broker-dealers. Tax identification numbers are not required to
be reported in EBS for average price, allocation, riskless principal,
foreign accounts, and subaccounts. In fact, when one broker-dealer
executes for a second broker-dealer, the tax identification number is
that of the second broker-dealer regardless of whether the second
broker-dealer is trading for a customer.
E. Aggregation
The practice used in some data records of bundling together data
from different orders and trades also can make it difficult to
distinguish the different orders and trades in a given bundle. As an
example, brokers frequently utilize average-price accounts to execute
and aggregate multiple trades for one or more customers. In these
cases, for example with EBS data, the system does not reflect the
details of each individual trade execution, because it reports only the
average aggregate prices and volumes of the various trades within a
series that have been bundled together for reporting purposes. Further,
information on trade allocations aggregate the trade information to
such an extent that it is difficult for regulators to identify when
particular clients may be afforded preferential treatment because it is
challenging to link subaccount allocations to orders and trades.
Equity and options cleared reports provide valuable data to
regulators, but aggregation reduces their usefulness, because the
reports do not have detailed trade information and do not include
activity that does not require clearing.\449\ The volume in these
reports cannot be fully disaggregated and reconciled with the equity
trade execution volume from other data sources used by the Commission,
e.g., TAQ and MIDAS, because the volume in the cleared reports is not
necessarily a summation of all trades. For example, the same trade can
be reported two or more times, by both the buy and the sell sides, for
some OTC transactions and for all trades in NASDAQ exchanges.\450\
Similarly, option cleared reports bundle together multiple executions
by compressing or netting them to facilitate clearing. This aggregation
limits regulators' ability to link records across data sources, as well
as limiting the accuracy with which the data source reflects market
events, which is particularly problematic in applications that require
market reconstruction.
---------------------------------------------------------------------------
\449\ The option cleared volume from the OCC contains the
clearing firm, number of customer contracts, and number of firm
contracts for the options.
\450\ This scenario of a trade being reported several times is
generally the result of agreements that permit a broker-dealer to
clear trades on behalf of another broker-dealer and send trades
directly to the NSCC. Broker-dealers often enter into these
agreements to simplify their clearing processes, achieve lower
transaction costs, and take advantage of extended hours of service.
---------------------------------------------------------------------------
Finally, issuer repurchase information is aggregated at the monthly
and quarterly level.\451\ This aggregation limits the use of such data
in investigations of the timing of issuer repurchases and issuer stock
price manipulation and in analysis of the use of the Rule 10b-18 issuer
repurchase safe harbor.\452\
---------------------------------------------------------------------------
\451\ Issuers report quarterly and monthly repurchases pursuant
to Item 703 of Regulation S-K. This data includes all issuer
repurchases, including tender offers and open market repurchases,
but does not distinguish the type of repurchase. The Commission
notes that Item 703 provides, in part, that issuers must disclose
``the number of shares purchased other than through a publicly
announced plan or program and the nature of the transaction (e.g.,
whether the purchases were made in open-market transactions, tender
offers, in satisfaction of the company's obligations upon exercise
of outstanding put options issued by the company, or other
transactions.'' See 17 CFR 229.703.
\452\ Rule 10b-18 provides issuers with a ``safe harbor'' from
liability for manipulation under Section 9(a)(2) of the Act, 15
U.S.C. 78i(2), and Rule 10b-5 thereunder, 17 CFR 240.10b-5, solely
by reason of the manner, timing, price, and volume of their
repurchases when they repurchase common stock in the market in
accordance with the Section's manner, timing price, and volume
conditions. See 17 CFR 240.10b-18.
---------------------------------------------------------------------------
(3) Accessibility
The SROs and Commission also lack direct access--meaning the
ability to log into a system in a manner that would allow them to
gather and analyze the data they need--to many of the data sources
described above. SROs generally have direct access only to their own
audit trails and the public data feeds.\453\ While SROs control the
manner in which they access their own data, their investigations in
some cases require access to the data of other SROs because firms could
trade across multiple SROs. To access another SRO's data, SROs must
send requests to the other SROs \454\ or to the ISG.\455\ SROs needing
information not included in their audit trails or the audit trail of
another SRO must request such information from their members. The SROs
might not be able to acquire data from entities that are not members of
that SRO; non-members are not obligated to provide SROs with data,\456\
any data provided by
[[Page 30672]]
the regulator of the non-member firm would be on a voluntary basis, or
pursuant to the terms of the ISG Agreement.
---------------------------------------------------------------------------
\453\ FINRA does receive data from certain SROs on a daily basis
and subsequently has direct access to that data.
\454\ Commission staff understands that SROs receiving
information requests from other SROs will typically provide the
information, although they are not required to do so.
\455\ See supra note 399.
\456\ See, e.g., NYSE Rule 2.A.xvi.--Jurisdiction (noting that
the exchange has jurisdiction over matters related to non-member
broker-dealers that choose to be regulated by the exchange). The
Commission may, by rule or order, subject non-members to the rules
of national securities exchanges if it deems it necessary or
appropriate in the public interest and for the protection of
investors, to maintain fair and orderly markets, or to assure equal
regulation. Section 6(f)(2) of the Act, 15 U.S.C. 78f(f)(2); see
also Sections 6(b)(1), 15A(b)(2) of the Act, 15 U.S.C. 78f(b)(1),
78o-3(b)(2) (requiring national securities exchanges and securities
associations, respectively, to have the capability to enforce
compliance by their members with applicable Exchange Act
requirements and exchange or association rules).
---------------------------------------------------------------------------
The Commission has direct access only to the public data feeds and
the equity and option cleared data; it lacks direct access to
information provided in EBS or contained in trade blotters, order
tickets, order handling data, SRO audit trails, and OATS data. Unlike
the SROs, the Commission can subpoena data from entities that are not
registered with the Commission, such as professional traders that are
neither broker-dealers nor investment advisers.
If a regulator does not have direct access to data it needs, the
regulator would request it. This can result in many data requests to
broker-dealers, SROs, and others,\457\ which are burdensome to fill.
The Commission recognizes that data requests could impose burdens on
the entities responding to the request, in addition to the burden on
the regulators to put the request together. Broker-dealers, investment
advisers, and SROs responding to a data request must incur costs in
order to produce, store, and transmit the data for the Commission or
SRO.\458\ Further, as indicated above, regulators may need to request
the data needed from many different data providers because of
fragmentation in the data, and thus one analysis, such as an
investigation, can generate many data requests.
---------------------------------------------------------------------------
\457\ In the context of an investigation or a court, in
litigation, the Commission can request or subpoena information from
entities, including those not registered with the Commission. See
SEC Rule of Practice 232. Pursuant to their rules, SROs can request
information from their registered entities; see also supra notes
454-456 and accompanying text (discussing how SROs request
information from other parties, including other SROs).
\458\ See, e.g., CAT NMS Plan, supra note 3, at Appendix C,
Section B.7(b)(ii)(B) (discussing the current process for broker-
dealers and SROs to respond to data requests, and stating that
broker-dealers must commit staff to respond to requests for EBS or
large trader data and may take varied approaches to fulfilling their
regulatory reporting obligations).
---------------------------------------------------------------------------
Fragmentation in trade and order data can take many forms. First,
an analysis may require the same type of data from many market
participants. Second, the required data fields for an analysis may be
reflected in different types of data. Finally, an analysis may require
data on different products covered in separate data sources. The
fragmentation in the data across market participants is a function of
the fragmentation of trading and broker-dealer services. In today's
equity markets, trades execute across 12 exchanges, more than 40 ATSs,
and around 250 dealers.\459\ With its RSAs, FINRA can consolidate much
of the SRO audit trails in equities.\460\ In the options markets, 14
different exchanges trade listed options with no off-exchange trading
of standardized options and no entity aggregating each audit trail into
one dataset. The vast majority of stocks trade in more than one
location and most options trade on multiple exchanges.
---------------------------------------------------------------------------
\459\ See Securities Exchange Act Release No. 76474 at 81008,
81112, ``Regulation of NMS Stocks'' (November 2015), available at
https://www.sec.gov/rules/proposed/2015/34-76474.pdf; see also Laura
Tuttle, OTC Trading: Description of Non-ATS OTC Trading in National
Market System Stocks (March 2014), available at https://www.sec.gov/dera/staff-papers/white-papers/otc-trading-white-paper-03-2014.pdf.
\460\ FINRA has access to data from OATS and each equities
exchange except CHX. See supra note 333 and accompanying text. This
reduces the data fragmentation as it relates to the number of data
requests for equities.
---------------------------------------------------------------------------
Exchange SROs generally limit their data collection to securities
traded on their own exchanges, and limit the scope of their audit
trails to transactions occurring on their exchanges. While ATSs and
dealers report order events in equities to OATS, each of the 12
equities exchanges has its own audit trail. As a result of this
structure, a market reconstruction for a single security may involve
data requests to multiple exchanges. Likewise, a project involving
options data may require data from each of the 14 options exchanges.
To acquire broker-dealer order records, EBS, trade blotters, and
order tickets, regulators need to send a request to each broker-dealer
to obtain its data. In the Commission's experience requested data can
suffer from missing variables, truncations, and formatting problems due
to the way that the data is queried by the broker-dealer. These
problems can lead to substantial delays in using data and loss in
regulatory productivity. Many different broker-dealers could have
trading records in a given security on a given day of interest, so one
narrow investigation could generate many data requests. As a result, in
2014 the Commission made 3,722 EBS requests that generated 194,696
letters to broker-dealers for EBS data. Likewise, the Commission
understands that FINRA requests further generate about half this number
of letters. In addition, for examinations of investment advisers and
investment companies, the Commission makes approximately 1,200 data
requests per year. Further, an investigation that requires tracing a
single trade or a set of trades back to an investor or investors can
generate many data requests. For such investigations, regulators would
first need to request data from the exchanges or market participants
executing the trades. This data would tell the regulators which
members, subscribers, or broker-dealers sent the orders that led to the
executions. Regulators would then need to go to the members,
subscribers, and broker-dealers to get information on the orders and
repeat until they get to the broker-dealer who initiated the order to
see the customer behind the order.
Finally, some regulatory activities require data on both equities
and options. Because current data sources do not contain information
regarding both equities and options, regulators needing data on both
types of securities would need to make several data requests. Closely
related securities are sometimes traded on entirely different
exchanges, complicating cross-product analyses. For example, COATS data
covers options trades but excludes the trading of the underlying
assets. Often investigations or analyses require examining both options
and their underlying assets, creating the need for regulators to
request data from multiple sources.
This data fragmentation also results in disparate requirements for
industry members to record and report the same information in multiple
formats. Because each SRO has its own data requirements, a market
participant that is a member of multiple SROs may be required to report
audit trail data in numerous formats and interact with multiple
regulators in response to normal data queries. That said, the
Commission understands that the number of disparate formats faced by
each member may have reduced over the past several years.\461\
---------------------------------------------------------------------------
\461\ For example, some exchange audit trails require floor
brokers who operated on their own systems to submit order records to
the exchange. These same floor brokers could be members of other
SROs that require different formats for submitting order reports.
The Commission understands that the volume of trading conducted on
an exchange but not on the exchange's systems has declined sharply.
Therefore, the activity generating the disparate reporting
requirements has declined.
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(4) Timeliness
In order to respond promptly to market events, regulators must be
able to obtain and analyze relevant data in a timely fashion.
Currently, obtaining trade and order data and converting the
[[Page 30673]]
data into a form in which they can be analyzed can involve a
significant delay from the time of a particular event of interest.
Indeed, in some cases the length of time from when an event occurs
until regulators can use relevant data in an investigation or analysis
can be weeks or months. This is especially true for trading data that
includes customer information.
Some of the data sources described above can be accessed by SROs
and the Commission without significant delay. For example, SROs and the
Commission have some real-time direct access to public data and,
through MIDAS, the Commission has next-day direct access to analytics
that are based on public data, such as volumes over various time
horizons. Regulators can also sometimes request and receive trade
blotter data on the same day as the trade(s) of interest because trade
blotters are generally stored in systems immediately.\462\ Further, the
Commission understands that FINRA receives audit trail data from
exchanges pursuant to RSAs at the end of each trading day. However, it
has been the Commission's experience that trade blotter data requests
can take weeks or in excess of a month depending on the scope of the
request and how accustomed the broker-dealer is with fulfilling such
requests.
---------------------------------------------------------------------------
\462\ The regulated entities that respond to data requests need
to query data to respond to the request while still maintaining
normal operations. Large data requests can take significant
computing time and thus, may require the respondents to time the
queries to minimize disruptions. Further, respondents need to write
code to execute the query. More experienced respondents would have
existing code that they could modify without significant debugging
whereas less experienced respondents would need to take time to code
and debug their queries.
---------------------------------------------------------------------------
Corrected FINRA OATS data may be available less than two weeks
after an event and uncorrected data on day T+1. In particular, FINRA
members submit OATS data on a daily basis, submitting end-of-day files
by 8:00 a.m. Eastern Time the following day or they are marked late by
FINRA.\463\ FINRA acknowledges receipt of the data an hour after the
member submits it, before running its validation process. FINRA then
takes approximately four hours after acknowledging receipt of OATS data
to determine if the data contain any syntax errors.\464\ In addition to
the four hours needed to identify errors within a report, it takes
another 24 hours for context checking, which identifies duplicates or
secondary events without an originating event. Once a context rejection
is available, the member has up to five business days to repair the
rejection.\465\ Reports for files that contain internally inconsistent
information about processing, linking, and routing orders may be
available within two business days. FINRA attempts to match the
inconsistent information against any additional data received up to day
T+2 for linking errors and day T+30 for routing errors. The timing for
surveillance programs varies depending on the type of surveillance
being performed; data is assumed to be completely processed and
corrected at day T+8.\466\
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\463\ FINRA currently receives exchange data from most SROs at
the end of the trading day. Information on broker-dealer data
reporting timeframes is available at OATS Reporting Technical
Specifications, supra note 357, at 8-1; see also Adopting Release,
supra note 9, at 45768 n.504.
\464\ See Section IV.D.2.b(2)A, supra (providing more detail on
the validation and error checking process for OATS and other data
sources).
\465\ See OATS Reporting Technical Specifications, supra note
357, at 6-3. Other types of errors and corrections adhere to
slightly different time-lines. See, e.g., id. at 6-12.
\466\ FINRA has the capability to query data that is not fully
corrected, processed and linked to investigate market activity at
T+1.
---------------------------------------------------------------------------
Because market participants generally do not report or compile
datasets immediately after an order event, there is a delay before
regulators may access some data sources. For example, the compilation
of equity and option cleared reports occurs on day T+1 for options and
day T+3 for equities (i.e., the clearing day) and the electronic query
access for equities is available from SIAC on day T+3. Additionally,
when broker-dealers receive a request for EBS, the firm must first fill
in the EBS report and then, if it does not self-clear, pass the reports
on to its clearing firm to compile and send to SIAC. The EBS submission
process can take up to ten business days. More immediate requests for
cleared options data can be submitted to FINRA, but even this process
takes up to two days. Because EBS data do not contain order entry time
and order execution time, regulators must obtain this information from
firms and brokers using either data requests or subpoenas, and this
process generally can take from two to four weeks depending on the size
of the request.
As discussed above,\467\ the lack of direct access to most data
sources may further delay the ability of regulators to use data in
certain cases. When regulators have direct access to a data source, the
time needed to receive data is only the time it takes for a query to
run. For example, depending on the scope of the search, it can take
just a few minutes to return the results of a query of equity and
option clearing data.\468\ As a result of direct access to their own
audit trails, some SRO surveillance occurs on the same day as the
trading activity. FINRA, however, typically gets direct access to
exchange data, uncorrected OATS data, and corrected OATS data at the
time it receives it, unlike the exchanges and broker-dealers that have
some access to the data as it is generated.\469\ However, when
regulators lack direct access, their data requests can consume
significant time, including both the time required to put the request
together and response times from the SROs, broker-dealers, and others
producing the data.\470\ For example, obtaining complete responses from
each broker-dealer for an EBS request can take days or weeks depending
on the scope of the request. Likewise, responses from the ISG for SRO
audit trail data can take days or weeks.
---------------------------------------------------------------------------
\467\ See Section IV.D.2.b(3), supra.
\468\ MIDAS, one example of a direct access data source, queries
return data in seconds for single ticker, intraday queries and
within hours for complex multi-ticker, multi-day queries. The data
response times from MIDAS vary depending on the format of the
resulting data and the number of other users on the system. A query
that pulls all message traffic in an equity on a single day would
take around thirty minutes.
\469\ FINRA typically collects exchange data at the end of the
trading day and, as noted above, OATS on T+1. FINRA can begin to
access each data source, but, as discussed below, FINRA has direct
access to combined data only after the completion of the OATS error
process and the processing necessary to reformat and merge the data
sources.
\470\ As discussed above, because analysis of some events
requires the collection of data from numerous sources, the time to
request and receive data may be significant. The more fragmented the
necessary data is, the longer it would take regulators to put
together the data request. Putting together an EBS request, for
example, could involve first identifying to which broker-dealers to
send the requests and then manually creating a request letter for
each broker-dealer. The Commission does recognize, however, that
regulators can request and receive trade blotter data on the same
day as the trade event if the request is for a small amount of data
from an experienced provider. In fact, two years of trade blotter
data from an experienced investment adviser can take several days
while two years of data from clearing firms can take six weeks to
several months.
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Once regulators receive requested data, the data often have to be
processed into a form in which they can be analyzed. As discussed
above,\471\ it can take considerable time for regulators to combine
data from different sources and link records from within or across data
sources. Furthermore, the lack of consistency in format adds complexity
to projects involving data from multiple data sources, even when the
project does not involve linking of these different data.\472\ For
example, the
[[Page 30674]]
Commission understands that FINRA takes approximately three days to
process exchange data to transform it into a common format and prepare
it for surveillance. Therefore, FINRA cross-market surveillances and
surveillance of the off-exchange market typically assumes data is fully
corrected and processed on T+8.\473\ Any processing that requires
linking order life-cycle events or other types of data can be time
consuming to perform, even if all of the data comes from the same data
source.\474\ In some cases, the laborious process of assembling the
data delays other critical investigative or analytical steps.
---------------------------------------------------------------------------
\471\ See Section IV.D.2.b(2)C, supra.
\472\ Because no single data source is complete, regulators
often need to combine data across sources to get a full picture. For
example, regulators may need to compile SRO audit trail records from
multiple SROs. Not all SROs collect data using the OATS format. The
different data formats implemented by SROs thus involve a
significant investment of staff time to reconcile. In addition, each
options exchange maintains its own COATS audit trail in a different
format and includes different supplemental data items in its audit
trail. These differences make it difficult and labor intensive for
regulators to view options trading activity across multiple markets.
\473\ FINRA can access data as soon as T+1 when necessary.
\474\ The first step in linking involves finding a key to link
the records. The key can be one field or a series of fields in the
data. The second step involves designing an algorithm to use the key
to link records. If each data source formats or stores the fields in
the key differently, the algorithm can be complex. Even within a
single data source, the creation of the algorithm may be complicated
because the fields needed to build the key can change with each
market participant. For example, each member can report a different
order ID for the same order, and this order ID may even change
within the same member. The algorithm for linking needs to recognize
how order IDs change and use additional information in the order
records to piece an order lifecycle together. As noted above in
Section IV.D.2.b(2)C, linking algorithms have varying rates of
success and significant error rates in event linking are common. The
lack of success could be due to the lack of a cross-participant
error resolution process, the complexity in the linkage, or
otherwise missing key information needed for linkage. As a result,
regulators may invest significant time and resources into linking
data only to achieve a success rate significantly less than 100%.
Linking across multiple data sources makes linking even more time
consuming.
---------------------------------------------------------------------------
In addition, those who use regulatory data also typically take time
to ensure the accuracy of the data. When regulators question the
accuracy of data, they often check several alternative sources until
they are comfortable that their data are accurate. This checking of
data accuracy and augmentation process adds time to an investigation or
analysis. In some cases, regulators may filter out unreliable data or
refocus an investigation to avoid relying on data after spending time
and resources unsuccessfully attempting to ensure accuracy.
As discussed in the Adopting Release, the timely accessibility of
data to regulators also impacts the efficacy of detecting (and possibly
mitigating the effects of) some types of market manipulation.\475\ For
example, some pernicious trading schemes are designed to generate large
``quick-hit'' profits in which market participants attempt to transfer
the proceeds from the activity to accounts outside of the reach of
domestic law enforcement as soon as the offending transactions have
settled in the brokerage account (typically three days after
execution). The timeframes currently required to acquire data generally
complicate the prevention of these asset transfers.
---------------------------------------------------------------------------
\475\ See Adopting Release, supra note 9, at 45731.
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3. Request for Comment on the Baseline
The Commission requests comment on all aspects of the Baseline for
the economic analysis of the CAT NMS Plan. In particular, the
Commission seeks responses to the following questions:
240. Do Commenters agree with the Commission's assessment of the
Baseline for the economic effects of the CAT NMS Plan? Why or why not?
241. Do Commenters believe that the Baseline appropriately
describes current market surveillance, examination, and investigation
activities by regulators? Why or why not?
242. Do Commenters believe that the Baseline appropriately
describes current market event analysis and reconstruction activities
by regulators? Why or why not?
243. Do Commenters believe that the Baseline appropriately
describes market analysis activities by regulators? Why or why not?
244. Do Commenters believe that the Baseline appropriately
describes the sources of trade and order data currently available to
regulators? Why or why not?
245. Are there additional sources of trade and order data currently
available to regulators? Please explain and describe those sources in
detail, including any limitations.
246. Do Commenters agree with the Commission's assessment of the
completeness of the trade and order data currently available to
regulators? Why or why not? Does the fragmented nature of current data
sources pose significant challenges to regulators seeking complete
data?
247. Do Commenters agree with the Commission's assessment of the
accuracy of the trade and order data currently available to regulators?
Why or why not?
248. Do Commenters agree that the error rates in current data
sources or in responses to ad hoc data requests pose significant
challenges to regulators? Why or why not? Do Commenters have additional
statistics on error rates in these data?
249. Do Commenters agree with the Commission's assessment of the
Baseline of clock synchronization for broker-dealers, exchanges, and
others in the securities industry? Please explain. Does the
Commission's analysis appropriately describe the frequency of orders
that regulators may need to sequence and the challenges to sequencing
given current clock synchronization standards? If not, do Commenters
have more appropriate analyses? How could the Commission improve the
analysis? Please explain.
250. Do Commenters believe that the Baseline appropriately
describes granularity of time stamps in the trade and order data
currently available to regulators? Please explain.
251. Do Commenters agree with the Commission's assessment of
regulators' ability to combine or link data across the sources of trade
and order data currently available to regulators? Please explain.
252. Do Commenters believe that the Baseline appropriately
describes customer and broker-dealer identifiers in the sources of
trade and order data currently available to regulators? Please explain.
253. Do Commenters believe that the Baseline appropriately
describes aggregation within the sources of trade and order data
currently available to regulators? Please explain.
254. Do Commenters agree with the Commission's assessment of the
current ability of regulators to access trade and order data? Why or
why not?
255. Do Commenters agree with the Commission's assessment of the
timeliness of the trade and order data currently available to
regulators? Why or why not?
256. Is there any other information that the Commission should
include in the Baseline? Please explain.
E. Benefits
As noted in the Framework Section above, the economic benefits of
the CAT NMS Plan would come from any expanded or more efficient
regulatory activities facilitated by improvements to the data
regulators use because the Plan would create a new consolidated data
source, CAT Data that could replace the use of some current data
sources for many regulatory activities. Therefore, the Benefits Section
first describes how CAT Data compares to data regulators currently use
for regulatory activities. Then this Section describes how the CAT Data
would improve regulatory
[[Page 30675]]
activities and how these improvements benefit investors.
The Commission preliminarily believes that the CAT NMS Plan would
produce data that would improve on current data sources, because CAT
Data would result in regulators having direct access to consolidated
audit trail data that would improve many of the regulatory activities
discussed in the Baseline Section. As summarized in Table 4, if the
Plan is approved, the Commission preliminarily believes that the Plan
would generate improvements in the quality of data that regulators
would have access to in the areas of completeness, accuracy,
accessibility, and timeliness. The Commission preliminarily believes
that the improvements in the quality of regulatory data within these
categories would significantly improve the ability of regulators to
perform a wide range of regulatory activities, which would lead to
benefits for investors and markets. In addition, the Commission
preliminarily believes that certain provisions in the Plan related to
future upgrades of the Central Repository, the promotion of the
accuracy of CAT Data, the promotion of the timeliness of CAT Data, and
the inclusion of specific governance provisions identified by the
Commission in the Adopting Release for Rule 613, increase the
likelihood that the potential benefits of the CAT NMS Plan described
below would be realized.
In the category of completeness, the ability for regulators to
access more material data elements from a consolidated source would
enable regulators to more efficiently carry out investigations,
examinations, and analyses because regulators could acquire from a
single source data that they would otherwise need to compile from many
data sources. This data source would include data elements that
regulators currently acquire with difficulty (if at all), including
customer information, allocation records, open/close position
information for equities, and certain other trade and order information
not consistently available in SRO audit trails.\476\
---------------------------------------------------------------------------
\476\ See CAT NMS Plan supra note 3, at Sections 1.1, 6.3 and
6.4; see also 17 CFR 242.613(c)(7).
---------------------------------------------------------------------------
In the category of accuracy, the Commission preliminarily believes
that the Plan would substantially improve data accuracy by requiring
CAT Data to be collected, compiled, and stored in a uniform linked
format using consistent identifiers for customers and market
participants. These requirements should over time result in fewer
inaccuracies in the data as well as fewer inaccuracies introduced in
combining data compared to the current data regime.\477\ The CAT NMS
Plan would also require that CAT Reporters' business clocks be
synchronized to within 50 milliseconds of the time maintained by the
NIST, which would increase the precision of the time stamps provided by
the 39% of broker-dealers who currently synchronize their clocks with
less precision than what is called for by the Plan. This information
may also be used to partially sequence surrounding events. However,
while the Commission preliminarily believes that the requirements in
the Plan for clock synchronization and time stamp granularity would
improve the accuracy of data with respect to the sequencing of market
events, the improvements would be modest, as regulators' would
experience improvement for a small percentage of market events relative
to all surrounding events.\478\ Independent of the potential time clock
synchronization benefits, the order linking data that would be captured
in CAT should increase the proportion of events that could be sequenced
accurately. This reflects the fact that some records pertaining to the
same order could be sequenced by their placement in an order lifecycle
(e.g., an order submission must have occurred before its execution)
without relying on time stamps.
---------------------------------------------------------------------------
\477\ The Commission recognizes that the high initial Error Rate
tolerance of the CAT NMS Plan could reduce the accuracy of raw CAT
Data relative to current data sources. However, as stated in the
Plan ``the Participants expect that error rates after reprocessing
of error corrections will be de minimis.'' See CAT NMS Plan supra
note 3, at Appendix C, Section 3(b), n.102.
\478\ See FIF Clock Offset Survey, supra note 127.
---------------------------------------------------------------------------
In the category of accessibility, the Commission preliminarily
believes that the Plan would substantially improve the access of data
for regulators due to the Plan's requirement for regulators to have
direct access to CAT Data. While some elements of CAT Data can
currently be obtained from other sources, it can take regulators weeks
or months to obtain this data. As opposed to the current state of
fragmented data with indirect regulatory access, if the CAT NMS Plan is
approved, regulators would have direct access to consolidated trade and
order data from a single source. Therefore, instead of requesting data
from multiple sources, the Plan would allow regulators to log into a
single system and query data directly from the system. This direct
access for regulators would dramatically reduce the hundreds of
thousands of requests that regulators must make each year in order to
obtain data, thus reducing the burden on the industry.
In the category of timeliness, the Commission preliminarily
believes that the Plan would significantly improve the timeliness of
data acquisition and use, which could improve the timeliness of
regulatory actions that use data. CAT Data would be reported by 8:00
a.m. Eastern Time on day T+1 and made available to regulators in raw
form after it is received and passes basic formatting validations,\479\
with an error correction and linkage process that would be completed by
8:00 a.m. Eastern Time on day T+5.\480\ These requirements would ensure
that data is available to regulators faster than in the current system
and should also reduce the amount of time regulators would need to
process data prior to usage.
---------------------------------------------------------------------------
\479\ While the Plan does not specify exactly when these
validations would be complete, the requirement to link records by
12:00 p.m. Eastern Time on day T+1 gives a practical upper bound on
this timeline.
\480\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.2(a).
---------------------------------------------------------------------------
Regulatory activities expected to benefit from improved data
quality would include surveillance, investigations, examinations,
analysis and reconstruction of market events, and analysis in support
of rulemaking initiatives. Data is essential to all of these regulatory
activities and therefore substantial improvements in the quality of the
regulatory data should result in substantial improvements in the
efficiency and effectiveness of these regulatory activities, which
should translate into benefits to investors and markets. For example,
improved data could lead to more effective and efficient surveillance
that better protects investors and markets from violative behavior and
facilitates more efficient and effective risk-based investigations and
examinations that more effectively protect investors. Together, these
improved activities could better deter violative behavior of market
participants, which could improve market efficiency. Furthermore, this
increase in directly accessible data should improve regulators'
understanding of the markets, leading to more informed public policy
decisions that better address market deficiencies to the benefit of
investors and markets.
The Commission notes that the Plan lacks information regarding the
details of certain elements of the Plan, primarily because many details
likely to affect the benefits of the Plan have not yet been determined,
which creates some uncertainty about the expected economic effects. As
discussed further below, lack of specificity surrounding the processes
for converting data formats and linking related order events
[[Page 30676]]
creates uncertainty in the anticipated improvements in accuracy because
such processes have the potential to create new data inaccuracies. Lack
of specificity surrounding the process for regulators to access the CAT
Data also creates uncertainty around the expected improvements in
accessibility. For example, while the Plan indicates that regulators
would have an on-line targeted query tool and a tool for user-defined
direct queries or bulk extraction,\481\ the Plan itself does not
provide an indication for how user-friendly the tools would be or the
particular skill set needed to use the tools for user-defined direct
queries.
[[Page 30677]]
[GRAPHIC] [TIFF OMITTED] TN17MY16.328
\481\ See CAT NMS Plan, supra note 3, at Appendix D, Sections
8.1, 8.2.
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[[Page 30678]]
1. Improvements in Data Qualities
As explained above, in the Adopting Release the Commission
identified four qualities of trade and order data that impact the
effectiveness of core SRO and Commission regulatory efforts: Accuracy,
completeness, accessibility, and timeliness.\486\ In assessing the
potential benefits of the CAT NMS Plan, the Commission's economic
analysis compares the data that would be available under the Plan to
the trading and order data currently available to regulators.\487\ As
explained in detail below, the Commission preliminarily believes that
the Plan would improve data in terms of all four qualities noted above,
although uncertainty remains as to the expected degree of improvement
in some areas.
---------------------------------------------------------------------------
\486\ See Adopting Release, supra note 9, at 45727.
\487\ Changes in all four data qualities affect certain data-
driven regulatory activities. The benefits of the Plan derive from
the changes to these regulatory activities.
---------------------------------------------------------------------------
a. Completeness
The CAT NMS Plan, if approved, would result in regulators having
direct access to a single data source that would be more complete than
any current data source.\488\ The CAT Data would be more complete than
other data sources because it would contain data from a greater number
of broker-dealers on more event types, products, and data fields, when
compared to existing SRO audit trails and other data sources. As
discussed in more detail below, while some current data sources contain
many of the elements that would be included in CAT Data, the CAT Data
would consolidate that data into one source to produce a data source
much more complete than any existing source. CAT Data would also
include some elements that are not available from any current data
source. Having this data consolidated in a single source would provide
numerous benefits that are described below.
---------------------------------------------------------------------------
\488\ See Sections IV.C.1.a(1) and IV.D.2.b(1), supra for a
definition of completeness.
---------------------------------------------------------------------------
(1) Events and Products
CAT Data would be more complete than any current data source
because it combines currently fragmented information into one data
source. In particular, the Plan states that the Central Repository,
under the Plan Processor's oversight, shall receive, consolidate, and
retain all CAT Data.\489\ ``CAT Data'' is defined as ``data derived
from Participant Data, Industry Member Data, SIP Data, and such other
data as the Operating Committee may designate as CAT Data from time to
time.'' \490\ Section 6.3 of the Plan describes the data to be received
from Participants that are national securities exchanges, which would
include data for ``each NMS Security \491\ registered or listed for
trading on such exchange or admitted to unlisted trading privileges on
such exchange.'' Participants that are a national securities
association (i.e., FINRA) must report data for each ``Eligible Security
for which transaction reports are required to be submitted to that
association.'' \492\ ``Eligible Security'' is defined in the Plan as
all NMS Securities and all OTC Equity Securities,\493\ and ``OTC Equity
Security'' is defined as ``any equity security, other than an NMS
Security, subject to prompt last sale reporting rules of a registered
national securities association and reported to one of such
association's equity trade reporting facilities.'' \494\ ``Industry
Member Data'' refers to audit trail data reported by members of the
exchanges and national associations, which includes Options Market
Makers.\495\ SIP Data is defined in the Plan as information, including
size and quote condition, on quotes including the National Best Bid and
National Best Offer (``NBBO'') for each NMS Security; Last Sale Reports
and transaction reports reported pursuant to an effective transaction
reporting plan filed with the Commission pursuant to, and meeting the
requirements of Rule 601 and 608; trading halts, limit-up limit-down
(``LULD'') price bands,\496\ and LULD indicators; and summary data or
reports described in the specifications for each of the SIPs and
disseminated by the respective SIP.\497\
---------------------------------------------------------------------------
\489\ See CAT NMS Plan, supra note 3, at Section 6.5(a)(i).
\490\ See id. at Section 1.1.
\491\ An ``NMS Security'' is defined as ``any security or class
of securities for which transaction reports are collected,
processed, and made available pursuant to an effective transaction
reporting plan, or an effective national market system plan for
reporting transactions in listed options.'' See 17 CFR
242.600(b)(46).
\492\ See CAT NMS Plan, supra note 3, at Section 6.3(c)(ii).
\493\ See id. at Section 1.1. Audit trail data regarding OTC
Equity Securities was not required under Rule 613, but the
Participants, in consultation with the DAG, included OTC Equity
Securities in the CAT NMS Plan so as to permit the retirement of
OATS and thereby reduce costs to the industry. See CAT NMS Plan,
supra note 3, at Appendix C, Section C.9, Section A.1(a) n.16. The
determination to include OTC Equity Securities would also have a
positive effect on further reducing fragmentation of data sooner.
\494\ See CAT NMS Plan, supra note 3, at Section 1.1.
\495\ See id. at Section 6.4(d).
\496\ See Plan to Address Extraordinary Volatility for
information on LULD, available at https://www.finra.org/sites/default/files/regulation-NMS-plan-to-address-extraordinary-market-volatility.pdf; see also Securities Industry Automation Corporation,
Consolidated Tape System, CTS, Output Multicast Interface
Specifications, available at https://www.nyse.com/publicdocs/ctaplan/notifications/trader-update/cts_output_spec.pdf Securities
Industry Automation Corporation, Consolidated Tape System, CQS,
Output Multicast Interface Specifications, available at https://www.nyse.com/publicdocs/ctaplan/notifications/trader-update/cqs_output_spec.pdf. The UTP Plan Trade Data Feed \SM\ (UTDF\SM\),
Direct Subcriber Interface Specification, Version 14.4 available at
https://www.utpplan.com/DOC/utdfspecification.pdf.
\497\ See id. at Section 1.1 and Section 6.5(a)(ii).
---------------------------------------------------------------------------
CAT Data would include data from all SRO audit trails, combined
into a single data source. In addition, it would include some off-
exchange activity not captured on current SRO audit trails. Section
6.4(d) of the Plan requires the Participants to require their Industry
Members to record and report order events to the Central Repository.
The Commission notes that SRO audit trails currently do not include the
activity of firms that are not members of that SRO.\498\ And, currently
only FINRA requires its members to report their off-exchange activity.
While broker-dealers that trade off-exchange must be members of FINRA
unless their activity fits the terms of the exemption in Rule 15b9-
1,\499\ firms that qualify for the exemption in that rule and that are
not FINRA members do not report their off-exchange activity to
OATS.\500\ This exemption amounts to a large percentage of off-exchange
activity. Broker-dealers that are not FINRA Members accounted for 48%
of orders sent directly to ATSs in 2014, 40% of orders sent directly to
ATSs in 2013, and 32% in 2012.\501\ Because all SROs
[[Page 30679]]
are Participants in the Plan, under the Plan all broker-dealers with
Reportable Events, including off-exchange, would be required to report
the required CAT Data to the Central Repository. And, the inclusion of
these additional Reportable Events would make CAT Data more complete
than the combination of current SRO audit trails.
---------------------------------------------------------------------------
\498\ This information can sometimes be inferred through data
reported by member firms. See Securities Exchange Act Release No.
74581 (March 25, 2015), 80 FR 18036 (April 2, 2015) (``Proposed
Amendments to Rule 15b9-1''), Section V.B.2; see also CAT NMS Plan,
supra note 3, at Appendix C Section B.7(a)(ii)(A).
\499\ See id. for details on the exemption to Rule 15b9-1 and
the proposed modifications to the Exemption for Certain Exchange
Members that would require a dealer to be a member of a registered
national securities association to conduct most off-exchange
activity. If these modifications are adopted, Section IV.F.1.c(2)B.i
discusses counts of broker-dealers currently not represented in
OATS; the 15b9-1 exclusion applies to approximately 125 firms, most
of which are not expected to incur OATS reporting obligations if
15b9-1 modifications are approved.
\500\ Furthermore, not all FINRA members are obligated to report
to OATS. FINRA's rules exempt from reporting certain members that
engage in a non-discretionary order routing process; additionally,
FINRA has the authority to exempt other members who meet specific
criteria from the OATS recording and reporting requirements, and has
granted many such exemptions. See supra notes 396 and 397, and
accompanying text. Approximately 799 firms that are excluded or
exempt from OATS would incur CAT reporting obligations if the Plan
were approved; see also Section IV.F.1.c(2)B.i, infra.
\501\ See Proposed Amendments to Rule 15b9-1, supra note 498, at
n.21. If the Commission adopts the proposed amendments to Rule 15b9-
1 set out in the proposed modifications to the Exemption for Certain
Exchange Members, the percentage of off-exchange activity captured
by CAT Data that is not currently captured by another audit trail
would be smaller, and fewer broker-dealers would be excluded from
OATS, reducing the number of broker-dealers that would be added to
regulatory data if the Plan were approved. Section IV.F.1.c(2)B.ii
discusses counts of broker-dealers currently not represented in
OATS; the 15b9-1 exclusion applies to approximately 125 firms, most
of which are not expected to incur OATS reporting obligations if
15b9-1 modifications are approved. Specifically, the exemption from
FINRA membership would be limited to dealers that effect
transactions off the exchanges of which they are members solely for
the purpose of hedging the risks of their floor-based activity, and
brokers and dealers that effect transactions off the exchange
resulting from orders that are routed by a national securities
exchange of which they are members. Id. at Section II.
---------------------------------------------------------------------------
CAT Data would also include many Reportable Events such as order
origination, order routing, receipt of a routed order, order
modifications, cancellations, and executions, and trade cancellations.
Currently, OATS data contains most of these Reportable Events but does
not cover all participants and does not include options.\502\ For
example, CAT Data would contain more events than EBS data, trade
blotters, and public data. As previously noted, OATS data also do not
include proprietary orders originated by a trading desk in the ordinary
course of a member's market making activities (or ``principal
activity'').\503\ But, pursuant to Rule 613(j)(8),\504\ principal
trading would be included in CAT reporting requirements, an improvement
over OATS. This requirement significantly improves completeness because
such events are not included in current SRO audit trails, and account
for a significant portion of market activity (40.5% of all transactions
and 67% of all exchange message traffic according to a Commission
analysis).\505\ This would improve regulatory activities in which
observation of pricing information, as it relates to market activity,
is important for determining the legality and consequences of market
activity of interest as well as regulatory analysis of market behavior
in general.
---------------------------------------------------------------------------
\502\ See Section IV.D.2.b(1)A, supra.
\503\ Id.
\504\ See 17 CFR 242.613(j)(8).
\505\ See Section IV.D.2.b(1)A, supra for a description of this
analysis.
---------------------------------------------------------------------------
CAT Data also would include the information described above for
listed equities and options and OTC Equity Securities.\506\ Therefore,
the inclusion in CAT Data of all these products adds an additional
level of completeness relative to current data sources.
---------------------------------------------------------------------------
\506\ See supra note 494.
---------------------------------------------------------------------------
(2) Data Fields
The CAT NMS Plan also would improve completeness by consolidating
in a single source fields that currently may only be available from
some data sources, and by including some fields that are difficult for
regulators to compile. Not every data field that would be in CAT Data
is currently included in SRO audit trails, and very few fields are
included in all data sources.
The inclusion of consistent unique customer information, in
particular, in the CAT Data represents a significant improvement over
current SRO audit trails in terms of completeness. Rule 613(c)(7)(i)
requires that a CAT Reporter report information to the Central
Repository that uniquely identifies a customer across all broker-
dealers.\507\ As noted in the Baseline, very few current data sources
contain customer information, and those that do are largely limited in
the completeness and accuracy of this information, all of which
significantly limits regulatory efficiency.\508\ The identification of
customers underlies numerous enforcement activities and many
examination and surveillance activities of regulators. This would also
allow regulators to obtain information efficiently regarding customers,
such as issuers repurchasing their stock and short sellers.\509\
---------------------------------------------------------------------------
\507\ 17 CFR 242.613(c)(7)(i). Specifically, Sections 9.1 and
9.2 of Appendix D of the Plan require the CAT Data to include the
following Customer information, at minimum: social security number
or individual taxpayer identification number, date of birth, current
name, current address, previous name and previous address. For legal
entities, the Plan requires the reporting of the LEI (if available),
tax identifier, full legal name and address. The Plan also requires
that the following information about a Customer be reported to the
Central Repository, at a minimum: Account owner name, account owner
mailing address, account tax identifier, market identifiers, type of
account, firm identifier number, prime broker ID, bank repository
ID, and clearing broker. See CAT NMS Plan supra note 3, at Sections
9.1 and 9.2. The CAT Data must also support account structures that
have multiple account holders. See id. Relatedly, the unique
Customer-ID also improves accuracy because Rule 613 requires that it
be consistent and associated with all Reportable Events involving
that Customer. Current data sources do not provide consistent
customer identifiers. See Sections IV.D.2.b(2)D supra, and
IV.E.1.b(4), infra.
\508\ See Sections IV.D.2.a(1) and IV.D.2.b(1)B, supra. As
discussed above, the Commission notes that SRO audit trails
typically do not provide customer information but a recent FINRA
rule change would require its members to report to OATS non-FINRA
member customers who are broker-dealers. See supra note 407.
\509\ See Short Sale Reporting Study, supra note 413, for a
discussion of the benefits of being able to identify short sellers.
Because CAT Data would include a short sale mark and identify
customers, regulators could use CAT Data to identify short sellers.
---------------------------------------------------------------------------
In addition to data fields providing customer information, the Plan
would improve completeness by including other data fields not found on
current SRO audit trails. For example, CAT Data would include
allocation information, open/close information, Quote Sent Time, and
information on whether a Customer gave a modification or cancellation
instruction.
The information in the Allocation Report required by the CAT NMS
Plan represents a significant improvement in completeness over current
sources for subaccount allocation data, such as trade blotter and EBS
data. Under the Plan, an Allocation Report would include the Firm
Designated ID for any account(s), including subaccount(s), to which
executed shares are allocated, the security that has been allocated,
the identifier of the firm reporting the allocation, the price per
share of shares allocated, the side of shares allocated, the number of
shares allocated to each account, and the time of the allocation.\510\
While most of the fields required on the Allocation Report are included
on trade blotter or EBS data, their inclusion in CAT Data would
significantly reduce the time and effort expended for regulators to
acquire such information.\511\ Because it is not required on EBS or in
broker-dealer recordkeeping rules, the allocation time field on the
Allocation Report provides information that is currently even more
difficult for regulators to acquire than the other information on the
Allocation Report. These data improvements should facilitate the use of
allocation data in regulatory investigations and should result in more
effective and efficient investigative processes. Allocation data also
serves an important role in many other regulatory activities that aim
to protect investors.\512\ Indeed, allocation time is an extremely
important data field because it is critical in investigations of
violations like market manipulation and cherry-picking.\513\
---------------------------------------------------------------------------
\510\ See CAT NMS Plan, supra note 3, at Section 1.1; see also
Exemption Order, supra note 18, at 11867.
\511\ See Section IV.D.2.b(1)B, supra, for further information
on Allocation Reports.
\512\ Id.
\513\ Id.
---------------------------------------------------------------------------
In addition, while many of the elements contained in the definition
of ``Material Terms of the Order'' are
[[Page 30680]]
collected in current SRO audit trails, the CAT NMS Plan's definition of
Material Terms of the Order expands the CAT Data beyond the coverage of
current SRO audit trails and other sources. The CAT NMS Plan requires
that the Material Terms of the Order be reported for order origination,
routing, and the receipt of a routed order. And Material Terms of the
Order is defined to include the security symbol, security type, price
(if applicable), size (displayed and non-displayed), side (buy/sell),
order type, if a sell order, whether the order is long, short, or short
exempt, open/close indicator, time in force (if applicable), and any
special handling instructions.\514\ In addition, if the order is for a
Listed Option, the Material Terms of the Order would be defined to
include option type (put/call), option symbol or root symbol,
underlying symbol, strike price, expiration date, and open/close.\515\
---------------------------------------------------------------------------
\514\ See CAT NMS Plan, supra note 3, Section 1.1; see also 17
CFR 242.613(j)(7).
\515\ Id.
---------------------------------------------------------------------------
Because data on open/close indicators are not currently included in
SRO audit trails, obtaining data on whether a trade opens or closes a
position in equities is currently very difficult. Ready access to this
information would facilitate regulators' ability to determine whether a
purchase or sale increases or decreases equity exposure, such as when a
buy covers a short position.\516\ This would help regulators
reconstruct customer positions without requiring specific position data
and would assist in analysis of rules such as Rule 105 of Regulation
M,\517\ governing when short sellers can participate in a follow-on
offering.\518\ This information is also useful in investigating short
selling abuses and short squeezes.\519\ Among other things, a build-up
of a large short position by one investor along with the spreading of
rumors may be indicative of using short selling as a tool to
potentially manipulate prices. Information on when the position
decreases is also useful for indicating potential manipulation, insider
trading, or other rule violations.\520\ The ability to determine
whether an order adds to a position, along with the timing of the
order, is particularly important in detecting and investigating
portfolio pumping or marking the close.\521\
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\516\ The open/close indicator would help to identify buy to
cover orders because a buy order that closes a position would
presumably be a buy-to-cover order. See Proposing Release supra note
9, at 32575. The Commission notes that the accuracy of this data
field may depend on how the Plan Processor interprets when CAT
Reporters should populate the field with particular permitted
values. See infra note 537 and accompanying text.
\517\ 17 CFR 242.105.
\518\ For a discussion of additional benefits of position
information and buy to cover information, see Short Sale Reporting
Study, supra note 413; see also Press Release: SEC Charges Six Firms
for Short Selling Violations in Advance of Stock Offerings (October
14, 2015), available at https://www.sec.gov/news/pressrelease/2015-239.html.
\519\ See Proposing Release, supra note 9 at 32575.
\520\ Id.
\521\ Id.
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The CAT Data would also include information regarding the sent time
for Options Market Maker quotes and information about whether a
modification or cancellation instruction for an order was given by a
Customer associated with an order, or was initiated by a broker-dealer
or exchange associated with the order. Neither of these data fields is
currently readily available from existing SRO audit trails.\522\ Quote
sent time is particularly informative for certain narrow market
reconstructions for enforcement investigations, and knowing whether the
member or Customer made a modification or cancellation helps regulators
understand the decisions that broker-dealers and others make in the
interest of best execution.
---------------------------------------------------------------------------
\522\ See Exemption Order, supra note 18 at 11857 and 11861.
---------------------------------------------------------------------------
The remaining data fields included in CAT Data are also included in
some or all current SRO audit trails, although no single source
contains all of them. For instance, Rule 613(c)(7)(vi)(C) requires the
collection of audit trail data that links executions to contra-side
orders and a CAT-Order-ID for the contra-side order.\523\ An order
identifier for the contra-side order(s) would help regulators better
reconstruct executions. Although some current exchange audit trails
identify counterparties to trades, this identification is sometimes
more difficult for off-exchange equity trading.\524\ Further, while all
SRO audit trails contain time stamps, as CAT Data would, some sources
of regulatory data do not currently include all the types of time
stamps that would be in CAT Data.
---------------------------------------------------------------------------
\523\ 17 CFR 613.242(c)(7)(vi)(C).
\524\ For off-exchange trading, OATS records sometimes do not
directly identify counterparties. In the case of ATS trades,
sometimes counterparty broker-dealers can only be identified through
TRF records; sometimes ATS OATS records alone suffice. For
internalized trades, the reporting broker-dealer is the
counterparty. By combining OATS with TRF data, regulators can
identify the broker-dealers representing the counterparties for over
99% of TRF reported trades, but identifying customer account
information generally requires a data request to those broker-
dealers. See Section IV.D.2.b(2)A, supra.
---------------------------------------------------------------------------
Additionally, the inclusion of order display information (i.e.,
whether the size of the order is displayed or non-displayed), and
special handling instructions in CAT Data improve completeness because
they are not always mandatory in SRO audit trail data, and therefore
may not be consistently available without data requests to broker-
dealers.\525\ Order display information is useful for examining how
hidden liquidity affects markets or how regulatory changes affect
hidden liquidity, and special order handling instructions could assist
in examinations of best execution and could allow regulators to better
understand the role and trends of these instructions in the market.
---------------------------------------------------------------------------
\525\ See supra note 412.
---------------------------------------------------------------------------
Other information required by the CAT NMS Plan includes the
security symbol, date and time of the Reportable Event, the identity of
each Industry Member or Participant accepting, routing, receiving,
modifying, canceling, or executing each order, the identity and nature
of the department or desk to which an order is routed, if an order is
routed internally within the system of an Industry Member, a CAT-Order-
ID, changes in any Material Term of the Order (if the order is
modified), execution capacity, the CAT-Order-ID of any contra-side
order(s), and the SRO-Assigned Market Participant Identifier of the
clearing broker or prime broker.\526\ Of these fields, the security
symbol and date are the only data found on all current data sources.
---------------------------------------------------------------------------
\526\ See CAT NMS Plan, supra note 3, Sections 6.3(d); 6.4(d).
---------------------------------------------------------------------------
The Commission preliminarily believes that the CAT Data would
include all data elements that would be useful and efficient to include
in a consolidated audit trail. The Commission previously considered
which fields should be reported to CAT when proposing and adopting Rule
613. The set of data fields required by Rule 613 reflected the
Commission's assessment, as informed by public comment, of the benefits
and costs of including various data elements in CAT.\527\ While the
costs and benefits of including particular fields can change due to
technological advances and/or changes in the nature of markets, the
Plan contains provisions regarding periodic reviews and upgrades to CAT
that could lead to proposing additional data fields that are deemed
important.\528\ In addition the Commission reviewed gap analyses that
examine whether the CAT Data would contain all important data elements
in current data sources.\529\ As a result of
[[Page 30681]]
this review, the Commission is aware that one data gap involves OATS
data fields that allow off-exchange transactions to be matched to their
corresponding trade reports at trade reporting facilities, and
recognizes that these fields are important to assure trade reporting
requirements are being met for off-exchange trading.\530\ Similarly,
the Commission notes that EBS includes 13 data elements that are not
required by CAT or derivable through other CAT fields and would thus
reflect some limitations of the Plan if EBS were retired before those
missing data elements were incorporated into CAT.\531\ However, as
discussed in Section 3 of Appendix D of the Plan, prior to the
retirement of existing systems, the CAT Data must contain data elements
sufficient to ensure the same regulatory coverage provided by existing
systems that are anticipated to be retired.\532\ The Commission
therefore expects that any missing elements that are material to
regulators would be incorporated into CAT Data prior to the retirement
of the systems that currently provide those data elements to
regulators. And the Commission preliminarily believes that CAT Data
would include the audit trail data elements that currently exist in
audit trail data sources and that could be retired upon implementation
of the CAT.
---------------------------------------------------------------------------
\527\ See Adopting Release, supra note 9, at 45751.
\528\ See Section IV.E.3a, infra for a discussion of adding new
data fields and other requirements for upgrading the CAT Data after
approval.
\529\ The Commission acknowledges that the Participants are
continuing to study gaps between current regulatory data sources and
the Plan as filed. CAT NMS Plan, supra note 3, at Appendix C,
Section C.9; see also SEC Rule 613--Consolidated Audit Trail (CAT)
OATS--CAT Gap Analysis and SEC Rule 613--Consolidated Audit Trail
(CAT) Revised EBS--CAT GAP Analysis, available at https://www.catnmsplan.com/gapanalyses/.
\530\ The Commission notes that Rule 613 does not require the
inclusion of this information. This information did not exist at the
time the Commission adopted Rule 613 and such information on
exchange trades does not exist today. The Commission expects that
the requirements discussed in Section 3 of Appendix D of the Plan
would result in the inclusion of this information in the CAT Data.
\531\ See SEC Rule 613--Consolidated Audit Trail (CAT) Revised
EBS--CAT GAP Analysis, available at https://www.catnmsplan.com/gapanalyses/p450537.pdf.
\532\ See CAT NMS Plan, supra note 3, at Appendix D, Section 3.
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b. Accuracy
This Section analyzes the expected effect of the CAT NMS Plan, if
approved, on the accuracy of the data available to regulators.\533\ In
general, the Commission preliminarily believes that the requirements in
the CAT NMS Plan for collecting, consolidating, and storing the CAT
Data in a uniform linked format, the use of consistent identifiers for
Customers, and the focus on sequencing would promote data accuracy.
---------------------------------------------------------------------------
\533\ As discussed above and in the Adopting Release, accuracy
refers to whether the data about a particular order or trade is
correct. See Adopting Release, supra note 9, at 45727.
---------------------------------------------------------------------------
The Commission notes that the full extent of improvement that would
result from the Plan is currently unknown, because the Plan defers many
decisions relevant to accuracy until the Plan Processor publishes the
Technical Specifications and interpretations.\534\ In particular, the
CAT NMS Plan specifies that the ``[t]echnical Specifications shall
include a detailed description of . . . each data element, including
permitted values, in any type of report submitted to the Central
Repository'' \535\ and ``the Plan Processor shall have sole discretion
to amend and publish interpretations regarding the Technical Specifica-
tions.'' \536\ This leaves open precise definitions and parameters for
the data fields to be included in CAT Data.\537\
---------------------------------------------------------------------------
\534\ See CAT NMS Plan, supra note 3, at Section 6.9.
\535\ Id. at Section 6.9(b)(v).
\536\ The CAT NMS Plan provides details regarding how the
responsibility for these decisions would be shared between the
Operating Committee and the Plan Processor, with the Plan Processor
having responsibility for data definitions and interpretations. See
CAT NMS Plan, supra note 3, at Section 6.9(c)(i).
\537\ For example, the completeness Section notes that the open/
close indicator for equities does not exist in current data sources
(see Section IV.E.1.a(2)). The accuracy of the open/close indicator
would be subject to Plan Processor discretion, because the Plan
Processor would have responsibility for defining the permitted
values and interpreting when CAT Reporters would use such permitted
values and the Plan Processor would not have guidance from previous
data sources on how to define or interpret such a field. While the
Commission would ultimately be able to correct such
misinterpretations, regulators may not detect such a
misinterpretation until the misinterpretation harms an
investigation, exam, or other analysis. Based on its experience with
short sale indicators, the Commission believes that defining and
interpreting the open/close indicator would be particularly complex.
See SEC, Division of Market Regulation: Responses to Frequently
Asked Questions Concerning Regulation SHO, Question 2.5, available
at https://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm
(``Regulation SHO FAQs'').
---------------------------------------------------------------------------
Nonetheless, the Commission preliminarily believes that the Plan
provides some procedural protections to mitigate this uncertainty and
help promote accuracy. For example, the Plan requires that, at a
minimum, the Technical Specifications be ``consistent with
[considerations and minimum standards discussed in] Appendices C and
D,'' and that the initial Technical Specifications and any Material
Amendments thereto must be provided to the Operating Committee for
approval by Supermajority Vote.\538\ Further, all non-Material
Amendments and all published interpretations must be provided to the
Operating Committee in writing at least ten days before publication,
and shall be deemed approved unless two or more unaffiliated
Participants call the matter for a vote of the full Operating
Committee.\539\
---------------------------------------------------------------------------
\538\ Id. at Section 6.9(a). The Commission notes that the
standards in Appendices C and D do not cover all decisions that
would affect the accuracy of the data.
\539\ See CAT NMS Plan, supra note 3, at Section 6.9(c)(i).
---------------------------------------------------------------------------
(1) Data Errors
The CAT NMS Plan specifies a high-level process for handling errors
that includes target Error Rates for data initially submitted by CAT
Reporters and a correction process and timeline. In particular, the
Plan specifies an initial maximum Error Rate, which measures errors by
CAT Reporters and linkage validation errors,\540\ of 5% for reports
received by the Central Repository before the error correction process
and contemplates the reduction of this Error Rate over time. It is
difficult to conclude whether the Error Rates and processes in the CAT
NMS Plan would constitute an accuracy improvement as compared to
current data sources.
---------------------------------------------------------------------------
\540\ The Commission notes that there is some uncertainty on
whether the Error Rate definition includes any additional errors
attributable to the Plan Processor because the Plan does not
explicitly state whether Plan Processor errors are included in the
Error Rate or not; it is also not clear whether Plan Processor
errors are included in linking errors. See id. at Article VI,
6.1(n)(v) n.1; Appendix C, Section A.3(b), n.102. Additional
uncertainty exists because the Operating Committee would determine
the details regarding error definitions in the Technical
Specifications after the Plan is approved.
---------------------------------------------------------------------------
The Plan states that 5% is an appropriate initial Error Rate, to
allow CAT Reporters the opportunity to get used to a new reporting
regime, and that the Error Rate should be reduced over time, with goal
of a 1% Error Rate to be achieved one year after each new category of
Reporters is required to begin reporting.\541\ This was determined
based on Participants' experience with OATS. The initial rejection
rates for OATS when it was initially implemented was 23%,\542\ although
more recent experience with OATS reporting indicates error rates below
3% following the implementation of additional OATS upgrades over the
past 10 years and a current error rate of less than 1%.\543\
---------------------------------------------------------------------------
\541\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(b).
\542\ See id. at Appendix C, Section A.3(b), n.106.
\543\ See Memorandum to File No. S7-11-10 regarding Telephone
Conferences with FINRA (April 17, 2012) available at https://www.sec.gov/comments/s7-11-10/s71110-116.pdf.
---------------------------------------------------------------------------
But, because the current OATS error rate is below 1%, the
Commission preliminarily believes that the initial
[[Page 30682]]
percentage of errors in CAT would be higher than current percentage of
errors in OATS, though the OATS error rate may not be directly
comparable to the Error Rate in the Plan.\544\ Given the magnitude of
CAT, the fact that many CAT Reporters would be new to audit trail
reporting, and that options would be covered for the first time, the
Participants believe that 5% is an appropriate initial Error Rate.\545\
And the Plan injects some uncertainty by asserting that this initial 5%
rate is subject to the quality assurance testing period to be performed
prior to launch, and then again before each new batch of CAT Reporters
are brought online.\546\ In time, the rate could be lowered, but it
also could be raised.
---------------------------------------------------------------------------
\544\ See Section IV.D.2.b(2)A, supra, for discussion of current
regulatory data error rates. It is important to note that both the
1% OATS error rate and the 5% proposed CAT Error Rate represent
error rates measured at initial data submission. Furthermore, some
situations that do not qualify as an error in OATS (i.e., a route
that cannot be linked because the routing destination is not
required to report OATS) would qualify as an error under CAT.
Furthermore, error rates after data correction are not known for
OATS, and are anticipated to be ``de minimis'' under CAT, as
discussed in note 547, infra. Finally, definitions of ``error'' for
both OATS and CAT Data are dependent on proscribed data validation
checks; if data is reported and passes validation checks, it is
assumed to be correct. When validation checks are exhaustive and
stringent, error rates are expected to be higher than when
validation checks are minimal. Consequently, the Commission is
cautious in directly comparing OATS reported and proposed CAT Error
Rates.
\545\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(b). See also Section IV.H.2.b, infra for a discussion and
solicitation of comment on alternative Error Rates.
\546\ See id. at Appendix C, Section A.3(b).
---------------------------------------------------------------------------
The Plan specifies an error correction process after initial
reports are received and indicates that practically all errors
identifiable by the validations used in the error correction process
would be corrected by 8:00 a.m. Eastern Time on day T+5, stating that
errors are expected to be ``de minimis'' after the error correction
period.\547\ Specifically, the Plan Processor must run initial
validation checks on the data by noon eastern time on day T+1 (four
hours after the submission deadline for the data). Those validation
checks must be published in the Technical Specifications (as discussed
further below) and have the objective to ensure that data is accurate,
timely, and complete as near as possible to the time of submission.
Once errors are identified, the Plan Processor must accept corrections
via manual web-based entry and via batch uploads. Although there is a
specific timeframe for performing these corrections, the Plan Processor
must accept error corrections at any time.\548\
---------------------------------------------------------------------------
\547\ See id. at Appendix C, Section A.3(b) n.102. ``De
minimis'' is not defined and no numerical Error Rate is given. The
Plan also includes a compliance program intended to help achieve
this goal.
\548\ See Section IV.E.1.d, infra. The RFP requested that
Bidders provide information on how data format and context
validations for order and quote events would be performed and how
errors would be communicated to CAT Reporters; a system flow diagram
showing how and when different types of validations would be
completed; and how Customer information would be validated. Bidders
noted that the validations would be performed via rules engines
(using standard data validation techniques like format checks, data
type checks, consistency checks, limit and logic checks, or data
validity checks), and processing would be done in real time during
data ingestion. The Plan Processor would be required to perform
validations within three specified categories, which must be set out
in the Technical Specifications document: File Validations
(confirmation that the file is received in the correct format);
Validation of CAT Data (checks of format, data type, consistency,
range/logic, data validity, completeness, and timeliness); and
Linkage Validation (checking the ``daisy chain''). See CAT NMS Plan,
supra note 3, at Appendix D, Section 7.2. If errors are found, the
data would be stored in an error database and notification sent to
the CAT Reporter.
---------------------------------------------------------------------------
Rather than providing details on the validations that would occur,
however, the Plan provides high-level requirements for the validations
and delegates the detailed design of the specific validations to the
Plan Processor (with the involvement of the Operating Committee and the
Advisory Committee).\549\ Additionally, the Plan does not provide the
level of detail necessary to verify whether the CAT validation process
would run the same validations as OATS, whether current validations
would be relevant, and what validations, if any, would be added.
---------------------------------------------------------------------------
\549\ See CAT NMS Plan, supra note 3, at Appendix D, Section 7.2
(discussing validation requirements); see also id. Appendix C at
Section A.3(b) (delegating responsibility regarding measurement of
Error Rates to the Plan Processor).
---------------------------------------------------------------------------
As noted above, it is therefore difficult to conclude whether the
Error Rates and processes in the CAT NMS Plan would constitute an
accuracy improvement as compared to current data sources. With respect
to OATS, FINRA currently performs over 152 validation checks on each
order event reported.\550\ After corrections, approximately 1-2% of
each day's recorded events remain unmatched (i.e., multi-firm events,
such as order routing that cannot be reconciled).\551\ However, the
Commission is not certain that those error rates are directly
comparable to the Error Rates permitted for CAT Data in the Plan given
the increased scope and level of linkages specified in the Plan, and
the new, large, and untested system. The Commission is not aware of
other systems that track and record similar error rates, although the
Commission does experience issues with errors contained in other
sources of data when the Commission attempts to use that data.
Accordingly, the Commission is unable to conclude whether the Error
Rates and processes in the Plan would constitute an accuracy
improvement compared to current data.
---------------------------------------------------------------------------
\550\ See Adopting Release, supra note 9, at 45729.
\551\ Id. at 45778.
---------------------------------------------------------------------------
(2) Event Sequencing
A. Clock Synchronization
Rule 613(d)(1) and (2) requires that the CAT NMS Plan require that
the business clocks of Participants and their members be synchronized
to a specified standard of precision and for protocols to be in place
for that standard to be maintained over time. Complying with this clock
synchronization standard will require that, for the purpose of
recording the date and time of Reportable Events, the business systems
of Participants and their members be synchronized consistently with
``industry standards.'' The Commission did not define the term
``industry standard'' in Rule 613, though it noted that it expected the
Plan to ``specify the time increment within which clock synchronization
must be maintained, and the reasons the plan sponsors believe this
represents the industry standard.'' \552\
---------------------------------------------------------------------------
\552\ See Adopting Release, supra note 9, at 45774.
---------------------------------------------------------------------------
The CAT NMS Plan describes the ``industry standard'' in this
context in terms of the technology adopted by the majority of the
industry.\553\ The Plan therefore bases its clock synchronization
standard on current practices of the broker-dealer industry generally
and provides that one standard would apply to all CAT Reporters.
Specifically, Section 6.8(a) of the CAT NMS Plan requires CAT Reporters
to synchronize their time clocks to the time maintained by the NIST
with an allowable clock offset of 50 milliseconds, which the Plan
determines is consistent with the current industry standards, as
defined in the Plan. The Plan further requires annual review of the
clock synchronization standard to evaluate its achievement of the
Plan's goals related to clock synchronization. Section 6.8(c) of the
Plan requires the Chief Compliance Officer to annually evaluate the
clock offset tolerance and to make recommendations to the Operating
Committee regarding whether industry standards have evolved such that
the standard in Section 6.8(a) should be shortened.\554\
---------------------------------------------------------------------------
\553\ See CAT NMS Plan, supra note 3, at Appendix C, Section
12(p).
\554\ See id. at Section 6.8.(c) and Appendix C, Section A.3.(c)
---------------------------------------------------------------------------
[[Page 30683]]
The Commission preliminarily believes that the clock
synchronization standards in the CAT NMS Plan are reasonably designed
to improve the accuracy of market activity sequencing by increasing the
percentage of order events that could be chronologically sequenced
relative to other order events,\555\ but notes that the improvements to
the percentage of sequenceable order events by Plan standards are
modest and the requirements of the Plan may not be sufficient to
completely sequence the majority of market events relative to all other
events.
---------------------------------------------------------------------------
\555\ Independent of the potential time clock synchronization
benefits, the order linking data that would be captured in CAT
should increase the proportion of events that could be sequenced
accurately. This reflects the fact that some records pertaining to
the same order could be sequenced by their placement in an order
lifecycle (e.g., an order submission must have occurred before its
execution) without relying on time stamps. This information may also
be used to partially sequence surrounding events.
---------------------------------------------------------------------------
As discussed in the Baseline Section, 39% of the broker-dealers
responding to the FIF Clock Offset Survey currently synchronize their
clocks to a clock offset tolerance of greater than 50
milliseconds.\556\ Accordingly, the 50 millisecond requirement for all
CAT Reporters (except on manual order handling systems) would result in
the availability of more precise time stamps from many broker-dealers
\557\ and would increase the number of order events that could be
accurately sequenced relative to each other.
---------------------------------------------------------------------------
\556\ See Section IV.D.2.b(2)B.i, supra (reporting results of
this survey); see also FIF Clock Offset Study, supra note 127.
\557\ As noted above, FINRA has indicated that it is considering
proposing a rule change that would require a 50 millisecond clock
offset tolerance. If this rule change is proposed and approved, more
entities would record time stamps with data at a 50 millisecond
clock offset tolerance regardless of whether the CAT NMS Plan is
approved.
---------------------------------------------------------------------------
To evaluate the proportion of order events that could be sequenced
with the clock offset tolerance specified in the CAT NMS Plan, the
Commission has conducted an analysis of the frequency of market events
occurring within 100 milliseconds of an event in a different trading
venue in the same security.\558\ Table 5 (CAT and Current Clock Offset
Tolerance) shows the percentage of events for listed equities and
options that could be accurately sequenced with one-second and 50-
millisecond clock offset tolerances.
---------------------------------------------------------------------------
\558\ The methodology to calculate these frequencies starts with
the steps described in supra note 438 and then subtracts the result
from one to get the percentage of unrelated orders that could be
sequenced. This assumes that consecutive unrelated events within
twice the clock offset tolerance cannot be sequenced. An unrelated
event is an order event at a different venue.
Table 5--CAT and Current Clock Offset Tolerance
----------------------------------------------------------------------------------------------------------------
% of Unrelated order events
----------------------------------------------------------------------------------------------------------------
Minimum time between adjacent events Clock offset tolerance Equities (%) Options (%)
----------------------------------------------------------------------------------------------------------------
2 seconds..................................... 1 second........................ 1.31 6.97
100 milliseconds.............................. 50 milliseconds................. 7.84 18.83
----------------------------------------------------------------------------------------------------------------
The analysis finds that the current FINRA one-second clock offset
tolerance allows only 1.31% of unrelated order events for listed
equities and 6.97% of unrelated order events for listed options to be
sequenced. The proposed 50-millisecond clock offset tolerance could
accurately sequence 7.84% for listed equities and 18.83% for listed
options of such events included in the MIDAS data. This analysis
overestimates the portion of unrelated events that the proposed clock
synchronization standard could sequence because the analysis includes
only trade and quote events observable in the MIDAS data. The data
currently available to the Commission provides only a rough and
upwardly-biased estimate of how many of these events could be sequenced
by the order data that would be captured by the CAT. In sum, the
results of the Commission's analysis suggest that the standards
required by the Plan do represent an improvement over current standard
but that the majority of market events would remain impossible to
sequence based on the Plan's required clock synchronization standards.
This analysis does not consider events in OTC Equity Securities.
The Commission believes that the proposed clock synchronization
standard could accurately sequence a higher proportion of unrelated
events in OTC Equity Securities because OTC Equity Securities trade
less frequently than NMS equities and unrelated order events may be
less frequent in OTC Equity Securities than in listed equities. The
Commission therefore preliminarily believes that the proposed 50
millisecond clock offset tolerance in the CAT NMS Plan could improve
accuracy by modestly increasing the number of events that could be
sequenced in OTC Equity Securities.
The Plan acknowledges that the required clock offset tolerance,
which is based on its determination of the current industry standard,
would not be sufficient to accurately sequence all order events by
their time stamps alone.\559\ In particular, the Plan states that
``[f]or unrelated events, e.g., multiple unrelated orders from
different broker-dealers, there would be no way to definitively
sequence order events within the allowable clock drift as defined in
Article 6.8.'' \560\ This in turn limits the benefits of CAT in
regulatory activities that require event sequencing, such as the
analysis and reconstruction of market events, as well as market
analysis and research in support of policy decisions, in addition to
examinations, enforcement investigations, cross-market surveillance,
and other enforcement functions.
---------------------------------------------------------------------------
\559\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(c). Order events occurring within a single system using the same
time clock could be accurately sequenced by their time stamps,
assuming that their time stamps are not identical. The CAT NMS Plan
does not specify the approach that would be used to sequence events
when time stamps are identical or indicate how this decision would
be made.
\560\ Id. at n.110. Events involving the same order routed
across systems could be logically sequenced using routing-related
data, because a routed order must be sent before it can be received,
and received before it can be executed. However, the Plan would not
facilitate the accurate sequencing of events that occur in different
systems within 100 milliseconds of each other (twice the clock
offset tolerance) that are not linked using a parent-child order
relationship. The CAT NMS Plan does not provide a solution that will
sequence these events, but recognizes the issue and states that
``the Participants plan to require that the Plan Processor develop a
way to accurately track the sequence of order events without relying
entirely on time stamps.'' See CAT NMS Plan, supra note 3, at
Appendix C, Section A.3(c).
---------------------------------------------------------------------------
The Plan discusses its determination of the current industry
standard and specifies implementation requirements for the clock
synchronization standards in Appendix C.\561\ As noted above, the
[[Page 30684]]
Plan bases industry standards on current practices of the broker-dealer
industry, which are derived from a survey of broker-dealers, and on the
assumption that a change in industry standards would be premised on
``the extent existing technology that synchronizes . . . clocks with a
lower tolerance . . . becomes widespread enough throughout the industry
to constitute a new standard.'' \562\
---------------------------------------------------------------------------
\561\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(c).
\562\ Id.
---------------------------------------------------------------------------
The Commission notes however, that the current practices for
exchanges and Execution Venues may differ from the industry standard
for broker-dealers as defined in the Plan, and current practices for
certain systems within broker-dealers may vary by the system within the
broker-dealers. As noted in the Baseline Section, the Commission does
not have precise information on the clock synchronization standards on
exchange and ATS matching engines and quoting systems, but exchanges
may currently synchronize their clocks to a 100 microsecond or less
clock offset tolerance, and have an average clock offset of 36
microseconds.\563\ By defining industry standards based on practices of
the broker-dealer industry generally, the Plan does not account for
these differences. Further, defining industry standards by majority
practices may have the unintended effect of setting a standard that
delays adopting advances in technology.
---------------------------------------------------------------------------
\563\ See supra notes 435 and436.
---------------------------------------------------------------------------
Despite these limitations, it is worth noting that the Plan
requires the CCO of the Plan Processor to develop and conduct an annual
assessment of Business Clock synchronization.\564\ Moreover, Plan
Participants must require Industry Members to certify periodically that
their Business Clocks comply with the clock synchronization standard
and that any violations thereof are reported to the Plan Processor and
the Plan Participant.\565\ Thus, the Commission believes that these
provisions would help ensure that the benefits of clock synchronization
are maintained.
---------------------------------------------------------------------------
\564\ See CAT NMS Plan, supra note 3, Section 6.2(a)(v)(M).
\565\ See id. at Section 6.8(a)(ii) and (iii).
---------------------------------------------------------------------------
B. Time Stamp Granularity
The Commission preliminarily believes that the minimum time stamp
granularity required by the Plan would result in some improvement in
data accuracy, but that the level of improvement could be limited.
Despite the modest level of direct improvements expected from the
Plan's minimum time stamp granularity standards, the Commission
preliminarily believes that the Plan should continue to have a time
stamp granularity standard because the Plan provides a mechanism for
making future improvements and monitoring whether more granular time
stamps would provide better quality CAT Data and be feasible given
technology improvements.
The level of precision or granularity with which time stamps are
recorded has significant implications for the usability of audit trail
data in terms of sequencing events, matching records, and linking the
data to other data sources. In some current regulatory data, the
relative lack of time stamp granularity standards for data reporters
could lead to difficulties in accurately sequencing events or linking
data with other data sources. Rule 613(d)(3) requires that CAT
Reporters record time stamps to reflect current industry standards and
be at least to the millisecond.\566\ Furthermore, the Plan requires
Participants to adopt rules requiring that CAT Reporters that use time
stamps in increments finer than milliseconds use those finer increments
when reporting to the Central Repository.\567\ Consistent with Rule
613, Section 6.8(b) of the CAT NMS Plan requires millisecond or less
time stamps. However, the Commission granted exemptive relief for
manual orders to be recorded at the granularity of one second or
better.\568\ Further, pursuant to Rule 613, if a CAT Reporter's system
already utilizes time stamps in increments less than the minimum
required by the Plan, the CAT Reporter must record time stamps in such
finer increments.\569\
---------------------------------------------------------------------------
\566\ 17 CFR 242.613(d)(3). This requirement does not apply to
certain Manual Order Events, which are exempted from the requirement
and are captured at one-second increments. Time stamp granularity on
manual order events is discussed separately in the Alternatives
Section.
\567\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(c).
\568\ See CAT NMS Plan, supra note 3, at Section 6.8(b) and
Appendix C, Section A.3(c) (explaining that recording Manual Order
Events at the millisecond level would be costly and ultimately
arbitrary or imprecise due to the human interaction); see also
Exemption Order, supra note 18, at 11868-9.
\569\ Id.
---------------------------------------------------------------------------
The Plan asserts that the millisecond increment required for CAT
Data reflects the industry standard level of granularity.\570\ As noted
in the discussion of clock synchronization, the Commission did not
define the term ``industry standard'' in Rule 613. The Plan therefore
bases its standard for time stamp granularity on current practices of
the broker-dealer industry generally, and provides that one standard
would apply to all CAT Reporters. There appears to be a wide divergence
of industry standards in practice, ranging from full seconds to
microseconds for latency-sensitive applications, and the Plan describes
the slower systems as mostly older ones that cannot support a finer
time stamp granularity.\571\ Many of the systems from which regulators
currently obtain data already capture time stamps in increments of
milliseconds or less. For example, OPRA allows for time stamps in
nanoseconds, and the other SIPs require time stamps in microseconds for
equity trades and quotes.\572\ However, OATS and EBS do not. Current
OATS rules require time stamps to be expressed to the nearest second,
unless the member's system expresses time in finer increments; and as
of September 2014, approximately 12% of OATS records contain time
stamps greater than one millisecond. EBS records either do not contain
times or express time stamps in seconds.\573\
---------------------------------------------------------------------------
\570\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(c).
\571\ Id. Because older technology cannot support finer time
stamp increments, members with older systems would incur significant
effort and cost to upgrade those systems to support reporting data
in milliseconds. The newest systems support finer increments, but
include mostly the subset of systems dealing with low latency
trading. Electronic Order Handling and Trading systems are commonly
set at the millisecond level; see, e.g., FIF Letter.
\572\ See Section IV.D.2.b(2), supra.
\573\ Id.
---------------------------------------------------------------------------
Thus, to the extent that some current data sources report time
stamps in increments coarser than a millisecond, which is the case for
12% of OATS records and all EBS records, the Commission expects the CAT
millisecond time stamp requirement to improve data, and thereby allow
regulators to more accurately determine the sequence of market events
relative to surrounding events.
The Commission preliminarily believes, however, that benefits from
the more granular time stamps could be limited by the level of clock
synchronization required by the Plan. In particular, the Commission
believes that time stamp granularity would not be the limiting factor
in sequencing accuracy, because recording events with time stamps with
resolutions of less than one millisecond cannot help to sequence events
occurring on different venues with clocks that may be 100 milliseconds
out of sync due to clock synchronization offsets.\574\ Therefore,
[[Page 30685]]
the benefits of time stamping order events at increments finer than a
millisecond would be limited without also improving the clock
synchronization standards of the Plan.
---------------------------------------------------------------------------
\574\ For example, under the requirements in the Plan, an order
event at Broker-Dealer A could have a time stamp that is 1
millisecond sooner than an order event at Broker-Dealer B even if
the event at Broker-Dealer B actually occurred 99 milliseconds
sooner. This could occur if Broker-Dealer A's systems are recording
times 50 milliseconds ahead of NIST while Broker-Dealer B's systems
are recording times 50 milliseconds behind NIST. Both broker-
dealers' systems would be within the Plan's allowable clock
synchronization tolerance.
---------------------------------------------------------------------------
(3) Linking and Combining Data
The Commission believes the requirements of Rule 613 and the Plan
related to data linking would result in improvements to the accuracy of
the data available to regulators, but the extent of the improvement
would depend on the accuracy of the linking algorithm and the
reformatting process that the Plan Processor would eventually develop.
As discussed in the Baseline, data is currently stored in multiple
formats, is difficult to merge, and results in errors during the
merging process. Moreover, in some cases, the data sources do not
capture the information necessary to link records, while in other cases
linking must be done with algorithms that accomplish the linking with
some degree of error.
Rule 613(e)(1) generally requires the creation and maintenance of a
Central Repository that would receive, consolidate, and retain
information reported to the CAT.\575\ Further, the rule requires that
the Central Repository store and make available to regulators data in a
uniform electronic format and in a form in which all events pertaining
to the same originating order are linked together in a manner that
ensures timely and accurate retrieval of information reported to the
CAT.\576\
---------------------------------------------------------------------------
\575\ 17 CFR 242.613(e)(1); see also CAT NMS Plan, supra note 3,
at Section 6.5(a) and (b).
\576\ 17 CFR 242.613(e)(1).
---------------------------------------------------------------------------
The Commission preliminarily believes that the requirement that
data be stored in a uniform format would eliminate the need for
regulators who are accessing the data to reformat the data. As noted in
the Baseline Section above, regulators face delays and inaccuracies
when attempting to reformat and link data from multiple sources, such
as linking trade blotters from several broker dealers with SRO audit
trails. Given that the reformatting of CAT Data would be accomplished
by individuals that likely specialize in this activity and that
repetitively do so in a prescriptive and formalized way, this
requirement could reduce the errors that could be introduced in the
current regime where reformatting data is often done on an ad hoc basis
by regulatory Staff who need to work with the data.\577\ In other
words, the Plan Processor would develop a reformatting process by
working with CAT Reporters to build an expertise in harmonizing the
various formats that it receives from Reporters. The Plan Processor
could then build, test, and refine the reformatting process with the
ability to go back to the CAT Reporters for further clarification. Even
if only one Staff member at each SRO or Affiliated Participant
developed the expertise necessary to reformat each of the various
formats and ran a reformatting process on order data, this would result
in a duplication of efforts compared to one centralized entity (the
Plan Processor) developing the expertise and running the reformatting
process. Storing data in a linked format removes the need for
regulators to link information from multiple lifecycle events of an
order or orders themselves, which could further reduce errors and
increase the usability of the data. The Commission recognizes, however,
that despite the potential improvements, the CAT Data could still
contain errors introduced in the reformatting and linking processes.
---------------------------------------------------------------------------
\577\ Whether errors would decrease depends on the actual
formatting process used.
---------------------------------------------------------------------------
The process for linking orders designated in the CAT NMS Plan is
similar to the process FINRA currently uses to link OATS records across
market participants. However, the Plan would significantly improve the
ability of regulators to link order events compared to OATS, and would
link this activity to specific customers unlike current audit trail
data.\578\ CAT Reporters must report a series of unique identifiers
that are designed to allow records of events that occur over the
order's lifecycle to be linked together to determine how the order was
handled and how the order interacted with other orders.\579\ The Plan
Processor must then create the initial linkages in the submitted data;
unlike in OATS, the Plan Processor would verify these linkages as part
of its data validity checks.\580\ In general, the CAT NMS Plan would
link orders using the ``daisy chain approach,'' where CAT Reporters
assign their own identifiers to each order event that the Plan
Processor later replaces with a single identifier (the CAT Order-ID)
for all order events pertaining to the same order.\581\ The Central
Repository at a minimum must be able to create linkages between all
order events that are internalized, between the Customer execution and
a proprietary order in the case of a riskless principal transaction,
between two broker-dealers, between a broker-dealer and an exchange,
and vice versa, between executed orders and trade reports, between
various legs of option/equity complex orders, and between order events
for all equity option order handling scenarios that currently are or
could potentially be used by CAT Reporters.\582\
---------------------------------------------------------------------------
\578\ As discussed above, the Commission notes that SRO audit
trails typically do not provide customer information but a recent
FINRA rule change requires its members to report to OATS non-FINRA
member customers who are broker-dealers. See supra note 407.
\579\ See id. at Section 6.3(d)(i) through (vi).
\580\ These data validations are to be established in a
Technical Specifications document by the Plan Processor.
Consequently, it is as yet unclear precisely how that process would
occur. See id. at Appendix D, Section 7.2; Appendix C, Section
A.3(a) (validations ensure that data is submitted in required
formats and that lifecycle events can be accurately linked).
\581\ See id. at Appendix D, Section 3.
\582\ See id.
---------------------------------------------------------------------------
Unlike OATS data, CAT Data would be less prone to breaking the
order lifecycle chain when an order is sent across market participants
because the order lifecycle linking procedure across reporters would be
uniform and all industry participants would be reporters.\583\
Currently, linking procedures across SROs are not uniform, which
complicates reconstructing order lifecycles. Furthermore, because some
broker-dealers are not required to report to OATS, these broker-
dealers' activity cannot be completely reconstructed from audit trail
data, and therefore, orders that they handle cannot be traced through
their lifecycle, effectively severing the links between the order being
received and the order's final disposition. Furthermore, as covered
elsewhere, unlike other data sources, CAT Data would link orders to
Customers because the Plan requires the order lifecycle to be linked
back to the original Customer, and the Plan Processor must be able to
fix linkages when error correction files are submitted.\584\ While the
success of such a matching process is dependent on the accurate
reporting of order linkages by CAT Reporters,\585\ Appendix D directs
the Plan Processor to ensure that breaks in certain lifecycle linkages
must not cause the entire lifecycle to break or
[[Page 30686]]
cause a CAT Reporter that correctly reports information to have its
submission rejected.\586\
---------------------------------------------------------------------------
\583\ See Section IV.D.2, supra.
\584\ See id.
\585\ For example, assume two broker-dealers handle an order
that is ultimately executed on an exchange. Broker-Dealer A receives
the order, and transmits it to Broker-Dealer B, that routes it to
Exchange C where it is executed. In order for the Plan Processor to
link these three order events, Broker-Dealer A would need to report
the order and its routing to Broker-Dealer B; B would need to
correctly echo A's order ID in its CAT reporting and its route to
Exchange C, and C would need to correctly echo Broker-dealer B's
order ID in its CAT reporting.
\586\ See CAT NMS Plan, supra note 3, at Appendix D, Section
7.3. The Commission also notes that, even if all CAT Reporters
provide the required linking information, the success of the linking
process would depend in part on the approach taken by the Plan
Processor and whether or not that approach results in errors.
---------------------------------------------------------------------------
The CAT NMS Plan does not provide sufficiently detailed information
for the Commission to estimate the likely Error Rates associated with
the linking process required by the CAT NMS Plan. Indeed, the 5% Error
Rate covers data from CAT Reporters, but the Plan Processor could
create errors as well, for example, through the linking process.
Further, the Plan does not include details on how the Plan Processor
would perform the linking process, identify broken linkages, and seek
corrected reports from CAT Reporters to correct broken linkages.
Instead, the Plan defers key decisions regarding the validation process
until the selection of a Plan Processor and the development of
Technical Specifications.\587\ Accordingly, while the centralized
linking should generally promote efficiencies and accuracies in
linking, these uncertainties make it difficult for the Commission to
gauge the degree to which the process for linking orders across market
participants and SROs would improve accuracy compared to existing data,
including OATS.\588\
---------------------------------------------------------------------------
\587\ The CAT NMS Plan describes the Plan Processor's
responsibility for creating the Technical Specifications. See CAT
NMS Plan, supra note 3, at Section 6.9.
\588\ The Commission notes that the Plan Processor is required
to create a quality assurance testing environment in which, during
industry-wide testing, the Plan Processor provides linkage
processing of data submitted, the results of which are reported back
to Participants and to the Operating Committee for review. See CAT
NMS Plan, supra note 3, at Appendix D, Section 1.2. This may help
identify challenges in the linking process and allow for their early
resolution.
---------------------------------------------------------------------------
Uncertainties also prevent the Commission from determining whether
the process for converting data into a uniform format at the Central
Repository would improve the accuracy of the data over existing audit
trail accuracy rates. The Plan includes two alternative approaches to
data conversion. In the first, called Approach 1, CAT Reporters would
submit data to the Central Repository in an existing industry standard
protocol of their choice such as the Financial Information eXchange
(``FIX'') protocol. In Approach 2, CAT Reporters would submit data to
the Central Repository in single mandatory specified format, such as an
augmented version of the OATS protocol. Under Approach 1, the data must
be converted into a uniform format at the Central Repository in a
second step. Under Approach 2, the data is already in a uniform format
at the time of submission. The Plan defers the decision regarding which
approach to take until the selection of a Plan Processor and the
development of Technical Specifications.
The Commission preliminarily believes that Approach 1 would likely
result in a lower Error Rate than Approach 2. Under Approach 1, the CAT
Reporters would presumably be submitting the actual data captured in
real time without having to translate it into another format. In
addition, under Approach 1, the conversion would be performed at the
Central Repository by the Plan Processor, rather than the conversion
being performed by each of the approximately 1,800 individual CAT
Reporters or their vendors, which should reduce potential points where
errors in formatting could be introduced, and provide for economies of
scale.\589\ This would likely result in increased efficiency and
accuracy due to specialization by the Plan Processor. However, while
the Commission preliminarily believes that Approach 1 is likely to
result in greater data accuracy than Approach 2, because of
uncertainties regarding expected Error Rates and error rates in current
data, the Commission is unable to evaluate the degree to which that
approach would improve data accuracy relative to currently available
data.\590\
---------------------------------------------------------------------------
\589\ The Commission understands that a large proportion of
reports that fail OATS validation checks do so because of errors in
the translation of the data by the OATS reporter.
\590\ The Plan Processor is required to have policies and
procedures, including standards, to ensure the accuracy of the
consolidation by the Plan Processor of the data, per Rule
613(e)(4)(iii), which could mitigate errors as well. 17 CFR
242.613(e)(4)(iii).
---------------------------------------------------------------------------
Uniquely complex situations also pose a difficulty for assessing
the ability of the Plan Processor to build a complete and accurate
database of linked data that regulators could query for regulatory
purposes. First, the Plan requires the Plan Processor, in consultation
with industry, to develop a linking mechanism that would allow the
option and equity legs of multi-leg trades to be linked within the
Central Repository.\591\ Because the mechanism for this linkage is not
yet determined, the Commission cannot assess the degree of the expected
linkage error rate but, given that equities are not linked to options
in current data sources, the Commission expects this feature to
significantly improve the accuracy of linking equities to options.
---------------------------------------------------------------------------
\591\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.1(b).
---------------------------------------------------------------------------
Second, the Commission in the Proposing Release noted concern about
the ability of the daisy chain approach to link a Customer order and a
member's order from which the Customer is provided with an
allocation.\592\ The Plan addresses this concern in the definition of
an Allocation Report, which is a report that identifies accounts and
subaccounts to which executed shares are allocated, but that is not
required to be tied to a particular order or execution.\593\ The Report
is required to be submitted to the Central Repository,\594\ but the
lack of linkages in this case could make the resulting data less
useful. Specifically, the content of the Allocation Report and the
order lifecycles must contain content that permits regulators to draw
certain conclusions about subaccount allocations even without a clean
linkage.
---------------------------------------------------------------------------
\592\ See Proposing Release, supra note 9, at 32576.
\593\ See CAT NMS Plan, supra note 3, at Section 1.1.
\594\ See id. at Section 6.4(d)(ii).
---------------------------------------------------------------------------
While uncertainty about this issue remains, the Commission notes
that the Plan's requirement for standardized Allocation Reports that
consistently and uniquely identify Customers and reporters should
improve the linkability of allocation information compared to current
data, despite the limitation of direct linkage to order lifecycles,
particularly in scenarios where potentially violative conduct is
carried out by market participants operating through multiple broker
dealers. This moderate improvement in the linkability of allocation
data should improve regulators' ability to identify market participants
who commit violations related to improper subaccount allocations.
(4) Customer and Reporter Identifiers
The Commission preliminarily believes that the inclusion of unique
Customer and Reporter Identifiers described in the CAT NMS Plan would
increase the accuracy of customer and broker-dealer information in data
regulators use and provide benefits to a broad range of regulatory
activities that involve audit trail data.
Currently, only a few data sources, which typically cover only a
small portion of order lifecycles, include information regarding
customers.\595\ Further, the customer information in these data sources
is often incomplete
[[Page 30687]]
and inconsistent and the data is currently only obtainable by
regulators making requests to broker-dealers directly. Additionally,
although broker-dealer identifiers, in the form of MPID numbers, CRD
numbers, and clearing broker numbers, appear within the current sources
of audit trail data, because of the lack of a centralized database and
because these identifiers may vary across exchanges, the Commission
faces challenges in relying on these identifiers to accurately identify
broker-dealer activity across the market.\596\
---------------------------------------------------------------------------
\595\ See Section IV.D.2.b(1)A, supra. As discussed above, the
Commission notes that SRO audit trails typically do not provide
customer information but a recent FINRA rule change would require
its members to report to OATS non-FINRA member customers who are
broker-dealers. See supra note 407.
\596\ See Section IV.D.2.b(1)D, supra.
---------------------------------------------------------------------------
Rule 613 requires the use of a unique Customer-ID that identifies
the Customer involved in CAT Reportable Events.\597\ Based on a concern
that requiring CAT Reporters to report a Customer-ID to the Central
Repository with each order would disrupt existing business practices
and that reporting on that basis could risk the leakage of order and
Customer information into the market,\598\ the Plan requires the Plan
Processor to translate a unique Customer identifier assigned by the
firm to its Customer (the Firm Designated ID) into the Customer-ID to
be used in CAT.\599\ Specifically, the Plan requires CAT Reporters to
provide a Firm Designated ID for each Customer, which is defined as the
unique identifier designated by the broker-dealer for each trading
account for purposes of providing data to the Central Repository.\600\
Upon receipt of the Firm Designated ID, the Plan Processor would be
required to generate and associate one or more Customer-IDs for orders
received by the Customer of the CAT Reporter, which would also be
linked to the relevant Reportable Events for that Customer's order.
Pursuant to the Plan, therefore, the Customer-ID would be generated
from the Firm Designated ID,\601\ and the Plan Processor would create a
unique Customer-ID that would be consistent across that Customer's
activity regardless of the originating broker-dealer.
---------------------------------------------------------------------------
\597\ Rule 613(c)(7) specifies the event records that would
contain the Customer-ID. 17 CFR 242.613(c)(7). Event records that do
not explicitly capture the Customer-ID could be linked to a record
that does contain this information, typically using the Order-ID.
\598\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.1.(a)(iii).
\599\ Id. The Firm Designated ID could be anything, provided
that it is unique across the firm for a given business date.
\600\ See id. at Section 6.3(d)(i)(A), n.2; see also id. at
Section 1.1.
\601\ See CAT NMS Plan, supra note 3, at Appendix D, Section 3.
---------------------------------------------------------------------------
To facilitate the creation of Customer-IDs, certain information
would be submitted to the Central Repository. Specifically, broker-
dealers would be required to submit an initial set of information
identifying a Customer to the Central Repository, including the Firm
Designated ID and the other biographical information associated
therewith including, for an individual, name, address, date of birth,
ITIN/SSN, and individual's role in the account (e.g., primary holder,
joint holder, guardian, trustee, person with power of attorney). With
respect to legal entities, identifying information would include: name,
address, EIN/LEI or other comparable common entity identifier.\602\
Broker-dealers must also submit to the Central Repository daily updates
for reactivated accounts, newly-established or revised Firm Designated
IDs, or other associated reportable Customer information.\603\ The Plan
also calls for periodic refreshes of all Customer information from CAT
Reporters.\604\ And the Plan Processor must have a way to periodically
receive full account lists (i.e., not just the daily changes) to ensure
the completeness and accuracy of the database.\605\
---------------------------------------------------------------------------
\602\ See id. at Appendix C, Section A.1.(a)(iii); see also id.
at Appendix D, Section 9.1. The CAT NMS Plan further provides, in
the definition of Customer Identifying Information, that where the
LEI or other comparable common identifier is provided, information
covered by such common entity identifier (e.g., name, address) would
not need to be separately submitted to the Central Repository. Id.
at Section 1.1.
\603\ See id. at Appendix C, Section A.1.(a)(iii).
\604\ See id. at Appendix C, n.33 and Appendix D, Section 9.1.
\605\ See id. at Appendix D, Section 9.1.
---------------------------------------------------------------------------
Based on this information, the Plan Processor has to ``maintain
information of sufficient detail to uniquely and consistently identify
each Customer across all CAT Reporters, and associated accounts from
each CAT Reporter.'' \606\ It is the Plan Processor's responsibility to
document and publish, with the approval of the Operating Committee, the
minimum list of data elements needed to maintain this association.
Appendix D sets forth a list of minimum data elements needed to
identify each Customer across all CAT Reporters, and associated
accounts within a CAT Reporter, including SSN or ITIN, date of birth,
current name, current address, previous name and address; and for legal
entities, the LEI (if available), tax identifier, full legal name, and
address.\607\ The Plan Processor must also support account structures
that have multiple account owners and associated Customer information
(e.g., joint accounts, managed accounts), and must be able to link
accounts that move from one CAT Reporter to another,\608\ so it is
possible that additional data fields would be necessary. Once a
database is established, it must be maintained over time, and provide
ready access to regulators to historical changes to that
information.\609\
---------------------------------------------------------------------------
\606\ See id. at Appendix C, Section A.1.(a)(iii).
\607\ See id. at Appendix D, Section 9.1.
\608\ See id.
\609\ See id. at Article VI, Section 6.5(b) and (c).
---------------------------------------------------------------------------
The Commission preliminarily believes that approval of the Plan
would likely further remedy some of the inconsistencies and other
limitations mentioned above. The Plan also contains provisions related
to the accuracy of submitted Customer information. For example, a
robust data validation process must be established for submitted
Customer and Customer Account Information.\610\ There must also be a
robust error resolution process for Customer information. The Central
Repository must be able to accommodate minor data discrepancies (e.g.,
Road versus Rd in an address) on its own, while more substantial
discrepancies (e.g., two different persons with the same SSN) would
need to be transmitted to the CAT Reporter for resolution within the
established error correction timeframe.\611\ While these elements
should help increase the accuracy of Customer identification within
CAT, there are some uncertainties, as the precise methods for
submitting Customer data to the Central Repository, along with
validations, are to be set out in Technical Specifications in the
future.\612\
---------------------------------------------------------------------------
\610\ See id. at Appendix C, Section A.1.(a)(iii); see also id.
at Appendix D, Section 9.1.
\611\ See id. at Appendix D, Section 3.
\612\ See id. at Appendix C, Section A.1.(a)(iii).
---------------------------------------------------------------------------
In addition to Customer-IDs, the CAT NMS Plan calls for the use of
CAT-Reporter-IDs. The data to be reported to the Central Repository
includes the SRO-assigned Market Participant Identifier (MPID) of the
Industry Member or Participant receiving, routing, or executing the
order.\613\ Upon receipt of the data, the Plan Processor must map the
SRO-assigned MPID to a CAT-Reporter-ID, which would be assigned by the
Plan Processor in the CAT data.\614\ Specifically, the Plan Processor
must be able to assign a CAT-Reporter-ID to all reports submitted to
the Central Repository based on SRO-assigned MPIDs. To the extent that
the different Participants assign the same MPID to different CAT
Reporters, the Plan Processor must be able to properly associate the
correct SRO-assigned
[[Page 30688]]
MPIDs with the CAT Reporters.\615\ To do this, the Plan Processor must
develop and maintain a mechanism for assigning CAT-Reporter-IDs based
on the relevant SRO-assigned identifier (MPID, ETPID, or trading
mnemonic) currently used by CAT Reporters in their order handling and
trading processes, and also to change those identifiers should that be
necessary (e.g., in the event of a merger), although changes are
expected to be infrequent.\616\ Moreover, the SROs would have an
obligation to provide all their SRO-assigned MPIDs to the Central
Repository on a daily basis to ensure the accuracy of the information
used to assign the CAT-Reporter-ID. The Plan Processor must capture,
store, and maintain this information in a master/reference database,
similar to how the Plan Processor would handle symbology changes.\617\
Finally, the validity of the SRO-assigned MPID is part of the initial
file validation process upon receipt of a submission from a CAT
Reporter, which should facilitate the accuracy of the Plan Processor's
subsequent assignment of the CAT-Reporter-ID.\618\
---------------------------------------------------------------------------
\613\ See Exemption Order, supra note 18, at 11863-11865; CAT
NMS Plan, supra note 3, at Sections 6.3(d), 6.4(d).
\614\ See CAT NMS Plan, supra note 3, at Appendix D, Section 3.
\615\ See id.
\616\ See id. at Appendix D, Section 10.1.
\617\ See id. at Appendix D, Section 2 and Section IV.E.3.b,
infra.
\618\ See id. at Appendix D, Section 7.2.
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The Commission preliminarily believes that the Customer-ID approach
in the CAT NMS Plan would significantly improve the accuracy of
customer information available to regulators. As noted above, existing
data does not consistently capture information about the customers
involved in a trade or other market event, which negatively affects the
ability of regulators to accurately track customers' activities across
broker-dealers. Additionally, customer identities in many existing data
sources use inconsistent definitions and mappings across market
centers. Accordingly, it is difficult for regulators to identify the
trading of a single customer across multiple market participants.\619\
The Customer-ID approach specified in the CAT NMS Plan constitutes a
significant improvement because it would consistently identify the
Customer responsible for market activity, obviating the need for
regulators to collect and reconcile Customer identification information
from multiple broker-dealers. This should reduce the risk of the
introduction of errors into the data by regulators and save a
significant amount of time.
---------------------------------------------------------------------------
\619\ See Adopting Release, supra note 9, at 45730; see also
Section III.D.2.b(2)D, supra.
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Furthermore, the Commission preliminarily believes that the
Reporter ID approach specified in the CAT NMS Plan would improve the
accuracy of tracking information regarding entities with reporting
obligations, namely broker-dealers and SROs. Because the Commission
currently face challenges in using MPIDs and CRD numbers, for example,
to identify broker-dealers across the market, the Plan's requirement
for consistent unique Reporter IDs would eliminate the need for the
Commission to reconcile broker-dealer information from multiple data
sources, which can be a costly task for regulatory Staff that is often
limited in terms of accuracy by the inconsistencies and non-uniqueness
of current identifiers, and facilitate more efficient and effective
regulatory activities that protect investors from harm. Moreover,
because CAT Data would include more Industry Members in the Reporter ID
category than are currently in any current set of broker-dealer
identifiers, the Commission preliminarily believes that approval of the
Plan would likely further remedy some of the inconsistencies and other
limitations mentioned above.
(5) Aggregation
Most CAT Data would be disaggregated data, meaning that CAT Data
would not suffer from the limitations that characterize some of the
aggregated data sources that regulators must currently use. As
mentioned in the Baseline Section, subaccount allocation data and
issuer repurchase data exist in forms that are aggregated and thus
these data sources are limited for use in certain regulatory activities
and interests.\620\ In particular, neither data type may necessarily
indicate the individual executions. This data feature should promote
more effective and efficient investigation by regulators of subaccount
allocation issues and repurchase activity.
---------------------------------------------------------------------------
\620\ See Section IV.D.2.b.(2)E, supra. Item 703 of Regulation
S-K requires issuers to report aggregated issuer repurchase data to
the Commission on an annual and quarterly basis in Forms 10-K and
10-Q; see also 17 CFR 229.703 and supra note 451.
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To meet the requirements of Rule 613, the CAT NMS Plan includes a
required allocation reporting tool that would provide information on
executions that are allocated to multiple subaccounts.\621\ The
Allocation Reports required by the Plan would provide the Firm
Designated ID for any account(s), including subaccount(s) to which
executed shares are allocated, the security that has been allocated,
the identifier of the firm reporting the allocation, the price per
share of shares allocated, the side of shares allocated, the number of
shares allocated to each account, and the time of the allocation.\622\
The Firm Designated IDs could facilitate linking back to the Customer-
ID, so it may not be possible to perfectly link a Customer's aggregated
orders, executions, and allocations for a day.\623\
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\621\ See CAT NMS Plan, supra note 3, at Section
6.4(d)(ii)(A)(1).
\622\ See Exemption Order, supra note 18, at 11867.
\623\ The Commission notes, however, that there may be
allocations made by non-broker-dealers that are difficult to track
if they involve multiple broker-dealers, or are not tracked if they
involve non-CAT-reporters. See Exemptive Request Letter, supra note
16, at 26 n.61.
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The Commission preliminarily believes that the CAT NMS Plan would
improve the accuracy of allocation data compared to existing data
available to regulators. It would provide disaggregated information on
the identity of the security, the number of shares and price allocated
to each subaccount, when the allocation took place, and how each
Customer subaccount is associated with the master account. This would
more accurately reflect which Customer ultimately received the shares
that were purchased in a particular trade.
The Commission anticipates that regulators may use CAT Data for
some purposes that they use cleared data for now because CAT is
significantly less aggregated. As discussed above, regulators often
used equity and option cleared reports to identify market participants
involved in trading activity relevant to an investigation.\624\ Because
these are aggregated, regulators can use them to identify clearing
firms that may have higher volume in a particular stock on a particular
day, but the data does not identify actual trades, and, therefore,
regulators make data requests to access the underlying disaggregated
data necessary to identify broker-dealers or customers that may be
involved in the activity under investigation. If the CAT NMS Plan is
approved, CAT Data could be used to identify individual trades and
customers or other market participants who were involved in such
activity with less delay and without requiring ad hoc data requests to
clearing firms identified using equity or option cleared reports.
---------------------------------------------------------------------------
\624\ See Section IV.D.2.a(2), supra.
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Likewise, the disaggregated issuer repurchase information that
would be in the CAT data would be an improvement in the accuracy of
information available to regulators about those issuer repurchases. In
particular, the Plan would require that the Plan Processor link
Customer information to the order lifecycle and the report would
identify as Customers those issuers that are
[[Page 30689]]
repurchasing their stock in the open market.\625\ This would provide
much more granular data than what is available currently for open
market issuer repurchases, which consists of monthly aggregations of
those issuer repurchases.\626\
---------------------------------------------------------------------------
\625\ See CAT NMS Plan, supra note 3, at Section 6.4(d)(iv).
\626\ See Section IV.D.2.b(2)E, supra for baseline information
on current issuer repurchase data.
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c. Accessibility
In general, the Commission believes that the Plan, if approved,
would substantially improve the accessibility of regulatory data by
providing regulators with direct access to the consolidated CAT Data,
including some data elements that currently take weeks or months to
obtain. However, there is some uncertainty regarding the process for
regulatory access under the Plan, which creates uncertainty as to the
degree of the expected improvement.\627\
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\627\ Accessibility refers to how the data is stored, how
practical it is to assemble, aggregate, and process the data, and
whether all appropriate regulators could acquire the data they need.
---------------------------------------------------------------------------
(1) Direct Access to Data
As discussed in the Baseline Section,\628\ one of the significant
limitations of current regulatory data sources is lack of direct
access. Rule 613(e)(1) requires the Central Repository to store and
make available to regulators data in a uniform electronic format and in
a form in which all events pertaining to the same originating order are
linked together in a manner that ensures timely and accurate retrieval
of the information for all Reportable Events for that order.\629\
Additionally, Rule 613(a)(1)(ii) requires that the CAT NMS Plan discuss
the time and method of access by which the data would be made available
to regulators.\630\ The CAT NMS Plan implements this requirement in
Section 6.5(c) \631\ and further describes the direct access methods
and functionality in the discussion of Consideration 2 and in Appendix
D.\632\ Section 6.5(c) requires that the Participants and the
Commission have access to the Central Repository, and access to and use
of the CAT Data stored at the Central Repository, and further requires
a method of access to the data that provides for the ability to run
searches and generate reports, including complex queries. Specifically,
the Central Repository must store 6 years of CAT data in a ``convenient
and usable standard electronic format'' that is ``directly available
and searchable electronically without any manual intervention by the
Plan Processor.'' \633\ This access to the Central Repository is solely
for the purpose of performing regulatory functions and must include the
ability to run searches and generate reports; further, the Plan
requires that the Central Repository shall allow the ability to return
results of queries that are complex in nature, including market
reconstructions and the status of order books at varying time
intervals.\634\ The Central Repository must also maintain valid
Customer and Customer Account Information and permit regulators access
to ``easily obtain historical changes to that information (e.g., name
changes, address changes).'' \635\
---------------------------------------------------------------------------
\628\ See Section IV.D.2.b(3), supra.
\629\ 17 CFR 242.613(e)(1).
\630\ 17 CFR 242.613(a)(1)(ii).
\631\ See CAT NMS Plan, supra note 3, at Section 6.5(c).
\632\ See id. at Appendix C, Section A.2(b) and (c), Appendix D,
Section 8.
\633\ See id. at Section 6.5(b)(i).
\634\ See id. at Section 6.5(c)(ii), Appendix D, Section 8.1.
\635\ See id. at Appendix C, Section A.1(a)(iii).
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The Commission recognizes that improving accessibility relative to
the Baseline requires ensuring that enough SRO and Commission Staff
members are able to use the direct access system supplied by the
Central Repository when they need it. The ability to use the direct
access system depends, among other things, on how user-friendly the
system is, whether it has enough capacity for the expected use of the
system, and whether it contains the functionality that the SROs and
Commission Staff require. The Commission preliminarily believes that
the minimum requirements for the direct access system would ensure that
the Plan would improve on the Baseline of access to current data,
including the process of requesting data.
Appendix D provides minimum functional and technical requirements
that must be met by the Technical Specifications to facilitate these
methods of access, including the methods of selecting data that must be
supported, query and bulk extract performance standards, and formats in
which data could be retrieved.\636\ Specifically, CAT must be able to
support a minimum of 3,000 regulatory users within the system, 600 of
which might be accessing the system concurrently (which must be
possible without an unacceptable decline in system performance) \637\:
20% of the 3,000 users would be daily or weekly users, and 10% would
require advanced regulatory-user access.\638\ Advanced user access
includes the ability to run complex queries (versus basic users who may
only run basic queries).\639\
---------------------------------------------------------------------------
\636\ See id. at Appendix D, Section 8; see also Appendix C,
Section A.2.
\637\ See id. at Appendix D, Section 8.1.
\638\ Id.
\639\ See id. at Appendix D, Section 8.1.1. Both Basic and
Advanced Users may be established by an employee at the regulator
designated to set up access to the system, if the Plan Processor
chooses to do so versus processing it themselves. See id. at
Appendix C, Section D.12(k). However, providing access to PII must
always be done directly by the Plan Processor. Id.
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Two types of query interfacing must be supported. The first, an
online targeted query tool, must include a date or time range, or both,
and allow users to choose from a broad menu of 26 pre-defined selection
criteria (e.g., data type, listing market, size, price, CAT-Reporter-
ID, Customer-ID, or CAT-Order-ID), with more to be defined at a later
date.\640\ Results must be viewable in the tool or downloadable in a
variety of formats and support at least a result size of 5,000 or
10,000 records, respectively, with a maximum result size to be
determined by the Plan Processor.\641\ The other method for regulator
access to the data is a user-defined direct query or bulk
extraction.\642\ CAT must be able to support at least 3,000 daily
queries, including 1,800 concurrently, and up to 300 simultaneous query
requests with no performance degradation.\643\ Datasets generated by
these direct queries could run from less than 1 GB to at least 10 TB or
more of uncompressed data.\644\
---------------------------------------------------------------------------
\640\ See id. at Appendix D, Section 8.1.1. This is a broad
range of criteria from which to choose, although deferring
additional selection fields to be defined at a later date makes the
precise scope of this tool less certain.
\641\ See id.
\642\ See id. at Appendix D, Section 8.2.
\643\ See id. at Appendix D, Section 8.2.1.
\644\ See id.
---------------------------------------------------------------------------
The actual method of query support is to be determined by the Plan
Processor, but must provide an open API that allows use of regulator-
supplied common analytic tools (e.g., Python, Tableau) and ODBC/JDBC
drivers.\645\ The Plan Processor is permitted to define a ``limited set
of basic required fields (e.g., date and at least one other field such
as symbol, CAT-Reporter-ID, or CAT-Customer-ID)'' that must be used by
regulators in direct queries.\646\ Direct queries must be able to be
created, saved, and run by regulators (either directly or at a
prescheduled time), with automated delivery of scheduled query
results.\647\ Finally, the Plan Processor must provide data models and
data dictionaries for all processed and unlinked CAT Data, and
[[Page 30690]]
the Plan Processor must provide procedures and training to regulators
that would use the direct query feature (although it is up to the Plan
Processor whether to require these training sessions).\648\
Consideration was given to requiring the Plan Processor to create an
online Report Center that would provide pre-canned reports (i.e.,
recurring reports of interest to regulators), but due to the added
complexity and lack of quantifiable use cases, the decision was made
not to proceed. The Plan, however, provides that this decision would be
reassessed when broker-dealers begin submitting data to the CAT.\649\
---------------------------------------------------------------------------
\645\ See id. at Appendix D, Section 8.2. A discussion of the
types of data tools that bidders proposed to support can be found in
Appendix C, Section A.2(b).
\646\ See id. at Appendix D, Section 8.2.
\647\ See id. at Appendix D, Section 8.2.1.
\648\ See id. at Appendix D, Section 8.2.
\649\ See id. at Appendix D, Section 8.2.2.
---------------------------------------------------------------------------
All queries must be able to be run against raw (i.e., unlinked) or
processed data, or both. A variety of minimum performance metrics apply
to these queries.\650\ The Plan Processor must also provide certain
support to regulatory users. Specifically, it must ``develop a program
to provide technical, operational and business support'' to regulators,
including creating and maintaining the CAT Help Desk to provide
technical expertise to assist regulators with questions and/or
functionality about the content and structure of the CAT query
capability.\651\ The Help Desk must be available 24x7, support email
and phone communication, and be staffed to handle 2,500 calls per month
(although this resource would not be exclusive to regulators; CAT
Reporters could use it as well).\652\ The Plan Processor must also
develop tools, including an interface, to let users monitor the status
of their queries and/or reports, including all in-progress queries/
reports and estimated time to completion.\653\ In addition, the Plan
Processor must develop communication protocols regarding system status,
outages, and other issues affecting access, including access by
regulators to a secure Web site to monitor CAT System status.\654\
Furthermore, the Plan Processor must develop and maintain documentation
and other materials to train regulators, including training on building
and running queries.\655\
---------------------------------------------------------------------------
\650\ See Section IV.E.1.IV.E.1.d(3), infra, for additional for
additional information.
\651\ See CAT NMS Plan, supra note 3, at Appendix D, Section
10.2.
\652\ See id. at Appendix D, Section 10.3.
\653\ See id. at Appendix D, Section 10.2.
\654\ See id.
\655\ See id.
---------------------------------------------------------------------------
The Commission preliminary believes that the direct access
facilitated by provisions of the CAT NMS Plan described above is
reasonably designed to substantially reduce the number of ad hoc data
requests and provide access to substantial data without the delays and
costly time and knowledge investments associated with the need to
create and respond to data requests. For example, regulators do not
have direct access to EBS or trade blotter data and therefore they must
request such data when needed for regulatory tasks. As a result, in
2014 the Commission made 3,722 EBS requests that generated 194,696
letters to broker-dealers for EBS data.\656\ Likewise, the Commission
understands that FINRA requests generate about half this number of
letters. In addition, for examinations of investment advisers and
investment companies, the Commission makes approximately 1,200 data
requests per year. If the Plan is approved, the Commission
preliminarily believes that the number of data requests would decline
sharply. In addition to decreasing the amount of time currently
required for regulators to access data sources, direct access to the
CAT Data should decrease the costs that many regulators and market
participants incur in either requesting data or fulfilling requests for
data, such as the time and resources that regulators and data liaisons
or back office IT staff at broker-dealers expend to understand and
access broker-dealer data collected and provided in a particular way.
---------------------------------------------------------------------------
\656\ See Section IV.D.2.b(2), supra, for discussion of ad hoc
data requests.
---------------------------------------------------------------------------
The Plan would also permit regulators to directly access customer
information, which could improve the ability of SROs to conduct
surveillance. Rule 613(e)(3) requires that the CAT provide the
capability to run searches and generate reports.\657\ The CAT NMS Plan
indicates that regulators would be able to run searches on many
variables, including Customer-IDs.\658\ Appendix D further clarifies
that both the online targeted query tool and the user-defined query/
bulk extract process would produce records that provide Customer-IDs,
but that do not themselves provide Customer PII data.\659\ Data
containing PII, however, could be obtained by regulatory personnel
specifically authorized to obtain PII access, through a process to be
documented by the Plan Processor.\660\ Currently, most regulatory data
sources do not directly link to specific customers.\661\ Instead,
regulators can use an ad-hoc data request to identify the customer and
follow up with an EBS request to identify the customer's other activity
across market participants. In this regard, CAT would provide SROs with
direct access to the data that is necessary to conduct surveillance of
the trading behavior of individual market participants in a more timely
fashion.\662\
---------------------------------------------------------------------------
\657\ 17 CFR 242.613(e)(3).
\658\ See CAT NMS Plan, supra note 3, at Appendix D, Section
8.2; See also supra note 632.
\659\ See id. at Appendix D, Section 4.1.6, Appendix D, Section
8.1.1-8.1.3.
\660\ See id. at Appendix D, Section 4.1.6.
\661\ The EBS system, trade blotters, order tickets, and trade
confirmations are the existing data sources that contain customer
information. See Section IV.D.2.b(1)A, supra; Adopting Release,
supra note 9, at 45727. Also a recent FINRA rule change would
require FINRA members to report to OATS non-FINRA member customers
who are broker-dealers. See supra note 407.
\662\ Currently, FINRA receives exchange data from SROs at the
end of the trading day. It takes approximately three days for FINRA
to process and translate this data to a common format before
surveillance programs can run. As noted in Section IV.D.1.c, this
economic analysis considers surveillance to be SROs running
automated processes on routinely collected or in-house data to
identify potential violations of rules or regulations.
---------------------------------------------------------------------------
(2) Consolidation of Data
The Commission also preliminarily believes that, if approved, the
Plan would improve accessibility by consolidating various data elements
into one combined source, reducing data fragmentation. First, Rule 613
requires that the Central Repository collect data that includes the
trading and routing of a given security from all CAT Reporters.\663\
Currently, audit trail data for securities that are traded on multiple
venues (multiple exchanges or off-exchange venues) is fragmented across
multiple data sources, with each regulator generally having direct
access only to data generated on the trading venues it regulates.\664\
If approved, the Plan would bring audit trail data related to trading
on all venues into the Central Repository where it could be accessed by
all regulators. Second, Rule 613 requires that the Plan include both
equity and options data.\665\ Currently no existing regulatory audit
trail data source includes both options and equities data, so
collecting this data and providing access would allow regulators to
monitor and run surveillance on the activity of market participants in
related instruments, such as when a market participant has activity in
both options and the options' underlying assets.
---------------------------------------------------------------------------
\663\ See 17 CFR 242.613(c).
\664\ The Commission recognizes that FINRA collects data from
exchanges for which it provides regulatory services. However, this
data is sent to FINRA by the exchanges with a delay, and the data
formats are not standardized prior to receipt at FINRA.
\665\ See 17 CFR 242.613(c)(5), (c)(6).
---------------------------------------------------------------------------
The Plan would also marginally increase the accessibility of
historical exchange data. In particular, Section 6.5(b)(i) of the Plan
requires that the Central Repository make historical data available for
not less than six years, in
[[Page 30691]]
a manner that is directly accessible and searchable electronically
without manual intervention by the Plan Processor.\666\
---------------------------------------------------------------------------
\666\ See CAT NMS Plan, supra note 3, at Section 6.5(b)(i).
Currently, broker-dealers retain data for six years, but exchanges
are only required to retain data for five years. In practice, the
Commission understands that most exchanges generally retain data for
at least six years, but at least one exchange does not retain data
for six or more years. Therefore, the CAT NMS Plan would improve the
historical data available from at least one exchange.
---------------------------------------------------------------------------
In some dimensions of accessibility, the Commission notes that
uncertainties exist that could affect the degree of expected
improvement to accessibility. In particular, while the Plan provides
detail on the method of access and the types of queries that regulators
could run, many of the decisions regarding access have been deferred
until after the Plan Processor is selected and finalizes the Technical
Specifications; the Plan does not specify how regulators would access
the data beyond providing for both an online query tool and user-
defined direct queries that could do bulk extractions.\667\ For
example, while the Plan indicates that regulators would have an on-line
targeted query tool and a tool for user-defined direct queries or bulk
extraction,\668\ the Plan itself does not provide an indication for how
user-friendly the tools would be or the particular skill set needed to
use the tools for user-defined direct queries.
---------------------------------------------------------------------------
\667\ See, e.g., CAT NMS Plan, supra note 3, at Appendix D,
Section 8.2.
\668\ See CAT NMS Plan, supra note 3 at Appendix D, Sections
8.1.1, 8.1.2.
---------------------------------------------------------------------------
In addition, it is not known whether the Plan Processor would host
a server workspace that regulators could use for more complex analyses,
what software tools would be available to regulators within such a
workspace, and whether complex analyses would be able to be performed
without extracting significant data from the Central Repository's
database.
While all Bidders included certain baseline functionality, such as
some means for regulators to perform dynamic searches, data extraction,
and ``off-line analysis,'' \669\ Bidders proposed using a variety of
tools to provide regulators with access to and reports from the Central
Repository, including direct access portals, web-based applications,
and a number of different options for formatting the data provided to
regulators in response to their queries.\670\ While all of these
proposed solutions would presumably be compatible with achieving the
accessibility benefits sought to be achieved through the Plan--i.e.,
they would all involve the aggregation of data from various sources and
the provision of ready access to that data for regulators--the precise
degree of functionality of the final system is still to be determined.
Similarly, the details of system performance would depend on Service
Level Agreements to be established between the Plan Participants and
the eventual Plan Processor, which means that the details would not be
known until after the Plan Processor is selected.\671\ These
functionality and performance uncertainties create some uncertainty
regarding the degree of improvement in regulatory access that would
result from the Plan.
---------------------------------------------------------------------------
\669\ See id. at Appendix C, Section A.2(b). ``Offline-
analysis'' refers to a regulator's analysis of data extracted from
the Central Repository using the regulator's own analytical tools,
software, and hardware to perform the analysis. See id. at Appendix
C, Section A.2(b) n.77.
\670\ See id. at Appendix C, Section A.2(b).
\671\ See id. at Appendix D, Section 8.5.
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Nonetheless, the requirements included in the Plan describe a
system that, once implemented, would result in the ability to query
consolidated data sources that represents a significant improvement
over the currently available systems. This substantial reduction in
data delays and costly data investments would permit regulators to
complete market reconstructions, analyses, and research projects, as
well as investigations and examinations, more effectively and
efficiently and would lead to improved productivity in the array of
regulatory matters that rely on data, which should lead to improved
investor protection.
d. Timeliness
The Commission believes that, if approved, the CAT NMS Plan would
significantly improve the timeliness of the reporting, compiling, and
access of regulatory data, which would benefit a wide array of
regulatory activities that use or could use audit trail data.\672\ The
Commission preliminarily believes that the timeline for compiling and
reporting data pursuant to the Plan constitutes an improvement over the
processes currently in place for many existing data sources, and
relative to some data sources the improvement is dramatic.
Specifically, under the Plan, CAT Data would be compiled and made ready
for access faster than is the case today for some data, both in raw and
in corrected form; regulators would be able to query and manipulate the
CAT Data without going through a lengthy data request process; and the
data would be in a format to make it more immediately useful for
regulatory purposes.
---------------------------------------------------------------------------
\672\ Timeliness refers to when the data is available to
regulators and how long it would take to process before it could be
used for regulatory analysis.
---------------------------------------------------------------------------
(1) Timing of Initial Access to Data
The Plan would require CAT Reporters to report data to the Central
Repository at times that are on par with current audit trails that
require reporting, but the Central Repository would compile the data
for initial access sooner than some other such data.\673\ Sections
6.3(b)(ii) and 6.4(b)(ii) of the Plan require that the data required to
be collected by CAT Reporters must be reported to the Central
Repository by 8:00 a.m. Eastern Time on day T+1.\674\ These provisions
also make clear that CAT Reporters could voluntarily report the
required data prior to the deadline.\675\ As described in Table 4, the
time at which data is reported often differs significantly from the
time at which data is made available to various regulators.\676\ The
CAT Data would be made available to regulators in raw form after it is
received from reporters and passes basic formatting validations; the
Plan does not specify exactly when these validations would be complete,
but the requirement to link records by 12:00 p.m. (noon) Eastern Time
on day T+1 gives a practical upper bound on this timeline for initial
access to the data.\677\ Thus, to the extent that access to the raw
(i.e., uncorrected and unlinked) data would be useful for regulatory
purposes, the CAT NMS Plan provides a way for SROs and the Commission
to access the uncorrected and unlinked data on day T+1 by 12:00 p.m. at
the latest.
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\673\ Compiling data refers to a process that aggregates
individual data records into a data set. This could occur when
regulators request data and when the regulators receive data from
multiple providers. This is different from the act of reporting
data.
\674\ See Rules 613(c)(3), (c)(4), 17 CFR 242.613(c)(3), (c)(4).
\675\ See CAT NMS Plan, supra note 3, at Appendix D, Section
3.1.
\676\ See Table 4, supra.
\677\ See CAT NMS Plan supra note 3, at Appendix C, Section
A.2(a); Appendix C, Section A.3(e); Appendix D, Section 6.1.
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As noted in the Baseline, some current data sources compile and
report the data with delays. For example, equity and option clearing
data are not compiled and reported to the NSCC and OCC until day T+3,
and thus access to this data by the Commission cannot occur until day
T+3 at the very soonest. Under the Plan, raw data would be available
two days sooner to all regulators. In other cases such as EBS reports,
the data are not compiled and reported to a centralized database until
[[Page 30692]]
a request is received.\678\ OATS data is initially reported to FINRA by
8 a.m. on the calendar day following the reportable event, and it takes
approximately 24 hours for FINRA to run validation checks on the
file.\679\ However, SROs do not currently access OATS information for
regulatory purposes until after the error correction process is
complete, which imposes a further delay of several business days for
non-FINRA SRO regulators' use.\680\ Uncorrected OATS data is, however,
available at 8 a.m. on the calendar day following the reportable event
to FINRA (several hours more timely than CAT Data would be)--and is
available to other regulators upon request several weeks later.\681\
Uncorrected CAT Data would be available to all regulators at 12:00 p.m.
on day T+1, which is at least several days sooner than OATS is
available to non-FINRA regulators; however, the Commission notes that
because OATS is reportable on the calendar day following the OATS-
reportable event while CAT would be reported on T+1 following a
Reportable Event, regulators' access to CAT Data from a day preceding a
non-trading day (Fridays or days before market holidays) is likely to
be less timely than it is currently, if that data would be covered by
OATS. However, to the extent that the CAT would generally make CAT
Data, which would include substantially more information than OATS
data, available to all regulators, as opposed to just FINRA, in raw
form by at least 12:00 p.m. Eastern Time on day T+1, the CAT would
generally represent a significant improvement in timeliness for SROs
other than FINRA compared to OATS.
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\678\ The Commission notes, however, that broker-dealers could
compile some data sources discussed in the baseline on the day of an
event. For example, broker-dealers can compile trade blotters on the
same day as the trade. Further, regulators can compile data received
in real-time on the event day. For example, regulators can compile
direct data feeds same day. The Commission does not believe the CAT
NMS Plan would affect the timing of the compilation of such data,
nor would it reduce the number of requests for data on the day of an
event.
\679\ See Adopting Release, supra note 9, at 45729.
\680\ Id.
\681\ See OATS Reporting Technical Specifications Section 8.1,
available at https://www.finra.org/sites/default/files/OATSTechSpec_01112016.pdf.
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It is true that the Plan would not necessarily improve the
timeliness of audit trail data in every case or for every regulator, as
some kinds of audit trail data are currently timely for some
regulators. For example, exchange SROs already have real-time access to
their own audit trail data.\682\ However, regulators at other SROs or
the Commission do not have real-time access to that exchange's audit
trail, and therefore CAT Data could be more timely for these other
regulators to access and use than obtaining that exchange's audit trail
data through any means.\683\
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\682\ Under the Plan, SROs that are exchanges would still have
the same real-time access to their own audit trail data as they
currently do. The Commission does not expect that all SRO audit
trails will be retired on implementation of the Plan because
exchanges may use such audit trails to implement their CAT reporting
responsibilities. CAT reporting requirements would require that
exchanges collect and report audit trail information from their
systems even if they elect to replace their current audit trails.
However, CAT requirements may improve the completeness of real-time
exchange audit trail data if the information that exchanges collect
under the Plan is more complete than what they currently collect.
\683\ As noted, the SROs are generally currently able to access
their own audit trail data on the same day of an event and the
Commission is currently able to access some public data, like SIP
and MIDAS, on the same day as an event. Further, OATS is available
to FINRA at 8am on the day following an event. The Commission
preliminarily does not expect the CAT NMS Plan would affect these
regulators' access to most of these respective data sources.
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(2) Timeliness of Access to Error-Corrected Data
Further, the Commission preliminarily believes that the error
correction process required by the CAT NMS Plan is reasonably designed
to provide additional improvements in timeliness for corrected data.
The CAT NMS Plan specifies that the initial data validation and
communication of errors to CAT Reporters must occur by noon on day T+1,
corrections of these errors must be submitted by the CAT Reporters to
the Central Repository by 8:00 a.m. Eastern Time on day T+3, and the
corrected data made available to regulators by 8:00 a.m. Eastern Time
on day T+5.\684\ During this interim time period between initial
processing and corrected data availability, ``all iterations'' of
processed data must be available for regulatory use.\685\ The Central
Repository must be able to receive error corrections at any time, even
if late; \686\ if corrections are received after day T+5, the Plan
Processor must notify the SEC and SROs of this fact and how re-
processing of the data (to be determined in conjunction with the
Operating Committee) would be completed.\687\ Customer information
(i.e., information containing PII) is processed along a slightly
different timeline, but the outcome--corrected data available by 8:00
a.m. Eastern Time on day T+5--is the same.\688\ One exception to this
timeline is if the Plan Processor has not received a significant
portion of the data, as determined according to the Plan Processor's
monitoring, in which case the Plan Processor could determine to halt
processing pending submission of that data.\689\
---------------------------------------------------------------------------
\684\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.2(a), Appendix D, Section 6.1.
\685\ Id. at Appendix D, Section 6.2.
\686\ See id. at Appendix C, Section A.3.(b), Appendix D,
Section 7.4.
\687\ See id. at Appendix D, Section 6.2.
\688\ Id.
\689\ See id. at Appendix D, Section 6.1.
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As discussed in the Baseline Section, the error resolution process
for OATS is limited to five business days from the date a rejection
becomes available.\690\ The CAT NMS Plan requires a three-day repair
window for the Central Repository.\691\ Accordingly, if the Plan is
approved, regulators would generally be able to access partially and
fully corrected data earlier than they would for OATS.\692\
---------------------------------------------------------------------------
\690\ See Section IV.D.2.b(4) and supra note 465.
\691\ Id. at Appendix C, Section A.2(a).
\692\ CAT Data being available on day T+5 may be later than for
other current SRO audit trails.
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(3) Timeliness of direct access
Improvements to timeliness would also result from the ability of
regulators to directly access CAT Data.\693\ As noted in the Baseline
Section and throughout this Section, most current data sources do not
provide direct access to most regulators, and data requests can take as
long as weeks or even months to process. Other data sources provide
direct access with queries that can sometimes generate results in
minutes--for example, running a search on all MIDAS message traffic in
one day can take up to 30 minutes \694\--but only for a limited subset
of the data to be available in CAT, and generally only for a limited
number of regulators. Accordingly, the Commission preliminarily
believes that the ability of regulators to directly access and analyze
the scope of audit trail data that would be stored in the Central
Repository should reduce the delays that are currently associated with
requesting and receiving data. For many purposes, therefore, CAT Data
could be up to many weeks more timely than current data sources.
Furthermore, direct access to CAT Data should reduce the costs of
making ad hoc data requests, including extensive interactions with data
liaisons and IT staff at broker-dealers, SROs, and vendors, developing
specialized knowledge of varied formats, data structures, and systems,
and reconciling data.
---------------------------------------------------------------------------
\693\ See CAT NMS Plan, supra note 3, Section 6.5(c).
\694\ See Section IV.D.2.b(4) and supra note 468.
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As discussed above, Rule 613 generally requires that the Central
[[Page 30693]]
Repository would receive, consolidate, and retain CAT Data in a linked
uniform electronic format and the regulators would be able to directly
access the data stored in the Central Repository.\695\ Queries take
time to return data because they need to look up information across a
range of data records, process that data, and compile it into an output
dataset. Therefore, the improvements to timeliness depend on how long
the queries take to return data. The CAT NMS Plan specifies that
regulators would be able to query the Central Repository using an
online targeted query tool with response times ``measured in time
increments of less than a minute'' for targeted queries and within 24
hours for large or complex queries that either scan large amounts of
data or return large result sets (i.e., sets of over 1 million
records).\696\ That said, if the data request is limited to one
business date, and that business date is within the last 12-month
period, the query must not take more than 3 hours to run, regardless of
complexity.\697\ Specifically, searches including only equities and
options trade data must be returned within either 1 minute (events for
a specific Customer or CAT Reporter with filterable other fields); 30
minutes (events for a specific Customer or CAT Reporter in a specified
date range of less than 1 month); or 6 hours (events for a single
Customer or CAT Reporter in a specified date range of up to 12 months
within the last 24 months).\698\ Searches including equities and
options trade data, along with NBBO data, must return within 5 minutes
for all orders for a specific security from a specific Participant; and
for all orders, cancellations, and NBBO (or the protected best bid and
offer) for a specific security, and with several similar types of
searches, within a specified window not to exceed 10 minutes for a
single date.\699\
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\695\ See Section IV.E.1.c, supra.
\696\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.2(c); Appendix D, Section 8.1.2.
\697\ Id. at Appendix D, Section 8.1.2.
\698\ Id.
\699\ Id.
---------------------------------------------------------------------------
Furthermore, the search tool must include a resource management
component, which could manage query requests to balance the workload,
and categorize and prioritize query requests based on the input
parameters, complexity of the query, and the volume of data to be
parsed in the query, with the details on the prioritization plan to be
provided at a later date.\700\ The database must support the estimated
600 concurrent users to ensure that there is not an unacceptable
decline in system performance.\701\ The direct query and bulk extract
features are also designed to ensure timely regulatory access to
critical data. For example, the bulk extract of an entire day's worth
of data should be able to be transferred in less than four hours
(assuming the regulator's network could support the required data
transfer speeds).\702\ The Plan Processor must have an automated
mechanism to monitor user-defined direct queries and bulk data
extracts, including automated alerts of issues with bottlenecks and
excessively long queues for queries or data extractions.\703\ Monthly
reporting on the delivery and timeliness of these tools to the
Operating Committee and regulators is required.\704\
---------------------------------------------------------------------------
\700\ See id. at Appendix D, Section 8.1.2.
\701\ See id. at Appendix D, Section 8.1.
\702\ See id. at Appendix D, Section 8.2.2.
\703\ Id.
\704\ Id.
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(4) Timeliness of use of Data
The Commission also preliminarily expects the CAT NMS Plan to
reduce the time required to process data before analysis. Currently
regulators can spend days and up to months processing data they receive
into a useful format.\705\ Part of this delay is due to the need to
combine data across sources that could have non-uniform formats and to
link data about the same event both within and across data sources. As
discussed above, these kinds of linking processes can require
sophisticated data techniques and substantial assumptions, and can
result in imperfectly linked data. The Plan addresses this issue by
stating that the Plan Processor must store the data in a linked uniform
format.\706\ Specifically, the Central Repository will use a ``daisy
chain'' approach to link and reconstruct the complete lifecycle of each
Reportable Event, including all related order events from all CAT
Reporters involved in that lifecycle.\707\ Therefore, regulators
accessing the data in a linked uniform format would no longer need to
take additional time to process the data into a uniform format or to
link the data.\708\ Accordingly, the Commission preliminarily believes
that the Plan would reduce or eliminate the delays associated with
merging and linking order events within the same lifecycle. Further,
the Plan would improve the timeliness of FINRA's access to the data it
uses for much of its surveillance by several days because the corrected
and linked CAT Data would be accessible on T+5 compared to FINRA's T+8
access to its corrected and linked data combining OATS with exchange
audit trails.
---------------------------------------------------------------------------
\705\ See Section IV.D.2.b(4), supra.
\706\ See CAT NMS Plan, supra note 3, at Section 6.5(b)(i). The
CAT NMS Plan does not link allocations to order events; see also 17
CFR 242.613(e)(1).
\707\ See CAT NMS Plan, supra note 3, at Appendix D, Section 3.
\708\ This does not apply if regulators choose to access raw
data before the Central Repository processed them.
---------------------------------------------------------------------------
The expected improvements to data accuracy discussed above could
also result in an increase in the timeliness of data that is ready for
analysis, although uncertainty exists regarding the extent of this
benefit.\709\ As noted in the Baseline, regulators currently take
significant time to ensure data is accurate beyond the time that it
takes data sources to validate data. In some cases, data users may
engage in a lengthy iterative process involving a back and forth with
the staff of a data provider in order to obtain accurate data necessary
for a regulatory inquiry. Accordingly, to the extent that the Central
Repository's validation process is sufficiently reliable and complete,
the duration of the error resolution process regulators would perform
with CAT Data may be shorter than for current data. Further, to the
extent that the Central Repository's linking and reformatting processes
are sufficiently successful, the SROs and Commission may not need a
lengthy process to ensure the receipt of accurate data. However, as
discussed above, the Commission lacks sufficient information on the
validations, linking, and reformatting processes needed to draw a
strong conclusion as to whether users would take less time to validate
CAT Data than they take on current data.\710\ Nonetheless, the
Commission preliminarily believes that the linking and reformatting
processes at the Central Repository would be more accurate than the
current decentralized processes such that it would reduce the time that
regulators spend linking and reformatting data prior to use.
---------------------------------------------------------------------------
\709\ See Section IV.E.1.b, supra.
\710\ As discussed above, Rule 613 requires a validation process
but leaves significant flexibility on the specific validations to be
performed and the timeline for validation. The details regarding
required validations do not appear in the CAT NMS Plan and instead
would appear in the Technical Specifications, which would not be
finalized until after approval of the CAT NMS Plan. See Section
IV.E.1.b, supra.
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2. Improvements to Regulatory Activities
The Commission preliminarily believes that improvements in the
quality of available data have the potential to result in improvements
in the analysis and reconstruction of market events; market analysis
and research in support of regulatory
[[Page 30694]]
decisions; and market surveillance, examinations, investigations, and
other enforcement functions.
Regulators' abilities to perform analyses and reconstructions of
market events would likely improve, allowing regulators to more quickly
and thoroughly investigate these events. This would allow regulators to
provide investors and other market participants with more timely and
accurate explanations of market events, and to develop more effective
responses to such events. The availability of the CAT Data would
benefit market analysis and research in support of regulatory
decisions, facilitating an improved understanding of markets and
informing potential policy decisions. Regulatory initiatives that are
based on an accurate understanding of underlying events and are
narrowly tailored to address any market deficiency should improve
market quality and benefit investors.
In the Commission's preliminary view, CAT Data would substantially
improve both the efficiency and effectiveness of SRO broad market
surveillance programs, which could benefit investors and market
participants by allowing regulators to more quickly and precisely
identify and address a higher proportion of market violations that
occur, as well as prevent violative behavior through deterrence.
The Commission also preliminarily believes that CAT Data would
enhance the SROs' and the Commission's abilities to effectively target
risk-based examinations of market participants who are at elevated risk
of violating market rules, as well as their abilities to conduct those
examinations efficiently and effectively, which could also contribute
to the identification and resolution of a higher proportion of
violative behavior in the markets. The reduction of violative behaviors
in the markets should benefit investors by providing investors with a
safer environment for allocating their capital and making financial
decisions. A reduction in violative behaviors could also benefit market
participants whose business activities are harmed by the violative
behavior of other market participants. The Commission further believes
that more targeted examinations could also benefit market participants
by resulting in proportionately fewer burdensome examinations of
compliant market participants. A significant percentage of Commission
enforcement actions involve trade and order data,\711\ and the
Commission also preliminarily believes that CAT Data would
significantly improve the efficiency and efficacy of enforcement
investigations, including insider trading and manipulation
investigations.
---------------------------------------------------------------------------
\711\ In 2015, the Commission filed 807 enforcement actions,
including 39 related to insider trading, 43 related to market
manipulation, 124 related to broker-dealers, 126 related to
investment advisers/investment companies, and one related to
exchange or SRO duties. In 2014, the Commission filed 755
enforcement actions, including 52 related to insider trading, 63
related to market manipulation, 166 related to broker-dealers, and
130 related to investment advisers/investment companies, many of
which involved trade and order data. See Year-by-Year SEC
Enforcement Statistics, available at https://www.sec.gov/news/newsroom/images/enfstats.pdf. The total number of actions filed is
not necessarily the same as the number of investigations. An
investigation may result in no filings, one filing, or multiple
filings. Additionally, trade and order data may be utilized in
enforcement investigations that do not lead to any filings. Based on
these numbers, the Commission estimates that 30-50% of its
enforcement actions incorporate trading or order data. A portion of
FINRA's 1,397 disciplinary actions in 2014 and 1,512 in 2015 also
involved trading or order data. See https://www.finra.org/newsroom/statistics.
---------------------------------------------------------------------------
The Commission further anticipates additional benefits associated
with enhanced abilities to handle tips, complaints and referrals, and
improvements in the speed with which they could be addressed,
particularly in connection with the significant number of tips,
complaints, and referrals that relate to manipulation, insider trading,
or other trading and pricing issues.\712\ The benefits to investor
protection of an improved tips, complaints, and referrals system would
largely mirror the benefits to investor protection that would accrue
through improved surveillance and examinations efficiency.
---------------------------------------------------------------------------
\712\ In fiscal years 2014 and 2015, the Commission received
around 15,000 entries in its TCR system, approximately one third of
which related to manipulation, insider trading, market events, or
other trading and pricing issues.
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a. Analysis and Reconstruction of Market Events
The Commission preliminarily believes that, if approved, the Plan
would improve regulators' ability to perform analysis and
reconstruction of market events. As noted in the Adopting Release, the
sooner regulators can complete a market reconstruction, the sooner
regulators can begin reviewing an event to determine what happened, who
was affected and how, if any regulatory responses might be required to
address the event, and what shape such responses should take.\713\
Furthermore, the improved ability for regulators to generate prompt and
complete market reconstructions could provide improved market
knowledge, which could assist regulators in conducting retrospective
analysis of their rules and pilots.
---------------------------------------------------------------------------
\713\ See Adopting Release, supra note 9, at 45732.
---------------------------------------------------------------------------
The fragmented nature of current audit trail data and the lack of
direct access to such data renders market reconstructions cumbersome
and time-consuming. Currently, the information needed to perform these
analyses is spread across multiple audit trails, with some residing in
broker-dealer order systems and trade blotters. Requesting the data
necessary for a reconstruction of a market event often takes weeks or
months and, once received, regulators then need weeks to reconcile
disparate data formats used in different data sources. For example, on
the afternoon of May 6, 2010, the U.S. equity and equity futures
markets experienced a sudden breakdown of orderly trading when indices,
such as the Dow Jones Industrial Average Index and the S&P 500 Index,
fell about 5% in five minutes, only to rebound soon after (the ``Flash
Crash'').\714\
---------------------------------------------------------------------------
\714\ See CFTC and SEC, Findings Regarding the Market Events of
May 6, 2010: Report of the Staffs of the CFTC and SEC to the Joint
Advisory Committee on Emerging Regulatory Issues (September 30,
2010), available at https://www.sec.gov/news/studies/2010/marketevents-report.pdf.
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The lack of readily available trade and order data resulted in
delays and gaps in the Commission's analysis of the events of the Flash
Crash. Ultimately, it took Commission Staff nearly five months to
complete an accurate representation of the order books of the equity
markets for May 6, 2010.\715\ Even then, the reconstruction only
contained an estimated 90% of trade and order activity for that day.
---------------------------------------------------------------------------
\715\ For a further explanation of the limitations data
deficiencies imposed on the Commission's investigation into the
Flash Crash, see Adopting Release, supra note 9, at 45732-33.
---------------------------------------------------------------------------
Regulators, such as the Commission and SROs on whose exchanges
events took place, faced similar challenges when reconstructing events
around the May 2012 Facebook IPO, the August 2012 Knight Securities
``glitch,'' and the August 2013 NASDAQ SIP outage.\716\ In addition,
during the financial crisis in 2008, the lack of direct access to audit
trail data resulted in the Commission being unable to quickly and
efficiently conduct analysis and reconstruction of
[[Page 30695]]
market events. The state of OATS data in 2008 also limited FINRA's
ability to analyze and reconstruct the market during the financial
crisis because FINRA could not yet augment its OATS data with exchange
data and OATS did not include market maker quotations. As a result,
regulators had little information about the role of short sellers in
market events and the identity of short sellers during the financial
crisis, for example.\717\ Some of these shortcomings in regulatory data
still apply today.\718\
---------------------------------------------------------------------------
\716\ For background information on these events, see SEC Press
Release, SEC Charges NASDAQ for Failures During Facebook IPO (May
29, 2013), available at https://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171575032; In the Matter of Knight Capital Americas
LLC, Securities Exchange Release Nos. 70694 (October 16, 2013);
73639 (November 19, 2014), 79 FR 72252, 72255, n.32 (December 5,
2014) (discussing NASDAQ SIP outage); see also Adopting Release,
supra note 9, at 45732-33 (discussing difficulty of analyzing and
reconstructing market events in absence of a consolidated audit
trail).
\717\ See Short Sale Reporting Study, supra note 413. To resolve
this lack of information, the Commission issued an emergency order
creating a new filing requirement for 13f filers to report their
short positions and short sales to the Commission weekly on Form SH.
See former Rule 10a-3T; available at https://www.sec.gov/rules/other/2008/34-58591.pdf; https://www.sec.gov/rules/other/2008/34-58591a.pdf; https://www.sec.gov/rules/other/2008/34-58724.pdf; https://www.sec.gov/rules/final/2008/34-58785.pdf; https://www.sec.gov/news/press/2008/2008-209.htm; https://www.sec.gov/divisions/marketreg/shortsaledisclosurefaq.htm. This data was kept confidential. After
evaluating whether the benefits from the data justified the costs,
the Commission let this requirement expire, replacing it with
additional public data. See SEC Press Release, SEC Takes Steps to
Curtail Abusive Short Sales and Increase Market Transparency (July
27, 2009), available at https://www.sec.gov/news/press/2009/2009-172.htm. This public data did not identify the short sellers as the
Form SH data did. In addition, using data requested from SROs, the
Commission conducted two studies on short selling during September
2008. These studies required data requests to select exchanges, took
two months to complete and did not have information identifying
short sellers. See ``Analysis of a Short Sale Price Test Using
Intraday Quote and Trade Data'' available at https://www.sec.gov/comments/s7-08-09/s70809-368.pdf and ``Analysis of Short Selling
Activity during the First Weeks of September 2008'' available at
https://www.sec.gov/comments/s7-08-09/s70809-369.pdf.
\718\ For example, OATS still does not include all principal
orders or option data. See Section IV.D.2.b(1)A, supra. Because
FINRA collects some exchange data, FINRA is able to merge exchange
quotes with OATS.
And although there is a proposed FINRA rule that will require
FINRA members to report to OATS identification for their non-FINRA
member customers who are broker-dealers, even after approval of this
rule OATS will lack identification for customers who are not broker-
dealers. See Section IV.D.2.b(1)B, supra.
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More generally, regulators face significant difficulties in using
some current data sources for a thorough market reconstruction. Some of
the most detailed data sources, including sources like EBS and trade
blotters that identify customers, are impractical for broad-based
reconstructions of market events. In particular, including EBS data for
a reconstruction of trading in the market for even one security on one
day could involve many, perhaps hundreds, of requests, and would
require linking that to SRO audit trail data or public data.\719\
Further, because EBS data lacks time stamps for certain trades,\720\
use of EBS data in market reconstructions requires supplementation with
data from other sources, such as trade blotters.
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\719\ See Section IV.D.2.b(3), supra (noting that in 2014, the
SEC made 3,722 EBS requests which generated 194,696 letters to
broker-dealers requesting EBS data). The Commission understands that
FINRA makes about half this number of requests.
\720\ Large traders who file Form 13H with the Commission are
assigned a ``large trader identification number'' by the Commission
and must provide that number to their brokers for inclusion in the
EBS records that are maintained by the clearing brokers. Rule 13h-1,
subject to relief granted by the Commission, requires that execution
time be captured (to the second) for certain categories of large
traders. See Sections IV.D.2.a.(3) and IV.D.2.b, supra (discussing
the EBS system and large trader reports and the limitations of these
data sources in performing market reconstructions).
---------------------------------------------------------------------------
The Commission therefore expects that improvements in data
completeness and accuracy from the Plan would enhance regulators'
ability to perform analyses and to reach conclusions faster in the wake
of a market event by reducing the time needed to collect, consolidate
and link the data. The inclusion of Customer-IDs and consistent CAT-
Reporter-IDs in CAT would allow regulators to more effectively and
efficiently identify market participants that submit orders through
several broker-dealers and execute on multiple exchanges and whose
activity may warrant further analysis. This would be useful if
regulators were interested in determining if a particular trader or
category of traders had some role in causing the market event, or how
they might have adjusted their behavior in response to the event, which
could amplify the effects of the root cause or causes. Furthermore, the
clock synchronization requirements of the Plan would improve the
ability of regulators to sequence some events that happened in
different market centers to better identify the causes of market
events. Overall, the Commission preliminarily believes that, if the
Plan is approved, regulators would have dramatically improved ability
to identify the market participants involved in market events.
The Commission further believes that better data accessibility
would significantly improve the ability of regulators to analyze and
reconstruct market events. As noted above, CAT Data would improve data
accessibility relative to every other data source because all SROs and
the Commission would have direct access to CAT Data. If the Plan is
approved, much of this information would be housed in the Central
Repository with query capabilities that would allow regulators to
access raw data beginning the day after an event.\721\ Further, as
mentioned below in the SRO Surveillance Section, the CAT Data would
link Reportable Events, which could allow regulators to respond to
market events more rapidly because they would not need to process
corrected and linked data before starting their analyses.\722\
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\721\ While the Commission recognizes that some data sources are
currently available earlier, those data sources are so fragmented as
to make collecting them for a broad-based market reconstruction
infeasible.
\722\ Such benefits could be limited for market events that
require linked data within five days of an event or if the linking
algorithm in the Central Repository introduces data errors.
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b. Market Analysis and Research
The Commission preliminarily believes that the CAT NMS Plan would
benefit the quality of market analysis and research that is produced to
increase regulatory knowledge and support policy decisions and would
lead to a more thorough understanding of current markets and emerging
issues. These expected benefits would stem from improvements in
accessibility, accuracy, and completeness of regulatory data.
Improvements in regulatory market analysis and research aimed at
informing regulatory decisions would benefit investors and market
participants by improving regulators' understanding of the intricacies
of dynamic modern markets and how different market participants behave
in response to policies and information. These more nuanced and more
thorough insights would help regulators to identify the need for
regulation that specifically tailors policies and interventions to the
diverse landscape of market participants and conditions that
characterize current financial markets, as well as assist them in
conducting retrospective analysis of their rules and pilots.
A lack of direct access to necessary data, along with inaccuracies
in the data that are available, currently limits the types of analyses
that regulators can conduct. These data limitations constrain the
information available to regulators when they are considering the
potential effects of regulatory decisions. For example, in January 2010
the Commission published a concept release on equity market structure
that discusses how the markets have rapidly evolved from trading by
floor-based specialists to trading by high-speed computers.\723\ The
concept release poses a number of questions about the role and impact
of high-frequency trading
[[Page 30696]]
strategies and the movement of trading volume from the public national
securities exchanges to over-the-counter trading venues such as dark
pools. Over the past five years there has been considerable discussion
about these topics by regulators, market participants, the media, and
the general public. Nevertheless, limitations in the completeness and
accessibility of the available data have limited the research that
followed the concept release.
---------------------------------------------------------------------------
\723\ See Concept Release on Equity Market Structure, supra note
733; see also Adopting Release, supra note 9, at 45733 (discussing
the Concept Release on Equity Market Structure).
---------------------------------------------------------------------------
The Commission preliminarily believes that the CAT NMS Plan
improves this situation, benefiting market analysis and research in
support of SRO and Commission rulemaking. It would provide direct
access to data that currently requires an often lengthy and labor-
intensive effort to request, compile, and process. Additionally, the
expected improvements in accuracy and completeness could benefit
efforts to analyze the activities of particular categories of market
participants, understand order routing behavior, identify short selling
and short covering trades, issuer repurchases, and related topics. The
requirement to store the data in a uniform format in the Central
Repository is particularly important, as linking and normalizing data
from disparate sources in different formats is a major component of
completing many types of analyses and currently requires a significant
amount of time. The Plan would provide direct access to data that
regulators could use to more directly study issues such as high
frequency trading, maker-taker pricing structures, short selling,
issuer repurchases, and ETF trading.
The CAT NMS Plan could improve market analysis and research
concerning HFT by providing regulators with direct access to more
uniform and comprehensive data that identifies HFT activity more
precisely compared to existing academic research that regulators
currently utilize. Existing academic research on high frequency trading
cannot precisely identify high frequency traders or their trading
activity and more comprehensive regulatory analysis on high frequency
trading currently relies on fragmented data that is cumbersome to
collect and process.\724\ For both academics and regulators, studying
high frequency traders is currently difficult because these traders
typically trade across many exchanges, and often off-exchange as well.
NASDAQ distributes a trade and quote dataset to researchers for the
purposes of performing academic studies on high frequency trading. This
dataset identifies the trading and quoting activity of a group of high
frequency traders identified by NASDAQ, but only includes activity from
the NASDAQ exchange. Other exchanges and market centers currently do
not provide such data to academics or the public.\725\ As a result,
studies of high frequency trading have been limited in their ability to
examine thoroughly such strategies and their impact on the market.
Because data on high-frequency trading tends to be fragmented across
many data sources, it is difficult even for regulators to thoroughly
analyze their aggregate activity level, study how their activity on one
exchange affects their activity on another, and study the effect of
particular high frequency strategies on market quality.\726\
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\724\ See High Frequency Trading, literature review, available
at https://www.sec.gov/marketstructure/research/hft_lit_review_march_2014.pdf.
\725\ Even if other exchanges did provide such data, the NASDAQ
data fields do not include the identities of the high frequency
traders. As a result researchers would not be able to study the
activity of the same high frequency trader across exchanges.
\726\ See infra note 724.
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The Plan also would provide information on how various broker-
dealers route their customer orders and would allow regulators to study
whether access fees and rebates drive routing decisions as much as
execution quality considerations. This could inform debates about
effects of conflicts of interest created by such maker-taker pricing.
Studies of maker-taker pricing require information on routing decisions
and how routing affects execution quality. Current academic studies of
maker-taker pricing rely on data that provide imprecise information
that cannot directly link routing and execution quality, and current
similar research carried out by some regulators is often hindered by
the significant amount of time it takes to obtain the relevant data
from all market centers. However, the Plan would provide regulators
with direct access to a data source that would link order lifecycle
events together in a way that would allow regulators to more thoroughly
analyze how and where broker-dealers route various order types. This
could assist regulators in analyzing the importance of fees to the
routing decisions and the ultimate impact on investors of any conflicts
of interest in broker-dealer routing decisions. Such analysis could
inform debates regarding whether maker/taker pricing structures are
harmful to market structure.
Similarly, the Plan would provide regulators with data to better
understand the nature of short selling. Existing studies of the effects
of short selling lack the ability to associate short selling activity
with customer-level data, and also lack the ability to distinguish
buying activity that covers short positions from buying activity that
establishes new long positions. The Plan would allow regulators to
examine, for example, how long particular types of traders hold a short
position and what types of traders short around corporate events.
The Plan, in requiring information about a Customer, would also
facilitate studies of how certain entities other than natural persons
trade and the market impact of their trading. For example, existing
information on repurchases is aggregated at the monthly and quarterly
level while the CAT Data on issuer repurchases would be much more
granular. CAT Data would provide information that could determine the
size and timing of issuer repurchases, for example. In addition, CAT
Data would provide information that could help identify open market
repurchases whereas existing data does not distinguish the type of
repurchase. As such, the Plan would facilitate research that addresses
the timing of issuer repurchases around corporate events or stock
option grants and exercises, the extent to which issuers use the safe
harbor in Rule 10b-18, and how aggressively issuers trade in the
market. In addition, CAT Data on the trading of leveraged ETFs,
particularly the end of day rebalancing, could shed light on how the
leveraged ETFs relate to market volatility. In addition, Customer
information should facilitate analyses of the secondary market trading
of ETF Authorized Participants in their ETFs.\727\ This could help
regulators better understand the arbitrage process between an ETF and
its underlying securities and the limitations of that arbitrage.
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\727\ The CAT NMS Plan does not include requirements to record
or report information on the creation or redemption of ETF shares.
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The Commission preliminarily believes that CAT Data would also
better inform SROs and the Commission in rulemakings and assist them in
conducting retrospective analysis of their rules and pilots. In
particular, SROs would be able to use order data that is currently not
available to examine whether rule changes are in the interest of
investors. For example, direct access to consolidated audit trail data
that identifies trader types could help an SRO examine whether a new
rule improved market quality across the entire market and whether it
benefitted retail and institutional investors specifically. Further,
CAT Data would allow SROs to examine whether a rule
[[Page 30697]]
change on another exchange was in the interest of investors and whether
to propose a similar rule on their own exchange.
c. Surveillance and Investigations
The Commission preliminarily believes that the enhanced
surveillance and investigations made possible by the implementation of
the CAT NMS Plan could allow regulators to more efficiently identify
and investigate violative behavior in the markets and could also lead
to market participants that currently engage in violative behavior
reducing or ceasing such behavior, to the extent that such behavior is
not already deterred by current systems. The current markets are
characterized by surveillance systems that identify violators so that
regulators may address these violations. Given that violative behavior
is identifiable in current markets, and potential violators know that
there is a positive probability that they would be caught by
surveillance should they commit a violation, fewer potential violators
commit violations than would do so in markets that had no surveillance.
Potential violators' expected probability of being caught influences
their likelihood of committing a violation.\728\ It then follows that
any system change that increases the likelihood of violative behavior
detection would increase potential violators' expected probability of
being caught and thus reduce the likelihood that potential violators
would commit a violation.
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\728\ It is well established in the economics and political
science literature that common knowledge among market actors can
lead to the deterrence of behaviors; see, e.g., Schelling, Thomas,
``The Strategy of Conflict: Prospectus for a Reorientation of Game
Theory,'' Journal of Conflict Resolution, Vol. 2 No. 3 (1958) and
Ellsberg, Daniel, ``The Crude Analysis of Strategic Choices,''
American Economic Review, Vol. 51, No. 2 (1961). Therefore, market
participants with knowledge of improvements in the efficiency of
market surveillance, investigations, and enforcements, and
consequently the increased probability of incurring a costly
penalty, could be deterred from participating in violative behavior.
---------------------------------------------------------------------------
Specifically, if market participants believe that the existence of
CAT, and the improved regulatory activities that result from
improvements in data and data processes, increase the likelihood of
regulators detecting violative behavior, they could reduce or eliminate
the violative activity in which they engage to avoid incurring the
costs associated with detection, such as fines, legal expenses, and
loss of reputation. Such a reduction in violative behavior would
benefit investor protection and the market as investors would no longer
bear the costs of the violative behavior that would otherwise exist in
the current system. Many of the improvements that would result from CAT
could also allow regulators to identify violative activity, such as
market manipulation, more quickly and reliably, which could improve
market efficiency by deterring market manipulation and identifying and
addressing it more quickly and more often when it occurs.\729\
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\729\ For example, as discussed in Section IV.E.2.c(1), the Plan
would allow regulators to more efficiently conduct cross-market and
cross-product surveillance relative to surveillance using current
data sources, and the requirement that data be consolidated in a
single database would assist regulators in detecting violative (but
not obvious) activity. To the extent that market participants are
aware of the current challenges to regulators in performing cross-
market surveillance and aggregating data across venues, and to the
extent that they believe that their violative behavior is more
likely to be detected if regulators' ability to perform those
activities improves, they may reduce or eliminate violative behavior
if the CAT Plan is approved.
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(1) SRO Surveillance
The Commission preliminarily believes that the CAT NMS Plan would
result in improvements in SROs' surveillance capabilities and that many
of the benefits to SRO surveillance stem from improvements to data
completeness. These benefits encompass a number of improvements to
surveillance, including: detection of insider trading; surveillance of
principal orders; cross-market and cross-product surveillance, and
other market surveillance activities.
Rule 613(f) requires SROs to implement surveillances reasonably
designed to make use of the CAT Data.\730\ Further, data improvements
resulting from the Plan would improve regulators' ability to perform
comprehensive and efficient surveillance. As a result, the market
surveillances required by Rule 613(f) could identify a broader and more
nuanced set of market participant behaviors. As such, the CAT would
also provide the opportunity for development of more effective and
efficient surveillance system. It is also possible that the CAT Data
and tools would enable further innovations in market surveillance
beyond those currently contemplated. These innovations could be in
response to new developments in the market over the next few years or
to the new capabilities for regulators.
---------------------------------------------------------------------------
\730\ 17 CFR 242.613(f).
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CAT Data would include additional fields not currently available in
data used for surveillance.\731\ The inclusion of Customer-IDs in the
CAT would significantly improve surveillance capabilities, including
surveillance designed to detect market manipulation and insider
trading. Because currently available data do not include customer
identifiers, SROs performing insider trading and manipulation
surveillance could be unable to identify some suspicious trading \732\
and must undertake multiple steps to request additional information
after identifying suspect trades. The ability to link uniquely
identified customers with suspicious trading behavior would provide
regulators with better opportunity to identify the distribution of
suspicious trading instances by a customer as well as improving
regulators' ability to utilize customer-based risk assessment. This
enhanced ability to link customers with behaviors would enable
detection of market abuses that are perpetrated by customers trading or
quoting through multiple accounts or on multiple trading venues.
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\731\ As noted in Section IV.D.1.c, this economic analysis
considers surveillance to be SROs running processing on routinely
collected or in-house data to identify potential violations of rules
or regulations.
\732\ The Commission understands that SRO surveillances on
topics such as insider trading and market manipulation do not
incorporate data that identifies customers. Based on alerts from
their surveillances, SROs may open a review that runs through
several stages of data requests before identifying a customer. As
discussed above, the Commission notes that SRO audit trails
typically do not provide customer information but a recent FINRA
rule change would require its members to report to OATS non-FINRA
member customers who are broker-dealers. See supra note 407.
---------------------------------------------------------------------------
Furthermore, having direct access to data could assist an SRO in
its surveillance activities by potentially facilitating quicker
responses to suspicious trading activity. Additionally, the inclusion
of the principal orders of members would enable regulators to better
identify rule violations by broker-dealers that have not previously had
to provide audit trail data on their unexecuted principal orders. The
evolution of the market has increased the importance of surveillance on
principal orders. Many of these principal orders originate from
algorithmic or high frequency trading firms who have been the recent
subject of regulatory interest.\733\ Further, some rules and
regulations provide for differential treatment of the principal orders
of broker-dealer market makers. Yet, some current data sources used for
SRO surveillance exclude unexecuted principal orders,\734\ limiting the
[[Page 30698]]
surveillance for issues such as wash sales. As a result, many
surveillance patterns are unable to detect certain rule violations
involving principal orders.
---------------------------------------------------------------------------
\733\ See Securities Exchange Act Release No. 61358 (January 14,
2010), 75 FR 3594 (January 21, 2010) (``Concept Release on Equity
Market Structure''); Exemption for Certain Exchange Members, supra
note 394.
\734\ See Section IV.D.2.b(1), supra.
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The Plan would also improve regulators' efficiency in conducting
cross-market and cross-product surveillance. The Plan would
particularly enhance regulators' ability to perform cross-market
surveillance, across equity and options markets, by enabling any
regulator to surveil the trading activity of market participants in
both equity and options markets and across multiple trading venues
without data requests. Regulators would also have access to
substantially more information about market participants'
activity,\735\ and the requirement that the data be consolidated in a
single database would assist regulators in detecting activity that may
appear permissible without evaluating data from multiple venues.\736\
Likewise, it would assist regulators in detecting activity that may not
appear violative without evaluating data from multiple venues.
---------------------------------------------------------------------------
\735\ For example CAT Data would include Customer information,
subaccount allocation information, exchange quotes, trade and order
activity that occurs on exchanges, trade and order activity that
occurs at broker-dealers that are not FINRA members, and trade and
order activity that occurs at FINRA members who are not currently
required to report to OATS. In addition CAT Data would require
reporters to report data in milliseconds and would be directly
available to non-FINRA regulators much faster than OATS is currently
available to them. See Section IV.E.1.a, supra.
\736\ See Section IV.E.1.c(2), infra. The Commission notes that
while this is a benefit allowed by consolidation of data in the
Central Repository, linked data would not be available in the
Central Repository until T+5, which may delay the completion of
surveillance activities.
---------------------------------------------------------------------------
Increasing market complexity and fragmentation has increased the
importance of cross-market surveillance. The Commission noted in its
Regulation of NMS Stock Alternative Trading Systems proposing release
that, ``[i]n the seventeen years since the Commission adopted
Regulation ATS, the equity markets have evolved significantly,
resulting in an increased number of trading centers and a reduced
concentration of trading activity in NMS stocks.'' \737\ However,
because market data are fragmented across many data sources and because
audit trail data lacks consistent customer identifiers, regulators
cannot run cross-market surveillance tracking particular
customers.\738\ Furthermore, routine cross-product surveillance is
generally not possible with current data. The potential enhancements in
market surveillance enabled by the CAT NMS Plan are likely to result in
more capable and efficient surveillance which could reduce violative
behavior and protect investors from harm.
---------------------------------------------------------------------------
\737\ See Securities Exchange Act Release No. 76474 (November
18, 2015), 80 FR 80998 (December 28, 2015), at 81000.
\738\ As noted in the above, SROs currently do not conduct
routine surveillance that tracks particular customers because data
currently used for surveillance does not include customer
information.
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(2) Examinations
The Commission preliminarily believes that availability of the CAT
would also improve examinations and that these improvements would
benefit investor protection, and the market in general, by resulting in
more effective supervision of market participants. The Commission
conducted 493 broker-dealer examinations in 2014 and 484 in 2015, 70
exams of the national securities exchanges and FINRA in 2014 and 21 in
2015. In addition, the Commission conducted 1,237 investment adviser
and investment company examinations in 2014 and 1,358 in 2015.
Virtually all investment adviser examinations and a significant
proportion of the Commission's other examinations involve analysis of
trading and order data. Currently some data that would be useful to
conduct risk-based selection for examinations, such as trade blotters,
are not available in data sources available for pre-exam analysis.\739\
Further, data available during exams often require regulatory Staff to
link multiple data sources to analyze customer trading. For example,
some customer identities are present in EBS data, but time stamps are
not. To evaluate the execution price a customer received, it is
necessary to know the time of the trade to compare the price of the
customer's execution with the prevailing market prices at that time.
This requires linking the EBS data with another data source that
contains trades with time stamps (such as the trade blotter). These
linking processes can be labor-intensive and require the use of
algorithms that may not link with 100% accuracy. Finally, for
investment adviser examinations, examiners sometimes use non-trading
data such as Form PF, Form 13-F, Form ADV, and clearing broker reports
as a proxy for trading data when selecting investment advisers for
examinations. The CAT would improve examinations in the following
specific ways.
---------------------------------------------------------------------------
\739\ Regulators can obtain detailed equity transaction data by
requesting a trade blotter from a particular firm; however, the data
would only show the activity of that firm.
---------------------------------------------------------------------------
First, the Commission preliminarily believes that the expected
improvements in the data qualities discussed above would enhance the
ability of regulators to select market participants for focused
examinations on the basis of risk. The direct access to consolidated
data in a single location would dramatically improve regulators'
ability to efficiently conduct analyses in an attempt to select broker-
dealers and investment advisers for more intensive examinations based
on identified risk. Having CAT Data stored in the Central Repository in
a linked format would allow examiners to access much more data directly
through a query and without performing the linking process on an ad-hoc
basis than is currently available before an exam. The ability to use
Customer Account Information in the process for selecting investment
advisers for exams, for example, could allow those selection models to
incorporate trading data directly instead of imperfect proxies for
trading data. This could lead to improved outcomes for risk-based
examinations, such as more regulatory resources invested in examining
market participants who are at an elevated risk of violating federal
securities laws, rules, and regulations, and SRO rules, and a reduction
in the proportion of examinations that might not have been necessary if
a more complete view of the market participant's activity had been
available. Compliant market participants could benefit from a reduction
in the relative frequency of burdensome examinations. Improvements in
the breadth and effectiveness of risk-based examination would help
protect investors by increasing the likelihood of identifying market
participants who are violating laws, rules and regulations.
Second, the Commission preliminarily believes that with the CAT,
regulators would be able to examine market participants more
effectively. In particular, regulators would be able to conduct certain
types of exams more efficiently because of the inclusion of Customer-
IDs in CAT. In addition, direct access to CAT Data would provide
examination Staff with the ability to conduct more analysis prior to
opening an examination because data would be available without the need
to make a formal data request. In addition, the clock synchronization
provisions of the Plan could aid regulators in sequencing some events
more accurately, thereby facilitating more informed exams.\740\ In sum,
the Plan would allow the data collection portion of examinations to be
completed more quickly with fewer formal data requests. More efficient
examinations would help regulators better protect
[[Page 30699]]
investors from the violative behavior of some market participants and
could reduce examination costs for market participants who would have
otherwise faced examinations that are less focused and more lengthy.
---------------------------------------------------------------------------
\740\ See Sections IV.D.2.b(2), supra and IV.H.2.a(1), infra.
---------------------------------------------------------------------------
(3) Enforcement Investigations
Many Commission enforcement actions involve trade and order
data.\741\ The Commission preliminarily believes that the improvements
in data qualities that would result from the CAT NMS Plan \742\ would
significantly improve the efficiency and efficacy of enforcement
investigations, including insider trading and manipulation
investigations. The Commission believes that more efficient and
effective enforcement activity is beneficial to both investors and
market participants because it deters violative behavior that degrades
market quality and that imposes costs on investors and market
participants.
---------------------------------------------------------------------------
\741\ See supra note 711 and accompanying text.
\742\ See Section IV.E.1, supra.
---------------------------------------------------------------------------
Dramatic expected benefits come from improvements to the accuracy,
accessibility, timeliness, and completeness of the data. As noted
above,\743\ compiling the data to support an investigation often
requires a tremendous amount of time and resources and requires
multiple requests to multiple data sources and significant data
processing efforts, for both SROs and the Commission. While individual
SROs have direct access to the data from their own markets, their
investigations often require access to the data of other SROs because
firms trade across multiple venues. Some enforcement investigations,
including those on insider trading and manipulation, require narrow
market reconstructions that allow investigators to view actions and
reactions across the market. Currently, the data fragmentation and the
time it takes to receive requested data, makes these market
reconstructions cumbersome and time-consuming. Further, new data fields
related to Customer information and the Allocation Reports should
improve the completeness of the data available to investigators.
---------------------------------------------------------------------------
\743\ See Sections IV.D.2.b(3) and IV.D.2.b(4), supra.
---------------------------------------------------------------------------
Under the CAT NMS Plan, the data for an enforcement investigation
initiated at least five days after an event would be processed, linked,
and available for analysis within 24 hours of a query, instead of the
current timeline of weeks or longer. Further, some of the data
processing steps that are now performed on an ad-hoc basis during an
investigation would be systematically performed by the Plan Processor
in advance.\744\ The availability of uncorrected data by noon on T+1
could improve the Commission's chances of preventing asset transfers
from manipulation schemes because regulators could use the uncorrected
data to detect the manipulation and identify the suspected
manipulators.\745\ These improvements could shorten the times required
to collect the data for investigations.
---------------------------------------------------------------------------
\744\ See Section IV.E.1.d(4), supra.
\745\ See Section IV.D.2.b(4), supra.
---------------------------------------------------------------------------
Other expected benefits stem from improvements in the accuracy and
completeness of the data. The inclusion and expected improvement in the
accuracy of customer identifying data could allow regulators to review
the activity of specific market participants more efficiently;
currently, identifying the activity of a single market participant
across the market is cumbersome and prone to error.\746\ This
information would be particularly helpful in identifying insider
trading, manipulation and other potentially violative activity that
depends on the identity of market participants. Customer information
could also be helpful to regulators in more efficiently identifying
investors who qualify for disgorgement proceeds and in estimating such
disgorgement proceeds.
---------------------------------------------------------------------------
\746\ See Section IV.D.2.b(2)D, supra.
---------------------------------------------------------------------------
The Commission also believes that increasing the proportion of
market events that could be sequenced under the CAT NMS Plan could
yield some benefits in enforcement investigations, improving
investigations of insider trading, manipulation, and compliance with
Rule 201 of Regulation SHO and Rule 611 of Regulation NMS.\747\ The
expected improvements in completeness could also benefit investigations
by allowing regulators to observe in a consolidated data source
relevant data that are not available in some or all current data
sources, including time stamps, principal orders, non-member activity,
allocations, and the identification of whether a trade increases or
decreases an existing position. This data could be important, for
example, when investigating allegations of market manipulation or
cherry-picking in subaccount allocations. Having disaggregated
information about allocations and issuer repurchases also could
facilitate new ways to investigate allegations of unfair allocations
and new ways to investigate and monitor manipulation through issuer
repurchases.
---------------------------------------------------------------------------
\747\ Again, benefits associated with the ability to sequence
events may be limited in some cases because many order events would
not be able to be sequenced completely with the standards
established in the CAT NMS Plan. See Section IV.D.2.b(2)B.i, supra.
---------------------------------------------------------------------------
(4) Tips and Complaints
The Commission preliminarily believes that the CAT NMS Plan would
improve the process for evaluating tips and complaints by allowing
regulators to more effectively triage tips and complaints, which could
focus resources on behavior that is most likely to be violative.\748\
The SROs and Commission evaluate thousands of tips and complaints
regarding trading behavior each year. In fiscal years 2014 and 2015,
the Commission received around 15,000 entries in its TCR system,
approximately one third of which related to manipulation, insider
trading, market events, or other trading and pricing issues. As stated
in the Baseline Section, the analysis of tips and complaints follows
three general stages. The Commission expects that the Plan would
improve the second and third stages, the third in ways described in the
Examinations and Enforcement Investigations Sections.\749\ The second
stage in the evaluations of tips, which help regulators determine the
credibility of a tip or complaint, is limited by a lack of direct
access to the most useful data; specifically, customer information and
cross-market data.\750\ The availability of the CAT Data would
drastically increase the detail of data available to regulators for the
purposes of tip assessment. This access would assist the SROs and
Commission in identifying which tips and complaints are credible, would
help ensure that regulators open investigations or examinations on
credible tips and complaints, and would limit regulatory resources
spent on unreliable tips and complaints. Likewise, regulated market
participants would likely benefit from a reduction in unnecessary
burdens placed upon them by inquiries that are related to tips that the
CAT Data could show are not credible.
---------------------------------------------------------------------------
\748\ See SEC Office of the Whistleblower, What Happens to Tips,
https://www.sec.gov/about/offices/owb/owb-what-happens-to-tips.shtml.
\749\ See Sections IV.D.2.a(4), supra.
\750\ Cross-market data is especially key to market manipulation
complaints, because regulators may need to examine a broad range
data to see if a complaint is valid.
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3. Other Provisions of the CAT NMS Plan
The Commission notes that there are a number of provisions of the
CAT NMS Plan that provide for features that are uniquely applicable to
a consolidated audit trail or otherwise lack a direct analog in
existing data systems.
[[Page 30700]]
Therefore, rather than analyze the benefits of these provisions as
compared to existing NMS Plans or data systems, the Commission has
analyzed these provisions in comparison to a CAT NMS Plan without these
features. The Commission preliminarily believes that these provisions
of the CAT NMS Plan increase the likelihood that the potential benefits
of the CAT NMS Plan described above would be realized.
a. Future Upgrades
Several provisions in the Plan seek to ensure that the CAT Data
would continually be updated to keep pace with technological and
regulatory developments. For example, the Plan would require that the
Chief Compliance Officer review the completeness of CAT Data
periodically,\751\ that the Central Repository be scalable to
efficiently adjust for new requirements and changes in
regulations,\752\ and that Participants provide the SEC with a document
outlining how the Participants could incorporate information on select
additional products and related Reportable Events.\753\ The Commission
preliminarily believes that these provisions would allow the CAT to be
updated if and when the applicable technologies and regulations change.
---------------------------------------------------------------------------
\751\ See CAT NMS Plan supra note 3, at Sections 4.12(b)(ii),
6.2(a)(v)(E). The Chief Compliance Officer would be required to
perform reviews on matters including the completeness of information
submitted to the Plan Processor or Central Repository and report
findings periodically to the Operating Committee.
\752\ See id. at Appendix D, Section 1.1.
\753\ See id. at Section 6.11. This document is due within six
months of the Effective Date of the CAT NMS Plan.
---------------------------------------------------------------------------
Specifically, Rule 613(b)(6)(ii) and (iii) require that the Plan
include a provision requiring a report at least every two years that
details potential improvements in the CAT, such as incorporating new
technology to improve system performance. Such a report would also
include the costs of any such improvements. The CAT NMS Plan delegates
responsibility for the report to the Chief Compliance Officer.
Section 6.1(d)(iv) of the Plan, with respect to new functionality,
requires the Plan Processor to ``design and implement appropriate
policies and procedures governing the determination to develop new
functionality for the CAT including, among other requirements, a
mechanism by which changes can be suggested by Advisory Committee
members, Participants, or the SEC,'' as well as providing for the
escalation of reviews of proposed technological changes and upgrades to
the Operating Committee, and for addressing the handling of
surveillance.
With respect to upgrades to maintain existing functionality, the
Plan Processor could evaluate and implement potential system changes
and upgrades to maintain and improve the normal day-to-day operating
function of the CAT System; material system changes and upgrades are to
be performed by the Plan Processor in consultation with the Operating
Committee.\754\ The Plan Processor may on its own discretion initiate
changes or upgrades to ensure compliance with applicable legal
requirements.\755\ Regular reports on the operations and maintenance of
the CAT System are to be provided by the Plan Processor to the
Operating Committee, including reports on system improvements
contemplated in Appendix D, Upgrade Process and Development of New
Functionality.\756\
---------------------------------------------------------------------------
\754\ See id. at Section 6.1(j).
\755\ See id. at Section 6.1(k).
\756\ See id. at Section 6.1(o).
---------------------------------------------------------------------------
Section 11 of Appendix D sets out the obligations of the Plan
Processor with respect to the requirements discussed above (e.g., to
develop a process to add functionality to CAT, including reviewing
suggestions submitted by the SEC). The Plan Processor must create a
defined process for developing impact assessments, including
implementation timelines for proposed changes, and a mechanism by which
functional changes that the Plan Processor wishes to undertake could be
reviewed and approved by the Operating Committee. The Plan Processor
``shall not unreasonably withhold, condition, or delay implementation
of any changes or modifications reasonably requested by the Operating
Committee.'' \757\ There must be a similar process to govern the
changes to the Central Repository discussed above--i.e., business-as-
usual changes that could be performed by the Plan Processor with only a
summary report to the Operating Committee, versus infrastructure
changes that would require approval by the Operating Committee.\758\
Finally, a process for user testing of new changes must be developed by
the Plan Processor.\759\
---------------------------------------------------------------------------
\757\ See id. at Appendix D, Section 11.1.
\758\ See id at Appendix D, Section 11.2.
\759\ See id. at Appendix D, Section 11.3.
---------------------------------------------------------------------------
Appendix C notes that the Plan Processor must ensure that the
Central Repository's technical infrastructure is scalable (to increase
capacity to handle increased reporting volumes); adaptable (to support
future technology developments so that new requirements could be
incorporated); and current (to ensure, through maintenance and
upgrades, that technology is kept current, supported, and
operational).\760\
---------------------------------------------------------------------------
\760\ See id. at Appendix C, Section A.5(a).
---------------------------------------------------------------------------
These provisions are designed to ensure that the Participants
consider enhancing and expanding CAT Data shortly after initial
implementation of the CAT NMS Plan and that the Participants consider
improvements regularly continuing forward. The Commission preliminarily
expects that, in addition to these provisions, the CCO review would
further facilitate proactive expansion of CAT to account for a
regulatory change or change in how the market operates, or should there
be a need for regulators to have access to new order events or new
information about particular order events. To the extent that the
Participants determine that an expansion is necessary and it is
approved by the Commission, the Plan's scalability provision promotes
the efficiency of the implementation of that expansion such that it
could be completed at lower cost and/or in a timely manner.
Taken together, these provisions could also provide a means for the
Commission to ensure that improvements to CAT functionality are
considered so as to preserve its existing benefits, or that expansion
of CAT functionality is undertaken in order to create new benefits.
These methods are not certain, but the Commission does retain the
ability to modify the Plan, if such a step becomes necessary to ensure
that future upgrades are undertaken as necessary.\761\ Moreover, the
focus on scalability, adaptability, and timely maintenance and upgrades
promotes a system that could be readily adapted over time, versus one
that is difficult or costly to expand or modify. The Commission
preliminarily believes that the provisions outlined above would allow
the CAT Data to be continually updated to keep pace with technological
and regulatory developments.
---------------------------------------------------------------------------
\761\ See 17 CFR 242.608.
---------------------------------------------------------------------------
b. Promotion of Accuracy
The Commission notes that the Plan contains specific provisions
designed to generally promote the accuracy of information contained in
the Central Repository. The CCO is required, among other
responsibilities, to perform reviews related to the accuracy of
information submitted to the Central Repository and report to the
Operating Committee with regard thereto,\762\ and there is a special
Compliance Subcommittee of the Operating
[[Page 30701]]
Committee, which is established to aid the CCO with regard to, among
other things, issues involving the accuracy of information.\763\ The
Plan also contains certain other provisions intended to monitor and
address Error Rates.\764\
---------------------------------------------------------------------------
\762\ See CAT NMS Plan, supra note 3, at Section 6.2(a)(v)(E).
\763\ See id. at Section 4.12(b).
\764\ See id. at Appendix C, Section A.3(b).
---------------------------------------------------------------------------
The Operating Committee is responsible for adopting policies and
procedures regarding the accuracy of CAT Data, which the Plan Processor
shall be responsible to implement.\765\ The Plan Processor in turn must
provide regular reports regarding accuracy issues to the Operating
Committee, specifically Error Rates relating to the Central Repository,
including (to the extent the Operating Committee deems necessary or
advisable) Error Rates by day, changes in the Error Rates over time,
and Compliance Thresholds by CAT Reporter, by Reportable Event, by age
before resolution, by symbol, by symbol type, and by event time. The
Plan documents an initial Error Rate tolerance of 5%, but requires
that, at least annually, the Plan Processor review the Error Rates and
make recommendations to the Operating Committee for proposed changes to
the maximum Error Rate; and requires that the Operating Committee set
and periodically review the maximum Error Rate.\766\
---------------------------------------------------------------------------
\765\ See id. at Section 6.5(d).
\766\ See id. at Section 6.5(d)(i).
---------------------------------------------------------------------------
Under the Plan, the Plan Processor would also provide details to
each CAT Reporter on the number of rejected records and the reasons for
their rejection on a daily basis. And on a monthly basis, the Plan
Processor would publish report cards that would allow CAT Reporters to
compare their Error Rates with those of industry peers; this is similar
to the process used by FINRA for OATS reporting. The Plan Processor
would notify each CAT Reporter that exceeds the maximum Error Rate, and
provide the specific reporting requirements that they did not fully
meet. Participants and the SEC could request reports on Error Rates
from the Plan Processor. The Plan Processor would also provide
statistics on each CAT Reporter's Compliance Thresholds--the CAT
Reporter's specific Error Rate, which could serve as the basis for a
review or investigation into the CAT Reporter's performance by the
Participants or the SEC for failure to comply with CAT reporting
obligations--to the Participants or the SEC.
In addition to providing CAT Reporters data on their Error Rates,
the Plan states that the Participants believe that in order to meet
Error Rate targets, industry would require certain resources, including
a stand-alone testing environment, and time to test their reporting
systems and infrastructure. The Technical Specifications must also be
well-written and effectively communicated to CAT Reporters with
sufficient time to allow proper systems updates.\767\ Finally, the Plan
notes that reporters may be subject to penalties or fines for excessive
Error Rates, to be defined by the Operating Committee.\768\
---------------------------------------------------------------------------
\767\ See id. at Appendix C, Section A.3(b).
\768\ See id. at Appendix C, Section A.3(b), n.101.
---------------------------------------------------------------------------
The Commission preliminarily believes that these provisions to
document Error Rates and promote data accuracy are reasonably designed
to improve the overall accuracy of CAT Data relative to the exclusion
of such provisions; however, the Commission also preliminarily believes
that certain procedures outlined in the Plan may not incentivize all
firms to further improve the quality of the data they report. The
Commission recognizes that providing feedback to individual CAT
Reporters on their individual Error Rates and information that compares
Error Rates to industry peers could motivate firms with high Error
Rates to reduce those rates, to avoid accruing penalties and fines
associated with being a high Error Rate CAT Reporter.\769\ However, it
is not clear what incentive, if any, would be provided to firms with
median Error Rates to improve their regulatory data reporting
processes; this could collectively limit industry's incentives to
reduce Error Rates. Furthermore, the Commission notes that, under the
Plan, proposals to adjust the maximum allowable Error Rate are to
originate from the Plan Processor. The Commission preliminarily
believes that the Participants (as data users) have incentives to
pursue lower Error Rates as data errors could complicate their efforts
to perform their regulatory responsibilities. However, the Commission
preliminarily believes that the Plan Processor would also have to
allocate resources to error resolution, so could be incentivized to
pursue Error Rate reduction.
---------------------------------------------------------------------------
\769\ The Commission understands that OATS has an analogous
feedback system, but not all current data sources have such a
system.
---------------------------------------------------------------------------
The Commission notes that the Plan includes provisions requiring
the establishment of a symbology database that will also foster
accuracy. The Plan requires the Central Repository to create and
maintain a symbol history and mapping table, as well as provide a tool
to regulators and CAT Reporters showing the security's complete symbol
history, along with a start of day and end of day list of reportable
securities for use by CAT Reporters, in .csv format, by 6:00 a.m. on
each trading day.\770\ This resource will assist regulators in
accurately identifying all trading activity of securities across
venues, many of which do not natively follow listing exchange
symbology.
---------------------------------------------------------------------------
\770\ See CAT NMS Plan, supra note 3, at Appendix D, Section 2.
---------------------------------------------------------------------------
Regarding the Plan's business clock synchronization requirements,
the Plan also discusses the expectation that Participants and their
Industry Members will each be required to maintain a five-year running
log, or comparable procedure, documenting the time of each clock
synchronization performed and the result of such synchronization. These
practices would reveal the parameters of any discrepancies, between
Business Clocks and NIST, that exceed 50 milliseconds.\771\ As
mentioned above, there is currently uncertainty regarding clock
offsets, clock drift, and synchronization practices of Participants and
Industry Members and the required practice of systematically
maintaining five-year logs regarding these details should improve
regulatory and industry understanding of these dynamics, which should
provide a clearer foundation for evaluating the standards set in the
Plan upon which future improvements could be considered.
---------------------------------------------------------------------------
\771\ Id. at Appendix C, Section A.3(c).
---------------------------------------------------------------------------
c. Promotion of Timeliness
In addition to the specific timeliness benefits discussed in the
foregoing Sections, the Plan contains some provisions that promote
performance of the Central Repository, and that therefore could
indirectly improve the timeliness of regulator access to or use of the
CAT Data. These are found in capacity requirements for the Plan
Processor, disaster recovery requirements to ensure the availability of
the system, and in supervision and reporting of timeliness issues.
Specifically, first, the Plan Processor must measure and monitor
Latency within the Central Repository's systems, must establish
acceptable levels of Latency with the approval of the Operating
Committee, and must establish policies and procedures to ensure that
data feed delays are communicated to CAT Reporters, the Commission, and
Participants' regulatory Staff.\772\ The Plan further provides that
``[a]ny delays will be
[[Page 30702]]
posted for public consumption, so that CAT Reporters may choose to
adjust the submission of their data appropriately. . . .'' \773\ The
Plan Processor must also provide relevant parties, as well as to the
public, with approximate timelines provided for system
restoration.\774\ Moreover, the Central Repository is required to be
designed to meet certain capacity standards, including handling above-
peak submission volumes, storing data for a sliding 6 year window (more
than 29 petabytes of raw, uncompressed data), and the ability to add
capacity quickly and seamlessly if needed.\775\
---------------------------------------------------------------------------
\772\ See CAT NMS Plan, supra note 3, at Appendix D, Section
8.3.
\773\ Id.
\774\ Id.
\775\ See id. at Appendix D, Section 1.3.
---------------------------------------------------------------------------
Second, the Plan Processor must develop disaster recovery and
business continuity plans to support the continuation of CAT business
operations.\776\ Business continuity planning must include a secondary
site for critical staff, capable of recovery and restoration of
services within 48 hours, with the goal of next day recovery.\777\ The
secondary site must have the same level of availability, capacity,
throughput and security (physical and logical) as the primary site--
i.e., it must be fully redundant.\778\ Thus, in the event of a
widespread disruption, delays to CAT processing and regulator access to
CAT of greater than a day or two could likely be prevented.
---------------------------------------------------------------------------
\776\ See id. at Appendix D, Sections 5.3-5.4.
\777\ Id.
\778\ Id.
---------------------------------------------------------------------------
Third, the Chief Compliance Officer of the Plan Processor must
conduct regular monitoring of the CAT System for compliance, including
with respect to the reporting and linkage requirements in Appendix
D.\779\ Moreover, the Plan Processor must provide the Operating
Committee with regular reports on the CAT System's operations and
maintenance, including its capacity and performance, as set out in
Appendix D.\780\
---------------------------------------------------------------------------
\779\ See id. at Section 6.2(a)(v)(J).
\780\ See id. at Section 6.1(o)(i).
---------------------------------------------------------------------------
Finally, one caveat on the foregoing discussion is that system
performance would in part be dependent on a series of SLAs to be
negotiated between the Plan Participants and the eventual Plan
Processor, including with respect to linkage and order event processing
performance, query performance and response times, and system
availability.\781\ As these have not yet actually been negotiated, some
of the key timeliness benefits anticipated to accrue from
implementation of the Plan could be subject to the successful
negotiation on an acceptable basis of the terms of the SLAs.
---------------------------------------------------------------------------
\781\ See id. at Appendix D, Section 8.5.
---------------------------------------------------------------------------
d. Operation and Administration of the CAT NMS Plan
There are certain elements of the CAT NMS Plan's governance that,
like the other factors discussed in this subsection, are uniquely
applicable to a consolidated audit trail, and that the Commission
therefore analyzed in comparison to a CAT NMS Plan without these
features (or that implements those features in a different way). The
Commission preliminarily believes that these provisions of the CAT NMS
Plan increase the likelihood that the potential benefits of the CAT NMS
Plan described above would be realized.
(1) Introduction
In adopting Rule 613, the Commission established certain
requirements for the governance of the CAT NMS Plan, stating that those
``requirements are important to the efficient operation and practical
evolution of the [CAT], and are responsive to many commenters' concerns
about governance structure, cost allocations, and the inclusion of SRO
members as part of the planning process.'' \782\ The Commission did
not, in Rule 613, establish detailed parameters for the governance of
the CAT NMS Plan, but rather allowed the SROs to develop specific
governance provisions, subject to a small number of requirements.
Recognizing that Rule 613 left Plan Participants with wide latitude to
determine how to structure the Plan's governance, the Commission in the
Adopting Release also stated that ``[a]fter the SROs submit the NMS
plan, the Commission and the public will have more detailed information
in evaluating the NMS plan.'' \783\
---------------------------------------------------------------------------
\782\ See Adopting Release, supra note 9, at 45787.
\783\ Id. at 45787-45788.
---------------------------------------------------------------------------
The Plan's governance is described in greater detail in Section
III.A.3. above, but generally consists of a Delaware LLC, which is to
``create, implement, and maintain the CAT and the Central Repository,''
and which is to be managed by the Operating Committee, consisting of
one voting representative of each SRO Participant. The Operating
Committee acts by majority or Supermajority Vote, depending on the
issue. An Advisory Committee that includes a mix of broker-dealers, as
required by Rule 613, is to ``advise the [Operating Committee] on the
implementation, operation and administration of the central
repository.'' \784\ These features are analyzed in greater detail
below.
---------------------------------------------------------------------------
\784\ See Rule 613(b)(7). Whereas Section 4.13(b) requires that
the Operating Committee select representatives of different types of
broker-dealers, it specifies that Advisory Committee representatives
would ``serve on the Advisory Committee on behalf of himself or
herself individually and not on behalf of the entity for which the
individual is then currently employed.'' See CAT NMS Plan, supra
note 3, at Section 4.13(b).
---------------------------------------------------------------------------
The Commission preliminarily believes that the governance
provisions identified in the Adopting Release continue to be important
to the efficient operation and practical evolution of the Plan,
particularly given that there are a range of possible outcomes with
respect to both the costs and benefits of the Plan that depend on
future decisions. The way in which the identified governance provisions
have been incorporated into the Plan, as discussed in greater detail
below, could help facilitate better decision-making by the relevant
parties. This, in turn, means that the Commission could have greater
confidence that the benefits resulting from implementation of the Plan
would be achieved in an efficient manner and that costs resulting from
inefficiencies would be avoided.
The Commission notes that it can monitor whether the benefits of
CAT are being achieved. For example, certain Operating Committee
actions are subject to Commission approval.\785\ The Commission also
retains the ability to modify the Plan as it may deem necessary or
appropriate.\786\ To enable the Commission to exercise its oversight
authority in an informed manner and to make its views known,
representatives of the Commission are permitted to attend meetings of
the Operating Committee, although the Commission representatives may be
excluded from Operating Committee Executive Sessions.\787\ Moreover,
the Commission is entitled to receive information regarding the
performance of the Central Repository, including a Regular Written
Assessment of the operation of the Central Repository at least every
two years, or more frequently in connection with any review of the Plan
Processor's performance. The assessment would cover the performance
metrics specified in Rule 613(b)(6)(i).\788\ The Commission
[[Page 30703]]
is also entitled to receive any reports prepared in connection with the
Operating Committee's annual performance review of the Plan
Processor.\789\
---------------------------------------------------------------------------
\785\ See CAT NMS Plan, supra note 3, at Section 4.3 (stating
that actions authorized by Majority and Supermajority Vote of the
Operating Committee are subject to approval by the Commission
whenever such approval is required under the Exchange Act and the
rules thereunder).
\786\ See 17 CFR 242.608(b)(2).
\787\ See CAT NMS Plan, supra note 3, at Section 4.4(a).
\788\ See 17 CFR 242.613(b)(6)(i). Rule 613(b)(6) requires the
Participants to provide the Commission with a written assessment of
operation of the CAT at least every two years, along with a detailed
plan, based on the assessment, that indicates any potential
improvements to the performance of the CAT and includes an estimate
of the costs and potential impacts of such improvements on
competition, efficiency and capital formation, as well as an
estimated implementation timeline for such potential improvements.
\789\ See CAT NMS Plan, supra note 3, at Section 6.1(n). The
review may be more frequent than annually if at the request of two
non-affiliated Participants. The Commission also has other means of
accessing information (e.g., through books & records requirements).
---------------------------------------------------------------------------
(2) Key Factors Relating to Governance
Two factors identified by the Commission in the Adopting Release as
``important to the efficient operation and practical evolution of the
[CAT]'' are voting within the Operating Committee and the role and
composition of the Advisory Committee. Voting thresholds that result in
Operating Committee decision-making that balances the ability of
minority members to have alternative views considered with the need to
move forward when appropriate to implement needed policies can promote
achievement of the Plan's benefits in an efficient manner. Similarly,
an Advisory Committee that is balanced in terms of membership size and
composition, as well as in its ability to present views to the
Operating Committee, can result in better performance of its
informational role, and thus more efficient achievement of the benefits
of the Plan.
A. Voting
In adopting Rule 613, the Commission found that one Commenter's
concerns about unanimous voting in the context of the CAT NMS Plan
``have merit.'' Specifically, the Commission stated that ``an alternate
approach'' to voting involving ``the possibility of a governance
requirement other than unanimity, or even super-majority approval, for
all but the most important decisions'' should be considered, as it
``may be appropriate to avoid a situation where a significant majority
of plan sponsors--or even all but one plan sponsor--supports an
initiative but, due to a unanimous voting requirement, action cannot be
undertaken.'' \790\ The Commission ``urge[d] the SROs to take into
account the need for efficient and fair operation of the NMS Plan
governing the consolidated audit trail'' in setting voting
thresholds.\791\
---------------------------------------------------------------------------
\790\ See Adopting Release, supra note 9, at 45787.
\791\ Id.
---------------------------------------------------------------------------
The Plan sets forth two voting thresholds for most matters to be
decided by the Operating Committee.\792\ Majority approval of the
Operating Committee is sufficient to approve routine matters, arising
in the ordinary course of business, while non-routine matters, outside
the ordinary course of business, would require a supermajority (two-
thirds) vote of the Operating Committee to be approved.\793\
---------------------------------------------------------------------------
\792\ As noted in Section IV.G.4, infra, the Plan requires
unanimous voting in only three circumstances: A decision to obligate
Participants to make a loan or capital contribution, a decision to
dissolve the Company, and a decision to take an action by written
consent instead of a meeting.
\793\ See CAT NMS Plan, supra note 3, at Section 4.3; Appendix
C, Section B.8(d). (specifying actions of the Operating Committee
that require a Supermajority Vote); see also id. at Appendix C,
Section D.11(b).
---------------------------------------------------------------------------
The Plan generally eschews a unanimous voting threshold, except for
the three clearly-defined circumstances noted above. Unanimity as a
voting threshold may confer greater influence on holders of minority
views, but it may also give a small faction the ability to extract
private benefits inconsistent with Plan objectives by acting as
holdouts.\794\ In a hold-out dynamic, one member may be able to block
action that all the other members agree should move forward. While this
dynamic may occasionally be used productively, to produce better
decision-making through fostering discussion and compromise, it also
may give one member the power to stand in the way of needed change.
---------------------------------------------------------------------------
\794\ There are other governance-related trade-offs for majority
voting versus supermajority voting; these are discussed in greater
detail in the Plan. See CAT NMS Plan, supra note 3, at Appendix C,
Sections B.8(d) and D.11(b).
---------------------------------------------------------------------------
The ability of a single member to prevent action with regard to the
Plan could be particularly troublesome if that member were motivated by
a conflict of interest.\795\ The Plan requires recusal of the member
representing such a Participant from voting in the Operating Committee
on matters that raise a conflict of interest, defined as any matter
subject to a vote that interferes, or is reasonably likely to
interfere, with the member's objective consideration of the matter, or
that is, or would reasonably likely be, inconsistent with the
regulatory purpose and objectives of CAT.\796\ Recusal of a member
could also be compelled by a supermajority of the Operating
Committee.\797\ If conflicts of interest were the cause of all
unproductive holding-out (i.e., holding out that does not contribute to
better decision-making), then a robust conflict of interest provision
could mitigate some of the negative features of unanimous voting.
---------------------------------------------------------------------------
\795\ That there are potential conflicts of interest between
Participants acting in their self-regulatory capacities and
Participants acting in the other capacities in which they serve is
well-documented; see, e.g., Peter M. DeMarzo, Michael J. Fishman,
and Kathleen M. Hagerty, ``Self-Regulation and Government
Oversight,'' 72 Review of Economic Studies 687 (2005); see also
David Reiffen and Michel Robe, ``Demutualization and Customer
Protection at Self-Regulatory Financial Exchanges,'' Journal of
Futures Markets (2011) and Securities Exchange Act Release No. 50700
(November 18, 2004), 69 FR 71256 (December 8, 2004) (Concept Release
Concerning Self-Regulation); John W. Carson, Conflicts of Interest
in Self-Regulation: Can Demutualized Exchanges Successfully Manage
Them? (World Bank Policy Research Working Paper 3183, December
2003). These conflicts could be further complicated if the
individual employee of the Participant SRO who represents the
Participant SRO on the Operating Committee sought to advance a
private gain for the individual employee that is inconsistent with
the Plan's regulatory objective or the objective of the Participant
SRO. Indeed, the idea that an agency conflict between a natural
person and the entity that the person represents has been discussed
extensively in the academic literature on the governance of
corporations; see, e.g., Jonathan Berk and Peter DeMarzo, 2011,
Corporate Finance, Second Edition, Prentice Hall (Section 2.1:
Corporate Governance and Agency Costs).
\796\ See CAT NMS Plan, supra note 3, at Section 4.3(d) (recusal
requirement) and Section 1.1 (definition of Conflict of Interest).
Section 4.3(d) also automatically recuses a member from voting with
respect to matters relating to the selection or removal of the Plan
Processor if they or their affiliates are, or are bidding to be, the
Plan Processor. Id.
\797\ See CAT NMS Plan, supra note 3, at Section 4.3(d).
---------------------------------------------------------------------------
Majority voting as a voting threshold strikes a different balance
between the rights of members than does unanimous voting. Majority
voting avoids the hold-out problem of unanimity, but can result in
decisions that bear less concern for the interests of the minority
members. Whether it does so or not may depend at least in part on
voting dynamics on the Operating Committee. Under the Plan, each member
has only one vote within the Operating Committee, and so an individual
member--and represented Participant--could not unilaterally advance a
position that benefits only the Participant under the Plan. That said,
however, some individual members could exercise more influence than
others over the outcome of the voting process. Participant SROs that
are affiliated with one another could vote as a bloc by designating a
single individual to represent them on the Committee.\798\ Individuals
who represent more than one SRO would then in principle
[[Page 30704]]
exercise more influence than other individuals on the Operating
Committee.\799\ The Chair of the Operating Committee also could
exercise more influence than other members on the Committee, even
though the Chair only has one vote, through influence over Committee
processes.\800\ Ultimately, however, no individual would have
unilateral control over vote outcomes, even at a majority voting
threshold. Whether the threshold results in adequate attention to the
rights of minority members could therefore depend on the ease with
which a majority coalition can be formed, whether those coalitions are
fluid or static, and whether in practice decision-making is collegial
or contentious. While majority voting could pose a risk of disregard
for minority positions, that risk here is mitigated in that majority
voting only applies to the less important matters that could arise in
the operations of the Plan.
---------------------------------------------------------------------------
\798\ See CAT NMS Plan supra note 3, at Section 4.2(a) (``One
individual may serve as the voting member of the Operating Committee
for multiple Affiliated Participants, and such individual shall have
the right to vote on behalf of each such Affiliated Participant.'')
Even if separate representatives were appointed for each voting
member, such individuals could agree to vote in a bloc; see also
Section IV.G.1, infra, (discussing how many affiliated groups would
need to vote together to reach a majority or supermajority).
\799\ By enabling a single individual (i.e., natural person) to
vote on behalf of groups of Affiliated Participant SROs, the Plan
reduces the share and number of individuals needed to approve a
committee action below the share and number of votes required for
approval. For example, as few as two individuals (who would possess
more than one-third of member votes) may be sufficient to block an
action that requires a two-thirds (a supermajority) vote for
approval of an action of the Operating Committee under the Plan.
This casting of multiple votes by a single group is limited for some
decisions under the Plan, however. See CAT NMS Plan, supra note 3,
at Section 4.4(a) (Meetings of the Operating Committee: special and
emergency meetings); see also Section IV.G.1, infra (discussing, in
n.1077, the various affiliated exchanges among the 20 members of the
Operating Committee, which could appoint a single individual to
represent them).
\800\ Specifically, see CAT NMS Plan, supra note 3, Section
4.2(b) which establishes that there shall be elected a Chair from
among the members of the Operating Committee, and states that the
Chair's powers are those that the Operating Committee may from time
to time prescribe. For example, the Chair may be granted the power
to set the agenda of Operating Committee meetings, and thereby
advance agenda items favorable to the Chair. Id. Section 4.2(b) also
specifies that the Chair is not entitled to a tie-breaking vote and
that the Chair may be removed by Supermajority Vote of the Operating
Committee.
---------------------------------------------------------------------------
The Plan's supermajority voting requirement for more important
matters represents an intermediate ground between majority and
unanimous voting, requiring more than a bare majority of members to
agree to support a position, which therefore enhances the ability of
members of the minority to seek to have their views reflected in the
ultimate decision, while limiting the ability of minority members to
act as holdouts. That said, the supermajority voting requirement may
also have some disadvantages: To the extent that rules and practices
already in place require correction, a supermajority voting requirement
may make it more difficult to assemble the votes necessary to make
needed changes. For example, supermajority voting could have the
indirect effect of locking in the preferred business practices of the
inaugural members of the Operating Committee. For decisions later in
the Plan implementation, this lock-in effect of supermajority voting
could make it more difficult for the Operating Committee to take non-
routine actions, such as replacing the Plan Processor after the initial
selection decision.\801\
---------------------------------------------------------------------------
\801\ See id. at Section 4.3(i). Supermajority voting as a
governance mechanism in the CAT NMS plan is distinct from an
analysis of supermajority voting rules in other settings.
---------------------------------------------------------------------------
B. Advisory Committee
Rule 613(b)(7) requires that the Plan designate an Advisory
Committee.\802\ Specifically, Rule 613(b)(7) calls for the formation of
an Advisory Committee to advise the plan sponsors on the
implementation, operation, and administration of the Central
Repository, as detailed above in Section III.A.3 of this Notice.\803\
Under Rule 613(b)(7)(i), the Advisory Committee must include
representatives of member firms of the plan sponsors (broker-dealers),
acting in their own capacities as individuals on the Committee. Under
Rule 613(b)(7)(ii), plan sponsors must give members of the Committee
access to information and permit them to express their views and attend
meetings of the Operating Committee. Also under Rule 613(b)(7)(ii), the
Operating Committee has the right to exclude members of the Advisory
Committee from its deliberations by meeting in Executive Session by a
Majority Vote of its members.
---------------------------------------------------------------------------
\802\ 17 CFR 242.613(b)(7).
\803\ See Section III.A.3 (Requirements Pursuant to Rule
608(a)), supra; see also Section IV.G.4.a, infra, for a discussion
of the effects of the Advisory Committee on the efficiency of the
Plan.
---------------------------------------------------------------------------
The Adopting Release states that the ``provision requiring the
creation of an Advisory Committee, composed at least in part by
representatives of the plan sponsors,'' was ``[i]n response to the
comment requesting that the broker-dealer industry receive a `seat at
the table' regarding governance of the NMS plan.'' \804\ In addition,
the Commission ``encourage[d] the plan sponsors to, in the NMS plan,
provide for an Advisory Committee whose composition includes SRO
members from a cross-section of the industry, including representatives
of small-, medium-and large-sized broker-dealers.'' Rule 613 does not
give broker-dealers a vote on the Operating Committee itself. In the
Adopting Release, the Commission stated that the structure of Rule 613
as adopted ``appropriately balances the need to provide a mechanism for
industry input into the operation of the central repository, against
the regulatory imperative that the operations and decisions regarding
the [CAT] be made by SROs who have a statutory obligation to regulate
the securities markets, rather than by members of the SROs, who have no
corresponding statutory obligation to oversee the securities markets.''
---------------------------------------------------------------------------
\804\ See Adopting Release, supra note 9, at 45786.
---------------------------------------------------------------------------
In implementing these provisions of Rule 613, the Plan requires the
Advisory Committee to have diverse membership.\805\ Section 4.13 of the
Plan requires an Advisory Committee with a minimum of six broker-
dealers of diverse types and six representatives of entities that are
not broker-dealers.\806\ That is, five of twelve seats on the initial
Advisory Committee would be filled by representatives, respectively, of
the client of a registered broker or dealer, two types of institutional
investors, and two others with academic and regulatory expertise. Terms
of Advisory Committee members would not exceed three years, and
memberships would be staggered so that a third of the Committee would
be replaced each year.\807\
---------------------------------------------------------------------------
\805\ See CAT NMS Plan, supra note 3, Section 4.13(b).
\806\ See id. at Section 4.13(b)(i) through (xii).
\807\ See id. at Section 4.13(c).
---------------------------------------------------------------------------
The Commission believes that the Plan's provisions regarding the
Advisory Committee advance the goals of the Advisory Committee
articulated in the Adopting Release: To allow the Operating Committee
to receive the benefit of members' expertise with respect to ``expected
or unexpected operational or technical issues'' and ``help assure the
Commission and market participants that any requirements imposed on SRO
members will be accomplished in a manner that takes into account the
burdens on SRO members.''
Given the primary purpose of the Advisory Committee as a forum to
communicate important information to the Operating Committee, which the
Operating Committee could then use to ensure its decisions are fully-
informed, the Plan's choices in implementing Rule 613 do reflect some
trade-offs. One factor in the ability of the Advisory Committee to
collect relevant information for the Operating Committee is the quality
and depth of the expertise, and the diversity of viewpoints, of the
Advisory
[[Page 30705]]
Committee's membership.\808\ A larger and more diverse Advisory
Committee may have better access to expertise and diversity of
viewpoints from among members for use in advising the Operating
Committee.\809\ But, members of a larger and more diverse Advisory
Committee would face potentially greater difficulties in working among
themselves to identify and convey the information that is available to
them. The Plan balances these considerations by providing the Advisory
Committee with sufficient membership to be able to generate useful
information and advice for the Operating Committee, while being at a
sufficiently low size and diversity level to permit the members to be
able to work together without undue obstacles that could otherwise
limit the Advisory Committee's effectiveness in conveying their
views.\810\
---------------------------------------------------------------------------
\808\ In a role similar to that of the Advisory Committee,
outsiders on corporate boards of directors can bring expertise and
independence to board actions, thereby enhancing board
effectiveness. Trade-offs in determining the optimum size and
composition of boards is the subject of extensive academic research.
For example, Lehn, Kenneth, Sukesh Patro, and Mengxin Zhao, 2009,
``Determinants of the size and structure of corporate boards: 1935-
2000,'' Financial Management, 747-780, consider the size and
composition of the board to be determined by trade-offs associated
with the information the directors bring to boards, which facilitate
their monitoring and advisory role, and the coordination costs and
free-rider problems associated with their presence. Harris, Milton
and Raviv, Artur, 2008, ``A Theory of Corporate Control and Size,''
21 Review of Financial Studies, 1797-1832, model the trade-off
between benefits of greater expertise that outside directors bring
versus the costs of an aggravated free-rider problem to arrive at
the optimum number of outside directors on the board. Collective-
action and communication problems can limit the effectiveness of a
board as it gains members as explored by Harris and Raviv (2008) and
Lehn, Patro, and Zhao (2009), in addition to Raheja, Charu, 2005.
``Determinants of Board Size and Composition: A Theory of Corporate
Boards,'' 40 Journal of Financial and Quantitative Analysis, 283-
306, and Yermack, David, ``Higher Market Valuation for Firms with a
Small Board of Directors,'' Journal of Financial Economics, XL
(1996), 185-211; see also Jerayr Haleblian and Sydney Finkelstein,
``Top Management Team Size, CEO Dominance, and Firm Performance: The
Moderating Roles of Environmental Turbulence and Discretion,'' The
Academy of Management Journal, Vol. 36, No. 4 (August, 1993), 844-
863.
\809\ For related literature that expressly examines trade-offs
and consequences of ``diverse'' boards, see Baranchuk, Nina, and
Phil Dybvig, 2009, ``Consensus in diverse corporate boards,'' Review
of Financial Studies 22(2), 715-747; and Malenko, Nadya, 2014,
``Communication and Decision-Making in Corporate Boards,'' Review of
Financial Studies 27(5), 1486-1532.
\810\ Another factor that may bear on the Advisory Committee's
ability to assemble a diverse range of views is the Plan's
provisions that Advisory Committee members sit in their individual
capacity, rather than as a representative of their employer. This
may give Advisory Committee members greater freedom to speak to
issues common to similarly-situated entities (e.g., large broker-
dealers), rather than potentially-idiosyncratic views of the
individuals' employers, which broader views in turn could better
inform the Operating Committee about issues or impacts associated
with the operation of the CAT.
---------------------------------------------------------------------------
Another factor in the ability of the Advisory Committee to advise
the Operating Committee is whether the Advisory Committee, having
assembled a diverse set of views, could effectively communicate those
views to the Operating Committee. Two Plan provisions, relating to the
staggering of member terms and the limits on participation of the
Advisory Committee under Rule 613(b)(7)(ii), bear on this
communication.\811\
---------------------------------------------------------------------------
\811\ See CAT NMS Plan, supra note 3, at Section 4.13(b) and
(c).
---------------------------------------------------------------------------
First, the Plan provides for Advisory Committee members to serve
for staggered three-year terms in order to provide ``improved
continuity given the complexity of CAT processing.'' \812\ Staggering
of terms would prevent the entire Advisory Committee or large numbers
of its members from turning over in any given year, which could enhance
the cohesion of the Advisory Committee, and thereby its effectiveness
in communicating member viewpoints to the Operating Committee. Second,
the Plan gives the Advisory Committee varying roles with respect to the
different actions to be taken by the Operating Committee. While the
Advisory Committee members may attend meetings and submit views to the
Operating Committee on matters prior to a decision by the Operating
Committee, the Operating Committee may exclude Advisory Committee
members from Executive Sessions.\813\
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\812\ See id. at Section 4.13(c); Appendix C, Section D.11(b)
(``Governance of the CAT . . . Industry Members also recommended a
three-year term with one-third turnover per year . . . to provide
improved continuity given the complexity of CAT processing.'').
\813\ See CAT NMS Plan, supra note 3, at Section 4.13(d).
---------------------------------------------------------------------------
An additional factor that bears on the ability of the Advisory
Committee to advise the Operating Committee is a feedback loop: Whether
the Advisory Committee could receive sufficiently detailed information
on the operations of the Plan so that the Advisory Committee members
can, in turn, provide decision-useful information to the Operating
Committee. Here, the Plan specifies that the Advisory Committee has the
right to receive from the Operating Committee information necessary and
appropriate to the fulfillment of its functions, but that the scope and
content of the information is to be determined by the Operating
Committee.\814\ Thus, the Commission notes that the Operating Committee
could act to limit the effectiveness of the Advisory Committee--for
example, if the Operating Committee were to fail to provide Advisory
Committee members with notice of the items to be deliberated and voted
upon by the Operating Committee with sufficient time and particularity
for the Advisory Committee to be able to adequately fulfill its
function, or fail to provide other pathways for Advisory Committee
members to become aware of topics of interest or concern to the
Operating Committee.
---------------------------------------------------------------------------
\814\ Id. at Section 4.13(e).
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One other determinant bears on the effectiveness of the Advisory
Committee in ensuring that the Operating Committee makes decisions in
light of diverse information--whether the Operating Committee actually
takes into account the facts and views of the Advisory Committee before
making a decision. Although the Plan expressly provides for Advisory
Committee input, it does not contain a mechanism--such as requiring the
Operating Committee to respond to the Advisory Committee's views,
formally or informally, in advance of or following a decision by the
Operating Committee--to ensure that the Operating Committee considers
the views of the Advisory Committee as a part of the Operating
Committee's decision-making process.
(3) Conclusion
The Commission preliminarily believes that the governance
provisions discussed above, which the Commission identified as being
``important to the efficient operation and practical evolution of the
[CAT], and . . . responsive to many commenters' concerns about
governance structure, cost allocations, and the inclusion of SRO
members as part of the planning process,'' could help promote better
decision-making by the relevant parties. These provisions thus could
mitigate concerns about potential uncertainty in the economic effects
of the Plan by giving the Commission greater confidence that its
expected benefits would be achieved in an efficient manner and that
costs resulting from inefficiencies would be avoided.
4. Request for Comment on the Benefits
The Commission requests comment on all aspects of the discussion of
the potential benefits of the CAT NMS Plan. In particular, the
Commission seeks responses to the following questions:
257. Do Commenters agree with the Commission's assessment of the
potential benefits of the CAT NMS Plan? Why or why not?
258. To what extent do the uncertainties related to future
decisions about Plan implementation impact the
[[Page 30706]]
assessment of potential benefits of the Plan? Please explain.
259. Do Commenters agree that the inclusion of the data fields in
one centralized data source in the CAT NMS Plan described above would
result in more complete data than what is currently available to
regulators? Which elements of the Plan would deliver improvements to
completeness? Are there any elements of the Plan that would degrade the
completeness of regulatory data? Please explain.
260. The Commission reviewed gap analyses that examine whether the
CAT Data would contain all important data elements in current data
sources \815\ and concluded that certain information is not included
(e.g., OATS data fields that allow off-exchange transactions to be
matched to their corresponding trade reports at trade reporting
facilities and certain EBS elements). Please identify any such data
elements that are missing under the Plan.
---------------------------------------------------------------------------
\815\ See SEC Rule 613--Consolidated Audit Trail (CAT) OATS--CAT
Gap Analysis and SEC Rule 613--Consolidated Audit Trail (CAT)
Revised EBS--CAT GAP Analysis, available at https://www.catnmsplan.com/gapanalyses/. The Commission
acknowledges that the Participants are continuing to study gaps
between current regulatory data sources and the Plan as filed. CAT
NMS Plan, supra note 3, at Appendix C, Section C.9
---------------------------------------------------------------------------
261. The Commission also seeks comment on the significance of the
gaps identified in the analyses. If there are particular fields that
are identified in the gap analyses that should not be incorporated into
CAT, please identify them and explain.
262. The Commission expects that, pursuant to the requirements of
the Plan,\816\ any missing elements that are material to regulators
would be incorporated into CAT Data prior to the retirement of the
systems that currently provide those data elements to regulators. Do
you agree? Why or why not? Do you agree that CAT Data would include the
audit trail data elements that currently exist in audit trail data
sources? Why or why not?
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\816\ The Plan requires that, prior to the retirement of
existing systems, the CAT Data must contain data elements sufficient
to ensure the same regulatory coverage provided by existing systems
that are anticipated to be retired. See CAT NMS Plan, supra note 3,
at Appendix D, Section 3.
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263. Do Commenters agree that the CAT NMS Plan would improve the
accuracy of the data available to regulators? Which elements of the
Plan would deliver these improvements? Are there any elements of the
Plan that would degrade the accuracy of regulatory data relative to
today? Are there any elements of the Plan that would prevent or limit
improvements in the accuracy of regulatory data? Are the provisions of
the Plan related to accuracy appropriate and reasonable in light of the
goal of improving data quality? Please explain.
264. Do Commenters believe that procedural protections in the Plan,
such as the requirement that the Technical Specifications be
``consistent with [considerations and minimum standards discussed in]
Appendices C and D,'' the requirement to provide the initial Technical
Specifications and any Material Amendments thereto to the Operating
Committee for approval by Supermajority Vote,\817\ and the requirement
that all non-Material Amendments and all published interpretations be
provided to the Operating Committee in writing at least ten days before
publication,\818\ can mitigate uncertainty regarding future decisions
and help promote accuracy? Please explain.
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\817\ Id. at Section 6.9(a). The Commission notes that the
standards in Appendices C and D do not cover all decisions that
would affect the accuracy of the data.
\818\ See CAT NMS Plan, supra note 3, at Section 6.9(c)(i).
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265. Do Commenters believe that the Error Rate, validations, and
error resolution processes described in the CAT NMS Plan would provide
improvements in accuracy? Are these processes appropriate and
reasonable in light of the goal of improving data quality? Please
explain.
266. The Plan specifies an error correction process after initial
reports are received and indicates that practically all errors
identifiable by the validations used in the error correction process
would be corrected by 8:00 a.m. Eastern Time on day T+5, stating that
errors are expected to be ``de minimis'' after the error correction
period.\819\ Do Commenters believe that this is a reasonable
conclusion? Please explain.
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\819\ See id. at Appendix C, Section A.3(b) n.102. ``De
minimis'' is not defined and no numerical Error Rate is given. The
Plan also includes a compliance program intended to help achieve
this goal.
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267. Do Commenters believe that the provisions in the CAT NMS Plan
related to event sequencing would provide improvements in accuracy? To
what degree does the 50 millisecond clock synchronization requirement
enable or prevent regulators' ability to sequence events that occur in
different Execution Venues? Are the provisions of the Plan related to
event sequencing appropriate and reasonable in light of the goal of
improving data quality? Please explain.
268. The Plan does not specify the approach that would be used to
sequence events when time stamps are identical. Do Commenters believe
that there is a way for the Plan Processor to sequence events with
identical time stamps? How would this process, or the lack of a
process, affect the quality of the CAT Data?
269. The Plan states that ``the Participants plan to require that
the Plan Processor develop a way to accurately track the sequence of
order events [of a particular order] without relying entirely on time
stamps.'' \820\ Do Commenters believe it is feasible to properly
sequence the events of a simple or complex order without relying
entirely on time stamps? Please explain. If such a procedure could be
developed, how accurate would it be?
---------------------------------------------------------------------------
\820\ See CAT NMS Plan supra note 3 at Appendix C, Section
A.3(c).
---------------------------------------------------------------------------
270. The Plan further states, ``For unrelated events, e.g.,
multiple unrelated orders from different broker-dealers, there would be
no way to definitively sequence order events within the allowable clock
drift as defined in Article 6.8.'' \821\ Do Commenters believe it would
be feasible for the Plan Processor to develop a way to accurately
sequence such unrelated orders given the time stamp and clock
synchronization requirements of the Plan? Please explain. If such a
procedure could be developed, how accurate would it be?
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\821\ See id. at Appendix C, Section A.3(c) n.110.
---------------------------------------------------------------------------
271. Do Commenters agree with the Commission's data analysis of the
clock synchronization improvements from the Plan? If not, how could the
Commission improve the data analysis? Do Commenters have their own data
analysis that informs on the expected improvements from the Plan? If
so, please provide. Do Commenters agree that the improvements to the
percentage of sequenceable order events by Plan standards are modest
and the requirements of the Plan may not be sufficient to completely
sequence the majority of market events relative to all other events?
272. Do Commenters agree with the Plan's assessment of the industry
standard for clock synchronization? Does this reflect the standards for
all CAT Reporters, including exchanges, ATSs, and other broker-dealers?
If not, what would be a more appropriate way to define the industry
standard for clock synchronization?
273. Do Commenters believe that the provisions in the CAT NMS Plan
related to linking data would result in improvements to the accuracy of
the data available to regulators? Would the process for linking orders
across market participants and SROs improve accuracy compared to
existing data? Would the Plan Processor be able to
[[Page 30707]]
develop expertise in linking data more efficiently than the regulatory
staff members from each entity could on their own? Please explain.
274. Would the Error Rates associated with the linking process
represent improvements to data accuracy? Would Approach 1 to data
conversion result in a lower Error Rate than Approach 2? Would the
Approach affect the Plan Processor's ability to build a complete and
accurate database of linked data? Are the Error Rates associated with
the linking process appropriate and reasonable in light of the goal of
improving data quality? Please explain.
275. Do Commenters believe that the inclusion of unique Customer
and Reporter Identifiers would increase the accuracy of information in
data regulators use and provide benefits to a broad range of regulatory
activities that involve audit trail data? Please explain.
276. Do Commenters agree that the CAT Data would provide less
aggregated allocation information and less aggregated issuer repurchase
information? Why or why not? Would these changes significantly affect
regulatory activities?
277. Do Commenters agree that the CAT NMS Plan would improve the
accessibility of the data available to regulators? Which elements of
the Plan would deliver these improvements? Are there any elements of
the Plan that would degrade the accessibility of regulatory data
relative to today? Are there any elements of the Plan that would
prevent or limit improvements in the accessibility of regulatory data?
278. Do Commenters believe that the minimum requirements for direct
access ensure that the Plan would improve access to current data,
including the process of requesting data? Would the direct access
facilitated by the Plan provide sufficient capacity and functionality?
Would direct access reduce the number of ad hoc data requests?
279. Do Commenters agree that the CAT NMS Plan would improve the
timeliness of the data available to regulators? Which elements of the
Plan would deliver these improvements? Are there any elements of the
Plan that would degrade the timeliness of regulatory data relative to
today? Are there any elements of the Plan that would prevent or limit
improvements in the timeliness of regulatory data?
280. Do Commenters believe that the CAT NMS Plan will facilitate
the ability of each national securities exchange and national
securities association to comply with the requirement in Rule 613(f)
that they develop and implement a surveillance system, or enhance
existing surveillance systems, reasonably designed to make use of the
consolidated information contained in the consolidated audit trail? If
not, why not?
281. Do Commenters agree that the CAT NMS Plan will facilitate the
ability of regulators to conduct risk-based examinations? Why or why
not? How significantly would the Plan improve risk-based examinations?
Please explain.
282. Do Commenters agree that the CAT NMS Plan will improve the
efficiency of regulators' enforcement activities? Why or why not? Which
specific regulatory activities would be most improved by the CAT NMS
Plan? Please explain.
283. Do Commenters agree that the CAT NMS Plan will improve the
ability for regulators to determine the credibility of tips and
complaints? Please explain.
284. Overall, do Commenters agree that the surveillance,
examination, and enforcement activities of regulators would improve
with the CAT NMS Plan? Please explain. Would these improvements be
significant enough to deter violative behavior? Please explain. What
would be the economic effect of this deterrence?
285. Would such improvements reduce the percentage of activities
that generate false positives (i.e., detection of behaviors that are
not violative) and/or reduce the percentage of activities that are
false negatives (i.e., not detecting behaviors that are violative)?
Please explain. What would be the economic effect of any changes in
false positives or false negatives?
286. Do Commenters agree with the Commission's assessment of the
economic effects of the improvements to surveillance, examinations, and
enforcement from the CAT NMS Plan? Please explain.
287. Do Commenters agree that the CAT NMS Plan would improve the
efficiency and effectiveness of regulators conducting analysis and
reconstruction of market events? Please explain. Do Commenters agree
with the Commission's assessment of the benefits to investors and the
market of more efficient and effective analysis and reconstruction of
market events? Please explain.
288. Do Commenters agree that the CAT NMS Plan would facilitate
market analysis and research that would improve regulators'
understanding of securities markets? Please explain. Do Commenters
agree with the Commission's assessment of the benefits to investors and
the markets from regulators having a better understanding of the
markets? Please explain.
289. Do Commenters believe that there are other features of the CAT
NMS Plan uniquely applicable to a consolidated audit trail that
increase the likelihood that the potential benefits of the CAT NMS Plan
would be realized? Please identify these features and explain.
290. Do Commenters agree that provisions of the Plan related to
future upgrades, promoting accuracy, and promoting timeliness increase
the likelihood that the potential benefits of the CAT NMS Plan would be
realized? Do current regulatory data sources have provisions similar to
ones the Commission analyzed? If so, please describe such provisions.
291. Do Commenters believe that provisions of the Plan provide
incentives to reduce reporting errors for a CAT Reporter that has an
Error Rate that does not exceed the thresholds that would trigger fines
under the Plan or possible enforcement actions by regulators? If so,
what are the incentives? Could the Plan provide different incentives to
reduce reporting errors? Please explain.
292. Under the Plan, proposals to adjust the maximum allowable
Error Rate are to originate from the Plan Processor. Do Commenters
agree with this approach? Please explain. Should others, such as the
Operating Committee, or Advisory Committee be able to originate changes
to the Error Rate? Please explain.
293. Do Commenters agree that communication of data feed delays for
public consumption is beneficial to the operation and effectiveness of
the CAT? If so, in what ways? What are the benefits and costs of such
public disclosure?
294. Do Commenters agree that the governance provisions identified
in the Rule 613 Adopting Release continue to be important to the
efficient operation and practical evolution of the Plan, and therefore
to the achievement of the Plan's benefits? Are there other aspects of
the Plan's governance that might enhance (or detract from) the Plan's
ability to achieve its intended benefits? Are there other governance
aspects that the Plan does not address that might enhance, if included
(or detract from, if not remedied) the Plan's ability to achieve its
intended benefits? Please identify these other features and explain how
they enhance (or detract from) the Plan's ability to achieve its
intended benefits.
295. The Commission's analysis of the provisions of the Plan
relating to voting assumes that these provisions will
[[Page 30708]]
promote the benefits sought to be achieved by the Plan because, by
assigning different voting thresholds to different actions, the Plan
seeks to address potential conflict of interest and holdout problems,
balancing dissenters' rights with the need to move forward with needed
changes. Is this a complete and accurate list of the factors that could
bear on whether the voting provisions of the Plan will promote the
benefits sought to be achieved by the Plan, and did the Commission
correctly weigh these factors in preliminarily concluding that the
Plan's voting provisions could help promote better Plan decision-making
and, thus, improve achievement of the Plan's goals? If the Commission
should have considered other factors or weighed the identified factors
differently, please explain how, and what the costs and benefits of an
alternative approach would be.
296. The Plan provides that ``[a]ll votes by the Selection
Committee shall be confidential and non-public.'' \822\ What are the
effects of confidential voting as a means of limiting conflicts of
interest and promoting accountability? Would expanding confidentiality
in voting to other situations help or hinder the effectiveness of the
Operating Committee and its Subcommittees in achieving the regulatory
objectives of the Plan? Please explain and provide supporting examples
and evidence, if available.
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\822\ See CAT NMS Plan, supra note 3, at Section 5.1(b)(v).
---------------------------------------------------------------------------
297. Do Commenters believe that the size, membership, and tenure of
Advisory Committee members is appropriately tailored to encourage the
effective accumulation and communication of Advisory Committee member
views to the Operating Committee, thereby improving Plan decision-
making? If not, why not? Are there other factors that could bear on
whether the provisions of the Plan relating to the Advisory Committee
will promote better decision-making? If so, what other factors?
298. Are there any alternatives for Advisory Committee involvement
that could increase the effectiveness of its involvement? What benefits
would these achieve in terms of improving the Operating Committee's
efficiency? Would these alternatives increase or decrease costs?
299. What obstacles to information-sharing between individual
members of the Operating Committee and the Commission, if any, are
likely to limit the Plan's effectiveness in meeting its regulatory
objectives? Is there any information, such as regarding individual SRO
clock synchronization standards, that members would need to share
within the Operating Committee to achieve plan regulatory objectives
but may be uncomfortable sharing with one another (or more comfortable
sharing with the Commission than with one another)? Please be specific
and explain what, if any, changes to the plan could mitigate obstacles
from inadequate information-sharing.
300. Are there any other factors relating to the operation and
administration of the Plan that the Commission should consider as part
of determining whether to approve the Plan? If so, what are those
factors and how could they influence the costs and benefits of the
Plan? Does the Plan currently address these factors? If not, how could
the Plan address these factors and what would be the relative costs and
benefits of any changes to the Plan?
F. Costs
As noted above, at the time of the Adopting Release the Commission
deferred its economic analysis of the creation, implementation, and
maintenance of CAT until after submission of the CAT NMS Plan.\823\
Accordingly, the Commission deferred its detailed analysis of costs
associated with CAT. In light of the SROs having submitted the CAT NMS
Plan, this Section sets forth the Commission's preliminary analysis of
the expected costs for creating, implementing, and maintaining the CAT,
as well as the associated reporting of data.
---------------------------------------------------------------------------
\823\ See Adopting Release, supra note 9, at 45789.
---------------------------------------------------------------------------
As discussed in detail below, the Commission has preliminarily
estimated current costs related to regulatory data reporting,
anticipated costs associated with building and maintaining the Central
Repository, and the anticipated costs to report CAT Data to the Central
Repository. These preliminary estimates are calculated from information
provided in the CAT NMS Plan as well as supplemental information.
Currently, the 20 Participants spend $154.1 million annually on
reporting regulatory data and performing surveillance.\824\ The
approximately 1,800 broker-dealers anticipated to have CAT reporting
responsibilities currently spend $1.6 billion annually on regulatory
data reporting.\825\ If the Plan is approved, the Commission
preliminarily estimates that the cost of the Plan would be
approximately $2.4 billion in initial aggregate implementation costs
and $1.7 billion in ongoing annual costs.\826\ Furthermore, the Plan
anticipates that market participants would have duplicative audit trail
data reporting responsibilities for a period of up to a maximum of 2.5
years, preceding the retirement of potentially duplicative regulatory
data reporting schemes.\827\ Duplicative audit trail data reporting
could cost broker-dealers $1.6 billion per year or more and could cost
the Participants up to $6.9 million per year. The Commission
preliminarily believes that the primary component of costs for CAT's
estimated annual costs would be the estimated aggregate broker-dealer
data reporting costs of $1.5 billion per year, whereas the Central
Repository build costs are preliminarily estimated by the Participants
to be no more than $92 million, with annual operating costs of no more
than $135 million.
---------------------------------------------------------------------------
\824\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(ii)(B)(1).
\825\ See Section IV.F.1.c(2), infra.
\826\ See Section IV.F.2, infra.
\827\ See id.
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As explained in detail below, the Commission believes, however,
that there is significant uncertainty surrounding the actual
implementation costs of CAT and the actual ongoing broker-dealer data
reporting costs if the Plan were approved. Methodology and data
limitations used to develop these preliminary cost estimates could
result in imprecise estimates that may significantly differ from actual
costs. The Commission has used its best judgment, however, in obtaining
and assessing available information and data to provide the analysis
and estimates included in this Notice. The Commission is also
requesting comment on the methodology and any additional data
Commenters believe should be considered.
Furthermore, the Commission notes that because some CAT design
decisions (such as setting forth detailed Technical Specifications)
have been deferred until the selection of the Plan Processor, the
associated cost uncertainties could cause the actual costs to vary
significantly from the estimates set forth in this analysis.
The Commission notes that the cost estimates set forth in this
analysis are updated from the cost estimates provided in the Proposing
Release. In the Proposing Release, the Commission estimated $4.3
billion in initial implementation costs and $2.3 billion in ongoing
annual costs.\828\ The
[[Page 30709]]
Commission has now updated its analysis and estimates $2.4 billion in
initial implementation costs and $1.7 billion in ongoing annual costs.
The Commission believes that several factors drive differences in cost
estimates from the Proposing Release to the current cost estimates in
this analysis. First, the scope of CAT as contemplated in the Proposing
Release is different than the scope of CAT Data as would be implemented
by the CAT NMS Plan.\829\ For example, the Commission notes that,
unlike CAT Data envisioned in the Proposing Release, the proposed Plan
includes OTC Equity Securities, which if included in CAT would
facilitate the possible retirement of OATS as an audit trail data
reporting system at a relatively earlier date. While the Commission's
cost estimates do not explicitly incorporate cost savings from systems
retirement, cost estimates provided in the Plan and based on surveys of
broker-dealers, participants and service providers may reflect some of
these savings. For example, because respondents anticipate
incorporating resources that would be devoted to OTC equity data
reporting to CAT reporting, cost estimates may be lower than they would
be if OTC equity data were excluded from CAT but were still reported to
OATS on an ongoing basis. Thus, after all CAT Reporters start reporting
to the Central Repository and the resolution of any data gaps between
OATS and CAT, FINRA would not need to maintain OATS solely to fulfill
its regulatory responsibilities relating to OTC Equity Securities.\830\
Additionally, the Commission's updated cost estimates are based on data
submitted with the Plan, which was unavailable when the Commission
first estimated the costs of CAT in the Proposing Release,\831\ as well
as certain additional information obtained by Commission Staff.\832\
Furthermore, the Plan also integrates exemptive relief extended to the
Participants regarding (1) Options Market Maker quotes; (2) Customer-
IDs; (3) CAT-Reporter-IDs; (4) linking of executions to specific
subaccount allocations on Allocation Reports; and (5) time stamp
granularity for Manual Order Events. The Commission preliminarily
believes that this exemptive relief contributes to reductions in cost
of the Plan relative to those estimated in the Proposing Release. The
Commission has incorporated this additional information into its
current cost analysis.\833\
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\828\ See Proposing Release supra note 9, at 32596-602. The $4.3
billion and $2.3 billion cost estimates can be calculated using
individual cost estimates from the Proposing Release. The Proposing
Release expressed some cost estimates on a per-Participant basis.
The Plan, however, breaks out costs to Participants by (i) single-
exchange-operating Participants and (ii) Affiliated Participants
that operate multiple exchanges. To validly compare the Commission's
preliminary cost estimates to the cost estimates set forth in the
Plan, the Commission's analysis aggregates costs to all Participants
for these cost estimates. The Proposing Release anticipated 1,114
SRO members would report data to the Central Repository directly,
and 3,006 broker-dealers would report data through a service
provider. The Plan anticipates that approximately 1,800 broker-
dealers would have CAT reporting obligations; the Commission
preliminarily believes that the majority of these broker-dealers
would rely on service bureaus to perform their regulatory data
reporting. Again, to validly compare the different cost estimates,
the Commission aggregates the cost estimates across all broker-
dealer CAT Reporters.
\829\ Similarly, in the Adopting Release, the Commission
explained that ``the methodology that the Commission used in the
Proposing Release to estimate the costs of creating, implementing,
and maintaining a consolidated audit trail may no longer be
suitable'' and that certain ``assumptions may no longer be valid
since several of the specific technical requirements underlying the
Proposing Release's approach have been substantially modified.'' See
Adopting Release, supra note 9, at 45781.
\830\ If FINRA were unable to retire OATS, the costs of
duplicative reporting (discussed in Section IV.F.2, infra), would
continue indefinitely. The Commission preliminarily believes this
outcome is unlikely because the Plan discusses the Participants'
plans to retire OATS if the Plan is approved. See CAT NMS Plan,
supra note 3, at Appendix C, Section C.9.
\831\ See Proposing Release, supra note 9, at 32601-02.
\832\ As discussed further below, the Commission's analysis also
incorporates data obtained from FINRA and information from
discussions with broker-dealers and service bureaus arranged by FIF
and staff. See infra notes 880 and 899.
\833\ The Commission's revised cost estimates are generally
substantially lower than those presented in the Proposing Release.
See Proposing Release, supra note 9, at 32601-02. The Proposing
Release's estimate of total industry implementation costs is 40.45%
higher than the current estimate, and the Proposing Release's
estimate of ongoing total industry costs is 57.99% higher than the
current estimate. Reductions in cost estimates are primarily driven
by lower broker-dealer implementation and ongoing reporting costs
that are largely attributable to a reduction in the number of
broker-dealers anticipated to incur CAT reporting responsibilities,
as the Proposing Release assumed that all 4,120 broker-dealers would
be CAT Reporters but the Plan estimates that only 1,800 broker-
dealers would incur CAT reporting responsibilities. The Proposing
Release also presented higher estimates of the number of broker-
dealers that are likely to be insourcers; these broker-dealers have
significantly higher implementation and ongoing costs that
outsourcing broker-dealers. The Proposing Release estimated Central
Repository implementation costs that are 23.33% higher than current
estimates; ongoing Central Repository costs were lower by 33.56%;
SRO implementation costs were 82.21% higher in the proposing
release; SRO ongoing costs were estimated to be 31.79% lower than
current estimates. The Proposing Release did not recognize costs to
Service Bureaus related to CAT.
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1. Analysis of Expected Costs
The Plan provides estimates of the expected costs associated with
the Plan, including costs to build and operate the Central Repository
and costs to Participants and CAT Reporters to implement and maintain
CAT reporting.\834\ As explained below, the Commission has thoroughly
reviewed the cost estimates contained in the Plan and other relevant
information to develop the Commission's preliminary estimate of
expected costs of the Plan. The Commission preliminarily believes that
in some cases the estimates provided in the Plan are reliable estimates
of the potential costs of certain aspects of the Plan. The Commission
preliminarily believes, however, that in other cases the data and
methodology underlying certain Plan estimates are unreliable and, in
such cases, the Commission has preliminarily evaluated and provided
separate estimates based on alternative data or a different
methodology.\835\
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\834\ Because the Plan does not provide data that permit
partitioning costs associated with the Central Repository between
Participants and broker-dealer CAT Reporters, this analysis
discusses the Central Repository costs separately.
\835\ For example, the Commission preliminarily believes that
cost estimates in the Plan relating to the costs that would be borne
by broker-dealers are unreliable due to limitations of certain
survey response data. These limitations and the Commission's
alternative cost estimate are discussed in detail below. See Section
IV.F.1.c, infra.
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In this Section, the Commission provides preliminary estimates of
the individual elements that constitute the estimated expected total
cost associated with implementing and maintaining the CAT, including
the costs of operating and building the Central Repository, the costs
to Participants, the costs to broker-dealers, and other costs
considered in the CAT NMS Plan.
a. Costs of Building and Operating the Central Repository
The Plan's estimates of the costs to build the Central Repository
are based on Bids that vary in a range as high as $92 million. The
Plan's estimates of annual operating costs are based on Bids that vary
in a range up to $135 million. The eventual magnitude of Central
Repository costs is dependent on the Participants' selection of the
Plan Processor, and may ultimately differ from estimates discussed in
the Plan if Bids are revised as the bidding process progresses. The
Plan discusses these costs both as (i) one-time and ongoing costs as
well as (ii) a five-year total cost, to help evaluate economic trade-
offs between initial build costs and operating costs. The Plan
anticipates that Participants and their members would bear the costs of
building and operating the Central Repository. The Commission
preliminarily believes that these estimates are reliable because they
are the result of a competitive bidding process, although the
Commission recognizes that the Bids are not legally binding on bidders.
In particular, the Commission preliminarily believes that a Bidder
would not likely decline a
[[Page 30710]]
contract to be Plan Processor that was based on the Bid it submitted
because that Bidder might lose future business due to reputational
consequences of its actions. Furthermore, Bidders have invested
considerable time and effort in evaluating the RFP and preparing their
Bids and thus if a Bidder were unwilling to serve as Plan Processor
according to the terms outlined in its Bid, the time and effort
expended to prepare the Bid would be wasted resources. As explained
further below, however, the Commission believes that these cost
estimates associated with building and operating the Central Repository
are subject to a number of uncertainties.
To estimate the one-time total cost to build the Central
Repository, the Plan uses the Bids of the final six Shortlisted
Bidders.\836\ The Bidders' implementation cost estimates range from $30
million to $91.6 million, with a mean of $53 million and a median of
$46.1 million.\837\ The Plan also estimates the ongoing costs of the
Central Repository. The Bids of the final six Shortlisted Bidders
estimate annual costs to operate and maintain the Central Repository
range from $27 million to $135 million, with a mean of $51.1 million
and a median of $42.2 million.\838\ The Plan's summary statistics show
that annual costs are not expected to be constant year-over-year for
all Bidders, but the Plan does not provide further details on how the
costs are expected to evolve over time or how many of the Bids have
time-varying annual costs.\839\ Although the Commission preliminarily
believes that costs provided by Bidders are reliable, the Commission
recognizes that these ongoing costs could increase over time due to
inflation or changes in market structure such as a significant increase
in message traffic. It is also possible these costs could decrease due
to improvements in technology, reductions in message traffic, and
innovation by the Plan Processor.
---------------------------------------------------------------------------
\836\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(i)(B). The Plan does not reflect any more specific cost
ranges that result from narrowing the range of Bidders from six to
three. See supra note 35.
\837\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(i)(B).
\838\ Id.
\839\ Id.
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The Plan also provides information based on the Bids on the total
five-year operating costs for the Central Repository because the annual
costs to operate and maintain the Central Repository are not
independent of the build cost. In particular, it is plausible that the
Bidders with the lowest build costs trade off lower build costs for
higher recurring annual costs. To account for this possibility, the
Plan presents the range of total five-year costs across Bidders using
the Bids of the final six Shortlisted Bidders.\840\ The methodology
takes the sum of the annual recurring costs over the first five years
(discounted to the present with a discount rate of 2%) and adds the
upfront investment. Across the six Shortlisted Bidders, the total five-
year costs to build and maintain CAT range from $159.8 million to
$538.7 million.\841\ This information is less granular than other
Bidder cost information provided in the Plan, and no mean or median is
provided or can be calculated with the information provided.
---------------------------------------------------------------------------
\840\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(i)(B). The five-year presentation of Central Repository costs
is converted into implementation and annual costs by using the
maximum build cost and maximum annual operating cost over the five
year period in the Bids. The Commission preliminarily believes that
this presentation is conservative in the sense that it avoids
underestimating the Central Repository costs that must be borne by
industry. However, the Commission preliminarily believes that it is
likely that this presentation overestimates the actual Central
Repository costs because most individual Bids forecast variation in
operating expenses year by year, with costs in some years lower than
the maximum used in this presentation. Because the Central
Repository costs are, in aggregate, significantly lower than the
aggregate costs broker-dealers would incur in reporting CAT Data,
the Commission preliminarily believes that this overestimation would
not materially affect the magnitude of aggregate costs for the Plan
to industry.
\841\ See supra note 836, and CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(i)(B).
---------------------------------------------------------------------------
The Plan provides that costs associated with building and operating
the Central Repository would be borne by both Participants and their
members.\842\ In particular, the Plan provides for fixed-tiered fees
based on ranges of activity levels to be levied on Execution Venues
(i.e., the Participants (including a national securities association
with trade reporting facilities, and ATSs)) based upon the Execution
Venue's market share of share volumes, with options and equity venue
fees determined by separate schedules set by CAT's Operating
Committee.\843\ Furthermore, the Plan provides for fixed-tiered fees
for Industry Members (broker-dealers) based on the message traffic
generated by the member, including message traffic associated with an
ATS operated by the member.\844\ The Plan also provides for the
establishment of other fees for activities such as late, inaccurate, or
corrected data submission by CAT Reporters.\845\ The Plan does not
present information on the potential magnitude of these fees, but the
Commission preliminarily believes they are likely to be a minor expense
for CAT reporters, who should be able to avoid these fees by fulfilling
their normal reporting responsibilities under the Plan. The Plan does
not provide information on the relative allocation of these fees
between transaction-based fees, message traffic-based fees, and other
fees.\846\
---------------------------------------------------------------------------
\842\ See CAT NMS Plan, supra note 3, at Section 11.
\843\ See id. at Section 11.3.
\844\ See id. at Section 11.3(b).
\845\ See id. at Section 11.3(c).
\846\ The economic analysis treats estimates of costs associated
with building and operating the Central Repository separately from
estimates of costs to Participants and other CAT Reporters to report
CAT Data. While the costs of building and operating the Central
Repository would be borne by the Participants and Industry Members,
the allocation of the costs between and among those entities would
be determined by the CAT Funding Model, which has not yet been
finalized. See Section IV.C.2, supra. However, these costs are
included in the Commission's estimate of the total costs to industry
if the Plan is approved.
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The Commission believes that a range of factors would drive the
ultimate costs associated with building and operating the Central
Repository and who would bear those costs. The Plan explains that the
major cost drivers identified by Bidders are (1) transactional volume,
(2) technical environments, (3) likely future growth in transactional
volumes, (4) data archival requirements, and (5) user support/help desk
resource requirements.\847\ The Plan does not present information on
how sensitive the cost estimates are to each of these factors. Further,
how Bidders propose to satisfy the RFP requirements could materially
affect the ultimate cost to the industry to operate the Central
Repository and who would bear those costs. For instance, some Bids may
provide more extensive user support from the Plan Processor than
others, effectively shifting user support costs from CAT Reporters to
the Plan Processor, where such support might be more efficiently
provided. However, the Plan does not provide information about how the
Bidders propose to address each of the RFP requirements; thus,
uncertainties exist around who would bear certain costs and how such
costs could change if each Bidder's proposal related to these factors
change.
---------------------------------------------------------------------------
\847\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(i)(B).
---------------------------------------------------------------------------
The Commission is mindful that the cost estimates associated with
building and operating the Central Repository are subject to a number
of additional uncertainties. First, the Participants have not yet
selected a Plan Processor, and the Shortlisted Bidders have submitted a
wide range of cost estimates for building and operating the Central
[[Page 30711]]
Repository. Second, the Bids submitted by the Shortlisted Bidders are
not yet final. Participants could allow Bidders to revise their Bids
before the final selection of the Plan Processor. Third, neither the
Bidders nor the Commission can anticipate the evolution of technology
and market activity with complete prescience. Available technologies
could improve such that the Central Repository would be built and
operated at a lower cost than is currently anticipated. On the other
hand, if anticipated market activity levels are materially
underestimated, the Central Repository's capacity could need to
increase sooner, increasing the actual costs to operate the Central
Repository than currently anticipated in the Bids. The Commission notes
that costs to build and operate the Central Repository are relatively
small compared to total industry costs if the CAT NMS Plan were
approved; consequently, the Commission preliminarily believes that
these uncertainties are unlikely to materially affect the final cost of
the Plan to industry, if it is approved.
b. Costs to Participants
The Commission preliminarily believes that the Plan's estimates for
Participants to report CAT Data are reliable because all of the SROs
provided cost estimates, and most SROs have experience collecting audit
trail data as well as expertise in the both the requirements of CAT as
well as their current business practices. The Plan provides estimated
costs for the Participants to report CAT Data.\848\ These estimates are
based on Participant responses to the Costs to Participants Study
(``Participants Study'') \849\ that the Participants collected to
estimate SRO CAT-related costs for hardware and software, full-time
employee staffing (``FTE costs''), and third-party providers.\850\
Respondents to the Participants Study also estimated the costs
associated with retiring current regulatory data reporting systems that
would be rendered redundant by CAT.\851\
---------------------------------------------------------------------------
\848\ See id. at Appendix C, Section B.7(b)(iii)(B)(2). In
addition to the costs the Participants would incur implementing and
maintaining CAT, the Participants would also incur and would
continue to incur costs associated with developing the CAT NMS Plan.
The Participants estimate such costs to be $8,800,000. The
Commission does not include these costs in its estimates of the
costs associated with CAT if the CAT NMS Plan is approved because
these costs have already been incurred and would not change
regardless of whether the Commission approves or disapproves the CAT
NMS Plan. Further, the Commission assumes that the CAT NMS Plan's
implementation cost estimates include any additional CAT NMS Plan
development costs that would be incurred by Participants if the CAT
NMS Plan were approved.
\849\ The Participants Study delineates Participant responses
into two groups. The first group consists of affiliated
Participants, which includes single entities that hold self-
regulatory licenses for multiple exchanges. The second group
consists of Participants that hold a single self-regulatory license,
including FINRA, the sole national securities association. Id. at
Appendix C, Section B.7(b)(i)(A)(1).
\850\ Third-party provider costs are generally legal and
consulting costs but may include other outsourcing. The template
used by respondents is available at https://catnmsplan.com/PastEvents/ under the Section titled ``6/23/14'' at the ``Cost Study
Working Template'' link.
\851\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(iii)(B)(2).
---------------------------------------------------------------------------
The Plan estimates costs for the Participants as an aggregate
across all Participants (the six single-license Participants and the
five Affiliated Participant Groups).\852\ The implementation cost
estimate for Participants is $17.9 million, including $770,000 in legal
and consulting costs and $10.3 million in full-time employee costs for
operational, technical/development, and compliance-type functions.\853\
Annual ongoing costs are estimated to be $14.7 million, including
$720,000 in legal and consulting costs and $7.3 million in full-time
employee costs.\854\ Other than legal and consulting costs and full-
time employee costs, the Plan does not specify the other categories of
implementation and ongoing costs, but based on discussion with the
Participants, the Commission preliminarily believes that much of the
remaining costs would be attributed to IT infrastructure, including
hardware and software costs.
---------------------------------------------------------------------------
\852\ Id. at Appendix C, Section B.7(b)(iii)(B)(2).
\853\ Id.
\854\ Id.
---------------------------------------------------------------------------
The Plan also provides estimates of the costs Participants
currently face in reporting regulatory data.\855\ The Plan anticipates
that some, but not all, of these reporting systems would be retired
after implementation of the Plan.\856\ The Plan reports that aggregate
annual costs for current regulatory data reporting systems are $6.9
million across all Participants.\857\
---------------------------------------------------------------------------
\855\ Id.
\856\ Id. As required by Rule 613(a)(1)(ix), 17 CFR
242.613(a)(1)(ix), the CAT NMS Plan includes a plan to eliminate
existing rules and systems that would be rendered duplicative under
CAT. Id. at Appendix C, Section C.9. Among other things, this plan
requires that within 18 months after Industry Members are required
to begin reporting data to the Central Repository, each Participant
will complete an analysis of whether its rules and systems related
to monitoring quotes, orders, and executions collect information
that is not rendered duplicative by CAT. Id. Each Participant must
also analyze whether any such non-duplicative information should
continue to be separately collected, incorporated into CAT, or
terminated. Id. Therefore, depending on the results of these
analyses, some existing regulatory reporting systems may continue to
be in place after the implementation of CAT.
\857\ Id. at Appendix C, Section B.7(b)(ii)(B)(1).
---------------------------------------------------------------------------
In addition to data reporting costs, Participants face costs
associated with developing and implementing a surveillance system
reasonably designed to make use of the information contained in CAT
Data as required by Rule 613(f).\858\ The Plan provides estimates of
the costs to Participants to implement surveillance programs using data
stored in the Central Repository. Participants would incur expenses,
including full-time employee (``FTE''), legal, consulting and other
costs to adapt their surveillance systems to utilize data in the
Central Repository. The Plan provides an estimate of $23.2 million to
implement surveillance systems for CAT, and ongoing annual costs of
$87.7 million.\859\ The Plan does not provide information on why
Participants' data reporting costs would substantially increase if the
Plan were approved, nor does it provide information on why surveillance
costs would decrease.
---------------------------------------------------------------------------
\858\ See 17 CFR 242.613(f).
\859\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(iii)(B)(2). Rule 613 requires the SROs to file updated
surveillance plans within 14 months of CAT implementation. 17 CFR
242.613(f). The Commission assumes that the CAT NMS Plan's estimate
is limited to adapting current surveillance programs to the Central
Repository. The Commission believes this is a conservative
assumption because if other expenses were included in the estimate,
the Commission would be overestimating the costs Participants would
incur to implement and operate CAT if the CAT NMS Plan is approved.
---------------------------------------------------------------------------
The Commission preliminarily believes the data reporting cost
estimates are reasonable because the Commission expects that
Participants would be required to implement new technology
infrastructure to report data to the Central Repository and support
specialized personnel to maintain this infrastructure and respond to
inquiries from the Plan Processor and users of CAT Data. The Commission
likewise preliminarily believes that the surveillance cost estimates
are reasonable, even though the annual estimate of $87.7 million is
lower than the $147.2 million Participants, in aggregate, currently
spend on surveillance programs annually \860\ because Participants
could realize efficiencies from having data standardized and centrally
hosted that could allow them to handle fewer ad hoc data requests. In
addition, the Plan could allow Participants to automate some
surveillance processes that may currently be labor intensive or
processed on legacy systems, which
[[Page 30712]]
could reduce costs because the primary driver of these costs is FTE
costs.
---------------------------------------------------------------------------
\860\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(ii)(B)(1).
---------------------------------------------------------------------------
Table 6 summarizes the Participants' estimated costs, both current
and CAT-related, that are set forth in the Plan. Currently,
Participants spend approximately $154 million per year on data
reporting and surveillance activities. The Participants estimate that
they would incur $41 million in CAT implementation costs, and $102
million annually in ongoing costs to report CAT Data and perform
surveillance as mandated under Rule 613.
Table 6--Participants' Cost Estimates
----------------------------------------------------------------------------------------------------------------
Current CAT implementation CAT ongoing
----------------------------------------------------------------------------------------------------------------
Data Reporting................................ $6,900,000 $17,900,000 $14,700,000
Surveillance.................................. 147,200,000 23,200,000 87,700,000
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
Total..................................... 154,100,000 41,100,000 102,400,000
----------------------------------------------------------------------------------------------------------------
c. Costs to Broker-Dealers
(1) Estimates in the Plan
The Plan estimates total costs for those broker-dealers expected to
report to CAT. In particular, the Plan relies on the Costs to CAT
Reporters Study (``Reporters Study''), which gathered from broker-
dealers the same categories of cost estimates used in the Participants
Study--i.e., the hardware and software costs, full-time employee
staffing costs, and third-party provider costs that CAT Reporters would
incur if the Commission approves the Plan.\861\ The Reporters Study
surveyed broker-dealers to respond to two distinct approaches for
reporting CAT Data to the Central Repository.\862\ Approach 1 assumes
CAT Reporters would submit CAT Data using their choice of industry
protocols. Approach 2 assumes CAT Reporters would submit data using a
pre-specified format. The Participants distributed the Reporters Study
to 4,406 broker-dealers and received 422 responses, of which the
Participants excluded 180 deemed materially incomplete and 75
determined to be erroneous.\863\ The Plan's cost estimate calculations
are based on the remaining 167 responses. In aggregating the cost
estimates across all broker-dealers expected to report CAT Data to the
Central Repository, the Plan assumed that the characteristics of survey
respondents (firm size and OATS reporting status) were representative
of the approximately 1,800 broker-dealers expected to have CAT
reporting obligations.\864\
---------------------------------------------------------------------------
\861\ See id. at Appendix C, Section B.7(b)(i)(A)(2).
\862\ See id.
\863\ See id.
\864\ Not all broker-dealers are expected to have CAT reporting
obligations; the Participants report that approximately 1,800
broker-dealers currently quote or execute transactions in NMS
Securities, Listed Options or OTC Equity Securities and would likely
have CAT reporting obligations. The Commission understands that the
remaining 2,338 registered broker-dealers either trade in asset
classes not currently included in the definition of Eligible
Security or do not trade at all (e.g., broker-dealers for the
purposes of underwriting, advising, private placements). The Plan
describes the process of determining that 1,800 broker-dealers would
report to the Central Repository in Appendix C. See CAT NMS Plan,
supra note 3, at Appendix C, Section B.7(b)(ii)(B)(2).
---------------------------------------------------------------------------
Based on the Reporters Study survey data, the Plan estimates
implementation costs of less than $740 million for small firms \865\
and approximately $2.6 billion for large firms, for a total of $3.34
billion in implementation costs for broker-dealers.\866\ For annual
ongoing costs, the Plan estimates costs of $739 million for small firms
and $2.3 billion for large firms, for a total of $3.04 billion in
annual ongoing costs for broker-dealers.\867\ For both large and small
broker-dealers, the Plan suggests that the primary cost driver for
projected CAT reporting costs for broker-dealers is costs associated
with full-time employees.\868\ For the reasons discussed below, the
Commission preliminarily believes that the broker-dealer cost estimates
in the Plan are in part unreliable, based on limitations with the
Plan's underlying data in estimating costs. As discussed below, the
Commission preliminarily believes that cost estimates in the Plan for
large broker-dealers may be reliable, and the Commission has
incorporated large firm data from the Plan into the Commission's
estimates outlined below.\869\
---------------------------------------------------------------------------
\865\ Survey respondents were instructed to classify themselves
as ``small'' if their Total Capital (defined as net worth plus
subordinated liabilities) was less than $500,000. See CAT NMS Plan,
supra note 3, at Appendix C, Section B.7(b)(ii)(C) n.188. This is
consistent with the definition of ``small business'' or ``small
organization'' used with reference to a broker or dealer for
purposes of Commission rulemaking in accordance with provisions of
Chapter Six of the Administrative Procedure Act (5 U.S.C. 601 et
seq.). See 17 CFR 240.0-10(c).
\866\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(iv)(A)(3).
\867\ Id.
\868\ See id. at Appendix C, Section B.7(b)(iii)(C)(2).
\869\ While the estimates presented in the Plan assume that the
proportion of large versus small broker-dealers that responded to
the Reporters Study is representative of the relative number of
large versus small broker-dealers that are expected to incur CAT
reporting obligations, the Commission's cost estimates do not embed
this assumption. Instead, the Commission relies on data from FINRA
to determine which firms are likely to outsource, and models those
firms' costs based on information gleaned from FIF-organized
discussions with industry. This is discussed further below, but this
estimation results in relatively fewer firms' costs being estimated
using ``large'' firm cost estimates presented in the Plan.
---------------------------------------------------------------------------
The Commission preliminarily believes, however, that the cost
estimates for small broker-dealers provided in the Plan, which are
based upon responses set forth in the Reporters Study, do not prove
reliable estimates of smaller CAT Reporter costs for a number of
reasons. First, some respondents classified as small in the Reporters
Study appear to have responded numerically with incorrect units, with
such responses resulting in annual estimated cost figures that would be
1,000 times too large. Second, maximum responses in certain categories
of costs suggest that some large broker-dealers may have misclassified
themselves as small broker-dealers.\870\ Third, methods used to remove
outliers are likely to have introduced significant biases. Finally, the
response rate to the Reporters Study survey was low and is likely to
have oversampled small broker-dealers who currently have no OATS
reporting obligations.\871\
---------------------------------------------------------------------------
\870\ The Plan presents summary statistics such as average,
median and maximum for each survey response. See CAT NMS Plan supra
note 3, at Appendix C, Section B(7)(b)(ii)(C), Table 5. In the left
most column, $14 million is the maximum response for ``Hardware/
Software Current Cost.''
\871\ In reaching these preliminary conclusions, the Commission
reviewed the detailed discussions of the Reporters Study survey
methodology in the Plan and the survey form and instructions
provided to respondents. See 6/23/14 entry on CAT NMS Plan Web site,
available at https://www.catnmsplan.com/pastevents/. The
Commission staff also discussed with the Participants potential
methodology adjustments in aggregating the CAT Reporters Study data.
After Commission staff discussions with the Participants, the
Commission concluded that no methodology could address these
fundamental issues with the survey data.
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First, the Commission preliminarily believes that the respondents
to the Reporters Study survey are likely to have used different units
in their responses and that the survey precision is materially affected
because
[[Page 30713]]
inconsistent use of reporting units across respondents introduces an
upward bias to the Reporters Study's findings. The survey collected
cost estimates in $1,000 increments; however, there is evidence that
some respondents did not provide estimates in $1,000 increments as
requested. Rather, survey results in the Plan reveal, for example, that
one small firm reported current annual hardware/software costs for
current regulatory data reporting to be $14,000,000 per year.\872\
Because small firms responding to the survey by definition have no more
than $500,000 in total capital, an annual $14,000,000 estimate for
hardware/software costs for current data reporting seems
unreasonable.\873\ Furthermore, a small survey respondent cited
$3,500,000 in hardware/software retirement of systems costs, which
seems unreasonable for a broker-dealer with less than $500,000 in total
capital. These are only a few examples, but they raise the question of
how many other respondents recorded incorrect units in their responses,
particularly if screening methodologies have difficulty detecting such
incorrect units. In light of these unreasonable results, the Commission
preliminarily believes that the Plan's cost estimates for small broker-
dealers reporting data to CAT has an upward bias because some firms did
not correctly respond to the survey in $1,000 increments.
---------------------------------------------------------------------------
\872\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.(7)(b)(ii)(C), Table 5.
\873\ The Plan notes that it is possible that the firm intended
to report that it had $14,000 in annual expenses for hardware/
software. See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(ii)(C), n.193.
---------------------------------------------------------------------------
Because of errant responses of this type, the Plan recommends using
medians instead of averages; \874\ however, for nearly all estimated
cost categories in the Reporters Study, the median response was zero,
which the Commission believes underestimates the costs that CAT
Reporters are likely to face in most categories of costs. Consequently,
the Commission is unable to adjust for these biases.
---------------------------------------------------------------------------
\874\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7.(b)(ii)(C), n.194.
---------------------------------------------------------------------------
In addition, the Commission preliminarily believes that the small
firm cost survey information in the Reporters Study is unlikely to be
representative of the small broker-dealers that would have CAT
reporting responsibilities in part because the Commission also believes
preliminarily that some survey respondents misclassified their firm's
size, which renders the Plan's separate presentation of results for
large and small broker-dealers imprecise. In particular, the Commission
believes that at least one large firm misclassified itself as a small
firm. The CAT NMS Plan Table 6 reveals that one firm designated as a
small firm responded to the Reporters Study survey with it having 68
full-time employees dedicated to performing regulatory data reporting
activities for a yearly cost of $27,300,000.\875\ The Commission
believes, however, that a firm with 68 full-time employees reporting
regulatory data could not be small (again, as defined by the survey to
include firms with less than $500,000 in total capital) because such a
firm would lack the working capital to support that level of employee
expense.\876\ The presence of large-firms with significantly higher
costs in the small-firm sample significantly biases the small-firm cost
estimates upward.
---------------------------------------------------------------------------
\875\ See id. at Appendix C, Section B.(7)(b)(ii)(C), Table 6.
\876\ See id. at Appendix C, Section B.7.(b)(i)(C), n.188.
---------------------------------------------------------------------------
Moreover, the Commission preliminarily believes that the
methodologies implemented to remove outliers in the Reporters Study
introduce cost estimate biases.\877\ Based on discussions with the
Participants, the Commission understands that to identify and remove
outliers, the Participants first determined if each survey item's
maximum response was a potential outlier because it was more than twice
the value of the next highest response; the Participants then
individually reviewed potential outliers and omitted those deemed
errant. While the Commission recognizes that this methodology may
mitigate the precision bias discussed above by removing a single
response that is 1,000 times too high, it may not remove such outliers
when two or more firms errantly report values 1,000 times too high, in
which case an upward bias to the cost estimates would remain.
Furthermore, if one firm genuinely incurs expenses that are more than
twice those of the next highest respondent, such survey response might
be removed under this methodology, even though such a response may
accurately identify expenses expected by the respondent, which in turn
introduces a downward bias to the cost estimates. For example, only 21
large OATS reporting firms are represented in the Reporters Study
survey responses. If most of these 21 firms perform the majority of
their regulatory data reporting functions in house, but one firm
outsources all of its regulatory data reporting, that single firm could
have outsourcing costs far higher than its peers. Under the Plan's cost
estimate methodology, this outsourcing response in the Reporters Study
might be removed as an outlier, unless another large, OATS reporting
firm responded to the Reporters Study with at least half of the
outsourcing costs. The Commission considered whether to request that
the Participants provide updated cost estimates under a methodology
that did not remove Reporters Study outlier responses, but the
Commission preliminarily believes that this approach would exacerbate
the precision problem discussed above and possibly increase the number
of errant responses that are 1,000 times too high to the cost estimate
data set.
---------------------------------------------------------------------------
\877\ See id. at Appendix C, Section B.7.(b)(i)(B)(ii)(C).
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Finally, the Commission believes that the Reporters Study response
rate is not adequate to be representative of the population of broker-
dealers that would report to CAT. The survey was delivered to 4,025
broker-dealers. After removing erroneous and materially incomplete
responses, only 167 responses remained of the 4,025 broker-dealers who
were sent the survey. To be representative of the broker-dealers that
would report to CAT, a final response rate of 4.15% seems low
considering the diversity of these broker-dealers. The majority of
broker-dealers are small and smaller broker-dealers are diverse along
many dimensions relevant to the likely magnitude of their expected CAT
costs, including business practices; tendency to centralize technology;
specialization in market segments, such as options versus equities; and
the range of products and markets in which individual broker-dealers
participate. Because broker-dealer diversity is great, a survey of
expected broker-dealer costs would ideally have a higher response rate
to ensure a representative sample. Furthermore, of the 167 responses
incorporated into the Plan's cost estimates, 118 respondent firms were
classified as small in the Reporters Study, and 88 of these 118 small
firms were identified as having no current OATS reporting
responsibilities.\878\ The Commission preliminarily believes that small
firms that anticipate limited CAT reporting responsibilities may have
been oversampled by the Reporters Study survey because for nearly all
categories of cost estimates, the median small firm response was zero,
suggesting that they do not expect to have CAT reporting
responsibilities. Consequently, the
[[Page 30714]]
Commission preliminarily believes that the small firms that responded
to the study cannot be statistically representative of the small firms
that would incur CAT reporting obligations, because the Commission
believes that most small broker-dealers would incur significant costs
in reporting to CAT.\879\ These costs are estimated below.
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\878\ Small firms may have no OATS reporting responsibilities
because they do not engage in activities that would incur OATS
reporting obligations, or they may be excluded or exempted under
FINRA's OATS reporting rules. See Section IV.D.2.b(1)A, supra.
\879\ The Commission notes that small firms currently excluded
from OATS reporting due to their size would have CAT reporting
responsibilities under the Plan because the Plan makes no provision
to exempt or exclude them, as FINRA does with OATS reporting. The
Commission preliminarily believes that these firms are likely to
experience higher implementation costs than other small firms
because CAT reporting would likely necessitate establishing business
relationships with service providers if they do not already have
such relationships. The Commission preliminarily believes that most
small firms that would have CAT reporting obligations but do not
currently have OATS reporting obligations would not have the IT and
regulatory personnel infrastructure to accomplish this reporting in-
house. The Commission's estimation of these firms' costs to
implement CAT includes higher estimates of employee costs to
implement CAT to account for this increased burden.
---------------------------------------------------------------------------
Although the Commission has preliminarily concluded that the small
broker-dealer cost estimates presented in the Plan are unreliable, the
Commission also preliminarily believes that the cost estimates in the
Plan for large broker-dealers may be reliable. The Commission
preliminarily believes that problems with the Reporters Study data are
less likely to affect the Plan's large broker-dealer cost estimates for
several reasons. First, if a large broker-dealer were to respond to the
Reporter Study survey with the incorrect level of units (resulting in
estimates that were 1,000 times too large as was the case for some
small broker-dealer responses), then these errant cost survey responses
would result in estimates that likely would be denominated in billions
of dollars. The maximums presented in the Plan's tables describing the
Reporters Study data do not include responses denominated in billions;
notably, under the Plan's cost estimate methodology, if such responses
were generated, these responses likely would have been removed as
outliers. Second, although it is possible that small broker-dealers
misclassified themselves as large broker-dealers in the Reporters Study
data, such misclassification does not seem to have biased the cost
estimate results for large broker-dealers to the degree that the
Commission preliminarily believes has occurred for the small broker-
dealer Reporters Study data. Cost estimates for large broker-dealers,
particularly those that do not have current OATS reporting obligations,
are not inconsistent with information gathered by the Commission in
discussions with broker dealers and service providers,\880\ although
the Commission preliminarily believes that averages presented in the
Plan generally fall between the expenses that a very large and complex
broker-dealer would experience and those of a more typical broker-
dealer in the same category. For example, the Plan estimates that the
average large OATS-reporting broker-dealer currently spends $8.7
million annually to comply with current data reporting
requirements.\881\ The Commission preliminarily believes that this
estimate is likely to be substantially lower than the actual data
reporting costs incurred by the largest and most complex broker-dealers
that currently report to OATS; these very large and complex firms are
assumed to spend far more than this estimate. There are, however, only
a limited number of exceptionally large OATS-reporting broker-dealers.
Similarly, the Plan's estimate is likely to significantly overestimate
the costs incurred by the majority of firms classified as large by the
Plan because most large firms are not as large or as complex as these
limited number of exceptionally large broker-dealers. Summary
statistics on activity levels of OATS reporting firms are discussed in
detail below.
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\880\ FIF arranged a group discussion with a small number of
broker-dealers whose identities were not provided to Commission
staff and individual discussions with five service bureaus whose
identities were not provided to Commission staff. Also, staff
arranged individual discussions with five additional broker-dealers.
When market participant identities were unknown, FIF provided
demographic information that allowed Commission staff to gauge a
firm's size, complexity, and general market activities. Broker-
dealers outside of the group discussion and service bureaus were
asked for specific cost information that related to their regulatory
data reporting costs; most broker-dealers and some service bureaus
shared general estimates, particularly of staffing levels, and
provided information on cost drivers and obstacles that firms face
in accomplishing their regulatory data reporting, particularly
challenges that they face in implementing changes to these
requirements. Most, but not all, firms participating in discussions
with Commission staff discussed OATS as their most challenging data
reporting requirement. Some firms named LOPR and EBS as additional
sources of regular challenges and significant costs. It is our
understanding from these discussions, that some data reporting
requirements, such as Rule 605 and Rule 606 reporting, are nearly
always outsourced.
\881\ See infra note 882.
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The Plan presents cost estimates for large broker-dealers' current
regulatory data reporting costs and costs they would incur to implement
and maintain CAT Data reporting. The Plan estimates that an OATS-
reporting large broker-dealer has current data reporting costs of $8.7
million per year.\882\ A non-OATS reporting large broker-dealer is
estimated to spend approximately $1.4 million annually.\883\ The Plan
estimates that OATS-reporting large broker-dealers would spend
approximately $7.2 million to implement CAT Data reporting, and $4.8
million annually for ongoing costs.\884\ For non-OATS reporting large
broker-dealers, the Plan estimates $3.9 million in implementation costs
and $3.2 million in annual ongoing costs.\885\ According to the Plan,
the magnitude of each of these cost estimates is primarily driven by
FTE costs.
---------------------------------------------------------------------------
\882\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.(7)(b)(ii)(C), Table 3. The $8.7 million figure was calculated by
summing the average hardware/software cost, third party/outsourcing
cost, and full-time employee costs using the Commission's estimated
cost per employee of $424,350.
\883\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.(7)(b)(ii)(C), Table 4. The $1.4 million figure was calculated by
summing the average hardware/software cost, third party/outsourcing
cost, and full-time employee costs using the Commission's estimated
cost per employee of $424,350.
\884\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.(7)(b)(iii)(C)(2)a., Table 9; and at Appendix C, Section
B.(7)(b)(iii)(C)(2)b., Table 15.
\885\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.(7)(b)(iii)(C)(2)a., Table 10; and at Appendix C, Section
B.(7)(b)(iii)(C)(2)b., Table 16.
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(2) Commission Cost Estimates
The Commission's broker-dealer cost estimates incorporate some
broker-dealer data from the Plan, but to address issues in the Plan's
Reporters Study data, the Commission's cost estimates also include
other data sources.\886\ As previously discussed, the Commission
preliminarily believes that the small firm cost estimates presented in
the Reporters Study are unreliable. As a result, the Commission has re-
estimated the costs that broker-dealers likely would incur for CAT
implementation and ongoing reporting. As with the Plan's cost
estimates, the Commission's re-estimation relies on classifying broker-
dealers based on whether they currently report OATS data. However, the
re-estimation further classifies broker-dealers, as in the Commission's
cost estimates presented in the Proposing Release, based on whether the
firm is likely to use a service bureau to report its regulatory data,
or, alternatively, whether the firm might choose to self-report its
regulatory data. In this updated analysis, the Commission preliminarily
estimates that the 1,800 broker-dealers expected to incur CAT reporting
obligations currently spend approximately $1.6 billion annually to
report regulatory data.\887\ If the CAT NMS Plan is
[[Page 30715]]
approved, the Commission preliminarily believes that these broker-
dealers would incur approximately $2.2 billion in implementation costs
and $1.5 billion in ongoing data reporting costs.\888\
---------------------------------------------------------------------------
\886\ Discussions below present information on data obtained
from FINRA and gleaned from discussions with broker-dealers and
service bureaus arranged by FIF and staff. See supra notes 880 and
899.
\887\ To the extent that the CAT NMS Plan underestimates the
number of broker-dealers that would incur CAT reporting obligations,
the Commission's updated estimates understate the actual costs
Reporters would face if the CAT NMS Plan is approved.
\888\ These figures cover only broker-dealer costs. Industry-
wide costs are summarized below in Section IV.F.2.
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The Commission preliminarily believes classifying broker-dealers
based on their manner of reporting provides a more accurate estimate of
the costs firms will incur because, as noted below, costs differ based
on whether the firm insources or outsources reporting responsibilities
and insourcing/outsourcing does not necessarily correlate with firm
size. Accordingly, the Commission begins its estimation of costs using
the number of OATS Reportable Order Events (``ROEs'') reported by firms
that report to OATS. The Commission preliminarily believes that because
OATS reportable events, such as order originations, routes, and
executions are also CAT Reportable Events, these two measures are
likely to be highly correlated, making the number of OATS records a
proxy for the anticipated level of CAT reporting.\889\ Based on
discussions with broker dealers and service providers, however, the
Commission preliminarily believes that firms that report high numbers
of OATS ROEs decide to either self-report their regulatory data or
outsource their regulatory data reporting based on a number of
criteria, including potential costs.\890\ Thus, simply using the number
of OATS ROEs as a proxy for firm size may not provide an accurate
picture of the reporting costs for such firms. As a result, the
Commission goes a step further in its estimation of costs by segmenting
firms into two groups--those that insource and those that outsource
their regulatory data reporting--and estimates costs separately for
each group. Empirical evidence supporting this approach is detailed
further below.\891\
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\889\ In other words, the Commission preliminarily believes that
the higher the number of OATS ROEs reported, the higher the
anticipated number of CAT records to report. As noted below,
however, the Commission anticipates that the number of CAT records
would exceed the number of OATS ROEs.
\890\ As explained further below, the Commission believes that
firms reporting relatively few OATS ROEs would be unlikely to have
the infrastructure and specialized employees necessary to insource
regulatory data reporting and would almost certainly outsource their
regulatory data reporting functions.
\891\ The Commission in its cost calculation uses the number of
OATS ROEs as a measure of firm size, rather than traditional
measures of firm size based on a single metric, such as capital
level, or OTC dollar volume. The Commission preliminarily believes
that the use of OATS ROEs provides a more accurate predictor of firm
reporting behavior. Data provided by FINRA, for example, reveals
that some firms with extremely high levels of OATS reporting
activity have relatively low capital levels; furthermore, many firms
that report exceptionally high numbers of OATS ROEs have no OTC
dollar-volume. See infra note 893.
---------------------------------------------------------------------------
The Plan also separates industry costs of current OATS reporting
firms from those that currently have no OATS reporting obligations,
recognizing that the group of non-OATS reporting firms are diverse in
size and scope of activities. The Commission maintains this approach in
its re-estimation, as firms that do not currently report to OATS would
face a different range of costs to implement and maintain CAT reporting
because firms that currently do not report to OATS may have little to
no regulatory data infrastructure in place. Broker-dealers that do not
currently report to OATS may have higher or lower costs than firms that
do report to OATS, depending on whether they do not report because of
SRO membership status or lack of equity market activity or because of
size and scope of activity within equity markets. For example, an
electronic liquidity provider (``ELP'') may trade extensively both on
and off-exchange, yet not report to OATS because it is not a FINRA
member; such a firm could incur high data reporting costs under CAT
because it has a high volume of records to report. Conversely, a small
equity trading firm might be excluded or exempted from OATS reporting
due to its size and scope of activities; such a firm could have
relatively low CAT reporting costs, although still higher than its
existing regulatory reporting costs, because it has few Reportable
Events and is assumed to outsource its reporting responsibilities.
Recognizing this diversity in non-OATS firms, the Commission's re-
estimation anticipates a large range of firm activity levels in non-
OATS CAT reporters and treats them differently when estimating their
costs.\892\ This is discussed further below.
---------------------------------------------------------------------------
\892\ The Commission's re-estimation of costs assumes that firms
that are currently excluded or exempted from OATS reporting are
Outsourcers. By definition, OATS-reporting Outsourcers report fewer
than 350,000 OATS ROEs per month. However, firms that are not FINRA
members are not assumed to be Outsourcers; many of these firms are
in the business of proprietary trading as ELPs or are Options Market
Makers, which are assumed to be typical of large non-OATS reporters
discussed in the Plan. The identification of these firms and their
estimated costs of CAT reporting are discussed further in Section
IV.F.1.c(2)B.i, infra.
---------------------------------------------------------------------------
In sum, the framework for the Commission's re-estimation is as
follows. First, the Commission identifies those OATS-reporting firms
that insource (``Insourcers'') and those that outsource based on an
analysis of the number of OATS reporting ROEs combined with specific
data provided by FINRA on how firms report. Furthermore, the Commission
identifies firms that do not currently report to OATS but are likely to
insource based on their expected activity level by identifying Options
Market Makers and ELPs. Based on that analysis, the Commission
preliminarily estimates that there are 126 OATS-reporting Insourcers
and 45 non-OATS reporting Insourcers; these estimates are discussed
further below. The Commission's re-estimation classifies the remaining
1,629 broker-dealers that the Plan anticipates would have CAT Data
reporting obligations as ``Outsourcers,'' based on outsourcing
practices observed in data obtained from FINRA and discussed further
below. The Commission preliminarily believes that most of these firms
would accomplish their CAT Data reporting through a service bureau.
Next, to determine costs for Insourcers, the Commission relies upon
cost estimates for firms classified as ``large'' in the Reporters
Study. For Outsourcers, the Commission uses a model of ongoing
outsourcing costs (``Outsourcing Cost Model'') to estimate both current
regulatory data reporting costs and CAT-related data reporting costs
Outsourcers would incur if the CAT NMS Plan were approved.
A. Broker-Dealer Reporting Practices
Although the Commission's analysis segregates broker-dealers into
two groups (Insourcers and Outsourcers), within those groups, broker-
dealer data reporting methods currently vary widely across firms, and
these varied methods affect the data reporting costs that broker-
dealers incur. As discussed previously, depending on the business in
which broker-dealers participate, broker-dealers can have a wide range
of reporting responsibilities.
There are two primary methods by which broker-dealers accomplish
data reporting: Insourcing, where the firm reports data to regulators
directly; and outsourcing, where a third-party service provider
performs the data reporting, usually as part of a service agreement
that includes other services. Firms that outsource retain
responsibility for complying with rules related to outsourced activity.
Based on data from FINRA and conversations with market participants,
the Commission preliminarily believes that the vast majority of broker-
dealers outsource most of their regulatory data reporting
[[Page 30716]]
functions to third-party firms. Data provided by FINRA shows that 932
broker-dealers reported at least one OATS ROE between June 15 and July
10, 2015.\893\ Of these 932 firms, 799 reported at least 90% of their
OATS ROEs through a service bureau. Broker-dealers generally used a
single service bureau (497 firms) to report OATS, but some broker-
dealers used multiple service bureaus (up to 9 service bureaus).
---------------------------------------------------------------------------
\893\ The Commission analyzed data on broker-dealer OATS
reporting received from FINRA. This data source included the number
of OATS ROEs reported by each individual broker-dealer, as well as
counts of how many ROEs were reported by the firm directly and how
many ROEs were reported through service bureaus, and the number of
service bureaus that reported data for the firm. The dataset
includes the firms' minimum net capital required and actual net
capital as well as the number of registered persons associated with
the firm. Factors that affect broker-dealers' insourcing/outsourcing
decision are discussed below. Because market activity is highly
correlated with volatility, this four-week period was chosen to have
a typical level of volatility (as measured by VIX level) for the
period September 16, 2010 through September 15, 2015.
---------------------------------------------------------------------------
Often, service bureaus bundle regulatory data reporting services
with an order-handling system service that provides broker-dealers with
market access and order routing capabilities. Sometimes regulatory data
reporting services are bundled with trade clearing services. A broker-
dealer's decision to insource/outsource these functions and services
can be complex, and different broker-dealers reach different solutions
based on their business characteristics. To illustrate, some broker-
dealers self-clear trades but outsource regulatory data reporting
functions; some broker-dealers have proprietary order handling systems,
self-clear trades, and outsource regulatory data reporting functions.
Other broker-dealers outsource order-handling, outsource clearing
trades, and self-report regulatory data. The most common insource/
outsource service configuration, however, for all but the most active-
in-the-market broker-dealers is to use one or more service bureaus to
handle all of these functions.
In most, but not all, cases, service bureaus host their client
broker-dealer's order-handling system on the service bureau's servers
while the broker-dealer has software serving as a ``front end'' for
this system running on the broker-dealers' local IT infrastructure. For
broker-dealers whose order-handling systems are thus hosted on their
service bureau's servers, their service bureaus would handle many
elements of CAT implementation, including clock synchronization. These
broker-dealers would still incur some CAT implementation costs because
some CAT Data, such as Customer information (including PII), is likely
to reside outside of the broker-dealer's order handling system;
consequently, such broker-dealers would need to develop technical and
regulatory infrastructure to provide such CAT Data to its service
bureaus. Further, broker-dealers that outsource could still need to
adapt their in-house software systems to address order-management
system changes. In addition to the resources needed to reprogram the
system, any order-handling system change is likely to require
significant staff training. Furthermore, broker-dealers that outsource
would need to update their internal monitoring of their service
bureau's reporting to ensure it meets the requirements of the Plan.
In discussions arranged by FIF, broker-dealers cited a number of
factors that influence a broker-dealer's decision on whether to handle
regulatory data reporting in-house. Generally, smaller broker-dealers
(with relatively few registered persons and limited capital) do not
have the business volume required to support the IT infrastructure and
specialized staff that is necessary to perform in-house regulatory data
reporting; these broker-dealers may have no business choice but to rely
upon third-party service providers to provide order handling and market
connectivity, as well as clearing services.\894\ For larger broker-
dealers, outsourcing is more likely to be a discretionary business
decision. In discussions with staff, larger broker-dealers cited a
number of reasons to outsource. First, it may be a strategic choice;
some broker-dealers view regulatory data reporting as a function that
offers no competitive advantages and a costly distraction from other
business activities, as long as an alternative solution satisfies
reporting requirements. For these firms, compliance might be achieved
at a lower-cost in-house, but the firms prefer to outsource the data
reporting function to focus key resources on business functions.
Second, some broker-dealers outsource these functions to reduce costs
associated with demonstrating regulatory compliance. Multiple broker-
dealers stated that using a regulatory reporting service that was
familiar to regulators allowed more efficient regulatory examinations,
because an in-house regulatory reporting system might require more
staff time invested in facilitating examinations and demonstrating
compliance. Third, some broker-dealers cited that keeping current with
regulatory requirements drove their decision to outsource. These
broker-dealers may have insourced initially, but they relayed that over
time they experienced accelerating regulatory rule changes, which led
to an escalation in their compliance costs. For these firms, the pace
of regulatory rule changes drove the decision to outsource where they
had at one time insourced, because the firm could fulfill its
regulatory responsibilities at a lower cost by outsourcing and
monitoring the service bureau's compliance.\895\
---------------------------------------------------------------------------
\894\ In conversations with market participants, several broker-
dealers suggested that for very small firms, establishing these
service bureau relationships could be difficult. These firms might
``piggy back'' on another broker-dealer's infrastructure,
essentially relying on them to act as an introducing broker. This
would generally add another cost layer for these very small firms
but could be more cost effective than establishing stand-alone
service bureau relationships.
\895\ The Commission notes that an Industry Member CAT Reporter
remains responsible for compliance with the requirements of the CAT
NMS Plan and Rule 613, as reflected in the Compliance Rule of the
SRO(s) of which it is a member, regardless of whether it has
outsourced some or all of its regulatory data reporting functions to
a third party.
---------------------------------------------------------------------------
On the other hand, some broker-dealers choose to insource their
regulatory data reporting functions. In discussions arranged by FIF,
broker-dealers cited a number of reasons supporting their decision to
self-report. First, some broker-dealers cited ancillary benefits to
constructing the IT infrastructure necessary to accomplish their
regulatory data reporting. Data collected in a central location for
regulatory data reporting and the software necessary to manipulate the
regulatory data facilitates self-monitoring and business reporting,
providing other benefits to the firm. Second, some broker-dealers cited
protecting their proprietary strategies as a motivator to self-report
regulatory data. These broker-dealers felt that sharing their trading
data with a service bureau was potentially too revealing of their
proprietary trading strategies. Third, some broker-dealers cited
operational complexity as a driver of their insourcing decision. For
these very large broker-dealers that traded in a wide range of assets,
outsourcing would involve multiple service provider contracts. At least
one broker-dealer stated that it did not believe service bureaus could
meet all of its requirements due to its complexity. Finally, while some
broker-dealers preferred to outsource to reduce the costs of
demonstrating compliance, others stated that outsourcing would increase
compliance costs because they could not conduct their own compliance
checks to ensure the reports comply with relevant regulations.
[[Page 30717]]
Current costs of outsourcing regulatory data reporting vary widely
across broker-dealers. Whether data reporting is provided on behalf of
a broker-dealer by the provider of an order-management system or
another third-party firm, a broker-dealer generally enters into long-
term agreements with its service provider to obtain a bundle of
services that includes regulatory data reporting, and costs to change
service bureaus are high. Furthermore, based on discussions with
service providers, the Commission understands that switching service
bureaus can be costly and involve complex onboarding processes and
requirements, and that systems between service bureaus may be
disparate; furthermore, changing service bureaus may require different
or updated client documentation.\896\ The Commission preliminarily
believes that annual costs for provision of an order-handling system
(including market connectivity, routing and regulatory data reporting)
range from $50,000 to $180,000 annually for very small broker-dealers.
Costs for very large broker-dealers that outsource these functions
begin at $1 million to 2.4 million annually.\897\
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\896\ See Section IV.G.1.d, infra, for a discussion of the
potential effects of the Plan on the market to report regulatory
data.
\897\ These estimates are based on Staff discussions with
service bureaus that were arranged by FIF. See supra note 895 and
accompanying text. The $1 million per year figure contemplated a
very large broker-dealer that provided its own order management
system and market connectivity, so it likely represents a rough
estimate of the regulatory data reporting costs of a very large
firm. Because service bureaus did not provide an OATS activity level
corresponding to ``very large,'' the Commission relies on an
analysis of FINRA data on OATS reporting to calibrate its definition
of ``very large'' in terms of OATS activity level and seeks comment
on what activity level should correspond to cost estimates for
``very large'' broker-dealers. The Commission notes that because
there are relatively few broker-dealers that report at medium
activity levels, the Commission's estimation of outsourcing costs is
not particularly sensitive to this definition because most broker-
dealers whose costs are estimated using the Outsourcing Cost Model
have very low OATS reporting levels. Finally, estimates of total
reporting costs include provision of an order-management system and
market connectivity.
---------------------------------------------------------------------------
For broker-dealers that perform regulatory data reporting in-house,
implementation costs are likely to vary widely. Some very large broker-
dealers that self-report regulatory data have a centralized IT
infrastructure and trade in relatively few asset classes. Some of these
broker-dealers carry no customer accounts, simplifying their regulatory
data reporting obligations. The Commission preliminarily believes that
such broker-dealers could incur relatively low CAT implementation costs
because they have a centralized IT infrastructure that captures all
broker-dealer activity and specialized personnel who are dedicated to
broker-dealer-wide data reporting. At the other end of the spectrum,
large broker-dealers may be very complex, facilitating complex multi-
leg transactions and operating within a non-centralized structure.
These broker-dealers would be likely to experience CAT implementation
costs far higher than broker-dealers with less complex structures for
several reasons. First, some of these broker-dealers do not have a
centralized IT infrastructure; instead, orders could originate from
many locations in the broker-dealer and may be handled by diverse
legacy systems, each of which the broker-dealer would need to adapt for
CAT Data reporting.\898\ Second, broker-dealers that accommodate more
complex transactions that involve multiple asset classes would likely
need to invest more time in understanding new regulatory requirements.
In discussions with market participants, several broker-dealers noted,
among other concerns, that determining the correct regulatory treatment
for unusual trades can be a significant cost-driver in implementing
regulatory rule changes and can delay implementation of system changes
or precipitate a second round of changes once regulatory treatment of
these trades is clarified. Third, broker-dealers that lack a
centralized IT infrastructure would likely incur higher costs to comply
with clock synchronization requirements because more servers may be
handling orders than in firms with a more centralized IT
infrastructure.
---------------------------------------------------------------------------
\898\ In discussions with market participants, some broker-
dealers indicated that they operate more than a dozen instances of a
third-party's order handling system, suggesting they originate
orders at more than a dozen places within the broker-dealer, yet
they handle data reporting in-house. Firms such as these are likely
to incur far higher costs to implement CAT compared to broker-
dealers with a centralized IT infrastructure and fewer legacy
systems because there are more systems that require changes to
comply with new data reporting requirements.
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B. Re-Estimation
i. Count of Firms Likely To Rely Upon Service Bureaus for Data
Reporting
To separately examine the costs to broker-dealers that outsource
and to aggregate those costs across all broker-dealers, Commission
Staff first established a count of CAT Reporters likely to outsource
their regulatory data reporting functions. For this, the Commission
analyzed data provided by FINRA.\899\
---------------------------------------------------------------------------
\899\ See supra note 893 and accompanying text.
---------------------------------------------------------------------------
The FINRA data allows the Commission to examine how broker-dealers'
current outsourcing activities vary with the number of ROEs reported to
OATS. Figure 1 shows the percentage of OATS ROEs that are self-reported
for five size categories of broker-dealers with the following OATS
reporting activity levels for a four-week period from June 15-July 10,
2015: More than 1 billion records; 1 million to 1 billion records;
350,000 to 1 million records; 100,000 to 350,000 records; and 100,000
records or fewer.\900\ The bars for each category represent the
percentage of total OATS ROEs reported by broker-dealers in the
category that were reported directly by the broker-dealers.
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\900\ The group that reports one billion records or more
comprises 77.90% of OATS records; the group that reports one million
records to one billion comprises an additional 22.05% of OATS
records. The remaining three groups comprise just 0.05% of all OATS
records. Overall, firms self-report 65.44% of OATS ROEs.
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[[Page 30718]]
[GRAPHIC] [TIFF OMITTED] TN17MY16.329
Based on this analysis of FINRA data, the Commission preliminarily
believes that the 126 broker-dealers that reported more than 350,000
OATS ROEs between June 15 and July 10, 2015 make the insourcing-
outsourcing decision strategically based on the broker-dealer's
characteristics and preferences, while the remaining OATS reporters are
likely to utilize a service bureau to accomplish their regulatory data
reporting.\901\ The categories of broker-dealers assumed to outsource
their data reporting are marked with an asterisk (*) in Figure 1.
---------------------------------------------------------------------------
\901\ The Commission preliminarily believes this decision is
strategic and discretionary because FINRA data reveals that while
many broker-dealers at these activity levels self-report most or all
of their regulatory data, other broker-dealers outsource most or all
of their regulatory reporting at these activity levels. At lower
activity levels, most, but not all, broker-dealers outsource most if
not all of their regulatory data reporting. The Commission is
cognizant that some broker-dealers reporting fewer than 350,000 OATS
ROEs per month can and do opt to self-report their regulatory data.
However, based on conversations with broker-dealers, the Commission
preliminarily believes that most broker-dealers at these activity
levels do not have the infrastructure and specialized staff that
would be required to report directly to the Central Repository, and
electing to self-report would be cost-prohibitive in most but not
all cases. See Section IV.F.1.c(2)A, supra.
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As seen in Figure 1, broker-dealers in the highest OATS-reporting
category insourced reporting for more than 60% of the OATS ROEs
reported. More specifically, the FINRA data shows that 16 broker-
dealers reported more than a billion OATS ROEs each between June 15 and
July 10, 2015; most of these broker-dealers (11) self-reported nearly
all of their regulatory data, but 3 used service bureaus for 100% of
their OATS reporting.
Figure 1 also shows that broker-dealers that report between 1
million and 1 billion OATS ROEs during the four-week period insourced
reporting for more than 70% of the OATS ROEs they reported in
aggregate. Thirty-six of these 89 broker-dealers used service bureaus
to report at least 90% of their OATS data while 42 of these 89 broker-
dealers self-reported over 99% of their regulatory data.
For the 21 broker-dealers that reported more than 350,000 but fewer
than 1 million OATS ROEs during the sample period, Figure 1 shows that
they insource approximately 27% of their aggregate OATS ROEs reporting.
Thirteen of these broker-dealers use service bureaus for more than 99%
of their OATS reporting while 7 of these 21 broker-dealers self-
reported more than 98% of their OATS data.
For the 806 broker-dealers that reported fewer than 350,000 OATS
ROEs during the sample period, approximately 88.9% of those OATS ROEs
were reported through service bureaus, with 730 broker-dealers
reporting more than 99% of their OATS ROEs through one or more service
bureaus.\902\ These broker-dealers are represented in the two right-
most bars in Figure 1 that are identified with asterisks (*) in their
labels. Because of the extensive use of service bureaus in these
categories of broker-dealers, the Commission assumes that these broker-
dealers are likely to use service bureaus to accomplish their CAT Data
reporting.
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\902\ Although most of these broker-dealers report nearly all of
their ROEs through a service bureau, there are broker-dealers, both
large and small, that self-report nearly all of their OATS data at
all activity levels, including a broker-dealer that self-reported
two OATS ROEs during the sample. Despite this variation, the
Commission believes that its assumptions regarding which firms are
likely to outsource and which firms have discretion are appropriate
because (1) small firms that insource likely do so because it is
less costly so the assumption simplifies the analysis and
overestimates costs and (2) the cost information for the other firms
already accounts for both insourcing and outsourcing.
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ii. Estimation of Outsourcing Costs
The Commission has estimated ongoing costs for outsourcing firms
using a model based on data gleaned from discussions with service
bureaus and broker-dealers and implementation costs using information
learned in conversations with industry.\903\ Service bureaus that
provide order-handling systems, market connectivity and regulatory data
reporting services estimated that a very small broker-dealer was likely
to currently spend $50,000-$180,000 per year for these services; they
suggested that current annual costs for very large broker-dealers would
likely be $1,000,000-$2,400,000 but could be greater in some
cases.\904\ The Commission assumes that a very small broker-dealer
would report a single OATS ROE per month and a very large broker-dealer
would report 100 million OATS ROEs per month.\905\
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\903\ See supra note 880.
\904\ Estimates are based on FIF-arranged conversations with
service bureaus. See supra note 880.
\905\ The Commission preliminarily believes that firms that
report more than 350,000 OATS ROEs per month outsource on a
discretionary basis. If the estimate of activity level for very
large firms is too large (100 million ROEs is used in the model
estimation), the Commission's model would underestimate the costs of
all firms that report fewer than 350,000 OATS ROEs per month
currently. The Commission preliminarily believes the 100 million
ROEs per year size estimate to be reliable because although most
firms at activity levels between 40 million and 300 million OATS
ROEs (15 firms) self-report, several use service bureaus.
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[[Page 30719]]
[GRAPHIC] [TIFF OMITTED] TN17MY16.330
Based on discussions with market participants, the Commission
assumes that the cost function for outsourcing is concave.\906\ This
type of function is appropriate when costs increase as activity level
increases, but the cost per unit of activity (e.g., cost per report)
declines as activity increases. Volume discounts can create such cost
functions. Alternatively, if the Commission estimates outsourcing costs
as a linear function using the two point-estimates (very small firms
and very large firms) obtained from service bureaus, that outsourcing
cost model would underestimate the costs of broker-dealers that are
neither very large nor very small due to the concavity of the function.
As shown in Figure 2, a concave function is greater than the linear
function that connects its endpoints. To illustrate the underestimation
concern, if the estimated pricing function was a straight line but the
actual pricing function was concave, the estimates would be too low.
Lacking data on outsourcing costs faced by broker-dealers with activity
levels that are neither very small nor very large, which would assist
the Commission in estimating the degree of concavity of the pricing
function, the Commission's estimation assumes that service bureau
pricing functions are similar in concavity to equity exchange pricing
functions.\907\
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\906\ The Commission preliminarily believes that service bureau
pricing functions are concave based on discussions with service
bureaus arranged by FIF. See supra note 897.
\907\ The Commission relies on exchange pricing functions
because the data is publicly available and because a broker-dealer's
activity level on exchanges is correlated with the quantity of
regulatory data it generates. If the pricing function for service
bureau services is more concave than exchange pricing functions, the
Commission's preliminary model would underestimate costs for broker-
dealers that are neither very small nor very large because an
increase in concavity would increase the distance between the
concave and linear functions in Figure 2.
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The Commission relies on a schedule of average charges to access
liquidity and rebates to provide liquidity from four non-inverted
exchanges to estimate the concavity of the exchange pricing function,
which the Commission uses to approximate the concavity of the
outsourcing cost model.\908\ On such exchanges, the party receiving
liquidity in the transaction generally pays a fixed fee to do so; the
party providing liquidity receives a rebate from the exchange. This
rebate often marginally increases with the market participant's
aggregate volume on the exchange.\909\ For liquidity providing firms,
this pricing scheme would imply a concave function of the cost
differential between taking and providing liquidity, which informs the
Commission's estimation of the degree of concavity of the outsourcing
cost model. The Commission preliminarily believes that estimating the
shape of the function \910\ using exchange pricing functions is a
reasonable approach because the same
[[Page 30720]]
activities that determine a broker-dealer's access fees on exchanges--
such as executing orders and the activities such as order submission
that are requisite to those executions--would affect the broker-
dealer's impact on a service bureau's infrastructure and thus the fee
that a service bureau is likely to charge to provide services to the
broker-dealer.
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\908\ On many exchanges, the party posting a resting order earns
a rebate when his order is executed. His counterparty, whose order
immediately executes, pays a fee to the exchange, which exceeds the
rebate the liquidity-providing party earned. The difference between
the rebate and the fee represents the cost a market participant
would incur to fill a resting order on the exchange, then
immediately trade out of the position--a so-called ``round-trip''
cost. The magnitude of this round-trip cost is often a function of
the market participant's trading activity on the exchange, with more
active traders paying lower round-trip costs. On ``inverted''
exchanges, the party with the resting order pays a fee while her
counterparty that receives immediate execution earns a rebate. The
Commission's estimate of concavity relies on data from exchanges
that do not feature inverted pricing.
The Commission obtained public fee schedule data from Web sites
for NASDAQ, PSX, NYSE, and ARCA during October, 2015. For NASDAQ,
the differential between access fees and liquidity rebates was
calculated using the universal ``take fee,'' and rebates were for
shares trading at greater than $1.00 per share (https://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2. For PSX,
calculations used the Tape C remove charge less rebate to add
displayed liquidity (https://www.nasdaqtrader.com/Trader.aspx?id=PSX_Pricing). For NYSE, calculations used the
``Providing Tier 3/2/1'' rebates versus the universal ``take fee''
(NYSE Trading Fees). For ARCA, calculations used charges and rebates
for midpoint passive liquidity orders available at https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/NYSE_Arca_Marketplace_Fees.pdf.
\909\ See supra note 908 for examples of exchange pricing
schedules.
\910\ This estimation affects the shape of the function, and
thus the relative prices that are estimated for each broker-dealer;
the absolute level of prices is determined through the function's
calibration, which is described below.
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The Commission's estimation of the outsourcing cost model begins
with construction of a tiered function based on the exchange pricing
function; the incorporation of the exchange pricing function is the
source of the concavity in the model.\911\ The Commission's estimation
of exchange pricing assumes four activity level categories.\912\ The
Commission preliminarily mapped OATS reporting activity levels to
exchange fee break points, with the assumptions that only a very small
minority of firms would qualify for the lowest-fee tier of services and
all of the firms that reported so few OATS ROEs to be assumed to be
Outsourcers would be at the highest-cost tier of service.\913\
Consequently, the Commission assumed the first fee break-point to be
350,000 OATS messages per month. A firm with 1 million messages per
month is assumed to qualify for the third pricing tier. To qualify for
the most favorable pricing tier, a firm would need to report more than
100 million OATS messages per month. The model is fitted by adding a
constant to the implied cost of message traffic to bring firms with a
single OATS ROE to the minimum $50,000 annual fee discussed by service
bureaus. The fee for very large firms (for purposes of this model, 100
million plus records per month) is calibrated by multiplying the
estimated exchange fee tiered function by a constant scale factor of
30. With these adjustments, the tiered function implies a firm with
20,000 OATS ROEs per month would incur a service bureau fee of $50,705
annually; a firm with 100 million OATS ROEs per month would incur a
service bureau fee of $1.175 million annually; and a firm with 1
billion OATS ROEs per month firm would incur a service bureau fee of
$11.3 million annually.\914\
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\911\ A tiered function often looks like a set of steps with
points of discontinuity where the function appears to suddenly move
up or down. Often, a tiered function's behavior is determined by the
range of its independent variable (input value). For example, a firm
that charges $1 per unit for orders of 100 units or less, or $.80
per unit for orders of more than 100 units prices according to a
step function, with the number of units ordered being the
independent variable. On exchanges, the round trip cost (access fee
less rebate) is often a step function based on the firm's activity
level during a given calendar period.
\912\ The Commission chose four tiers to strike a balance
between incorporating as much information from exchange pricing
models and having to extrapolate information from them. NASDAQ and
PSX have five activity level tiers, while NYSE and ARCA have three
activity level tiers. Building a model with only three tiers would
ignore potentially significant information from NASDAQ and PSX while
building a model with five tiers would require extrapolating
information on nonexistent tiers on NYSE and ARCA, which adds
imprecision to the function. For NASDAQ and PSX, the Commission used
prices for the four most active tiers in the analysis; for NYSE and
ARCA, the Commission used all three, with the middle activity level
assumed constant over the two middle activity tiers in the
outsourcing cost model. The aggregate exchange price function
averages prices on those four exchanges.
\913\ The Commission preliminarily believes that this is a
conservative assumption because all of the firms assumed to be
outsourcing are assumed to be at the highest priced service level on
a per record reported basis. This causes the Commission's estimate
of their costs to be higher than other possible assumptions.
\914\ Estimates are outputs of the calibrated step function
based on exchange pricing. Calculations are as follows: Outsourcing
Cost = Fixed Fee ($50,000) + Monthly OATS ROEs x Fee per ROE.
$50,705 = $50,000 + 20,000 x $0.03525; $1.175 million = $50,000 +
100MM x $0.01125; $11.3MM = $50,000 + 1B x $0.01125.
---------------------------------------------------------------------------
The final step in estimating the Outsourcing Cost Model is to
smooth the tiered function by fitting it to a polynomial. As discussed
previously, tiered functions are not continuous; the behavior of the
function can change dramatically at a discontinuity, such as happens
when moving from one activity level category to another. In the earlier
illustrative example, a vendor offered pricing that would be
characterized by a tiered function, in which the firm charges $1 per
unit for orders of 100 units or less, or $.80 per unit for orders up to
400 units. In this example, a purchase of 100 units is more expensive
than a purchase of 120 units.\915\ On exchanges, the pricing
discontinuities may be acceptable to broker-dealers because the broker-
dealers can more easily estimate a range of volume rather than actual
volume, and thus pricing discontinuities may allow the broker-dealers
to better forecast their expected exchange fees based on those volume
ranges. For the Outsourcing Cost Model, however, such discontinuities
are undesirable because service bureaus negotiate the contract with
each customer individually and contracts generally cover a period of
several years. Consequently, service providers provide custom
quotations in consideration of the firm's business activities and
likely capacity impact upon the provider's infrastructure. The
Commission preliminarily believes that there are unlikely to be
instances in which a service bureau's costs to service a customer would
decrease if the customer were to become more active, and because the
contract has a fixed cost, there is unlikely to be incentives to price
with a tiered function to ease billing. To smooth the Outsourcing Cost
Model, the Commission estimates a second degree polynomial to points
imputed across the tiered function.\916\ This step essentially involves
finding a smooth curve that closely tracks the tiered function, but
smoothes its discontinuities.
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\915\ In this illustrative example, 100 units would cost $100
(100 units x $1 per unit), while 120 units would cost $96 (120 units
x $.80).
\916\ A first degree polynomial is linear; a second-degree
polynomial includes a term raised to the power of two and defines a
quadratic function. The Commission did not consider higher degree
polynomials because they include inflection points, which would be
undesirable in this model because there is unlikely to be a range in
which costs per unit would be expected to increase with volume.
Quadratic functions are characterized by curves with a single
minimum or maximum and include concave curves that would be typical
of cost curves with volume discounts. The estimated functional form
of the outsourcing cost model used in cost estimates is based on
OATS ROE activity levels expressed in millions of ROEs per month.
The estimated function is: Cost estimate = -1.3939 ROEs \2\ + 12,473
ROEs + 124,005. Model fit statistics, used to measure how well a
model fits its underlying data, are not meaningful for this model
because points used for the estimation are imputed rather than
observed. This function is not monotonic (always increasing or
always decreasing); it has a maximum at 4.47 billion ROEs. The
Commission believes this is not a serious concern because the model
is not used to provide cost estimates for firms that report more
than 350,000 OATS ROEs per month.
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[[Page 30721]]
[GRAPHIC] [TIFF OMITTED] TN17MY16.331
The model's output in Figure 3 is an estimate of a broker-dealer's
current cost to outsource data reporting services as part of a bundle
of services from a service bureau; for smaller broker-dealers, it is
assumed to include provision of an order management system and market
connectivity.\917\
---------------------------------------------------------------------------
\917\ In conversations with Commission staff, service bureaus
related that some very large clients provide their own order-
handling system and market connectivity. See supra note 880.
---------------------------------------------------------------------------
To estimate costs of CAT Data reporting by the service bureaus, the
Commission preliminarily assumes that the current pricing function
would apply for CAT Data reporting, but the costs in relation to the
number of ROEs would increase because some events that are excluded
from OATS (like proprietary orders originated by a trading desk in the
ordinary course of a member's market making activities), would be
included in CAT.\918\ The Commission estimates the expected increase in
broker-dealer data by estimating the ratio of all SRO audit trail data
(OATS and exchange data) to OATS data; with this methodology, the
Commission estimates CAT Data ROEs reported by broker-dealers would
increase from those reported to OATS by a factor of 1.9431.\919\ The
Commission preliminarily believes that the assumption of the same cost
function is reasonable for several reasons. First, the service bureaus
that provide market access for broker-dealers already process the
exchange traffic for most of these broker-dealers. Although the number
of ROEs reported would increase, service bureaus already host most of
the data that broker-dealers would report to the Central Repository.
Second, although some broker-dealers would have to establish a process
of hosting or processing their customer information at their service
bureau, many broker-dealers already do so to allow their service bureau
to prepare information for clearing.\920\
[[Page 30722]]
Consequently, most service bureaus have already established the
infrastructure to host or process customer information. Third, the Plan
requires broker-dealers to update customer information files, one of
the additional data sources that broker-dealers would need to report to
the Central Repository. While the costs of ensuring the appropriate
security could be significant, these updates occur at a much lower
frequency than the rate of a service bureau customer's market activity,
and thus such updating activity would be unlikely to provide a
technological stress on a service bureau's infrastructure.
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\918\ Although the pricing function is assumed constant, broker-
dealer costs would increase because the number of ROEs they report
through their service bureaus would increase under the Plan. It is
possible that, if the Plan is approved, data under CAT might be
reported in a form other than ROEs; however, if a ROE is equivalent
to a Reportable Event, the number of Reportable Events--regardless
of the form of the event report--would increase by approximately the
same adjustment factor.
\919\ To approximate the increase in reporting activity that
broker-dealers would likely experience if the Plan were approved,
the Commission relied on equity data from the week of September 15-
19, 2014, previously provided by FINRA. This FINRA data includes all
OATS data reported to FINRA, as well as SRO audit trail data from
all equity exchanges effecting trades that week except the Chicago
Stock Exchange. The adjustment factor was estimated by dividing the
number of ROEs in SRO audit trail data hosted by FINRA for all
exchanges and OATS, by the number of ROEs in OATS; this methodology
is equivalent to assuming that all exchange message traffic would
become reportable by broker-dealers. Because some exchange message
traffic is already reported through OATS, this is a conservative
assumption in the sense that it increases the adjustment factor and
consequently increases estimates of broker-dealer reporting costs.
To adjust for the missing exchange, data for the NASDAQ OMX BX (the
lowest volume exchange with trading volume exceeding that of the
Chicago Stock Exchange, based on trades reported through NYSE TAQ)
was double-counted in the exchange activity total. Although this
adjustment factor does not capture options data, the Commission
preliminarily believes that the underestimation is not material in
this application because the Plan assumes that Options Market Maker
quotes (the most frequent option event) would not be reported by
broker-dealers. Furthermore, the Commission notes that the largest
group of events excluded by OATS but reportable under CAT's
reporting rules (proprietary orders originated by a trading desk in
the ordinary course of a member's market making activities)
predominantly originate from insourcing firms for which the service-
bureau model does not provide estimates of reporting costs.
Consequently, the adjustment factor is likely to overestimate the
increased regulatory data volume of outsourcing firms under CAT to a
degree that should encompass the limited option activity reported by
outsourcing broker-dealers.
\920\ Broker-dealers that self-clear but rely on a service
bureau to perform their regulatory data reporting may not have
infrastructure in place to share customer information with their
service providers. However, service bureaus that provide regulatory
data reporting services would need customer information to perform
CAT reporting. The Commission preliminarily believes that service
bureaus that do not currently collect customer information but
provide regulatory data reporting services would need to change
their business processes to continue to offer regulatory data
reporting services; the Commission further assumes that the cost
estimates presented in the Vendors Study encompass the expenses
these service bureaus would incur to continue providing their
current service offerings. In discussions with service bureaus
arranged by FIF, some service bureaus that do not offer clearing
services discussed additional costs, some related to security, that
accompany hosting customer information. If these service bureaus
were to stop offering regulatory data reporting services due to
unwillingness to host customer information, their customers would be
forced to establish new service bureau relationships or undertake
self-reporting. The Commission cannot rule out that one or more
service bureaus may choose to exit the market to provide data
reporting services rather than change their business practices to
satisfy their clients' responsibilities under the Plan. Any such
event would potentially be very costly to the broker-dealer clients
of the exiting service bureaus due to the switching costs that
broker-dealers incur to change service bureaus. Such an event could
also contribute to crowded entrances problems. See infra note 934.
The Commission preliminarily believes that such service bureau exit
events are unlikely because service bureaus should be able to pass
costs associated with handling customer information on to their
clients as part of a more comprehensive bundle of services.
Furthermore, based on information from broker-dealer discussions
arranged by FIF, the Commission preliminarily believes that the
market for regulatory data reporting services is generally expanding
and the trend is for more, not less, outsourcing. Consequently, the
Commission believes that market share in this market is valuable and
existing competitors are unlikely to voluntarily exit the market
abruptly. The Commission preliminarily believes that most firms that
report fewer than 350,000 OATS ROEs per month do not self-clear;
smaller firms that do not self-clear are likely to already have
relationships with service bureaus that host their customer
information. It is possible that some of these firms have clearing
arrangements that do not include regulatory data reporting; these
firms may be forced to seek new service bureau relationships to
satisfy their CAT reporting obligations, but it is also possible
these clearing firms may either add CAT reporting as a service or
establish a relationship with a service bureau to perform the
function of providing customer information for CAT on behalf of its
clients.
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The Commission preliminarily believes this activity is unlikely to
result in a service bureau pricing structure that significantly differs
from the Commission's current outsourcing cost model. The Commission
recognizes, however, that these new data sources create implementation
costs for both broker-dealers and service bureaus, and preliminarily
believes that these costs are reflected in cost estimates provided by
service bureaus because service providers that responded to the Service
Providers Study were presumably familiar with the requirements of CAT
when they estimated the costs they could likely incur if the CAT NMS
Plan is approved. The number of ROEs broker-dealers would report would
likely increase because, for example, proprietary orders originated by
a trading desk in the ordinary course of a member's market-making
activities, currently excluded from OATS, would be included in a
broker-dealer's audit trail data under the Plan.\921\ The increase in
ROEs would drive an increase in service bureau costs that the
Commission's model anticipates for broker-dealers that would outsource
CAT Data reporting obligations.\922\ For illustration, consider two
firms: Firm A reports the median number of OATS ROEs per month in the
Outsourcers sample (1,251) and Firm B reports the maximum number of
OATS ROEs per month (348,636). After CAT implementation, the estimation
would assume that Firm A would report 2,431 ROEs of audit trail data
per month and Firm B would report 677,435 ROEs of audit trail data per
month.\923\ Using the outsourcing cost model discussed above, Firm A's
annual cost would increase from $124,021 to $124,035. Firm B's average
annual cost would increase from $128,353 to $132,454.\924\
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\921\ The Commission recognizes that OATS does not include
options market activity. Because option quotes are not reportable by
broker-dealers under the Plan, the Commission preliminarily believes
that option related events would not significantly increase the
number of events that would be included in regulatory data reporting
for broker-dealers whose costs are estimated by the Outsourcing Cost
Model. The Outsourcing Cost Model predicts costs only for broker-
dealers that the Commission expects to outsource CAT reporting
responsibilities. Because exchanges would report Options Market
Maker quotes, the Outsourcing Cost Model would not predict the costs
of reporting Options Market Maker quotes. See Exemption Order, supra
note 18, at 11857-58.
In addition, the Commission recognizes that larger and more
complex broker-dealers are likely to have significant regulatory
reporting responsibilities related to their options activities, but
the Commission preliminarily believes that these broker-dealers are
likely to be included in the broker-dealers reporting more than
350,000 OATS ROEs per month. The Commission estimates these broker-
dealers' costs using information from the Reporters Study in the
Plan as opposed to the Outsourcing Cost Model, and those cost
estimates presumably include costs related to options activity.
\922\ The Outsourcing Cost Model assumes that other CAT
reporting tasks like providing customer information to the Central
Repository are handled by the firms' service bureaus. In practice,
some Outsourcers may have a service bureau that provides an order
handling system and market connectivity, but does not currently host
broker-dealers' customer information, while another service provider
provides clearing services and hosts customer information. For
broker-dealers with multiple service provider relationships, the
clearing broker-dealer is assumed to provide services that include
providing the Central Repository with the customer information for
its broker-dealer clients. The Commission recognizes that not all
clearing firms may plan to provide this service to their customers,
and this may result in additional costs for broker-dealers that do
not have relationships with service providers that will provide all
services they need to comply with CAT, if it is approved. This is
discussed further below in Section IV.G.1.d, infra.
\923\ Firm A: 2,431 = 1,251 x 1.9431. Firm B: 677,435 = 348,636
x 1.9431.
\924\ Firm A: $124,021 = -1.3939 x (0.001251) \2\ + 12,473 x
0.001251 + 124005; $124,035 = -1.3939 x (0.002431) \2\ + 12,473 x
0.002431 + 124,005. Firm B: $128,353 = -1.3939 x (0.348636) \2\ +
12,473 x 0.348636 + 124,005; $132,454 = -1.3939 x (0.677435) \2\ +
12,473 x 0.677435 + 124,005. The Commission notes that, as set
forth, the outsourcing cost model's output is dominated by the fixed
cost of maintaining service at low reporting levels. But if the
service bureau cost model estimated a very large firm's outsourcing
cost, a very large firm's cost increase due to CAT would be far more
significant. For example, a firm that reported 1.05 billion OATS
ROEs per month would have estimated current costs of $11.7 million
annually; after CAT implementation, its costs would be estimated to
be $19.8 million. However, the Commission does not assume that firms
that report more than 350,000 OATS ROEs per month are Outsourcers
nor does the Commission assume that they are necessarily Insourcers;
instead, their costs are estimated using data from the Reporters
Study.
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Application of the model to data provided by FINRA allows the
Commission to estimate current outsourcing costs for broker-dealers, as
well as projected costs under the CAT NMS Plan.\925\ The Commission
estimates that the 806 broker-dealers that monthly each currently
report fewer than 350,000 OATS ROEs currently spend an aggregate $100.1
million on annual outsourcing costs.\926\ Under the CAT NMS Plan, the
Commission estimates these 806 broker-dealers would spend $100.2
million on annual outsourcing costs. The Commission recognizes that the
magnitude of this increase is quite small, but this is driven by the
fact that the vast majority of firms that are assumed to outsource have
very low regulatory data reporting levels currently. As mentioned
previously, the median firm in this group reports 1,251 OATS ROEs per
month; only 39 of these 806 firms currently reports more than 100,000
OATS ROEs per month. The Outsourcing Cost Model also does not include
additional staffing costs that the broker-dealer is likely to incur for
implementation and maintenance of CAT reporting; these are discussed
further below, and are the primary cost driver of costs that
Outsourcers are expected to incur if the Plan is approved. Furthermore,
the Commission is cognizant that data reporting is
[[Page 30723]]
normally part of a bundle of services provided by a service bureau;
many of those services, including the provision of market access and an
order handling system, are likely to contribute substantially to the
costs service bureaus bear to service their clients. The Commission is
cognizant that while the volume of transactions reported by broker-
dealers assumed to be Outsourcers are unlikely to dramatically increase
under CAT, the service bureaus would incur significant costs to
implement changes required by CAT reporting. Those costs are discussed
below.\927\ Assuming service bureaus pass those implementation costs on
to their broker-dealer clients eventually, the Outsourcing Cost Model
would change.\928\
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\925\ This data is described above. See supra note 893.
\926\ The average broker-dealer in this category reported 15,185
OATS ROEs from June 15-July 10, 2015; the median broker-dealer
reported 1,251 OATS ROEs. Of these broker-dealers, 39 reported more
than 100,000 OATS ROEs during the sample period.
\927\ See Section IV.F.1.d, infra.
\928\ This would constitute a transfer of costs between market
participants, but would not affect the Commission's estimate of the
total costs to industry. In particular, the Commission preliminarily
believes that if service bureaus pass their implementation costs on
to their broker-dealer clients, it would appear as higher ongoing
costs for those clients, but the overall costs would not change.
---------------------------------------------------------------------------
Firms that outsource their regulatory data reporting still incur
internal staffing costs associated with this activity. These employees
perform activities directly related to regulatory data reporting such
as answering inquiries from their service bureaus, investigating
reporting exceptions, maintaining any systems that transmit data to
their service providers, and overseeing their service bureaus' data
reporting to ensure compliance.\929\ Based on conversations with market
participants, the Commission estimates that these firms currently have
0.5 full-time employees devoted to regulatory data reporting
activities. The Commission further estimates these firms would need one
full-time employee for one year to implement CAT reporting
requirements, and 0.75 full-time employees on an ongoing basis to
maintain CAT reporting.\930\
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\929\ Other employees perform other compliance duties such as
supervising associated persons, and creating and enforcing internal
regulatory policies (e.g., personal trading, churning reviews, sales
practice reviews, SEC filings and net capital compliance). Because
these regulatory activities are not part of regulatory data
reporting directly affected by the Plan, they are not included in
activities that contribute to current regulatory data reporting
costs in the Commission's analysis.
\930\ As previously discussed, the Commission preliminarily
believes that small broker-dealer cost data in the Reporters Study
is unreliable. Based on discussions with broker-dealers, the
Commission preliminarily believes that very small broker-dealers are
unlikely to have employees entirely dedicated to regulatory data
reporting. Instead, other employees have duties that include dealing
with service bureau matters and answering regulatory inquiries. The
Commission assumes a full-time employee costs $424,350 per year. See
Section V.D.2(2)A.i, infra.
---------------------------------------------------------------------------
In addition to broker-dealers that currently report to OATS, the
Commission estimates there are 799 broker-dealers that are currently
excluded from OATS reporting rules due to firm size, or exempt because
all of their order flow is routed to a single OATS reporter, such as a
clearing broker, that would have CAT reporting responsibilities.\931\
The Commission assumes these broker-dealers would have low levels of
CAT reporting, similar to those of the typical Outsourcers that
currently report to OATS.\932\ For these firms, the Commission assumes
that under CAT they would incur the average estimated outsourcing cost
of firms that currently report fewer than 350,000 OATS ROEs per month,
which is $124,373 annually. Furthermore, because these firms have more
limited data reporting requirements than other firms, the Commission
assumes these firms currently have only 0.1 full-time employees
currently dedicated to regulatory data reporting activities. The
Commission assumes that these firms would require 2 full-time employees
for one year to implement the CAT NMS Plan and 0.75 full-time employees
annually to maintain CAT Data reporting.\933\
---------------------------------------------------------------------------
\931\ In discussions with Commission Staff, FINRA has stated
that there are currently 54 OATS-exempt broker-dealers and 691 OATS-
excluded firms. The Commission's estimate of 799 new CAT-reporting
broker-dealers is based on the counts of other broker-dealer types
(current OATS reporters, ELPs, Options Market Makers, and floor
brokers) and the 1,800 broker-dealer estimate provided in the Plan.
Based on the FINRA information on OATS-excluded or OATS-exempt
broker-dealers, there are 54 remaining broker-dealers in the 1,800
with an unknown type. The Commission preliminarily assumes that
these broker-dealers are small and new reporters, although it is
possible that they are floor brokers on exchanges other than the
CBOE (CBOE floor brokers are accounted for directly as discussed
below.) Floor brokers are assumed to have the same costs as new
reporting small firms, so there would be no impact on the
Commission's cost estimate if these firms were reclassified as
options floor brokers.
\932\ Exemption or exclusion from OATS may be based on firm size
or type of activity. Broker-dealers with exemptions or exclusions
that relate to firm size are presumably relatively inactive.
However, some firms may be exempted or excluded because they route
only to a single OATS-reporting broker-dealer; this could encompass
large firms that would be more similar to Insourcers.
\933\ The Commission assumes that these very small firms already
have established service bureau relationships to provide an order
handling system, market access, and clearing services. If any of
these firms would have to establish these relationships to comply
with CAT, they would likely face greater costs associated with
implementing these relationships. Furthermore, the Commission notes
that conversations with market participants revealed that
establishing these relationships can be difficult for very small
firms because their relatively low activity levels results in
service bureau fees that may not make the relationship economically
feasible for service providers. Faced with this constraint, some
very small firms currently resort to establishing ``piggy back''
relationships with larger broker-dealers, essentially using another
firm as its introducing broker. Such a relationship may add an
additional layer of costs to those discussed here, but such an
agreement may actually prove less costly for these small firms than
establishing the service bureau relationships assumed in the cost
estimation because the process of onboarding with a service bureau
is costly.
---------------------------------------------------------------------------
The Commission recognizes that some broker-dealers that are
categorized in its estimation as Outsourcers in fact currently self-
report their regulatory data; there are 36 firms that the Commission
categorized as Outsourcers that self-report more than 95% of their OATS
ROEs. Some of these broker-dealers could find that the costs associated
with adapting their systems to the CAT NMS Plan reporting would render
self-reporting (insourcing) CAT Data reporting infeasible or
undesirable; others could continue to self-report regulatory data. The
Commission preliminarily believes that the estimated cost of
outsourcing for these broker-dealers is reliable, but recognizes that
some of these broker-dealers could choose to self-report for other
reasons at costs that could exceed these estimates. If some of these
broker-dealers choose to outsource under CAT, these broker-dealers
would likely incur additional costs associated with establishing or re-
negotiating service bureau relationships.\934\ The Commission does
[[Page 30724]]
not have information on existing service bureau relationships for firms
that currently self-report OATS data, so cannot estimate the costs
these firms might face in aggregate. It would be, however, unlikely
that many firms of this size do not have relationships with service
bureaus that would provide this service because firms with limited OATS
reporting are unlikely to be large enough to self-clear and support the
IT infrastructure necessary to provide a proprietary order handling
system and market access.
---------------------------------------------------------------------------
\934\ In addition to the 36 broker-dealers discussed above, it
is possible that many of the 799 broker-dealers that are currently
exempt or excluded from OATS reporting may seek to establish service
bureau relationships to accomplish their regulatory reporting
required under the Plan if it were approved. It is possible that
this could precipitate a ``crowded entrances'' problem in the market
for regulatory data reporting services, in which more broker-dealers
wished to establish relationships than the market could accommodate.
As discussed previously, the onboarding process for service bureaus
is onerous and time-consuming, both for the broker-dealer and the
service bureau. If a large number of broker-dealers seek
relationships simultaneously, service bureaus might not accommodate
them in time to meet CAT reporting requirements. In such a
situation, smaller broker-dealers are more likely to fail to
establish service bureau relationships because they are presumably
less profitable for service bureaus to serve and so are likely to be
seen as lower-priority when onboarding resources are constrained.
Some small broker-dealers could be forced to establish relationships
with larger broker-dealers and rely on their infrastructure,
essentially using the larger partner as an introducing broker. This
could add an additional layer of costs for the smaller broker-
dealer. The Commission preliminarily believes that significant
crowded entrances problems with service bureaus are unlikely for two
reasons. First, in discussions with service bureaus arranged by FIF,
several service bureaus stated that onboarding resources were not
difficult to scale up. Consequently, it seems likely that service
bureaus could deploy additional onboarding resources to accommodate
new demand for their services. Second, the Commission preliminarily
believes that most of the OATS exempt or excluded broker-dealers
already have service bureau relationships which provide them with
order handling systems and market access; it is likely that these
service bureaus could add regulatory data reporting packages to
their current bundle of services. Finally, the implementation
timelines may help alleviate strained capacity because it would
allow some time for expanding onboarding capacity and new entrants
and would spread out onboarding somewhat. See Section IV.G.1.d,
infra.
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C. Aggregate Broker-Dealer Cost Estimate
The Commission's methodology to estimate costs to broker-dealers of
implementing and maintaining CAT reporting varies by the type of
broker-dealer. As discussed previously,\935\ the Commission
preliminarily believes that the survey of small broker-dealers used in
the Reporters Study is unreliable. The Commission does, however, rely
on the Reporters Study's large broker-dealer cost estimates in
estimating costs for Insourcers. Consequently, for broker-dealers that
are FINRA members, the Commission relies on the Reporters Study data to
estimate costs for broker-dealers that report more than 350,000 OATS
ROEs per month (using estimates from the Reporters Study for large,
OATS-reporting broker-dealers).\936\ For lower activity FINRA-member
broker-dealers (including those that do not currently report to OATS
due to exclusions and exemptions to OATS reporting requirements), the
Commission relies on the Outsourcing Cost Model to estimate costs for
CAT Data reporting.
---------------------------------------------------------------------------
\935\ See Section IV.F.1.c(1), supra.
\936\ The Commission's cost estimates assume that broker-dealers
that currently reporter fewer than 350,000 OATS ROEs per month are
likely to use one or more service bureaus to report their regulatory
data. This is discussed further in Section IV.F.1.c(2)B.i, supra.
---------------------------------------------------------------------------
The Commission, however, preliminarily believes that there are
three other categories of broker-dealers not reflected in the above
detailed cost estimates that do not currently report OATS data but
could be CAT Reporters. First, there are at least 14 ELPs that do not
carry customer accounts; these firms are not FINRA members and thus
have no regular OATS reporting obligations.\937\ The Commission
preliminarily believes that it is likely that these broker-dealers
already have self-reporting capabilities in place because each is a
member of an SRO that requires the ability to report OATS on request.
The second group of broker-dealers that are not encompassed by the cost
estimates of FINRA member broker-dealers discussed above are those that
make markets in options and not equities. Although not required by the
CAT NMS Plan to report their option quoting activity to the Central
Repository,\938\ these broker-dealers may have customer orders and
other activity that would cause them to incur a CAT Data reporting
obligation. Based on CBOE membership data, the Commission believes
there are 31 options market-making firms that are members of multiple
SROs but not FINRA.\939\ The third group comprises 24 broker-dealers
that have SRO memberships only with CBOE; the Commission believes this
group is comprised primarily of CBOE floor brokers and, further,
preliminarily believes these firms would incur CAT implementation and
ongoing reporting costs similar in magnitude to small equity broker-
dealers that currently have no OATS reporting responsibilities because
they would face similar tasks to implement and maintain CAT reporting.
The Commission assumes the 31 options market-making firms and 14 ELPs
would be typical of the Reporters Study's large, non-OATS reporting
firms because this group encompasses large broker-dealers that are not
FINRA members, a category that would exclude any broker-dealer that
carries customer accounts and trades in equities. For these 45 firms,
the Commission relies on cost estimates from the Reporters Study.\940\
---------------------------------------------------------------------------
\937\ The category of Insourcers that do not currently report
OATS data includes firms that have multiple SRO memberships that
exclude FINRA. This category includes Options Market Makers and at
least 14 ELPs; these are firms that carry no customer accounts and
directly route proprietary orders to Alternative Trading Systems;
further information on these firms including the methodology by
which they are identified can be found in the 15b9-1 Proposing
Release. See Proposed Amendments to Rule 15b9-1, supra note 498, at
18052. Because the Commission has identified at least 14 ELPs, it
can consider these firms separately from Options Market Makers for
analysis. However, the Commission recognizes that some firms that
are classified as Options Market Makers may actually be ELPs, if
they were not identified as ELPs previously and are members of CBOE;
because the same cost estimates are used for these groups, this
misclassification does not affect the Commission's aggregate cost
estimates for broker-dealers. The Commission recognizes that some
FINRA member firms also make markets in options; if these firms
report more than 350,000 OATS ROEs per month, the Commission's
estimate of these firms' costs would be based on the estimates for
OATS-reporting large firms based on data in the Reporters Study,
which are higher than estimates for non-OATS reporting large firms
(which include Options Market Makers that do not currently report
OATS). If FINRA member Options Market Makers report fewer than
350,000 OATS ROEs per month or are exempt or excluded from
reporting, they would be incorrectly classified as Outsourcers.
Furthermore, ELPs that were not included in the analysis for the
15b9-1 Proposing Release and are not CBOE members would be
incorrectly classified as new Outsourcers.
Most if not all ELPs have SRO memberships that require them to
report OATS data upon request. Consequently, these firms are likely
to have infrastructure in place that would reduce their
implementation costs for CAT. The Commission preliminarily believes
that this is reflected in the lower CAT implementation costs that
the Plan estimates for large firms that do not currently report
OATS; these estimates form the basis of the Commission's estimates
of costs that ELPs would face if CAT were approved.
\938\ See Section III.B.9, supra; see also Exemption Order,
supra note 18, at 11857-58.
\939\ The Commission identified 39 CBOE-member broker-dealers
that are not FINRA members, but are members of multiple SROs; 8 of
these broker-dealers were previously identified as ELPs, leaving 31
firms with multiple SRO memberships that are unlikely to be CBOE
floor brokers. These 31 firms are likely to include some ELPs. This
methodology implicitly assumes that there are no Options Market
Makers that are not members of the CBOE. Because the Commission uses
the same cost estimates for ELPs and options market making firms,
uncertainty in the classification of the 31 Non-FINRA member CBOE
member firms does not impact the Commission's cost estimates. The
Commission recognizes that Options Market Makers may be FINRA
members, but preliminarily believes these broker-dealers would be
identified as Insourcers using FINRA data discussed in Section
IV.F.1.c(2)B.i and thus would not fall under cost estimates produced
by the Outsourcing Cost Model.
\940\ The Commission recognizes that additional broker-dealers
may be members of neither FINRA nor CBOE, yet may incur CAT
reporting obligations if the Plan is approved. Indeed, the Plan
estimates that 100 CAT Reporters are not currently FINRA members
(B.7.(b)(ii)(B)(2)), while the Commission estimates 69 (24 floor
brokers, 31 Options Market Makers, and 14 ELPs). The Commission has
determined that categorizing additional broker-dealers that are
currently classified as exempt or excluded FINRA members as non-
FINRA members would not change the cost estimates because these
groups have identical estimated per-firm costs.
---------------------------------------------------------------------------
The estimated costs in the Reporters Study for non-OATS reporting
firms are lower than the Reporters Study's estimated costs for large
OATS-reporting firms; in reviewing the Reporters Study data, the
Commission considered the possibility that firms that do not currently
report OATS may systematically underestimate the costs they would incur
to initiate and maintain the type of comprehensive regulatory data
reporting that OATS entails or the CAT NMS Plan would entail. After
discussions with multiple broker-dealers, the Commission, however,
preliminarily believes that large non-OATS reporting firms would likely
have lower CAT Data reporting costs than current OATS reporting large
[[Page 30725]]
firms because large non-OATS reporting firms tend to be cutting-edge
technology firms that already have a centralized IT infrastructure;
they are unlikely to have a fragmented structure with multiple legacy
systems. A centralized IT infrastructure with cutting-edge technology
would likely simplify their implementation of the CAT NMS Plan, as
fewer of their systems would need altering and fewer servers would be
subject to clock synchronization requirements.
The Commission presents cost estimates for individual broker-
dealers in Table 7 that include estimates of current costs, CAT
implementation costs, and ongoing CAT reporting costs. In addition,
Table 7 presents cost estimates for three categories of costs:
Hardware/software; staffing; and outsourcing.\941\ Table 7 also
presents a total across these three categories.\942\ Current data
reporting cost estimates range from $167,000 annually for floor broker
and firms that are currently exempt from OATS reporting requirements to
$8.7 million annually for firms that currently report more than 350,000
OATS ROEs per month (``Insourcers''). One-time implementation costs
range from $424,000 for current OATS reporters that are assumed to
outsource (``OATS Outsourcers'') to $7.2 million for Insourcers.
Ongoing annual costs range from $443,000 annually for firms that are
assumed to outsource (OATS Outsourcers, New Outsourcers and Floor
Brokers) to $4.8 million for Insourcers.
---------------------------------------------------------------------------
\941\ The Commission preliminarily believes that ``Hardware/
Software'' costs include technology such as servers and
telecommunications infrastructure necessary to report data to the
Central Repository, as well as software that must be acquired or
costs to alter existing software. ``Staffing'' includes the costs of
employees assigned to regulatory data reporting, and includes
existing staff as well as staff that would need to be hired if the
CAT NMS Plan is approved. ``Outsourcing'' includes costs of service
bureau relationships, legal and technical consulting, as well as
other services that firms would need to acquire from service vendors
to accomplish CAT reporting.
\942\ Rounding may cause totals to vary from the sum of
individual elements in Table 7.
Table 7--Cost Estimates for Individual Broker-Dealers by Type
----------------------------------------------------------------------------------------------------------------
Costs
---------------------------------------------------------------
Broker-dealer type Hardware/
software Staffing Outsourcing Total
----------------------------------------------------------------------------------------------------------------
Current Costs:
Insourcers.................................. $720,000 $7,587,000 $400,000 $8,707,000
ELPs........................................ 3,000 1,409,000 22,000 1,433,000
Options Market Makers....................... 3,000 1,409,000 22,000 1,433,000
OATS Outsourcers \1\........................ 0 212,000 124,000 336,000
New Outsourcers \1\......................... 0 42,000 124,000 167,000
Floor Brokers \1\........................... 0 42,000 124,000 167,000
CAT Implementation:
Insourcers.................................. 750,000 6,331,000 150,000 7,231,000
ELPs........................................ 450,000 3,416,000 10,000 3,876,000
Options Market Makers....................... 450,000 3,416,000 10,000 3,876,000
OATS Outsourcers \1\........................ 0 424,000 0 424,000
New Outsourcers \1\......................... 0 849,000 0 849,000
Floor Brokers \1\........................... 0 849,000 0 849,000
CAT Ongoing:
Insourcers.................................. 380,000 4,256,000 120,000 4,756,000
ELPs........................................ 80,000 3,144,000 1,000 3,226,000
Options Market Makers....................... 80,000 3,144,000 1,000 3,226,000
OATS Outsourcers \1\........................ 0 318,000 124,000 443,000
New Outsourcers \1\......................... 0 318,000 124,000 443,000
Floor Brokers \1\........................... 0 318,000 124,000 443,000
----------------------------------------------------------------------------------------------------------------
\1\ Outsourcing costs are modelled on an individual broker-dealer basis. Category averages are presented here.
Table 8 presents aggregate total costs to broker-dealers by broker-
dealer type. The Commission estimates that broker-dealers spend
approximately $1.6 billion annually on current regulatory data
reporting activities. The Commission estimates approximate one-time
implementation costs of $2.1 billion, and annual ongoing costs of CAT
reporting of $1.5 billion. The Commission notes that estimates of
ongoing CAT reporting costs of $1.5 billion are slightly lower than
current data reporting costs of $1.6 billion. This differential is
driven by reductions in data reporting costs reported by large OATS-
reporting broker-dealers in the Reporters Study survey.\943\ The
Commission estimates that all other categories of broker-dealers would
face significant increases in annual data reporting costs.
---------------------------------------------------------------------------
\943\ In the Reporters Study, Large OATS Reporters cite average
current data reporting costs of $8.32 million and Approach 1
maintenance costs of $4.5 million annually.
Table 8--Aggregate Broker-Dealer Cost Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Costs
--------------------------------------- Individual
Broker-dealer type Hardware/ Count total Aggregate total
software Staffing Outsourcing
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current Data Reporting Costs:
Insourcers................................................ $720,000 $7,587,000 $400,000 126 $8,707,000 $1,097,130,000
ELPs...................................................... 3,000 1,409,000 22,000 14 1,433,000 20,068,000
Options Market Makers..................................... 3,000 1,409,000 22,000 31 1,433,000 44,437,000
OATS Outsourcers \1\...................................... 0 212,000 124,000 806 336,000 271,113,000
New Outsourcers \1\....................................... 0 42,000 124,000 799 167,000 133,137,000
[[Page 30726]]
Floor Brokers \1\......................................... 0 42,000 124,000 24 167,000 3,999,000
------------------------
Total................................................. ........... ........... ........... 1,800 ........... 1,569,884,000
CAT Implementation Costs:
Insourcers................................................ 750,000 6,331,000 150,000 126 7,231,000 911,144,000
ELPs...................................................... 450,000 3,416,000 10,000 14 3,876,000 54,257,000
Options Market Makers..................................... 450,000 3,416,000 10,000 31 3,876,000 120,141,000
OATS Outsourcers \1\...................................... 0 424,000 0 806 424,000 342,026,000
New Outsourcers \1\....................................... 0 849,000 0 799 849,000 678,111,000
Floor Brokers \1\......................................... 0 849,000 0 24 849,000 20,369,000
------------------------
Total................................................. ........... ........... ........... ........... ........... 2,126,048,000
CAT Ongoing Costs:
Insourcers................................................ 380,000 4,256,000 120,000 126 4,756,000 599,285,000
ELPs...................................................... 80,000 3,144,000 1,000 14 3,226,000 45,160,000
Options Market Makers..................................... 80,000 3,144,000 1,000 31 3,226,000 99,998,000
OATS Outsourcers \1\...................................... 0 318,000 124,000 806 443,000 356,764,000
New Outsourcers \1\....................................... 0 318,000 124,000 799 443,000 353,666,000
Floor Brokers \1\......................................... 0 318,000 124,000 24 443,000 10,623,000
------------------------
Total................................................. ........... ........... ........... ........... ........... 1,465,496,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Outsourcing costs are modeled on an individual broker-dealer basis. Category averages are presented here.
d. Costs to Service Bureaus
The Plan discusses costs that service bureaus would face to
implement the CAT NMS Plan and maintain ongoing CAT reporting.\944\ The
CAT NMS Plan's cost estimates for service bureaus are based on the
Participant's Costs to Vendors Study (``Vendors Study''), which
gathered data from third-party vendors.\945\ The Vendors Study
requested information from thirteen (13) service providers about their
potential costs for reporting CAT Data--five (5) service providers
responded. The CAT NMS Plan cites aggregate implementation costs of
$51.6 million to $118.2 million for service bureaus, depending on
whether Approach 1 or Approach 2 is selected, where Approach 1 would be
more costly to vendors.\946\ Aggregate ongoing annual cost estimates
ranged from $38.6 million to $48.7 million.
---------------------------------------------------------------------------
\944\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(iii)(D), Appendix C, Section B.7(b)(iv)(A)(4).
\945\ See id. at Appendix C, Section B.7(b)(i)(A)(3); Appendix
C, Section B.7(b)(iii)(D). The Commission preliminarily believes
that most if not all market participants that responded to the
Vendors Survey are service bureaus, but it is possible that some
respondents are firms providing technology rather than service
bureau services.
\946\ Approach 1 allows broker-dealers to submit data to the
Central Repository using their choice of existing industry messaging
protocols while Approach 2 would specify a pre-defined format. See
Section IV.E.1.b(3), supra.
---------------------------------------------------------------------------
The Commission preliminarily believes that costs that service
bureaus would face to implement CAT should be included as part of the
aggregate costs of CAT. While the CAT NMS Plan does not require the use
of service bureaus to report CAT Data, the Commission recognizes that
the most cost effective manner to implement the CAT NMS Plan likely
would be for most market participants to continue their current
practice of outsourcing their regulatory data reporting to one or more
service bureaus. By doing so, the roughly 1,600 broker-dealers
predicted to outsource would avoid incurring a significant fraction of
CAT implementation costs; instead, service bureaus would incur
implementation costs on their behalf. Based on conversations with
market participants, the Commission preliminarily believes that these
implementation costs are likely to pass-through to broker-dealers that
outsource data reporting, because service contracts between broker-
dealers and service bureaus are renegotiated periodically, and approval
of the CAT NMS Plan might trigger renegotiation as the bundle of
services provided would materially change. Consequently, service
bureaus likely would renegotiate their client agreements during the
period of implementation of the CAT NMS Plan. The Commission
preliminarily recognizes that service bureaus may, when re-negotiating
these service contracts factor in the CAT implementation costs the
service bureaus incurred; consequently, broker-dealers could see
increases in costs that reflect a service bureau's efforts to recoup
those costs. In its analysis of costs, the Commission includes these
service bureau costs and separately identifies them as service bureau
implementation costs, but the Commission recognizes that they are
likely to ultimately be borne by broker-dealers.\947\
---------------------------------------------------------------------------
\947\ Although the Commission preliminarily believes that
service bureau implementation costs would ultimately be passed on to
broker-dealers, the Commission believes these costs are not double-
counted in this analysis because re-negotiation of service bureau's
contracts with their clients is not explicitly factored in to the
Outsourcing Cost Model. Instead, the Commission recognizes these
costs as being borne by the service bureaus initially, and does not
identify a specific mechanism by which they will ultimately be
passed onto broker-dealers.
---------------------------------------------------------------------------
The Commission, however, preliminarily believes that the ongoing
costs of CAT Data reporting by service bureaus would be duplicative of
costs incurred by broker-dealers. The aggregate fees paid by
outsourcing broker-dealers to service bureaus cover the service
bureaus' costs of ongoing data reporting. To include ongoing service
bureau costs as a cost of CAT would double-count the costs that broker-
dealers incur for CAT Data reporting; thus, in aggregating the cost
estimates for CAT, the Commission includes only the maximum
implementation cost that vendors would likely face of $118.2 million.
2. Aggregate Costs to Industry
The Sections above provide four sets of cost estimates that
together encompass the costs of the Plan. This Section discusses
aggregation of these costs into the total costs of the Plan. The Plan
provides estimates of the total costs to industry if the Commission
approves the Plan. The Plan estimates initial aggregate costs to
industry of $3.2 billion to $3.6 billion and annual ongoing costs of
$2.8 billion to $3.4
[[Page 30727]]
billion, with system retirement costs of $2.6 billion.\948\ The
Commission estimates that industry would spend $2.4 billion to
implement CAT, and $1.7 billion per year in ongoing annual costs.
---------------------------------------------------------------------------
\948\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(iv)(A)(5).
---------------------------------------------------------------------------
Using estimates discussed above, the Commission recalculated total
implementation and ongoing annual costs, partitioned across market
participant types as possible. Because the Plan does not discuss how
Central Repository costs would be partitioned across Participants and
CAT Reporters, the analysis here presents Central Repository costs
separately from costs to Participants and costs to CAT Reporters. The
Plan presents some costs related to constructing and operating the
Central Repository as ranges; in these cases, the Commission uses range
maximums in the total cost calculation. Where costs differ for Approach
1 and Approach 2, the Commission uses estimates for the approach that
is more costly in aggregate.\949\
---------------------------------------------------------------------------
\949\ Approach 1 aggregate costs are higher than those for
Approach 2 for all market participants except in one case where
service bureaus have lower ongoing costs for Approach 1. In its
discussion of industry (broker-dealer) costs, the Plan states that
the cost differences between these two approaches are not
statistically significant and that there would likely be no
incremental costs associated with either approach. See CAT NMS Plan,
supra note 3, at Appendix C, Section B.7(b)(iii)(C)(2)e.
---------------------------------------------------------------------------
Table 9 presents estimates of aggregate current, implementation,
and ongoing costs to the industry. The Commission notes that costs to
broker-dealers are much greater than the costs of building and
maintaining the Central Repository. In terms of magnitudes of aggregate
costs, costs to the 126 largest broker-dealers that currently report
OATS data is the largest driver of implementation costs, accounting for
38.3% of CAT implementation costs. Although these firms would face
significant costs in implementing CAT, the Reporters Study survey
results suggest that they anticipate lower ongoing reporting costs than
they currently incur ($599 million annually in expected aggregate costs
versus $1.1 billion annually in current aggregate regulatory data
reporting costs).\950\ For all other categories of broker-dealers, the
Commission estimates ongoing annual costs to be higher than currently
reporting costs.
---------------------------------------------------------------------------
\950\ As discussed in Section IV.F.1.c(1), supra, the Commission
preliminarily believes that cost estimates for Large Broker-Dealers
presented in the Plan are reliable.
Table 9--Aggregate Data Reporting Costs to Industry
----------------------------------------------------------------------------------------------------------------
CAT
Number Current costs ---------------------------------
Implementation Ongoing
----------------------------------------------------------------------------------------------------------------
Central Repository............................ 1 $0 $92,000,000 $134,900,000
Participants (all)............................ 1 154,100,000 41,100,000 102,400,000
Service Bureaus (all, 13)..................... 1 Unknown 118,200,000 Excluded
Broker Dealers:...............................
Insourcers (126).............................. 126 1,097,130,000 911,144,052 599,285,000
Outsourcers (806)............................. 806 271,113,000 342,026,100 356,764,000
New Small Firms (799)......................... 799 133,137,000 678,111,300 353,666,000
ELPs (14)..................................... 14 20,068,000 54,257,245 45,160,000
Options Market Makers (31).................... 31 44,437,000 120,141,043 99,998,000
Options Floor Brokers (24).................... 24 3,999,000 20,368,800 10,623,000
-------------------------------------------------
Total BD.................................. 1800 1,569,884,000 2,126,048,540 1,465,496,000
-------------------------------------------------
Total Industry............................ .............. 1,723,984,000 2,377,348,540 1,702,796,000
----------------------------------------------------------------------------------------------------------------
Although the Commission relied on an alternative to the Reporters
Study data to estimate costs for most broker-dealers, the Commission's
aggregate cost estimate is consistent with information presented in the
Plan that suggests that ongoing costs under CAT would likely be lower
than ongoing costs for current reporting systems.\951\ The Plan,
however, also discusses significant costs ($2.6 billion) for retirement
of current regulatory reporting systems.\952\
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\951\ See CAT NMS Plan, supra note 3, at Appendix C.
\952\ Id. at Appendix C, Section B.7(b)(iv)(A)(5).
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The Commission has not included those costs in its estimate of the
aggregate costs of the Plan for several reasons. First, for reasons
discussed below, the Commission preliminarily believes that cost
estimates provided in the Plan are unlikely to accurately represent the
actual costs industry will face in retiring duplicative reporting
systems. Second, the retirement of current regulatory reporting systems
is not a requirement of the Plan and the timeline and process for their
retirement is uncertain.\953\ While the Commission's cost estimates do
not recognize explicit system retirement expenses, it also does not
explicitly recognize savings from elimination of these systems, though
they are recognized qualitatively as additional benefits of the Plan.
The Commission preliminarily believes that this approach is
conservative in the sense that (for reasons that are discussed below)
system retirement costs are likely to be mitigated by incorporation of
current reporting infrastructure into CAT reporting infrastructure,
while cost savings associated with industry's need to maintain fewer
regulatory data reporting systems are not explicitly recognized.
Finally, while the Commission does not include explicit system
retirement costs, the Commission does recognize that industry will
experience a costly period of duplicative reporting if the CAT NMS Plan
is approved, and the Commission believes it is possible that these
costs may be conflated with actual retirement costs estimated in the
Plan. These reasons are discussed further below. As discussed above,
the Commission preliminarily believes that retirement costs are
unlikely to reflect actual costs to industry in eliminating duplicative
reporting systems for several reasons. First, for the majority of
broker-dealers that outsource, system retirement would affect few in-
house systems; these broker-dealers are likely to adapt the systems
that interface with service bureaus for current regulatory data
reporting to interface for CAT Data reporting. Consequently, the
Commission believes that, for these broker-dealers, costs to implement
CAT reporting are likely to implicitly
[[Page 30728]]
accomplish the retirement of older regulatory data reporting systems
because these older systems will be transformed--in whole or in part--
into systems that accomplish CAT reporting. Second, for broker-dealers
that self-report regulatory data, the Commission cannot determine the
source of the costs of system retirement that are estimated in the
Plan. At its simplest level, ceasing reporting activities would include
scrapping IT hardware dedicated to the endeavor and terminating the
employees responsible for such regulatory data reporting.\954\ The
Commission recognizes that there are costs associated with those
activities, but does not preliminarily believe their magnitude
(estimated in the Plan as $2.6 billion) should approach or exceed the
magnitude of costs of CAT implementation (estimated in this analysis as
$2.4 billion). Although the Commission is uncertain what estimates were
included in system retirement costs and the Commission recognizes that
different survey respondents may have interpreted the question
differently, the Commission preliminarily believes that the system
retirement costs cited in the Plan might include industry estimates of
an extended period of duplicative reporting costs, during which
industry would report data to both CAT and to the systems that CAT
would likely replace.
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\953\ Id. at Appendix C, Section C.9.
\954\ Based on discussions with industry, the Commission
believes that industry is likely to implement the CAT NMS Plan by
repurposing systems and employees currently assigned to other
regulatory data reporting. The cost of eliminating these resources,
however, should provide an upper bound to what actual system
retirement costs would be, because eliminating these resources is an
available and effective means of retiring these systems; market
participants could choose other methods if they are preferable in
terms of reducing costs of system retirement or CAT implementation.
See supra note 880.
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The Commission preliminarily believes that the period of
duplicative reporting would likely constitute a major cost to industry
for several reasons. These reasons include the length of the
duplicative reporting period; constraints on the capacity of industry
to implement changes to regulatory reporting infrastructure that might
cause market participants to implement changes using less cost-
effective resources; and the inability of some market participants to
implement duplicative reporting in house, necessitating that they seek
service bureau relationships to accomplish their CAT reporting
requirements.
Based on data provided in the Plan, the Commission believes that
the period of duplicative reporting anticipated by the Participants is
likely to last for 2 to 2.5 years. The Commission preliminarily
believes that these estimates are reliable because they reflect the
Participants' experience with their historical rulemaking activity,
although the Commission preliminarily believes that some steps outlined
by the Participants might happen concurrently with Commission
rulemaking required to facilitate ending some duplicative reporting.
The Plan outlines a timeline for eliminating duplicative
reporting.\955\ The timeline begins when Industry Members (other than
Small Industry Members) are required to begin reporting to the Central
Repository. The elimination of duplicative reporting would require
several steps: (1) The SROs would identify their respective duplicative
SRO rules and systems; (2) the SROs would file with the Commission the
relevant rule modifications or eliminations; (3) the Commission would
review and consider such rule modification or elimination filings; and
(4) subject to the requisite Commission approval, the SROs would then
implement such SRO rule changes.
---------------------------------------------------------------------------
\955\ See CAT NMS Plan, supra note 3, at Appendix C, Section
C.9. The elimination of duplicative reporting may or may not involve
actually retiring IT systems. If current regulatory data reporting
systems are adapted to report CAT Data, some of these systems may
continue to also report duplicative data during the period of
duplicative reporting. In such a case, system retirement would
involve no longer using these systems to report the duplicative data
and any savings may be associated with no longer requiring staff to
maintain the software and systems that support the duplicative
reporting.
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According to the Plan, step (1)--SRO identification of duplicative
SRO rules and systems--of the process could take 12 to 18 months from
implementation. SROs have 12 months (in the case of duplicative rules
and systems) or 18 months (in the case of partially duplicative rules
and systems) to complete their analysis of existing rules and systems
to identify which systems should continue collecting data, or whether
data in the Central Repository could substitute for the information
collected through rules and systems in place.\956\
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\956\ The Plan notes that if a Participant determines that
sufficient data is not available to complete the analysis, a
subsequent date could be identified for such a determination to be
made.
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Certain SRO rules or systems identified by the SROs in step (1)
might first necessitate an SEC rule change before the SROs can properly
modify or eliminate such SRO rule or system. If so, Commission
rulemaking may be required.\957\ This step (1)--even for those SRO rule
and system changes requiring Commission rulemaking--could still
feasibly take less than 18 months total because the SRO's analysis of
their rules and their corresponding SRO rule filings could be
undertaken in parallel with any such related Commission rulemaking
during this period.
---------------------------------------------------------------------------
\957\ See CAT NMS Plan, supra note 3, at Appendix C, Section
C.9. For example, Commission rules that require broker-dealers to be
able to report Large Trader or EBS data would prevent SROs from
changing their rules to eliminate this capability. See id.
Consequently, the timeframe for retirement of these systems may also
be dependent on Commission rulemaking. The Commission recognizes
that during the comment period of any SEC rulemaking, SROs might
begin their analysis of their own rules and preparation of potential
filings, possibly compressing this timeline further.
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According to the Plan, step (2) of the process could take 6 months.
After identifying the rules to eliminate or modify, the Plan provides
the Participants with six months to file the proposed rule change with
the Commission. It is possible for the Participants to file these
sooner if their rule changes are not complex, but the Plan places an
upper bound on this. Under this timeline, it could take 18 months to
two years after the first broker-dealers start reporting to the Central
Repository for Participants to file rules to eliminate duplicative
reporting.\958\
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\958\ It could also take longer if the Participant determines
that sufficient data is not available to complete such analysis by
12 or 18 months after Industry Member reporting to the Central
Repository commences.
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According to the Plan, step (3) of the process could take another 3
months to a year. The Commission recognizes that the approval process
for Participant rule changes can take time. In particular, for the
Commission to approve such rules could take another 3 to 12 months
depending on how complex the rule change. However, the Commission
preliminarily expects that as long as such rule changes would be fairly
straight forward, approval would likely take 3 months or less. As such,
the first three steps add up to 21 months to 27 months.
Step (4) involves implementing the Participant rule changes, which
would eliminate duplicative reporting. The Plan states that
Participants would, upon Commission approval of rule changes, implement
the ``. . . most appropriate and expeditious timeline . . . for
eliminating such rules and systems.'' \959\ The Commission
preliminarily believes that the elimination of duplicative reporting
will require significant planning and implementation, but believes that
much of the required planning is likely to happen concurrently with the
Commission approval process of the
[[Page 30729]]
underlying SRO rules. Consequently, the Commission preliminarily
believes that actual implementation could occur as soon as 90 days
after approval, and is not likely to occur more than six months after
approval. The Plan also states that Participants should consider in
setting an implementation timeline, when the quality of CAT Data would
be sufficient to meet surveillance needs. In addition, reducing some
duplicative reporting could require changing Participant rules in
response to the elimination or modification of Commission Rules.
---------------------------------------------------------------------------
\959\ See CAT NMS Plan, supra note 3, at Appendix C, Section
C.9.
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Based on the timelines for all four steps and the Commission's
analysis of how this timeline would be affected by the need in some
cases for Commission rulemaking, the Commission preliminarily believes
that the period of duplicative reporting could last at least 2 years,
and the period of system retirement could extend for up to 2.5 years
after Industry Members begin reporting data, assuming SROs are not
limited in their initial analysis by problems such as delays in
Commission rulemaking or excessive Error Rates, and Commission approval
of SRO rules is completed within 90 days of submission.
Second, industry-wide resources to update order-handling systems
are limited. Based on conversations with market participants, the
Commission preliminarily believes that while most Insourcers and
service bureaus have permanent staff that specialize in these
activities, some would rely on hiring additional staff or utilizing
contractors to increase their capacity to implement changes to order
handling and data reporting systems and support of duplicative
reporting systems. Furthermore, multiple broker-dealers and service
providers cited access to specialized staff as a constraint that limits
their ability to implement regulatory rule changes, stating that while
current and newly hired staff might be able to implement the CAT NMS
Plan and continue supporting OATS, they would be unlikely to be able to
continue to implement changes to both systems. Consequently, Insourcers
and service bureaus would likely incur significant costs associated
with hiring additional employees to implement the CAT NMS Plan and
accomplish regulatory data reporting during any duplicative reporting
period.
Third, the Commission preliminarily believes that some firms that
are currently challenged to maintain their self-reporting of data may
not have the resources to implement the CAT NMS Plan at the same time
as current reporting absent a service bureau relationship. It is
possible that a number of relatively large firms would seek to
establish service bureau relationships to accomplish both CAT reporting
and current reporting even as a number of very small firms that
currently do not report OATS could seek to establish such
relationships. This could precipitate a ``crowded entrances'' situation
in the market to provide data reporting services. The establishment of
these relationships would pose a significant cost to industry.\960\
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\960\ See supra note 934 and Section IV.G.1.d, infra.
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The Commission expects that there would be some cost efficiencies
with respect to current data reporting costs and CAT reporting costs
during any period of duplicative reporting. For example, servers
hosting software to produce records for CAT could possibly also host
software to produce records for OATS during the duplicative reporting
period because these regulatory reporting systems rely upon much of the
same underlying data. However, the Commission does not currently have
the necessary data to determine the extent of these efficiencies, which
would vary across market participants. Therefore, the Commission cannot
estimate duplicative reporting costs. The Commission preliminarily
believes, however, that the current data reporting costs of $1.7
billion per year constitutes an estimate of the cost per year to
industry of duplicative reporting requirements, as it represents the
cost of duplicative reporting to industry if there are no efficiencies.
The Commission notes, however, that staff required to implement changes
to order handling systems are a limited resource. If market
participants do not have adequate staffing to implement the changes
required by CAT and maintain duplicative reporting, costs for
duplicative reporting could exceed current reporting costs because
market participants could have to rely on external staff (such as
consultants) or contract through service bureaus to accomplish this
reporting; this is likely to be more expensive than staff used for
current reporting.
Further, the Commission does not believe that duplicative reporting
costs should be added to the estimated aggregate costs of the CAT NMS
Plan. The Commission believes that the aggregate costs above represent
the total costs of the Plan and do not account for the differential
between these costs and the costs the industry currently incurs for
regulatory data reporting and maintenance. During the period of
duplicative reporting, industry would incur the aggregate costs of
accomplishing CAT reporting described above, plus the costs of current
data reporting, which the Commission uses as an estimate of duplicative
reporting costs. The Commission notes that market participants will
incur costs equal to current data reporting costs if the Plan were not
approved (because current regulatory data reporting would continue), or
as duplicative reporting costs if the Plan were approved. Consequently,
the Commission preliminarily believes these costs should not be
considered as costs attributable to approval of the Plan, because
market participants would bear these costs whether the Plan is approved
or disapproved.
While broker-dealers are anticipated to bear the burden of the
costs associated with CAT, including implementation costs, ongoing
costs and duplicative reporting costs, the Commission does not know
whether these costs would be passed on to investors, or whether these
costs would be absorbed by the broker-dealers themselves. On one hand,
it could be assumed that broker-dealers could pass on the costs
associated with CAT to investors because broker-dealers currently
already pass on certain regulatory fees to their customers. For
instance, the SROs have adopted rules that require broker-dealer to pay
Section 31 transaction fees,\961\ and some of these broker-dealers have
in turn imposed fees on their customers in order to provide funds to
pay for the fees owed to the SROs. However on the other hand, if the
passing on of these costs is associated with higher fees, a given
broker-dealer could decide to absorb these costs and not increase their
fees, and by doing so, they may attract more customer order flow. The
incremental order flow that the broker-dealer attracts from having
lower fees relative to their competitors may indeed offset the costs
associated with CAT that they incur by not passing these on to their
customers. Other broker-dealers, cognizant that they could lose order
flow to other broker-dealers that do not pass on the costs to their
customers could strategically respond and thus, could also absorb these
costs. Ultimately, the Commission does not know which situation is more
likely to eventuate,
[[Page 30730]]
primarily because the Commission generally does not know the cost
structure of broker-dealers.
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\961\ Under Section 31 of the Securities Exchange Act of 1934,
SROs and all the national securities exchanges must pay transaction
fees to the Commission based on the volume of securities that are
sold on their markets. These fees are designed to recover the costs
incurred by the government, including the Commission, for
supervising and regulating the securities market and securities
professionals. See ``SEC Fee--Section 31 Transaction Fees,''
available at https://www.sec.gov/answers/sec31.htm.
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3. Further Analysis of Costs
a. Costs Included in the Estimates
In general, the CAT NMS Plan does not break down its cost estimates
as a function of particular CAT NMS Plan requirements, although it does
provide some cost information for certain requirements in the Plan.
However, the Commission has considered which elements of the CAT NMS
Plan are likely to be among the most significant contributors to CAT
costs. The Commission preliminarily believes that significant sources
of costs would include the requirement to report customer information,
the requirement to report certain information as part of the material
terms of the order, the requirement to use listing exchange symbology,
and possibly, the inclusion of Allocation Reports. The Commission
preliminarily believes that the clock synchronization requirements, the
requirement that Options Market Makers send quote times to the
exchanges, the requirement that the Central Repository maintain six
years of CAT Data, and the inclusion of OTC Equity Securities in the
initial phase of the implementation of the CAT NMS Plan are unlikely to
be significant contributors to the overall costs of the Plan. Notably,
the Commission believes that its estimates of the implementation costs
and ongoing costs to industry above include each of the costs discussed
in this Section because these provisions encapsulate major parts of the
Plan.
The Commission preliminarily believes that the requirement in the
CAT NMS Plan to report customer information for each transaction
represents a significant source of costs.\962\ In particular, the
adapting of systems to report customer information that is not included
in current regulatory data on a routine basis could require significant
and potentially difficult reprogramming because current audit trail
data does not routinely provide this information. Consequently, this
reprogramming could require gathering information from separate systems
within a broker-dealer's infrastructure and consolidating it in one
location, and redesigning an IT infrastructure to satisfy this
requirement could interrupt other workflows within the broker-dealer,
expanding the scope of systems that must be altered to accomplish CAT
reporting. While the Commission preliminarily believes that the
requirement to report customer information would be a significant
source of costs, the Commission lacks the necessary information to
estimate what proportion of the costs of the Plan are attributable to
this requirement. The Plan does not provide information on the costs
attributable to the reporting of customer information, and the
Commission has no other data from which it can independently estimate
these costs, because the Commission is not aware of any data currently
available to it regarding the number of broker-dealers that would need
to engage in significant reprogramming in order to report customer
information as required in the Plan, or the costs of doing so. The
Commission therefore seeks comment on the costs that would be
attributable to the requirement to report customer information as set
out in the CAT NMS Plan. The Commission also notes that the Plan
reflects exemptive relief granted by the Commission in connection with
this requirement. Specifically, as discussed further in the
Alternatives Section, the Commission granted exemptive relief from
certain requirements of Rule 613 to allow the alternative approach to
customer information that leverages existing identifiers to be included
in the Plan and subject to notice and comment.\963\ Based on cost
survey data provided by the Participants, this approach would reduce
quantifiable costs to the top three tiers of CAT Reporters by at least
$195 million as compared to an approach that followed requirements of
Rule 613 as adopted.\964\
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\962\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.1.a.iii.
\963\ See Exemption Order, supra note 18.
\964\ Id. at 17-18.
---------------------------------------------------------------------------
Similarly, the Commission preliminarily believes that the
requirement to report material terms of the order that include an open/
close indicator, order display information, and special handling
instructions represents a significant source of costs.\965\ Not all
broker-dealers are currently required to report these elements on every
order and no market participants report an open/close indicator on
orders to buy or sell equities. Thus, the adapting of some market
participants' systems to report this information for each transaction
could require significant and potentially difficult reprogramming that
requires centralizing or copying information from multiple IT systems
within the broker-dealer. As discussed above, redesigning a broker-
dealer's IT infrastructure could disrupt multiple workflows and
dramatically increase the costs associated with implementing the
changes required by CAT. While the Commission preliminarily believes
that this reprogramming would be a significant source of implementation
costs, the Commission lacks the necessary information to estimate what
proportion of the costs of the Plan are attributable to this
requirement. The Plan does not provide information on the costs
attributable to these elements of the Plan, and the Commission has no
other data from which it can independently estimate the costs, because
the Commission is not aware of any data currently available to it
regarding the number of broker-dealers that would need to engage in
significant reprogramming in order to report this information as
required in the Plan, or the costs of doing so. The Commission
therefore seeks comment on the costs that would be attributable to
reporting the material terms of the order as set out in the CAT NMS
Plan, including an open/close indicator, order display information, and
special handling instructions.
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\965\ See CAT NMS Plan, supra note 3, at Article I.
---------------------------------------------------------------------------
The Commission also preliminarily believes that the requirement to
use listing exchange symbology in the CAT NMS Plan could represent a
significant source of costs. The Plan requires CAT Reporters to report
CAT Data using the listing exchange symbology format,\966\ which would
also be used in the display of linked data; because broker-dealers do
not necessarily use listing exchange symbology when placing orders on
other exchanges or off-exchange, this requirement could require broker-
dealers to perform a translation process on their data before they
submit CAT Data to the Central Repository.\967\ The translation process
could be costly to design and perform and result in errors that would
be costly for the broker-dealers to correct. If other elements of the
Plan were to necessitate a translation, then the listing exchange
symbology could be fairly low cost because it would be just another
step in the translation. However, if the Plan has no other requirement
that would necessitate a translation, the costs of including listing
exchange symbology on all CAT reports would include the costs of
designing and performing the
[[Page 30731]]
translation as well as the costs of correcting any errors caused by the
translation. While the Commission preliminarily believes that the
requirement to use listing exchange symbology could be a significant
source of costs, the Commission lacks the necessary information to
estimate what proportion of the costs of the Plan are attributable to
this requirement. The Plan does not provide information on the costs
attributable to this particular element of the Plan, and the Commission
has no other data from which it can independently estimate these costs,
because the Commission is not aware of any data currently available to
it regarding the number of broker-dealers that would need to undertake
the translation process, either as a result of this or other elements
of Plan, or the costs of doing so. The Commission seeks comment on the
costs that would be attributable to the requirement to report CAT Data
using listing exchange symbology format as set out in the CAT NMS Plan.
---------------------------------------------------------------------------
\966\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.1.a.
\967\ For example, class A shares of ABC Company might be traded
using ticker symbol ``ABC A'' on one exchange, ``ABC_A'' on another
exchange, and ``ABC.A'' on a third. As written, the Plan would
require all broker-dealers to use the listing exchange's symbol for
its Central Repository reporting, regardless of the symbol in the
order messages received or acted upon at the broker-dealer or
exchange.
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The Commission recognizes that industry would bear certain costs
associated with Allocation Reports, particularly the requirement that
the reports include allocation times. The Commission understands that
some broker-dealers already record allocation times; broker-dealers
that do not currently record these times will face implementation costs
associated with changing their business processes to record these
times. Implementation costs for allocation reporting may include
significant costs associated with incorporating additional systems into
their regulatory data reporting infrastructure to facilitate this
reporting, if such systems would not already be involved in recording
or reporting order events. Furthermore, Outsourcers could face
significant implementation and ongoing costs associated with reporting
Allocation Reports if their service bureaus do not extend their
services to manage the servers that handle allocations. Because
implementation costs for Allocation Reports would vary widely across
broker-dealers and because the Plan does not break out costs associated
with reporting allocation information, the Commission cannot separately
estimate costs attributable to this reporting.
The Commission preliminarily believes that the clock
synchronization requirements in the Plan represent a less significant
source of costs. The CAT NMS Plan estimates industry costs associated
with the 50 millisecond clock synchronization requirement, based on the
FIF Clock Offset Survey.\968\ The FIF Clock Offset Survey states that
broker-dealers currently spend $203,846 per year on clock
synchronization activities, including documenting clock synchronization
events.\969\ The FIF Clock Offset Survey states that firms expect the
50 millisecond requirement to increase those costs by $109,197 per
firm.\970\
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\968\ See CAT NMS Plan, supra notes 3, at Section D.12, and note
127. The Commission notes that the survey has two limitations
pertinent to specific cost estimates provided in the summary of
survey results. First, cost estimates are likely to be significantly
downward biased. Individual responses to cost data were gathered
within a range; for example, a firm would quantify its expected
costs as ``Between $500K and less than $1M'' or ``$2.5M and over''.
When aggregating these responses, FIF generally used the range
midpoint as a point estimate; however, for the highest response, the
range minimum was used (i.e., ``$2.5M and over'' was summarized as
$2.5M.) This is likely to have produced a significant downward bias
in aggregate survey responses. Second, the survey includes only
broker-dealers and service bureaus, thus the data excludes
exchanges. The Commission preliminarily believes this limitation
would not significantly impact industry costs because all exchanges
currently maintain clock synchronization standards finer than those
discussed as alternatives.
\969\ See FIF Clock Offset Survey, supra note 127. This is based
on the current practice of the broker-dealers who responded to the
survey.
\970\ See id. at 16. The $109,197 figure is obtained by
subtracting the cost of maintaining current clock offsets of
$203,846 annually from the estimated per-firm annual cost of
maintaining a 50 millisecond clock offset of $313,043; see also id.
at 7 (``Even where firms were at the target clock offset, many firms
cited additional costs associated with compliance including logging
and achieving greater degrees of reliability'').
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Based on discussions with industry, the Commission preliminarily
believes that the majority of broker-dealers (Outsourcers) would not
face significant direct costs for clock synchronization because time
stamps for CAT Data reporting would be applied by service bureaus.\971\
However, the Commission preliminarily estimates there are 171 firms
that make the insourcing-outsourcing decision on a discretionary basis;
\972\ if these firms decide to insource their data reporting under CAT,
each of these firms is likely to face costs associated with complying
with new clock synchronization requirements. The Commission
preliminarily estimates that industry-wide implementation costs for the
50 millisecond clock synchronization requirement would be $268 million,
with $25 million annually in ongoing costs.\973\ The Commission
preliminarily believes that approximately $19.7 million in broker-
dealer implementation costs would be attributable to clock
synchronization requirements.\974\ The Commission also preliminarily
believes that service bureaus would face similar clock synchronization
costs if the CAT NMS Plan is approved. Using 13 as an estimate of the
number of service bureaus, approximately $1.4 million in service bureau
implementation costs would be attributable to clock synchronization
requirements in the Plan.\975\
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\971\ See Section IV.F.1.d for discussion of service bureau
costs and the degree to which those costs might be passed on to
broker-dealers.
\972\ These are the 126 current OATS reporters that report more
than 350,000 OATS ROEs per month; the 31 options market-making
firms; and the 14 ELPs.
\973\ See Section IV.H.2.a(1), infra, for a discussion of how
these implementation costs might vary for different clock
synchronization standards.
\974\ See id., for discussion of costs attributable to the 50
millisecond clock synchronization tolerance proposed in the Plan,
including the $109,197 estimate of per-firm implementation costs of
the 50 millisecond clock synchronization requirement; see also CAT
NMS Plan, supra note 3, at Appendix C, Section B.7(b)(i)(A)(3). 171
broker-dealers x $109,197 = $18,672,687.
\975\ The CAT NMS Plan states that the Vendor Study was
distributed to 13 service bureaus or technology-providing firms
identified by the DAG. See CAT NMS Plan, supra note 3, at Appendix
C, Section B.7(b)(i)(A)(3). 13 service bureaus x $109,197 =
$1,419,561. The Commission believes clock synchronization costs are
already included in cost estimates provided in the Vendor Study. As
discussed above (see Section IV.F.1.d), the Commission believes it
is likely that these costs would ultimately be passed on to service
bureaus' broker-dealer clients.
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Other Plan requirements that the Commission preliminarily believes
are unlikely to represent major contributions to the overall costs of
the Plan include the requirement that Options Market Makers report the
quote times sent to the exchanges,\976\ which the Plan estimates would
cost between $36.9 million and $76.8 million over five years; the
requirement to maintain six years of data at the Central Repository,
which the Plan estimates would cost $5.59 million,\977\ and the
inclusion of OTC Equity Securities in the initial phase of the
implementation of the CAT NMS Plan.\978\
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\976\ See FIF, SIFMA, and Security Traders Association, Cost
Survey Report on CAT Reporting of Options Quotes by Market Makers
(November 5, 2013), available at https://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p601771.pdf; see also CAT
NMS Plan, supra note 3, at Appendix C, Section B.7(b)(iv)(B).
\977\ See CAT NMS Plan, supra note 3, Section 12(m).
\978\ See id. at Section 12(q). The Commission does not have the
information necessary to precisely estimate the costs that are
incurred by including OTC Equity Securities in the initial phase of
the implementation of the CAT NMS Plan, because the Plan does not
separately present the costs associated with OTC Equity Securities.
Because of low trading activity in the OTC equity markets, any
significant costs associated with including OTC Equity Securities
would be in implementation costs. Further, broker-dealers that
implement CAT Data reporting for NMS securities may not incur
significant additional costs to implement CAT Data reporting for OTC
Equity Securities.
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[[Page 30732]]
There are many other categories of costs that contribute to the
aggregated estimates of the costs of the Plan in addition to the items
discussed above. For example, in addition to providing CAT Reporters
data on their Error Rates, the Plan states that the Participants
believe that in order to meet Error Rate targets, industry would
require certain resources, including a stand-alone testing environment,
and time to test their reporting systems and infrastructure. There are
also likely to be costs related to the Plan Processor's management of
PII.\979\ As noted above, the Commission does not have sufficient
information to analyze each individual category of costs, because the
available cost estimates do not reflect a detailed breakdown of the
expected cost of each element of the CAT NMS Plan. However, the
Commission preliminarily believes that its estimates of implementation
costs and the ongoing costs of the CAT NMS Plan reflect all relevant
costs to industry.
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\979\ The Commission also acknowledges that the costs associated
with handling PII could create an incentive for service bureaus not
to offer CAT Reporting services. The Commission does not believe
that this incentive would significantly alter the services available
to broker-dealers. For further discussion, see supra note 920 and
Section IV.G.1.e, infra. The Commission also notes that, pursuant to
the exemptive relief granted by the Commission, the approach to the
reporting of Customer information in the CAT NMS Plan could allow
for the bifurcation of PII reporting from the reporting of order
data. See Exemption Order, supra note 18, at 11858-63.
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b. Fees
The Plan states that the Operating Committee would have the
authority to levy ancillary fees on both broker-dealers reporting to,
and regulators accessing, the Central Repository.\980\ The Commission
believes that ancillary fees levied on broker-dealers are unlikely to
be levied broadly, because discussion in the Plan associates these fees
with late and/or inaccurate reporting. The Plan also discusses
ancillary fees possibly levied on regulators associated with the use of
Central Repository data. The Commission recognizes that costs estimated
in Bids for constructing and operating the Central Repository already
anticipate use of the CAT Data by regulators, and that additional fees
to access the data might give regulators incentives to make less use of
the data than anticipated in the Benefits Section. However, any fee
schedule proposed by the Participants would be filed with the
Commission. Consequently, the Commission does not believe that the
provisions for ancillary fees would likely significantly impact the
costs or benefits of CAT.
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\980\ See CAT NMS Plan, supra note 3, at Section 11.3(c).
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4. Second-Order Effects and Other Security-Related Costs
a. Security
As noted in the Adopting Release, Commenters have expressed
concerns regarding the risk of failing to maintain appropriate controls
over the privacy and security of CAT Data.\981\ The Commission
recognizes that investors and market participants could face
significant costs if CAT Data security were breached.
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\981\ See Adopting Release, supra note 9, at 45725, 45756-58.
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The Commission believes that it is difficult to form reliable
economic expectations for the costs of security breaches, because there
are few examples of security breaches analogous to the type that could
occur under the CAT NMS Plan. However, the Commission can break down
the expected costs of security breaches into two components: The risk
of a security breach and the cost resulting from a security breach.
Therefore, the Commission separates its discussion of the expected
costs of security breaches into these two components. The Commission
recognizes that security risks could give rise to second order costs as
well where the costs come not directly from the security breach but
rather from the actions of market participants attempting to avoid
security risks.
(1) Costs of a Security Breach
The form of the direct costs resulting from a security breach would
vary across market participants and could be significant. For broker-
dealers, investment advisers, and other similar institutions, a
security breach could leak highly-confidential information about
trading strategies or positions,\982\ which could be deleterious for
market participants' trading profits and client relationships. A data
breach could also expose the proprietary information about the
existence of a significant business relationship with either a
counterparty or client, which could reduce business profits.
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\982\ Although the Plan does not require reporting positions,
observation of a broker-dealer's recent executions can offer
information about their change in position, or, potentially,
information about their actual position if the audit trail
information breached contains all trading activity since the
creation of the position.
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A data breach could also potentially reveal PII of Customers.
Because some of the CAT Data that would be stored in the Central
Repository would contain PII such as names, addresses and social
security numbers, a security breach could raise the possibility of
identity theft, which currently costs Americans billions of dollars per
year.\983\ Because PII would be stored in a single, centralized
location rather than stored across multiple locations, a breach in the
Central Repository could leak all PII, rather than a subset of PII that
could be leaked if the information was stored in multiple locations. As
such, these costs associated with the risk of a security breach could
be substantial in aggregate.\984\
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\983\ According to survey data, the Bureau of Justice Statistics
reported $24.7 billion in identity theft costs in 2012, available at
https://www.bjs.gov/content/pub/press/vit12pr.cfm.
\984\ At a June 23, 2015 congressional hearing titled,
``Government Personnel Data Security Review'', Office of Personnel
Management (OPM) Director Katherine Archuleta estimated the direct
costs of the OPM data breach at $19 to $21 million. Available at
https://www.c-span.org/video/?326710-1/opm-director-katherine-archuleta-testimony-spending-data-security&start=3304. This breach
of PII of current and former federal employees exposed PII for
approximately 4 million individuals. Available at https://www.federaltimes.com/section/OPM-Cyber-Report/. The Commission
recognizes that the number of individuals whose PII would be stored
in the Central Repository far exceeds the number of federal
employees whose data was exposed in the OPM breach, and that these
costs include only the direct costs (such as the provision of credit
monitoring services to affected individuals) incurred by OPM and do
not reflect the total costs that these individuals may face as a
result of the data breach, which could be far larger than the direct
costs faced by OPM. These indirect costs may include the
consequences of the breach as well as costs of credit fraud and
legal services to address consequences of the data breach. There may
also be second-order effects to such a breach, if investors reduce
their engagement with the securities industry to avoid these costs.
See Section IV.F.4.a(3), infra.
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A breach that reveals the activities of regulators within the
Central Repository, such as data on the queries and processes run on
query results, could compromise regulatory efforts or lead to
speculation that could falsely harm the reputation of market
participants and investors. For example, a breach could result in an
article that reports on regulators querying trading information of
certain individuals or broker-dealers, which could harm those
individuals or broker-dealers even if no regulators open
investigations. Further, perpetrators of a breach could attempt to
trade on information on regulatory queries to try to profit ahead of
public information of an action, to the disadvantage of other
investors.
(2) Risk of a Security Breach
The Commission preliminarily believes that the risks of a security
breach may not be significant because certain provisions of Rule 613
and the
[[Page 30733]]
CAT NMS Plan appear reasonably designed to mitigate these risks.
However, the Commission notes that the considerable diversity in the
potential security approaches of the bidders creates some uncertainty
about the effectiveness of the eventual security procedures and hence,
the risk of a security breach.\985\
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\985\ The Commission notes that, at a minimum, the security of
the CAT Data must be consistent with Regulation Systems Compliance
and Integrity under the Exchange Act (``Reg SCI'') (17 CFR 242.1000
to 1007).
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Provisions of Rule 613 provide safeguards designed to prevent
security breaches. Rule 613(e)(4) requires policies and procedures that
are designed to ensure the rigorous protection of confidential
information collected by the Central Repository, and Rule 613(iv)
requires that the Plan contain a discussion of the security and
confidentiality of the information reported to the Central Repository.
Rule 613 also restricts access to use only for regulatory purposes, and
requires certain provisions that are designed to mitigate these
security risks such as the appointment of a Chief Compliance Officer
and annual audits of Plan Processor operating procedures.
The Plan also includes provisions designed to prevent security
breaches. First, governance provisions of the CAT NMS Plan could
mitigate the risk of a security breach. Section 4.12 of the CAT NMS
Plan provides for a Compliance Subcommittee whose activities could
reduce the risk that information is released to unauthorized
entities.\986\ Among the Subcommittee's responsibilities is ``the
maintenance of the confidentiality of information submitted to the Plan
Processor or Central Repository.'' Furthermore, the Plan Processor is
required to submit a comprehensive security plan to the Operating
Committee and update this security plan annually.\987\ The security
plan must cover all components of CAT, including physical assets and
personnel; the plan ``must document how the Plan Processor would
protect, monitor and patch the environment; assess it for
vulnerabilities as part of a managed process, as well as the process
for response to security incidents and reporting of such
incidents.''\988\ In addition, Section 6.2(b) of the Plan establishes a
Chief Information Security Officer who is responsible for monitoring
and addressing data security issues for the Plan Processor. Second, the
Plan includes specific provisions designed to ensure the security of
data in flight. For instance, the Plan requires that bulk extract data
be encrypted, password protected and sent via secure methods of
transmission.\989\ Third, Section 6.7(g) of the Plan requires that the
Participants establish, maintain, and enforce written policies and
procedures reasonably designed to (1) ensure the confidentiality of the
CAT Data obtained from the Central Repository; and (2) limit the use of
CAT Data obtained from the Central Repository solely for surveillance
and regulatory purposes. Finally, the Plan makes further provisions
designed to provide security for PII. For example, regulators
authorized to access PII would be required to complete additional
authentications, and PII would be masked unless users have permissions
to view PII.\990\
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\986\ See CAT NMS Plan, supra note 3, at Section 4.12.
\987\ Id. at Section 6.12.
\988\ See id. at Appendix D, Section 4.
\989\ See id. at Appendix D, Section 8.2.2.
\990\ See id. at Appendix C, Section A.2(c).
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As discussed in the Plan,\991\ the Participants collected
information from the Bidders regarding security and confidentiality
during the RFP process, however, there was considerable diversity in
the approaches proposed by the Bidders and the Participants chose to
give the Plan Processor flexibility on many implementation details and
state the requirements as a set of minimum standards. These
requirements include both general security and PII treatment
requirements. General security requirements are designed to address
physical security, data security during transmissions, transactions,
and while at-rest, confidentiality, and a cyber-incident response plan.
PII requirements include a separate PII-specific workflow, PII-specific
authentication and access control, separate storage of PII data, and a
full audit trail of PII access.\992\ Because many of the decisions that
define security measures for the Central Repository are coincident with
the selection of the Plan Processor, there is a degree of uncertainty
with regards to security measures that would be implemented by the Plan
Processor. Consequently, there is uncertainty about the significance of
the risks, the expected costs of a breach when considering the
likelihood of a data breach,\993\ and the second-order effects.
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\991\ See id. at Appendix C, Section A.4; Appendix D, Section 4.
\992\ See CAT NMS Plan, supra note 3, at Appendix D, Section
4.1.2-4.1.6.
\993\ One study of 62 U.S. companies experiencing data breaches
in 2015 puts the average cost per stolen record containing personal
or sensitive information at $217; the average number of breached
records per incident was 28,070. See Ponemon Institute, 2015 Cost of
Data Breach Study: United States (May 2015) (noting, however, that
the study specifically excluded breaches of over 100,000 records as
not representative of ``typical'' data breaches). As one example of
a large data breach, Target Corporation's 2013 data breach affecting
40 million credit card numbers and 70 million other records
containing PII had, as of January 2015, resulted in $252 million of
related expenses for Target. See Target Corporation, Form 10-K for
the Fiscal Year ended January 31, 2015 (March 13, 2015). Because it
is not clear what the risk of a breach would be for CAT, in terms of
either likelihood or magnitude, these types of numbers are simply
indicative; it is impossible to estimate with any precision what the
cost of a breach might be. For example, a complete breach of the CAT
System, including the PII storage, might expose records an order of
magnitude larger than the Target breach; however the types of
records stored in CAT could be more difficult to exploit than credit
card information, but their exploitation might prove far more
damaging to individuals and entities whose trading information, for
example, were compromised.
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The Commission preliminarily believes the Plan marginally increases
the threat of breach of broker-dealer trading and business strategies
because although SROs currently receive this data from their own
members, SROs are expected to have access to other SROs data more
readily within the Central Repository. There is some risk that SROs
could use this data improperly to gain information on how broker-
dealers interact with other SROs' trading platforms. The Plan includes
certain measures that mitigate this risk, however, by restricting the
use of CAT Data reported by other entities for business purposes.\994\
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\994\ Rule 613(e)(4)(1)(A) states that Participants and the Plan
Processor ``agree not to use such data for any purpose other than
surveillance and regulatory purposes, provided that nothing in this
paragraph (e)(4)(i)(A) shall be construed to prevent a plan sponsor
from using the data that it reports to the central repository for
regulatory, surveillance, commercial, or other purposes as otherwise
permitted by applicable law, rule, or regulation.'' Similar language
appears in the CAT NMS Plan. The Commission preliminarily believes
this provision does not increase security risks because the data
reported to the Central Repository by a Participant is already
available to that Participant. See CAT NMS Plan, note 3, supra, at
Section 6.5(f)(i)(A).
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(3) Second Order Effects
The desire to avoid direct costs of a security breach could
motivate actions that would result in second order effects of security
breaches. For example, if service bureaus perceive the costs and risks
of a security breach to be great enough because of the addition of PII
in the data, which is not included in current data, some could decide
not to provide CAT Data reporting services. This could increase the
potential for a short term strain on capacity and exacerbate the costs
of this strain described above and below.\995\ Further, investors or
other market participants could move their activity off-shore or cease
market participation altogether to
[[Page 30734]]
avoid having sensitive information stored in the Central Repository.
Consequences of changes in investor behavior in response to the threat
of a breach include: Investors holding suboptimal portfolios; lost
profits to the securities industry; and higher costs of raising capital
for U.S.-based securities issuers, if the public's willingness to
participate in capital markets is sufficiently reduced.\996\
---------------------------------------------------------------------------
\995\ See supra note 934 and Section IV.G.1.d, infra.
\996\ See Section IV.G.3, infra.
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Nonetheless, the Commission preliminarily does not believe that the
effect of the Plan on the risk or costs of a data breach would be great
enough to result in significant second order effects. As discussed
above, the Commission preliminarily believes the Plan marginally
increases the threat of breach of broker-dealer trading and business
strategies. However, the Plan includes certain measures that mitigate
this risk. In light of these provisions, the Commission preliminarily
believes that the Plan is unlikely to significantly deter broker-
dealers from participating in markets. In addition, in deciding whether
to trade in the U.S. markets or abroad, investors and other market
participants would continue to assess a multitude of potential trade-
offs. While the expected costs of a security breach may factor in, so
would the level of investor protections, which the Commission
preliminarily believes would increase if it approved the Plan.\997\
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\997\ See Section IV.E.2, supra.
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Another possible second order effect of avoiding the risk and cost
of a security breach event could be the risk that one or more service
bureaus could choose to exit the market in providing data reporting
services rather than change their business practices to report PII to
the Central Repository, in order to assist their client(s) in meeting
their reporting responsibilities under the Plan. Specifically, while
some service bureaus currently handle PII for their broker-dealer
clients, others do not or do so only on an occasional and limited
basis. To the extent service bureaus that do not already handle such
PII were to stop offering regulatory data reporting services due to an
unwillingness to host such customer information, their customers would
be forced to establish new service bureau relationships, or undertake
self-reporting. This potentially would be very costly to the broker-
dealer clients of the exiting service bureaus due to the switching
costs that broker-dealers incur to change service bureaus. Such an
event could also contribute to crowded entrances problems.\998\ As
noted above, however, the approach in the Plan to the reporting of
customer information could allow for the bifurcation of PII reporting
from the reporting of order data, which could affect a service bureau's
decision whether to exit the market for reporting services to a broker-
dealer client.\999\ While the Commission cannot rule out that one or
more service bureaus could choose to exit the data reporting services
market to avoid the costs of a potential security breach, the
Commission preliminarily believes that such exits are unlikely. In
addition, the Commission preliminarily believes that security breach
risks are unlikely to result in service bureau exit because the market
for regulatory data reporting services is generally expanding and the
trend is for more, not less, outsourcing.\1000\ Consequently, the
Commission preliminarily believes that market share in this market is
valuable and existing competitors are unlikely to voluntarily exit the
market abruptly.
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\998\ See supra note 934.
\999\ See supra note 979.
\1000\ See Section IV.G.1.d, infra.
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b. Changes to CAT Reporter Behavior
The Commission acknowledges that increased surveillance could
potentially impose some costs by altering the behavior of market
participants. Benefits could accrue to the extent that improved
surveillance, investigation, and enforcement capabilities allow for
regulators to better identify and address violative behavior when it
occurs; and to the extent that common knowledge of improved
capabilities deters violative behavior.\1001\ Costs could accrue to the
extent that some forms of market activity, which are permissible and
economically beneficial to the market and investors, could come under
higher scrutiny, which could create a disincentive to engage in that
activity.
---------------------------------------------------------------------------
\1001\ See Section IV.E.2.c, supra.
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In particular, the Commission acknowledges that some market
participants could reduce economically beneficial behavior if those
market participants believe that, because of enhanced surveillance,
their activities would increase the level of regulatory scrutiny that
they bear. In other words, if market participants engaging in non-
violative activity believe that such activity could increase the
likelihood of examinations, inspections, and other interactions with
regulators, those market participants could reduce or cease such
activity to reduce the frequency and costs of interactions with
regulators, including staff time to accommodate inspections, facilitate
examinations and answer regulatory inquiries. Because facilitating
regulatory inquiries is costly to firms, such a firm might conclude
that certain permissible activities generate insufficient profits to
offset costs associated with the regulatory scrutiny generated by these
activities, even if the firm's behavior is permissible and no fines or
other penalties result from these inquiries. To the extent that market
participants could reduce activity that benefits the market, this could
impose costs on investors and the market in the form of a reduction in
the economic value of such activity.
Additionally, in an environment of improved surveillance,
regulators could increase the number of inspections, examinations and
enforcement proceedings that they initiate.\1002\ To the extent that
these activities result in a reduction in violative behavior, the
market benefits in not bearing the costs of this behavior. To the
extent, however, the additional regulatory activity increases the
number of inspections, examinations and enforcement on permissible
activities,\1003\ market participants would incur the increased costs
of facilitating these regulatory inquiries. The Commission
preliminarily believes, however, that these costs would be offset by
other effects of CAT such as fewer ad hoc data requests, improvement in
regulators' precision in selecting firms for risk-based exams, and
other efficiency improvements, and that the related savings would
likely be greater than such costs in aggregate.
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\1002\ See Section IV.E.2.c, supra.
\1003\ For example, the Commission preliminarily believes that
the Plan would improve the efficiency and effectiveness of risk-
based exams. However, because the efficiency could increase the
total number of risk-based exams, the total number of exams on
permissible activity could go up even if the percentage of exams on
permissible activity goes down.
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c. Tiered Funding Model
The Commission preliminarily believes that establishing a small
number of discrete fee tiers, as occurs under the Plan, could create
incentives for CAT Reporters to alter their behavior to switch from one
tier to another, thereby qualifying for lower fees. Specifically, in
the discussion of Consideration 7, the Plan states that CAT Reporters
would be classified into a number of groups based on reporter type and
market share of share volume or message traffic and assessed a fixed
fee that is determined by this classification.\1004\ The higher-
activity groups would be assessed higher fees.
[[Page 30735]]
Equity Execution Venues would be classified into 2-5 fee tiers based on
market share of share volume, option Execution Venues would be
classified into a separate set of 2-5 fee tiers based on market share
of share volume, and Industry Members would be classified into another
set of 5-9 fee tiers based on message traffic.\1005\ That is, the Plan
describes a funding policy with a tiered funding model that places
market participants who fall into the lower tiers at a fee advantage
over the market participants that fall into the higher tiers.\1006\ The
Plan states that this funding model is designed to reward the
characteristics--small market share of share volume in the case of
Execution Venues, low message traffic in the case of broker-dealers--
that would enable CAT Reporters to qualify for the lower tiers. The
potential effect of rewarding these characteristics is to incent market
participants at the margins to reconfigure their operations so as to
qualify for smaller tiers than would otherwise apply. The potential for
such an effect would be greater among those CAT Reporters that fall at
the low end of a tier and could most easily alter their operations to
qualify for a smaller tier. Similarly, the funding model could create
incentives for a firm that has an activity level near the top of a tier
to avoid additional market activity that might move it to a higher fee
tier. For example, to control its tier level, a market participant
could reduce its quoting activity or cease providing services in a set
of securities. Such activity could affect liquidity and the
availability of trading services to investors. The Commission notes,
however, that because this incentive is contingent on being near a fee-
tier cutoff point, it preliminarily believes relatively few market
participants would likely be affected and thus market quality effects
would likely not be significant.\1007\ Furthermore, for those market
participants near a cutoff point, managing activity to avoid a higher
fee tier would necessarily incur costs of lost business and potential
loss of market share, and would possibly be difficult to implement,
which should mitigate any effects on market quality.
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\1004\ See CAT NMS Plan, supra note 3, at Section 11.3 and
Appendix C, Section B.7(b)(4)(C).
\1005\ The CAT NMS Plan defines ``Execution Venue'' as ``. . . a
Participant or an alternative trading system (``ATS'') (as defined
in Rule 300 or Regulation ATS) that operates pursuant to Rule 301 of
Regulation ATS (excluding any such ATS that does not execute
orders).'' The Plan also defines Industry Member as ``. . . a member
of a national securities exchange or a member of a national
securities association''. See CAT NMS Plan, supra note 3, at Article
I, Section 1.1 for definitions. Classification of Execution Venues
into tiers is based on transacted volume market share of share
volume (in the case of NMS stocks and OTC Equity Securities) or
contract volume (in the case of listed options). For Industry
Members, classification into tiers is based on message traffic.
Based on conversations with Participants, the Commission
preliminarily believes message traffic would be based on CAT
Reportable Events reported to the Central Repository. See id. at
Article XI, Section 11.3 for discussion of assignment to funding
tiers.
\1006\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(v).
\1007\ This argument assumes that activity levels used to
determine funding tiers do not naturally cluster near cutoffs, and
that if such natural cutoff points exist, the Operating Committee
would avoid setting such funding tier cutoff levels near those
activity levels.
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The Commission recognizes that the tiering of fees also could
create calendar effects within markets. Although the Plan does not
detail the horizon at which CAT would measure activity levels, the
structure ultimately approved by the Operating Committee could affect
market participant behavior near the end of a measuring period. For
example, high levels of market activity during a measuring period might
cause CAT Reporters to limit their activity near the end of a
measurement period to avoid entering a higher fee tier. If this
translates into a reduction in quoting activity, market liquidity
conditions could deteriorate at the end of activity measurement
periods, and improve when a new measurement period begins, for example.
The Commission notes that the Operating Committee has discretion
under the Plan governance structure to make the tier adjustments
discussed in Section 11.1.d for individual CAT Reporters. This
provision might mitigate incentives for individual market participants
to alter market activities to reduce their expected CAT fees.
d. Differential CAT Costs Across Execution Venues
The funding model proposed in the Plan is a bifurcated funding
model, in which costs are first allocated between the group of all
broker-dealers and the group of all Execution Venues, then within these
groups by market activity level.\1008\ The proposed funding model
treats Execution Venues differently from broker-dealers; this
differential treatment could introduce inefficiencies to the market for
execution services. As discussed in a recent academic paper,\1009\
differential funding models in execution venues could influence how
broker-dealers route customer order flow, possibly to the detriment of
execution quality realized by investors. The Commission preliminarily
believes that the bifurcated funding model proposed in the Plan almost
certainly results in differential CAT costs between Execution Venues
because it would assess fees differently on exchanges and ATSs for two
reasons. First, message traffic to and from an ATS would generate fee
obligations on the broker-dealer that sponsors the ATS, while exchanges
incur almost no message traffic fees.\1010\ Second, broker-dealers that
internalize off-exchange order flow, generating off-exchange
transactions outside of ATSs, would face a differential funding model
compared to ATSs and exchanges.\1011\ The cost differentials that
result might create incentives for broker-dealers to route order flow
to minimize costs,\1012\ creating a potential conflict of interest with
broker-dealers' investor customers, who are likely to consider many
facets of execution quality (such as price impact of a trade and
probability of execution in a venue in which the order is exposed) in
addition to any of these costs that are passed on to them.
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\1008\ See CAT NMS Plan, supra note 3, at Article XI.
\1009\ See Robert H. Battalio, Shane A. Corwin and Robert H.
Jennings, Can Brokers Have It All? On the Relation between Make-Take
Fees and Limit Order Execution Quality (2015 working paper),
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2367462. (``Battalio, Corwin, and
Jennings'').
\1010\ See CAT NMS Plan, supra note 3, at Section 11.3.(b):
``For the avoidance of doubt, the fixed fees payable by Industry
Members pursuant to this paragraph shall, in addition to any other
applicable message traffic, include message traffic generated by:
(i) an ATS that does not execute orders that is sponsored by such
Industry Member; and (ii) routing orders to and from any ATS
sponsored by such Industry Member.'' The Commission notes that
exchange broker-dealers would be subject to message traffic fees as
Industry Members under the Plan. However, the Commission notes that
based on its analysis of OATS data from September 15-19, 2014, these
broker-dealers are minor contributors to overall message traffic,
accounting for less than 0.03% of OATS ROEs.
\1011\ See CAT NMS Plan, supra note 3, at Article XI.
\1012\ This assumes that CAT fees would ultimately be borne by
the broker-dealers that make routing decisions. Currently, exchange
access fees are often borne by broker-dealers that make routing
decisions, as discussed in Battalio, Corwin, and Jennings. Id. If
Execution Venues were to absorb these fees rather than pass them on
to customers, broker-dealer routing decisions might not be affected.
It is also possible that some Execution Venues could incorporate
some sort of rebate for broker-dealer message fees into their fee
schedules, effectively making some venues less expensive for broker-
dealers to access.
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In addition to friction created by the bifurcated structure of the
funding model, the Commission preliminarily believes that the CAT NMS
Plan funding model shifts broker-dealer costs associated with the
Central Repository to all broker-dealers and away from Options Market
Makers. The CAT NMS Plan provides that broker-dealers would not report
their options quotations to the Central Repository, while equity market
makers would report their equity
[[Page 30736]]
quotations to the Central Repository.\1013\ This differential treatment
of market making quotes affects costs of funding the Central Repository
in two ways. First, the elimination of Options Market Maker quotes from
the message traffic of broker-dealers decreases the number of messages
that must be reported and stored, which presumably reduces the overall
cost of building and operating the Central Repository. This reduction
in the overall cost of the Central Repository reduces costs to both
broker-dealers and Execution Venues. Second, because Options Market
Maker quotes would not be in the message traffic which determines the
allocation of broker-dealer costs of the Central Repository, broker-
dealers that do not quote listed options would pay a higher share of
broker-dealer-assessed CAT fees than they would if Options Market
Makers' quotes were included in the allocation of fees. Also, Options
Market Makers would pay relatively lower fees than they would if their
quotations were included in CAT message traffic from broker-dealers.
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\1013\ See Section IV.H.1.a, supra for a discussion of an
alternative that would require Options Market Makers to report their
quotes.
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Although this differential treatment would marginally increase the
cost of providing other broker-dealers services relative to options
market making, the Commission preliminarily does not believe that this
would materially affect a market participant's willingness to provide
broker-dealer services other than options market making for several
reasons. First, many market participants participate in both equities
and options markets because activity in one market (equities or
options) could be used to hedge positions acquired in the other market.
Consequently, many firms already find it cost effective to participate
in both markets. Second, broker-dealers participating in equity markets
have significant infrastructure in place for serving that market and
switching costs to participate in options market making are high due to
the need to establish quantitative infrastructure to quote options,
market connectivity, IT infrastructure, and clearing/settlement
arrangements required to transact in options; consequently, reducing
the cost to make markets in options is unlikely to attract broker-
dealers to change their business models. Finally, the Commission
believes that the market to provide liquidity in the options market is
already a competitive one because many broker-dealers participate in
that market and market share that is sufficient to cover substantial
fixed costs of making markets in options is valuable; consequently,
options market participants have incentives to compete to win market
share. Without a market change that significantly affects profits to be
made in options market making, it seems broker-dealers would need a
competitive advantage relative to existing competitors to successfully
win market share from the existing competitors. The Commission
preliminarily believes that that broker-dealers that currently focus on
equity market making and other broker-dealer services unrelated to
options market making are likely to continue to focus on the markets in
which they participate because their competitive advantages relate to
these activities.
5. Request for Comment on the Costs
The Commission requests comment on all aspects of the discussion of
the potential costs of the CAT NMS Plan. In particular, the Commission
seeks responses to the following questions:
301. Do Commenters agree with the Commission's assessment of the
potential costs of the CAT NMS Plan? Why or why not?
302. To what extent do the uncertainties related to future
decisions about Plan implementation impact the assessment of potential
costs of the Plan? Please explain.
303. Do Commenters agree that the Plan's level of detail regarding
the drivers of the costs to build, operate, and maintain the Central
Repository is sufficient to assess the economic effects of the Plan? If
more detail is needed, how can this information be obtained?
304. Do Commenters agree that using the cost estimates provided in
Bids from the Shortlisted Bidders provides reasonable estimates of
costs to build and operate the Central Repository? Why or why not?
305. Estimates in the Plan suggest that the Participants' data
reporting costs will significantly increase while surveillance costs
will significantly decrease if the Plan is approved. Do Commenters
agree that these changes are likely to occur? Please explain.
306. Do Commenters agree with the Commission's characterization of
the limitations in the cost studies? Do Commenters agree with the
Commission's assessment that the Vendors Study and Participants Study
have reliable cost estimates? Do Commenters agree that cost estimates
for large OATS Reporters and large non-OATS Reporters are reliable? Do
Commenters agree that cost estimates for small reporters are
unreliable? Why or why not? Do Commenters have more precise estimates
of the costs than provided in the cost surveys?
307. The Commission re-estimated aggregated costs under a different
set of assumptions than the Plan. Do Commenters agree that the re-
estimated costs better represent the expected costs of the CAT NMS
Plan? Why or why not? Do Commenters agree that most broker-dealers that
report fewer than 350,000 OATS ROEs per month are likely to report this
data through a service bureau?
308. Do Commenters agree with the estimates of annual service
bureau costs for a very small OATS-reporting firm of $50,000 to
$180,000 per year, which assumes that the service bureau provides order
routing and an order-handling system? If not, please provide alternate
estimates.
309. Do Commenters agree that the pricing function for service
bureaus is concave (increasing at a decreasing rate)? Why or why not?
The Commission assumes in its re-estimation that service bureau cost
functions are approximately as concave as exchange pricing functions.
Do Commenters agree? Why or why not?
310. Will the requirement to provide customer information to the
Central Repository be a significant cost-driver for Outsourcers? Why or
why not? Is the need for encryption of this data a significant cost-
driver?
311. Will the anticipated retirement of duplicative reporting
systems such as EBS affect Outsourcer costs? Why or why not? Will the
reduction in ad hoc data requests significantly affect the costs
incurred by service bureaus in assisting their clients in responding to
these requests? Why or why not?
312. Are there ways in which the Commission could better estimate
the aggregate costs of the CAT NMS Plan? If so, please explain.
313. Do Commenters agree with the Commission's assumption that most
firms that report fewer than 350,000 OATS ROEs per month are self-
clearing? If not, please explain. Do Commenters believe that these
firms would have significantly higher implementation costs due to their
need to provide this information to any service bureaus they use for
regulatory data reporting?
314. Do Commenters agree that broker-dealers that are exempt or
excluded from OATS reporting are likely to be small and should have
their costs estimated as Outsourcers? If no, how many of these broker-
dealers currently participate in more than 350,000 events that would be
OATS-reportable, were they not exempt or excluded, per month?
[[Page 30737]]
315. Are Commenters aware of options market making firms that are
FINRA members and report fewer than 350,000 OATS ROEs per month, or
that are exempt or excluded from OATS reporting rules? If so, are there
ways that the Commission can identify these firms to better estimate
their costs under the Plan?
316. Are Commenters aware of ELPs that are not CBOE members that
did not trade on ATSs in 2014? If so, are there ways that the
Commission can identify these firms to better estimate their costs
under the Plan?
317. Do Commenters agree that FINRA member broker-dealers that are
Options Market Makers are unlikely to be exempt or excluded from OATS-
reporting requirements, and are likely to report more than 350,000 OATS
ROEs per month? If not, how many FINRA member Options Market Makers
exist that are exempt or excluded from OATS reporting requirements, or
that report fewer than 350,000 OATS ROEs per month? Are there methods
by which the Commission could improve its estimates of costs these
broker-dealers are likely to face if the Plan is approved?
318. According to survey results, Approach 1 aggregate
implementation and ongoing costs are higher than those for Approach 2
for CAT Reporters, though not statistically so.\1014\ The Commission
notes that this cost estimate does not seem intuitive because Approach
2 could result in extra data processing by CAT Reporters to translate
data into a fixed format whereas Approach 1 would require no
translation. Why is the cost of Approach 1 anticipated to be higher
than Approach 2? Can this be explained by the use of service bureaus
whom CAT Reporters expect to charge the same for either approach? Can
this be explained by the need to process data under either approach to
replace ticker symbols with listing exchange symbology?
---------------------------------------------------------------------------
\1014\ Approach 1 assumes CAT Reporters would submit CAT Data
using their choice of industry protocols. Approach 2 assumes CAT
Reporters would submit data using a pre-specified format.
---------------------------------------------------------------------------
319. Do Commenters believe that duplicative reporting systems will
be retired and, if so, when? What systems do Commenters expect to be
retired? \1015\ Are there any systems that cannot be retired? What are
the costs associated with retiring duplicative reporting systems? What
are the benefits of retiring duplicative reporting systems? Would there
be cost savings as a result of retiring any duplicative reporting
systems? How does the timeline for retiring duplicative reporting
systems affect the costs and benefits? Please explain.
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\1015\ See supra note 856.
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320. Do service bureaus handle EBS reporting for their clients? To
what extent would EBS reporting contribute to duplicative reporting
costs or system retirement costs and savings?
321. The Commission's analysis discusses the Plan's timetable for
retirement of duplicative reporting systems (i.e., a maximum of 2.5
years). Is the timetable for retirement of these systems in the Plan
realistic and/or reasonable? Are there ways that the timetable for
duplicative reporting system retirement could be accelerated? If so,
how?
322. Do Commenters believe that the period of duplicative reporting
that would precede the retirement of certain current, anticipated to be
retired, regulatory reporting systems would impose significant cost
burdens on industry? Are the Commission's estimates of those costs
accurate? Are there dimensions of these costs that the Commission has
not recognized? If so, what are they and what are their magnitudes?
323. What milestones should CAT be required to reach before
duplicative reporting systems can be retired?
324. What costs would service bureaus face in accomplishing a
period of duplicative reporting during which both CAT and the
regulatory data reporting systems that the Plan anticipates would be
retired are operational? How many FTEs would be involved?
325. What costs would broker-dealers face in accomplishing a period
of duplicative reporting during which both CAT and the regulatory data
reporting systems that the Plan anticipates would be retired are
operational? How many FTEs would be involved?
326. The CAT NMS Plan estimates that market participants would face
significant costs of approximately $2.6 billion in connection with
retiring duplicative reporting systems. What expenses does this
estimate cover, and which systems account for which costs? For some
broker-dealers, would implementation of CAT reporting accomplish the
retirement of other regulatory data reporting systems? How do system
retirement costs differ between broker-dealers that outsource their
data reporting versus those who perform this function in-house?
327. Do Commenters believe that the CAT NMS Plan would deliver
additional cost savings from sources other than the retirement of
duplicative reporting systems and a reduction in the amount of ad-hoc
data requests to regulated entities? Are there any changes to the CAT
NMS Plan that would increase the potential cost savings?
328. Are SROs adequately incentivized to retire current regulatory
reporting and surveillance systems that might be replaced by CAT? Do
they have incentives to resist the retirement of these systems that
this analysis fails to identify?
329. Do Commenters agree that costs associated with the Plan
incurred by broker-dealers could be passed down to their customers? Why
or why not? If so, do Commenters have estimates regarding what fraction
of broker-dealer costs would be passed down?
330. The Commission preliminarily believes that the Vendors Study
measures ongoing costs that would also be captured by the third-party
outsourcing costs in the other surveys. As a result, the Commission
does not add these to the aggregated cost estimates. Do Commenters
agree with this approach? Is there any double counting of costs across
the surveys, or can the individual survey estimates be aggregated into
an industry-wide estimate? Please explain.
331. According to survey results, Approach 1 aggregate
implementation costs are higher than those for Approach 2 for vendors
and ongoing costs are lower.\1016\ The Commission notes that this
implementation cost result does not seem intuitive because Approach 2
could result in creating a whole new data translation process to
implement the Plan whereas Approach 1 would require no translation. Why
is Approach 1 costlier for vendors to implement than Approach 2? Can
this be explained by the need to process data under either approach to
replace ticker symbols with listing exchange symbology?
---------------------------------------------------------------------------
\1016\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(iv)(A).
---------------------------------------------------------------------------
332. The Commission assumes that cost estimates from Participants
include all costs the Participants would incur if the Plan is approved,
and that other costs related to development of the Plan are not
avoidable if the Plan is not approved. Is it reasonable for the
Commission to treat all costs related to development of the Plan that
are not included in implementation and ongoing costs as sunk costs? Why
or why not?
333. To what degree would industry's costs to implement and
maintain CAT reporting be passed on to investors? Would competition
between broker-dealers affect the passing on of costs to investors? Why
or why not?
334. How significant to the total industry costs of the CAT NMS
Plan are
[[Page 30738]]
clock synchronization requirements, the requirement that Options Market
Makers send quote times to the exchanges, the requirement that the
Central Repository maintain six years of CAT Data, and the inclusion of
OTC Equity Securities in the initial phase of the implementation of the
CAT NMS Plan? Why?
335. How significant to the total industry costs of the CAT NMS
Plan is the requirement to report customer information to the Central
Repository? What elements of this requirement contribute to its
significance of the potential costs of the Plan? Are there ways in
which this data can be made available to regulators that would prove
less costly to industry and investors? If so, what are they?
336. How significant to the total industry costs of the CAT NMS
Plan is the requirement to report certain information as part of the
material terms of the order? What elements of this requirement
contribute to its significance of the potential costs of the Plan? Are
there ways in which this data can be made available to regulators that
would prove less costly to industry and investors? If so, what are
they?
337. How significant to the total industry costs of the CAT NMS
Plan is the requirement to report information to the Central Repository
using listing exchange symbology? What elements of this requirement
contribute to its significance of the potential costs of the Plan? Are
there ways in which this data can be made available to regulators that
would prove less costly to industry and investors? If so, what are
they?
338. How significant to the total industry costs of the CAT NMS
Plan is the requirement to report allocation information to the Central
Repository? What elements of this requirement contribute to its
significance of the potential costs of the Plan? Are there ways in
which this data can be made available to regulators that would prove
less costly to industry and investors? If so, what are they?
339. Are there other requirements of the CAT NMS Plan that would be
significant sources of costs? If so, what are they? Are there ways in
which those requirements could be made less costly? If so, what are
they?
340. Do Commenters agree that ancillary fees levied by the Plan
Processor on broker-dealers in response to late or inaccurate reporting
are unlikely to broadly levied on broker-dealers? Do Commenters believe
they would comprise a significant source of CAT costs to industry? Why
or why not?
341. Do Commenters agree with the Commission's analysis of
potential cost savings from a reduction in the number (and ultimately
the cost) of data requests as a result of regulators having direct
access to CAT Data?
342. Do Commenters agree with the Commission's analysis of the risk
of a security breach? Do Commenters agree with the Commission's
analysis of the potential costs of a security breach? Are there factors
not covered in the analysis? What are they? Are the security measures
outlined in the Plan appropriate and reasonable? Why or why not?
343. Do Commenters agree with the Commission's analysis of
potential changes to CAT reporter behavior? Why or why not? Are there
additional factors that should be considered?
344. Do Commenters agree with the Commission's analysis of the
Plan's funding model? Why or why not? Are there additional factors that
should be considered?
345. Do Commenters agree with the Commission's analysis of
potential costs resulting from differential CAT costs across Execution
Venues? Why or why not? Are there additional factors that should be
considered?
346. Should the Plan require the inclusion of a web-based manual
data entry option for initial CAT reporting in addition to updates and
corrections? Please explain. How would a web-based manual data entry
option affect the costs incurred by CAT Reporters? Do any current
regulatory data reporting systems have a web-based manual data entry
option? If so, which ones and how often do broker-dealers utilize that
option for data submission?
G. Efficiency, Competition, and Capital Formation
In determining whether to approve the CAT NMS Plan, and whether the
Plan is in the public interest, Rule 613 requires the Commission to
consider the impact of the Plan on efficiency, competition and capital
formation.\1017\
---------------------------------------------------------------------------
\1017\ See 17 CFR 242.613(a)(5); see also 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
The Commission preliminarily believes that the Plan generally
promotes competition. However, as explained below, the Commission
recognizes that the Plan could increase barriers to entry because of
the costs to comply with the Plan. Further, the Commission's analysis
identifies several limitations to competition, but the Plan contains
provisions to address some limitations and Commission oversight can
also address the limitations.
The Commission preliminarily believes that the Plan would improve
the efficiency of regulatory activities and enhance market efficiency
by deterring violative activity that harms market efficiency. The
Commission preliminarily believes that the Plan would have modest
positive effects on capital formation and that the threat of a security
breach at the Central Repository is unlikely to significantly harm
capital formation.
The Commission notes that the significant uncertainties discussed
earlier in this economic analysis also affect the Commission's analysis
of efficiency, competition, and capital formation. For example, the
Commission recognizes that the uncertainties around the improvements to
data qualities can affect the strength of the Commission's conclusions
on efficiency, and the uncertainty regarding how the Operating
Committee allocates the fees used to fund the Central Repository could
affect the Commission's conclusions on competition. Additionally, the
Commission recognizes that the Plan's likely effects on competition,
efficiency and capital formation are dependent to some extent on the
performance and decisions of the Plan Processor and the Operating
Committee in implementing the Plan, and thus there is necessarily some
further uncertainty in the Commission's analysis. Nonetheless, the
Commission believes that the Plan contains certain governance
provisions, as well as provisions relating to the selection and removal
of the Plan Processor, that mitigate this uncertainty by promoting
decision-making that could, on balance, have positive effects on
competition, efficiency, and capital formation.
1. Competition
As required by Rule 613, the Plan contains an analysis of its
expected impact on competition.\1018\ The Plan's analysis considers
potential impacts of the CAT NMS Plan on competition related to
technology, cost allocation across CAT Reporters, and changes in
regulatory reporting requirements.\1019\ The Plan splits its analysis
between ``Participants and broker-dealers communities'' and concludes
that the Plan generally would avoid placing an inappropriate burden on
competition in U.S. markets.\1020\ The Plan's analysis states the
criteria for evaluating impacts on competition by outlining the channel
of potential impacts as policy changes
[[Page 30739]]
caused by the Plan that ``burden a group or class of CAT Reporters in a
way that would harm the public's ability to access their services'' and
states that such impacts ``should be measured relative to the economic
baseline.'' \1021\
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\1018\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8 (noting that Rule 613(a)(1)(viii) requires the Plan to include a
discussion of an analysis of the impact of the Plan on competition,
efficiency and capital formation).
\1019\ See id.
\1020\ See id.
\1021\ See id.
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The Commission's evaluation of competition reorients the Plan's
approach to analyzing competition, expands upon it, and notes some
limitations in the scope and conclusions of the Plan's analysis. In
particular, the Commission's analysis of competition is organized and
segmented by the particular markets in which competition among service
providers of types of services exists. The Commission's analysis
focuses on four distinct markets: The market for trading services, the
markets for broker-dealer services, the market for regulatory services,
and the market for data reporting services. In the context of the Plan,
this allows the competition analysis to consider a more complex
interaction between all market participants in a defined market than
would be feasible by focusing solely on market participant types. This
approach allows the Commission to determine whether a differential
impact across competitors affects overall competition in the market.
Much like the Plan's criteria for evaluation, the Commission recognizes
that any effects on competition, with respect to each market, should be
compared to a Baseline that characterizes the competitive environment
without the CAT NMS Plan. In addition, the Commission considered
uncertainty in the effect of the Plan on competition in any of these
markets.
After analyzing the discussion of competition and the other
relevant provisions of the Plan in the context of four affected
markets, the Commission preliminarily believes that, while there could
be effects on individual competitors, these effects would not lead to
changes to competition as a whole in affected markets in a way that
would generate significant adverse effects. In sum, and as discussed in
detail below, the Commission preliminarily believes that the Plan poses
a risk for competition for trading services, but provisions in the Plan
and Commission oversight could mitigate this risk. Additionally, the
Plan could have a differential impact on the ability of smaller broker-
dealers and broker-dealers subject to CAT reporting to compete in the
various markets for broker-dealer services, but these differential
impacts may not be significant enough to affect overall competition in
the markets for broker-dealer services. Moreover, the Plan generally
promotes competition to be the Plan Processor and competition for
regulatory services, but friction in those markets could limit the
competition. Finally, the Plan could have a harmful effect on
competition in the market for data reporting services, at least in the
short term, because of capacity constraints, but the prolonged
implementation for small broker-dealers could limit these harmful
effects.
a. Market for Trading Services
The Commission analyzed the CAT NMS Plan's economic effects on
competition in the market for trading services, compared to the
Baseline of the competitive environment without the Plan, and
preliminarily believes that the Plan would not place a significant
burden on competition for trading services. The Commission recognizes
the risk for the Plan to have negative effects on competition and to
increase the barriers to entry in this market, but preliminarily
believes that Plan provisions and Commission oversight could mitigate
these risks.
The market for trading services, which is served by exchanges,
ATSs, and liquidity providers (internalizers and others), relies on
competition to supply investors with execution services at efficient
prices. These trading venues, which compete to match traders with
counterparties, provide a framework for price negotiation and
disseminate trading information. The market for trading services in
options and equities consists of 19 national securities exchanges,
which are all Plan Participants,\1022\ and off-exchange trading venues
including broker-dealer internalizers, which execute substantial
volumes of transactions, and 44 ATSs, which are not Plan
Participants.\1023\ Since the adoption of Regulation NMS in 2005, the
market for trading services has become more fragmented and competitive,
and there has been a shift in the market share of trading volume among
trading venues. For instance, from 2005 to 2013, there was a decline in
the market share of trading volume for exchange-listed stocks on NYSE.
At the same time, there was an increase in the market share of newer
national securities exchanges such as NYSE Arca, BATS-Z, BATS-Y, EDGA
and EDGX.\1024\ During the same time period, the proportion of NMS
Stocks trading off-exchange (which includes both internalization and
ATS trading) increased; for example, during the second quarter of 2015,
NMS Stock ATSs alone comprised approximately 15 percent of consolidated
volume, and other off-exchange volume totaled 18 percent of
consolidated volume over the same period.\1025\ Aside from trading
venues, exchange market makers provide trading services in the
securities market. These firms stand ready to buy and sell a security
``on a regular and continuous basis at publicly quoted prices.'' \1026\
Exchange market makers quote both buy and sell prices in a security
held in inventory, for their own account, for the business purpose of
generating a profit from trading with a spread between the sell and buy
prices. Off-exchange market makers also stand ready to buy and sell out
of their own inventory, but they do not quote buy and sell
prices.\1027\
---------------------------------------------------------------------------
\1022\ The Commission understands that ISE Mercury, LLC will
become a Participant in the CAT NMS Plan and thus is accounted for
as a Participant for purposes of this Notice. See supra note 3.
\1023\ See Concept Release on Equity Market Structure, at 3598-
3560, supra note 733 (for a discussion of the types of trading
centers); see also Alternative Trading Systems with Form ATS on File
with the SEC as of April 1, 2016, available at https://www.sec.gov/foia/ats/atslist0416.pdf.
\1024\ See Securities Exchange Act Release No. 76474 at 81112,
``Regulation of NMS Stock Alternative Trading Systems'', available
at https://www.sec.gov/rules/proposed/2015/34-76474.pdf.
\1025\ See id. at 81124.
\1026\ See ``Market Maker'', available at https://www.sec.gov/answers/mktmaker.htm (last visited April 18, 2016).
\1027\ Laura Tuttle, OTC Trading: Description of Non-ATS OTC
Trading in National Market System Stocks (March 2014), available at
https://www.sec.gov/dera/staff-papers/white-papers/otc-trading-white-paper-03-2014.pdf.
---------------------------------------------------------------------------
The Plan examined the effect of the CAT NMS Plan on the market for
trading services primarily from the perspective of the exchanges. The
Plan asserts that distribution of regulatory costs incurred by the Plan
would be distributed according to ``the Plan's funding principles,''
calibrated to avoid placing ``undue burden on exchanges relative to
their core characteristics,'' and would thus not cause any exchange to
be at a relative ``competitive disadvantage in a way that would
materially impact the respective Execution Venue marketplaces.'' \1028\
Likewise, the Plan asserts that its method of cost allocation would
avoid discouraging entry into the Participant community because a
potential entrant, like an ATS, would ``be assessed exactly the same
amount [of allocated CAT-related fees] for a given level of activity''
both before and after becoming an exchange.\1029\
---------------------------------------------------------------------------
\1028\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(a)(i); see also id. at Section 11.2 (for a discussion of the
Plan's funding principles); Section, III.A.3.d, supra.
\1029\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(a)(i).
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[[Page 30740]]
The Commission also examined the effect of the funding model on
competition in the market for trading services, including off-exchange
liquidity suppliers and ATSs. In addition, the Commission considered
the effect of implementation and ongoing costs of the Plan, whether
particular elements of the Plan could hinder competition, and the
effect of enhanced surveillance on competition in the market for
trading services.
(1) The Funding Model
As noted above, the Operating Committee would fund the Central
Repository by allocating its costs across exchanges, FINRA, ATSs and
broker-dealers.\1030\ The Operating Committee would decide which
proportion of costs would be funded by exchanges, FINRA, and ATSs and
which portion would be funded by broker-dealers. The Plan does not
specify how the Operating Committee would select this allocation.
However, the portion allocated to the exchanges, FINRA, and ATSs would
be divided among them according to market share of share volume and the
portion allocated to broker-dealers would be divided among them
according to message traffic, including message traffic sent to and
from an ATS.\1031\ The Operating Committee would allocate fees for the
equities market and options market separately based on market share in
each market. The Operating Committee would file the fees resulting from
its funding model with the Commission under the Exchange Act.
---------------------------------------------------------------------------
\1030\ See id. at Article XI.
\1031\ Id.
---------------------------------------------------------------------------
Any entity that becomes a new exchange would be required to join
the CAT NMS Plan as a Participant. In addition, any new Participant to
the Plan must pay a ``Participation Fee,'' to the Company ``in an
amount determined by a Majority Vote of the Operating Committee as
fairly and reasonably compensating the Company and the Participants for
costs incurred in creating, implementing, and maintaining the CAT.''
\1032\ This Participation Fee would be based on, among other potential
factors, capital expenditures paid by the Company amortized over five
years, costs incurred by the Company to accommodate the new
Participant, and Participant Fees paid by other new Participants.\1033\
---------------------------------------------------------------------------
\1032\ See id. at Section 3.3. The Commission notes that the
Plan does not specify the Participation Fee. The Commission expects
this fee to be filed as an amendment to the CAT NMS Plan under Rule
608 of Regulation NMS. See 17 CFR 242.608.
\1033\ The Commission notes that Section 3.3(b)(v) of the CAT
NMS Plan states, ``In the event the Company (following the vote of
the Operating Committee contemplated by Section 3.3(a)) and a
prospective Participant do not agree on the amount of the
Participation Fee, such amount shall be subject to review by the
Commission pursuant to Sec. 11A(b)(5) of the Exchange Act.'' See
CAT NMS Plan, supra note 3, at Section 3.3(b)(v); see also text
accompanying notes 1038-1039, infra.
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The Commission preliminarily believes that any impacts of such fees
on competition in the market for trading services would manifest either
through the model for the fees itself or through the later allocation
of the fees across market participant types, across equity or options
exchanges or, within market participant types and markets, through the
levels of fees paid by each tier. Each of the different channels
through which the Plan could have an adverse effect on competition is
discussed separately below.
A. Funding Model
As discussed in Section IV.F.4.d, the Commission preliminarily
believes that the structure of the funding model could provide a
competitive advantage to exchanges over ATSs. The Plan states that an
entity would be assessed exactly the same amount for a given level of
activity whether it acted as an ATS or an exchange.\1034\ However,
FINRA would be charged fees based on the market share of off-exchange
trading. ATSs, which are FINRA members, would presumably pay a portion
of the FINRA fee through their broker-dealer membership fees. In
addition, ATSs would pay a fee for their market share, which is a
portion of the total off-exchange market share. Therefore, ATS volume
would effectively be charged once to the broker-dealer operating the
ATS and a second time to FINRA.\1035\ This would result in ATSs paying
more than exchanges for the same level of activity. Ultimately, if the
funding model disadvantages ATSs relative to registered exchanges,
trading volume could migrate to exchanges in response, and ATSs could
have incentives to register as exchanges as well.\1036\
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\1034\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(iii)(C).
\1035\ Id. at Section 11.3(b).
\1036\ The Commission notes that ATSs currently incur a
different set of regulatory fees than are incurred by exchanges,
because ATSs are required to be members of a national securities
association. FINRA charges its members fees to cover its regulatory
costs. See FINRA Manual: Corporate Organization: By-Laws of the
Corporation: Schedule A: Section 1--Member Regulatory Fees,
available at https://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4694 (``FINRA shall, in
accordance with this Section, collect member regulatory fees that
are designed to recover the costs to FINRA of the supervision and
regulation of members, including performing examinations, financial
monitoring, and policy, rulemaking, interpretive, and enforcement
activities.'').
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Additionally, the Commission preliminarily believes that the
Participation Fee could discourage new entrants or the registration of
an ATS as an exchange, increasing the barriers to entry to becoming an
exchange. In particular, the factors listed in the Plan for determining
the Participation Fee consider the previous costs incurred by the
existing Participants but not the costs already incurred by the new
Participant when it acted as an ATS.\1037\ However, the Plan does not
prescribe a set formula for determining the Participation Fee and the
Plan does not preclude considering previous costs incurred by the ATS
in the Participation Fee. In addition, although amendments designated
by sponsors to an NMS plan as establishing or changing a fee may be
effective upon filing with the Commission,\1038\ the Commission may
summarily abrogate the amendment that establishes (or in the future,
changes) the Participation Fee within 60 days of its filing and require
that the fee amendment be refiled in accordance with Rule 608(a)(1) and
reviewed in accordance with Rule 608(b)(2) of Regulation NMS, if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or the
maintenance of fair and orderly markets, to remove impediments to, and
perfect the mechanisms of, a national market system or otherwise in
furtherance of the purposes of the Act.\1039\
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\1037\ See CAT NMS Plan, supra note 3, at Section 3.3(b).
\1038\ See 17 CFR 242.608(b)(3)(i).
\1039\ See 17 CFR 242.608(a)(1); 608(b)(2); 608(b)(3)(i); and
608(b)(3)(iii). Pursuant to Rule 608(b)(2) of Regulation NMS, the
Commission shall approve such amendment, with such changes or
subject to such conditions as the Commission may deem necessary or
appropriate, if it finds that such amendment is necessary or
appropriate in the public interest, for the protection of investors
and the maintenance of fair and orderly markets, to remove
impediments to, and perfect the mechanisms of, a national market
system, or otherwise in furtherance of the purposes of the Act.
Approval of the amendment shall be by Commission order.
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Further, because the funding model seems to charge ATSs more for
their market share than exchanges, ATSs could pay relatively less for
their market share as an exchange than as an ATS, countering this
barrier to entry depending on the magnitudes of the two fee types.
B. Allocation of Fees
The Plan discusses the allocation of fees among market participants
of different sizes within the same market participant type (Execution
Venues versus broker-dealers), but does not
[[Page 30741]]
discuss the allocation of fees across the different market participant
types or markets. The Operating Committee would determine this
allocation and would submit a filing to the Commission, which would be
subject to Commission review and public comment.\1040\ The Commission
recognizes the potential for the Operating Committee to influence the
market for trading services either by coordinating to favor one segment
over another, or through an imbalance in the voting rights on the
Operating Committee. The Commission also preliminarily believes that
the Plan contains governance provisions that could mitigate such
potential burdens on competition.
---------------------------------------------------------------------------
\1040\ See supra notes 78 and 79 (describing how fee schedules
for CAT could be filed and noting that they could take effect upon
filing with the Commission).
---------------------------------------------------------------------------
The Commission recognizes that the potential for a burden on
competition and effects on competitors in the market for trading
services could arise from provisions relating to the allocation and
exercise of voting rights. In particular, a concentration of influence
over Committee decisions could directly and indirectly affect
competition. The potential for concentration of influence over vote
outcomes arises from proposed provisions to give one vote to each Plan
Participant \1041\ in an environment where some Participants are
Affiliated SROs.\1042\ Indeed, supermajority approval could be achieved
through five of the 10 groups of Affiliated SROs and majority approval
could be achieved with just four such groups.\1043\ In light of this
potential for concentration, voters could weigh some particular
interests more than others. For example, the Participant groups with
options exchanges could have the incentive to allocate a
disproportionately low level of fees for options market share than for
equity market share. Such an allocation could disadvantage competing
Participants with only equities exchanges.
---------------------------------------------------------------------------
\1041\ See CAT NMS Plan, supra note 3, at Section 4.3.
\1042\ The CAT NMS Plan states that the Operating Committee
shall consist of one voting member representing each Participant and
that one individual may serve as the voting member of the Operating
Committee for multiple Affiliated Participants and shall have the
right to vote on behalf of each such Affiliated Participant. See id.
at Section 4.2(a).
\1043\ The twenty SROs that are Participants in the CAT NMS Plan
include five sets of affiliated SROs (New York Stock Exchange LLC,
NYSE Arca, Inc., and NYSE MKT LLC (the ``NYSE Group''); The NASDAQ
Stock Market LLC, NASDAQ OMX BX, Inc., and NASDAQ OMX PHLX LLC (the
``NASDAQ Group''); BATS Exchange, Inc., BATS Y-Exchange, Inc., EDGX
Exchange, Inc., and EDGA Exchange, Inc. (the ``BATS Group'');
Chicago Board Options Exchange, Incorporated and C2 Options
Exchange, Incorporated (the ``Chicago Options Group'');
International Securities Exchange, LLC, ISE Gemini, LLC, and ISE
Mercury, LLC (the ``ISE Group''); and five independent SROs
(National Stock Exchange, Inc.; Chicago Stock Exchange, Inc.; BOX
Options Exchange LLC; Miami International Securities Exchange LLC;
and Financial Industry Regulatory Authority, Inc.). The BATS Group
has four votes, the NYSE Group, the NASDAQ Group and the ISE Group
each have three votes, and the Chicago Options Group has two votes.
See CAT NMS Plan, supra note 3, at Appendix C, Section D.11(b)
(Affiliated Participant Groups and Participants without
Affiliations). A majority approval requires eleven votes. This could
include as few as four of the SROs and sets of affiliated SROs: the
affiliated SROs that have four votes, two sets of affiliated SROs
that have three votes, and one other SRO or set of affiliated SROs.
Supermajority approval requires fourteen votes. This could include
as few as five SROs and sets of affiliated SROs: the affiliated SROs
that have four votes, three sets of affiliated SROs with three
votes, and any additional SRO. Note also that as few as two sets of
affiliated SROs could block a Supermajority approval by casting
seven ``no'' votes: the affiliated SROs with four votes and any one
of the affiliated SROs with three votes.
---------------------------------------------------------------------------
The inclusion of all exchanges on the Operating Committee could
give the Plan Participants opportunities and incentives to share
information and coordinate strategies in ways that could reduce the
competition among exchanges or could create a competitive advantage of
exchange trading over off-exchange trading.\1044\ However, the
Commission preliminarily believes that the Plan would limit these
potential burdens on competition. In particular, the Plan includes
provisions designed to limit the flow of information between the
employees of the Plan Participants who serve as members of the
Operating Committee and other employees of the Plan Participants.\1045\
Additionally, the Plan includes provisions that guide the Operating
Committee to set fees between exchanges and ATSs in a tiered fashion,
based upon market share.\1046\ Finally, Commission oversight could also
mitigate any concerns that burdens on competition might arise as a
result of this approach.
---------------------------------------------------------------------------
\1044\ See infra note 1272. The Commission notes that FINRA
could represent the perspectives of the off-exchange portion of the
market, but FINRA would have only one vote and exchanges would have
nineteen.
\1045\ See CAT NMS Plan, supra note 3, at Section 9.6(a)
(Participants may share Plan information with their employees and
other Representatives on a need-to-know basis; their use of Plan
information is restricted to what is needed to achieve plan
regulatory objectives). Details on the implementation of these
confidentiality provisions are not stated. However, see also id. at
Section 9.6(c) (Participants may share information among themselves
without Operating Committee approval in some instances).
\1046\ See id. at Section 11.3; Appendix C, Section
B.7(b)(iv)(C).
---------------------------------------------------------------------------
Additionally, the Commission agrees with the Plan's assessment that
some governance features of the Plan would limit adverse effects on
competition in the market for trading services. The governance
structure of the Plan contains provisions to limit the incentive and
ability of Operating Committee members to serve the private interests
of their employers, such as rules regulating conflicts of
interest.\1047\ Such governance provisions could mitigate the potential
for members of the Operating Committee to use their influence over the
fee schedule to benefit their own enterprise in a way that unfairly
harms the customers of competing exchanges and ATSs and places a burden
on competition. Moreover, as discussed above, the Commission may
summarily abrogate and require the filing of Plan amendments that
establish or change a fee in accordance with Rule 608(a)(1) and review
such amendments in accordance with Rule 608(b)(2) of Regulation NMS, if
it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
the maintenance of fair and orderly markets, to remove impediments to,
and perfect the mechanisms of, a national market system or otherwise in
furtherance of the purposes of the Act.\1048\ In such a case, if the
Commission chooses to approve such amendment, it would be by order and,
with such changes or subject to such conditions as the Commission may
deem necessary or appropriate.
---------------------------------------------------------------------------
\1047\ See supra note 796.
\1048\ See supra note 1039.
---------------------------------------------------------------------------
(2) Costs of Compliance
Because all Participants but one compete in the market for trading
services, the ability of affiliates to vote as a group could in
principle allow a few large Participant groups to influence the outcome
of competition in the market for trading services by making various
decisions that can alter the costs of one set of competitors more than
another set. Further, the Plan would allocate profits and losses from
operating the Central Repository equally across Participants, which
could advantage small exchanges in the event of a profit and
disadvantage small exchanges in the event of a loss. This could
negatively impact competition if the cost differentials are unnecessary
in light of the cost-benefit trade-offs of alternatives and if the cost
differentials are significant enough to alter the set of services that
some Participants offer.
Generally, smaller competitors could have implementation and
ongoing costs of compliance that are disproportionate
[[Page 30742]]
relative to their size. Any choices that could exacerbate these
differences could potentially result in the exit of smaller
competitors. To lessen the impact of funding the Central Repository on
smaller exchanges and ATSs, the Plan would apply a tiered funding model
that charges the smallest exchanges and ATSs the lowest fees. Likewise,
the Plan would apply a tiered funding model that would charge the
smallest broker-dealers, including liquidity suppliers, the lowest
fees. However, the Commission notes that the Plan does not indicate
whether off-exchange liquidity providers would pay fees similar to
similarly-sized ATSs and exchanges.
In addition, as noted above, the Plan provides that the Technical
Specifications would not be finalized until after the selection of a
Plan Processor, which would not occur until after any decision by the
Commission to approve the Plan.\1049\ The Commission recognizes that
the costs of compliance associated with future technical choices or the
selection of the Plan Processor could exacerbate the relative cost
differential across competitors. For example, the Affiliated
Participants on the Selection Committee could favor a Plan Processor
that employs technology that would make implementation costs relatively
higher for the exchanges that do not have affiliates. In addition, the
Affiliated Participants, who have more votes on the Operating
Committee, could be amenable to adding particular CAT Data items in the
future that could expose violations on other exchanges, but not be
amenable to CAT Data items that could expose violations on their own
exchanges. While those groups could still use such data to surveil
their own exchanges, if not in CAT Data, the data items would not be
available for cross-market surveillance or efficient Commission
examinations and enforcement. As such, the independent exchanges, which
have only one vote on the Operating Committee, could face higher
regulatory costs than exchanges of the Affiliated Participants.
However, for the same reasons as stated above, the Commission
preliminarily believes that the governance provisions of the Plan and
Commission oversight could help to mitigate such effects on these
competitors in the market for trading services.
---------------------------------------------------------------------------
\1049\ See Section IV.C.2, supra.
---------------------------------------------------------------------------
(3) Enhanced Surveillance and Deterrence
The Commission also preliminarily believes that the CAT NMS Plan
could promote competition in the market for trading services through
enhanced surveillance and the deterrence of violative behavior that
could inhibit competition.\1050\ Should the Plan deter violative
behavior, passive liquidity suppliers, such as on or off-exchange
market makers could increase profits as a result of reduced losses from
others' violative behavior. This increase in profits could encourage
new entrants or could spark greater competition, which reduces
transaction costs for investors. For example, spoofing, which involves
building up the apparent depth of the market to trigger particular
trading patterns and then trading against those patterns, could cause
confusion about bona-fide supply and demand for a particular security.
Liquidity providers could compete less than is optimal to provide
liquidity in that security out of fear that they could suffer a decline
in profitability if they trade at inopportune times as a result of
others' spoofing behavior. If the Plan facilitates surveillance
improvements that deter spoofing, it could increase incentives to
provide liquidity and promote lower transaction costs for investors,
particularly in stocks that may lack a critical mass of competing
liquidity providers or that could be targets for violative trading
behavior.
---------------------------------------------------------------------------
\1050\ See Section IV.E.2.c, supra, for a discussion of how the
CAT NMS Plan would enhance surveillance and deter violative
behavior.
---------------------------------------------------------------------------
b. Market for Broker-Dealer Services
The Commission analyzed the effect of the CAT NMS Plan on the
market for broker-dealer services. For simplification, the Commission
presents its analysis as if the market for broker-dealer services
encompasses one broad market with multiple segments even though, in
terms of competition, it actually may be more realistic to think of it
as numerous inter-related markets. The market for broker-dealer
services covers many different markets for a variety of services,
including, but not limited to, managing orders for customers and
routing them to various trading venues, holding customer funds and
securities, handling clearance and settlement of trades, intermediating
between customers and carrying/clearing brokers, dealing in government
bonds, private placements of securities, and effecting transactions in
mutual funds that involve transferring funds directly to the issuer.
Some broker-dealers may specialize in just one narrowly defined
service, while others may provide a wide variety of services.
The market for broker-dealer services relies on competition among
broker-dealers to provide the services listed above to their customers
at efficient levels of quality and quantity. The broker-dealer industry
is highly competitive, with most business concentrated among a small
set of large broker-dealers and thousands of small broker-dealers
competing for niche or regional segments of the market. To limit costs
and make business more viable, small broker-dealers often contract with
larger broker-dealers or service bureaus to handle certain functions,
such as clearing and execution, or to update their technology.\1051\
Large broker-dealers typically enjoy economies of scale over small
broker-dealers and compete with each other to service the smaller
broker-dealers, who are both their competitors and their customers.
---------------------------------------------------------------------------
\1051\ See Securities Exchange Act Release No. 63241 (November
3, 2010), 75 FR 69791, 69822 (November 15, 2010) (Risk Management
Controls for Brokers or Dealers with Market Access).
---------------------------------------------------------------------------
There are approximately 1,800 broker-dealers likely to be CAT
Reporters, while approximately 2,338 broker-dealers would not be CAT
Reporters because their businesses do not involve reportable events in
securities covered by the Plan.\1052\ Further, broker-dealers that are
anticipated to have CAT reporting obligations could compete with the
broker-dealers that would not have CAT reporting responsibilities in
various broker-dealer market segments that are unrelated to CAT
reporting. Some broker-dealers may offer specialized services in one
line of business mentioned above, while other broker-dealers may offer
diversified services across many different lines of businesses. As
such, the competitive dynamics within each of these specific lines of
business for broker-dealers is different, depending on the number of
broker-dealers that operate in the given segment and the market share
that the broker-dealers occupy.
---------------------------------------------------------------------------
\1052\ Examples of these business activities include
underwriting and advising. See supra note 864.
---------------------------------------------------------------------------
The Commission preliminarily believes costs of compliance incurred
by broker-dealers to comply with the Plan, particularly to report order
events to the Central Repository, will differ substantially between
broker-dealers and may affect competition between smaller and larger
broker-dealers. As discussed previously in the Commission's analysis of
Costs, broker-dealers that outsource regulatory data reporting
activities are expected to see their costs of regulatory data reporting
increase, while broker-dealers that Insource may see a decrease in
their regulatory data reporting costs.\1053\ The Commission
preliminarily believes this
[[Page 30743]]
dynamic may affect competition between Outsourcers (that tend to be
smaller) and Insourcers (that tend to be larger), and may increase
barriers to entry in some segments of this market.
---------------------------------------------------------------------------
\1053\ See Section IV.F.1.c(2)C, supra.
---------------------------------------------------------------------------
The Plan discusses certain aspects of competition pertaining to
broker-dealers that relate to costs and the allocation of fees. The
Plan states, ``[b]roker-dealer competition could be impacted if the
direct and indirect costs associated with meeting the CAT NMS Plan's
requirements materially impact the provision of their services to the
public. Further, competition may be harmed if a particular class or
group of broker-dealers bears the costs disproportionately . . . .''
The Plan asserts that it would have little to no adverse effect on
competition between large broker-dealers, and would not materially
disadvantage small broker-dealers relative to large broker-dealers.
Regarding small broker-dealers, the Plan states, ``. . . . [the
allocation of costs on broker-dealers based on their contribution to
market activity] may be significant for some small firms, and may even
impact their business models materially . . . .'' and that the
Participants were sensitive to the burdens the Plan could impose on
small broker-dealers, noting that such broker-dealers could incur
minimal costs under their existing regulatory reporting requirements
``because they are OATS-exempt or excluded broker-dealers or limited
purpose broker-dealers.'' The CAT NMS Plan attempts to mitigate its
impact on these broker-dealers by proposing to follow a cost allocation
formula that (in expectation) charges lower fees to smaller broker-
dealers; furthermore, Rule 613 provides them additional time to
commence their reporting requirements.
The Commission preliminarily agrees with the Plan's general
assessment of competition among broker-dealers, and also with the
Plan's assessment of differential effects on small versus large broker-
dealers. The Commission agrees that the Plan's funding model is an
explicit source of financial obligation for broker-dealers and
therefore an important feature to evaluate when considering potential
differential effects of the Plan on competition in the market for
broker-dealers. The Commission understands that the tiered funding
model should result in the smallest broker-dealers paying the smallest
fees, but the Plan does not outline how the magnitudes of fees would
differ across the tiers. The Commission also recognizes that the
potentially greater level of service specialization that may
characterize small broker dealers and the potentially non-linear
economies of scale may result in the compliance costs associated with
the Plan competitively disadvantaging small broker-dealers, on average,
relative to large broker-dealers.
However, the Commission preliminarily believes that the segments of
the market most likely to experience higher barriers to entry are those
that currently have no data reporting requirements of the type the Plan
requires and those that would involve more CAT Reporting obligations,
such as the part of the broker-dealer market that involves connecting
to exchanges, because of the technology infrastructure requirements and
the potential to have to report several types of order events.\1054\
The opportunity to rely on service bureaus or other solutions to reduce
the costs of complying with the Plan could limit any increases in the
barriers to entry in this market. Nonetheless, the Commission
preliminarily believes that any increases in the barriers to entry are
justified because they are necessary in order for the CAT Data to
include data from small broker-dealers. In the Adopting Release, the
Commission explained that excluding small broker-dealers from reporting
requirements would ``eliminate the collection of audit trail
information from a segment of the broker-dealer community and would
thus result in an audit trail that does not capture all orders by all
participants in the securities markets.'' \1055\ The Commission further
noted that ``illegal activity, such as insider trading and market
manipulation, can be conducted through accounts at small broker-dealers
just as readily as it can be conducted through accounts at large
broker-dealers'' and that ``granting an exemption to certain broker-
dealers might create incentives for prospective wrongdoers to utilize
such firms to evade effective regulatory oversight through the
consolidated audit trail.'' \1056\
---------------------------------------------------------------------------
\1054\ The majority of broker-dealers do not directly engage in
exchange trading, and most broker-dealers are not expected to have
CAT reporting obligations. See supra note 864.
\1055\ See Adopting Release supra note 9, at 45749.
\1056\ See id.
---------------------------------------------------------------------------
The Commission also recognizes that the Plan could affect the
current relative competitive positions of broker-dealers in the market
for broker-dealer services. To varying degrees, the economic impacts
resulting from the Plan could benefit some broker-dealers and adversely
affect others. The magnitude of these effects on broker-dealers could
vary across and within categories of broker-dealers and classes of
securities. However, there is no clear reason to expect these impacts,
should they occur, to decrease the current state of overall competition
in the market for broker-dealer services so as to materially burden the
price or quality of services received by investors on average.
Regardless of the differential effects of the CAT NMS Plan on small
versus large broker-dealers, it is the Commission's preliminary view
that the CAT NMS Plan, in aggregate, would likely not reduce
competition and efficiency in the overall market for broker-dealer
services. Even if small broker-dealers potentially face a burden, this
may not necessarily have an adverse effect on competition as a whole in
the overall market for broker-dealer services. Under the CAT NMS Plan,
broker-dealers would have greater reporting responsibilities than they
would otherwise have. Broker-dealers could face high upfront
infrastructure costs to set up a processing environment to meet
reporting responsibilities. Because these infrastructure costs are
upfront, fixed costs, the burden to bear these costs could be
potentially greater for small broker-dealers. Instead of bearing these
costs in-house, small broker-dealers could contract with outside
technology vendors for reporting services. This outcome could lead to
lower costs relative to not using a vendor for reporting services. For
these reasons, even firms that currently do not report to OATS, but
will be CAT Reporters under the Plan, could face manageable upfront
costs that permit them to continue in their line of business without a
severe setback in their profitability.
The Commission notes that a difficulty in assessing the likely
impacts of the CAT NMS Plan on competition among broker-dealers is that
competition in the markets for different broker-dealer services could
be affected in different ways. As mentioned above, there is great
diversity in the business activities of broker-dealers. Broker-dealer
services that are likely to incur CAT reporting responsibilities
include: executing orders, whether it be as an ATS or acting as a
carrying broker-dealer; intermediating between customers and carrying/
clearing brokers; effecting transactions in mutual funds that involve
transferring funds directly to the issuer; writing options; and acting
as an exchange floor broker. As noted above, these broker-dealers may
also compete with the approximately 2,338 other broker-dealers in
market segments that are not related to CAT reporting, such as dealing
in municipal bonds or arranging
[[Page 30744]]
private placements of securities.\1057\ If CAT costs represent a
significant increase in overall costs, the Plan could disadvantage
broker-dealers who are CAT Reporters in the market segments that do not
require CAT reporting. For example, broker-dealers that, in addition to
providing services related to market transactions that are reportable
to CAT, also compete to provide fixed-income order entry as a line of
business may be at a relative disadvantage to competitors in the fixed-
income market who do not provide broker-dealer services that are
related to market activity that is reportable to CAT. Whether this
disadvantage amounts to a substantial reduction in competition in
various markets depends on the magnitude of the disadvantage and
whether it affects the price and level of services available to
investors.
---------------------------------------------------------------------------
\1057\ See Section IV.F.1.c, supra.
---------------------------------------------------------------------------
The Commission recognizes that the CAT NMS Plan could result in
fewer broker-dealers providing specialized services that trigger CAT
reporting obligations. The Commission preliminarily believes that this
potential effect on broker-dealer specialization depends on whether
three key conditions are met. First, the effect requires that, compared
to large broker-dealers, small broker-dealers disproportionately
specialize in providing regional or niche services to a particular
market segment of clients. Second, the effect requires that this
specialization is correlated with business risk associated with changes
in marginal cost. Finally, the effect requires that the compliance
costs of the CAT NMS Plan could affect the ability for some small
broker-dealers to provide these specialized services. This effect, in
which fewer broker-dealers compete in specialized market segments,
could thereby negatively affect the competitive dynamics in these
market segments, especially if these segments currently contain
relatively few broker-dealers. The Commission preliminarily believes
that these conditions could hold, particularly for smaller broker-
dealers, and result in fewer broker-dealers operating in specialized or
niche markets if the Plan is approved.
The Commission recognizes, however, that fewer broker-dealers in a
specialized segment of the market may not necessarily harm competition
in that segment. In particular, the costs of compliance with the Plan
may be less of a relative burden for large broker-dealers who may,
compared to small broker-dealers, provide a larger portfolio of
specialized services to clients. This portfolio may buffer large
broker-dealers from business risk associated with specialization.
Because of the lower relative burden, large broker-dealers are more
likely to maintain their presence in specialized market segments. If a
sufficient number of large broker-dealers, or all broker-dealers more
generally, maintain their presence in specialized market segments, a
net decrease in broker-dealers may not affect the competition in such
market segments to a level in which the market segment offers fewer or
lower quality services or higher prices. However, the Commission
recognizes that negative effects on competition in specialized market
segments could result if broker-dealers achieve a level of market
concentration necessary to adversely affect prices for investors.
c. Market for Regulatory Services
SROs compete in the market for regulatory services.\1058\
Regulatory functions include market surveillance, cross-market
surveillance, oversight, compliance, investigation, and enforcement, as
well as the registration, testing, and examination of broker-dealers.
Although the Commission oversees exchange SROs' supervision of trading
on their respective venues, the responsibility for direct supervision
of trading on an exchange resides in the SRO that operates the
exchange. Currently, SROs compete to provide regulatory services in at
least two ways. First, because SROs are responsible for regulating
trading within venues they operate, their regulatory services are
bundled with their operation of the venue. Consequently, for a broker-
dealer, selecting a trading venue also entails the selection of a
provider of regulatory services surrounding the trading activity.
Second, SROs could provide this supervision not only for their own
venues, but for other SROs' venues as well through the use of
Regulatory Service Agreements or a plan approved pursuant to Rule 17d-2
under the Exchange Act.\1059\ Consequently, SROs compete to provide
regulatory services to venues they do not operate. Because providing
trading supervision is characterized by high fixed costs (such as
significant IT infrastructure and specialized personnel), some SROs
could find that another SRO could provide some regulatory services at a
lower cost than it would incur to provide this service in-house. Until
recently, nearly all the SROs that operate equity and option exchanges
contracted with FINRA for some or much of their trading surveillance
and routine inspections of members' activity.\1060\
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\1058\ FINRA is the SRO responsible for supervision of trading
off-exchange, which includes trading occurring on ATSs.
\1059\ 17 CFR 240.17d-2.
\1060\ Every equity exchange except CHX and NSX has an RSA with
FINRA which allows FINRA to provide cross-market surveillance for
nearly 100% of the equity markets. These RSAs differ in scope, but
in every case these contracts represent a partnership between FINRA
and the other SROs to provide a full set of effective regulatory
services. Recently NYSE Group and NASDAQ OMX decided to
significantly scale back their RSA with FINRA and directly resume
most of their market surveillance and investigation regulatory
obligations.
---------------------------------------------------------------------------
As a result, the market for regulatory services in the equity and
options markets currently has one dominant competitor, FINRA. This may
provide relatively uniform levels of surveillance across trading
venues. One SRO having a competitive advantage in providing such
services could also limit the incentives to innovate in surveillance.
Hypothetically, increases in the competition to provide regulatory
services could promote regulatory oversight of exchanges and investor
protection for investors. To the extent that a regulator could improve
on current regulatory oversight, this could result in a better
functioning, more liquid, financial market. However, it is possible
that increased competition between SROs to provide regulatory services
could have negative effects on the market if SROs compete on the basis
of providing light-touch regulation, which might be less likely to
detect violative activity.
The Commission preliminarily believes that the Plan could provide
opportunities for increased competition in the market to provide
regulatory services. In particular, designated regulatory Staff from
all of the SROs would have access to CAT Data, which would reduce the
differences in data access across SROs.\1061\ This could reduce
barriers to entry in providing regulatory services because data would
be centralized and standardized, possibly reducing economies of scale
in performing surveillance activities.\1062\ Furthermore, because some
types of
[[Page 30745]]
previously infeasible surveillance would become possible with the
availability of additional data,\1063\ SROs would have greater
opportunities to innovate in the type of surveillance that is
performed, and the efficiency with which it is performed. In addition,
when as Rule 613(a)(3)(iv) requires, SROs implement new or updated
surveillance within 14 months after effectiveness of the CAT NMS
Plan,\1064\ any SRO could reconsider its approach to outsourcing its
own regulation and whether it wants to compete for regulatory service
agreements.
---------------------------------------------------------------------------
\1061\ Without a Central Repository, an SRO wishing to compete
as a regulatory services provider would need to invest in the IT
infrastructure and enter into the data access agreements necessary
to surveil broadly beyond its exchanges' data resources. By
providing access to consolidated trade and order data to all SROs,
CAT may reduce barriers to entry for this market. See Exemption for
Certain Exchange Members, supra note 394, at 18057-58 (describing
the barriers to entry of potential new national securities
associations).
\1062\ The Commission recognizes that efficient access to data
is not the only prerequisite for entering the market to provide
regulatory services and that high barriers to entry may still
characterize this market.
\1063\ See Section IV.G.2.a, infra, for a discussion of the
efficiency improvements for surveillance.
\1064\ 17 CFR 242.613(a)(3)(iv).
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d. Market for Regulatory Data Reporting Services
The Commission analyzed the effect of the CAT NMS Plan on
competition in the market for data reporting services with a focus on
its impact on the costs incurred by broker-dealers to comply with the
Plan. As discussed in the Costs Section above, the Commission
preliminarily believes that many broker-dealers, particularly smaller
broker-dealers, would fulfill their CAT Reporting obligations by
outsourcing to service bureaus and that the fees charged by the service
bureaus would be a major cost driver for these broker-dealers. Further,
these fees would factor into the increase in barriers to entry in the
market for broker-dealer services.\1065\ Therefore, the Commission
preliminarily believes that any effects on competition in the market
for regulatory data reporting services could have a significant effect
on the costs incurred by broker-dealers in complying with the CAT NMS
Plan.
---------------------------------------------------------------------------
\1065\ See Section IV.G.1.b, supra.
---------------------------------------------------------------------------
The Plan provides information on broker-dealers' use of third-party
service providers to accomplish current regulatory data reporting. The
Plan notes that while some broker-dealers perform their regulatory data
reporting in-house, others outsource this activity. The Plan does not
state what proportion of broker-dealers currently outsources their
regulatory data reporting work. However, the Commission interviewed a
variety of broker-dealers and service bureaus in order to gain insight
into the scope of broker-dealers' use of data reporting services. As
noted in the Costs Section,\1066\ the Commission understands that most
firms outsource the bulk of their regulatory data reporting to third-
party firms. The Commission preliminarily believes that the competition
in the market to provide data reporting services is a product of firms
choosing to perform this activity in-house or to outsource it based on
a number of considerations including cost, with some firms choosing to
outsource this activity across multiple service providers.
---------------------------------------------------------------------------
\1066\ See Section IV.F.1.c(2)A, supra.
---------------------------------------------------------------------------
The market for regulatory data reporting services is characterized
by bundling, high switching costs, and barriers to entry. The high IT
infrastructure costs of regulatory data reporting creates economies of
scale that give rise to the data reporting services provided by service
bureaus. Broker-dealers, instead of investing in the IT infrastructure
necessary for regulatory data reporting, could share the costs of the
IT infrastructure with other broker-dealers by paying for a service
bureau to report for them. Often, service bureaus bundle regulatory
data reporting services with an order-handling system service that
provides broker-dealers with market access and order routing
capabilities.\1067\ Sometimes service bureaus bundle regulatory data
reporting services with trade clearing services.
---------------------------------------------------------------------------
\1067\ See Section IV.F.1.c(2)A, supra, for more information on
broker-dealer use of service bureaus.
---------------------------------------------------------------------------
In discussions with Staff, service bureaus stated that switching
service bureaus can be costly and involve complex onboarding processes
and requirements, that systems between service bureaus may be
disparate, and switching service providers may require different or
updated client documentation. However, service bureaus stated that on-
boarding operations were infrequent and that it was rare for broker-
dealers to switch between service providers. Difficulty switching
between service providers could limit the competition among service
bureaus to provide data reporting services, and impact the costs that
Outsourcers incur to secure regulatory data reporting services.
Furthermore, the high IT infrastructure costs also give rise to
barriers to entry, which could slow the entry of new market
participants into the market. Despite this, the trend in the market is
toward expansion.\1068\
---------------------------------------------------------------------------
\1068\ See supra note 920.
---------------------------------------------------------------------------
The Commission preliminarily believes that the Plan could alter the
competitive landscape in the market for data reporting services in
several ways. It is not clear whether demand for regulatory data
reporting services would increase or decrease; although more broker-
dealers would be required to report regulatory data, it is possible
that flexible reporting options allowed by the Plan could make
preparing data for reporting less onerous, leading to fewer firms
choosing to outsource this activity.
It is possible that the Plan would increase the demand for data
reporting services by requiring regulatory data reporting by broker-
dealers that may have previously been exempt due to size under
individual SRO rules.\1069\ Because more broker-dealers would be
required to report regulatory data under the Plan, the Commission
preliminarily believes there could be an opportunity for increased
competition in this market which might benefit all broker-dealers that
outsource their regulatory data reporting activity. However, it is also
possible that the increase in demand for data reporting services could
serve to entrench existing providers if they capture a large share of
newly created demand; this could lead to relatively higher costs for
broker-dealers than they would face in a more competitive market. The
potential increase in demand for data reporting services could impact
the capacity of already existing data reporting services to meet this
increase in demand, and this in turn could have implications for
competition and pricing in the market for data reporting services.
Considering the barriers to entry that characterize the market for data
reporting services and this potential increase in demand, service
bureaus could have less incentive to compete for broker-dealer clients
because these clients are no longer scarce, and as such, the CAT NMS
Plan could result in a decline in the competition for data reporting
services. It is possible that broker-dealers seeking to establish
relationships with service bureaus could have trouble securing them
because of the limited on-boarding capacity and need to on-board many
broker-dealers at once. In the short-run these capacity constraints and
the high demand could increase the costs of reporting through a service
bureau. However, the two year implementation period for large broker-
dealers and three year period for small broker-dealers could alleviate
the reduction in competition due to the onboarding capacity strain
because current service bureaus have time to increase their on-boarding
capacity and new entrants have time to build the necessary IT
infrastructure and a client base.
---------------------------------------------------------------------------
\1069\ See, e.g., FINRA Rule 7470.
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The CAT NMS Plan could also dramatically change the pool of firms
demanding data reporting services, which would be skewed toward firms
that are smaller and on average costlier to service, which could result
in higher
[[Page 30746]]
prices, which could eventually be passed onto investors. In addition to
small and medium sized broker-dealers that previously self-reported,
the CAT NMS plan would result in more broker-dealers having data
reporting responsibilities and the Commission preliminarily believes
that these broker-dealers would predominantly be small. For example,
very small broker-dealers that are currently exempt from OATS reporting
requirements could seek to establish service bureau relationships. In
addition, because the Plan would require additional elements in
regulatory data, particularly customer data, some broker-dealers that
currently self-report could no longer find it economically feasible to
continue to do so.
In addition to possibly increasing demand for data reporting
services, the CAT NMS Plan may have a mixed effect on the number of
firms offering data reporting services. This can impact the
competitiveness of this market, and affect the costs broker-dealers
bear in securing these services. On one hand, the number of firms
offering data reporting services could decrease, because the need to
secure PII might increase the likelihood of liability and litigation
risks in the event of a security breach.\1070\ On the other hand, it is
possible that the number of service bureaus offering data reporting
services would increase. New reporting requirements for numerous
broker-dealers could create opportunities for new entrants to meet this
demand. This could increase capacity and result in innovation in
providing these services, which could benefit broker-dealers needing
data reporting services by potentially reducing reporting costs, or at
least reducing the potential for cost increases. Lower reporting costs
for broker-dealers could in turn benefit the investors who are serviced
by these broker-dealers, through reduced costs.
---------------------------------------------------------------------------
\1070\ See Section IV.F.4.a(3), supra for a discussion of the
potential exit of service bureau resulting from the risk of a
security breach.
---------------------------------------------------------------------------
It is also possible that the Plan would decrease the demand for
data reporting services. Many broker-dealers currently pay another firm
(such as a service bureau) to fulfill their regulatory data reporting;
this may be because these broker-dealers find it would be more
expensive to handle the translation of their order management system
data into fixed formats, such as is required for OATS. If the Plan
Processor allows broker-dealers to send data to the Central Repository
in the formats that they use for normal operations, in drop copies for
example, these broker-dealers may no longer see a cost advantage in
engaging the services of a regulatory data reporting service provider
because one of the costs associated with regulatory data reporting--
having to translate data into a fixed format--will have been
eliminated.\1071\ Without the cost of having to translate data, some
broker-dealers that currently outsource OATS reporting could choose, at
the margin, to insource their regulatory data reporting.
---------------------------------------------------------------------------
\1071\ The Plan does not mandate the data ingestion format. See
CAT NMS Plan, supra note 3, at Appendix C, at Section A.1(b). The
Commission recognizes that the CAT Reporters Study found no
difference in expected costs for a fixed format, but requests
comment on why the costs may be similar when it would seem logical
that allowing flexible data reporting formats would reduce costs for
broker-dealers. See Request for Comment Nos. 318 and 331 in Section
IV.F.5, supra.
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The Commission preliminarily believes that this reduction in demand
would not likely be realized and, if realized, would be unlikely to
offset the increase in demand that would come from CAT reporters not
subject to OATS reporting. As noted in the Costs Section, of the 1,800
expected CAT Reporters, 868 do not currently report to OATS.\1072\ This
means that the Commission expects a large proportion of CAT Reporters
may be broker-dealers that currently do not have a service bureau for
regulatory data reporting but would choose to engage one to manage
their CAT reporting responsibilities. This is more than the
Commission's estimate of 806 current outsourcing broker-dealers.\1073\
Therefore, it is unlikely that the number of current Outsourcers that
choose to become Insourcers would be larger than the number of non-OATS
reporters that would elect to outsource. As a result, demand is more
likely to increase. Further, the requirement for CAT reports to use
listing exchange symbology could require pre-report data processing
even if the Plan Processor allows for the receipt of reports in the
formats that broker-dealers use for normal operations.\1074\ As a
result, the CAT NMS Plan is unlikely to eliminate the costs of
processing data prior to reporting that data to the Central Repository.
---------------------------------------------------------------------------
\1072\ The Plan estimates that 1,800 broker-dealers are expected
to have CAT reporting obligations. Based on data from FINRA, 932
broker-dealers currently report OATS data. 1,800-932=868. See
Section IV.F.1.c(2)A, supra.
\1073\ Id.
\1074\ See supra note 949.
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2. Efficiency
The Commission has analyzed the potential impact of the Plan on
efficiency. The Plan includes a discussion of certain efficiency
effects anticipated if the Plan is approved; as part of its economic
analysis, the Commission discusses these effects, as well as additional
effects on efficiency anticipated by the Commission. The Commission
preliminarily believes that the Plan as proposed is likely to result in
significant improvements in efficiency related to how regulatory data
is collected and used. The Plan also has the potential to result in
improvements in market efficiency by deterring violative activity that
could reduce market efficiency.\1075\ The Commission notes, however,
that efficiency gains from the retirement of duplicative and outdated
reporting systems would be delayed for up to two and a half years and
the interim period of increased duplicative reporting would impose
significant financial burden on Industry Members.\1076\
---------------------------------------------------------------------------
\1075\ The Commission has also analyzed the likely effect of the
Plan on allocative efficiency of existing capital within the
industry. These potential effects are discussed in Section IV.G.3,
infra.
\1076\ See Section IV.F.2, supra.
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a. Effect of the Plan on Efficiency
The Commission has analyzed the possible effects of the CAT NMS
Plan on efficiency. Specifically, building off the discussion in the
Plan, the Commission analyzed the effect of the Plan on the efficiency
of detecting violative behavior through examinations and enforcement,
on the efficiency of surveillance, on market efficiency through
deterrence of violative behavior, on operational efficiency of CAT
Reporters, and on efficiencies through reduced ad hoc data requests and
quicker access to data.
The current state of regulatory data collection and use provides
ample opportunity for efficiency improvements. First, regulators'
ability to efficiently perform cross-market surveillance is hindered by
data fragmentation.\1077\ Second, regulators' ability to efficiently
supervise and surveil market participants and carry out their
enforcement responsibilities is hindered by limitations in current
regulatory data.\1078\ Finally, there are a number of other
inefficiencies associated with the current system of regulatory data
collection. These include: Delays in data availability to regulators;
lack of direct access to data collected by other regulators results in
numerous ad-hoc data requests; and the need for regulatory Staff to
invest
[[Page 30747]]
significant time and resources to reconciling disparate data
sources.\1079\
---------------------------------------------------------------------------
\1077\ See Section IV.E.2.c, supra.
\1078\ See Section IV.E.2.c, supra.
\1079\ See Section IV.D.2.b, supra. These other inefficiencies
are discussed above in the Baseline and Benefits Sections.
---------------------------------------------------------------------------
The Plan discusses a number of expected efficiency effects
associated with the Plan, including both positive and negative
effects.\1080\ The Commission preliminarily agrees with the Plan's
assessment and has identified additional efficiency effects as well.
The Plan outlines several positive effects relating to efficiency in:
Monitoring for rule violations; performing surveillance; and supporting
fewer reporting systems. Some of these efficiencies are also discussed
in the Benefits Section of this analysis.\1081\
---------------------------------------------------------------------------
\1080\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(b).
\1081\ See Section IV.E, supra.
---------------------------------------------------------------------------
The Plan concludes SROs would experience improved efficiency in the
detection of rule violations, particularly for violations that involve
trading in multiple markets.\1082\ The Plan states an expectation that
SROs would need to expend fewer resources to detect violative cross-
market activity, and such activity would be detected more
quickly.\1083\ The Commission agrees that the Plan would result in
improvements in efficiency in the performance of examinations of market
participants by SROs and the Commission. Improvements to data
availability and access through the Central Repository could allow SROs
and the Commission to more efficiently identify market participants for
examination.\1084\ The Commission also agrees that the Plan would
improve the efficiency of enforcement investigations. If regulatory
data access improves, the quality and quantity of enforcement
investigations could increase through improvements to the
comprehensiveness and timeliness of data used to support
investigations. As mentioned previously, it can take months for
regulators to assemble the data necessary to comprehensively
investigate a regulatory inquiry.\1085\ To the extent that the Plan
allows regulators to access more comprehensive data directly from the
Central Repository, regulators would be able to collect data faster and
start processing it sooner, resulting in a more efficient data analysis
portion of an investigation. As a result, follow-up enforcement
inquiries could be avoided entirely in situations where data from the
Central Repository allows regulators to conclude an initial inquiry
without initiating an enforcement investigation.\1086\ This benefit
would be observable to both regulators and subjects of investigations,
for whom ongoing enforcement investigations can be costly and the
source of uncertainty.
---------------------------------------------------------------------------
\1082\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(b); see also Section IV.E.2, supra.
\1083\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(b).
\1084\ See Section IV.E.2.c, supra.
\1085\ See Section IV.E.2.c, supra.
\1086\ The Commission notes that this does not preclude an
increase in total enforcement investigations, but rather that some
enforcement investigations may determine earlier in the
investigation that no violation occurred.
---------------------------------------------------------------------------
The Plan states that the Participants believe that the CAT NMS Plan
could improve the efficiency of surveillance.\1087\ According to the
Plan, this improvement is due to a number of factors including:
Increased surveillance capacity; improved system speed, which would
result in more efficient data analysis; and a reduction in surveillance
system downtime.\1088\ The Plan also cites reduced monitoring
costs,\1089\ but the Commission notes that estimates in the Costs
Section of the Plan predict increased surveillance costs if the Plan is
approved. The increased surveillance costs predicted in the Plan could
reflect more effective surveillance under the Plan. Although the Plan
does not discuss the cost-benefit trade-off of increased surveillance
directly, the Commission notes that achieving the level of surveillance
that would be possible if the Plan is approved would likely be more
expensive using currently available data sources, if it is achievable
at all, due to the inefficiencies that currently exist in delivering
regulatory supervision, discussed previously.\1090\
---------------------------------------------------------------------------
\1087\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(b) (stating that the CAT NMS Plan could reduce monitoring costs,
enable regulators to detect cross-market violative activity more
quickly, provide regulators more fulsome access to unprocessed data
and timely and accurate information on market activity, and provide
CAT Reporters with long term efficiencies resulting from the
increase in surveillance capabilities); see also IV.E.2.c, supra.
\1088\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(b). The Participants surveyed the 10 exchange-operating SRO
groups on surveillance downtime. In conversations with Staff, the
Participants informed Staff that average surveillance downtime was
0.03% from August 1, 2014 to August 31, 2015, and ranges from 0 to
0.21% across SROs.
\1089\ See id.
\1090\ See Section IV.E.2, supra.
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The Commission preliminarily believes that CAT may reduce violative
behavior.\1091\ The Plan states that CAT may serve a deterrent effect,
thereby reducing investor losses attributable to such behavior.\1092\
Improvements in the efficiency of market surveillance, investigations,
and enforcement could directly reduce the amount of violative behavior
by identifying and penalizing market participants who violate rules and
who would more easily go undetected in the current regime. Furthermore,
market participants' awareness regarding improvements in the efficiency
of market surveillance, investigations, and enforcement (or perceptions
thereof), and the resultant increase in the probability of incurring a
costly penalty for violative behavior, could deter violative
behavior.\1093\ Reductions in violative behavior through both of these
economic channels could improve market efficiency, assuming violative
behavior receives diminishing marginal gains and generates increasing
marginal harm.\1094\
---------------------------------------------------------------------------
\1091\ See Section IV.E.2.c, supra.
\1092\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(b).
\1093\ See, e.g., Schelling, Thomas, ``The Strategy of Conflict:
Prospectus for a Reorientation of Game Theory,'' Journal of Conflict
Resolution, Vol. 2 No.3 (1958); Ellsberg, Daniel, ``The Crude
Analysis of Strategic Choices,'' American Economic Review, Vol. 51,
No. 2 (1961).
\1094\ See, e.g., Becker, Gary and William Landes, ``Essays in
the Economics of Crime and Punishment,'' Columbia University Press,
(1974).
---------------------------------------------------------------------------
The Plan discusses increased efficiency due to reductions in
redundant reporting systems.\1095\ The Plan also discusses increases in
system standardization, which would allow consolidation of resources,
including the sunsetting of legacy reporting systems and processes, as
well as consolidated data processing envisioned from the Plan.\1096\
However, the Commission is aware that the Plan, as proposed, calls for
a period of years during which Industry Members would face duplicative
reporting systems before older regulatory data reporting systems are
retired.\1097\ This period of duplicative reporting would impose a
considerable financial burden on Industry Members.\1098\
---------------------------------------------------------------------------
\1095\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(iii)(C) (discussing benefits of CAT to broker-dealers).
\1096\ See id. at Appendix C, Section B.8(b).
\1097\ See id. at Appendix C, Section B.9.
\1098\ See Section IV.F.2, supra for a discussion of duplicative
reporting and whether broker-dealers would pass costs on to
investors.
---------------------------------------------------------------------------
The Plan discusses two other efficiency improvements: a reduction
in ad-hoc data requests and more fulsome access to raw data. The Plan
predicts a reduction in ad-hoc data requests, which would free up
resources previously used to service such requests.\1099\ However,
while the Plan anticipates a decrease in ad-hoc data requests as a
result of Plan-related data improvements, the Commission notes that it
is possible that some types of ad-hoc data requests might increase. For
instance, even if enforcement
[[Page 30748]]
investigations initially use CAT Data, later-stage investigations may
involve requests for data not included in CAT Data, such as commissions
paid or a locate identifier for a short sale. An increase in the
efficiency of enforcement investigations could increase the total
number of later-stage investigations.\1100.\ Such investigations could
produce additional ad-hoc data requests and require other interactions
with market participants.\1101\ The Commission recognizes that these
data request increases would partially offset the efficiency
improvements from the reduction in data requests noted above, but the
Commission preliminarily believes that the Plan would improve
efficiency by reducing the total number of data requests. The
Commission, however, acknowledges that this decrease in data requests
may be partially offset in an increase in the number of investigations
in general, because enhanced surveillance is likely to detect more
potentially violative activity that would need to be investigated.
---------------------------------------------------------------------------
\1099\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(b).
\1100\ This does not preclude regulators determining sooner if
the actions they are investigating are not violative. Rather, an
increase in the total number of enforcement investigations due to
efficiency improvements can result in more later-stage
investigations even if regulators are better able to conclude some
investigations earlier.
\1101\ See Section IV.D.1.c, supra.
---------------------------------------------------------------------------
Furthermore, the Plan anticipates more robust access to unprocessed
regulatory data, which could improve the efficiency with which SROs
could respond to market events where they previously had to submit data
requests and wait for data validation procedures to be completed before
accessing data collected by other regulators.\1102\ The Commission
recognizes that unprocessed data may contain errors that would later be
fixed.\1103\ The Commission preliminarily believes the benefits of the
greater timeliness of the unprocessed data may justify the lack of
validations and corrections in such unprocessed data.\1104\
---------------------------------------------------------------------------
\1102\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(b).
\1103\ See Section III.B.10, supra.
\1104\ See Section IV.E.2.c, supra, for an example of benefits
from regulators accessing uncorrected data on T+1.
---------------------------------------------------------------------------
b. Effects of Certain Costs of the Plan on Efficiency
The Plan discusses several sources of inefficiency due to costs of
the Plan that are difficult to quantify, and are transient in nature.
First, the Plan anticipates that implementation would introduce new
costs related to data mapping and data dictionary creation.\1105\
Second, the Plan discusses needs for expenditures, such as staff time
for compliance with encryption requirements associated with the
transmission of PII.\1106\ While the Commission recognizes that these
are additional activities and costs that the Plan would require, it
views these as additional costs rather than inefficiencies and, though
the Commission cannot quantify the magnitude, these costs are likely to
have relatively minor contributions to overall costs of the Plan
because they impose technical requirements on systems that industry
will need to significantly alter to comply with other provisions in the
Plan.\1107\ Furthermore, the Commission notes that the costs of data
mapping and encryption requirements are likely to be included in costs
covered by surveys conducted by the Participants while preparing the
Plan because these requirements were known publicly at the time the
surveys were conducted, and are anticipated to be small relative to
other costs entailed in potentially complying with the Plan if it is
approved.\1108\
---------------------------------------------------------------------------
\1105\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(b).
\1106\ See id.
\1107\ See Section IV.G.2.a, supra.
\1108\ See Section IV.F.1, supra.
---------------------------------------------------------------------------
The Plan notes that there could be a market inefficiency effect
related to the funding proposal for the Plan. For example, the cost
allocation methodology for the Plan could create disincentives for the
provision of liquidity, which could impair market quality and increase
the costs to investors to transact.\1109\ The Plan notes that the
funding principles set forth in the Plan \1110\ seek to mitigate the
risk of reduction in market quality resulting from allocation of costs
from building and operating the Central Repository.\1111\ The
Commission preliminarily recognizes that negative effects on efficiency
could result from the CAT Funding Model.\1112\ First, data reporters
could respond to the Funding Model by taking actions to limit their fee
payments, such as exiting the market or reducing their activity levels.
Second, the funding policy of the CAT NMS Plan of aligning fees closely
with the amounts that are required to cover costs could create
incentives for the Plan Processor or Operating Committee to propose a
cost schedule for the CAT that matches a given fee schedule, but is not
the most efficient cost schedule for meeting the CAT regulatory
objectives.\1113\
---------------------------------------------------------------------------
\1109\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(b).
\1110\ See id. at Section 11.2, Appendix C, Section
B.7(b)(iv)(C).
\1111\ See id. at Appendix C, Section B.7.(b)(iv)(C).
\1112\ See id. at Appendix C, Section B.7(b)(v)(B).
\1113\ Economics research that dates back to Averch, Harvey, and
Johnson, Leland L. (1962) (``Behavior of the Firm Under Regulatory
Constraint,'' American Economic Review 52 (5): 1052-1069)
characterizes an incentive of regulated utilities to inflate their
costs in order to establish larger rate bases and justify higher
rates. An opposite effect would arise if the regulated utility were
unable to justify sufficient fee revenue to pay the fixed cost of
expanding the base.
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3. Capital Formation
a. Enhanced Investor Protection
The Commission has examined the potential effects on capital
formation discussed in the Plan in addition to other potential effects
on capital formation that the Commission believes could result if the
Plan is approved. The Commission preliminarily believes that the Plan
would have a modest positive effect on capital formation.
The Plan's analysis regarding capital formation concludes that the
Plan would generally not have a deleterious effect on capital formation
and could bolster capital formation that could lead to increased
investor participation in capital markets.\1114\ The Plan's analysis
provides several reasons why the Plan would not adversely affect
capital formation. Specifically, it asserts that the Plan would not
place any undue burden on primary issuances; would not pass along CAT
related costs to ``investors in a way that would limit their access to
or participation in capital markets''; and would not discourage market
participation as a result of data security concerns given the data
security safeguards outlined in the Plan.\1115\ The Commission
preliminarily agrees with the rationale of the Plan's analysis, but
addresses some additional considerations regarding the scope of the
Plan's effects on capital formation, as well as the channels through
which these effects could accrue.
---------------------------------------------------------------------------
\1114\ See CAT NMS Plan, supra note 3, at Appendix C, Section
C.8(c).
\1115\ See id.
---------------------------------------------------------------------------
The Plan's analysis states that the Plan may improve capital
formation by improving investor confidence in the market due to
improvements in surveillance. As discussed previously,\1116\ the
Commission believes that the Plan would provide substantial
enhancements to investor protection through improvements to
surveillance, particularly for cross-market trading.\1117\
[[Page 30749]]
As discussed throughout, improved surveillance, as well as other
regulatory activities, could decrease the rate of violative activity in
the market, reducing investor losses due to violative activity, to the
extent that such behavior is not already deterred by current
systems.\1118\ If improved surveillance leads to expectations of fewer
losses due to violative activity, this may increase capital formation
by facilitating a market where investors could be more likely to
mobilize capital into securities markets.\1119\
---------------------------------------------------------------------------
\1116\ See Section IV.E.2.c, supra and CAT NMS Plan, supra note
3, at Appendix C, Section B.7(b)(ii)(B)(1) and (2), B.7(b)(iii)(C).
\1117\ FINRA currently provides cross-market surveillance, but
limitations in the data (e.g. reliable cross-market linkages,
customer identification, parent order identification) limit the
scope and reliability of this surveillance.
\1118\ For example, as discussed in Section IV.E.2.c, the Plan
would allow regulators to more efficiently conduct cross-market and
cross-product surveillance relative to surveillance using current
data sources, and the requirement that data be consolidated in a
single database would assist regulators in detecting activity that
does not appear clearly violative until data is linked and evaluated
from multiple venues. To the extent that market participants are
aware of the current challenges to regulators in performing cross-
market surveillance and aggregating data across venues, and to the
extent that they believe that their violative behavior is more
likely to be detected if regulators' ability to perform those
activities improves, they may reduce or eliminate violative behavior
if the CAT Plan is approved.
\1119\ There is evidence in the academic finance literature that
countries with weaker investor protections, considering both the
character of rules as well as the quality of enforcement, have
smaller and narrower capital markets in terms of investor
participation. See La Porta, R. et al, ``Legal Determinants of
External Finance,'' Journal of Finance, Vol. 52 No. 3 (1997).
---------------------------------------------------------------------------
The Commission preliminarily believes there could be additional
increases in capital formation in the form of improvements in
allocative efficiency of existing capital within the industry. If
investors perceive an environment of improved surveillance, they could
be willing to allocate additional capital to liquidity provision or
other activities that increase market efficiency. Furthermore, an
environment of improved surveillance efficiency could result in the
reduction of capital allocated to violative activities that impose
costs on other market participants, because these market participants
may no longer find it possible to engage in such behavior that exposes
them to regulatory action. In this scenario, this reallocation of
capital could improve market quality and efficiency even if net capital
formation changes little. In addition to the potential reallocation of
capital currently mobilized toward violative activities, investor
capital that may currently be diverted because of the risk of loss to
violative activities could also be reallocated should the violative
activities decrease. If the CAT NMS Plan reduces manipulative quoting
activities, either through improved detection/enforcement or through
deterrence of such activities, then investors are less likely to make
capital allocation decisions in response to manipulative quoting
activities. In this scenario, because manipulative quoting activities
have been reduced, the contribution of manipulation to prices has been
reduced and prices should therefore better reflect fundamentals. It
would follow that, to the extent that displayed prices better reflect
fundamentals rather than manipulation, investors could allocate capital
more efficiently for their purposes. The Commission notes, however,
that market participants engaging in allowable activity that might risk
additional regulatory scrutiny under the Plan regime could allocate
capital to other activities to avoid this scrutiny, because even when
activity is not violative, interacting with regulators can be costly
for market participants.\1120\ This reallocation away from allowable
activity to avoid regulatory interactions could result in capital
allocations that are less efficient.\1121\
---------------------------------------------------------------------------
\1120\ See Section IV.F.4.b, supra, for a discussion of the
potential for the efficiencies in surveillance, examinations, and
investigations to increase the number of regulatory activities,
including the number of regulatory activities on conduct that turns
out not to violate regulations.
\1121\ The Commission is unable to estimate the magnitude of
allowable economic activity that does not occur when market
participants anticipate relatively high costs of demonstrating
regulatory compliance in the course of normal regulatory
interactions such as exams and inquiries because this activity is
not observable. However, Section IV.F.1.c(2) discusses how some
broker-dealers avoid self-reporting regulatory data because of
expectations of higher costs to demonstrate compliance, providing an
example of an allowable activity that is perceived as costly due to
the risk of compliance costs. See Section IV.F.1.c(2), supra.
---------------------------------------------------------------------------
The Plan states that the costs from CAT are unlikely to deter
investor participation in the capital markets.\1122\ The Commission
notes, however, that the final costs of the Plan and the funding
mechanism for CAT are not wholly certain at this time; thus, it is the
Commission's view that there is uncertainty concerning the extent to
which investors would bear Plan costs and consequently to what extent
Plan costs could affect investors' allocation of capital. As mentioned
above in the Costs Section,\1123\ the Commission preliminarily does not
know whether Plan costs incurred by the industry are likely to be
passed on to investors. Competition in the market for broker-dealer
services could mitigate some of these costs, but it may not minimize
costs passed on to retail investors. Despite these potential costs to
investors, investors could believe that the additional benefits they
receive from the potential of a market that is more effectively
regulated justify any additional costs they pay to access capital
markets.
---------------------------------------------------------------------------
\1122\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(c).
\1123\ See Section IV.F.2, supra.
---------------------------------------------------------------------------
b. Data Security
The Commission preliminarily agrees with the Plan's assessment that
data security concerns are unlikely to materially affect capital
formation. In its discussion of capital formation, the Plan recognizes
that data security concerns could potentially impact capital formation
through market participants' perception that sensitive proprietary data
might be vulnerable in case of a data breach at the Central Repository.
The Plan's analysis discusses the security measures that are required
by Rule 613 and the manner in which they have been implemented in the
Plan. It concludes that these security measures are sufficient and that
it is unlikely market participants would reduce their participation in
markets in a manner that would affect capital formation.
As noted above, the Commission agrees that concerns regarding data
security are unlikely to substantially affect capital formation, but
that some uncertainty about the risks exist because of the variations
in the potential security solutions and their resulting
effectiveness.\1124\ The Commission notes that the consequences of a
data breach, nonetheless, could be quite severe. It is inherently
difficult to form reliable economic expectations given that security
breaches of the form that could occur under the CAT NMS Plan occur
infrequently. Therefore, as described in Section IV.F above, even if a
CAT Data security breach is unlikely with the safeguards required by
the Plan, the scope of the potential consequences of such a breach in
the event that one should occur is important to evaluating the risk to
capital formation.\1125\
---------------------------------------------------------------------------
\1124\ See Section IV.F.4.a, supra.
\1125\ See id. for a more thorough discussion of the costs and
risks of security breaches of the Central Repository.
---------------------------------------------------------------------------
A data breach could also substantially harm market participants by
exposing proprietary information, such as a proprietary trading
strategy or the existence of a significant business relationship with
either a counterparty or client. The Commission notes, however, that
broker-dealers already bear such risks in transmitting regulatory data
to SROs. The Commission preliminarily believes that the marginal
increase in the risks to broker-dealers associated with a data breach
would be unlikely to deter
[[Page 30750]]
broker-dealers from participating in markets.
A data breach could potentially reveal PII of investors. To address
the potential for harm to the investing public and the health of
capital markets through such a breach, the Plan has enhanced
requirements for security around PII. Those requirements include a
separate PII-specific workflow, PII-specific authentication and access
control, separate storage of PII data, and a full audit trail of PII
access.\1126\ The Commission preliminarily believes that these risks
will not materially affect investors' willingness to participate in
markets because they already face these risks with PII shared with
broker-dealers, though not in one centralized location.\1127\ However,
the risk and costs of a security breach would be only one factor that
market participants would consider in deciding whether to participate
in the market. Another consideration would be investor protection,
which the Commission preliminarily believes would increase under the
CAT NMS Plan.\1128\
---------------------------------------------------------------------------
\1126\ See CAT NMS Plan, supra note 3, at Appendix D, Sections
4.1.1-4.1.6. The Commission notes that there is considerable
diversity in the approaches proposed by the Bidders. Further, the
Participants chose to give the Plan Processor flexibility on many
implementation details and the Plan states the requirements as a set
of minimum standards. Consequently, the final PII security solution
cannot be evaluated--only the minimum standards specified in the
Plan.
\1127\ See Section IV.F.2, supra.
\1128\ See Section IV.E.2, supra.
---------------------------------------------------------------------------
4. Related Considerations Affecting Competition, Efficiency and Capital
Formation
The Commission recognizes that the Plan's likely effects on
competition, efficiency and capital formation are dependent to some
extent on the performance and decisions of the Plan Processor and the
Operating Committee in implementing the Plan, and thus there is
necessarily some uncertainty in the Commission's analysis. Nonetheless,
the Commission believes that the Plan contains certain governance
provisions, as well as provisions relating to the selection and removal
of the Plan Processor, that mitigate this uncertainty by promoting
decision-making that could, on balance, have positive effects on
competition, efficiency, and capital formation.
a. The Efficiency of Plan Decision-Making
As noted in several places above,\1129\ future decisions of the
Operating Committee could significantly alter the economic effects of
the Plan. As a result, this economic analysis also considered whether
the process by which the Operating Committee would make such decisions
promotes efficiency. According to the Plan, the inability of the
Operating Committee to act in a timely manner could create consequences
for efficiency, competition, and capital formation.\1130\ On the other
hand, the Commission notes that consequences also could arise if the
Operating Committee makes decisions so quickly that it does not
consider all relevant information. This Section analyzes whether the
decision-making processes in the Plan promote timely decisions that
consider all relevant information of value. While the Plan considers
the potential for inefficiencies in the decision-making process, the
Commission preliminarily believes that certain governance provisions in
the Plan could create some inefficiencies in the decision-making
process, but that these inefficiencies are limited or exist to promote
better decision-making. The Plan discusses two areas where the proposed
governance structure impacts the efficiency of the decision-making
process: (1) Voting protocols and (2) the role of industry
advisers.\1131\ The Commission also considered the efficiency
implications of the level of detail included in the Plan and the
scalability of the Plan.
---------------------------------------------------------------------------
\1129\ See, e.g., Section IV.C.2, supra.
\1130\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(d).
\1131\ See id.
---------------------------------------------------------------------------
The Plan specified three types of voting protocols and determines
when each protocol applies.\1132\ The Plan requires unanimous voting in
only three circumstances: A decision to obligate Participants to make a
loan or capital contribution, a decision to dissolve the Company, and a
decision to take an action by written consent instead of a
meeting.\1133\ Further, the Plan requires supermajority voting in
instances considered by the Participants to have a direct and
significant impact on the functioning, management, and financing of the
CAT System,\1134\ such as selection and removal of the Plan Processor
and key officers, approving the initial Technical Specifications,
approving Material Amendments to the Technical Specifications proposed
by the Plan Processor, and approving direct amendments to the Technical
Specifications proposed by the Operating Committee.\1135\ The Plan
considers other matters as routine matters that arise in the ordinary
course of business and would be subject to majority voting. As a
practical matter, Majority Vote is the default standard for decisions
other than those requiring supermajority or unanimous voting.
---------------------------------------------------------------------------
\1132\ See Section III.A.3.a(3), supra, for a discussion of the
management of the Company, including the definitions of the voting
protocols and details on their application.
\1133\ See CAT NMS Plan, supra note 3, at Appendix C, Section
D.11(b), Voting Criteria of the Operating Committee.
\1134\ See id. at Appendix C, Section D.11(b).
\1135\ See id. at Appendix C, Section D.11(b). The Plan also
requires supermajority voting on matters outside the ordinary course
of business, such as modifications to a Material Contract, incurring
debt, making distributions or tax elections, or changing the fee
schedules.
---------------------------------------------------------------------------
The Plan balanced the efficiency of the decision-making process
against the value of considering minority and dissenting opinions in
proposing these voting protocols.\1136\ In particular, the Plan
recognizes that some voting protocols might impede the effective
administration of the CAT System.\1137\ From a mechanical perspective,
voting protocols determine a threshold for a passing vote. Unanimity
requires a threshold of 100% yes votes while majority voting requires a
threshold of more than 50% yes votes and Supermajority requires two-
thirds or more. The Plan explains that too-high a threshold for
decision-making, such as may be the case in applying unanimity to all
voting matters, could limit the ability of the Operating Committee to
adopt broadly agreed upon provisions.\1138\ For example, in the
extreme, requiring unanimity in voting could result in one dissenting
opinion holding up the entire decision-making process. Conversely, the
Plan explains that a threshold that is set too low might limit the
opportunities for the consideration of dissenting or minority opinions
and alternative approaches.\1139\ For example, if voting thresholds
were too low, a set of Participants could potentially adopt provisions
that might provide them a competitive advantage over other
Participants.
---------------------------------------------------------------------------
\1136\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(d).
\1137\ See id.
\1138\ See id.
\1139\ See id.
---------------------------------------------------------------------------
The Commission preliminarily agrees with the discussion on the need
to balance efficiency in the voting protocols in the Plan. The
Commission notes that the speed and ability to make a decision are key
components of whether the Plan promotes efficiency in its operations.
High-vote thresholds may result in an increase in the effort needed to
obtain enough votes to make a decision. Further, in addition to the
drawn out discussions necessary to obtain a unanimous vote, a unanimous
[[Page 30751]]
vote might also require compromises that reduce the efficiency of the
decision-making process. This could be particularly costly in
situations in which the Operating Committee must make a decision by a
particular date. It could also result in inaction for decisions related
to making discretionary changes that could improve data qualities, such
as updates, if the Participants disagree among the various
alternatives.
Furthermore, while the decision-making processes with a very low
voting threshold would be faster, the resulting decisions might not
consider all relevant information.\1140\ As a result, the Commission
preliminarily agrees that the inefficiencies in the voting protocols in
the Plan are limited enough to strike a balance between the
inefficiencies of the decision-making process and the quality of the
decisions.
---------------------------------------------------------------------------
\1140\ See Section IV.E.3.d, supra, for a discussion of how
certain governance provisions could help promote better decision-
making by the relevant parties.
---------------------------------------------------------------------------
The Plan also discusses the role of industry representation as part
of the governance structure.\1141\ Section 4.13 of the Plan requires an
Advisory Committee that contains twelve members, including
representatives from 7 types of broker-dealers, 2 institutional
investors, and 3 individuals.\1142\ In addition, the Plan says that the
Advisory Committee is ``intended to support the Operating Committee and
to promote continuing efficiency in meeting the objective of the CAT.''
\1143\ The Plan also indicates that it is important to include industry
representation to assure that all affected parties have representation.
---------------------------------------------------------------------------
\1141\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(d).
\1142\ See id. at Section 4.13 (Advisory Committee).
\1143\ See id. at Appendix C, Section B.8(d).
---------------------------------------------------------------------------
The Commission preliminarily agrees with the discussion in the Plan
that including industry representation might result in a more
efficiently designed CAT, but adds that an Advisory Committee also adds
operational inefficiencies. As discussed above, the Commission
preliminarily believes that an Advisory Committee could add more
diverse viewpoints to the debates surrounding Operating Committee
decisions and thus reduce the risk that members of the Operating
Committee could make decisions without first obtaining a full
understanding of the underlying facts or the likely impact of its
decisions.\1144\ The Commission also recognizes, however, that
including an Advisory Committee in the decision-making process might
add complexity to the process and decisions might require more time
relative to allowing the Operating Committee to make decisions without
the input of an Advisory Committee. The inclusion of an Advisory
Committee could thereby potentially adversely affect the efficiency of
the Plan's operation. In general, the Commission preliminarily believes
that as long as the Advisory Committee adds sufficiently useful
information, the benefits from the Advisory Committee would justify any
operational inefficiencies from the inclusion of the Advisory
Committee.
---------------------------------------------------------------------------
\1144\ See Section IV.E.3.d(2)B, supra.
---------------------------------------------------------------------------
The Commission considered an additional source of potential
efficiencies in the decision-making process. The Plan specifies minimum
standards for particular provisions or solutions in Appendix D of the
Plan instead of specifying the solutions themselves in the Plan.\1145\
While this creates uncertainty in the costs and benefits of the Plan
and reduces the transparency for the bidders, the Commission recognizes
that decisions to not specify certain solutions in the Plan could
promote efficiency in the decision-making process of the Operating
Committee. The Operating Committee and/or Selection Committee would
effectively decide upon the unspecified details when selecting the Plan
Processor and when approving the Technical Specifications.\1146\ As
such, certain technical details may not appear in the Plan and may not
be subject to Commission approval or, potentially, to public comment.
Instead, the Operating Committee could implement such decisions much
more quickly and at a potentially lower cost. The Commission believes
that the Commission and public review process could add value to the
decision-making process, particularly in assuring that the decisions
consider costs and benefits. However, a notice and comment process for
certain technical changes could be cumbersome and time-consuming, and
may not therefore be justified in the context of certain technical
issues. The Plan therefore may be more agile and efficient in its
ability to upgrade and improve systems quickly. On the other hand, the
cost of this efficiency comes in the form of the significant
uncertainties surrounding the economic effects of the Plan during the
approval process.
---------------------------------------------------------------------------
\1145\ For example, the Plan provides minimum standards for
regulator access to CAT Data but does not propose any particular
method for regulatory access. Nor does the Plan specify whether the
regulators would have work space on servers at the Central
Repository or whether regulators would have to download the results
of every query before being able to process such results.
\1146\ For example, the Selection Committee would decide on the
details of regulator access in conjunction with selecting the Plan
Processor or in subsequent negotiations with the selected Plan
Processor.
---------------------------------------------------------------------------
Provisions of the Plan should also promote efficiently implementing
expansions to the CAT Data. Appendix C of the Plan notes that the Plan
Processor must ensure that the Central Repository's technical
infrastructure is scalable and adaptable.\1147\ These provisions should
reduce the costs and time needed for expansions to the Central
Repository.
---------------------------------------------------------------------------
\1147\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.5(a).
---------------------------------------------------------------------------
b. Selection and Removal of the Plan Processor
The CAT NMS Plan uses a request for proposal (``RFP'') to select
the Plan Processor that would design, build, and operate the Central
Repository. The winning bidder becomes the sole supplier of the
operation of the Central Repository. The Commission preliminarily
believes this is necessary to achieve the benefits of a single
consolidated source of regulatory data.
The competitiveness of the selection process influences the
ultimate economic effect of the Plan because those effects depend in
large part on the efficiency and effectiveness of the Plan Processor.
In particular, many of the details of the Plan would be determined
either by the winning bid or in negotiations with the Plan Processor
after selection. The Plan Processor exercises control over the future
costs of operating and maintaining the Central Repository in this
context and the Plan Processor chooses its performance level, subject
to the minimum standards in the Plan and with oversight from the
Operating Committee.
Given the effects associated with the selection process for the
Plan Processor, the Commission considered whether the Plan promotes a
competitive process and whether the Plan contains provisions that would
create incentives for the chosen Plan Processor to set costs and
performance competitively. As explained below, the Commission
preliminarily believes that the selection process generally promotes
competition but that there are also a few potential limitations on
competition. Moreover, the Commission recognizes that a competitive
bidding process does not necessarily mean that the selected bidder
would behave competitively after being selected as the Plan
Processor.\1148\
[[Page 30752]]
But the Commission preliminarily believes that the Plan could control
the costs of the Central Repository and the performance of the Plan
Processor if the Plan included sufficient competitive incentives for
the selected Plan Processor. While the Commission preliminarily
believes that threat of replacement of the Plan Processor could
incentivize them to set costs and performance competitively, the high
cost of replacement could limit these incentives.\1149\
---------------------------------------------------------------------------
\1148\ See Goldfine and Vorrasi, ``The Fall of the Kodak
Aftermarket Doctrine: Dying A Slow Death in the Lower Courts,'' 74
Antitrust Law Journal No. 1 (2004), p. 209 (stating that
``competition in the primary market, as a matter of law, does not
necessarily preclude the possibility of market power (and
anticompetitive conduct) in the aftermarkets for parts and
services,'' and citing Eastman Kodak Co. v. Image Technical
Services, Inc., 504 U.S. 451 (1992)). Economic theories of the
relation between primary markets and aftermarket are the focus of
other literature as well; see infra note 1149. (In the context of
the Plan, the ``primary market'' would be the initial selection of
the Plan Processor while in the ``aftermarket,'' the selected Plan
Processor would supply a performance level for the given revenues
received from the Company.)
\1149\ Under the theory of contestable markets, it is possible
for the sole supplier of a service to behave as if there multiple
suppliers, and thus not exercise monopoly power. Necessary
conditions include the absence of entry and exit costs. William J.
Baumol, John C. Panzar, Robert D. Willig (1982), Contestable Markets
and the Theory of Industry Structure. When the conditions needed to
support contestable markets are not met, the presence of alternative
suppliers may not be sufficient to prevent the costly exercise of
monopoly power, post-selection. For example, if the supplier cannot
make complete and binding commitments to the price and quality of
its post-selection services, and the buyer becomes locked into the
sole supplier (e.g., due to switching costs or other sources of
friction), a competitive selection process may lead to monopoly
outcomes, post-selection; see, e.g., Carl Shapiro, 1995,
``Aftermarkets and Consumer Welfare: Making Sense of Kodak,''
Antitrust Law Journal, and Borenstein, Severin, Jeffrey K. Mackie-
Mason, and Janet S. Netz, 1995, Antitrust Policy in Aftermarkets,
Antitrust Law Journal 63: 455-82. For a recent survey of alternative
theories, see section 3.1, Dennis W. Carlton and Michael Waldman,
2014. ``Robert Bork's Contributions to Antitrust Perspectives on
Tying Behavior,'' Journal of Law & Economics.
---------------------------------------------------------------------------
(1) Competitiveness of the Plan Processor Selection Process
The Commission believes that two elements determine the
competitiveness of the bidding process. The first relates to the voting
process and the second relates to the degree of transparency in the
bidding process. The Commission preliminarily believes that the Plan
provisions relevant to these two factors could promote competition in
the bidding process and limit the risk that selection of the Plan
Processor would be affected by a conflict of interest, thereby
promoting better decision-making.
The CAT NMS Plan outlines a bidding process whereby a Selection
Committee votes on bidders during several rounds of voting that each
narrow the potential bidders until one bidder is selected.\1150\
Pursuant to the Plan, the bidders compete to be selected by proposing
solutions to comply with Rule 613 and documenting the anticipated costs
of doing so. The Plan also contains provisions for revising Bids if the
Commission approves the Plan.\1151\
---------------------------------------------------------------------------
\1150\ See CAT NMS Plan, supra note 3, at Section 5.2 (Bid
Evaluation and Initial Plan Processor Selection).
\1151\ Id. at Section 5.2(e).
---------------------------------------------------------------------------
The Participants received 31 Intent to Bid forms during the RFP
process; 13 of the potential bidders withdrew before January 30, 2014;
the Participants reported receiving 10 Bids by April 2, 2014.\1152\ Six
of these Bidders were shortlisted through the selection process in July
2014, including one SRO that is also a Bidder. In November 2015, the
shortlist was further narrowed to three Bidders.\1153\
---------------------------------------------------------------------------
\1152\ For details on the progression of the CAT RFP process,
see RFP Process, SEC Rule 613: Consolidated Audit Trail (CAT),
available at https://catnmsplan.com/process/ (last visited November
19, 2015).
\1153\ See supra note 35.
---------------------------------------------------------------------------
In considering how competitive the voting process is, the
Commission has considered whether conflicts of interest could limit
competition in the bidding process through the proposed participation
of a bidder representative on the Selection Committee. The Plan
includes provisions that mitigate this conflict but that have not
eliminated it completely. In particular, the Plan requires recusal of
an SRO from any selection round if that SRO or its affiliate has
submitted a bid--or is included as a material subcontractor as part of
a bid--that is still under consideration in such round.\1154\
Similarly, the Plan creates information barriers between the Staff at
the SRO selecting the bidder and the Staff undertaking the
bidding.\1155\ These provisions promote a level playing field for all
bidders because the SRO bidder does not know any more than a non-SRO
bidder and so has no informational advantage in submitting a bid that
the Selection Committee may find favorable. Further, the information
barriers prevent those working on the bid from attempting to persuade
members of the Selection Committee toward their bid in a way that other
bidders cannot. The Commission recognizes, however, that there is a
residual risk in having an SRO among the bidders; it is possible that
voting Participants would be biased for or against that SRO either
because they compete with that SRO in another market (and could gain a
competitive advantage in that market by acting as Plan Processor) or
because of repeated interactions with that SRO.
---------------------------------------------------------------------------
\1154\ See CAT NMS Plan, supra note 3, at Section 4.3(d), at
Section 5.1(b).
\1155\ See id. at Section 5.1(d).
---------------------------------------------------------------------------
The Commission also recognizes that, to the extent the Operating
Committee has specific preferred solutions as to how the Plan should be
implemented, the degree to which the Committee is transparent about
those preferences in the bidding process would affect the
competitiveness of that process. For example, if the Commission were to
approve the Plan and bidders were thereafter given the opportunity to
revise their bids, the Operating Committee could promote
competitiveness in the bidding process by outlining its preferences.
Transparency into the Operating Committee's views regarding potential
optimal solutions could assist a bidder in revising its bid to inform
how that bidder could supply those optimal solutions, and the Selection
Committee could then compare all bidders on those particular solutions.
To the extent that the Operating Committee has strong preferences
toward particular solutions but did not specify those preferences
directly in the Plan, the bidder may not know that it could improve its
chances of winning the bid by proposing a different solution and the
Selection Committee would not know whether the bidder is capable of
delivering the preferred solution more efficiently than the other
bidders. On the other hand, the Commission notes that specifying a
preferred solution also has the potential to discourage bidders from
competing on innovation by proposing novel approaches that may deliver
superior outcomes.
The Commission has no reason to believe that the Operating
Committee has preferred solutions beyond what is in the Plan that would
significantly impact the competitiveness of the Plan Processor
selection process. Indeed, Appendix D of the Plan details numerous
minimum standards not included in the RFP. In addition, the Plan also
provides details on the range of solutions proposed by bidders and why
the Operating Committee may not have a preference and therefore did not
select a particular solution. This provides transparency to the bidders
on the criteria the Selection Committee may use to compare bidders.
(2) Competitive Incentives of the Selected Plan Processor
The Plan could create competitive incentives for the selected Plan
Processor by detailing strong requirements for the Plan Processor and
providing an efficient mechanism to
[[Page 30753]]
remove the selected Plan Processor and introducing an alternative Plan
Processor in the event of underperformance. As described below, the
Commission preliminarily believes that the Plan provides the selected
Plan Processor with competitive incentives because the Plan contains
defined procedures for monitoring and removing the Plan Processor for
failure to perform functions adequately or otherwise. However, the ease
with which the Operating Committee could remove the Plan Processor and
the costs of switching to another Plan Processor could limit these
competitive incentives.
The Plan contains several provisions that would allow the Operating
Committee to remove the Plan Processor.\1156\ By Supermajority Vote,
the Operating Committee could remove the Plan Processor for any reason.
The Operating Committee may, by Majority Vote, remove the Plan
Processor if it determines that the Plan Processor has failed to
perform its functions ``in a reasonably acceptable manner'' or if the
Plan Processor's expenses ``have become excessive or are not
justified.'' The consideration of such poor performance or excessive
expenses would include (1) responsiveness to requests for technological
changes or enhancements, (2) results of assessments performed pursuant
to Section 6.6 of the Plan, (3) staying up-to-date on reliability and
security of operations, (4) compliance with the requirements of
Appendix D, and (5) other factors the Operating Committee may determine
to be appropriate.
---------------------------------------------------------------------------
\1156\ See CAT NMS Plan, supra note 3, at Section 6.1(q), (r),
(s).
---------------------------------------------------------------------------
The Commission preliminarily believes that the ability of the
Operating Committee to remove the Plan Processor for poor performance
with only a Majority Vote incentivizes the Plan Processor to perform
well enough to avoid being removed. The Commission further
preliminarily believes that the performance of the Plan Processor would
depend significantly on strong oversight by the Operating
Committee.\1157\
---------------------------------------------------------------------------
\1157\ See Section IV.E.3.d, supra, for a discussion of the
incentives of the Operating Committee in overseeing the Plan
Processor.
---------------------------------------------------------------------------
The Commission recognizes that the effort required to remove a Plan
Processor could be significant, which would limit the incentives of the
Plan Processor to perform well. To subject a removal to a Majority
Vote, the Operating Committee would presumably need to demonstrate the
Plan Processor's performance and determine that it was not ``reasonably
acceptable.'' If not, the removal would be subject to Supermajority
Vote, which could also take significant effort and a removal would be
less likely to pass.
In addition, significant switching costs could influence whether
removing a Plan Processor despite poor performance makes economic
sense. In other words, the Operating Committee could wait for
significant performance issues before initiating a vote to remove the
Plan Processor. Additionally, before removing a Plan Processor, the
Operating Committee would need to select a new Plan Processor. This
would likely be a lengthy process taking significant time and effort by
the Operating Committee. Moreover, switching Plan Processors could
entail a complete rebuild of the Central Repository and significant
implementation costs for CAT Reporters and Participants, potentially
amounting to the initial implementation costs of the Plan. These costs
would be higher if the Plan Processor's solutions include proprietary
technologies that no other potential replacement (competitor) could
supply. The costs would be lower if the new Plan Processor could
implement the existing Technical Specifications. The benefits of
switching could also depend on the benefits from technological
advancements that these competitors could supply. In light of these
costs, the competitive incentives of the Plan Processor to maintain top
performance could be limited. Specifically, the Plan Processor may only
need to perform well enough to keep the inefficiencies associated with
their performance from exceeding the cost to switch to another Plan
Processor. Despite the limitations on competitive incentives due to
switching costs, however, the Commission preliminarily believes that
the threat of replacement still provides an incentive to stay
relatively current on technology advancements to avoid falling
significantly behind potential competitors.
5. Request for Comment on Efficiency, Competition, and Capital
Formation
The Commission requests comment on all aspects of the discussion of
the effects of the CAT NMS Plan on efficiency, competition, and capital
formation. In particular, the Commission seeks responses to the
following questions:
347. The Participants state in the Plan that they believe the Plan
would avoid disincentives such as placing an inappropriate burden on
competition in the U.S. securities markets. In its analysis, the
Commission concludes that competition is unlikely to be harmed to a
degree that would affect investors. Do Commenters agree with the
conclusions discussed in the Plan? Why or why not? Do Commenters agree
with the Commission's conclusion regarding the Plan's impact on
competition? Why or why not?
348. Do Commenters agree with the Commission's characterization of
the relevant markets that the CAT NMS Plan affect? Why or why not? Do
Commenters agree with the identified level of competition in each of
the relevant markets in the Commission's analysis? Why or why not?
349. Do Commenters agree with the Commission's discussion of the
Baseline for the market for trading services? Why or why not?
350. Do Commenters agree with the Commission's analysis of
competition in the market for trading services under the Plan? Why or
why not?
351. Do Commenters agree with the Commission's analysis of effects
of the Plan's funding model on competition? Why or why not? Would the
funding model as outlined in the Plan affect competition in the market
for trading services between exchanges and ATSs? If so, how? Do
Commenters agree with the Commission's analysis of the effects on
competition of the Plan's allocation of CAT fees across market
participants? Why or why not? Would the Participation Fee outlined in
the Plan serve as a barrier to entry for ATSs that might otherwise
register as exchanges? Why or why not?
352. Do Commenters believe that the allocation of voting rights
among the Participants may serve to affect competition between
Participants that operate options exchanges and those that do not? Why?
Do governance provisions outlined in the Plan provide controls that
could prevent burdens on competition due to the allocation of voting
rights among Participants? If not, are there controls that could
achieve this?
353. Do Commenters believe that the allocation of voting rights
among the Participants may serve to affect competition between
exchanges and ATSs in the market for trading services? Why or why not?
354. Do Commenters agree with the Commission's analysis of the
effects on competition of costs of compliance with the Plan? Why or why
not?
355. Do Commenters agree with the Commission's analysis of the
effects on competition of the Plan's enhanced surveillance and
deterrence? Why or why not?
356. Do Commenters agree with the Commission's analysis of the
Baseline
[[Page 30754]]
for competition in the market for broker-dealer services? Why or why
not?
357. Do Commenters agree with the Commission's analysis of the
effects on competition in the market for broker-dealer services of the
Plan? Why or why not? Are these effects different for smaller broker-
dealers? How? How significant are these impacts?
358. Do Commenters agree with the Commission's analysis of the
competition to be Plan Processor? Why or why not?
359. Do Commenters believe that any elements of the CAT NMS Plan
may affect competition among the bidders? Do Commenters believe that
any decisions by the Operating Committee that are allowable or likely
under the proposed Plan may affect competition among the bidders in the
market to be Plan Processor? If so, how would these competitive
dynamics affect CAT as outlined in the Plan?
360. Do Commenters agree with the Commission's analysis of
competition in the market to be Plan Processor post-selection? Why or
why not?
361. Do Commenters agree with the Commission's analysis of the
Baseline for competition in the market for regulatory services? Why or
why not?
362. Do Commenters agree with the Commission's analysis of
competition in the market for regulatory services of the Plan? Why or
why not?
363. Do Commenters agree with the Commission's analysis of the
Baseline for competition in the market for data reporting services? Why
or why not? Do Commenters believe that capacity constraints in this
market may affect broker-dealers' ability to comply with data reporting
requirements under the Plan?
364. Do Commenters agree with the Commission's analysis of
competition in the market for data reporting services under the Plan?
Why or why not?
365. If some or all of the Participants decide to share the Raw
Data they collect pursuant to the CAT NMS Plan and use the combined
data for commercial purposes, how do Commenters believe that might
affect competition in the markets described above?
366. In the Plan, the Participants state that they believe the Plan
would have a net positive effect on efficiency. The Commission's
analysis states that the Commission preliminarily believes the Plan
would have a significant positive effect on efficiency. Do Commenters
agree with the conclusions stated in the Plan? Why or why not? Do
Commenters agree with the Commission's analysis? Why or why not?
367. Do Commenters agree that costs related to the Plan's
requirements for data mapping, data dictionary creation, and encryption
associated with the transmission of PII would not significantly affect
efficiency? Why or why not?
368. Do Commenters agree with the Commission's analysis of the
Plan's effects on the efficiency of market regulation and oversight?
Why or why not?
369. Do Commenters agree with the Commission's analysis of the
Plan's effects on market efficiency due to reductions in violative
behavior? Why or why not?
370. Do Commenters agree with the Commission's analysis of the
Plan's effect on efficiency related to reductions in ad hoc data
requests from regulators? Why or why not?
371. Do Commenters agree with the Commission's analysis of the
Plan's effect on efficiency due to reductions in duplicative reporting
systems? Why or why not?
372. Do Commenters believe that the period of duplicative reporting
that would precede the retirement of certain current, anticipated to be
retired, regulatory reporting systems would significantly affect
efficiency? Why or why not?
373. Do Commenters agree with the Commission's analysis of
inefficiencies related to the funding model? Why or why not?
374. Do Commenters agree with the Commission's analysis of the
likelihood of CAT fees being passed on to investors under the Plan? Why
or why not?
375. Do Commenters agree with the Commission's analysis of the
efficiency of Plan operations? Why or why not?
376. Do Commenters agree with the Commission's analysis of the
effects of voting thresholds for Operating Committee decisions on
efficiency? Why or why not?
377. Do Commenters agree with the Commission's analysis of the
Advisory Committee's effect on efficiency under the Plan? Why or why
not?
378. Do Commenters agree with the Commission's analysis of the
effects on efficiency of the Participants' decision to specify or not
specify certain aspects of CAT in the RFP? Why or why not?
379. Do Commenters believe that the CAT NMS Plan would impact
investor confidence? If so, how? Do investors currently lack confidence
because of the current state of regulatory data? Would the expected
improvements to investor protection result in increased investor
confidence? Please explain. What would be the expected effects of
changes in investor confidence on allocative efficiency and capital
formation? What would be the magnitude of the economic effects from
expected changes to investor confidence? Please provide analysis.
380. The Plan states that the Participants believe that the Plan
would have no deleterious effect on capital formation. Do Commenters
agree with the Participants' conclusions stated in the Plan? Do
Commenters agree with the Commission's preliminary belief that the Plan
would not have a deleterious effect on capital formation? Why or why
not?
381. Do Commenters agree with the Commission's analysis of the
Plan's effects on capital formation due to enhanced market surveillance
and regulatory activities? Why or why not?
382. Do Commenters agree with the Commission's analysis of effects
on capital formation due to data security provisions of the Plan? Why
or why not?
H. Alternatives
As a part of its economic analysis, the Commission is considering
and soliciting comment on alternatives to certain approaches or
elements of the CAT NMS Plan. The Commission analyzes alternatives that
could have a direct and significant impact on costs or benefits
deriving from at least one of the four data qualities discussed above:
accuracy, completeness, accessibility, and timeliness. While the
discussed alternatives are not the only alternatives that could
significantly impact costs, benefits, or data quality, they are an
attempt to identify reasonable options. Each has the potential to alter
the Commission's preliminary conclusions regarding the economic effects
of the CAT NMS Plan.
The analysis of alternatives is divided into three categories.
First, the Commission analyzes alternatives to the approaches the
Exemption Order permitted the Participants to include in the
Plan.\1158\ As noted in the Exemption Order, the Commission was
persuaded to grant exemptive relief to provide flexibility such that
the proposed approaches described in the Exemption Request can be
included in the CAT NMS Plan and subject to notice and comment.\1159\
Second, the Commission analyzes alternatives to certain specific
approaches in the CAT NMS Plan, including alternative approaches to
clock synchronization, time stamps, Error Rates, error correction
timelines, the funding model, listing exchange symbology, data
accessibility standards, and the intake capacity levels. Third,
[[Page 30755]]
the Commission analyzes alternatives to the scope of certain specific
elements of the Plan. Specifically, the Commission analyzes the impact
of changing the scope of the CAT to exclude certain data fields. The
Commission also analyzes alternatives to exclude OTC Equity Securities
and the requirement to periodically refresh all customer information.
Finally, the Commission solicits comment on the broad alternative of
modifying OATS and/or another existing system to meet the requirements
of Rule 613 instead of approving the Plan.
---------------------------------------------------------------------------
\1158\ See Exemption Order, supra note 18.
\1159\ Id.
---------------------------------------------------------------------------
1. Alternatives to the Approaches the Exemption Order Permitted To Be
Included in the Plan
The Commission is soliciting additional comment on alternatives to
the approaches the Exemption Order permitted the SROs to include in the
CAT NMS Plan.\1160\ Specifically, the Commission is soliciting comment
on how the following alternatives (the ``Rule 613 approach''),
described in further detail below, would affect the costs and benefits
of the CAT: (a) Requiring both Options Market Makers and Options
Exchanges to report Options Market Maker quotations to the Central
Repository, (b) requiring CAT Reporters to report a Customer-ID for
each Customer upon the original receipt or origination of an order, (c)
requiring CAT Reporters to report a universal CAT-Reporter-ID to the
Central Repository for orders and certain Reportable Events, (d)
requiring the reporting of the account number for any subaccount to
which an execution is allocated, and (e) requiring that Manual Order
Events be reported with a time stamp granularity of one millisecond.
---------------------------------------------------------------------------
\1160\ Id.
---------------------------------------------------------------------------
a. Options Market Maker Quotes
The Commission is soliciting comment on how an alternative
approach--the Rule 613 approach--to the reporting of Options Market
Maker quotations might impact the costs and benefits of the Plan. Rule
613(c)(7) provides that the CAT NMS Plan must require each national
securities exchange, national securities association, and any member of
such exchange or association to record and electronically report to the
Central Repository details for each order and each Reportable Event,
including the routing and modification or cancellation of an
order.\1161\ Rule 613(j)(8) defines ``order'' to include ``any bid or
offer'' so that the details for each Options Market Maker quotation
must be reported to the Central Repository by both the Options Market
Maker and the exchange to which it routes its quote.\1162\ The SROs
requested an exemption from Rules 613(c)(7)(ii) and (iv) and proposed
an approach whereby only Options Exchanges--but not Options Market
Makers--would be required to report information to the Central
Repository regarding Options Market Maker quotations.\1163\ The
Commission granted exemptive relief to the SROs to allow the approach
to collecting Options Market Maker quotations described in the
Exemption Request to be included in the CAT NMS Plan and subject to
notice and comment.\1164\
---------------------------------------------------------------------------
\1161\ See 17 CFR 242.613(c)(7).
\1162\ See 17 CFR 242.613(j)(8).
\1163\ See Exemptive Request Letter, supra note 16, at 2-5.
\1164\ See Exemption Order, supra note 18.
---------------------------------------------------------------------------
Pursuant to the exemptive relief granted by the Commission, the CAT
NMS Plan provides that only Options Exchanges--but not Options Market
Makers--would be required to report information to the Central
Repository regarding Options Market Maker quotations.\1165\ On the
other hand, the Rule 613 approach would require that each Options
Market Maker quotation be reported to the Central Repository by both
the Options Market Maker and the exchange to which it routes its quote.
The Commission preliminarily believes that the Rule 613 approach would
increase certain costs associated with the implementation and operation
of CAT as compared to the Plan as filed without providing any
additional material information.
---------------------------------------------------------------------------
\1165\ See CAT NMS Plan, supra note 3, at Appendix C, Background
Section.
---------------------------------------------------------------------------
Under the Rule 613 approach, the reports from the Options Exchanges
would be virtually identical to the reports coming from the Options
Market Makers, with the exception that reports from the Options Market
Makers would indicate the time that the Options Market Maker routes its
quote, or any modification or cancellation thereof, to the exchange
(``Quote Sent Time''). However, to ensure that regulators would receive
all of the information contemplated by Rule 613(c)(7), the CAT NMS Plan
requires that (1) Options Market Makers report to the relevant Options
Exchange the Quote Sent Time along with any quotation, or any
modification or cancellation thereof; and (2) Options Exchanges submit
the quotation data received from Options Market Makers, including the
Quote Sent Time, to the Central Repository without change.\1166\ Under
the CAT NMS Plan, therefore, regulators would have access to all the
material information in CAT that would be provided under the Rule 613
approach. As such, the Commission preliminarily does not believe that
there would be any additional benefits to using the Rule 613 approach.
---------------------------------------------------------------------------
\1166\ Id. at Section 6.4(d)(iii).
---------------------------------------------------------------------------
Furthermore, the CAT NMS Plan estimates that the Rule 613 approach
would increase the amount of records that must be handled by the
Central Repository by 18 billion records per day, at an additional cost
of between $2 million and $16 million for data storage and technical
infrastructure over a five year period.\1167\ A cost survey estimates
the Rule 613 approach would cost all Options Market Makers between
$307.6 million and $382 million over five years.\1168\ Under the
approach taken in the CAT NMS Plan, these costs would be avoided but
the Options Market Makers surveyed would spend approximately $8.5
million to send Quote Sent Times to the exchanges and all Options
Market Makers would spend $36.9M to $76.8M.\1169\ In aggregate, the
estimates provided suggest that the Rule 613 approach would add between
$230.80 million and $345.10 million to industry costs over five
years.\1170\ The Exemption Request also notes that the additional costs
would be disproportionately borne by smaller broker-dealers relative to
their market share.\1171\
---------------------------------------------------------------------------
\1167\ Id. at Appendix C, Section B.7(b)(iv)(B).
\1168\ See FIF, SIFMA, and Security Traders Association, Cost
Survey Report on CAT Reporting of Options Quotes by Market Makers
(November 5, 2013), available at https://www.catnmsplan.com/industryfeedback/p601771.pdf; see also CAT NMS Plan, supra note 3,
at Appendix C, Section B.7(b)(iv)(B).
\1169\ See FIF, SIFMA, and Security Traders Association, Cost
Survey Report on CAT Reporting of Options Quotes by Market Makers 3-
4 (November 5, 2013), available at https://www.catnmsplan.com/industryfeedback/p601771.pdf.
\1170\ To be conservative, the Commission estimates the lower
end of the range to be the lower cost to comply with a CAT NMS Plan
without the exemption minus the higher cost to comply with a CAT NMS
Plan with the exemption ($230.8M = $307.6 - $76.8M). Likewise, the
higher end of the range is the higher cost to comply with a CAT NMS
Plan without the exemption minus the lower cost to comply with a CAT
NMS Plan with the exemption ($345.1M = $382M - $36.9M).
\1171\ See Exemptive Request Letter, supra note 16, at 7.
---------------------------------------------------------------------------
The Commission notes that there are limitations to the cost
estimation methodology presented in the Exemption Request. These
limitations include the lack of quantified cost estimates for
additional indirect cost savings associated with the exemption.
However, the Commission preliminarily believes that the Rule 613
approach would increase certain costs associated with the
implementation and operation of CAT as compared to the Plan as filed
[[Page 30756]]
without providing any additional material information.
b. Customer-ID
The Commission is soliciting comment on how an alternative
approach--the Rule 613 approach--to the reporting of customer
information might impact the costs and benefits of the Plan. Rule
613(c)(7)(i)(A) requires that for the original receipt or origination
of an order, a CAT Reporter report the ``Customer-ID(s) for each
Customer.'' \1172\ ``Customer-ID'' is defined in Rule 613(j)(5) to mean
``with respect to a customer, a code that uniquely and consistently
identifies such customer for purposes of providing data to the central
repository.'' \1173\ Rule 613(c)(8) further requires that ``[a]ll plan
sponsors and their members shall use the same Customer-ID and CAT-
Reporter-ID for each customer and broker-dealer.'' \1174\ The SROs
requested an exemption from the requirements in Rule 613(c)(7)(i)(A)
and Rule 613(c)(8), and proposed an approach whereby each broker-dealer
would assign a unique Firm Designated ID to each trading account, which
would be linked to a set of identifying information (the ``Customer
Information Approach'').\1175\ Using the Firm Designated ID and the
other information identifying the Customer that would be reported to
the Central Repository, the Plan Processor would then assign a unique
Customer-ID to each Customer. Upon original receipt or origination of
an order, broker-dealers would only be required to report the Firm
Designated ID on each new order, rather than using the Customer-ID. The
Commission granted exemptive relief to the SROs to allow the
alternative approach to Customer-IDs described in the Exemption Request
to be included in the CAT NMS Plan and subject to notice and
comment.\1176\
---------------------------------------------------------------------------
\1172\ See 17 CFR 242.613(c)(7)(i)(A).
\1173\ See 17 CFR 242.613(j)(5).
\1174\ See 17 CFR 242.613(c)(8).
\1175\ See Exemptive Request Letter, supra note 16, at 9.
Because the Plan Processor would still assign a Customer-ID to each
Customer under the Customer Information Approach, the SROs did not
request an exemption from Rule 613(j)(5).
\1176\ See Exemption Order, supra note 18, at 11863.
---------------------------------------------------------------------------
Pursuant to the exemptive relief granted by the Commission, the CAT
NMS Plan provides for the use of the Customer Information
Approach.\1177\ The Commission is soliciting comment on the Rule 613
approach, which would require that broker-dealers report Customer
information using a consistent, unique Customer-ID, as set out in in
Rule 613(c)(7)(i)(A) and Rule 613(c)(8). The Commission preliminarily
believes that the Rule 613 approach would increase certain costs
associated with the implementation and operation of CAT as compared to
the Customer Information Approach while providing substantially
identical data.
---------------------------------------------------------------------------
\1177\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.1(a)(iii).
---------------------------------------------------------------------------
The Commission also preliminarily believes that the Rule 613
approach would have no significant impact on the benefits of the CAT
NMS Plan. The Participants maintain that, under the Rule 613 approach,
there would be no gains in terms of accuracy or reliability, no effect
on the ability to link records, and no effect on the time the data
would be made available to regulators, as compared to the Customer
Information Approach.\1178\ The Participants also believe that there
may be accuracy gains under the Customer Information Approach if it
reduces errors that may otherwise occur if broker-dealers must adapt
their systems and business processes to manage Customer-IDs.\1179\
---------------------------------------------------------------------------
\1178\ See Exemptive Request Letter, supra note 16, at 15-18.
\1179\ Id.
---------------------------------------------------------------------------
The Commission also preliminarily believes that the Rule 613
approach would increase the costs of the CAT NMS Plan. In their
Exemption Request, the Participants discussed a number of reasons why
the Customer Information Approach is less burdensome than the Rule 613
approach. First, it reduces the CAT implementation burden on market
participants by eliminating the need for changes to their current
customer identification systems.\1180\ Currently, market participants
have individual formats for their customer identifiers; under the
Customer Information Approach, no standardization of form would be
required. Second, the Customer Information Approach eliminates the need
for centrally-assigned Customer-IDs to be assigned at the Central
Repository and communicated back to market participants.\1181\ Third,
it allows the Plan Processor to implement modifications and technical
upgrades to the Customer-ID generation process and infrastructure
without the involvement of CAT Reporters.\1182\ Fourth, the Customer
Information Approach eliminates the need to train CAT Reporters on the
Customer-ID management process and provide related technical support.
Fifth, it potentially reduces delays faced by investors opening new
accounts, who might not be able to transact until the Central
Repository has assigned a Customer-ID and communicated it to the
broker-dealer representing the Customer.\1183\
---------------------------------------------------------------------------
\1180\ See id. at 17.
\1181\ See id.
\1182\ See id.
\1183\ See id. at 16-17.
---------------------------------------------------------------------------
Based on cost survey data provided by the Participants, the Rule
613 approach would increase quantifiable costs to the top three tiers
of CAT Reporters by at least $195 million.\1184\ The Commission notes
that this likely underestimates the increased costs to all CAT
Reporters because the Rule 613 approach would likely increase costs to
CAT Reporters outside the top three tiers also. Furthermore, the
Bidders have indicated that the costs of building and operating the
Central Repository under the Rule 613 approach would not be lower than
the costs of the Customer Information Approach.\1185\ The Commission
therefore preliminarily believes that the Rule 613 approach would
increase the costs of the CAT NMS Plan relative to the Plan's Customer
Information Approach, while providing substantially identical data.
---------------------------------------------------------------------------
\1184\ Id. at 17-18.
\1185\ Id. at 17.
---------------------------------------------------------------------------
c. CAT-Reporter-ID
The Commission is soliciting comment on how an alternative
approach--the Rule 613 approach--to the reporting of CAT Reporter
information might impact the costs and benefits of the Plan. A CAT-
Reporter-ID is ``a code that uniquely and consistently identifies [a
CAT Reporter] for purposes of providing data to the central
repository.'' \1186\ Subparagraphs (c)(7)(i)(C), (ii)(D), (ii)(E),
(iii)(D), (iii)(E), (iv)(F), (v)(F), (vi)(B), and (c)(8) of Rule 613
provide that the CAT NMS Plan must require CAT Reporters to report CAT-
Reporter-IDs to the Central Repository for orders and certain
Reportable Events.\1187\ Additionally, Rule 613(c)(8) requires that CAT
Reporters use the same CAT-Reporter-ID for each broker-dealer.\1188\ To
leverage existing infrastructure and business processes, the
Participants requested an exemption from Rule 613(c)(7) and (c)(8) to
allow a different approach to be included in the Plan; CAT Reporters
would report existing SRO-assigned market participant identifiers when
submitting data to the Central Repository (``SRO-Assigned Market
Participant Identifiers'').\1189\ The Central Repository would then
generate a corresponding CAT-Reporter-ID for internal use to identify
CAT Reporters.
[[Page 30757]]
This approach--called the ``Existing Identifier Approach''--allows the
CAT-Reporter-IDs to be managed at the Central Repository by the Plan
Processor without the involvement of the Reporters.\1190\ The
Commission granted exemptive relief to the SROs to allow the Existing
Identifier Approach to be included in the CAT NMS Plan and subject to
notice and comment.\1191\
---------------------------------------------------------------------------
\1186\ 17 CFR 242.613(j)(2).
\1187\ 17 CFR 242.613(c)(7)(i)(C), (ii)(D), (ii)(E), (iii)(D),
(iii)(E), (iv)(F), (v)(F), (vi)(B), and (c)(8).
\1188\ 17 CFR 242.613(c)(8).
\1189\ See Exemptive Request Letter, supra note 16, at 19.
\1190\ Id.
\1191\ See Exemption Order, supra note 18, at 11866.
---------------------------------------------------------------------------
Pursuant to the exemptive relief granted by the Commission, the CAT
NMS Plan provides for the use of the Existing Identifier
Approach.\1192\ The Commission is soliciting additional comment on the
Rule 613 approach, which would require that CAT Reporters use a
consistent, unique CAT-Reporter-ID, as set out in in Rule 613(c)(7) and
Rule 613(c)(8). The Commission preliminarily believes that the Rule 613
approach would increase certain costs associated with the
implementation and operation of CAT as compared to the Existing
Identifier Approach while providing substantially identical data.
---------------------------------------------------------------------------
\1192\ See, e.g., CAT NMS Plan, supra note 3, at Sections 6.3(d)
and (e), 6.4(d).
---------------------------------------------------------------------------
The Commission preliminarily believes that the Rule 613 approach
would not result in more reliable or accurate data as compared to the
Existing Identifier Approach. The Exemption Request states that ``the
proposed approach would not compromise the goal of Rule 613 to record
and link Reportable Events to the CAT Reporter associated with the
event.'' \1193\ The processed CAT Data would contain the CAT-Reporter-
ID fields, and the Participants maintain that there would be no loss of
accuracy or reliability, no effect on the ability to link records, and
no effect on the time the data would be made available to
regulators.\1194\
---------------------------------------------------------------------------
\1193\ See Exemptive Request Letter, supra note 16, at 21.
\1194\ Id. at 22-23.
---------------------------------------------------------------------------
In fact, the Commission preliminarily believes that the Rule 613
approach would reduce the quality of data obtained as compared to the
Existing Identifier Approach. Specifically, the Rule 613 approach would
reduce the granularity of information on departments, trading desks,
and other business units within CAT Reporters, which would be captured
under the Existing Identifier Approach. This additional granularity
would be possible under the Existing Identifier Approach because
identifiers currently in use are often assigned to entities that are
defined more granularly than the CAT-Reporter-ID level. The Commission
also preliminarily believes that the ability to leverage existing
infrastructure and business processes may reduce the potential for
delays and errors that could be associated with requiring CAT Reporters
to modify their systems and workflows to handle the CAT-Reporter-IDs.
The Commission preliminarily believes that the Rule 613 approach
would increase the costs of the CAT NMS Plan relative to the Existing
Identifier Approach. The Participants estimate implementation costs for
the top three tiers of CAT Reporters for the Rule 613 approach of $78
to $244 million, depending on how report types have to use the CAT-
Reporter-IDs.\1195\ The Exemption Request does not compare these costs
to the Existing Identifier Approach allowed by the exemption and
included in the Plan.\1196\ The Participants note that these estimates
are conservative because they are based on only 11% of broker-
dealers.\1197\ The Participants indicated that they have consulted with
the bidders and the industry in compiling this analysis.\1198\
---------------------------------------------------------------------------
\1195\ Id. at 24.
\1196\ Id. at 24.
\1197\ Id. at 25.
\1198\ Id. at 22.
---------------------------------------------------------------------------
While the Commission preliminarily believes that the Rule 613
approach would increase certain costs associated with the
implementation and operation of CAT as compared to the Existing
Identifier Approach, the Commission notes that there are limitations
associated with the cost estimation methodology presented in the
Exemption Request. These limitations include the exclusion of SROs and
smaller CAT Reporters from the survey, no apparent differentiation
between initial, deferred, and recurring costs, and lack of support for
the method used to extrapolate the estimates for large broker-dealers
to the industry. Nor do the cost estimates address the broker-dealers
who would be CAT Reporters but are currently not OATS reporters,
including those that are currently not registered with FINRA, which may
have a very different cost structure. However, it is likely that the
dominant effect would be the exclusion of many CAT Reporters from the
cost estimates, which would tend to underestimate the cost increases.
The Commission currently has no data from which it can independently
estimate the cost differential because it depends on information
internal to each of a heterogeneous group of CAT Reporters, which is
not compiled or stored anywhere and to which the Commission therefore
does not have ready access. The Commission believes that these effects
are not likely to alter its preliminary conclusion that the Rule 613
approach would significantly increase the costs of the CAT NMS Plan as
compared to the Plan's Existing Identifier Approach. The Commission is
requesting comment on this preliminary conclusion and any additional
data Commenters believe should be considered.
d. Linking Order Executions to Allocations
The Commission is soliciting comment on how an alternative approach
to the reporting of allocation information--the Rule 613 approach--
might impact the costs and benefits of the Plan. Rule 613(c)(7)(vi)(A)
requires each CAT Reporter to record and report to the Central
Repository ``the account number for any subaccounts to which the
execution is allocated (in whole or part).'' \1199\ This information
would allow regulators to link the subaccount to which an allocation
was made to the original order placed and its execution. In the
Exemptive Request Letter and April 2015 Supplement, the SROs requested
an exemption from Rule 613(c)(7)(vi)(A) to include in the Plan an
approach whereby CAT Reporters would instead submit information to the
Central Repository that would allow regulators to link subaccount
information to the Customer that submitted the original order.\1200\
The Commission granted exemptive relief to the SROs to allow this
approach to be included in the CAT NMS Plan and subject to notice and
comment.\1201\
---------------------------------------------------------------------------
\1199\ See 17 CFR 242.613(c)(7)(vi)(A).
\1200\ See Exemptive Request Letter, supra note 16, at 28-29;
April 2015 Supplement, supra note 16, at 2.
\1201\ See Exemption Order, supra note 18, at 11868.
---------------------------------------------------------------------------
Pursuant to the exemptive relief granted by the Commission, the CAT
NMS Plan provides that, rather than providing the account number for
any subaccounts to which the execution is allocated, CAT Reporters
would submit information to the Central Repository in the form of an
Allocation Report, in order to allow regulators to link subaccount
information to the Customer that submitted the original order.\1202\
The Allocation Report would include the Firm Designated ID for any
account(s), including subaccount(s), to which executed shares are
allocated, and provide the security that has been allocated, the
identifier of the firm
[[Page 30758]]
reporting the allocation, the price per share of shares allocated, the
side of shares allocated, the number of shares allocated to each
account, and the time of the allocation, which is information that is
not currently required to be reported and/or retained by broker-
dealers.\1203\ There would not be a direct link in the Central
Repository between the subaccounts to which an execution is allocated
and the execution itself. However, CAT Reporters would be required to
report each allocation to the Central Repository on an Allocation
Report, and the Firm Designated ID of the relevant subaccount provided
to the Central Repository as part of the Allocation Report could be
used by the Central Repository to link the subaccount holder to those
with authority to trade on behalf of the account.\1204\ Further, the
Allocation Reports used in conjunction with order lifecycle information
in CAT would assist regulators in identifying, through additional
investigation, the probable group of orders that led to
allocations.\1205\
---------------------------------------------------------------------------
\1202\ See CAT NMS Plan, supra note 3, at Section
6.4(d)(ii)(A)(1).
\1203\ See id. at Section 1.1; see also Exemption Order, supra
note 18, at 44-45.
\1204\ See Exemption Order, supra note 18, at 45.
\1205\ Id.
---------------------------------------------------------------------------
The Commission is soliciting comment on the Rule 613 approach,
which would require CAT Reporters to record and report the account
number for any subaccounts to which the execution is allocated, as
described above. The Commission preliminarily believes that that the
Rule 613 approach could provide the Central Repository with a way to
link allocations to order lifecycles.\1206\ This linkage would not be
available under the current approach. However, based on estimates
provided by the Participants, the Commission preliminarily believes
that the Rule 613 approach would increase certain costs associated with
the implementation and operation of CAT as compared to the Plan as
filed by roughly $525 million.\1207\
---------------------------------------------------------------------------
\1206\ In the Exemption Request, the SROs explained that under
the Rule 613 approach allocations made from an average price account
would not reflect a true one-to-one relationship between an
execution and an allocation, and therefore the information provided
would not directly link a single order execution and the subaccount
to which an allocation was made. See Exemptive Request Letter, supra
note 16, at 28. However, the Commission believes that under the Rule
613 approach, regulators would receive information that would
identify each execution resulting from the original order placed, as
well as the identity of all the subaccounts to which those
executions were allocated. This information would provide regulators
a finite list of executions from which the subaccount allocations
could have been made.
\1207\ The Participants estimate that the Plan's approach to
allocation information would result in a reduction in implementation
cost for the top three tiers of CAT Reporters of $525 million as
compared to the Rule 613 approach. See Exemptive Request Letter,
supra note 16, at 31.
---------------------------------------------------------------------------
The Commission preliminarily believes that either approach would
allow regulators to link specific allocations, and the prices received
on those allocations, with the aggregated executions that resulted in
the allocations and their execution prices. Industry feedback received
by the Participants indicates that existing business practices
typically involve aggregating executions in an average price account
before making allocations, and forcing a precise matching between
orders and executions ex-post would be misleading.\1208\ The Exemption
Request maintains that, under the approach in the Plan, there would be
no loss of accuracy or reliability, no effect on the ability to link
order records, and no effect on the time the data would be made
available to regulators as compared to the Rule 613 approach.\1209\ The
Exemption Request also states that there may be accuracy and
reliability gains if the exemption reduces errors that may otherwise
occur if broker-dealers were required to re-engineer their allocation
handling systems and business processes to meet the requirements of
Rule 613.\1210\
---------------------------------------------------------------------------
\1208\ See Exemptive Request Letter, supra note 16, at 28
(``[T]his approach . . . introduces an artificial relationship
between any one execution and one allocation. . . . Although, . . .
the ultimate allocation of the shares executed that result from [an]
aggregated order may be useful for regulatory surveillance purposes,
tying these allocations to multiple different executions is of
little regulatory benefit.'').
\1209\ Id. at 30.
\1210\ Id.
---------------------------------------------------------------------------
However, the Rule 613 approach would provide regulators access to
allocations linked to specific disaggregated orders, which is not
possible under the approach in the Plan. The Exemption Request notes
that linking particular allocations to particular order lifecycles
would be inaccurate in some circumstances, such as when many orders are
allocated to many customers.\1211\ The Commission is soliciting comment
on whether such information would necessarily be inaccurate, and
whether requiring the linking of allocations to order lifecycles would
reduce accuracy for several reasons. First, in cases in which one order
is allocated to one customer, the Rule 613 approach would provide an
improvement in accuracy over the approach proposed in the CAT NMS Plan
because the Rule 613 approach would allow the Central Repository to
accurately link such allocations to order lifecycles whereas the
approach proposed in the CAT NMS Plan might not. Under the CAT NMS
Plan, for regulators to link the allocations to the order lifecycles,
they would need to construct an algorithm that would rely on less
information than the Central Repository would have under the Rule 613
approach. As a result, these regulator linkages would likely be less
accurate than a Central Repository linkage. The Commission
preliminarily believes that this is true for cases in which one order
is allocated to many customers and when many orders are linked to one
customer. For the many-to-many allocations, in which many customer
orders are grouped and worked by the market participant using many
orders to acquire the aggregate position ultimately used to fill the
customer orders, the Commission notes that broker-dealers likely
already maintain records that allow them to ensure that the allocations
receive fair prices based on market executions. The Commission is
soliciting comment on whether such information might be sufficient to
link the many allocations to the many orders executed in an accurate
manner. Such information would greatly aid investigations of fair
allocations because it would allow regulators to reconstruct the manner
in which allocations occur.
---------------------------------------------------------------------------
\1211\ See id. at 28-30.
---------------------------------------------------------------------------
The Commission preliminarily believes that the Rule 613 approach
would increase the costs of compliance with the CAT NMS Plan. According
to industry feedback collected by the Participants, the Rule 613
approach would require broker-dealers to undertake a major re-
engineering of their middle and back office systems and
processes.\1212\ The Participants estimate a reduction in
implementation cost over the Rule 613(c)(7)(vi) Baseline for the top
three tiers of CAT Reporters of $525 million; consequently, the
Commission preliminarily believes that this alternative would cost at
least $525 million more than the estimated costs of the CAT NMS Plan to
implement.\1213\ The Participants indicated that they have consulted
with the bidders and the industry in compiling this analysis.\1214\
---------------------------------------------------------------------------
\1212\ Id. at 27.
\1213\ Id. at 31.
\1214\ See id. at 30-31.
---------------------------------------------------------------------------
e. Time Stamp Granularity
The Commission is soliciting comment on how an alternative
approach--the Rule 613 approach--to time stamps on ``Manual Order
Events'' might impact the costs and benefits of
[[Page 30759]]
the Plan.\1215\ Rule 613(c)(7) and Rule 613(d)(3) require time stamps
with a minimum granularity of one millisecond on all order
events.\1216\ The Participants requested an exemption from the
requirement in Rule 613(d)(3) that for Manual Order Events each CAT
Reporter record and report details for Reportable Events with time
stamps that ``reflect current industry standards and [are] at least to
the millisecond.'' \1217\ The Commission granted exemptive relief to
the SROs to allow the approach to recording and reporting time stamps
for Manual Order Events described in the Exemption Request to be
included in the CAT NMS Plan and subject to notice and comment.\1218\
---------------------------------------------------------------------------
\1215\ ``Manual Order Events'' are defined to mean ``non-
electronic communication[s] of order-related information for which
CAT Reporters must record and report the time of the event.'' See
CAT NMS Plan, supra note 3, at Section 1.1.
\1216\ See 17 CFR 242.613(c)(7) (requiring use of time stamps
pursuant to 17 CFR 242.613(d)(3)); 17 CFR 242.613(d)(3) (requiring
time stamp granularity be ``at least to the millisecond'').
\1217\ See 17 CFR 242.613(d)(3); Exemptive Request Letter, supra
note 16, at 32.
\1218\ See Exemption Order, supra note 18, at 11869.
---------------------------------------------------------------------------
Pursuant to the exemptive relief granted by the Commission, the CAT
NMS Plan provides that: (1) Each CAT Reporter would record and report
Manual Order Event time stamps to the second; (2) Manual Order Events
would be identified as such when reported to the CAT; and (3) CAT
Reporters would report in millisecond time stamp increments when a
Manual Order Event is captured electronically in the relevant order
handling and execution system of the CAT Reporter (``Electronic Capture
Time'').\1219\ On the other hand, the Rule 613 approach would require
that CAT Reporters record and report details for Manual Order Events
with time stamps that are at least to the millisecond, as required by
Rule 613(c)(7) and Rule 613(d)(3). The Commission preliminarily
believes that the Rule 613 approach would increase the costs of
implementing the CAT NMS Plan while providing little regulatory benefit
relative to the current approach.
---------------------------------------------------------------------------
\1219\ See CAT NMS Plan, supra note 3, at Section 6.8.
---------------------------------------------------------------------------
The Participants maintain in the Exemption Request that there would
be little benefit, and possibly some adverse consequences, of capturing
Manual Order Event time stamps in milliseconds.\1220\ They note that
determining the time of a manual event is inherently imprecise, due to
the limits of human reaction time in completing a transaction and the
time required to manually record the event.\1221\ They claim human
reaction time to visual stimulus is on the order of 400-500
milliseconds, making millisecond time stamps imprecise.\1222\ The
Commission preliminarily agrees that attempting to record the precise
millisecond in which a manual event occurred would necessarily be
imprecise. The Commission also preliminarily agrees that potential
adverse consequences could arise from relying on time stamps with a
misleading level of precision.\1223\
---------------------------------------------------------------------------
\1220\ See Exemptive Request Letter, supra note 16, at 33.
\1221\ Id. at 37.
\1222\ Id.
\1223\ The Commission notes that Manual Order Events are not
clearly and exhaustively defined, and the definitions may not be
available until the Technical Specifications are published. It may
be possible for the Plan Processor to classify some types of order
events as Manual Order Events that were not considered to be a
Manual Order Event for the purposes of this analysis. This creates a
degree of uncertainty as to whether the Rule 613 approach might
yield some regulatory benefit.
---------------------------------------------------------------------------
The Participants discussed the costs and benefits of the proposed
exemption in their Exemption Request. They estimated a minimum total
cost to the industry of $10.5 million based on the cost of advanced
OATS-compliant clocks with granularity of one second, and noted that
clocks with millisecond granularity would likely be more expensive if
available.\1224\ The Participants also noted that the industry was
consulted through the DAG and an unsuccessful attempt was made to find
a commercially available time stamping device with millisecond
granularity.\1225\ Based on this information, the Commission
preliminarily believes the Rule 613 approach to Manual Order Events
would increase certain costs associated with the implementation and
operation of CAT as compared to the Plan as filed without providing any
significant additional benefit.
---------------------------------------------------------------------------
\1224\ See Exemptive Request Letter, supra note 16, at 36-37.
\1225\ Id. at 35.
---------------------------------------------------------------------------
2. Alternatives to Certain Specific Approaches in the CAT NMS Plan
The Commission has analyzed alternatives to specific approaches in
the CAT NMS Plan with respect to clock synchronization, time stamps,
error rates, the time within which errors must be corrected, the
funding model, requirements regarding listing exchange symbology, data
accessibility standards, and intake capacity levels.
a. Clock Synchronization
The Commission is soliciting comments on alternate approaches to
clock synchronization as compared to those proposed in the CAT NMS
Plan. First, the Commission is soliciting comment on alternatives to
the Plan's one-size-fits-all definition of ``industry standard.'' Under
these alternatives, ``industry standard'' would be defined in terms of
the standard practices of different segments of the CAT Reporters, or
by looking at information other than current industry practices. These
alternative approaches could result in clock offset tolerances shorter
than the CAT NMS Plan's proposed 50 millisecond standard for some or
all CAT Reporters. The Commission preliminarily believes that these
alternatives could substantially increase the benefits of CAT in
regulatory activities that require event sequencing, such as analysis
and reconstruction of market events, as well as market analysis and
research in support of policy decisions, and cross-market surveillance,
examinations, investigations, and other enforcement functions.\1226\
---------------------------------------------------------------------------
\1226\ See Section IV.E.1.b(2), supra.
---------------------------------------------------------------------------
Second, the Commission is soliciting comment on two additional
alternatives that could allow for more cost-effective clock
synchronization standards. In particular, the Commission is soliciting
comment on modifying the requirement to document clock synchronization
activities such that only events that require clock adjustment would be
required to be documented, and modifying the clock synchronization
requirement such that clocks would not have to be synchronized at times
when systems are not recording time-sensitive CAT Reportable Events,
such as orders originated outside of market hours when they are not
immediately actionable. The Commission preliminarily believes that
reduced clock synchronization logging requirements might significantly
reduce ongoing costs associated with clock synchronization compliance
as compared to the Plan as filed, without losing any additional
material information. In addition, the Commission preliminarily
believes that more flexible clock synchronization standards outside of
regular and extended trading hours may also reduce costs without a
material loss to the ability of regulators to sequence order events as
compared to the Plan as filed, without losing any additional material
information. Each of these alternatives is outlined below.
(1) Alternative Clock Synchronization Standards
Rule 613(d)(1) requires synchronization of business clocks for the
purposes of recording the date and time of Reportable Events consistent
[[Page 30760]]
with industry standards.\1227\ The CAT NMS Plan describes the
``industry standard'' in terms of the technology adopted by the
majority in the industry.\1228\ The Plan therefore bases its clock
synchronization standard on current practices of the broker-dealer
industry generally, and provides that one standard would apply to all
CAT Reporters. The Commission is soliciting comment on an alternative
interpretation of ``industry standard'' that would consider the
standard practices of different segments of the CAT Reporters for the
purposes of setting the clock synchronization requirements. The
Commission is also soliciting comment on an alternative that would
define industry standard by looking at information other than current
industry practice; for example, the most accurate technology currently
available in the industry, or the standard recommended by a particular
authority or industry group.
---------------------------------------------------------------------------
\1227\ The Commission did not define the term ``industry
standard'' in Rule 613. In the Adopting Release, the Commission
noted that it expected the Plan to ``specify the time increment
within which clock synchronization must be maintained, and the
reasons the plan sponsors believe this represents the industry
standard.'' See Adopting Release, supra note 9, at 45774.
The benefits of alternative clock offset tolerances discussed
in this Section may be dependent on time stamp granularity
requirements. Related alternatives are discussed in Section
IV.H.2.b, infra.
\1228\ See CAT NMS Plan, supra note 3, at Appendix C, Section
12(p).
---------------------------------------------------------------------------
First, the Commission is soliciting comment on an alternative
definition of industry standard that would consider the standard
practices of different segments of CAT Reporters. Under this
alternative, all systems within market participants that process CAT-
Reportable Events would be required to comply with a clock
synchronization requirement reflecting an industry standard particular
to that market participant's segment of the industry. Currently, the
Commission lacks the information necessary to reach a preliminary
conclusion regarding the appropriate industry standards for all subsets
of the industry. Specifically, neither the FIF Clock Offset Survey nor
the Plan provides comprehensive data on the clock synchronization
practices of firms within each of the relevant subsets of the industry,
and the Commission has no data from which it can independently estimate
the cost differential because the Commission is not aware of any such
data available to it at this time. However, the Commission is
soliciting comment on this approach, which it believes would result in
a clock offset tolerance of less than 50 milliseconds for some market
participants. The Commission seeks comment on the current practices for
clock synchronization in various segments of the industry, including
but not limited to broker-dealers that are introducing firms,
institutional firms, retail firms that accept customer orders
electronically, registered market makers and principal trading firms,
as well as service bureaus hosting order management systems, exchanges
and ATSs, and branches of broker-dealers that predominantly handle
manual orders. The Commission also seeks comment on the costs and
benefits of requiring varying clock offset tolerances within the
industry.
The Commission notes that the current practices for exchanges and
Execution Venues may differ from the industry standard for broker-
dealers as defined by the Plan, and current practices for certain
systems within broker-dealers may vary by the system within the broker-
dealers. For example, a small clock offset tolerance may be nearly
universally adopted for systems like ATSs that operate a matching
engine, while systems involved in manual entry of orders may typically
have larger clock offset tolerances. By defining industry standard
based on practices of the broker-dealer industry generally, the Plan
does not account for these differences.
Other information now available for the Commission and the public
to study, particularly information from the FIF Clock Offset Survey,
shows that several of the survey respondents that have a current clock
offset tolerance of one second are clearing firms or service
bureaus.\1229\ According to the same survey, current clock offset
tolerances vary from one second to five microseconds among the broker-
dealers surveyed with 22% of respondents having multiple clock offset
tolerances across their systems.\1230\ Further, the FIF Clock Offset
Survey shows that the firms with multiple clock offset tolerances
typically engage in multiple lines of business. The fact that some
broker-dealers maintain clock offset tolerances at different levels
within the firm suggests that these broker-dealers believe that clock
precision is more important for some systems; furthermore, based on
conversations with market participants,\1231\ the Commission
preliminarily believes that market participants strategically upgrade
certain systems and reallocate older technology within the firm to
applications where up-to-date technology is less critical.\1232\
---------------------------------------------------------------------------
\1229\ See FIF Clock Offset Survey, supra note 127.
\1230\ See Section IV.D.2.b(2)B.i, supra for more information
regarding the distribution of broker-dealer clock offset tolerances.
\1231\ Based on FIF-organized conversations with broker-dealers
and service bureaus. See supra note 880.
\1232\ Systems that have greater clock offset tolerances may
have technology that is too old to support smaller clock offset
tolerances. The Commission preliminarily believes that if a shorter
clock offset tolerance is important to these broker-dealers, they
would update their systems to support newer technology capable of
smaller clock offset tolerances.
---------------------------------------------------------------------------
Finally, exchanges and ATSs, as well as the SIPs, may have current
clock offset tolerances that are significantly different from the clock
offset tolerances at broker-dealers and could therefore achieve finer
clock offset tolerances at lower cost than broker-dealers.\1233\
According to FIF, all exchange matching engines meet a clock offset
tolerance of 50 milliseconds or less while NASDAQ states that all
exchanges that trade NASDAQ securities have clock offset tolerances of
100 microseconds or less.\1234\ In conversations with Commission Staff,
the Participants stated that absolute clock offset on exchanges
averages 36 microseconds, further suggesting that certain business
activities warrant smaller clock synchronization tolerances.\1235\
---------------------------------------------------------------------------
\1233\ See supra notes 441 and 442. Specifically, the NASDAQ SIP
Web site implies that exchanges reporting to the NASDAQ SIP
synchronize their systems to 100 microseconds.
\1234\ See Section IV.D.2.b(2)B.i, supra for more information on
clock offset tolerances of exchanges and the SIPs.
\1235\ See supra note 436.
---------------------------------------------------------------------------
Given this information, the Commission recognizes the possibility
that some business systems and some CAT Reporter types would rarely be
responsible for recording the date and time of reportable events and
also recognizes that the time stamp precision of such rare events might
not be as critical as for other events. For example, a system that
routes customer orders to market centers may be considered critical for
sequencing market events, while a system that facilitates manual input
of orders received by telephone may not. Conversely, the clock
synchronization practices of some CAT Reporters may be more critical to
the overall benefits of CAT or could be less costly to implement. For
example, a service bureau that provides an order-handling system hosted
on its own servers is likely to route orders for many market
participants and its clock synchronization practices would, thus, be
critical to event sequencing. On the other hand, the precision of time
stamps from systems of an isolated broker-dealer that routes customer
orders to its service bureau or another broker-dealer for market access
and conducts no
[[Page 30761]]
proprietary trading may be less critical to event sequencing,
especially if the receiving system at the service bureau would record a
high-precision time stamp when the order is received. Furthermore,
instituting higher clock precision at a single service bureau would be
less costly than instituting that same level of clock precision at the
service bureau and all of its broker-dealer customers as is required by
the Plan as filed.
Relative to the proposed clock synchronization standard, the
Commission preliminarily believes that an alternative approach that
would consider the standard practices of different segments of the
industry for the purposes of setting the clock synchronization
requirements, and would require a smaller clock offset tolerance than
in the Plan for certain business systems that are more critical to
being able to accurately sequence order events, could have significant
benefits. In other words, the Commission preliminarily believes that
some business systems may be responsible for time stamping more time-
sensitive order events than others, where more time-sensitive orders
are those for which precise time stamps are more critical for event
sequencing.
The Commission does not currently have the information necessary to
specify which particular types of business system handle more time-
sensitive orders because neither the FIF Clock Offset Survey nor the
Plan provides this data. The Commission has no data from which it can
independently estimate this because the Commission is not aware of any
such data available to it. However, the Commission recognizes the
potential for such an approach. For example, it is possible that almost
all of the order origination events, routing events, modification
events, and execution events, which are likely to be more time-
sensitive than other CAT Reportable Events, occur on systems at broker-
dealers that conduct certain types of businesses. The businesses that
seem most likely to record these time-sensitive events include:
Introducing broker-dealers; institutional broker-dealers; retail
broker-dealers that accept customer orders electronically; registered
market makers; principal trading firms; service bureaus that host order
management systems; exchanges; and ATSs.
Further, some systems collect order events that either do not
require a granular time stamp; other systems would not be required to
record order events in real time. An example would be regional branches
of broker-dealers that only handle manual orders which require a time
stamp to the second until the broker enters the order into an
electronic system. If the order entry hits a centralized system
quickly, then perhaps the clock precision of the centralized system may
be sufficient for sequencing.
The Commission is also soliciting comment on an alternative
approach that would define industry standard by looking at information
other than current industry practices; for example, by considering the
most accurate technology currently available in the industry, or the
standard recommended by a particular industry group or authority.
Defining industry standards by majority practices may have the
unintended effect of setting a standard that delays adopting advances
in technology. The Commission preliminarily believes that this
alternative approach could result in defining an industry standard for
clock synchronization that would require a clock offset tolerance for
all CAT Reporters that is lower than the 50 millisecond standard
required by the Plan. The Commission seeks comment on any appropriate
definitions of ``industry standard'' with respect to clock
synchronization, including the costs and benefits of using any
alternative definitions of ``industry standard'' for the purposes of
setting clock synchronization requirements. The Commission also seeks
comment on whether a definition of ``industry standard'' could set a
maximum clock offset tolerance with an expectation that each CAT
Reporter would be responsible for smaller clock offsets if the CAT
Reporter is technically capable of such clock offsets.
The Commission conducted an analysis to assess the benefits of
alternative approaches to defining industry standard that would result
in smaller clock offset tolerances for some or all segments of CAT
Reporters. The Commission evaluated the percentage of unrelated events
that can potentially be sequenced under various clock offset
tolerances, including the 50 millisecond tolerance outlined in the CAT
NMS Plan. The Commission estimates that approximately 7.84% of
unrelated orders for listed equities and 18.83% of unrelated orders for
listed options can be accurately sequenced using a clock offset
tolerance of 50 milliseconds.\1236\ The Commission augmented this
analysis by conducting a clock synchronization analysis to examine
certain alternative clock offset tolerances from those examined in the
FIF Clock Offset Survey.\1237\ Table 10 shows the results of the
Commission's analysis as a percentage of unrelated order events for
equities that could be sequenced under various alternative clock offset
tolerance.
---------------------------------------------------------------------------
\1236\ See Section IV.E.1.b(2)A, supra. In general, events occur
with such frequency that a 50 millisecond clock synchronization
standard would not be sufficient to sequence all orders; see also
CAT NMS Plan, supra note 3, at Appendix C, Section A.3(c) n.110
(``Events occurring within a single system that uses the same clock
to time stamp those events should be able to be accurately sequenced
based on the time stamp. For unrelated events, e.g., multiple
unrelated orders from different broker-dealers, there would be no
way to definitively sequence order events within the allowable clock
drift as defined in Article 6.8 [of the CAT NMS Plan].'').
\1237\ See Section IV.D.2.b(2)B, supra, for information on the
Commission's clock offset tolerance analysis. Specifically, the
analysis says that an order event can be sequenced if its time stamp
is at least twice the clock offset tolerance from any other event on
another venue.
Table 10--Sequencing Accuracy of Unrelated Events by Clock Offset
Tolerance
------------------------------------------------------------------------
Percentage of unrelated events
that can be sequenced
Clock offset tolerance -----------------------------------
Equities (%) Options (%)
------------------------------------------------------------------------
50 milliseconds..................... 7.84 18.83
5 milliseconds...................... 16.51 35.54
1 millisecond....................... 22.08 50.70
100 microseconds.................... 42.47 78.42
------------------------------------------------------------------------
[[Page 30762]]
The Commission's analysis suggests that approximately 16.51% of
unrelated order events for equities and 35.54% of unrelated order
events for options could be sequenced under a clock offset tolerance of
5 milliseconds, 22.08% of orders events for equities and 50.70% of
order events for options could be sequenced under a clock offset
tolerance of 1 millisecond, and 42.47% of order events for equities and
78.42% of orders events for options could be sequenced under a clock
offset tolerance of 100 microseconds. Given these results, the
Commission believes that requiring a smaller clock offset tolerance
than the Plan's proposed 50 milliseconds for some segments of the
industry could improve the accuracy of event sequencing.
Relative to the Plan's proposed universal 50 millisecond clock
offset tolerance, the Commission preliminarily believes that requiring
a smaller clock offset tolerance for some segments of the industry
would likely increase the costs of the CAT NMS Plan. Table 11 is from
page C-126 of the CAT NMS Plan, and it provides the costs of the Plan's
proposed clock offset tolerance (50 milliseconds) and alternative
tolerances (100 microseconds, 5 milliseconds, and 1 millisecond).\1238\
These costs assume that each clock offset tolerance is applied to all
business systems. However, as noted above, the alternative the
Commission is soliciting comment on is to require smaller clock offset
tolerance for certain segments of the industry. So, the estimates below
provide an upper bound on the potential cost if the Commission requires
smaller clock offset tolerances in some cases.
---------------------------------------------------------------------------
\1238\ Table 11 is from the CAT NMS Plan, supra note 3, at
Appendix C, Section D.12(p) and it draws its numbers from the FIF
Clock Offset Survey. See supra note 127.
Table 11--Implementation and Annual Ongoing Cost Estimates per Firm by
Clock Offset Tolerance
------------------------------------------------------------------------
Estimated Estimated annual
Clock offset tolerance implementation ongoing cost
cost (per firm) (per firm)
------------------------------------------------------------------------
50 milliseconds..................... $554,348 $313,043
5 milliseconds...................... 887,500 482,609
1 millisecond....................... 1,141,667 534,783
100 microseconds.................... 1,550,000 783,333
------------------------------------------------------------------------
The Commission understands that the cost figures in Table 11 do not
net out the current ongoing costs of clock synchronization, which are
$203,846.\1239\ Table 12 shows the preliminary estimated annual ongoing
cost increase (ongoing costs minus current costs) to comply with
various alternative clock offset tolerances as well as the clock offset
tolerance specified in the Plan.
---------------------------------------------------------------------------
\1239\ See FIF Clock Offset Survey, supra note 127, at 16. This
is based on current practice of the broker-dealers who responded to
the survey.
Table 12--Annual Ongoing Cost Increases per Firm by Clock Offset
Tolerance
------------------------------------------------------------------------
Estimated
annual ongoing
Clock offset tolerance cost increases
(per firm)
------------------------------------------------------------------------
50 milliseconds....................................... $109,197
5 milliseconds........................................ 278,763
1 millisecond......................................... 330,937
100 microseconds...................................... 579,487
------------------------------------------------------------------------
Based on these estimates, the Commission estimated aggregate clock
synchronization costs for broker-dealers consistent with the estimation
of their total CAT compliance costs as detailed in the Costs Section
above.\1240\ The Commission assumed that 171 broker-dealers would incur
the full ongoing costs and full implementation costs indicated in the
FIF Clock Offset Survey.\1241\ Conversely, the remaining 1,629 broker-
dealers that are already assumed to use service bureaus would rely on
the 13 service bureaus to facilitate their clock synchronization, and
therefore would pay lower implementation and ongoing costs than those
in the FIF Clock Offset Survey. The Commission understands that broker-
dealers that rely on service bureaus for order management systems and
regulatory reporting usually use servers operated by their service
bureaus and most would therefore not directly bear the costs to
implement and comply with clock synchronization standards.\1242\ For
the implementation costs for those relying on service bureaus for clock
synchronization, the Commission assumes \1/4\ FTE for 50 milliseconds,
\1/2\ FTE for 5 milliseconds, \3/4\ FTE for 1 millisecond, and 1 FTE
for 100 microseconds. Under these assumptions, broker-dealers that
outsource their order management and regulatory reporting obligations
would incur costs (shown in Table 13) that are significant relative to
the estimated implementation costs for broker-dealers that handle order
management and reporting obligations in-house.\1243\
---------------------------------------------------------------------------
\1240\ See Section IV.F.3.a, supra.
\1241\ The 171 broker-dealers comes from the total of
Insourcers, ELPs, and Options Market Makers.
\1242\ See Section IV.F.1.d, supra for a discussion of service
bureaus passing costs on to clients.
\1243\ As in the Costs Section above (see Section IV.F.1.c(2)C),
monetizing the FTE costs involves multiplying the number of FTEs by
$424,350. See infra note 1487.
Table 13--Implementation Cost Estimates per Firm for Outsourcing Firms
by Clock Offset Tolerance
------------------------------------------------------------------------
Estimated
implementation
Clock offset tolerance costs (per firm)
for outsourcing
firms
------------------------------------------------------------------------
50 milliseconds....................................... $106,000
5 milliseconds........................................ 212,000
1 millisecond......................................... 318,000
100 microseconds...................................... 424,000
------------------------------------------------------------------------
With these implementation costs, the Commission aggregated
implementation and ongoing costs as indicated in Table 14.
[[Page 30763]]
Table 14--Aggregated Implementation and Annual Ongoing Cost Estimates by
Clock Offset Tolerance
------------------------------------------------------------------------
Estimated Estimated
aggregate aggregate annual
Clock offset tolerance implementation ongoing cost
cost \1244\ \1245\
------------------------------------------------------------------------
50 milliseconds..................... $268 million $25 million.
5 milliseconds...................... 497 million 63 million.
1 millisecond....................... 714 million 75 million.
100 microseconds.................... 956 million 131 million.
------------------------------------------------------------------------
Table 14 suggests that the Plan's clock synchronization costs for
the approximately 1,800 expected CAT Reporters would be approximately
$268 million in estimated implementation costs and about $25 million in
ongoing costs. To estimate the relative costs of each alternative
compared to the Plan, the Commission subtracted the costs of the Plan
from the costs of each alternative.
---------------------------------------------------------------------------
\1244\ $268 million [ap] 171*$554,348 + 1,629*0.25*$424,350.
$497 million [ap] 171*$887,500 + 1,629*0.5*$424,350. $714 million
[ap] 171*$1,141,667 + 1,629*0.75*$424,350. $956 million [ap]
171*$1,550,000 + 1,629*$424,350.
\1245\ $25 million [ap] 171*$109,197 + 13*4.2*$109,197. $63
million [ap] 171*$278,763 + 13*4.2*$278,763. $75 million [ap]
171*$330,937 + 13*4.2*$330,937. $131 million [ap] 171*$579,487 +
13*4.2*$579,487. 13 is the number of service bureaus and 4.2 is the
ratio between the total incremental ongoing charges to broker-
dealers and the total incremental ongoing costs to service bureaus
derived from the cost estimates above. See Section IV.F.2, supra.
---------------------------------------------------------------------------
Table 15 provides estimates for how the costs of alternative clock
offset tolerances applied to all business systems would be greater than
those of the CAT NMS Plan if a different clock offset tolerance applied
to all CAT Reporters.
Table 15--Aggregated Implementation and Annual Ongoing Cost Increases by
Clock Offset Tolerance
------------------------------------------------------------------------
Estimated Estimated
increase in increase in
Clock offset tolerance implementation annual ongoing
cost cost
(aggregate) (aggregate)
------------------------------------------------------------------------
5 milliseconds...................... $229 million $38 million.
1 millisecond....................... 446 million 50 million.
100 microseconds \1246\............. 688 million 106 million.
------------------------------------------------------------------------
The Commission does not have information on the implementation and
ongoing costs to exchanges or ATSs of various alternative clock offset
tolerances because trading venues were not included in the FIF Clock
Offset Survey. The Plan does not provide this data, and the Commission
has no other data from which it can independently estimate this,
because the Commission is not aware of any such data available to it.
However, exchanges may currently synchronize their clocks to within 100
microseconds.\1247\ Consequently, the Commission preliminarily believes
that any of the alternative clock offset tolerances discussed above
would not materially increase costs to Participants relative to the
costs they would incur under the Plan because their current clock
synchronization procedures seem to satisfy any of the proposed clock
offset tolerances. In the case of ATSs, these systems tend to be
operated by large and complex broker-dealers that are unlikely to rely
upon service bureaus to perform their clock synchronization
responsibilities. Consequently, the Commission preliminarily believes
that cost estimates for the broker-dealers surveyed by FIF are likely
to include broker-dealers that operate ATSs and already reflect any
additional clock synchronization costs attributable to operating ATSs.
However, if Execution Venues (including ATSs) were to have smaller
clock offset tolerances than other broker-dealer systems, broker-
dealers operating ATSs would be expected to incur higher clock
synchronization costs than other broker-dealers.
---------------------------------------------------------------------------
\1246\ The Commission recognizes that the benefits of clock
synchronization of less than one millisecond are limited unless the
time stamps are also more granular. Requiring more granular time
stamps than the 1 millisecond in the Plan would increase the costs
relative to those in Table 15.
\1247\ See Section IV.D.2.b(2)B.i, supra; see also supra notes
435 and 436.
---------------------------------------------------------------------------
As noted above, the Commission is soliciting comment on both an
alternative that would consider the standard practices of different
segments of the CAT Reporters for the purposes of setting the clock
synchronization requirements, and an alternative that would define
industry standard by looking at information other than current industry
practice. The Commission preliminarily believes that if the CAT NMS
Plan used an alternative interpretation of ``industry standard'' that
considered the standard practices of different segments of the CAT
Reporters for the purposes of setting the clock synchronization
requirements, the cost increases associated with smaller clock offset
tolerances might be lower than estimates presented in the tables above.
In particular, if the clock synchronization requirements were only
applied to the most time-sensitive systems, the costs increases would
be lower than those presented.\1248\ In addition, if the only broker-
dealers required to comply with clock synchronization requirements were
the ones accepting, routing, and executing orders, the costs could be
lower than those presented above. The Commission does not have the
information necessary to quantify how much lower the costs would be
under an alternative that applied different clock offset tolerances to
different segments of the CAT Reporters, because neither the Plan nor
[[Page 30764]]
the FIF Clock Offset Survey break the cost estimates for changes in
clock synchronization requirements down by business system types, and
the Commission has no data from which it can independently estimate
this, because the Commission is not aware of any such data available to
it.
---------------------------------------------------------------------------
\1248\ This belief is also consistent with information in the
FIF Clock Offset Survey. See supra note 127, at 20. Specifically,
the survey found that respondents would save on costs if the
alternative clock offset tolerance were applied only to ``server-
side trading systems.''
---------------------------------------------------------------------------
The Commission recognizes that a clock offset tolerance smaller
than 50 milliseconds would have differential cost across market
participants. An alternate approach to defining ``industry standard''
that took into account the standard practices of different segments of
CAT Reporters could mitigate those costs. All FIF Clock Offset Survey
respondents that provided technology information use technology capable
of 50 millisecond clock offset tolerances, but 36% of those respondents
do not employ a technology capable of clock offset tolerances smaller
than 50 milliseconds. Some survey respondents indicated that they
employ software that is not capable of clock offset tolerances of less
than 50 milliseconds or that desktop PCs would be a challenge with such
clock offset tolerances. An alternative definition of ``industry
standard'' that considered the practices of various segments of the
industry could apply smaller clock offset tolerances to a subset of
business systems; the Commission expects that applying smaller clock
offset tolerances to a subset of systems would cost less than applying
such clock offset tolerances to all systems. However, the benefits
could also be limited in terms of the percentage of unrelated events
that could potentially be sequenced, as compared to a definition of
``industry standard'' that a set a lower clock offset tolerance for all
CAT Reporters.
(2) Alternative Logging Procedures
Rule 613(d)(1) requires synchronizing business clocks that are used
for the purposes of recording the date and time of any Reportable
Event. The CAT NMS Plan further requires that Participants and other
CAT Reporters maintain a log recording the time of each clock
synchronization that is performed and the result of such
synchronization, specifically identifying any synchronization initiated
in response to an observed discrepancy between the CAT Reporter's
business clock and the time maintained by the NIST exceeding 50
milliseconds.\1249\ According to the FIF Clock Offset Survey, costs in
logging the synchronization events is a significant driver of overall
clock synchronization costs.\1250\
---------------------------------------------------------------------------
\1249\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(c).
\1250\ Other cost drivers include hardware and software costs
and costs in ensuring reliability.
---------------------------------------------------------------------------
A few survey respondents indicated that the number of logged events
would go up significantly with a shorter clock offset, which requires a
costly logging system.\1251\ Therefore, the Commission is soliciting
comment on an alternative that would require logging only exceptions to
the clock offset (i.e., events in which a market participant checks the
clock offset and applies changes to the clock).\1252\ While logging
every event, including clock offset checks, may be cost effective with
longer clock synchronization tolerances, the Commission questions
whether logging each event is cost efficient with finer clock offset
tolerances, given the large number of events expected for the proposed
and alternative clock synchronization standards. For example, if an
investigation is relying on properly sequenced events, the
investigation only would need to examine exception files to ensure the
precision of the time stamps. The FIF Clock Offset Survey suggests that
relaxing the logging requirement could reduce the burdens associated
with clock synchronization.
---------------------------------------------------------------------------
\1251\ See FIF Clock Offset Survey, supra note 127, at 19. One
survey respondent noted that a log file for a one second clock
offset would require 1 gigabyte of compressed storage each day but
clock offset log files for 50 millisecond clock offset would
increase the daily data storage 10 fold. Another survey respondent
noted that its current system logs 86,000 events per day and that
the proposed clock offset would require logging 35 million events
per day; see also CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(c).
\1252\ This is one of the alternatives suggested in the FIF
Clock Offset Survey. See supra note 127.
---------------------------------------------------------------------------
The Commission cannot quantify the reduction in costs from this
alternative because it lacks data on the proportion of clock
synchronization costs that are associated with event logging and the
proportion of those costs that could be avoided by alternative event
logging requirements. The Commission preliminarily believes that any
reduction in benefits from this alternative, as compared to the CAT NMS
Plan's approach for clock synchronization, would be minor because the
inclusion of clock synchronization checks that required no clock
adjustment would not improve regulators' ability to sequence events.
The Commission notes, however, that enforcement of clock
synchronization requirements may be more difficult without
comprehensive logging requirements that document firms' actions to
comply with requirements; consequently, relaxing the logging
requirement may also reduce incentives to comply with the clock
synchronization requirements.
(3) Alternative Clock Synchronization Hours
The Commission is soliciting comment on alternative requirements
for the times during which clock synchronization is required that would
provide more flexibility than the requirements of the Plan. The clock
synchronization requirement presented in the CAT NMS Plan makes no
provision for reduced clock synchronization requirements at times
during which systems are not performing tasks that produce time-
sensitive CAT Reportable Events; in the FIF Clock Offset Survey,
respondents identified that there were certain times during which
maintaining clock synchronization is more costly. Survey respondents
noted they would incur additional costs in maintaining clock offset
``99.9% of the time'' or with ``100% reliability'' and costs associated
with managing ``clock synch instability . . . after server reboot.''
The Commission notes that maintaining 99.9% or 100% reliability may be
unnecessary during times when the system does not record Reportable
Events. Further, the Commission understands that generally a system
does not record Reportable Events during server reboots. Therefore, the
Commission preliminarily believes that an alternative that does not
require synchronizing clocks when servers are not recording Reportable
Events or when precise time stamps are not as important to sequencing,
such as outside of normal trading hours, would not materially reduce
benefits. Given the responses to the FIF Clock Offset Survey, the
Commission preliminarily believes that this alternative could reduce
costs because synchronization activities and log entries related to
those events would not be as beneficial outside of normal trading
hours. The Commission does not have information necessary to quantify
the cost reduction because cost information available to the Commission
is not broken down by time of day or server status.
b. Time Stamp Granularity
The Commission is soliciting comment on the benefits and costs of
an alternative time stamp granularity requirement of less than one
millisecond. Rule 613(d)(3) requires time stamp granularity consistent
with industry standards and, as discussed above, the Plan requires time
stamps that reflect industry standards and are at
[[Page 30765]]
least to the millisecond.\1253\ Furthermore, the Plan requires
Participants to adopt rules requiring that CAT Reporters that use time
stamps in increments finer than milliseconds use those finer increments
when reporting to the Central Repository.\1254\ As discussed in the
Commission's analysis of alternative clock offset tolerance
requirements, millisecond time stamps may be inadequate to allow
sequencing of the majority of unrelated Reportable Events across
markets.\1255\ In addition, as discussed below, the Commission
recognizes that the benefits of more granular time stamps would be
limited unless the Plan were to require a clock offset tolerance far
lower than is proposed in the Plan.
---------------------------------------------------------------------------
\1253\ See Section IV.H.1.e, supra.
\1254\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(c).
\1255\ See Section IV.E.1.b(2)B, supra.
---------------------------------------------------------------------------
The Commission recognizes that regulators' ability to sequence
events is dependent on both clock offset tolerance and time stamp
granularity. If the Plan requires any or all CAT Reporters to implement
clock offset tolerances of less than a millisecond, time stamps
reported at the millisecond level would not capture the additional
precision of the smaller clock offset tolerance and much of the
benefits of this smaller clock offset requirement would be lost if time
stamps were rounded or truncated due to a millisecond time stamp
granularity requirement. The Commission notes that provisions in the
Plan require that any Participant that utilizes time stamps in
increments finer than the minimum required to be reported under the
Plan utilize such increments in reporting data to the Central
Repository. Also, the Commission notes that a sub-millisecond clock
offset tolerance would not in itself require the reporting of sub-
millisecond time stamps to the Central Repository.\1256\
---------------------------------------------------------------------------
\1256\ See CAT NMS Plan, supra note 3, at Section 6.8(b).
---------------------------------------------------------------------------
A requirement for time stamps at resolutions finer than 1
millisecond would entail certain costs. Because some market
participants already use time stamps at the sub-millisecond level and
will be required to report this information under the Plan, such a
requirement is unlikely to create significant additional costs for CAT
Reporters. Furthermore, while some exchanges and broker-dealers are
already required to report time stamps at the sub-millisecond level,
implementation costs are likely to vary across CAT Reporters. The Plan
does not provide data on the cost of requiring sub-millisecond time
stamps, and the Commission has no other data from which it can
independently estimate this, because the Commission is not aware of any
such data currently available to it.
Requiring sub-millisecond time stamp reporting would bring certain
benefits. However, the Commission preliminarily believes these benefits
may be limited without requiring clock offset tolerances of less than
one millisecond as well. For example, with a 50 millisecond clock
offset tolerance, a time stamp can only pinpoint the time of an event
to a 100 millisecond range.\1257\ In this case, sub-millisecond time
stamps provide little benefit to regulators attempting to determine the
order of events occurring in venues with separate clocks. However, even
with a 1 millisecond clock offset tolerance, a sub-millisecond time
stamp granularity requirement could provide some benefit for regulators
attempting to sequence events. For example, two events recorded at
times 12:00:00.0001 and 12:00:00.0021 on different venues can be
sequenced with a 1 millisecond clock offset, while if these time stamps
were rounded or truncated to 12:00:00.000 and 12:00:00.002, they could
not be sequenced with certainty, because it would be possible that both
events occurred at 12:00:00.001. If the Plan were to require sub-
millisecond clock offset tolerances, the additional benefits of this
sub-millisecond clock offset tolerance would be significantly limited
without time stamps that were similarly granular.
---------------------------------------------------------------------------
\1257\ See Section IV.H.2.a(1), supra.
---------------------------------------------------------------------------
c. Error Rate
The Commission is soliciting comment on the benefits and costs of
alternative maximum Error Rates. The Commission does not possess
sufficient data to quantitatively assess the costs and benefits of an
alternative to the maximum Error Rates specified in the CAT NMS Plan.
However, the Commission is using information provided in the CAT NMS
Plan to perform a qualitative assessment of the proposed maximum Error
Rates.\1258\
---------------------------------------------------------------------------
\1258\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(b).
---------------------------------------------------------------------------
The potential benefits from a lower maximum Error Rate than
proposed in the CAT NMS Plan could be improved accuracy in the data,
and a quicker retirement of OATS and other regulatory data reporting
systems.\1259\ However, the CAT NMS Plan states that errors would be de
minimis by the morning of day T+5, therefore the improvement in
accuracy does not seem to affect the data available to regulators
starting on day T+5.\1260\ Accordingly, the benefit of improved
accuracy as a result of a lower maximum Error Rate comes primarily from
regulatory use of the data prior to day T+5. While the Commission
believes that most regulatory uses would involve data after day T+5,
regulators also have essential needs for uncorrected data prior to day
T+5. For example, as discussed in the Benefits Section, the
availability of unprocessed data within three days of an event could
improve the Commission's chances of preventing asset transfers from
manipulation schemes.\1261\ Therefore, a lower Error Rate in data
available before day T+5 could, in certain regulatory contexts, be
meaningful.
---------------------------------------------------------------------------
\1259\ The Commission recognizes that a lower Error Rate could
also lead to the same accuracy level as the proposed Error Rate, but
more violations and consequences from those violations. This is
likely to occur if the Error Rates in the Plan are lower than what
every broker-dealer could reasonably obtain on the timeline; as a
consequence, because broker-dealers are reporting the most accurate
data they are currently able to report, a lower Error Rate cannot
improve data quality, but it can produce additional costs in the
form of penalties levied by the Plan Processor. However, as long as
at least one broker dealer can reasonably obtain lower Error Rates
than those in the Plan, a lower Error Rate would improve accuracy
because the lower Error Rate would incentivize that broker-dealer to
reduce its initial errors.
\1260\ See id. at Appendix C, Section A.3(b), n.102.
\1261\ See Section IV.E.3.d(3), supra.
---------------------------------------------------------------------------
Second, because OATS currently has a lower observed error rate than
the CAT NMS Plan, a reduction in CAT Error Rates may accelerate the
retirement of OATS because the SROs may find it advantageous to retain
OATS until CAT Data is at least as accurate as OATS data. However, the
CAT NMS Plan does not require a particular target Error Rate before
OATS can be retired and the Plan does not estimate any cost savings
associated with the retirement of OATS or other systems, beyond those
resulting from the end of a period of costly duplicative reporting.
Therefore, any acceleration in the retirement of OATS would not provide
a direct benefit resulting from a lower Error Rate. Further, the error
rates in OATS may not be comparable to the Error Rates in CAT Data
because the algorithm that identifies errors in CAT Data is unlikely to
be identical to the algorithm that identifies errors in OATS. In
particular, the Plan requires some types of validation checks on CAT
Data that OATS data does not go through. These additional validation
checks will help to ensure the accuracy of information types not
currently collected by OATS such as Customer Account Information, Firm
Designated
[[Page 30766]]
ID, and options information, or to ensure the accuracy of information
necessary for the order lifecycle linking process.\1262\ Consequently,
the Commission cannot be sure of the specific CAT Error Rate that would
accelerate retirement of OATS. In addition, the Commission does not
have cost estimates for different maximum Error Rates because such
information was not provided in the CAT NMS Plan.
---------------------------------------------------------------------------
\1262\ See CAT NMS Plan, supra note 3, at Appendix C, Sections
A.1(a)(iii) and A.3(a) and Appendix D, Section 7.2 for a discussion
of the types of required validations of CAT Data.
---------------------------------------------------------------------------
While reducing error rates may have these potential benefits, the
Commission recognizes that it would also come at a cost. In particular,
reducing Error Rates could increase the implementation and ongoing
costs incurred by CAT Reporters and the Central Repository as compared
to costs estimated in the Plan, as filed. To achieve lower Error Rates,
some CAT Reporters might have to run additional validation checks on
their data before sending their data to the Central Repository. Such
CAT Reporters would incur additional costs to code and test any
additional validation checks prior to implementation. CAT Reporters
might also have to monitor and adjust their validation checks to
respond to Error Rate reports from the Central Repository, incurring
additional ongoing costs. However, the CAT Reporters already achieving
lower Error Rates might not require additional checks, adjustments, or
monitoring. Additionally, the Commission preliminarily believes that
costs incurred by CAT Reporters to reduce error rates prior to sending
data to the Central Repository may ultimately result in lower costs
associated with correcting errors after the data is sent. The
Commission also notes that the costs incurred would depend in part on
the format in which data is reported to the Central Repository, which
has yet to be determined. If a solution is chosen that requires the
reformatting of data, and this reformatting results in errors, then the
costs could be higher. Conversely, a solution that does not require
data reformatting could result in a lower Error Rate with lower costs
to CAT Reporters.
Additionally, the Plan contains provisions that require the Plan
Processor to monitor and address Error Rates. For example, the Plan
Processor is required to notify each CAT Reporter that exceeds the
maximum Error Rate, and provide the specific reporting requirements
that they did not fully meet. Requiring a lower Error Rate could
increase the costs of these provisions, as compared to the costs
estimated in the Plan as filed, because more CAT Reporters would exceed
the Error Rate at which penalties are levied by the Plan Processor.
d. Error Correction Timeline
The Commission is soliciting comment on an alternative error
correction timeline to that proposed in the CAT NMS Plan. The CAT NMS
Plan proposes a deadline of T+3 for submission of corrected data to the
Central Repository.\1263\ The CAT NMS Plan also discusses
recommendations from FIF and SIFMA to impose a day T+5 deadline, which
is the current standard for OATS.\1264\ The Participants state in the
CAT NMS Plan that they believe it is important to retain the day T+3
deadline in order to make data available to regulators as soon as
possible.\1265\
---------------------------------------------------------------------------
\1263\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.1(a)(iv).
\1264\ Id.
\1265\ Id.
---------------------------------------------------------------------------
The Commission is soliciting comment on whether the CAT NMS Plan
should impose a day T+5 deadline rather than the day T+3 deadline. In
comment letters submitted to the Participants, FIF and SIFMA maintain
that the day T+3 deadline may not be feasible and would prove costly to
market participants.\1266\ The alternative of a day T+5 deadline could
reduce the costs relative to the CAT NMS Plan for CAT Reporters. The
Commission preliminarily believes that the delays in regulatory access
from a day T+5 deadline would significantly reduce regulators' ability
to conduct surveillance and slow the response to market events relative
to the CAT NMS Plan. However, the Commission also believes that day T+5
error correction may reduce costs to industry relative to the CAT NMS
Plan, although the Commission is unaware of any cost estimates that
have been provided to date.
---------------------------------------------------------------------------
\1266\ See Letter from Manisha Kimmel, Managing Director, FIF,
to the Participants, dated November 19, 2014, available at https://www.catnmsplan.com/industryfeedback/p601972.pdf; Industry
Recommendations for the Creation of a Consolidated Audit Trail
(CAT), SIFMA, March 28, 2013, available at https://www.catnmsplan.com/industryfeedback/p242319.pdf.
---------------------------------------------------------------------------
e. Funding Model
The mechanism by which CAT fees are allocated is important because
it can potentially disadvantage particular business models. Although
the Plan does not discuss the final details of the CAT funding model,
it does provide some details, including a set of funding principles
that the Participants have discussed with the Development Advisory
Group. The Commission is soliciting comment on alternative mechanisms
for allocating fees across Execution Venues and across Industry
Members.
The CAT NMS Plan presents details regarding an allocation of costs
between the Execution Venues and the other Industry Members (i.e.,
broker-dealers), but does not detail the proportions of fees to be
borne by each group. Under the CAT NMS Plan, fees would be tiered by
activity levels, with market participants within a given tier incurring
a fixed fee.\1267\ In the case of Execution Venues (exchanges and
ATSs), market share of share volume would determine the tier of the
Execution Venue. In the case of broker-dealers, fees would be allocated
by message traffic. The Commission is cognizant that ATSs are operated
by broker-dealers, complicating this division of fees between broker-
dealers and Execution Venues. This is discussed further below.
---------------------------------------------------------------------------
\1267\ For a discussion of the economic effect of the tiered
structure, see IV.F.4.c, supra.
---------------------------------------------------------------------------
(1) Unified Funding Models
The Commission is soliciting comment on several unified funding
models as alternatives to the Plan's bifurcated funding model. One of
the alternative funding models the Commission is soliciting comment on
is a unified funding model in which Central Repository costs are
allocated across all market participants (including Execution Venues)
by message traffic. The Commission expects that message traffic will be
a primary cost driver for the Central Repository, because transactional
volume (which is cited by the Plan as a primary cost driver for the
Central repository) is highly correlated with message traffic.
Consequently, assessing CAT costs on market participants by message
traffic may have the benefit of aligning market participants'
incentives with the Participants' stated goal of minimizing costs.
However, the Commission is also aware that while a broker-dealer's
choice of business model is likely to determine its level of message
activity, the majority of an exchange's message traffic is passive
receipt of quote updates.\1268\ Because quotes must be updated on all
exchanges when prices change, exchanges with low market share are
likely to have more message
[[Page 30767]]
traffic (incurring CAT fees) per executed transaction (generating
revenue).\1269\ Consequently, a model that charges exchanges for the
passive receipt of messages from broker-dealers is likely to
disadvantage the smaller exchanges relative to a model that charges for
market share of executions.
---------------------------------------------------------------------------
\1268\ Using MIDAS data, Commission staff analyzed the number of
equity exchange proprietary feed messages and trades during the week
of October 12, 2015. The message per trade ratio varied across
exchanges from 38.46 to 987.17, with a median of 57.21.
\1269\ Commission staff data analysis confirms this for the
smallest exchanges. Except for the smallest exchanges, the trade to
message ratios range from about 0.016 trades for every quote update
to about 0.026 trades for every quote update and appear constant
across market share levels. However, the smallest exchanges by
market share have only about 0.001 trades for every quote update to
about 0.009 trades for every quote update.
---------------------------------------------------------------------------
The Commission is also soliciting comment on an alternative
approach to reporting market maker quotations on exchanges that could
address this concern. In this approach, market makers (both equity and
options) would not need to report their quotation updates. Exchanges
(both equity and options) would report quotation sent times (as
detailed in the Plan with regard to Options Market Makers and the
Exemption Request \1270\). Exchanges would not be assessed message
traffic fees for these quotation updates; the broker-dealers who sent
the quotes would be assessed for this message traffic. All other
message traffic, regardless of which market participant initiated it,
would be assessed fees associated with CAT using a common rate formula.
---------------------------------------------------------------------------
\1270\ See Exemption Order, supra note 18, at 7-8.
---------------------------------------------------------------------------
The Commission is soliciting comment on this alternative for a
number of reasons. First, it ties CAT costs to a primary driver of the
magnitude of Central Repository costs: message traffic.\1271\ Second,
it substantially reduces the number of messages stored in the Central
Repository. Third, it avoids disadvantaging smaller exchanges whose
message traffic may be relatively large compared to their execution
volume. Finally, this alternative avoids bifurcated fee approaches that
may cause one Execution Venue to be relatively cheaper than another due
to the manner in which CAT fees are assessed and may cause conflicts of
interest for broker-dealers routing customer orders.\1272\ However,
this alternative assesses CAT fees based on messages rather than the
revenue-generating activity of trades. This may provide market
participants with incentives to change their business models to reduce
CAT fees, which could lead to reduced quotation activity that could be
detrimental to market liquidity levels. Furthermore, because the vast
majority of message activity originates with broker-dealers, this
approach necessarily shifts most of the ultimate CAT funding burden to
broker-dealers.
---------------------------------------------------------------------------
\1271\ See Section IV.F.1.a, supra, stating that transactional
volume is a primary driver of the costs of the Central Repository.
The Commission preliminarily believes that transactional volume is
highly correlated with message traffic.
\1272\ For example, if the CAT funding model were set to make
ATS trades significantly more costly relative to exchange trades,
the exchanges might benefit from increased market share because ATSs
might be compelled to increase their access fees to offset the
proportionately higher CAT charges that they would incur. In the
extreme, some ATSs might cease operations or seek to register as
exchanges. Most ATSs do not disseminate quotation information;
exchanges are required to do so. Reorganizing an ATS as an exchange
therefore involves significant changes to its business model.
Consequently, the Commission believes it unlikely that many ATSs
would register as exchanges to avoid proportionately higher CAT
charges. If certain types of trades have lower costs when their
trades execute on an ATS, their trading costs would increase if they
are forced onto exchanges. If some trades would not happen in the
absence of an ATS, this would drive down overall trading volumes (as
opposed to a shift from ATS to exchange). Lower overall trading
volumes would be considered welfare-reducing, as they indicate
foregone gains from trade.
---------------------------------------------------------------------------
The Commission also is soliciting comment on a second alternative
approach to CAT funding, a unified funding approach where the tiers in
the funding model are based on market share of share volume. Under this
approach, all market participants (both exchanges and broker-dealers)
would qualify for a tier based on reported share volumes. Share volume
would count equally toward the tier regardless of the Execution Venue
selected by the broker-dealer originating the order. However, this
approach does not align the costs of operating and maintaining the
Central Repository, which would largely depend on message traffic, with
the fees charged to market participants. Furthermore, it is possible
that some Execution Venues could compete for order flow by not passing
this fee on to their customers, generating the same limitations as
discussed above for the funding model in the Plan.\1273\
---------------------------------------------------------------------------
\1273\ See Section IV.F.4.c, supra.
---------------------------------------------------------------------------
A third alternative would be for the funding model to impose fees
on every individual trade instead of imposing a fixed fee by tier. This
approach has several benefits. First, the Commission preliminarily
believes that implementation costs for this approach are likely to be
lower than other alternatives because infrastructure already exists to
levy fees on each trade (this is the mechanism by which Section 31 fees
are levied).\1274\ Second, it ties fees to the revenue-generating
activity of trading, rather than quoting activity, which results in
those more likely to afford high fees paying the higher fees. Quoting
activity provides liquidity to the market, but often does not
necessarily result in an execution that can bring revenue to the market
participant placing the quote; consequently, levying CAT fees on trades
avoids making a generally desirable activity (posting liquidity) more
costly.\1275\ Third, it avoids the problems that may accompany a
bifurcated approach to CAT cost allocation. Because the fee is levied
regardless of where the trade occurs, it limits incentives of market
participants to route to exchanges to avoid message traffic fees within
broker-dealers or to avoid exposing an order in multiple venues to try
to find non-displayed liquidity. These liquidity-seeking activities
might reduce a client's trading costs, but they also potentially incur
message traffic fees, creating a conflict of interest for broker-
dealers.
---------------------------------------------------------------------------
\1274\ Under Section 31 of the Act, 15 U.S.C. 78ee, and Rule 31
thereunder, 17 CFR 240.31, SROs such as FINRA and the national
securities exchanges must pay transaction fees to the SEC based on
the volume of securities that are sold on their markets. These fees
are designed to recover the costs incurred by the government,
including the SEC, for supervising and regulating the securities
markets and securities professionals. The SROs have adopted rules
that require their broker-dealer members to pay a share of these
fees. Broker-dealers, in turn, may impose fees on their customers
that provide the funds to pay the fees owed to their SROs. See SEC,
Section 31 Transaction Fees (September 25, 2013), available at
https://www.sec.gov/answers/sec31.htm.
\1275\ Some quoting behavior may be costly to the market, for
example spoofing or layering. This analysis assumes that message
traffic fees associated with this undesirable behavior would not be
sufficient to reduce that behavior. If that assumption is false,
funding models that assign fees to quotes have the additional
benefit of reducing disruptive activity. The Commission
preliminarily believes that the benefits of reducing disruptive
quoting activity via levying fees on quotes would not justify the
costs of reducing beneficial quoting activity through the same fees.
---------------------------------------------------------------------------
Assessing fees directly on trades entails certain costs as well.
First, it does not provide incentives for market participants to limit
their message traffic, which is a primary cost-driver for the Central
Repository. Second, it does not provide the benefits of a tiered
approach, which the CAT NMS Plan lists as including transparency,
predictability and ease of calculation.\1276\
---------------------------------------------------------------------------
\1276\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(v)(B).
---------------------------------------------------------------------------
(2) Bifurcated Funding Models
The Commission is also soliciting comment on alternatives to the
funding model proposed in the CAT NMS Plan that would also be
bifurcated. One alternative would be to allocate CAT costs to broker-
dealers by market share of share volume while retaining the Plan's
funding model for Execution
[[Page 30768]]
Venues.\1277\ A benefit of this alternative would be to avoid
disincentives to liquidity provision operations, particularly for
infrequently traded securities and high volatility securities. A
disadvantage of this approach would be that it does not align the fees
charged to a CAT Reporter with the costs those CAT Reporters impose on
the Central Repository in terms of message traffic, potentially
resulting in disproportionate charges to CAT Reporters because high
message traffic broker-dealers would pay no more than low message-
traffic broker-dealers with the same level of trading activity.
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\1277\ SROs currently fund their regulatory data collection
through a number of mechanisms. The Commission notes that FINRA does
not charge its members for OATS directly. Rather, it is funded from
FINRA's regulatory budget, which is collected from its members
through various membership fees. The options exchanges charge an
Options Regulatory Fee (``ORF''), which is a pass-through exchange
fee collected by OCC clearing members on behalf of the U.S. option
exchanges. The stated purpose of the fee is to assist in offsetting
exchange costs relating to the supervision and regulation of the
options market (e.g., routine surveillance, investigations, and
policy, rule-making, interpretive and enforcement activities). The
fee was first adopted by CBOE in 2008. See Securities Exchange Act
Release No. 58817 (October 20, 2008), 73 FR 63744 (October 27,
2008). Subsequently, PHLX (Securities Exchange Act Release No. 61133
(December 9, 2009), 74 FR 66715 (December 16, 2009), ISE (Securities
Exchange Act Release No. 61154 (December 11, 2010, 74 FR 67278
(December 18, 2009)), BOX (See Securities Exchange Act Release No.
61388 (January 20, 2010), 75 FR 4431(January 27, 2010)), NYSEAmex
(Securities Exchange Act Release No. 64400 (May 4, 2011), 76 FR
27114 (May 10, 2011), NYSE Arca (Securities Exchange Act Release No.
64399 (May 4, 2011), 76 FR 27114 (May 10, 2011), NASDAQ (Securities
Exchange Act Release No. 66158 (January 13, 2012), 77 FR 3024
(January 20, 2012, C2 (Securities Exchange Act Release No. 67596
(August 6, 2012), 77 FR 47902 (August 10, 2012)), MIAX (Securities
Exchange Act Release No. 68711 (January 23, 2013), 78 FR 6155
(January 29, 2013)), ISE Gemini (Securities Exchange Act Release No.
70200 (August 14, 2013), 78 FR 51242 (August 20, 2013)), and BATS
(Securities Exchange Act Release No. 74214 (February 5, 2105), 80 FR
7665 (February 11, 2015)) also adopted an ORF. The OFR is currently
assessed to customer orders at a rate of $0.0417 per U.S. exchange
listed option contract. The ORF is assessed on all trades, both buys
and sells. Further, FINRA charges fees for reporting to TRACE.
Certain fees are based on the number of users and type of connection
a firm has to the system, and others are based on size of the
transaction. See FINRA Rule 7730.
---------------------------------------------------------------------------
The Commission is further soliciting comment on the alternative of
requiring the CAT NMS Plan to treat ATSs only as broker-dealers for
funding purposes, instead of treating ATSs as Execution Venues. Under
this alternative, firms that operate ATSs would not be charged for both
their ATS's market share of share volume (like an exchange) and its
message traffic (as a broker-dealer).\1278\ Instead, the firm operating
the ATS would pay fees based on the ATS's message traffic as part of
its operations as a broker-dealer, rather than as an Execution Venue as
well, for fee purposes. As described in Section IV.F.4.d, the
Commission preliminarily believes that under the current funding model
in the CAT NMS Plan, the cost differentials that result might create
incentives for broker-dealers to route order flow to minimize costs,
creating a potential conflict of interest with broker-dealers' investor
customers, who are likely to consider many facets of execution quality
(such as price impact of a trade and probability of execution in a
venue in which the order is exposed) in addition to any of these costs
that are passed on to them.\1279\ The Commission is aware that this
alternative would, in effect, shift part of the Central Repository
funding costs from broker-dealers to Execution Venues because volume
transacted on ATSs would not be assessed a portion of the Execution
Venue funding burden and this portion would instead be allocated to
exchanges. Furthermore, the Commission is aware that it is possible
that under this alternative approach, ATSs might pay less in fees than
similarly situated exchanges, which could disadvantage exchanges
relative to ATSs.
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\1278\ As explained in Section IV.F.4.c, supra, the Commission
preliminarily believes that the bifurcated funding model proposed in
the Plan results in differential CAT costs between Execution Venues
because it would assess fees differently on exchanges and ATSs for
two reasons. First, message traffic to and from an ATS would
generate fee obligations on the broker-dealer that sponsors the ATS,
while exchanges incur no message traffic fees. Second, broker-
dealers that internalize off-exchange order flow, generating off-
exchange transactions outside of ATSs, would face a differential
funding model compared to ATSs and exchanges.
\1279\ See CAT NMS Plan, supra note 3, at Article VIII.
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The Commission is also soliciting comment on the alternative
approach of not charging broker-dealers for message traffic to and from
their ATSs while still assessing fees to ATSs as Execution Venues or
exchange broker-dealers for their message traffic. Under this
alternative, broker-dealers that operate ATSs would pay trading volume
based fees on their ATSs volume in the same manner as exchanges' fees
are assessed. However, the message traffic to and from the ATS would
not be included in the message traffic used to calculate fees assessed
to the broker-dealer that sponsors the ATS. The Commission
preliminarily believes this alternative would help mitigate the broker-
dealer routing incentives discussed above. The Commission is aware that
because the volume executed on ATSs would be included in the portion of
Central Repository funding assigned to Execution Venues, this funding
approach would not shift part of the funding burden assigned to
Execution Venues away from ATSs (and the broker-dealers that operate
them) to exchanges as the previous alternative would.
The Commission preliminarily believes that either of these ATS-
related funding alternative approaches would avoid disadvantaging ATSs
relative to similarly situated exchanges, and would be less likely to
result in the conflicts of interest in routing described above.
Currently, the Commission lacks sufficient details on the fee structure
to make this determination, because the fee structure has not yet been
finalized.
The Commission is also soliciting comment on the alternative of
excluding ATS volume from TRF volume for purposes of allocating fees
across Execution Venues. Under this alternative, SROs that operate TRFs
(currently only FINRA) would not pay Execution Venue fees for volume
that originated from an ATS execution. This alternative would avoid the
problem of double-counting ATS volume as share volume, which originates
because each ATS trade is counted for fee-levying purposes as share
volume associated with an ATS, then counted again as share volume when
the trade is printed to a TRF. However, the Commission notes that other
over the counter volume, such as occurs when orders are executed off-
exchange against a broker-dealer's inventory, would be assessed share
volume fees while the message traffic that resulted in this execution
would also be subject to fees through the broker-dealers that had order
events related to these transactions. This contrasts to executions that
occur on exchanges, where the venue that facilitates the execution does
not pay fees for message traffic that led to the execution.
The Commission is also soliciting comment on the alternative of not
treating the Trade Reporting Facilities (``TRFs'') as FINRA Execution
Venues. TRFs capture ATS share volume, which is already subject to fees
allocated to Execution Venues, and non-ATS off-exchange share volume,
which is subject to CAT fees allocated to broker-dealer message
traffic. Consequently, under the approach in the Plan, the activity
that generates a TRF trade report is already assessed CAT fees through
the broker-dealers that facilitate the trade, or the ATSs that served
as the Execution Venue. Under this alternative approach, FINRA would
not pay any fees directly into the Central Repository, and broker-
dealers would only incur fees directly levied on them by the Operating
Committee, rather than also
[[Page 30769]]
indirectly paying the TRF fees passed on to them by FINRA. If FINRA
does not pay fees directly to the Central Repository, this could alter
its incentives with respect to matters of cost voted on by the
Operating Committee. However, it is possible that, since FINRA
represents the viewpoints of its broker-dealer members, its incentives
would be similar under either approach.
The CAT NMS Plan would allocate net profit or net loss from the
operation of the CAT equally among the Participants, regardless of
size, which could advantage small exchanges in the event of a profit
and disadvantage small exchanges in the event of a loss. This could
negatively impact competition if the cost differentials are significant
enough to alter the set of services that some competitors offer. As an
alternative, the Commission is soliciting comment on whether the profit
or loss from operating CAT should be allocated across Participants by
market share of share volume, consistent with how the CAT costs would
be allocated under the Plan.\1280\ The Commission preliminarily
believes that this alternative would limit the possibility of
extraordinary profits or losses from CAT resulting in a
disproportionate advantage or disadvantage to exchanges with low
trading volume.
---------------------------------------------------------------------------
\1280\ Id.
---------------------------------------------------------------------------
Finally, the Commission is soliciting comment on requiring a
strictly variable funding model, rather than the fixed-tiered model in
the CAT NMS Plan. Under a variable funding model, each trade or message
is subject to a fee, rather than a broker-dealer incurring a fixed fee
that depends on that broker-dealer's volume tier.\1281\ The Commission
preliminarily believes that this alternative might increase
administrative costs of the CAT NMS Plan as compared to an approach
that uses the fixed-tiered funding model. However, the Commission also
preliminarily believes that the fixed-tiered funding model can create
incentives for market participants to change their behavior to avoid
fees when their activity is near the boundary between two tier
levels.\1282\ The Commission preliminarily believes that a strictly
variable funding model could reduce inefficiencies resulting from
market participants changing their behavior to move into a lower fee
tier.
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\1281\ For example, under a fixed-tiered funding approach, any
broker-dealer with no more than 10,000 CAT Reportable Events in a
given month might pay $100 in fees, even a broker-dealer reporting a
single event. Under a strictly variable funding approach, every
broker-dealer CAT message might be assessed one cent in fees. For a
broker-dealer reporting 10,000 CAT Reportable Events in a given
month, the same fee burden would be incurred, but a broker-dealer
reporting a single CAT reportable event would pay only one cent.
\1282\ See Section IV.F.3.b, supra.
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f. Requiring Listing Exchange Symbology
The Commission is soliciting comment on an alternative to the CAT
NMS Plan that would allow CAT Reporters to report using their existing
symbologies, rather than listing exchange symbology. The Plan requires
the Plan Processor maintain a complete symbology database, including
the historical symbology. The CAT NMS Plan also requires CAT Reporters
to report data using the listing exchange symbology format, which would
be used in the display of linked data. The CAT NMS Plan also requires
Participants to provide the Plan Processor with the issue symbol
information, and validation of symbology would be part of data
validation performed by the Plan Processor.\1283\
---------------------------------------------------------------------------
\1283\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.1(a).
---------------------------------------------------------------------------
The Commission preliminarily believes that, in light of the
proposed requirement for the Plan Processor to maintain a complete
symbology database, the requirement that CAT Reporters report using
listing exchange symbology may result in unnecessary costs to CAT
Reporters. Therefore, the Commission preliminarily believes that the
alternative of allowing CAT Reporters to use their existing symbologies
for reporting purposes could significantly reduce the costs for
exchanges and broker-dealers to report order events to the Central
Repository, as compared to the approach in the CAT NMS as filed,
without a significant impact on the expected benefits of the Plan or
the costs to operate the Central Repository.
Currently, Execution Venues handle complex symbology in different
fashions. Some common stocks, for example, have multiple classes of
shares. Exactly specifying the issue to be traded involves identifying
the ticker symbol and sometimes a share class. On some venues, the
convention is that these security types are reported without a
delimiter in the symbol; other venues use a delimiter, and delimiters
can vary across venues. For example, assume a firm has a listing symbol
of ABC, and has two classes of shares, A and B. An issue might be ``ABC
A'' on one venue, ``ABC_A'' on another, and ``ABCA'' on a third. This
can cause numerous problems for analyses that extend beyond a single
trading venue, particularly if ``ABCA'' is the complete listing symbol
for an unrelated security. As mentioned in the Benefits Section, the
inclusion of the complete symbol history of a security and the
requirement for queries, reports, and searches to automatically collect
the appropriate data despite symbol changes promotes accurate query
responses by ensuring the inclusion of order events that might have
been excluded because of symbology differences and by excluding order
events in unrelated securities. The Commission preliminarily believes
that the CAT NMS Plan can achieve these benefits without requiring CAT
Reporters to report using listing exchange symbology.
As discussed in the Costs Section, one potential cost driver to CAT
Reporters is the need to process reports before submitting them to the
Central Repository.\1284\ If reports can contain drop copies from an
order management system, CAT Reporters can aggregate their drop copies
and send them without further processing the reports. If, on the other
hand, CAT Reporters need to transform or add any fields to the report,
those CAT Reporters would need to develop, test, and maintain code to
run the transformation, and they would need to actually transform the
data at least once a day. If CAT Reporters do not need to run this
transformation at all, they could save money. The Commission
preliminarily believes that the requirement to report in listing
exchange symbology could be the only requirement that necessitates that
CAT Reporters transform data before reporting it to the Central
Repository.\1285\ Therefore, the Commission preliminarily believes that
eliminating this requirement could reduce costs relative to the CAT NMS
Plan as filed.
---------------------------------------------------------------------------
\1284\ See Section IV.F.3.a, supra.
\1285\ See id.
---------------------------------------------------------------------------
Some broker-dealers may already have adequate computational
resources to run the transformation, whether at once, in batches, or in
real-time; others could have to invest in such resources--an investment
that would be saved by eliminating the requirement to use listing
exchange symbology. The degree of cost savings would depend on any
requirements to transform the data prior to reporting, which depends on
the allowable formats for transmission. The CAT NMS Plan does not
specify the allowable formats or whether the Central Repository would
require a fixed format. If the Technical Specifications require a fixed
format, broker-dealers would most likely have
[[Page 30770]]
to transform their data prior to reporting it to the Central Repository
regardless of the requirement to use listing exchange symbology, and
the listing exchange symbol requirement could add very little to the
reporting costs. Therefore, the Commission recognizes significant
uncertainty in the cost savings associated with this alternative.
Further, the Commission cannot estimate the degree to which
eliminating this requirement could reduce costs as compared to those in
the CAT NMS Plan as filed, because it lacks the data to do so. The Plan
assumes the need to transform the data to match exchange symbologies
and therefore does not separately itemize the cost for transformation
as a separate step in the reporting process. The Commission has no data
from which it can independently estimate the cost differential because
it depends on information internal to each of a heterogeneous group of
CAT Reporters (e.g., the symbologies their current systems use and
whether those are readily transformed to match listing exchange
symbologies), which information is not compiled or stored anywhere and
to which the Commission therefore does not have ready access.
g. Data Accessibility Standards
The Commission is soliciting comment on alternative approaches to
the manner in which the CAT NMS Plan provides data access to
regulators. Section IV.E.1.c of the CAT NMS Plan summarizes the Central
Repository's requirements to provide access to regulators. This access
would include both an online targeted query tool and a user-defined
direct query or bulk extract.\1286\ The CAT NMS Plan also specifies
minimum standards the Central Repository must meet, such as capacity to
support 3,000 minimum regulatory users and minimum acceptable response
times for queries of varying complexity and size.\1287\ The CAT NMS
Plan also requires that the Plan Processor provide an open API that
allows use of regulator-supplied common analytic tools. As discussed
above, the CAT NMS Plan could result in many improvements to regulatory
activities such as surveillance, examinations, and enforcement, but
these benefits may not be fully realized if access to data is
cumbersome or inefficient.\1288\ The Commission does not have
information on the incremental benefits and costs of each aspect of
regulator access as would be necessary to analyze specific alternatives
to the many data access standards in the CAT NMS Plan.
---------------------------------------------------------------------------
\1286\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.2(c).
\1287\ Id. at Appendix C, Section A.1(b).
\1288\ See Section IV.E.2, supra.
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The Commission is generally soliciting comment on alternatives to
each minimum data accessibility standard required in the CAT NMS Plan.
With multiple standards that could each be adjusted in countless ways,
the set of possibilities is infinite, which precludes their enumeration
and discussion within this analysis. Instead, this Section discusses
several examples and requests comment on alternative standards that
might be adopted. Because query response time standards provide exact
limits, the Commission uses those to illustrate how changing the
standards could affect benefits and costs. The CAT NMS Plan requires
query responses for various types of queries of 5 minutes, 10 minutes,
3 hours, and 24 hours, where the simplest queries involving scanning
narrow sets of data would be required to return in 5 minutes and
complex queries scanning multiple days of data and returning large
datasets would be required to return within 24 hours.
The Commission notes that particularly large and complex data
queries can take extensive computing resources. While the benefits of
direct access to CAT Data depend on reasonably fast query responses,
the Commission recognizes that faster query response times come at a
cost. The Commission does not have detailed information on significant
breakpoints in those costs to judge whether slightly longer response
times than those in the Plan could significantly reduce the costs of
developing, maintaining, and operating the Central Repository. For
example, the Commission does not know whether a 48-hour response time
on a query of 5 years of data is significantly less expensive than a 24
hour response time, but either maximum response time would provide a
significant improvement in timeliness over current data. Likewise, the
Commission does not know whether the response times could be faster
without a significant increase in costs. The Commission recognizes that
the detailed information on numerous other minimum standards regarding
access to regulators is similarly unclear. Therefore, the Commission
requests comment regarding all standards for regulatory access and
whether technology creates natural breakpoints in costs such that a
particular alternative could reduce the costs of the Plan without
significantly reducing benefits or could increase benefits without
significantly increasing costs.
h. Intake Capacity Levels
The Commission is soliciting comment on alternatives to the intake
capacity level required in the CAT NMS Plan. The CAT NMS Plan requires
that the Central Repository have an intake capacity of twice historical
peak daily volume measured over the most recent six years and the
ability to handle peaks beyond this Baseline level for short
periods.\1289\ In setting this requirement, the Participants could have
selected any number of alternative intake capacity standards.
---------------------------------------------------------------------------
\1289\ See CAT NMS Plan, supra note 3, at Appendix D, Section
1.1.
---------------------------------------------------------------------------
The Commission performed an analysis using MIDAS data and
determined that, for equities, the daily message traffic volume would
exceed two times the maximum daily message volume from the previous six
years (2010 through 2015) with a probability of 0.033%, which amounts
to the intake exceeding capacity levels about once every 8\1/3\ years.
Message volume measures all equity messages, including orders, order
updates, executions and cancellations, from MIDAS exchange direct
feeds, consolidated SIP feeds, and a small portion of the FINRA ATS
feed.\1290\
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\1290\ The Commission collected daily message volume from MIDAS
for six years (January 1, 2010 through November 19, 2015) and found
that August 10, 2011 generated the highest message traffic with 8.6
billion messages. A Box-Cox transformation was applied to the data
to fit it into a normal distribution. Using a probability density
function to fit the transformed data into a normal distribution, the
Commission found the probability that the daily message volume would
exceed 17.2 billion (twice the maximum) messages is 0.033%. The
MIDAS data used are all equity messages between 4 a.m. and 7 p.m. on
trading days--including orders, order updates, executions, and
cancellations--from exchange direct feeds, consolidated SIP feeds,
and a small portion of the FINRA ATS feed. MIDAS does not receive
messages before 4 a.m. and after 7 p.m. from its feed sources. The
data is missing AMEX feeds from January 1, 2010 through October 4,
2010; however, on average AMEX messages represent only 0.26% of
daily message volume from all feeds.
---------------------------------------------------------------------------
The Commission preliminarily believes that intake capacity level is
likely to be a primary cost driver for the Central Repository.\1291\ In
selecting a standard, there is a trade-off between additional cost for
constructing and operating the Central Repository and the risk that
increased volume could exceed the Central Repository's capacity. If the
capacity were exceeded, the Commission preliminarily believes that
regulators' access to CAT Data could be
[[Page 30771]]
significantly delayed. The Commission is cognizant that periods of
heavy market activity are more likely to be periods with market events
that would require regulatory investigation, so the risk that the
Central Repository might not be able to provide timely access to data
when it is most needed is concerning.
---------------------------------------------------------------------------
\1291\ Transactional volume and the growth in transactional
volume is likely a primary driver of the costs of the Central
Repository. See Section IV.F.1.a, supra. The Commission believes
that higher transactional volumes require higher intake capacity
levels, higher storage capacity, and higher processing capacity.
---------------------------------------------------------------------------
The Commission is soliciting comment on requiring a different
intake capacity level. Alternative intake capacity levels would result
in costs and benefits that depend on the specific alternative capacity
level and whether it is higher or lower than the proposed level. For an
alternative with a lower intake capacity level, such as 1.5 times the
historic peak capacity level, the cost of creating and operating the
Central Repository might be lower, but the risk that the Central
Repository would be unable to meet regulator's data needs would be
higher than under the CAT NMS Plan, particularly following events
similar to the Flash Crash and August 24th, which created both a high
volume of trading records and a high demand for timely regulatory
analysis.
An alternative with a higher required intake capacity level, such
as 3 times the historic peak capacity level, would likely entail higher
costs than the CAT NMS Plan, but higher intake capacity levels would
reduce the risk of the Central Repository being unable to meet
regulators' data needs and thus increase the benefits of the Plan.
The CAT NMS Plan does not provide sufficient information for the
Commission to quantify the cost difference between alternative intake
capacities and the intake capacity in the CAT NMS Plan and there are no
analogous projects of this scope with publicly-available data from
bidding or otherwise from which the Commission could extrapolate.
3. Alternatives to the Scope of Certain Specific Elements in the CAT
NMS Plan
The Commission notes that Rule 613 sets forth the minimum elements
the Commission believes are necessary for an effective consolidated
audit trail.\1292\ The Commission also notes that it adopted these
elements after notice and comment, including analyzing comment letters
submitted in response to the Rule 613 Proposing Release.\1293\
Moreover, the Participants, pursuant to Rule 613, analyzed and proposed
for inclusion in the CAT NMS Plan certain elements after consultation
with their members, the Bidders and the DAG.\1294\
---------------------------------------------------------------------------
\1292\ See Adopting Release, supra note 9.
\1293\ See id.
\1294\ See CAT NMS Plan, supra note 3.
---------------------------------------------------------------------------
While the Commission and the SROs have previously analyzed Rule
613, including the elements to be included in the CAT NMS Plan, the
Commission now has the Plan, together with the cost and alternatives
analysis provided by the Participants. The Commission has reviewed the
Plan, including the cost estimates, and has performed its own economic
analysis of the Plan. With the benefit of having reviewed and analyzed
the Plan, the Commission believes that it is reasonable to solicit
comment on alternatives to the scope of certain elements of the CAT NMS
Plan because these alternatives could impact the cost and benefits of
CAT, and given the passage of time, there may be market developments
that could affect those costs and benefits that should be evaluated.
These alternatives include: (1) Not requiring certain data fields that
are currently required by the Plan; (2) requiring the Operating
Committee to consider including more primary market transactions than
it would otherwise be required to consider under the Plan; (3) removing
from the Plan the OTC Equity Securities recording and reporting
requirements; and (4) excluding certain Customer information periodic
update requirements.
a. Data Fields
Rule 613 provides that the Plan must require the reporting of
certain data fields.\1295\ It also gives discretion to the Participants
to require the reporting of data fields beyond the minimum set of
fields mandated by Rule 613.\1296\ The Commission is soliciting comment
on whether there should be changes to the data fields that would be
subject to CAT reporting. Specifically, the Commission is soliciting
comment on whether any data fields that would be subject to CAT
reporting under the Plan should be excluded.
---------------------------------------------------------------------------
\1295\ See 17 CFR 242.613(c)(7).
\1296\ Id.
---------------------------------------------------------------------------
The Commission is soliciting comment on whether any data fields
that would be subject to CAT reporting under the Plan should be
excluded. For example, Rule 613 required the Plan to include a unique
customer identifier. As discussed further in Section IV.H.1 above the
Commission granted the Participants an exemption from certain
requirements in Rule 613 so that the Plan could include an approach
whereby each broker-dealer would assign a unique Firm Designated ID to
each trading account, which would be linked to a set of identifying
information.\1297\ The Commission preliminarily believes that this
approach would reduce the costs of requiring the customer identifier as
compared to the Rule 613 approach.\1298\
---------------------------------------------------------------------------
\1297\ Using the Firm Designated ID and the other information
identifying the Customer that would be reported to the Central
Repository, the Plan Processor would then assign a unique Customer-
ID to each Customer. Upon original receipt or origination of an
order, broker-dealers would only be required to report the Firm
Designated ID on each new order, rather than using the Customer-ID.
See Exemption Order, supra note 18, at 14-15. Because the Plan
Processor would still assign a Customer-ID to each Customer under
the Customer Information Approach, the SROs are not requesting an
exemption from Rule 613(j)(5).
\1298\ See Section IV.H.1.b, supra.
---------------------------------------------------------------------------
As an alternative, the Commission could eliminate the requirement
to report customer identifiers. In the Adopting Release, the Commission
recognized that the implementation of the unique customer identifier
requirement might be complex and costly, and that the reporting of a
unique customer identifier would require SROs and their members to
modify their systems to comply with the Rule's requirements.\1299\
While the Commission preliminarily believes that eliminating the
customer identifier would reduce certain costs to industry associated
with the implementation and operation of CAT as compared to the Plan as
filed, without providing any additional material information, the
Commission preliminarily believes that such a change would limit the
benefits of the Plan significantly. As the Commission noted in the
Adopting Release for Rule 613, unique customer identifiers are vital to
the effectiveness of the consolidated audit trail, and the inclusion of
unique customer identifiers would greatly facilitate the identification
of the orders and actions attributable to particular customers and thus
substantially enhance the efficiency and effectiveness of the
regulatory oversight provided by the SROs and the Commission. Further,
without the inclusion of unique customer identifiers, many of the
potential benefits of a consolidated audit trail would not be
achievable.\1300\
---------------------------------------------------------------------------
\1299\ See Adopting Release, supra note 9, at 45756.
\1300\ Id.
---------------------------------------------------------------------------
The Commission could also consider the alternative of excluding the
allocation time field from reporting requirements in the Allocation
Reports. Although this field is not currently required for
recordkeeping, some broker-dealers do already retain allocation time
information at the subaccount level in their trade blotters, though the
Commission does not have precise information on the prevalence of this
practice. The Commission preliminarily believes that removing
allocation time would significantly
[[Page 30772]]
reduce the benefits of the Plan because regulators currently undergo
significant difficulties to obtain allocation times and the allocation
times would be useful for enforcement investigations.\1301\ At the same
time, given the uncertainty in the current practices and the lack of
information on the costs of this field in the Plan, the Commission is
not sure how significant the cost savings of excluding the allocation
time field would be. The Commission preliminarily believes that the
substantial benefits of having allocation time at the subaccount level
available and relatively accessible for regulatory activities warrants
the costs associated with requiring CAT Reporters to include this field
in CAT Data and that these costs would be significantly mitigated to
the extent that CAT Reporters already retain this information.
---------------------------------------------------------------------------
\1301\ See Section IV.E.1.a, supra.
---------------------------------------------------------------------------
The Plan requires both the CAT-Reporter-ID for the broker-dealer
routing an order and the CAT-Reporter-ID for the broker-dealer
receiving a routed order to be reported to the Central Repository, both
when the order is routed and again when the routed order is received.
The Commission could eliminate the requirement to report the CAT-
Reporter-IDs when the routed order is received. However, while the
Commission preliminarily believes this might reduce the CAT Reporting
burden on some broker-dealers as compared to the Plan as filed, without
providing any additional material information, the Commission noted in
the Adopting Release that it does not believe the information reported
when the order is received would be duplicative. Instead, the
Commission noted that information regarding when a broker-dealer
received a routed order could prove useful in an investigation of
allegations of best execution violations to see if, for example, there
were delays in executing an order that could have been executed
earlier.\1302\ In addition, the Commission notes that if a market
participant is required to report when it receives an order, regulators
could solely rely on information gathered directly from that market
participant when examining or investigating the market
participant.\1303\ The Commission also noted that it relies on such
data to improve its understanding of how markets operate and evolve,
including with respect to the development of new trading practices, the
analysis and reconstruction of atypical or novel market events, and the
implications of new market dynamics.\1304\
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\1302\ See Adopting Release, supra note 9, at 45763.
\1303\ Id.
\1304\ Id.
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The Commission preliminarily believes that, with respect to the
reporting of data fields required by Rule 613, the analysis in the
Adopting Release is still applicable and the elimination of these data
fields from the Plan would result in a failure to achieve many of the
significant potential benefits of the Plan. However, as noted above,
the costs or benefits of including particular fields in the Plan as
filed, may have changed due to technological advances and/or changes in
the nature of markets since Rule 613 was adopted. The Commission is
therefore soliciting comment on the benefits and drawbacks of
eliminating these and any other required data fields from the Plan.
b. Primary Market Transactions
The CAT NMS Plan does not require the reporting of any primary
market information to the Central Repository. However, as required by
Rule 613(i), the CAT NMS Plan commits to incorporating a discussion of
how and when to implement the inclusion of some primary market
information into a document outlining how additional Eligible
Securities could be reported to the Central Repository (the
``Discussion Document''), which would be jointly provided to the
Commission within six months after effectiveness of the Plan.\1305\
Additionally, as required by Rule 613(a)(1)(vi), the Plan includes a
discussion of the feasibility, benefits and costs of including primary
market transactions in the CAT NMS Plan.\1306\
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\1305\ See CAT NMS Plan, supra note 3, at Appendix C, Section
C.9. Section 6.11 of the Plan satisfies a requirement in 17 CFR
242.613(i) to plan for expansion.
\1306\ 17 CFR 242.613(a)(1)(vi); CAT NMS Plan, supra note 3, at
Appendix C, Section A.6.
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In its discussion of primary market transactions, the CAT NMS Plan
states that including some primary market allocation information in the
CAT NMS Plan would provide significant benefits without unreasonable
costs, while other allocation information would provide marginal
benefits at significantly higher cost.\1307\ Specifically, the
discussion in the CAT NMS Plan divides the primary market allocation
information into two categories: Top-account allocations and subaccount
allocations. Top-account allocations refer to allocations during the
book-building process to institutional clients and retail broker-
dealers. These allocations are conditional and can fluctuate until the
offering syndicate terminates. Top-account institutions and broker-
dealers make the subsequent subaccount allocations to the actual
accounts receiving the shares. The Plan concludes that, with respect to
primary market information, only the subaccount allocations would
provide significant benefits without unreasonable costs if they were to
be incorporated into the CAT.
---------------------------------------------------------------------------
\1307\ See id. at Appendix C, Section A.6(b)-(c).
---------------------------------------------------------------------------
Based on that discussion, the Plan states that ``the Participants
are supportive of considering the reporting of Primary Market
Transactions, but only at the subaccount level, and would incorporate
analysis of this requirement, including how and when to implement such
a requirement, into their document outlining how additional Eligible
Securities could be reported to the Central Repository, in accordance
with SEC Rule 613(i) and Section 6.11 of the Plan.'' \1308\ The Plan
therefore would limit the discussion of reporting primary market
transactions in the Discussion Document to the subaccount level. As an
alternative to the approach in the Plan, the Commission is soliciting
comment on whether to broaden the required scope of the discussion of
primary market allocation information in the Discussion Document to
include an analysis of incorporating both top-account and subaccount
information for primary market transactions into the CAT. The
Commission preliminarily believes that the potential benefits of
including top-account information in the CAT could be significant and
that the costs of including top-account information could be lower than
what is described in the CAT NMS Plan and appropriate in light of
significant potential benefits. For these reasons, the Commission
preliminarily believes that top-account information should not be
excluded from the Discussion Document.
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\1308\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.6(c).
---------------------------------------------------------------------------
Some primary market information is currently available to
regulators. FINRA collects primary market allocation information on the
initial and final list of distribution participants in their
Distribution Manager. Based on discussions with Participants, the
Commission understands that issuers of IPOs are required to report
primary market allocations to broker-dealers within the Distribution
Manager, but reported information does not contain broker-dealer
customer information on those allocations. Primary market allocations
to market participants other than broker-dealers can be voluntarily
reported to the system. FINRA uses this system in the course of
investigations in response to complaints and in normal
[[Page 30773]]
examinations of broker-dealers. The Commission can request data from
the Distribution Manager. When the Commission or an SRO needs
additional primary market information, they request it from
underwriters and other broker-dealers in the offering process. These ad
hoc data requests can take weeks for underwriters to process and, if
requesting data from multiple underwriters or other broker-dealers,
each could submit the data in a different format or with different data
definitions, adding time to the process of combining the data across
underwriters.
Primary market information currently assists regulators in
examining underwriting practices and surveilling for violations of
regulations regarding allocations in primary offerings. The information
also is useful for conducting market analysis and research on policy
issues such as allocation decisions, flipping, and secondary market
price support and the analysis and reconstruction of market events such
as the Facebook IPO or the Vonage IPO.\1309\
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\1309\ See Reena Aggarwal, Allocation of Initial Public Offering
and Flipping Activity, 68(1) Journal of Financial Economics 111-135
(2003); Reena Aggarwal, Manju Puri and N. Prabhala, Institutional
Allocation in Initial Public Offerings: Empirical Evidence 57 (3)
Journal of Finance 1421-1442 (2002); Raymond P. Fishe, How Stock
Flippers Affect IPO Pricing and Stabilization, Journal of Financial
and Quantitative Analysis 319-339 (2002); and Raymond P. Fishe,
Ekkehart Boehmer, Underwriter Short Covering in the IPO Aftermarket:
A Clinical Study, Journal of Corporate Finance, 575-594 (2004). For
background information on the Facebook IPO, see SEC Press Release,
SEC Charges NASDAQ for Failures During Facebook IPO (May 29, 2013),
available at https://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171575032. For background information on the Vonage
IPO, see FINRA, FINRA Fines Citigroup Global Markets, UBS and
Deutsche Bank $425,000, Orders Customer Restitution for Supervisory
Failures in Vonage IPO (September 22, 2009), available at https://www.finra.org/newsroom/2009/finra-fines-citigroup-global-markets-ubs-and-deutsche-bank-425000-orders-customer.
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The Commission preliminarily believes that including both top-
account and subaccount allocation information for primary market
transactions in CAT would make primary market information that
identifies customers directly accessible to regulators, which would be
beneficial. In particular, top-account information in addition to
subaccount information would be necessary to surveil, without
requesting data from underwriters, for prohibited activities in the
book-building process and would improve the efficiency of
investigations into such prohibited activities. For example, including
top-account information in CAT Data would provide regulators efficient
access to data relevant for investigations into tie-in arrangements
because regulators would be able to correlate treatment in the primary
offering with other trading activity to see if, for example, those who
trade more in the aftermarket receive more of the initial public
offering shares they request than others. Including such information in
CAT Data would also provide efficient access to data that could
identify potential allocations that preference some customers over
others in the IPO allocation process because the SROs and Commission
could examine the relationship between IPO initial allocations, initial
indications of interest, and fluctuations in allocations and
indications of interest during the book-building process. In the
Adopting Release, the Commission noted several additional benefits of
collecting top-account information in addition to subaccount
information for primary market transactions. For example, examinations
of ``spinning,'' ``laddering,'' and other ``quid pro quo'' arrangements
would benefit from efficient access to such CAT Data, which would
facilitate a comparison of those customers allocated shares in an
offering to those who are not allocated shares in an offering and how
the conditional allocations change during the book-building process.
Book-building information, which is currently very difficult for
regulators to assemble, would provide very useful insights into IPO and
follow-on allocations in market analysis. Such insights would better
inform rulemaking and other policy decisions.
The CAT NMS Plan estimates that for broker-dealers to implement a
system to record and report top-account and subaccount allocation
information for primary market transactions would take 36 months of
staff time per firm at a cost of $234.8 million whereas just subaccount
information would take 12 months of staff time per firm at a cost of
$58.7 million.\1310\ The inclusion of top-account allocation
information accounts for the difference of $176.1 million. The CAT NMS
Plan explains that including top-account information in the CAT would
result in higher implementation costs because the top-account
information is maintained in book-building systems in investment
banking divisions of broker-dealers that differ fundamentally from
secondary market systems.\1311\
---------------------------------------------------------------------------
\1310\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.6(c). The estimated costs reflect the implementation cost of
systems development needed to support top-account and subaccount
information for primary market transactions to CAT. The $234.8
million figure assumes 36 months of staff time, with 21.741 days per
month at a $1200 daily FTE rate for 250 firms. The $58.7 million
figure assumes 9 months of staff time, with 21.741 days per month at
a $1200 daily FTE rate for 250 firms. The estimates do not include
any ongoing annual costs to maintain the reporting; the Commission
assumes that these systems would be supported by staff already
engaged to support CAT reporting.
\1311\ Id. at Appendix C, Section A.6(a).
---------------------------------------------------------------------------
However, the Commission preliminarily believes that the costs of
adding top-account allocation information may be lower than those
estimated in the CAT NMS Plan, for several reasons. First, in
combination with an alternative that would require less granular time
stamps or a larger allowable clock offset on less time-sensitive
systems, the costs for top-account information would be lower than
indicated in the Plan. The Commission recognizes that the benefits from
time stamp granularity and clock synchronization in the systems for
reporting top-account information may be lower than those for secondary
market systems because activity occurs far less frequently than it does
on exchanges and regulators may not need to sequence primary market
transactions relative to secondary market transactions within a second.
The Commission is unable to estimate cost savings from alternative
clock synchronization requirements because estimates presented in the
Plan do not cite these specific costs. Second, the Plan's estimate is
sensitive to the number of underwriters. In particular, the estimates
assume 250 underwriters would need to implement changes to provide for
top-account allocation information for primary market
transactions.\1312\ This is also the same number of underwriters
assumed to need to implement subaccount allocation information.
However, the Commission suspects that the number of underwriters that
would need to implement changes for top-account information may be
lower than the number that implement subaccount information for primary
market transactions because the lead underwriters could have all of the
information necessary to report the top-account information. If so,
then only those underwriters that expect to lead an offering would need
to implement systems changes to report top-account allocation
information. Estimating costs only for lead underwriters could result
in a much smaller estimate.
---------------------------------------------------------------------------
\1312\ See Cost Estimate for Adding Primary Market Transactions
into CAT (February 17, 2015), available at https://www.catnmsplan.com/industryfeedback/p602480.pdf.
---------------------------------------------------------------------------
The Commission does not have an estimate of the ongoing costs of
underwriters reporting top-account information. However, the Commission
preliminarily estimates an average of
[[Page 30774]]
approximately 120 IPOs each year and 340 follow-on offerings each year
from 2001 to 2014. Assuming each offering contains approximately 260
initial allocations, including all indications of interest, with 10
amendments from initial allocation to final allocation, each offering
would generate 2,600 CAT Reportable Events for a total of 1.2 million
per year.\1313\ This total is much smaller than the number of
Reportable Events in the secondary market (trillions). Therefore, while
the Commission cannot estimate the costs of ongoing primary market
reporting, the Commission believes the ongoing costs of reporting
primary market transactions would be a fraction of the ongoing costs of
secondary market reporting and would likely be supported by staff
already engaged to maintain CAT reporting.
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\1313\ The Commission estimated the number of allocations per
offering by averaging the data for the 11 IPOs made public along
with an academic paper. See Jay R. Ritter and Donghang Zhang,
Affiliated Mutual Funds and the Allocation of Initial Public
Offerings, 86(2) Journal of Financial Economics 337-368 (2007) and
https://bear.warrington.ufl.edu/ritter/Allocation08282012.xls. If the
Commission assumes that each offering would generate 10 amendments
to allocations prior to the subaccount allocations, there would be
2,600 reports per offering and 1.2 million reports per year using
the number of offerings in 2014. If each offering instead generates
5 or 20 amendments, the number of reports per year would be 0.6
million or 2.4 million.
---------------------------------------------------------------------------
The Commission also recognizes that including top-account
information in the CAT NMS Plan could change the competitive landscape
of the market for underwriting services. In particular, some
underwriters may choose to exit the market instead of report top-
account information. The Commission preliminarily believes that the
compliance costs themselves would be low compared to underwriting
fees.\1314\ Nonetheless, the Commission recognizes that some
underwriters may exit rather than comply with the CAT NMS Plan
requirements. Likewise, the Commission recognizes that the costs to
implement CAT reporting of top-account allocation information could
increase barriers to entry.
---------------------------------------------------------------------------
\1314\ The primary market issued about $450 billion in common
stock in 2014 and underwriters earned $5.2 billion in underwriting
fees in 2014. This is high relative to the $176 million cost
estimate above. The value of issuances comes from the Securities
Data Corporation and information regarding the aggregate
underwriting fees comes from FOCUS reports.
---------------------------------------------------------------------------
Finally, the Commission recognizes that requiring top-account
information in the CAT NMS Plan could alter the way underwriters
conduct their book-building activities. The Commission is not sure if
these changes would be beneficial or harmful to issuers and investors.
For example, issuers and investors could benefit if including top-
account information in CAT deters book-building activity that violates
Regulation M or FINRA Rule 5110, 5130 or 5131, though some particular
investors may lose any gains from preferential treatment. However, the
Commission is uncertain whether investors and issuers would benefit if
underwriters altered their book-building activity in an effort to
reduce their reporting burden. For example, if reporting every change
to a conditional allocation proved cumbersome, underwriters may choose
to update preliminary allocations less often. This could change the way
that underwriters and investors interact with each other in the book-
building process with implications for the potential success of the
offering or investors' satisfaction with the outcome.
c. OTC Equity Securities
The CAT NMS Plan requires the reporting of data regarding OTC
Equity Securities upon implementation of the CAT NMS Plan. The
Commission is soliciting comment on the alternative of eliminating the
requirement to report activity in OTC Equity Securities from the CAT
NMS Plan, and instead requiring only that the SROs include a discussion
of how OTC Equity Securities could be incorporated into the CAT in the
Discussion Document that they are required to provide within six months
after the effective date of the Plan pursuant to Rule 613(i).\1315\
This was the approach taken with respect to OTC Equity Securities in
Rule 613, because the Commission believed that limiting the scope of
the CAT to NMS securities was a reasonable first step in implementing
the CAT.\1316\ Under this approach, the CAT NMS Plan would require each
national securities exchange and national securities association,
within six months after effectiveness of the national market system
plan, to jointly provide to the Commission a document outlining in
detail how OTC Equity Securities (along with certain other categories
of securities) could be incorporated into the CAT information,
including an implementation timeline and a cost estimate. The
Commission preliminarily believes that excluding OTC Equity Securities
from the CAT upon implementation would reduce costs of the CAT NMS
Plan. But, the Commission also preliminarily believes that removing the
requirement to report activity in OTC Equity Securities from the CAT
NMS Plan would limit the regulatory benefits of the CAT NMS Plan
significantly.
---------------------------------------------------------------------------
\1315\ 17 CFR 242.613(i).
\1316\ Id.; see also Adopting Release, supra note 9 at 45744.
The Plan states that ``[e]ven though SEC Rule 613 does not require
reporting of OTC Equity Securities, the Participants have agreed to
expand the reporting requirements to include OTC Equity Securities
to facilitate the elimination of OATS.'' See CAT NMS Plan, supra
note 3, at Appendix C, Section C.9.
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Under the alternative approach, OTC Equity Securities would be
excluded from the Plan upon implementation. While they could still be
incorporated into the Plan following the submission of the Discussion
Document, the alternative approach would create uncertainty as to
whether or not OTC Equity Securities would ultimately be incorporated
into CAT NMS Plan and the timeline for that process.
Excluding OTC Equity Securities from the CAT NMS Plan could limit
oversight of the OTC equity market relative to the oversight obtainable
under the Plan.\1317\ FINRA currently collects reports on OTC equity
markets in its OATS data.\1318\ The primary difference between OATS and
CAT Data for OTC Equity Securities would be in completeness, due to the
additional data fields in CAT Data that are not in OATS, particularly
Customer-ID; in any accuracy improvements relative to OATS; in direct
access for the Commission; and in the timeliness relative to OATS,
particularly in having linked data that requires less time to process.
Relative to the Plan, therefore, excluding OTC Equity Securities could
reduce the efficiency and effectiveness of regulators overseeing the
OTC market, conducting investigations of manipulation, pump and dumps,
and improper penny stock sales. It could also reduce the efficiency of
estimating disgorgement payments to harmed investors relative to the
Plan.
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\1317\ The Commission has discussed the potential for fraudulent
activity in the OTC market. See SEC, Microcap Fraud, available at
https://www.sec.gov/spotlight/microcap-fraud.shtml.
\1318\ See supra note 351 and related text.
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The CAT NMS Plan states that including OTC Equity Securities could
facilitate the retirement of OATS.\1319\ If OTC Equity Securities are
not included in the CAT NMS Plan upon implementation, including OTC
Equity Securities at a later time would require an amendment to the CAT
NMS Plan, which could take significant time and potentially delay the
retirement of OATS.\1320\ The Commission is cognizant
[[Page 30775]]
that the period of duplicative reporting, during which both CAT and
OATS would be reported by market participants, is likely to impose a
significant cost on industry.\1321\ The CAT NMS Plan states that the
inclusion of OTC Equity Securities at CAT implementation is generally
supported by industry to facilitate the retirement of OATS.\1322\
---------------------------------------------------------------------------
\1319\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.1(a) n.16.
\1320\ The Commission notes, however, that the incorporation of
OTC Equity Securities is not the only hurdle needed to retire OATS,
and other hurdles may remain open even after any approval of the CAT
NMS Plan. For example, the Plan anticipates a period of 12-18 months
during which the SROs would analyze rules and systems to determine
which require duplicative information. The process and timeline for
elimination of duplicative reporting systems is discussed in Section
IV.F.2, supra.
\1321\ See Section IV.F.2, supra.
\1322\ See CAT NMS Plan, supra note 3, at Appendix C, Section
C.9.
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The Commission preliminarily believes that excluding OTC Equity
Securities from the CAT upon implementation would reduce certain costs
associated with implementation and operation of CAT as compared to the
Plan as filed, without providing any additional material information,
because less data would be reported,\1323\ therefore requiring fewer
resources to implement and maintain the CAT. The Commission further
preliminarily believes that CAT Reporters and the Central Repository
would avoid certain compliance costs if OTC equities were excluded. To
the extent that market participants rely on separate IT infrastructure
to handle activity in OTC as opposed to listed securities, delaying the
inclusion of OTC Equity Securities in CAT postpones costs associated
with updating these systems. Postponing these system modifications may
allow these modifications to be more efficiently integrated into other
planned system upgrades, reducing costs to industry. The Commission
notes that, even under this alternative approach, market participants
still may incur these costs eventually, because the approach
contemplates that the CAT NMS Plan could be expanded to require the
reporting of order events in OTC Equities following the submission of
the Discussion Document.
---------------------------------------------------------------------------
\1323\ For example, in February, 2016, the average daily number
of trades in OTC securities is approximately 98,300, on an average
of approximately 18,500 issues over that same period. While that
volume of trades is not large, the number of distinct issues is.
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Furthermore, the Commission preliminarily believes that the cost
savings from delaying incorporating OTC Equity Securities in the CAT
NMS Plan are likely to be lower than the increase in costs of
duplicative reporting that result from a delay to OATS retirement. Any
broker-dealers that trade both OTC Equity Securities and listed equity
or option securities would have to comply with the Plan regardless of
the inclusion of OTC equities, so the cost savings to these broker-
dealers from the exclusion of OTC Equity Securities may not be
significant. The Commission preliminarily believes that the number of
broker-dealers that trade only OTC Equity Securities is small. Finally,
the Commission expects that the duplicative reporting costs would be
fairly significant and that extending the time until the retirement of
OATS would be a significant additional cost.
The Commission cannot estimate the amount of the cost reduction
from excluding OTC Equity Securities because it lacks the data to do
so. The CAT NMS Plan presents data only on the aggregate costs of on-
exchange and OTC equity reporting; it does not present data on the
costs specifically attributable to OTC equity reporting. The Commission
has no data from which it can independently estimate the cost
differential because it depends on information internal to each CAT
Reporter (e.g., how their systems would change for the alternative
compared to the Plan), which is not compiled or stored anywhere, and to
which the Commission therefore does not have ready access, and it
depends on when OTC Equity Securities would otherwise be included and
the status of OATS and other systems in the interim.
d. Periodic Updates to Customer Information
As noted above in Section IV.E.1.b(4), the Plan Processor is
required to create a Customer-ID and map Firm Designated IDs to this
Customer-ID so that records stored in the CAT Data link to the
Customers. To facilitate this, the Plan requires CAT Reporters to
submit an initial set of Customer information to the Central Repository
and subsequent daily updates and changes to that Customer
information.\1324\ In addition to daily updates to reflect changes in
Customer information required in Rule 613, the CAT NMS Plan also
requires members to submit periodic full refreshes of all Customer
information to the CAT.\1325\ The Commission is soliciting comment on
an alternative that would eliminate the requirement for periodic full
refreshes.
---------------------------------------------------------------------------
\1324\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.1(a)(iii); Appendix D, Section 9.1.
\1325\ See id., at Appendix C, Section A.1(a)(iii) n.33.
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The CAT NMS Plan states that the purpose of these refreshes is to
``ensure the completeness and accuracy of Customer information and
associations.'' \1326\ Although the Commission believes that the
Participants should ensure that customer information in the Central
Repository is complete and accurate, the requirement for periodic full
refreshes seems redundant if the initial list and daily updates are
complete and accurate and would, therefore, provide no additional
benefit. Further, not requiring these periodic refreshes could reduce
the risk of a security breach of personally identifiable information.
However, the Commission recognizes that periodic full refreshes of
customer information could address any errors that are introduced in
the daily update process, although the Commission preliminarily
believes that such problems are likely to be quite rare. In addition,
the Commission recognizes that not requiring the periodic full
refreshes could reduce certain costs associated with implementation and
operation of CAT as compared to the Plan as filed for CAT Reporters,
although the Commission preliminarily believes that these cost
reductions would be minor for two reasons. First, the quantity of data
required to refresh the customer information table is very small
compared to the size of market data files submitted regularly by most
market participants. Second, because market participants would need to
develop software and procedures to initially populate the customer
information table, that software and procedure should be available to
refresh the table periodically. Therefore, the Commission preliminarily
believes that removing the requirements for periodic full refreshes of
customer information could minimally reduce the cost of the Plan
without materially reducing the benefits.
---------------------------------------------------------------------------
\1326\ Id.
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4. Alternatives to the CAT NMS Plan
The Commission is soliciting comment on the broad set of
alternatives of modifying existing systems to reduce the data
limitations described above instead of approving the CAT NMS Plan.
When it adopted Rule 613, the Commission noted that ``the costs and
benefits of creating a consolidated audit trail, and the consideration
of specific costs as related to specific benefits, are more
appropriately analyzed once the SROs narrow the expanded array of
choices they have under the adopted Rule and develop a detailed NMS
plan.'' \1327\ The Commission also noted that a ``robust economic
analysis of . . . the actual creation and implementation of a
consolidated audit trail itself . . .
[[Page 30776]]
requires information on the plan's detailed features (and their
associated cost estimates) that will not be known until the SROs submit
their NMS plan to the Commission for its consideration.'' \1328\
Accordingly, the Commission deferred its economic analysis of the
actual creation, implementation, and maintenance of the CAT until after
submission of an NMS plan.
---------------------------------------------------------------------------
\1327\ See Adopting Release, supra note 9, at 45725-26.
\1328\ Id. at 45726.
---------------------------------------------------------------------------
The Commission recognizes that approving the CAT NMS Plan is not
the only available means of improving the completeness, accuracy,
accessibility, and timeliness of the data used in regulatory
activities. Alternatively, the Commission could mandate improvements to
one or more existing data sources to address the data limitations noted
in the Baseline Section. The Commission previously considered this set
of alternatives when considering whether to adopt Rule 613.\1329\ The
Commission has now reviewed the CAT NMS Plan, including the cost
estimates, and has performed its own economic analysis of the Plan.
With the benefit of having reviewed and analyzed the Plan, the
Commission is now soliciting comment on this set of alternatives.
---------------------------------------------------------------------------
\1329\ Id. at 45739-41.
---------------------------------------------------------------------------
As an alternative to the CAT NMS Plan, the Commission could require
modifications to OATS. In the Adopting Release, the Commission noted
that it had received comments suggesting various ways that the OATS
system could be modified to serve as the central repository for the
consolidated audit trail.\1330\ However, the Commission also noted that
OATS would require significant modifications in order to provide the
attributes that the Commission deems crucial to an effective audit
trail. In particular, OATS excludes some exchange-based and other types
of non-member activity; it does not collect market-making quotes
submitted by registered market makers (in those stocks for which they
are registered); it is not a central repository and therefore does not
presently provide other regulators with ready access to a central
database containing processed, reconciled, and linked orders, routes,
and executions ready for query, analysis, or download; it does not
presently collect options data; it does not afford regulators an
opportunity to perform cross-product surveillance and monitoring; and
it does not collect information on the identities of the customers of
broker-dealers from whom an order is received.\1331\
---------------------------------------------------------------------------
\1330\ Id.
\1331\ Id. at 45741.
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The Commission preliminarily believes that, as stated in the
Adopting Release, the missing attributes identified above are crucial
to improving the completeness, accuracy, accessibility, and timeliness
of the data used in regulatory activities. Thus, any alternative to CAT
based on OATS that does not address those deficiencies would limit the
potential benefits of the alternative significantly. Given the
modifications necessary, the Commission cannot estimate the potential
cost savings, if any, from mandating an OATS-based approach as an
alternative to the CAT NMS Plan, because the Commission does not have
sufficient information to estimate the cost of modifying OATS to
address some or all of these deficiencies, either separately or in
combination. The Plan does not provide data on the cost of making each
relevant modification to OATS, and the Commission has no other data
from which it can independently estimate this, because the Commission
is not aware of any such data currently available to it. The Commission
notes, however, that Rule 613 provided flexibility to the SROs to
propose an approach based on OATS and/or other existing data
sources.\1332\ Given that Rule 613 provided this flexibility to the
SROs, the Commission preliminarily believes that the SROs could have
utilized an OATS-based approach if that approach would have represented
significant cost savings relative to the Plan's approach, and the SROs
that operate those reporting systems had presented such a solution as a
Bid. Furthermore, the Commission notes that an approach that modifies
and expands OATS to satisfy the requirements of the CAT NMS Plan
remains feasible under the current bidding process. The Commission
seeks comment on the costs and benefits of requiring modifications to
OATS as an alternative to the CAT NMS Plan.
---------------------------------------------------------------------------
\1332\ Id. The Commission also notes that the current Plan could
allow the Plan Processor to leverage some elements of the existing
OATS infrastructure and/or other existing data sources in the
implementation of the CAT.
---------------------------------------------------------------------------
Another alternative would be for the Commission to modify other
data sources instead of, or in combination with, OATS. However, like
OATS, all of the current data sources have limitations that would need
to be addressed in order to provide the attributes that the Commission
deems crucial to an effective audit trail.\1333\ Furthermore, the
Commission preliminarily believes that modifying any other single data
source would be more costly than modifying OATS, which is currently the
most comprehensive audit trail. While the Commission could require the
modification of multiple data sources in combination, the Commission
preliminarily believes that an alternative to the CAT NMS Plan that
relied on multiple data sources, such as a combination of OATS, COATS,
other SRO audit trail data and/or publicly available data, would
eliminate the benefits associated with having a single, complete
consolidated source from which regulators can access trade and order
data, which the Commission considers to be very significant.\1334\
---------------------------------------------------------------------------
\1333\ The limitations of the various data sources are discussed
in Section IV.D, supra.
\1334\ These benefits are discussed in Section IV.E, supra.
---------------------------------------------------------------------------
In summary, the Commission cannot estimate the potential cost
savings, if any, from modifying one or more other data sources instead
of, or in combination with, OATS, because the Commission does not have
sufficient information to estimate the cost of modifying each of the
currently available data sources to address their current limitations,
separately or in combination. The Plan does not provide data on the
cost of making each relevant modification to each current data source,
and the Commission has no other data from which it can independently
estimate this, because the Commission is not aware of any such data
currently available to it.
However, the Commission preliminarily believes that mandating
improvements to the completeness, accuracy, accessibility, and
timeliness of current data sources without an NMS Plan that requires
the consolidation of data and increased coverage across markets and
broker-dealers would likely significantly limit the potential benefits,
possibly without providing significant cost savings. The Commission
seeks comment on the costs and benefits of modifying one or more
currently available data sources, separately or in combination, as an
alternative to the CAT NMS Plan.
5. Request for Comment on the Alternatives
a. Generally
383. Are there any other alternatives that the Plan should require?
If so, please describe the alternative and the costs and benefits of
the alternative relative to the Plan.
[[Page 30777]]
b. Alternatives to the Approaches Permitted by the Exemption Order
\1335\
---------------------------------------------------------------------------
\1335\ See also Sections III.B.5-III.B.9, supra, for additional
requests for comment on the alternative Rule 613 approaches to the
approaches the Exemption Order allowed to be included in the CAT NMS
Plan.
---------------------------------------------------------------------------
384. Should the CAT NMS Plan require Options Market Makers to
report their quotes to the Central Repository? Please explain. Do
Commenters believe that the costs of the Rule 613 approach would be
disproportionately borne by smaller broker-dealers? Why or why not?
Please provide data supporting your position.
385. Should the Plan treat equity market makers the same as Options
Market Makers for purposes of quotation reporting--i.e., equity market
makers report only Quote Sent Time and exchanges to which the quote is
routed report the other information? Why or why not? What are the
relative costs and benefits of this alternative? Please provide cost
estimates.
386. Should the Plan require an alternative approach to reporting
market maker quotes on exchanges where both equity and Options Market
Makers would not need to report their quotation updates, and instead
the exchanges would report Quote Sent Times in their reports of
receiving these quotation updates? Why or why not? How would such an
alternative affect the costs of building and operating the Central
Repository? How would such an alternative affect market-maker costs of
implementing and continuing CAT reporting?
387. Should the CAT NMS Plan require that Allocation Reports
provide sufficient information for the Central Repository to be able to
link those allocations to order lifecycles? What are the costs and
benefits of providing this information? Please explain and provide cost
estimates.
388. How do broker-dealers currently track which customers should
receive allocations from which set of orders and how do broker-dealers
ensure that those orders receive the correct average price? Can these
same systems provide a key that could accurately link the allocations
to lifecycles in many-to-many allocations? Please explain.
389. Should the CAT NMS Plan require an alternative to the Customer
Information Approach? If so, what alternative should the Commission
require and what are the relative costs and benefits of the
alternative? Please explain.
390. Should the CAT NMS Plan require an alternative approach to
assigning CAT-Reporter-IDs? If so, what alternative should the
Commission require and what are the relative costs and benefits of the
alternative? Please explain.
391. Should the CAT NMS Plan provide for the use of the LEI or
another unique identification code as an alternative to the CAT-
Reporter-ID? What are the advantages and disadvantages of this
approach?
392. Should the CAT NMS Plan require an alternative to the
requirement to time stamp manual orders to the second? If so, what
alternative should the Commission require? For example, should the Plan
require millisecond time stamps or one-minute time stamps? Please
explain and provide information on the relative costs and benefits of
the alternatives.
c. Alternatives to Certain Specific Approaches in the CAT NMS Plan
\1336\
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\1336\ See also Sections III.B.2, III.B.4, III.B.10, III.B.11,
supra, for additional requests for comment related to alternatives
to certain specific approaches in the CAT NMS Plan.
---------------------------------------------------------------------------
393. Should the ``industry standard'' for the purposes of the clock
synchronization and time stamping be ``one-size-fits-all''? Please
explain. If not, how should the CAT NMS Plan structure variations in
clock synchronization and time stamp requirements that are based on
industry practices?
394. Should the ``industry standard'' for the purposes of the clock
synchronization and time stamping requirements be defined based on
industry practice? Please explain. If not, how should ``industry
standard'' be defined? Should the ``industry standard'' consider
information other than current industry practice, such as the most
accurate technology currently available in the industry, or the
standard recommended by a particular industry group or authority? Could
a definition of ``industry standard'' set a maximum clock offset
threshold with an expectation that each CAT Reporter would be
responsible for smaller clock offsets if the CAT Reporter is
technically capable of such clock offsets? Please explain and include
information on the relative costs and benefits of such alternative
definitions.
395. What benefits, if any, would derive from applying the same
uniform clock synchronization standards to all market participants
versus applying different standards to different participant types?
Which approach is preferable? If applying different standards to
different participant types, which participant types should have
smaller clock offset tolerances and which should have larger clock
offset tolerances and what are the industry standards for those
participant types? Please explain and provide any supporting data.
396. Do Commenters agree with the Commission's cost estimates for
clock synchronization alternatives? Are there CAT Reporters other than
broker-dealers that would incur significant costs from increasing clock
synchronization standards to allowable clock drifts of less than 50
milliseconds, such as 1 millisecond or 100 microseconds? At what level
of clock synchronization would these costs become material? Please
explain. Do Commenters have estimates of these costs?
397. Does the FIF Clock Offset Survey reflect the operational
capabilities of all potential CAT Reporters? Please explain.
398. Do Commenters agree that an alternative that would relax the
logging requirements such that CAT Reporters would only need to log
exceptions and resulting synchronization events (and not every
synchronization event) would reduce costs of the CAT NMS Plan without
materially reducing its benefits? Why or why not? Do Commenters have an
estimate of how much such an alternative would reduce costs, either in
isolation or in combination with the alternative to not require
synchronization outside of event recording times? Please provide
supporting documentation for these estimates.
399. Is there a need for clock synchronization standards outside of
regular and extended trading hours? Is clock synchronization beneficial
for retail orders that come in overnight? Are there examples of times
or events outside of regular and extended trading hours when clock
synchronization is more beneficial? Do Commenters agree that an
alternative that would not require synchronizing clocks outside of
times when servers record Reportable Events would reduce costs of the
Plan without materially reducing its benefits? Do Commenters have an
estimate of how much such an alternative would reduce costs? Please
explain and provide supporting documentation if possible.
400. Are some CAT Reportable Events more time-sensitive than other
events? If so, what events are more time-sensitive and why? What
systems are more likely to process these events, and where are those
systems located (i.e., within broker-dealers, service bureaus,
Execution Venues)? Please explain.
401. What market participant systems, if any, should have smaller
clock offset tolerances? Why? What clock
[[Page 30778]]
synchronization standard should these systems have? Why? What market
participant systems, if any, should have smaller clock offset
tolerances? Why? What clock offset tolerances should these systems
have? Why?
402. Should the Plan require time stamps to be reported more
granularly than the one millisecond required in the Plan? If so, what
standard should be required? Do Commenters agree with the Commission's
analysis of the costs and benefits of requiring finer time stamp
resolution than 1 millisecond? Please explain.
403. Should the CAT NMS Plan require different Error Rates in CAT?
For example, should the Plan require a lower initial Error Rate? If so,
what initial Error Rate should the Plan require and why? What would be
the costs and benefits of requiring a lower initial Error Rate? Should
the Plan require a lower Error Rate at some time period after
implementation? If so, what Error Rate should the Plan require and why
and when? What would be the costs and benefits of requiring a lower
Error Rate?
404. Should the CAT NMS Plan require a day T+5 error correction
deadline instead of a day T+3 error correction deadline? What are the
relative costs and benefits of different error correction deadlines?
Please explain and provide cost estimates.
405. Should the CAT NMS Plan require an alternative to the funding
model in which broker-dealers and Execution Venues pay fees on the same
fee schedule? If so, how would that funding model be structured and
what metric would determine the fee level? How would that funding model
affect the costs and benefits of the Plan, including the effect on
competition? Please explain.
406. The Plan cites ``transactional volume'' as a cost driver for
the Central Repository, but uses ``message traffic'' to allocate
Central Repository costs across Industry Members. Do Commenters agree
with the Commission's assumption that these two metrics are highly
correlated? Is one of these metrics preferable for allocating costs
across Industry Members? Please explain.
407. Should the CAT NMS Plan require alternative metrics to the
message traffic and market share metrics required by the Plan for
determining the tiers of the funding model but still place Execution
Venues on a different fee schedule than broker-dealers? If so, which
metrics? How would these alternative metrics affect the costs and
benefits of the Plan, including effects on competition? Could these
alternative metrics create conflicts of interest? Please explain.
408. Do Commenters agree with the Commission's analysis of unified
versus bifurcated funding models? Why or why not?
409. Should the Plan require a unified funding model wherein
Central Repository costs are allocated across all market participants
by message traffic? Why or why not?
410. Should the Plan require a unified funding model wherein the
tiers of the funding model for all CAT Reporters would be based on
market share of share volume? Why or why not?
411. Should the Plan require a unified funding model wherein a
fixed fee is levied on every trade? Why or why not? Could such a
funding model reduce implementation costs by utilizing infrastructure
already in place to assess Section 31 fees?
412. Should the Plan require a bifurcated funding model wherein
Central Repository costs are allocated across broker-dealers by market
share of share volume? Why or why not?
413. Should the Plan require a bifurcated funding model wherein
Central Repository costs treat ATSs as part of broker-dealers only,
instead of including them as Execution Venues? Why or why not?
414. Should the Plan require a bifurcated funding model wherein
broker-dealer message traffic to and from an ATS are not included in
message traffic measures used to assess fees on broker-dealers? Why or
why not?
415. Should the Plan require a bifurcated funding model wherein ATS
volume is excluded from TRF volume for the purposes of assessing
Execution Venue fees to operators of TRFs? Why or why not?
416. Should the Plan require a bifurcated funding model wherein
TRFs are not counted as Execution Venues for purposes of assessing fees
on Execution Venues? Why or why not?
417. Should the Plan require that profits or losses from operating
the Central Repository be allocated across Participants by market share
of share volume? Why or why not?
418. Should the Plan require a strictly variable, rather than
tiered, funding model? Why or why not?
419. Should the CAT NMS Plan require any funding model alternatives
that could result in ATSs and exchanges paying equivalent fees? If so,
how should that funding model be structured and what metrics should
determine the funding tiers? How would that funding model affect the
costs and benefits of this alternative, including effects on
competition? Could these alternatives create conflicts of interest and,
if so, to what extent? Please explain.
420. How should the CAT NMS Plan distribute the profits and losses
of the Company among Participants? What are the relative costs and
benefits of alternative ways to divide the profits and losses among the
Participants? Please explain.
421. Should the CAT NMS Plan require a strictly variable funding
model in which the fees paid are a set percentage of message traffic or
share volume instead of a tiered funding model in which fees are fixed
for a tier that is determined by message traffic or market share of
share volume? If so, how would that funding model be structured? What
are the relative costs and benefits of that funding model, including
the effect on competition? Please explain.
422. Should the CAT NMS Plan exclude the requirement to report
listing exchange symbology and instead allow CAT Reporters to use
existing symbologies? Please explain. Would excluding this requirement
allow broker-dealers to report data to CAT without processing the data
ahead of the report? Please explain. What would be the relative costs
and benefits of removing this requirement from the Plan? Please provide
any cost estimates.
423. Should the CAT NMS Plan require alternative minimum standards
for access to the CAT Data to those proposed in the CAT NMS Plan? If
so, what alternative minimum standards should the Commission require?
For example, should the response time on the largest queries be longer
or shorter than 24 hours? How would changes to the alternative minimum
standards affect the costs and benefits of the Plan? Please be specific
and provide cost estimates.
424. Should the CAT NMS Plan require an intake capacity level
different from twice historical peak daily volume measured over the
most recent six years? If so, what intake capacity level should the
Plan require? What are the relative costs and benefits of this
alternative intake capacity level?
425. The Plan proposes using a ``daisy chain'' approach for linking
order events within the Central Repository.\1337\ This approach was
chosen in favor of an approach that would require a unique order ID to
be assigned by the first market participant that receives an order, and
that order ID to be passed to and used by any market participant that
handles the order afterward (the ``unique order ID''
[[Page 30779]]
approach). Do Commenters believe that a unique order ID approach or any
other alternative approach would produce more accurate linkages than a
daisy chain approach or any other benefits? Please explain. According
to the Plan, the daisy chain approach would minimize impact on existing
OATS reporters because OATS already uses this type of linkage.\1338\ Do
Commenters believe that a unique order ID approach or any other
alternative approach would increase the costs for CAT Reporters who
currently report to OATS or have any other effect on the costs of the
Plan? Please explain and provide estimates. Given that the Bids from
potential Plan Processors all utilize the ``daisy chain'' approach,
would adopting a unique order ID approach at this stage cause a
significant disruption in the progress toward the implementation of a
consolidated audit trail? Please explain. What would the costs of such
a disruption be?
---------------------------------------------------------------------------
\1337\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.1(b).
\1338\ Id.
---------------------------------------------------------------------------
426. The CAT NMS Plan requires that the Plan Processor make use of
a commercially available file management tool. What are the benefits to
CAT Reporters from this requirement? Does this requirement have any
effects on the competition between bidders? For example, are any
bidders, such as those that could more efficiently use a proprietary
file management tool, disadvantaged by this requirement? Please
explain. Does this requirement affect the ability of the Operating
Committee to replace an under-performing Plan Processor? Are there
other costs or benefits of this requirement? Please explain.
d. Alternatives to the Scope of Certain Specific Approaches in the CAT
NMS Plan
427. Should the CAT NMS Plan require excluding any data fields
currently required to be included in the CAT Data (e.g., unique
customer identification, allocation time, and CAT-Reporter-IDs at both
order routing and receipt)? If so, which ones? Please explain and
provide information on the relative costs and benefits of excluding
those data fields, including any cost estimates.
428. Should the CAT NMS Plan exclude primary market information?
Why or why not?
429. Do Commenters agree with the analysis in the Plan of the
feasibility, benefits, and costs of the inclusion of primary market
information (including primary market transactions) in the CAT NMS
Plan? Please explain.
430. Do Commenters have additional analysis relevant to the
decision to include primary market information (including primary
market transactions) in the CAT NMS Plan? If so, please describe that
analysis, including any data.
431. Do Commenters agree with the Plan's decision to include
subaccount allocation information for primary market transactions in
the Discussion Document, which commits the Operating Committee to
consider the implementation of this subaccount allocation information
in the CAT NMS Plan? Please explain.
432. Do Commenters agree with the Commission's assessment of the
costs and benefits of requiring top-account allocation information for
primary market transactions? Please explain. Should the Operating
Committee consider requiring top-account information? Please explain.
433. What are the implications of the SROs decision not to include
top-account information for primary market transactions in the
Discussion Document? Please explain.
434. Should the CAT NMS Plan exclude OTC Equity Securities? Please
explain. Would the exclusion of OTC Equity Securities in the CAT NMS
Plan delay the retirement of OATS? If so, by how long and what would be
the added cost be? Please provide an estimate. What are the other costs
and benefits of excluding OTC Equity Securities from the CAT NMS Plan?
435. The CAT NMS Plan requires that CAT Reporters provide periodic
refreshes of all customer information to the Central Repository to
maintain an accurate database of customer information. What intervals
for updates would be appropriate and reasonable, and what information
should be required to be updated? Should the CAT NMS Plan remove the
requirement for periodic full submission of customer information beyond
the daily updates sent when customer information changes? Please
explain. Would broker-dealers reduce their costs if they did not have
to report all customer information periodically? Would the removal of
this requirement significantly reduce the risk of a security breach of
personally identifiable information? Please explain.
e. Alternatives to the CAT NMS Plan
436. Do Commenters agree with the Commission's analysis of the
broad alternatives to approving the CAT NMS Plan, such as modifying
OATS and/or other data sources to meet the objectives of Rule 613?
Please explain. Are there other alternative approaches that the
Commission has not identified that it should consider? Please explain.
f. Alternatives Discussed in the CAT NMS Plan
The Commission recognizes that the Plan discusses many alternatives
that the Commission does not analyze above, including alternatives in
Consideration 12 therein. This Consideration (Rule 613(a)(1)(xii))
requires the Participants to discuss in the Plan any reasonable
alternative approaches that the plan sponsors considered in developing
the Plan, including a description of any such alternative approach; the
relative advantages and disadvantages of each such alternative,
including an assessment of the alternative's costs and benefits; and
the basis upon which the plan sponsors selected the approach reflected
in the CAT NMS Plan. Such discussions appear in Section 12 of Appendix
C. The Commission reviewed these alternatives and has not included
above a discussion of all of the specific alternatives addressed in the
Plan. In some cases, the Commission, at this time, has no analysis to
add beyond the analysis in the Plan. In other cases, the Plan does not
require any specific alternative, so the Commission cannot analyze the
effect on the Plan of selecting a different alternative. The Commission
is soliciting comment on the alternatives discussed by the Participants
in the Plan but not discussed above. The Commission requests comment on
each of these alternatives, both in isolation and in combination, as
well as any data that would assist the Commission in evaluating the
costs and trade-offs associated with these alternatives.
437. Organizational Structure. According to the CAT NMS Plan, the
Participants considered various organizational structures of the
Bidders.\1339\ The CAT NMS Plan notes that the Bidders have three
general organizational structures: (1) Consortiums or partnerships
(i.e., the Plan Processor would consist of more than one unaffiliated
entity that would operate the CAT), (2) single firms (i.e., one entity
would be the Plan Processor and that entity would operate the CAT as
part of its other ongoing business operations), and (3) dedicated legal
entities (i.e., Plan operations would be conducted in a separate legal
entity that would perform no other business activities). The CAT NMS
Plan notes that each type of organizational structure has strengths and
weaknesses but does not discuss those strengths and
[[Page 30780]]
weaknesses. The CAT NMS Plan concludes that the organizational
structure should not be a material factor in selecting a bidder and
does not mandate any specific organizational structure for the Plan
Processor.\1340\ The Commission requests comment on whether the CAT NMS
Plan should mandate a particular organizational structure. Why or why
not? How can the organizational structure of the Plan Processor affect
the costs and benefits of the CAT NMS Plan? What are the relative
strengths and weaknesses of the different organizational structures?
---------------------------------------------------------------------------
\1339\ See CAT NMS Plan, supra note 3, at Appendix C, Section
D.12(b).
\1340\ Id.
---------------------------------------------------------------------------
438. Primary Storage. The CAT NMS Plan states that bidders proposed
two methods of primary data storage: traditionally-hosted storage
architecture and infrastructure-as-a-service.\1341\ The CAT NMS Plan
does not mandate a specific method for primary storage, but does
indicate that the storage solution would meet the security,
reliability, and accessibility requirements for the CAT, including
storage of PII data, separately. The CAT NMS Plan also indicates
several considerations in the selection of a storage solution including
maturity, cost, complexity, and reliability of the storage method. The
Commission requests comment on whether the CAT NMS Plan should mandate
a particular data storage method. Why or why not? How can the storage
method affect the costs and benefits of the Plan? What are the relative
strengths and weaknesses of the different primary storage methods?
---------------------------------------------------------------------------
\1341\ See CAT NMS Plan, supra note 3, at Appendix C, Section
D.12(c). Traditionally-hosted storage architecture is a model in
which an organization would purchase and maintain proprietary
servers and other hardware to store CAT Data. Infrastructure-as-a-
service is a provisioning model in which an organization outsources
the equipment used to support operations, including storage,
hardware, servers, and networking components, to a third party who
charges for the service on a usage basis.
---------------------------------------------------------------------------
439. Personally Identifiable Information. The CAT NMS Plan
discusses several requirements to reduce the risk of misuse of PII,
such as multi-factor authentication \1342\ and Role Based Access
Control for access to PII; \1343\ separation of PII from other CAT
Data; restricted access to PII; and an auditable record of all access
to PII data contained in the Central Repository.\1344\ The CAT NMS Plan
notes that all bidders proposed some of these requirements, but only
some bidders proposed others. The Commission requests comment on
whether the Plan should mandate any/all of these requirements. The
Commission further requests comment on the alternatives to these
requirements. What are the potential alternative ways to protect PII?
What are the costs and benefits of those alternatives compared to the
Plan? Please provide estimates or other data to support answers.
---------------------------------------------------------------------------
\1342\ See CAT NMS Plan, supra note 3, at Appendix C, Section
D.12(e). Multifactor authentication is a mechanism that requires the
user to provide more than one factor (e.g., biometrics/personal
information in addition to a password) in order to be validated by
the system. Id.
\1343\ See CAT NMS Plan, supra note 3, at Appendix C, Section
D.12(e). Role Based Access Control (``RBAC'') is a mechanism for
authentication in which users are assigned to one or many roles, and
each role is assigned a defined set of permissions. Id.
\1344\ See CAT NMS Plan, supra note 3, at Appendix C, Section
D.12(e). Appendix D provides additional discussion of these PII
requirements. See id. at Appendix D, Section 4.1-4.2.
---------------------------------------------------------------------------
440. Data Ingestion Format. The Plan discusses the trade-offs
between requiring that the CAT Reporters report data to CAT in a
uniform defined format or in existing messaging protocols.\1345\ The
Plan does not require either method. A uniform defined format would
include the current process for reporting data to OATS. This is
Approach 2 in the CAT Reporters Study.\1346\ Several bidders proposed
to leverage the OATS format and enhance it to meet the requirements of
Rule 613. The Plan states that this could reduce the burden on certain
CAT Reporters (i.e., current OATS Reporters) and simplify the process
for those CAT Reporters to implement the CAT.\1347\ Accepting existing
messaging protocols would allow CAT Reporters to submit copies of their
order handling messages that are typically used across the order
lifecycle and within order management processes, such as FIX. This is
Approach 1 in the CAT Reporters' Survey.\1348\ The Plan states that
using existing messaging protocols could result in quicker
implementation times and simplify data aggregation.\1349\ The Plan
further notes that the surveys revealed no cost difference between the
two approaches,\1350\ but that FIF members prefer using the FIX
protocol.\1351\ Should the Plan specify a particular approach? Please
explain.
---------------------------------------------------------------------------
\1345\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(i)(A)(2); Section D.12(f). These are also called ``Approach
1'' and ``Approach 2'' in the Costs Section herein.
\1346\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(i)(A)(2).
\1347\ Id. at Appendix C, Section D.12(f).
\1348\ Id. at Appendix C, Section B.7(b)(i)(A)(2).
\1349\ Id. at Appendix C, Section D.12(f).
\1350\ Id.
\1351\ Id.
---------------------------------------------------------------------------
441. The Commission requests further information on the relative
costs and benefits and strengths and weaknesses of these two data
ingestion format approaches. Would either of these approaches produce
more accurate data? For example, would using existing messaging
protocols such as FIX be more accurate because CAT Reporters would send
their messages without the possibility of adding errors when
translating them to a different format? Alternatively, would using
existing messaging protocols such as FIX be less accurate because the
Central Repository would have to translate too many different and
possibly bespoke formats into a uniform format for the CAT data? Would
a hybrid approach produce the most accurate data? \1352\ How else would
the benefits of the CAT NMS Plan differ between these approaches?
---------------------------------------------------------------------------
\1352\ A hybrid approach would allow data to be submitted in
either a uniform defined format or using existing messaging
protocols.
---------------------------------------------------------------------------
442. The Commission requests comment on the implementation costs of
these two data ingestion format approaches. The Commission expects that
broker-dealers would need to modify existing messaging protocols to
implement CAT regardless of which approach the Plan requires for
reporting order events. What additional implementation costs would CAT
Reporters incur to report using existing messaging protocols? What
additional implementation costs would CAT Reporters, both OATS and non-
OATS reporters, incur to report using a uniform defined format such as
a modification of OATS format? In what ways would the implementation
costs incurred at the Central Repository differ for the two approaches?
What is the estimated cost of implementing each approach for CAT
Reporters, Participants, and the Central Repository?
443. The Commission requests comment on the ongoing costs of these
two data ingestion format approaches. How would ongoing costs be
different for the two approaches? Would CAT Reporters need to process
the order messages before reporting using existing messaging protocols
to comply with requirements such as using the listing exchange
symbology? If so, how costly is that processing? How costly is the
processing required to translate order messages into a uniform defined
format such as OATS format? What other ongoing costs associated with
these approaches would CAT Reporters incur and how would they differ
for the two approaches? How do the ongoing costs incurred by the
Central Repository differ for the two approaches? Would the translation
process from existing messaging protocols into a uniform format be more
costly for the Central
[[Page 30781]]
Repository relative to putting reports submitted in a uniform defined
format in a single dataset? Would the validation process associated
with existing messaging protocols be more costly for the Central
Repository than uniform defined format because of the complexity of
validating data from many different and possibly bespoke messaging
protocols? What are the estimated ongoing costs of each approach for
CAT Reporters, Participants, and the Central Repository?
444. Process to Develop the CAT. Bidders proposed, and the Plan
describes, several processes for development of the CAT: The agile or
iterative development model, the waterfall model, and hybrid
models.\1353\ The CAT NMS Plan does not mandate a particular
development process because any of the options could be utilized to
manage the development of CAT.\1354\ The CAT NMS Plan notes that the
agile model is more flexible and more susceptible to the early delivery
of software for testing and feedback, but that the agile model makes it
more difficult to accurately estimate the effort and time required for
development. The waterfall model would also facilitate longer-term
planning and coordination among multiple vendors or project
streams.\1355\ The Commission requests comment on the strengths and
weaknesses of each development process. The Commission further requests
comment on whether the CAT NMS Plan should mandate a particular process
and the impact on the relative costs and benefits of the mandating a
particular process.
---------------------------------------------------------------------------
\1353\ See CAT NMS Plan, supra note 3, at Appendix C, Section
D.12(g). An agile methodology is an iterative model in which
development is staggered and provides for continuous evolution of
requirements and solutions. A waterfall model is a sequential
process of software development with dedicated phases for
Conception, Initiation, Analysis, Design, Construction, Testing,
Production/Implementation and Maintenance. Id.
\1354\ Id.
\1355\ Id.
---------------------------------------------------------------------------
445. Industry Testing. The CAT NMS Plan requires a dedicated test
environment that is functionally equivalent to the production
environment and available 24 hours a day, six days a week.\1356\ The
CAT NMS Plan discusses alternative approaches for industry
testing.\1357\ Using the production environment for scheduled testing
events on weekends or on specific dates would allow for realistic
testing because multiple users are likely to test at the same time.
However, CAT Reporters would not be able to test when it might be more
convenient or less costly for them to test. The Commission requests
comment on whether the Plan should mandate particular industry testing
processes and the benefits and costs of these alternatives compared to
the requirements of the CAT NMS Plan. How would either of these
alternatives lead to more accurate data than the Plan? Would the
alternatives otherwise affect the benefits of the CAT NMS Plan? How
would either of these alternatives affect the costs of the CAT NMS Plan
for CAT Reporters, Participants, and the Central Repository? Please
provide estimates, if available.
---------------------------------------------------------------------------
\1356\ See CAT NMS Plan, supra note 3, at Appendix D, Section
1.2.
\1357\ See id, at Appendix C, Section D.12(h).
---------------------------------------------------------------------------
446. Quality Assurance (QA). The CAT NMS Plan mentions several
alternative approaches to quality assurance, but does not select a
particular approach.\1358\ In particular, the CAT NMS Plan states that
the Participants considered many approaches, including continuous
integration, test automation, and industry standards such as ISO 20000/
ITIL. Although the Plan does not mandate a particular approach, certain
requirements were detailed in the RFP.\1359\ In addition, the CAT NMS
Plan discusses the trade-offs associated with the QA staffing
level.\1360\ The Commission requests comment on whether the CAT NMS
Plan should mandate a particular QA approach. Why or why not? If so,
which approach should the Plan mandate? How can the QA approach affect
the costs and benefits of the CAT NMS Plan? For example, how does the
QA approach affect the accuracy and accessibility of the CAT Data? What
are the relative strengths and weaknesses of the different quality
assurance approaches?
---------------------------------------------------------------------------
\1358\ See id., at Appendix C, Section D.12(i).
\1359\ See RFP, supra note 29, at 31. Specifically, the RFP
requires that Bidders' responses include both the functional and
non-functional testing that includes the following: System testing,
integration testing, regression testing, software performance
testing, system performance testing, application programming
interface (API) testing, user acceptance testing, industry testing,
interoperability, security, load and performance testing, and CAT
Reporter testing.
\1360\ See CAT NMS Plan, supra note 3, at Appendix C, Section
D.12(i). Bidder QA staffing levels range from 2 to 90. Id.
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447. User Support and Help Desk. The CAT NMS Plan discusses several
alternatives related to how the Plan Processor provides a CAT Help Desk
that would be available 24 hours a day, 7 days a week and be able to
manage 2,500 calls per month.\1361\ Specifically, alternatives relate
to the number of user support staff members, the degree to which the
support team is dedicated to CAT, and whether the help desk is located
in the US or offshore. The CAT NMS Plan discusses the benefit and cost
trade-offs,\1362\ but does not mandate any of the particular
alternatives. Instead, the CAT NMS Plan commits to considering each
bidder's user support proposals in the context of the overall bid. The
Commission requests comment on whether the CAT NMS Plan should specify
the standards for user support. How would the various alternatives
affect the benefits of CAT? How would the various alternatives affect
the implementation costs of CAT? How would the various alternatives
affect the ongoing costs of CAT for CAT Reporters, Participants, and
the Central Repository? Please explain and provide estimates, if
available.
---------------------------------------------------------------------------
\1361\ See CAT NMS Plan, supra note 3, at Appendix C, Section
D.12(j). The RFP specified these standards. Id.
\1362\ See id. The Plan states that a larger support staff could
be more effective, but would be more costly. Further, a dedicated
CAT support team would have a deeper knowledge of CAT but would be
more costly. Finally, a U.S.-based help desk could facilitate
greater security and higher quality service, but would be more
costly. Id.
---------------------------------------------------------------------------
448. CAT User Management. The CAT NMS Plan discusses several
alternatives to manage users, but does not require a specific approach
or standards.\1363\ Specifically, the CAT NMS Plan discusses help desk
creation of accounts, user creation (by broker-dealers or regulators),
and multi-role solutions. Generally, there are trade-offs in terms of
convenience and security in the approaches.\1364\ The Commission
requests comments on whether the CAT NMS Plan should specify an
approach for user management. How would the various alternatives affect
the benefits of CAT, such as accessibility? How would the various
alternatives affect the implementation costs of CAT? How would the
various alternatives affect the ongoing costs of CAT for CAT Reporters,
Participants, and the Central Repository? How would the various
alternatives affect the risk of a security breach or misuse of the CAT
Data? Please explain and provide estimates, if available.
---------------------------------------------------------------------------
\1363\ See CAT NMS Plan, supra note 3, at Appendix C, Section
D.12(k). User management is a business function that grants,
controls, and maintains user access to a system. Id. at n.253.
\1364\ See id. for more specific information on the relative
strengths and weaknesses of each approach.
---------------------------------------------------------------------------
449. Required Reportable Events. The CAT NMS Plan states that the
Participants considered requiring the reporting of multiple additional
order event types, such as the ``results order event'' and the ``CAT
feedback order
[[Page 30782]]
event.'' \1365\ According to the CAT NMS Plan, a ``results order
event'' type would not provide additional value over a ``daisy chain''
linkage method and a ``CAT feedback order event'' can be generated by
the Plan Processor, making reporting by others unnecessary.\1366\ The
Commission requests comments on these additional order event types and
any other order event types that the Plan might require. Should the CAT
NMS Plan require additional order event types? What are these order
event types and what distinguishes them from the required order event
types? What would be the purpose of these order event types? Would they
make the CAT Data more complete or more accurate? How would regulators
use these event types? How much would these additional order event
types cost to report, to validate, and/or to store? Are there any other
costs associated with these additional order event types? Please
provide estimates, if available.
---------------------------------------------------------------------------
\1365\ See CAT NMS Plan, supra note 3, at Appendix C, Section
D.12(l).
\1366\ Id.
---------------------------------------------------------------------------
450. Data Feed Connectivity. The Plan discusses requiring the
collection of SIP data in real-time as opposed to through an end-of-day
batch process.\1367\ According to the Plan, real-time data would
provide for more rapid access to SIP Data, but may require additional
processing support to deal with out-of- sequence or missing
records.\1368\ Because CAT Reporters are only required to report order
information on a next-day basis, the Plan does not require the Plan
Processor to have real-time SIP connectivity. The Commission requests
comments on whether the Plan should require a particular SIP
connectivity. The Commission requests comment on the costs and benefits
of requiring real-time SIP connectivity, or conversely, the costs and
benefits of requiring end-of-day batch SIP connectivity (and not allow
real-time). What would the Plan Processor do with real-time SIP data?
Would the real-time SIP data be available to regulators, and if so,
what would regulators do with that data? Do all regulators currently
receive real-time SIP data? How much would the various SIP connectivity
alternatives cost? How much processing would each alternative require
to be of use to the Plan Processor or regulators?
---------------------------------------------------------------------------
\1367\ See CAT NMS Plan, supra note 3, at Appendix C, Section
D.12(n).
\1368\ See id.
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I. Request for Comment on the Economic Analysis
The Commission has identified above the economic effects associated
with the proposed CAT NMS Plan and requests comment on all aspects of
its preliminary economic analysis. The Commission encourages Commenters
to identify, discuss, analyze, and supply relevant data, information,
or statistics regarding any such economic effects. Commenters should,
when possible, provide the Commission with data to support their views.
Commenters suggesting alternative approaches should provide
comprehensive proposals, including any conditions or limitations that
they believe should apply, the reasons for the suggested approaches,
their analysis of the cost-benefit trade-offs of suggested approaches
compared to the Plan, and their analysis regarding why their suggested
approaches would satisfy the objectives of Rule 613. In particular, the
Commission seeks comment on the following:
451. Do Commenters agree with the Commission's analysis of the
potential economic effects of the Plan? Why or why not?
452. Has the Commission considered all relevant economic effects?
If not, what other economic effects should the Commission consider?
453. Do Commenters have information that could help the Commission
fill in gaps in the economic analysis related to a lack of information
on details in the plan that could significantly affect the economic
analysis? If so, please provide this information and explain how it
could affect the economic analysis.
454. Do Commenters have data that could help the Commission fill in
gaps in the economic analysis related to a lack of available data? If
so, please provide this information and explain how it could affect the
economic analysis.
455. Do Commenters believe that there are additional categories of
benefits or costs that could be quantified or otherwise monetized? If
so, please identify these categories and, if possible, provide specific
estimates or data.
456. Do Commenters believe that the CAT NMS Plan would change the
behavior of any market participant in such a way as to create
unintended effects? For example, would requirements to report certain
data elements or events change the activities of market participants in
ways other than deterrence but that create second-order economic
effects? If so, please explain. Would such effects be economic benefits
or economic costs? Please explain.
V. Paperwork Reduction Act
Certain provisions of Rule 613 contain ``collection of information
requirements'' within the meaning of the Paperwork Reduction Act of
1995 (``PRA'') \1369\ and the Commission has submitted them to the
Office of Management and Budget (``OMB'') for review in accordance with
44 U.S.C. 3507 and 5 CFR 1320.11. An agency may not conduct or sponsor,
and a person is not required to respond to, a collection of information
unless it displays a currently valid OMB control number. The title of
the collection of information is ``Creation of a Consolidated Audit
Trail Pursuant to Section 11A of the Securities Exchange Act of 1934
and Rules Thereunder.''
---------------------------------------------------------------------------
\1369\ 44 U.S.C. 3501 et. seq.
---------------------------------------------------------------------------
As noted above, Rule 613 of Regulation NMS (17 CFR part 242)
requires the Participants to jointly submit to the Commission the CAT
NMS Plan to govern the creation, implementation, and maintenance of the
consolidated audit trail and Central Repository for the collection of
information for NMS securities. The CAT NMS Plan must require each
Participant and its respective members to provide certain data to the
Central Repository in compliance with Rule 613. When it adopted Rule
613, the Commission discussed the burden hours associated with the
development and submission of the CAT NMS Plan.\1370\ In doing so, the
Commission noted that the
[[Page 30783]]
development and submission of the CAT NMS Plan that would govern the
creation, implementation and maintenance of a consolidated audit trail
is a multi-step process and accordingly that the Commission was
deferring its discussion of the burden hours associated with the other
paperwork requirements required by Rule 613 and ongoing burdens since
they would only be incurred if the Commission approves the CAT NMS
Plan.\1371\
---------------------------------------------------------------------------
\1370\ See Adopting Release, supra note 9, at 45804. On
September 25, 2015, the Commission submitted to OMB a request for
approval of an extension of the collection of information related to
the development and submission of the CAT NMS Plan. The Commission
stated that, although that collection of information pertained to
the development and submission of an NMS plan, and that such NMS
plan had already been developed and submitted, the Commission
believed it was prudent to extend the collection of information
during the pendency of the Commission's review of the NMS plan. The
Commission provided estimates for 19 SROs, stating that they would
spend a total of 2,760 burden hours of internal legal, compliance,
information technology, and business operations time to comply with
the existing collection of information, calculated as follows: (880
programmer analyst hours) + (880 business analyst hours) + (700
attorney hours) + (300 compliance manager hours) = 2,760 burden
hours to prepare and file an NMS plan, or approximately 52,440
burden hours in the aggregate, calculated as follows: (2,760 burden
hours per SRO) x (19 SROs) = 52,440 burden hours. Amortized over
three years, the annualized burden hours would be 920 hours per SRO,
or a total of 17,480 for all 19 SROs. The Commission further
estimated that the aggregate one-time reporting burden for preparing
and filing an NMS plan would be approximately $20,000 in external
legal costs per SRO, calculated as follows: 50 legal hours x $400
per hour = $20,000, for an aggregate burden of $380,000, calculated
as follows: ($20,000 in external legal costs per SRO) x (19 SROs) =
$380,000. Amortized over three years, the annualized capital
external cost would be $6,667 per SRO, or a total of $126,667 for
the 19 SROs. See Submission for OMB Review; Comment Request for
Extension of Rule 613; SEC File No. 270-616, OMB Control No. 3235-
0671 (September 25, 2015), 80 FR 59209 (October 1, 2015).
\1371\ Id.
---------------------------------------------------------------------------
The Commission is now publishing its preliminary estimates of the
paperwork burdens of the CAT NMS Plan. These estimates are based on the
requirements of Rule 613 and take into account the Exemption Order
discussed above.\1372\ Information and estimates contained in the CAT
NMS Plan that was submitted by the Participants also informed these
estimates because they provide a useful, quantified point of reference
regarding potential burdens and costs. The Commission acknowledges that
the CAT NMS Plan as filed contains provisions in addition to those
required by Rule 613 (e.g., requiring the inclusion of OTC Equity
Securities; \1373\ the availability of historical data for not less
than six years in a manner that is directly available and searchable
without manual intervention from the Plan Processor; \1374\ a complete
symbology database to be maintained by the Plan Processor, including
the historical symbology; as well as issue symbol information and data
using the listing exchange symbology format \1375\).
---------------------------------------------------------------------------
\1372\ See Exemption Order, supra note 18.
\1373\ See CAT NMS Plan, supra note 3, at Section 1.1 (defining
``Eligible Security'' as all NMS securities and all OTC Equity
Securities); Appendix C, Section A.1(a).
\1374\ See id. at Section 6.5(b)(i).
\1375\ See CAT NMS Plan, supra note 3 at Appendix C, Section
A.1(a); Appendix D, Section 2.
---------------------------------------------------------------------------
A. Summary of Collection of Information Under Rule 613
Rule 613 requires that the CAT NMS Plan must provide for an
accurate, time-sequenced record of an order's life, from receipt or
origination, through the process of routing, modification, cancellation
and execution.\1376\ The Central Repository, created by the
Participants, would be required to receive, consolidate and retain the
data required under the Rule.\1377\ Such data must be accessible to
each Participant, as well as the Commission, for purposes of performing
regulatory and oversight responsibilities.\1378\
---------------------------------------------------------------------------
\1376\ See 17 CFR 242.613(c)(1).
\1377\ See 17 CFR 242.613(e)(1).
\1378\ See 17 CFR 242.613(e)(1), (e)(2).
---------------------------------------------------------------------------
Rule 613 provides that the CAT NMS Plan must require that all
Participants that are exchanges, and their members, record and report
to the Central Repository certain data for each NMS security registered
or listed on a national securities exchange, or admitted to unlisted
trading privileges on such exchange, and each Participant that is a
national securities association, and its members, record and report for
each NMS security for which transaction reports are required to be
submitted to the national securities association in a uniform
electronic format or in a manner that would allow the Central
Repository to convert the data to a uniform electronic format for
consolidation and storage. This data must be recorded contemporaneously
with the Reportable Event and reported to the Central Repository in no
event later than 8:00 a.m. Eastern Time on the trading day following
the day such information has been recorded by the national securities
exchange, national securities association, or member.\1379\
---------------------------------------------------------------------------
\1379\ See 17 CFR 242.613(c)(3).
---------------------------------------------------------------------------
Rule 613 also provides that the CAT NMS Plan must require each
member of a Participant to record and report to the Central Repository
other information which may not be available until later in the
clearing process no later than 8:00 a.m. Eastern Time on the trading
day following the day the member receives such information.\1380\ The
CAT NMS Plan also requires the Participants to provide to the
Commission, at least every two years after the effectiveness of the CAT
NMS Plan, a written assessment of the operation of the consolidated
audit trail.\1381\
---------------------------------------------------------------------------
\1380\ See 17 CFR 242.613(c)(4).
\1381\ See 17 CFR 242.613(b).
---------------------------------------------------------------------------
Rule 613 requires all Participants to make use of the consolidated
information, either by each developing and implementing new
surveillance systems, or by enhancing existing surveillance
systems.\1382\ The Rule also requires the CAT NMS Plan to require
Participants to submit to the Commission a document outlining the
manner in which non-NMS securities and primary market transactions in
NMS and non-NMS securities can be incorporated into the consolidated
audit trail.\1383\
---------------------------------------------------------------------------
\1382\ See 17 CFR 242.613(a)(3)(iv).
\1383\ See 17 CFR 242.613(i).
---------------------------------------------------------------------------
1. Central Repository
Rule 613 provides that the CAT NMS Plan must require the creation
and maintenance of a Central Repository that would be responsible for
the receipt, consolidation, and retention of all data submitted by the
Participants and their members.\1384\ The Rule also requires that the
CAT NMS Plan require the Central Repository to retain the information
reported pursuant to subparagraphs (c)(7) and (e)(7) of the Rule for a
period of not less than five years in a convenient and usable standard
electronic data format that is directly available and searchable
electronically without any manual intervention.\1385\ The Plan
Processor is responsible for operating the Central Repository in
compliance with the Rule and the CAT NMS Plan. In addition, the Rule
provides that the CAT NMS Plan must include: Policies and procedures to
ensure the security and confidentiality of all information submitted to
the Central Repository,\1386\ including safeguards to ensure the
confidentiality of data; \1387\ information barriers between regulatory
and non-regulatory staff with regard to access and use of data; \1388\
a mechanism to confirm the identity of all persons permitted to use the
data; \1389\ a comprehensive information security program for the
Central Repository that is subject to regular reviews by the CCO;\1390\
and penalties for non-compliance with policies and procedures of the
Participants or the Central Repository with respect to information
security.\1391\ Further, the Rule provides that the CAT NMS Plan must
include policies and procedures to be used by the Plan Processor to
ensure the timeliness, accuracy, integrity, and completeness of the
data submitted to the Central Repository,\1392\ as well as policies and
procedures to ensure the accuracy of the consolidation by the Plan
Processor of the data.\1393\
---------------------------------------------------------------------------
\1384\ See 17 CFR 242.613(e)(1).
\1385\ See 17 CFR 242.613(e)(8). The Commission notes that the
CAT NMS Plan proposes to require that the Central Repository retain
data reported in a convenient and usable standard electronic data
format that is directly available and searchable electronically
without any manual intervention for six years. See CAT NMS Plan,
supra note 3, at Section 6.5(b)(i).
\1386\ See 17 CFR 242.613(e)(4)(i).
\1387\ See 17 CFR 242.613(e)(4)(i)(A).
\1388\ See 17 CFR 242.613(e)(4)(i)(B).
\1389\ See 17 CFR 242.613(e)(4)(i)(C).
\1390\ Id.
\1391\ See 17 CFR 242.613(e)(4)(i)(D).
\1392\ See 17 CFR 242.613(e)(4)(ii).
\1393\ See 17 CFR 242.613(e)(4)(iii).
---------------------------------------------------------------------------
2. Data Collection and Reporting
Rule 613 provides that the CAT NMS Plan must require each
Participant, and any member of such Participant, to record and
electronically report to the
[[Page 30784]]
Central Repository details for each order and Reportable Event
documenting the life of an order through the process of original
receipt or origination, routing, modification, cancellation, and
execution (in whole or part) for each NMS security.\1394\ For national
securities exchanges, Rule 613 requires the CAT NMS Plan to require
each national securities exchange and its members to record and report
to the Central Repository the information required by Rule 613(c)(7)
for each NMS security registered or listed for trading on an exchange,
or admitted to unlisted trading privileges on such exchange.\1395\ Rule
613 provides that the CAT NMS Plan must require each Participant that
is a national securities association, and its members, to record and
report to the Central Repository the information required by Rule
613(c)(7) for each NMS security for which transaction reports are
required to be submitted to the Participant.\1396\ The Rule requires
each Participant and any member of a Participant to record the
information required by Rule 613(c)(7)(i) through (v) contemporaneously
with the Reportable Event, and to report this information to the
Central Repository by 8:00 a.m. Eastern Time on the trading day
following the day such information has been recorded by the Participant
or member of the Participant.\1397\ The Rule requires each Participant
and any member of a Participant to record and report the information
required by Rule 613(c)(7)(vi) through (viii) to the Central Repository
by 8:00 a.m. Eastern Time on the trading day following the day the
Participant or member receives such information.\1398\ The Rule
requires each Participant and any member of such Participant to report
information required by Rule 613(c)(7) in a uniform electronic format
or in a manner that would allow the Central Repository to convert the
data to a uniform electronic format for consolidation and
storage.\1399\
---------------------------------------------------------------------------
\1394\ See 17 CFR 242.613(c)(1), (c)(5), (c)(6), (c)(7).
\1395\ See 17 CFR 242.613(c)(1), (c)(5).
\1396\ See 17 CFR 242.613(c)(1), (c)(6).
\1397\ See 17 CFR 242.613(c)(3).
\1398\ See 17 CFR 242.613(c)(4).
\1399\ See 17 CFR 242.613(c)(2).
---------------------------------------------------------------------------
Such information must also be reported to the Central Repository
with a time stamp of a granularity that is at least to the millisecond
or less to the extent that the order handling and execution systems of
a Participant or a member utilize time stamps in finer
increments.\1400\ The Commission understands that any changes to
broker-dealer recording and reporting systems to comply with Rule 613
may also include changes to comply with the millisecond time stamp
requirement.
---------------------------------------------------------------------------
\1400\ See 17 CFR 242.613(d)(3).
---------------------------------------------------------------------------
3. Collection and Retention of NBBO, Last Sale Data and Transaction
Reports
Rule 613(e)(7) provides that the CAT NMS Plan must require the
Central Repository to collect and retain on a current and continuing
basis: (i) Information on the NBBO for each NMS Security; (ii)
transaction reports reported pursuant to a transaction reporting plan
filed with the Commission pursuant to, and meeting the requirements of,
Rule 601 of Regulation NMS; and (iii) Last Sale Reports reported
pursuant to the OPRA Plan.\1401\ The Central Repository must retain
this information for no less than five years.\1402\
---------------------------------------------------------------------------
\1401\ See 17 CFR 242.613(e)(7); 17 CFR 242.601.
\1402\ See 17 CFR 242.613(e)(8).
---------------------------------------------------------------------------
4. Surveillance
Rule 613(f) provides that the CAT NMS Plan must require that every
Participant develop and implement a surveillance system, or enhance
existing surveillance systems, reasonably designed to make use of the
consolidated information contained in the consolidated audit trail.
Rule 613(a)(3)(iv) provides that the CAT NMS Plan must require that the
surveillance systems be implemented within fourteen months after
effectiveness of the CAT NMS Plan.
5. Participant Rule Filings
Rule 613(g)(1) requires each Participant to file with the
Commission, pursuant to Section 19(b)(2) of the Exchange Act and Rule
19b-4 thereunder,\1403\ a proposed rule change to require its members
to comply with the requirements of Rule 613 and the CAT NMS Plan
approved by the Commission.\1404\ The burden of filing such a proposed
rule change is already included under the collection of information
requirements contained in Rule 19b-4 under the Exchange Act.\1405\
---------------------------------------------------------------------------
\1403\ 15 U.S.C. 78s(b)(2) and 17 CFR 240.19b-4.
\1404\ See 17 CFR 242.613(g)(1).
\1405\ See Securities Exchange Act Release No. 50486 (October 5,
2004), 69 FR 60287, 60293 (October 8, 2004) (File No. S7-18-04)
(describing the collection of information requirements contained in
Rule 19b-4 under the Exchange Act). The Commission has submitted
revisions to the current collection of information titled ``Rule
19b-4 Filings with Respect to Proposed Rule Changes by Self-
Regulatory Organizations'' (OMB Control No. 3235-0045). According to
the last submitted revision, for Fiscal Year 2012 SROs submitted
1,688 Rule 19b-4 proposed rule changes.
---------------------------------------------------------------------------
6. Written Assessment of Operation of the Consolidated Audit Trail
Rule 613(b)(6) provides that the CAT NMS Plan must require the
Participants to provide the Commission a written assessment of the
consolidated audit trail's operation at least every two years, once the
CAT NMS Plan is effective.\1406\ Such written assessment shall include,
at a minimum, with respect to the CAT: (i) An evaluation of its
performance; (ii) a detailed plan for any potential improvements to its
performance; (iii) an estimate of the costs associated with any such
potential improvements; and (iv) an estimated implementation timeline
for any such potential improvements, if applicable.\1407\
---------------------------------------------------------------------------
\1406\ See 17 CFR 242.613(b)(6).
\1407\ See id.
---------------------------------------------------------------------------
7. Document on Expansion to Other Securities
Rule 613(i) provides that the CAT NMS Plan must require the
Participants to jointly provide to the Commission, within six months
after the CAT NMS Plan is effective, a document outlining how the
Participants could incorporate into the CAT information regarding: (1)
Equity securities that are not NMS securities; \1408\ (2) debt
securities; and market transactions in equity securities that are not
NMS securities and debt securities.\1409\
---------------------------------------------------------------------------
\1408\ As noted above, the CAT NMS Plan would require the
inclusion of OTC Equity Securities, while Rule 613 does not include
such a requirement. See supra note 1373.
\1409\ See 17 CFR 242.613(i).
---------------------------------------------------------------------------
B. Proposed Use of Information
1. Central Repository
Rule 613 states that the Central Repository is required to receive,
consolidate and retain the data required to be submitted by the
Participants and their members.\1410\ Participant and Commission Staff
would have access to the data for regulatory purposes.\1411\
---------------------------------------------------------------------------
\1410\ See 17 CFR 242.613(e)(1).
\1411\ See 17 CFR 242.613(e)(2).
---------------------------------------------------------------------------
2. Data Collection and Reporting
The Commission believes that the data collected and reported
pursuant to the requirements of Rule 613 would be used by regulators to
monitor and surveil the securities markets and detect and investigate
activity, whether on one market or across markets.\1412\ The data
collected and reported pursuant to Rule 613 would also be used by
regulators for the evaluation of tips and complaints and for complex
enforcement inquiries or investigations, as well as inspections and
examinations. Further, the Commission believes that regulators would
use the data collected and reported to conduct timely and accurate
analysis of market activity for reconstruction of broad-based market
[[Page 30785]]
events in support of regulatory decisions.
---------------------------------------------------------------------------
\1412\ See Section IV.E.2, supra.
---------------------------------------------------------------------------
3. Collection and Retention of NBBO, Last Sale Data and Transaction
Reports
The CAT NMS Plan must require the Central Repository to collect and
retain NBBO information, transaction reports, and Last Sale Reports in
a format compatible with the order and event information collected
pursuant to Rule 613(c)(7).\1413\ Participant and Commission Staff
could use this data to easily search across order, NBBO, and
transaction databases. The Commission believes that having the NBBO
information in a uniform electronic format compatible with order and
event information would assist Participants in enforcing compliance
with federal securities laws, rules, and regulations, as well as their
own rules.\1414\ The Commission also believes that a CAT NMS Plan
requiring the Central Repository to collect and retain the transaction
reports and Last Sale Reports in a format compatible with the order
execution information would aid regulators in monitoring for certain
market manipulations.\1415\
---------------------------------------------------------------------------
\1413\ See 17 CFR 242.613(e)(7).
\1414\ The Commission and Participants use the NBBO to, among
other things, evaluate members for compliance with numerous
regulatory requirements, such as the duty of best execution or Rule
611 of Regulation NMS. See 17 CFR 242.611; see also, e.g., ISE Rule
1901 and Phlx Rule 1084.
\1415\ Rules 613(e)(7)(ii) and (iii) require that transaction
reports reported pursuant to an effective transaction reporting plan
and Last Sale Reports reported pursuant to the OPRA Plan be reported
to the Central Repository. This requirement should allow regulators
to evaluate certain trading activity. For example, trading patterns
of reported and unreported trades may cause Participant or
Commission staff to make further inquiries into the nature of the
trading to ensure that the public was receiving accurate and timely
information regarding executions and that market participants were
continuing to comply with trade reporting obligations under
Participant rules. Similarly, patterns in the transactions that are
reported and unreported to the consolidated tape could be indicia of
market abuse, including failure to obtain best execution for
customer orders or possible market manipulation. The Commission and
the Participants would be able to review information on trades not
reported to the tape to determine whether they should have been
reported, whether Section 31 fees should have been paid, and/or
whether the trades are part of a manipulative scheme.
---------------------------------------------------------------------------
4. Surveillance
The requirement in Rule 613(f) that the Participants develop and
implement a surveillance system, or enhance existing surveillance
systems, reasonably designed to make use of the consolidated
information in the consolidated audit trail,\1416\ is intended to
position regulators to make full use of the consolidated audit trail
data in order to carry out their regulatory obligations. In addition,
because trading and potentially manipulative activities could take
place across multiple markets, and the consolidated audit trail data
would trace the entire lifecycle of an order from origination to
execution or cancellation, new or enhanced surveillance systems may
also enable regulators to investigate potentially illegal activity that
spans multiple markets more efficiently.
---------------------------------------------------------------------------
\1416\ 17 CFR 242.613(f).
---------------------------------------------------------------------------
5. Written Assessment of Operation of the Consolidated Audit Trail
Rule 613(b)(6) requires the CAT NMS Plan to require the
Participants to provide the Commission a written assessment of the
CAT's operation at least every two years, once the CAT NMS Plan is
effective.\1417\ These assessments would aid Participant and Commission
Staff in understanding and evaluating any deficiencies in the operation
of the consolidated audit trail and to propose potential improvements
to the CAT NMS Plan. The Commission believes the written assessments
would allow Participants and Commission Staff to periodically assess
whether such potential improvements would enhance market oversight.
Moreover, the Commission believes these assessments would help inform
the Commission regarding the likely feasibility, costs, and impact of,
and the Participants' approach to, the consolidated audit trail
evolving over time.
---------------------------------------------------------------------------
\1417\ 17 CFR 242.613(b)(6).
---------------------------------------------------------------------------
6. Document on Expansion to Other Securities
Rule 613(i) requires the CAT NMS Plan to require the Participants
to jointly provide to the Commission, within six months after the CAT
NMS Plan is effective, a document outlining how the SROs could
incorporate into the CAT information regarding certain products that
are not NMS securities.\1418\ A document outlining a possible expansion
of the consolidated audit trail could help inform the Commission about
the SROs' strategy for potentially accomplishing such an expansion over
a reasonable period of time. Moreover, such document would aid the
Commission in assessing the feasibility and impact of possible future
proposals by the SROs to include such additional securities and
transactions in the consolidated audit trail.
---------------------------------------------------------------------------
\1418\ See 17 CFR 242.613(i). See also supra note 1408.
---------------------------------------------------------------------------
C. Respondents
1. National Securities Exchanges and National Securities Associations
Rule 613 applies to the 20 Participants (the 19 national securities
exchanges and the one national securities association (FINRA))
currently registered with the Commission.\1419\
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\1419\ The Participants are: BATS Exchange, Inc., BATS-Y
Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange,
Incorporated, Chicago Board Options Exchange, Incorporated, Chicago
Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc.,
Financial Industry Regulatory Authority, Inc., International
Securities Exchange, LLC, ISE Gemini, LLC, ISE Mercury, LLC, Miami
International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ
OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange,
Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc.
The Commission understands that ISE Mercury, LLC will become a
Participant in the CAT NMS Plan and thus is accounted for as a
Participant for purposes of this Section. See supra note 3.
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2. Members of National Securities Exchanges and National Securities
Association
Rule 613 also applies to the Participants' members, that is,
broker-dealers. The Commission believes that Rule 613 applies to 1,800
broker-dealers. The Commission understands that there are currently
4,138 broker-dealers; however, not all broker-dealers are expected to
have CAT reporting obligations. The Participants report that
approximately 1,800 broker-dealers currently quote or execute
transactions in NMS Securities, Listed Options or OTC Equity Securities
and would likely have CAT reporting obligations.\1420\
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\1420\ The Commission understands that the remaining 2,338
registered broker-dealers either trade in asset classes not
currently included in the definition of Eligible Security or do not
trade at all (e.g., broker-dealers for the purposes of underwriting,
advising, private placements). See supra note 864.
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D. Total Initial and Annual Reporting and Recordkeeping Burden
1. Burden on National Securities Exchanges and National Securities
Associations
a. Central Repository
Rule 613 requires the Participants to jointly establish a Central
Repository tasked with the receipt, consolidation, and retention of the
reported order and execution information. The Participants issued an
RFP soliciting Bids from entities to act as the consolidated audit
trail's Plan Processor.\1421\ Bidders were asked to provide total one-
year and annual recurring cost estimates to estimate the costs to the
Participants for implementing and maintaining the
[[Page 30786]]
Central Repository.\1422\ There are currently three remaining Bidders,
any of which could be selected to be the Plan Processor. The Plan
Processor would be responsible for building, operating, administering
and maintaining the Central Repository.
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\1421\ See Section III.A.1, supra.
\1422\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(i)(B). The CAT NMS Plan listed the following as primary
drivers of Bid costs: (1) Reportable volumes of data ingested into
the Central Repository; (2) number of technical environments that
would be have to be built to report to the Central Repository; (3)
likely future rate of increase of reportable volumes; (4) data
archival requirements; and (5) user support and/or help desk
resource requirements. See id. at Section B.7(b)(i)(B).
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The Plan's Operating Committee, which consists of one voting
representative of each Participant,\1423\ would be responsible for the
management of the LLC, including the Central Repository, acting by
Majority or Supermajority Vote, depending on the issue.\1424\ In
managing the Central Repository, among other things, the Operating
Committee would have the responsibility to authorize the following
actions of the LLC: (1) Interpreting the Plan; \1425\ (2) determining
appropriate funding-related policies, procedures and practices
consistent with Article XI of the CAT NMS Plan; \1426\ (3) terminating
the Plan Processor; (4) selecting a successor Plan Processor (including
establishing a Plan Processor Selection Subcommittee to evaluate and
review Bids and make a recommendation to the Operating Committee with
respect to the selection of the successor Plan Processor); \1427\ (5)
entering into, modifying or terminating any Material Contract; \1428\
(6) making any Material Systems Change; \1429\ (7) approving the
initial Technical Specifications or any Material Amendment to the
Technical Specifications proposed by the Plan Processor; \1430\ (8)
amending the Technical Specifications on its own motion; \1431\ (9)
approving the Plan Processor's appointment or removal of the CCO, CISO,
or any Independent Auditor in accordance with Section 6.1(b) of the CAT
NMS Plan; \1432\ (10) approving any recommendation by the CCO pursuant
to Section 6.2(a)(v)(A); \1433\ (11) selecting the members of the
Advisory Committee; \1434\ (12) selecting the Operating Committee
chair; \1435\ and (13) determining to hold an Executive Session of the
Operating Committee.\1436\
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\1423\ See id. at Section 4.2(a).
\1424\ See Section IV.E.3.d(1), supra.
\1425\ See CAT NMS Plan, supra note 3, at Section 4.3(a)(iii).
\1426\ See id. at Section 4.3(a)(vi).
\1427\ See id. at Section 4.3(b)(i).
\1428\ See id. at Section 4.3(b)(iv).
\1429\ See id. at Section 4.3(b)(v).
\1430\ See id. at Section 4.3(b)(vi).
\1431\ See id. at Section 4.3(b)(vii).
\1432\ See id. at Section 4.3(b)(iii).
\1433\ See id. at Section 4.3(a)(iv).
\1434\ See id. at Section 4.3(a)(ii).
\1435\ See id. at Section 4.3(a)(i).
\1436\ See id. at Section 4.3(a)(v).
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Additionally, in managing the Central Repository, the Operating
Committee would have the responsibility and authority, as appropriate,
to: (1) Direct the LLC to enter into one or more agreements with the
Plan Processor obligating the Plan Processor to perform the functions
and duties contemplated by the Plan to be performed by the Plan
Processor, as well as such other functions and duties the Operating
Committee deems necessary or appropriate; \1437\ (2) appoint as an
Officer of the Company the individual who has direct management
responsibility for the Plan Processor's performance of its obligations
with respect to the CAT; \1438\ (3) approve policies, procedures, and
control structures related to the CAT System that are consistent with
Rule 613(e)(4), Appendix C and Appendix D of the CAT NMS Plan that have
been developed and will be implemented by the Plan Processor; \1439\
(4) approve any policy, procedure or standard (and any material
modification or amendment thereto) applicable primarily to the
performance of the Plan Processor's duties as the Plan Processor;
\1440\ (5) for both the CCO and CISO, render their annual performance
reviews and review and approve their compensation; \1441\ (6) review
the Plan Processor's performance under the Plan at least once each
year, or more often than once each year upon the request of two
Participants that are not Affiliated Participants; \1442\ (7) in
conjunction with the Plan Processor, approve and regularly review (and
update as necessary) SLAs governing the performance of the Central
Repository; \1443\ (8) maintain a Compliance Subcommittee for the
purpose of aiding the CCO as necessary; \1444\ and (9) designate by
resolution one or more Subcommittees it deems necessary or desirable in
furtherance of the management of the business and affairs of the
Company.\1445\
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\1437\ See id. at Section 6.1(a).
\1438\ See id. at Section 4.6(b).
\1439\ See id. at Section 6.1(c).
\1440\ See id. at Section 6.1(e).
\1441\ See id. at Section 6.2(a)(iv) and Section 6.2(b)(iv).
\1442\ See id. at Section 6.1(n).
\1443\ See id. at Section 6.1(h).
\1444\ See id. at Section 4.12(b).
\1445\ See id. at Section 4.12(a).
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The CAT NMS Plan also proposes to establish a Selection Committee
comprised of one Voting Senior Officer from each Participant,\1446\
which is tasked with the review and evaluation of Bids and the
selection of the initial Plan Processor.\1447\ The Selection Committee
would determine, by Majority Vote, whether Shortlisted Bidders will
have the opportunity to revise their Bids.\1448\ The Selection
Committee would review and evaluate all Shortlisted Bids, including any
permitted revisions submitted by Shortlisted Bidders, and in doing so,
may consult with the Advisory Committee (or the DAG until the Advisory
Committee is formed) and such other Persons as the Selection Committee
deems appropriate.\1449\ After receipt of any permitted revisions, the
Selection Committee would select the Initial Plan Processor from the
Shortlisted Bids in two rounds of voting where each Participant has one
vote via its Voting Senior Officer in each round.\1450\ Following the
selection of the Initial Plan Processor, the Participants would file
with the Commission a statement identifying the Initial Plan Processor
and including the information required by Rule 608.\1451\
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\1446\ See id. at Section 5.1(a).
\1447\ See id. at Section 5.1.
\1448\ See id. at Section 5.1(d)(i).
\1449\ See id. at Section 5.1(d)(ii).
\1450\ See id. at Section 5.1(e).
\1451\ See id. at Section 6.7(a)(i).
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For its initial and ongoing internal burden and cost estimates
associated with the management of the Central Repository, the
Commission is relying on estimates provided in the CAT NMS Plan for the
development of the CAT NMS Plan, which the Participants ``have accrued,
and will continue to accrue,'' \1452\ and have described in the CAT NMS
Plan as ``reasonably associated with creating, implementing, and
maintaining the CAT upon the Commission's adoption of the CAT NMS
Plan.'' \1453\
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\1452\ See id. at Appendix C, Section B.7(b)(iii).
\1453\ See id.
---------------------------------------------------------------------------
The Commission believes that the activities of the Operating
Committee and the Selection Committee overlap with those undertaken by
the Participants to develop the CAT NMS Plan. The CAT NMS Plan
describes the costs incurred by the Participants to develop the CAT NMS
Plan as including ``staff time contributed by each Participant to,
among other things, determine the technological requirements for the
Central Repository, develop the RFP, evaluate Bids received, design and
collect the data necessary to evaluate costs and other economic
impacts, meet with Industry
[[Page 30787]]
Members to solicit feedback, and complete the CAT NMS Plan submitted to
the Commission for consideration.'' \1454\ For the building and
management of the Central Repository, the Selection Committee and the
Operating Committee would have comparable responsibilities. The
Selection Committee would be required to review and evaluate all
Shortlisted Bids, including any permitted revisions submitted by
Shortlisted Bidders, and then to select the initial Plan Processor from
those Bids. As part of its overall management of the Central
Repository, the Operating Committee would have responsibility for
decisions associated with the technical requirements of the Central
Repository.\1455\ Furthermore, the Operating Committee would be
required to establish a Selection Subcommittee to evaluate Bids
received to select a successor Plan Processor,\1456\ and would also be
required to authorize the selection of the members of the Advisory
Committee,\1457\ comprising members of the Industry, to advise the
Participants on the implementation, operation, and administration of
the Central Repository.\1458\ Because the responsibilities of the
Operating Committee and the Selection Committee are similar to those
described in the CAT NMS Plan for the development of the CAT NMS Plan
itself, the Commission believes that it is reasonable to use the CAT
NMS Plan estimates as the basis for its burden and cost estimates for
the initial and ongoing management of the Central Repository.
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\1454\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(iii).
\1455\ For example, the Operating Committee would be required to
authorize the following actions of the LLC: Entering into, modifying
or terminating any Material Contract (see id. at Section
4.3(b)(iv)); making any Material Systems Change (see id. at Section
4.3(b)(v)); amending the Technical Specifications on its own motion
(see id. at Section 4.3(b)(vii)); and approving the initial
Technical Specifications or any Material Amendment to the Technical
Specifications proposed by the Plan Processor (see id. at Section
4.3(b)(vi)). Further, the Operating Committee would be able to
approve policies, procedures, and control structures related to the
CAT System that are consistent with Rule 613(e)(4), Appendix C and
Appendix D of the CAT NMS Plan that have been developed and will be
implemented by the Plan Processor (see id. at Section 6.1(c)); and
in conjunction with the Plan Processor, approve and regularly review
(and update as necessary) SLAs governing the performance of the
Central Repository (see id. at Section 6.1(h)).
\1456\ See id. at Section 4.3(b)(i).
\1457\ See id. at Section 4.3(a)(ii).
\1458\ See id. at Section 4.13(d).
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(1) Initial Burden and Costs To Build the Central Repository
As proposed, each Participant would contribute an employee and a
substitute for the employee to serve on the Operating Committee that
would oversee the Central Repository.\1459\ Additionally, each
Participant would select a Voting Senior Officer to represent the
Participant as a member of the Selection Committee responsible for the
selection of the Plan Processor of the Central Repository.\1460\
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\1459\ In the case of Affiliated Participants, one individual
may be the primary representative for all or some of the Affiliated
Participants, and another individual may be the substitute for all
or some of the Affiliated Participants. See id. at Section 4.2(a).
\1460\ In the case of Affiliated Participants, one individual
may be (but is not required to be) the Voting Senior Officer for
more than one or all of the Affiliated Participants. Where one
individual serves as the Voting Senior Officer for more than one
Affiliated Participant, such individual will have the right to vote
on behalf of each such Affiliated Participant. See id. at Section
5.1(a).
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The Commission preliminarily estimates that, over the 12-month
period after the effectiveness of the CAT NMS Plan within which the
Participants would be required to select an initial Plan Processor
\1461\ and begin reporting to the Central Repository,\1462\ each
Participant would incur an initial internal burden of 720 burden hours
associated with the management of the creation of the Central
Repository and the selection of the Plan Processor (including filing
with the Commission the statement identifying the Initial Plan
Processor and including the information required by Rule 608), for an
aggregate initial estimate of 14,407 burden hours.\1463\
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\1461\ Rule 613(a)(3)(i) requires the selection of the Plan
Processor within 2 months after effectiveness of the CAT NMS Plan.
See 17 CFR 242.613(a)(3)(i).
\1462\ Rule 613(a)(3)(iii) requires the Participants to provide
to the Central Repository the data required by Rule 613(c) within
one year after effectiveness of the CAT NMS Plan. See 17 CFR
242.613(a)(3)(iii).
\1463\ The Commission is basing this estimate on the internal
burden estimate provided in the CAT NMS Plan related to the
development of the CAT NMS Plan. See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii) (stating ``. . . the Participants
have accrued, and will continue to accrue, direct costs associated
with the development of the CAT NMS Plan. These costs include staff
time contributed by each Participant to, among other things,
determine the technological requirements for the Central Repository,
develop the RFP, evaluate Bids received, design and collect the data
necessary to evaluate costs and other economic impacts, meet with
Industry Members to solicit feedback, and complete the CAT NMS Plan
submitted to the Commission for consideration. The Participants
estimate that they have collectively contributed 20 FTEs in the
first 30 months of the CAT NMS Plan development process''). The
Commission believes the staff time incurred for the development of
the CAT NMS Plan would be comparable to the staff time incurred for
the activities required of the Operating Committee and the Selection
Committee for the creation and management of the Central Repository
once the Plan is effective). (20 FTEs/30 months) = 0.667 FTEs per
month for all of the Participants to develop the CAT NMS Plan.
Converting this into burden hours, (0.667 FTEs) x (12 months) x
(1,800 burden hours per year) =14,407 initial burden hours for all
of the Participants to develop the CAT NMS Plan. (14,407 burden
hours for all Participants/20 Participants) = 720 initial burden
hours for each Participant to develop the CAT NMS Plan.
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Additionally, the Commission preliminarily estimates that the
Participants will collectively spend $2,400,000 on external public
relations, legal and consulting costs associated with the building of
the Central Repository and the selection of the Plan Processor for the
Central Repository, or $120,000 per Participant.\1464\ The Commission
is basing this estimate on the estimate provided in the CAT NMS Plan
for public relations, legal and consulting costs incurred in
preparation of the CAT NMS Plan. Because the Participants described
such costs as ``reasonably associated with creating, implementing and
maintaining the CAT,'' \1465\ the Commission preliminarily believes
these external cost estimates should also be applied to the creation
and implementation of the Central Repository.
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\1464\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(iii) (stating ``the Participants have incurred public
relations, legal and consulting costs in preparation of the CAT NMS
Plan. The Participants estimate the costs of these services to be
$8,800,000''). $2,400,000 for all Participants over 12 months =
($8,800,000/44 months between the adoption of Rule 613 and the
filing of the CAT NMS Plan) x (12 months). ($2,400,000/20
Participants) = $120,000 per Participant over 12 months.
\1465\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(iii).
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The CAT NMS Plan provides the estimates given by the Shortlisted
Bidders \1466\ for the one-time total cost associated with the Plan
Processor that would build the Central Repository.\1467\
[[Page 30788]]
The CAT NMS Plan states that this includes internal technological,
operational, administrative and ``any other material costs.'' \1468\
Using the estimates in the CAT NMS Plan, which are based on the Bids of
the six Shortlisted Bidders, the Commission preliminarily estimates
that the initial one-time cost to develop the Central Repository would
be an aggregate initial external cost to the Participants of $91.6
million,\1469\ or $4.6 million per Participant.\1470\ Therefore, the
Commission preliminarily estimates that each Participant would incur
initial one-time external costs of $7 million \1471\ to build the
Central Repository, or an aggregate initial one-time external cost
across all Participants of $140 million.\1472\
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\1466\ The Selection Committee narrowed the list of Shortlisted
Bidders from six to three Shortlisted Bidders. See ``Participants,
SROs Reduce Short List Bids from Six to Three for Consolidated Audit
Trail'' (November 16, 2015), available at https://www.catnmsplan.com/pastevents/catnms_release_downselect_111615.pdf. However, the costs
provided by the SROs in the CAT NMS Plan are based on the Bids of
the six Shortlisted Bidders.
\1467\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(i)(B). See also id. at Appendix C, Section B.7(b)(iv)(A)(1).
The Commission notes that the cost associated with the build and
maintenance of the Central Repository includes compliance with the
requirement in Rule 613(e)(8) that the Central Repository retain
information collected pursuant to Rule 613(c)(7) and (e)(7) in a
convenient and usable standard electronic data format that is
directly available and searchable electronically without any manual
intervention for a period of not less than five years. See id. at
Section 6.1(d)(i) (requiring the Plan Processor to comply with the
recordkeeping requirements of Rule 613(e)(8)). See also id. at
Appendix C, Section D.12(l) (stating that Rule 613(e)(8) requires
data to be available and searchable for a period of not less than
five years, that broker-dealers are currently required to retain
data for six years under Rule 17a-4(a), and that the Participants
are requiring CAT Data to be kept online in an easily accessible
format for regulators for six years, though this may increase the
cost to run the CAT). The Commission notes that a Shortlisted Bidder
may be permitted to revise its Bid prior to approval of the CAT NMS
Plan if the CAT Selection Committee determines by Majority Vote that
such revisions are necessary or appropriate, so the estimates
provided in the CAT NMS Plan may be subject to change. See id. at
Section 5.2(c)(ii). In addition, changes in technology between the
time the Bids were submitted and the time the Central Repository is
built could result in changes to the costs to build and operate the
Central Repository.
\1468\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(i)(B).
\1469\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(i)(B) (describing the minimum, median, mean and maximum
Bidder estimates for the build and maintenance costs of the Central
Repository).
\1470\ Id. The Bidders provided a range of estimates. For
purposes of this Paperwork Burden Act analysis, the Commission is
using the build cost of the maximum Bidder estimate. $4,580,000 =
$91,600,000/20 SROs.
\1471\ $7 million for each Participant to build the Central
Repository = ($4.6 million per Participant in initial one-time costs
to compensate the Plan Processor to build the Central Repository) +
($2.4 million per Participant in initial one-time public relations,
legal and consulting costs associated with the building of the
Central Repository and the selection of the initial Plan Processor).
\1472\ $140 million for all of the Participants to build the
Central Repository = $7 million per Participant to build the Central
Repository) x (20 Participants). Id.
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(2) Ongoing, Annual Burden Hours and Costs for the Central Repository
After the Central Repository has been developed and implemented,
there would be ongoing costs for operating and maintaining the Central
Repository, including the cost of systems and connectivity upgrades or
changes necessary to receive, consolidate, and store the reported order
and execution information from Participants and their members; the
costs to store data, and make it available to regulators, in a uniform
electronic format, and in a form in which all events pertaining to the
same originating order are linked together in a manner that ensures
timely and accurate retrieval of the information; \1473\ the cost,
including storage costs, of collecting and maintaining the NBBO and
transaction data in a format compatible with the order and event
information collected pursuant to the Rule; the cost of monitoring the
required validation parameters, which would allow the Central
Repository to automatically check the accuracy and completeness of the
data submitted and reject data not conforming to these parameters
consistent with the requirements of the proposed Rule; and the cost of
paying the CCO. The CAT NMS Plan provides that the Plan Processor would
be responsible for the ongoing operations of the Central
Repository.\1474\ The Operating Committee would continue to be
responsible for the management of the Central Repository. In addition,
the CAT NMS Plan states that the Participants would incur costs for
public relations, legal, and consulting costs associated with
maintaining the CAT upon approval of the CAT NMS Plan.\1475\
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\1473\ See supra note 1469.
\1474\ See CAT NMS Plan, supra note 3, at Section 6.1.
\1475\ See id. at Appendix C, Section B.7(b)(iii).
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The Commission preliminarily estimates that the Participants would
incur an ongoing annual internal burden of 720 burden hours associated
with the continued management of the Central Repository, for an
aggregate annual estimate of 14,407 burden hours across the
Participants.\1476\
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\1476\ The Commission is basing this estimate on the internal
burden estimate provided in the CAT NMS Plan for the development of
the CAT NMS Plan. The Commission notes that the CAT NMS Plan
describes the internal burden estimate for the development of the
CAT NMS Plan as a cost the Participants will continue to accrue;
therefore, the Commission preliminarily believes that it is
reasonable to use this burden estimate as the basis for its ongoing
internal burden estimate for the maintenance of the Central
Repository, particularly as the Commission believes the reasons for
the staff time incurred for the development of the CAT NMS Plan
would be comparable to those of the staff time to be incurred by the
Operating Committee and the Selection Committee for the continued
management of the Central Repository. See CAT NMS Plan, supra note
3, at Appendix C, Section B.7(b)(iii) (stating `` . . . the
Participants have accrued, and will continue to accrue, direct costs
associated with the development of the CAT NMS Plan. These costs
include staff time contributed by each Participant to, among other
things, determine the technological requirements for the Central
Repository, develop the RFP, evaluate Bids received, design and
collect the data necessary to evaluate costs and other economic
impacts, meet with Industry Members to solicit feedback, and
complete the CAT NMS Plan submitted to the Commission for
consideration. The Participants estimate that they have collectively
contributed 20 FTEs in the first 30 months of the CAT NMS Plan
development process''). (20 FTEs/30 Participants) = 0.667 FTEs per
month for all of the Participants to continue management of the
Central Repository. Converting this into burden hours, (0.667 FTEs)
x (12 months) x (1,800 burden hours per year) = 14,407 ongoing
annual burden hours for all of the Participants to continue
management of the Central Repository. (14,407 ongoing annual burden
hours for all Participants/20 Participants) = 720 ongoing annual
burden hours for each Participant to continue management of the
Central Repository.
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Additionally, the Commission estimates that the Participants will
collectively spend $800,000 annually on external public relations,
legal and consulting costs associated with the continued management of
the Central Repository, or $40,000 per Participant.\1477\
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\1477\ The Commission is basing this external cost estimate on
the public relations, legal and consulting external cost estimate
provided in the CAT NMS Plan associated with the preparation of the
CAT NMS Plan (which the Participants consider ``reasonably
associated with creating, implementing, and maintaining the CAT upon
the Commission's adoption of the CAT NMS Plan''). See CAT NMS Plan,
supra note 3, at Appendix C, Section B.7(b)(iii) (stating ``the
Participants have incurred public relations, legal and consulting
costs in preparation of the CAT NMS Plan. The Participants estimate
the costs of these services to be $8,800,000''). $2,400,000 for all
Participants over 12 months = ($8,800,000/44 months between the
adoption of Rule 613 and the filing of the CAT NMS Plan) x (12
months). Because the Central Repository will have already been
created, the Commission believes it is reasonable to assume that the
Participants will have a lesser need for public relations, legal and
consulting services. The Commission is estimating that the
Participants will incur one-third of the external cost associated
with development and implementation of the Central Repository to
maintain the Central Repository. $800,000 = (0.333) x ($2,400,000).
($800,000/20 Participants) = $40,000 per Participant over 12 months.
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The CAT NMS Plan includes the estimates the six Shortlisted Bidders
provided for the annual ongoing costs to the Participants to operate
the Central Repository.\1478\ The CAT NMS Plan did not categorize the
costs included in the ongoing costs, but the Commission believes they
would comprise external technological, operational and administrative
costs, as the Participants described the costs included in the initial
one-time external cost to build the Central Repository.\1479\ Using
these estimates, the Commission preliminarily estimates that the annual
ongoing cost to the Participants \1480\ to compensate the Plan
Processor for building, operating and maintaining the Central
Repository would be an aggregate ongoing external cost of $93
million,\1481\ or approximately $4.7 million per
[[Page 30789]]
Participant.\1482\ Therefore, the Commission preliminarily estimates
that each Participant would incur ongoing annual external costs of
$4,740,000 \1483\ to maintain the Central Repository, or aggregate
ongoing annual external costs across all Participants of
$94,800,000.\1484\
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\1478\ See Section IV.F.1.a, supra, for a discussion of the
total five-year operating costs for the Central Repository presented
in the CAT NMS Plan. See also CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(i)(B); supra note 840; supra note 1467.
\1479\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(i)(B).
\1480\ See supra note 1469.
\1481\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(i)(B).
\1482\ The Bidders provided a range of estimates. For purposes
of this Paperwork Burden Act analysis, the Commission is using the
maximum operation and maintenance cost estimate. $4,650,000 =
$93,000,000/20 Participants. See also Section IV.F.1.a, supra. The
Commission noted several uncertainties that may affect the Central
Repository cost estimates, including (1) that the Participants have
not yet selected a Plan Processor and the Shortlisted Bidders have
submitted a wide range of cost estimates for building and operating
the Central Repository; (2) the Bids submitted by the Shortlisted
Bidders may not be final because they may be revised before the
final selection of the CAT Processor; and (3) neither the Bidders
nor the Commission can anticipate the evolution of technology and
market activity with precision, as improvements in available
technology may allow the Central Repository to be built and operated
at a lower cost than is currently anticipated, but if levels of
anticipated market activity are materially underestimated, the
capacity of the Central Repository may need to be increased,
resulting in an increase in costs.
\1483\ $4,740,000 for each Participant to build the Central
Repository = ($4.7 million per Participant in ongoing annual costs
to build the Central Repository) + ($40,000 per Participant in
ongoing annual public relations, legal and consulting costs
associated with the maintenance of the Central Repository).
\1484\ $94,800,000 for all of the Participants to maintain the
Central Repository = ($4,740,000 per Participant to compensate the
Plan Processor and for external public relations, legal and
consulting costs associated with the maintenance of the Central
Repository) x (20 Participants). Id.
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b. Data Collection and Reporting
Rule 613(c)(1) requires the CAT NMS Plan to provide for an
accurate, time-sequenced record of orders beginning with the receipt or
origination of an order by a Participant, and further to document the
life of the order through the process of routing, modification,
cancellation and execution (in whole or in part) of the order. Rule
613(c) requires the CAT NMS Plan to impose requirements on Participants
to record and report CAT information to the Central Repository in
accordance with specified timelines.
Rule 613(c) would require the collection and reporting of some
information that Participants already collect to operate their business
and are required to maintain in compliance with Section 17(a) of the
Exchange Act and Rule 17a-1 thereunder.\1485\ For instance, the
Commission believes that the national securities exchanges keep records
pursuant to Section 17(a) of the Exchange Act and Rule 17a-1 thereunder
in electronic form, of the receipt of all orders entered into their
systems, as well as records of the routing, modification, cancellation,
and execution of those orders. However, Rule 613 requires the
Participants to collect and report additional and more detailed
information, and to report the information to the Central Repository in
a uniform electronic format, or in a manner that would allow the
Central Repository to convert the data to a uniform electronic format
for consolidation and storage.
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\1485\ 15 U.S.C. 78q(a); 17 CFR 240.17a-1.
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The CAT NMS Plan provides estimated costs for the Participants to
report CAT Data. These estimates are based on Participant responses to
the Participants Study that the Participants collected to estimate CAT-
related costs for hardware and software, FTE costs, and third-party
providers, if the Commission approves the CAT NMS Plan.\1486\ For these
estimates, the Commission is relying on the cost data provided by the
Participants because it believes that the Plan's estimates for
Participants to report CAT Data are reliable since all of the
Participants provided cost estimates, and most Participants have
experience collecting audit trail data, as well as knowledge of both
the requirements of Rule 613 as well as their current business
practices. The Commission is providing below its paperwork burden
estimates for the initial burden hours and external costs, and ongoing,
annual burden hours and external costs to be incurred by the
Participants to comply with the data reporting requirements of Rule
613.
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\1486\ Third-party provider costs are generally legal and
consulting costs, but may include other outsourcing. The template
used by respondents is available at https://catnmsplan.com/PastEvents/ under the Section titled ``6/23/14'' at the ``Cost Study
Working Template'' link.
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The Commission notes that throughout this Paperwork Reduction Act
analysis, it is categorizing the FTE cost estimates for the
Participants, as well as the broker-dealer respondents, that were
provided in the CAT NMS Plan as an internal burden. To convert the FTE
cost estimates into internal burden hours, the Commission: (1) Divided
the FTE cost estimates by a divisor of $424,350, which is the
Commission's estimated average salary for a full-time equivalent
employee in the securities industry in a job category associated with
regulatory data reporting; \1487\ and then (2) multiplied the quotient
by 1,800 (the number of hours a full-time equivalent employee is
estimated to work per year).
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\1487\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(ii)(C) at n.192. The Participants represented that the cost
per FTE is $401,440. The $401,440 figure used in the CAT NMS plan
was based on a Programmer Analyst's salary ($193 per hour) from
SIFMA's Management & Professional Earnings in the Securities
Industry 2008, multiplied by 40 hours per week, then multiplied by
52 weeks per year. The Commission has updated this number to include
recent salary data for other job categories associated with
regulatory data reporting in the securities industry, using the hour
and multiple methodology used by the Commission in its paperwork
burden analyses. The Commission is using $424,350 as its annual cost
per FTE for purposes of its cost estimates. The $424,350 FTE cost =
25% Compliance Manager + 75% Programmer Analyst (0.25) x ($283 per
hour x 1,800 working hours per year) + (0.75) x ($220 per hour x
1,800 working hours per year). The $282 per hour figure for a
Compliance Manager and the $220 per hour figure for a Programmer
Analyst are from SIFMA's Management & Professional Earnings in the
Securities Industry 2013, modified by the Commission to account for
an 1800-hour work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
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(1) Initial Burden Hours and External Cost
The CAT NMS Plan provides the following average costs that the
Participants would expect to incur to adopt the systems changes needed
to comply with the data reporting requirements of the consolidated
audit trail: $10,300,000 in aggregate FTE costs for internal
operational, technical/development, and compliance functions; $770,000
in aggregate third party legal and consulting costs; and $17,900,000 in
aggregate total costs.\1488\
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\1488\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(iii)(B)(2). Of the $17,900,000 in aggregate total costs,
$11,070,000 is identified (subtotal of FTE costs and outsourcing),
but the remaining $6,830,000 is not identified in the CAT NMS Plan.
The Commission believes that the $6,830,000 may be attributed to
hardware costs because the Participants have not provided any
hardware costs associated with data reporting elsewhere and the
Commission believes that the Participants will likely incur external
costs to purchase upgraded hardware to report data to the Central
Repository.
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Based on estimates provided in the CAT NMS Plan, the Commission
preliminarily estimates that the initial internal burden hours to
develop and implement the needed systems changes to capture the
required information and transmit it to the Central Repository in
compliance with the Rule for each Participant would be approximately
2,185 burden hours.\1489\ The Commission also estimates that each
Participant would, on average, incur approximately $38,500 in initial
third party legal and consulting costs \1490\ for
[[Page 30790]]
a total of $380,000 in initial external costs.\1491\ Therefore, the
Commission preliminarily estimates that, for all Participants, the
estimated aggregate one-time burden would be 43,690 hours \1492\ and
the estimated aggregate initial external cost would be
$7,600,000.\1493\
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\1489\ ($10,300,000 anticipated initial FTE costs)/(20 SROs) =
$515,000 in anticipated initial FTE costs per Participant. ($515,000
in anticipated initial FTE costs per Participant)/($424,350 FTE
costs per Participant) = 1.214 anticipated FTEs per Participant for
the implementation of data reporting. (1.214 FTEs) x (1,800 working
hours per year) = 2,184.5 initial burden hours per Participant to
implement CAT Data reporting.
\1490\ ($770,000 anticipated initial third party costs)/(20
Participants) = $38,500 in initial anticipated third party costs per
Participant.
\1491\ To determine the total initial external cost per
Participant, the Commission subtracted the anticipated initial FTE
cost estimates for the Participants as provided in the Plan from the
total aggregate initial costs to the Participants and divided the
remainder by 20 Participants. ($17,900,000 total aggregate initial
cost to Participants) - ($10,300,000 initial FTE cost to
Participants) = $7,600,000. ($7,600,000)/20 Participants = $380,000
in initial external costs per Participant. See CAT NMS Plan, supra
note 3, at Appendix C, Section B.7(b)(iii)(B)(1) for the
Participants' anticipated costs associated with the implementation
of regulatory reporting to the Central Repository.
\1492\ 43,690 initial burden hours = (20 Participants) x
(2,184.5 initial burden hours).
\1493\ $7,600,000 = ($380,000 in initial external costs) x (20
Participants).
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(2) Ongoing, Annual Burden Hours and External Cost
Once a Participant has established the appropriate systems and
processes required for collection and transmission of the required
information to the Central Repository, the Commission preliminarily
estimates that Rule 613 would impose on each Participant ongoing annual
burdens associated with, among other things, personnel time to monitor
each Participant's reporting of the required data and the maintenance
of the systems to report the required data; and implementing changes to
trading systems that might result in additional reports to the Central
Repository. The CAT NMS Plan provides the following average aggregate
costs that the Participants would expect to incur to maintain data
reporting systems to be in compliance with Rule 613: $7,300,000 in
anticipated annual FTE costs for operational, technical/development,
and compliance functions related to data reporting; $720,000 in annual
third party legal, consulting, and other costs; \1494\ and $14,700,000
total annual costs.\1495\
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\1494\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(iii)(B)(2). The CAT NMS Plan did not identify the other
costs.
\1495\ Of the $14,700,000 in aggregate total annual costs,
$8,020,000 is identified (subtotal of FTE costs and outsourcing),
but the remaining $6,680,000 is not identified in the CAT NMS Plan.
The Commission believes that this amount may be attributed to
hardware costs because the Participants have not provided any
hardware costs associated with data reporting elsewhere and the
Commission believes that the Participants will likely incur costs to
upgrade their hardware to report data to the Central Repository.
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Based on estimates provided in the CAT NMS Plan, the Commission
believes that it would take each Participant 1,548 ongoing burden hours
per year \1496\ to continue compliance with Rule 613. The Commission
preliminarily estimates that it would cost, on average, approximately
$36,000 in ongoing third party legal and consulting and other costs
\1497\ and $370,000 in total ongoing external costs per
Participant.\1498\ Therefore, the Commission preliminarily estimates
that the estimated aggregate ongoing burden for all Participants would
be approximately 30,966 hours \1499\ and an estimated aggregate ongoing
external cost of $7,400,000.\1500\
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\1496\ ($7,300,000 in anticipated Participant annual FTE costs)/
(20 Participants) = $365,000 in anticipated per Participant annual
FTE costs. ($365,000 in anticipated per Participant FTE costs)/
($424,350 FTE cost per Participant) = 0.86 anticipated FTEs per
Participant. (0.86 FTEs) x (1,800 working hours per year) = 1,548.3
burden hours per Participant to maintain CAT Data reporting.
\1497\ ($720,000 in annual third party costs)/(20 Participants)
= $36,000 per Participant in anticipated annual third party costs.
\1498\ To determine the total external annual cost per
Participant, the Commission subtracted the anticipated annual FTE
cost estimates for the Participants as provided in the Plan from the
total aggregate annual costs to the Participants and divided the
remainder by 20 Participants. ($14,700,000 total aggregate annual
cost to Participants) - ($7,300,000 annual FTE cost to Participants)
= $7,400,000. ($7,400,000)/20 Participants = $370,000 in annual
external costs per Participant. See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii)(B)(1) for the Participants'
anticipated maintenance costs associated with regulatory reporting
to the Central Repository.
\1499\ 30,966 annual burden hours = (20 Participants) x (1,548.3
annual burden hours).
\1500\ $7,400,000 = ($370,000 in total annual external costs) x
(20 Participants).
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c. Collection and Retention of NBBO, Last Sale Data and Transaction
Reports
Rule 613(e)(7) provides that the CAT NMS Plan must require the
Central Repository to collect and retain on a current and continuous
basis NBBO information for each NMS security, transaction reports
reported pursuant to an effective transaction reporting plan, and Last
Sale Reports reported pursuant to the OPRA Plan.\1501\ Additionally,
the CAT NMS Plan must require the Central Repository to maintain this
data in a format compatible with the order and event information
consolidated and stored pursuant to Rule 613(c)(7).\1502\ Further, the
CAT NMS Plan must require the Central Repository to retain the
information collected pursuant to paragraphs (c)(7) and (e)(7) of Rule
613 for a period of not less than five years in a convenient and usable
uniform electronic format that is directly available and searchable
electronically without any manual intervention.\1503\ The Commission
notes that the CAT NMS Plan includes these data as ``SIP Data'' to be
collected by the Central Repository.\1504\ The Commission believes the
burden associated with SIP Data is included in the burden to the
Participants associated with the implementation and maintenance of the
Central Repository.
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\1501\ See 17 CFR 242.613(e)(7).
\1502\ Id.
\1503\ See 17 CFR 242.613(e)(8).
\1504\ See CAT NMS Plan, supra note 3, at Section 6.5(a)(ii).
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d. Surveillance
Rule 613(f) provides that the CAT NMS Plan must require that every
national securities exchange and national securities association
develop and implement a surveillance system, or enhance existing
surveillance systems, reasonably designed to make use of the
consolidated information contained in the consolidated audit trail.
Rule 613(a)(3)(iv) provides that the CAT NMS Plan must require that the
surveillance systems be implemented within fourteen months after
effectiveness of the CAT NMS Plan.
(1) Initial Burden Hours and External Cost
The CAT NMS Plan states that the estimated total cost to the
Participants to implement surveillance programs within the Central
Repository is $23,200,000.\1505\ This amount includes legal,
consulting, and other costs of $560,000, as well as $17,500,000 in FTE
costs for operational, technical/development, and compliance Staff to
be engaged in the creation of surveillance programs.\1506\
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\1505\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(iii)(B)(2).
\1506\ Id. The Commission also notes that based upon the data
provided by the Participants, the source of the remaining $5,140,000
in initial costs to implement new or enhanced surveillance systems
is unspecified. The Commission believes that this amount may be
attributed to hardware costs because the Participants have not
provided any hardware costs associated with surveillance elsewhere
and the Commission believes that the Participants will likely incur
costs to implement new or enhanced surveillance systems reasonably
designed to make use of the consolidated audit trail data.
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Based on the estimates provided in the CAT NMS Plan, the Commission
preliminarily estimates that the initial internal burden hours to
implement new or enhanced surveillance systems reasonably designed to
make use of the consolidated audit trail data for each Participant
would be approximately 3,711.6 burden hours,\1507\ for an
[[Page 30791]]
aggregate initial burden hour amount of 74,232 burden hours.\1508\ The
Commission also estimates that each Participant would, on average,
incur an initial external cost of approximately $28,000 \1509\ for
outsourced legal, consulting and other costs in order to implement new
or enhanced surveillance systems, for a total of $285,000 in initial
external costs,\1510\ for an aggregate one-time initial external cost
of $5,700,000 across the 20 Participants to implement new or enhanced
surveillance systems.\1511\
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\1507\ ($17,500,000 in anticipated initial FTE costs)/(20
Participants) = $875,000 in anticipated FTE costs per Participant.
($875,000 in anticipated initial FTE costs per Participant)/
($424,350 FTE cost per Participant) = 2.06 anticipated initial FTEs
per Participant. (2.06 FTEs) x (1,800 working hours per year) =
3,711.6 initial burden hours per Participant to implement new or
enhanced surveillance systems.
\1508\ (3,711.6 initial burden hours per Participant to
implement new or enhanced surveillance systems) x (20 Participants)
= 74,232 aggregate initial burden hours.
\1509\ $28,000 = $560,000/20 Participants.
\1510\ $285,000 = ($23,200,000 in total initial surveillance
costs--$17,500,000 in FTE costs)/(20 Participants).
\1511\ $5,700,000 = $285,000 x 20 Participants.
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(2) Ongoing, Annual Burden Hours and External Cost
The CAT NMS Plan states that the estimated total annual cost
associated with the maintenance of surveillance programs for the
Participants is $87,700,000.\1512\ This amount includes annual legal,
consulting, and other costs of $1,000,000, as well as $66,700,000 in
annual FTE costs for internal operational, technical/development, and
compliance Staff to be engaged in the maintenance of surveillance
programs.\1513\ Based on the estimates provided in the CAT NMS
Plan,\1514\ the Commission preliminarily estimates that the ongoing
internal burden hours to maintain the new or enhanced surveillance
systems reasonably designed to make use of the consolidated audit trail
data for each Participant would be approximately 14,146 annual burden
hours,\1515\ for an aggregate annual burden hour amount of 282,920
burden hours.\1516\ The Commission also estimates that each Participant
would, on average, incur an annual external cost of approximately
$50,000 \1517\ for outsourced legal, consulting and other costs in
order to maintain the new or enhanced surveillance systems, for a total
estimated ongoing external cost of $1,050,000,\1518\ for an estimated
aggregate ongoing external cost of $21,000,000 across the 20
Participants to maintain the surveillance systems.\1519\
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\1512\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(iii)(B)(2).
\1513\ Id. The Commission also notes that based upon the data
provided by the Participants, the source of the remaining
$21,000,000 in ongoing costs to maintain the new or enhanced
surveillance systems is unspecified. The Commission believes that
this amount may be attributed to hardware costs because the
Participants have not provided any hardware costs associated with
surveillance elsewhere and the Commission believes that the
Participants would likely incur costs associated with maintaining
the new or enhanced surveillance systems.
\1514\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(iii)(B)(2).
\1515\ ($66,700,000 in anticipated ongoing FTE costs)/(20
Participants) = $3,335,000 in anticipated ongoing FTE costs per
Participant. ($3,335,000 in anticipated ongoing FTE costs per
Participant)/($424,350 FTE cost per Participant) = 7.86 anticipated
FTEs per Participant. (7.86 FTEs) x (1,800 working hours per year) =
14,146 ongoing burden hours per Participant to maintain the new or
enhanced surveillance systems.
\1516\ (14,146 annual burden hours per Participant to maintain
new or enhanced surveillance systems) x (20 Participants) = 282,920
aggregate annual burden hours.
\1517\ $50,000 = $1,000,000 for ongoing legal, consulting and
other costs associated with maintenance of surveillance programs/20
Participants.
\1518\ $1,050,000 = ($87,700,000 in total ongoing surveillance
costs-$66,700,000 in ongoing FTE costs)/20 Participants
\1519\ $21,000,000 = $1,050,000 x 20 Participants.
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e. Written Assessment of Operation of the Consolidated Audit Trail
Rule 613(b)(6) provides that the CAT NMS Plan must require the
Participants to provide the Commission a written assessment of the
CAT's operation at least every two years, once the CAT NMS Plan is
effective.\1520\ The assessment must address, at a minimum, with
respect to the consolidated audit trail: (i) An evaluation of its
performance; (ii) a detailed plan for any potential improvements to its
performance; (iii) an estimate of the costs associated with any such
potential improvements; and (iv) an estimated implementation timeline
for any such potential improvements, if applicable.\1521\ Thus, the
Participants must, among other things, undertake an analysis of the
consolidated audit trail's technological and computer system
performance.
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\1520\ 17 CFR 242.613(b)(6). See also Section IV.E.3.a, supra.
\1521\ See 17 CFR 242.613(b)(6).
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The CAT NMS Plan states that the CCO would oversee the assessment
required by Rule 613(b)(6), and would allow the Participants to review
and comment on the assessment before it is submitted to the
Commission.\1522\ The CCO would be an employee of the Plan Processor
and would be compensated by the Plan Processor.\1523\ The Commission
assumes that the overall cost and associated burden on the Participants
to implement and maintain the Central Repository includes both the
compensation for the Plan Processor as well as its employees for the
implementation and maintenance of the Central Repository.
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\1522\ See CAT NMS Plan, supra note 3, at Section 6.6.
\1523\ Id. at Section 6.2(a).
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The Commission preliminarily estimates that it would take each
Participant approximately 45 annual burden hours of internal legal,
compliance, business operations, and information technology staff time
to review and comment on the assessment prepared by the CCO of the
operation of the consolidated audit trail as required by Rule
613(b)(6).\1524\ The Commission preliminarily estimates that on
average, each Participant would outsource 1.25 hours of legal time
annually to assist in the review of the assessment, for an ongoing
annual external cost of approximately $500.\1525\ Therefore, the
[[Page 30792]]
Commission preliminarily estimates that the ongoing annual burden of
submitting a written assessment at least every two years, as required
by Rule 613(b)(6), would be 45 ongoing burden hours per SRO plus $500
of external costs for outsourced legal counsel per Participant per
year, for an estimated aggregate annual ongoing burden of 900 hours
\1526\ and an estimated aggregate ongoing external cost of
$10,000.\1527\
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\1524\ The Commission calculated the total estimated burden
hours based on a similar formulation used for calculating the total
estimated burden hours of Rule 613(i)'s requirement for a document
addressing expansion of the CAT to other securities. See Section
V.D.1.f., infra. The Commission assumes that the review and
potential revision of the written assessment required by Rule
613(b)(6) would be approximately one-half as burdensome as the
document required by Rule 613(i) as the Participants are delegating
the responsibility to prepare the written assessment required by
Rule 613(b)(6) to the CCO and the Participants would only need to
review the written assessment and revise it as necessary. As noted
in note 1530, infra, to estimate the Rule 613(i) burden, the
Commission is applying the internal burden estimate provided in the
CAT NMS Plan for Plan development over a 6-month period, and
dividing the result in half. See CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii). To estimate the Rule 613(b)(6)
written assessment burden, the Commission is dividing the result
further by half. 0.667 FTEs required for all Participants per month
to develop the CAT NMS Plan = (20 FTEs/30 months). 0.667 FTEs x 6
months = 4 FTEs. 4 FTEs/2 = 2 FTEs needed for all of the
Participants to create and submit the Rule 613(i) document. 2 FTEs/2
= 1 FTE needed for all of the Participants to review and comment on
the written assessment. (1 FTE x 1,800 working hours per year) =
1,800 ongoing annual burden hours per year for all of the
Participants to review and comment on the written assessment. (1,800
burden hours/20 Participants) = 90 ongoing annual burden hours per
Participant to review and comment on the written assessment prepared
by the CCO. The Commission notes that this assessment must be filed
with the Commission every two years and is providing an annualized
estimate of the burden associated with the assessment as required
for its Paperwork Reduction Act analysis. To provide an estimate of
the annual burden associated with the assessment as required for its
Paperwork Reduction Act analysis, Commission is dividing the 90
ongoing burden hours in half (over two years) = 45 ongoing annual
burden hours per Participant to review and comment on the written
assessment prepared by the CCO.
\1525\ $500 = ($400 per hour rate for outside legal services) x
(1.25 hours). The Commission based this estimate on the assumption
that the written assessment required by Rule 613(b)(6) would require
approximately one-half the effort of drafting and submitting the
document required by Rule 613(i) regarding the expansion of the CAT
to other securities because the Participants have delegated the
responsibility to draft the written assessment on the CCO, rather
than having to draft it themselves (as with the expansion report),
but would also have to review the written assessment and revise it
as necessary. See Section V.D.1.f., infra. Because the written
assessment is a biennial requirement, the Commission is further
dividing the cost of the written assessment in half (over two years)
to estimate the annual ongoing external cost per Participant for
outside legal services to review and comment on the written
assessment prepared by the CCO.
\1526\ 900 ongoing annual burden hours = (45 ongoing annual
burden hours) x (20 Participants).
\1527\ $10,000 = 20 Participants x ($400 per hour rate for
outside legal services) x (1.25 hours).
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f. Document on Expansion to Other Securities
Rule 613(i) provides that the CAT NMS Plan must require the
Participants to jointly provide to the Commission, within six months
after the CAT NMS Plan is effective, a document outlining how the
Participants could incorporate into the consolidated audit trail
information regarding: (1) Equity securities that are not NMS
securities; \1528\ (2) debt securities; and (3) primary market
transactions in equity securities that are not NMS securities and debt
securities.\1529\ The document must also detail the order and
Reportable Event data that each market participant may be required to
provide, which market participants may be required to provide such
data, an implementation timeline, and a cost estimate. Thus, the
Participants must, among other things, undertake an analysis of
technological and computer system acquisitions and upgrades that would
be required to incorporate such an expansion.
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\1528\ As noted above, the CAT NMS Plan would require the
inclusion of OTC Equity Securities, while Rule 613 does not include
such a requirement. See supra note 1408.
\1529\ See 17 CFR 242.613(i).
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The Commission preliminarily estimates that it would take each
Participant approximately 180 burden hours of internal legal,
compliance, business operations and information technology staff time
to create a document addressing expansion of the consolidated audit
trail to additional securities as required by Rule 613(i).\1530\ The
Commission preliminarily estimates that on average, each Participant
would outsource 25 hours of external legal time to create the document,
for an aggregate one-time external cost of approximately $10,000.\1531\
Therefore, the Commission preliminarily estimates that the one-time
initial burden of drafting the document required by Rule 613 would be
180 initial burden hours plus $10,000 in initial external costs for
outsourced legal counsel per Participant, for an estimated aggregate
initial burden of 3,600 hours and an estimated aggregate initial
external cost of $200,000.\1532\
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\1530\ The Commission is basing this estimate on the internal
burden provided in the CAT NMS Plan related to the development of
the CAT NMS Plan. See CAT NMS Plan, supra note 3, at Appendix C,
Section B.7(b)(iii) (stating ``[t]he Participants estimate that they
have collectively contributed 20 FTEs in the first 30 months of the
CAT NMS Plan development process''). Because this document is much
more limited in scope than the CAT NMS Plan, and because the
Commission assumes that in drafting the CAT NMS Plan, the
Participants have already contributed time toward considering how
the CAT can be expected to be expanded in accordance with Rule
613(i), the Commission is applying the CAT NMS Plan development
internal burden over a 6-month period (Rule 613(i) requires this
document to be submitted to the Commission within six months after
effectiveness of the CAT NMS Plan), divided by half. 0.667 FTEs
required for all Participants per month to develop the CAT NMS Plan
= (20 FTEs/30 months). 0.667 FTEs x 6 months = 4 FTEs. 4 FTEs/2 = 2
FTEs needed for all of the Participants to create and submit the
document. 2 FTEs x 1,800 working hours per year = 3,600 burden
hours. 3,600 burden hours/20 Participants = 180 burden hours per
Participant to create and file the document.
\1531\ $10,000 = (25 hours of outsourced legal time per
Participant) x ($400 per hour rate for outside legal services). The
Commission derived the total estimated cost for outsourced legal
counsel based on the assumption that the report required by Rule 613
would require approximately fifteen percent of the Commission's
approximated burden of drafting and filing the CAT NMS Plan. This
assumption is based on the Participants leveraging their knowledge
gained from their drafting and filing of the CAT NMS Plan and
applying it to efficiently preparing the report required by Rule 613
with respect to other securities' order and Reportable Events,
implementation timeline and cost estimates.
\1532\ The initial burden hour estimate is based on: (20
Participants) x (180 initial burden hours to draft the report). The
initial external cost estimate is based on: (20 Participants) x
($10,000 for outsourced legal counsel).
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2. Burden on Members of National Securities Exchanges and National
Securities Associations
a. Data Collection and Reporting
Rule 613(c)(1) requires the CAT NMS Plan to provide for an
accurate, time-sequenced record of orders beginning with the receipt or
origination of an order by a broker-dealer member of a Participant, and
further documenting the life of the order through the process of
routing, modification, cancellation and execution (in whole or in part)
of the order. Rule 613(c) requires the CAT NMS Plan to impose
requirements on broker-dealer members to record and report CAT
information to the Central Repository in accordance with specified
timelines.
The Commission acknowledges the inherent difficulty in establishing
precise burden estimates because the Commission does not know the exact
method of data reporting the Participants would decide for broker-
dealers. For these estimates, the Commission is relying, in part, on
the cost data provided by the Participants in the CAT NMS Plan,\1533\
and, as noted earlier, on its own estimates of the costs that broker-
dealers are likely to face for CAT implementation and ongoing reporting
in compliance with Rule 613.\1534\
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\1533\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b).
\1534\ See Sections IV.F.1.c(1) and IV.F.1.c(2), supra.
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The Commission's estimates delineate broker-dealer firms by whether
they insource or outsource, or are likely to insource or outsource, CAT
Data reporting obligations.\1535\ The Commission preliminarily believes
that firms that currently report high numbers of OATS ROEs
strategically would decide to either self-report their CAT Data or
outsource their CAT Data reporting functions, while the firms with the
lowest levels of activity would be unlikely to have the infrastructure
and specialized employees necessary to insource CAT Data reporting and
would almost certainly outsource their CAT Data reporting
functions.\1536\ The Commission recognizes that more active firms that
will likely be CAT Reporters and insource regulatory data reporting
functions may not have current OATS reporting obligations because they
either are not FINRA members, or because they do not trade in NMS
equity securities.\1537\
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\1535\ See Section IV.F.1.c(2)B, supra.
\1536\ Id.
\1537\ The Commission also preliminarily recognizes as discussed
above that some broker-dealer firms may strategically choose to
outsource despite the Plan's working assumption that these broker-
dealers would insource their regulatory data reporting functions.
---------------------------------------------------------------------------
The Commission preliminarily estimates that there are 126 OATS-
reporting Insourcers and 45 non-OATS reporting Insourcers.\1538\ The
Commission's estimation categorizes the remaining 1,629 broker-dealers
that the Plan anticipates would have CAT Data reporting obligations as
Outsourcers.\1539\
---------------------------------------------------------------------------
\1538\ See Section IV.F.1.c(2)B, infra.
\1539\ Id.
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[[Page 30793]]
(1) Insourcers
A. Large Non-OATS Reporting Broker-Dealers
i. Initial Burden Hours and External Cost
The Commission relies on the Reporters Study's large broker-dealer
cost estimates in estimating costs for large broker-dealers that can
practicably decide between insourcing or outsourcing their regulatory
data reporting functions. The Commission estimates that there are 14
large broker-dealers that are not OATS reporters currently in the
business of electronic liquidity provision that would be classified as
Insourcer firms.\1540\
---------------------------------------------------------------------------
\1540\ These broker-dealers are not FINRA members and thus have
no regular OATS reporting obligations. See supra note 937.
---------------------------------------------------------------------------
Additionally, the Commission estimates that there are 31 broker-
dealers that may transact in options but not in equities that can be
classified as Insourcer firms.\1541\ Although the Exemptive Relief may
relieve these firms of the obligation to report their option quoting
activity to the Central Repository, these firms may have customer
orders and other activity off-exchange that would cause them to incur a
CAT reporting obligation.
---------------------------------------------------------------------------
\1541\ See supra note 939.
---------------------------------------------------------------------------
The Commission assumes the 31 options firms and 14 ELPs would be
typical of the Reporters Study's large, non-OATS reporting firms; for
these firms, the Commission relies on the cost estimates provided under
Approach 1 \1542\ for large, non-OATS reporting firms in the CAT NMS
Plan.
---------------------------------------------------------------------------
\1542\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(i)(A)(2). The Reporters Study requested broker-dealer
respondents to provide estimates to report to the Central Repository
under two approaches. Approach 1 assumes CAT Reporters would submit
CAT Data using their choice of industry protocols. Approach 2
assumes CAT Reporters would submit data using a pre-specified
format. Approach 1's aggregate costs are higher than those for
Approach 2 for all market participants except in one case where
service bureaus have lower Approach 1 costs. See supra note 946. For
purposes of this Paperwork Reduction Act analysis, the Commission is
not relying on the cost estimates for Approach 2 because overall the
Approach 1 aggregate estimates represent the higher of the proposed
approaches. The Commission believes it would be more comprehensive
to use the higher of the two estimates for its Paperwork Reduction
Act analysis estimates.
---------------------------------------------------------------------------
The CAT NMS Plan provides the following average initial external
cost and FTE count figures that a large non-OATS reporting broker-
dealer would expect to incur to adopt the systems changes needed to
comply with the data reporting requirements of Rule 613 under Approach
1: $450,000 in external hardware and software costs; 8.05 internal
FTEs; \1543\ and $9,500 in external third party/outsourcing
costs.\1544\ Based on this information, the Commission preliminarily
estimates that the average initial burden associated with implementing
regulatory data reporting to capture the required information and
transmit it to the Central Repository in compliance with the Rule for
each large, non-OATS reporting broker-dealer would be approximately
14,490 initial burden hours.\1545\
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\1543\ Approach 1 also provided $3,200,000 in initial internal
FTE costs. The Commission believes the $3,200,000 in internal FTE
costs is the Participants' estimated cost of the 8.05 FTEs. (8.05
FTEs) x ($401,440 Participants' assumed annual cost per FTE provided
in the CAT NMS Plan) = $3,231,592. See CAT NMS Plan, supra note 3,
at n. 192. See also supra note 1487.
\1544\ See CAT NMS Plan, supra note 3, at Section
B.7(b)(iii)(c)(2)(a). The Commission believes that the third party/
outsourcing costs may be attributed to the use of service bureaus
(potentially), technology consulting, and legal services.
\1545\ 14,490 initial burden hours = (8.05 FTEs for implementing
CAT Data reporting systems) x (1,800 working hours per year).
---------------------------------------------------------------------------
The Commission also preliminarily estimates that these broker-
dealers would, on average, incur approximately $450,000 in initial
costs for hardware and software to implement the systems changes needed
to capture the required information and transmit it to the Central
Repository, and an additional $9,500 in initial third party/outsourcing
costs.\1546\ Therefore, the Commission preliminarily estimates that the
average one-time initial burden per ELP and options market-making firm
would be 14,490 internal burden hours and external costs of
$459,500,\1547\ for an estimated aggregate initial burden of 652,050
hours \1548\ and an estimated aggregate initial external cost of
$20,677,500.\1549\
---------------------------------------------------------------------------
\1546\ See supra note 1544.
\1547\ ($450,000 in initial hardware and software costs) +
($9,500 initial third party/outsourcing costs) = $459,500 in initial
external costs to implement data reporting systems.
\1548\ The Commission preliminarily estimates that 45 large non-
OATS reporting broker-dealers would be impacted by this information
collection. (45 large non-OATS reporting broker-dealers) x (14,490
burden hours) = 652,050 initial burden hours to implement data
reporting systems.
\1549\ ($450,000 in hardware and software costs) + ($9,500 third
party/outsourcing costs) x 45 large, non-OATS reporting broker-
dealers = $20,677,500 in initial external costs to implement data
reporting systems.
---------------------------------------------------------------------------
ii. Ongoing, Annual Burden Hours in External Cost
Once a large non-OATS reporting broker-dealer has established the
appropriate systems and processes required for collection and
transmission of the required information to the Central Repository, the
Commission preliminarily estimates that the Rule would impose ongoing
annual burdens associated with, among other things, personnel time to
monitor each large non-OATS reporting broker-dealer's reporting of the
required data and the maintenance of the systems to report the required
data; and implementing changes to trading systems that might result in
additional reports to the Central Repository. The CAT NMS Plan provides
the following average ongoing external cost and internal FTE count
figures that a large non-OATS reporting broker-dealer would expect to
incur to maintain data reporting systems to be in compliance with Rule
613: $80,000 in external hardware and software costs; 7.41 internal
FTEs; \1550\ and $1,300 in external third party/outsourcing
costs.\1551\ Based on this information, the Commission preliminarily
believes that it would take a large non-OATS reporting broker-dealer
13,338 burden hours per year \1552\ to continue to comply with the
Rule. The Commission also preliminarily estimates that it would cost,
on average, approximately $80,000 per year per large non-OATS reporting
broker-dealer to maintain systems connectivity to the Central
Repository and purchase any necessary hardware, software, and other
materials, and an additional $1,300 in third party/outsourcing
costs.\1553\
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\1550\ Approach 1 also provided $3,000,000 in internal FTE costs
related to maintenance. The Commission believes the $3,000,000 in
ongoing internal FTE costs is the Participants' estimated cost of
the 7.41 FTEs. (7.41 FTEs) x ($401,440 Participants' assumed annual
cost per FTE provided in the CAT NMS Plan) = $2,974,670. See CAT NMS
Plan, supra note 3, at n.192. See also supra note 1487.
\1551\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(iii)(C)(2)(b). The CAT NMS Plan did not break down these
third party costs into categories.
\1552\ 13,338 ongoing burden hours = (7.41 ongoing FTEs to
maintain CAT data reporting systems) x (1,800 working hours per
year).
\1553\ See supra note 1544; CAT NMS Plan, supra note 3, at
Appendix C, Section B.7(b)(iii)(C)(2)(b).
---------------------------------------------------------------------------
Therefore, the Commission preliminarily estimates that the average
ongoing annual burden per large non-OATS reporting broker-dealer would
be approximately 13,338 hours, plus $81,300 in external costs \1554\ to
maintain the systems necessary to collect and transmit information to
the Central Repository, for an estimated aggregate ongoing burden of
600,210
[[Page 30794]]
hours \1555\ and an estimated aggregate ongoing external cost of
$3,658,500.\1556\
---------------------------------------------------------------------------
\1554\ ($80,000 in ongoing external hardware and software costs)
+ ($1,300 ongoing external third party/outsourcing costs) = $81,300
in ongoing external costs per large non-OATS reporting broker-
dealer.
\1555\ The Commission estimates that 45 large non-OATS reporting
broker-dealers would be impacted by this information collection. (45
large non-OATS reporting broker-dealers) x (13,338 burden hours) =
600,210 aggregate ongoing burden hours.
\1556\ ($80,000 in ongoing external hardware and software costs)
+ ($1,300 ongoing external third party/outsourcing costs) x (45
large non-OATS reporting broker-dealers) = $3,658,500 in aggregate
ongoing external costs.
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B. Large OATS-Reporting Broker-Dealers
i. Initial Burden Hours and External Cost
Based on the Commission's analysis of data provided by FINRA and
discussions with market participants, the Commission estimates that 126
broker-dealers, which reported more than 350,000 OATS ROEs between June
15 and July 10, 2015, would strategically decide to either self-report
CAT Data or outsource their CAT data reporting functions.\1557\ To
conduct its Paperwork Burden Analysis for the 126 broker-dealers, the
Commission is relying on the Reporters Study estimates used by the CAT
NMS Plan of expected costs that a large OATS-reporting broker-dealer
would incur as a result of the implementation of the consolidated audit
trail under Approach 1.\1558\
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\1557\ See Section IV.F.1.c.2.B and Section IV.F.1.c(2)B.i,
supra. See also supra note 901, stating that the Commission believes
that broker-dealers that report fewer than 350,000 OATS ROEs per
month are unlikely to be large enough to support the infrastructure
required for insourcing data reporting activities.
\1558\ See supra note 1544.
---------------------------------------------------------------------------
The CAT NMS Plan provides the following average initial external
cost and internal FTE count figures that a large OATS-reporting broker-
dealer would expect to incur as a result of the implementation of the
consolidated audit trail under Approach 1: $750,000 in hardware and
software costs; 14.92 internal FTEs; \1559\ and $150,000 in external
third party/outsourcing costs.\1560\ Based on this information the
Commission preliminarily estimates that the average initial burden to
develop and implement the needed systems changes to capture the
required information and transmit it to the Central Repository in
compliance with the Rule for large OATS-reporting broker-dealers would
be approximately 26,856 internal burden hours.\1561\ The Commission
also preliminarily estimates that these large OATS-reporting broker-
dealers would, on average, incur approximately $750,000 in initial
external costs for hardware and software to implement the systems
changes needed to capture the required information and transmit it to
the Central Repository, and an additional $150,000 in initial external
third party/outsourcing costs.\1562\
---------------------------------------------------------------------------
\1559\ Approach 1 also provided $6,000,000 in initial internal
FTE costs. The Commission preliminarily believes the $6,000,000 in
initial internal FTE costs is the Participants' estimated cost of
the 14.92 FTEs. (14.92 FTEs) x ($401,440 Participants' assumed
annual cost per FTE provided in the CAT NMS Plan) = $5,989,485. See
CAT NMS Plan, supra note 3, at n. 192. See also supra note 1487.
\1560\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(iii)(C)(2)(a). The CAT NMS Plan did not break down these
third party costs into categories. The Commission preliminarily
believes that these costs may be attributed to the use of service
bureaus, technology consulting, and legal services.
\1561\ 26,856 initial burden hours per large OATS-reporting
broker-dealer = (14.92 FTEs for implementation of CAT data reporting
systems) x (1,800 working hours per year).
\1562\ See CAT NMS Plan, supra note 3, at Section
B.7(b)(iii)(C)(2)(a).
---------------------------------------------------------------------------
Therefore, the Commission preliminarily estimates that the average
one-time initial burden per large OATS-reporting broker-dealer would be
26,856 burden hours and external costs of $900,000,\1563\ for an
estimated aggregate initial burden of 3,383,856 hours \1564\ and an
estimated aggregate initial external cost of $113,400,000.\1565\
---------------------------------------------------------------------------
\1563\ ($750,000 in initial external hardware and software
costs) + ($150,000 initial external third party/outsourcing costs) =
$900,000 in initial external costs per large OATS-reporting broker-
dealer to implement CAT data reporting systems.
\1564\ The Commission preliminarily estimates that 126 large
OATS-reporting broker-dealers would be impacted by this information
collection. 126 large OATS-reporting broker-dealers x 26,856 burden
hours = 3,383,856 initial burden hours to implement data reporting
systems.
\1565\ ($750,000 in initial external hardware and software
costs) + ($150,000 initial external third party/outsourcing costs) x
126 large OATS-reporting broker-dealers = $113,400,000 in initial
external costs to implement data reporting systems.
---------------------------------------------------------------------------
ii. Ongoing, Annual Burden Hours and External Cost
Once a large OATS-reporting broker-dealer has established the
appropriate systems and processes required for collection and
transmission of the required information to the Central Repository, the
Commission preliminarily estimates that the Rule would impose on each
broker-dealer ongoing annual burdens and costs associated with, among
other things, personnel time to monitor each broker-dealer's reporting
of the required data and the maintenance of the systems to report the
required data; and implementing changes to trading systems which might
result in additional reports to the Central Repository.
The CAT NMS Plan provides the following average ongoing external
cost and FTE count figures that a large OATS-reporting broker-dealer
would expect to incur to maintain data reporting systems to be in
compliance with Rule 613: $380,000 in ongoing external hardware and
software costs; 10.03 internal FTEs; \1566\ and $120,000 in ongoing
external third party/outsourcing costs.\1567\ Based on this information
the Commission preliminarily believes that it would take a large OATS-
reporting broker-dealer 18,054 ongoing burden hours per year \1568\ to
continue compliance with the Rule. The Commission preliminarily
estimates that it would cost, on average, approximately $380,000 per
year per large OATS-reporting broker-dealer to maintain systems
connectivity to the Central Repository and purchase any necessary
hardware, software, and other materials, and an additional $120,000 in
external ongoing third party/outsourcing costs.\1569\
---------------------------------------------------------------------------
\1566\ Approach 1 also provided $4,000,000 in internal FTE costs
related to maintenance. The Commission believes the $4,000,000 in
ongoing internal FTE costs is the Participants' estimated cost of
the 10.03 FTEs. (10.03 FTEs) x ($401,440 Participants' assumed
annual cost per FTE provided in the CAT NMS Plan) = $4,026,443. See
CAT NMS Plan, supra note 3, at n. 192. See also supra note 1487.
\1567\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(iii)(C)(2)(b). The CAT NMS Plan did not categorize these
third party costs. The Commission preliminarily believes that these
costs may be attributed to the use of service bureaus, technology
consulting, and legal services.
\1568\ 18,054 ongoing burden hours = (10.03 ongoing FTEs for
maintenance of CAT data reporting systems) x (1,800 working hours
per year).
\1569\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(iii)(C)(2)(b).
---------------------------------------------------------------------------
Therefore, the Commission preliminarily estimates that the average
ongoing annual burden per large OATS-reporting broker-dealer would be
approximately 18,054 burden hours, plus $500,000 in external costs
\1570\ to maintain the systems necessary to collect and transmit
information to the Central Repository, for an estimated aggregate
burden of 2,274,804 hours \1571\ and an estimated aggregate ongoing
external cost of $63,000,000.\1572\
---------------------------------------------------------------------------
\1570\ ($380,000 in ongoing external hardware and software costs
+ $120,000 in ongoing external third party/outsourcing costs) =
$500,000 in ongoing external costs per large OATS-reporting broker-
dealer.
\1571\ The Commission preliminarily estimates that 126 large
OATS-reporting broker-dealers would be impacted by this information
collection. (126 large OATS-reporting broker-dealers) x (18,054
burden hours) = 2,274,804 aggregate ongoing burden hours.
\1572\ ($380,000 in ongoing external hardware and software costs
+ $120,000 in ongoing external third party/outsourcing costs) x 126
large OATS-reporting broker-dealers = $63,000,000 in aggregate
ongoing external costs.
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[[Page 30795]]
(2) Outsourcing Firms
A. Small OATS-Reporting Broker-Dealers
i. Initial Burden Hours and External Cost
Based on data provided by FINRA, the Commission estimates that
there are 806 broker-dealers that report fewer than 350,000 OATS ROEs
monthly. The Commission preliminarily believes that these broker-
dealers generally outsource their regulatory reporting obligations
because during the period June 15-July 10, 2015, approximately 88.9% of
their 350,000 OATS ROEs were reported through service bureaus, with 730
of these broker-dealers reporting more than 99% of their OATS ROEs
through one or more service bureaus.\1573\ The Commission estimates
that these firms currently spend an aggregate of $100.1 million on
annual outsourcing costs.\1574\ The Commission estimates these 806
broker-dealers would spend $100.2 million in aggregate to outsource
their regulatory data reporting to service bureaus to report in
accordance with Rule 613,\1575\ or $124,373 per broker-dealer.\1576\
These external outsourcing cost estimates are calculated using the
information from Staff discussions with service bureaus and other
market participants, as applied to data provided by FINRA.\1577\
---------------------------------------------------------------------------
\1573\ See Section IV.F.1.c(2)B.i, supra. Because of the
extensive use of service bureaus in these categories of broker-
dealers, the Commission assumes that these broker-dealers are likely
to use service bureaus to accomplish their CAT data reporting.
\1574\ The average broker-dealer in this category reported
15,185 OATS ROEs from June 15-July 10, 2015; the median reported
1,251 OATS ROEs. Of these broker-dealers, 39 reported more than
100,000 OATS ROEs during the sample period. See Section
IV.F.1.c(2)B.ii, supra.
\1575\ Id.
\1576\ $124,373 = $100,200,000/806 broker-dealers. This amount
is the average estimated annual outsourcing cost to firms that
currently report fewer than 350,000 OATS ROEs per month. Id.
\1577\ See Section IV.F.1.c(2)B.ii, supra.
---------------------------------------------------------------------------
Firms that outsource their regulatory data reporting still face
internal staffing burdens associated with this activity. These
employees perform activities such as answering inquiries from their
service bureaus, and investigating reporting exceptions. Based on
conversations with market participants, the Commission estimates that
these firms currently have 0.5 full-time employees devoted to these
activities.\1578\ The Commission estimates that these firms would need
to hire one additional full-time employee for one year to implement CAT
reporting requirements.\1579\
---------------------------------------------------------------------------
\1578\ Id.
\1579\ Id.
---------------------------------------------------------------------------
Based on this information, the Commission preliminarily estimates
that the average initial burden to implement the needed systems changes
to capture the required information and transmit it to the Central
Repository in compliance with the CAT NMS Plan for small OATS-reporting
broker-dealers would be approximately 1,800 burden hours.\1580\ The
Commission believes the burden hours would be associated with work
performed by internal technology, compliance and legal staff in
connection with the implementation of CAT data reporting. The
Commission also preliminarily estimates that each small OATS-reporting
broker-dealer would incur approximately
---------------------------------------------------------------------------
\1580\ This estimate assumes that, based on the expected FTE
count provided, a small OATS-reporting broker-dealer would have to
hire 1 new FTE for implementation. The salary attributed to the 1
FTE would be (1 x $424,350 FTE cost) = $424,350 per year. To
determine the number of burden hours to be incurred by the current
0.5 FTE for implementation, multiply 0.5 FTE by 1,800 hours per year
= 900 initial burden hours.
---------------------------------------------------------------------------
$124,373 in initial external outsourcing costs.\1581\ Therefore,
the Commission preliminarily estimates that the average one-time
initial burden per small OATS-reporting broker-dealer would be 1,800
burden hours and external costs of $124,373, for an estimated aggregate
initial burden of 1,450,800 hours \1582\ and an estimated aggregate
initial external cost of $100,244,638.\1583\
---------------------------------------------------------------------------
\1581\ See Section IV.F.1.c(2)B.ii, supra. The Commission
preliminarily believes the outsourcing cost would be the cost of the
service bureau, which would include the compliance and legal costs
associated with changing to CAT Data reporting. The Commission
assumes these costs of changing to CAT would be included in the cost
of the service bureau because the broker-dealers would be relying on
the expertise of the service bureau to report their data to CAT on
their behalf. See supra note 941.
\1582\ The Commission preliminarily estimates that 806 small
OATS-reporting broker-dealers would be impacted by this information
collection. (806 small OATS-reporting broker-dealers x 1,800 burden
hours) = 1,450,800 aggregate initial burden hours.
\1583\ ($124,373 in outsourcing costs) x (806 small OATS-
reporting broker-dealers) = $100,244,638 in aggregate initial
external costs.
---------------------------------------------------------------------------
ii. Ongoing, Annual Burden Hours and External Cost
Small OATS-reporting broker-dealers that outsource their regulatory
data reporting would likely face internal staffing burdens and external
costs associated with ongoing activity, such as maintaining any systems
that transmit data to their service providers. Based on conversations
with market participants, the Commission estimates these firms would
need 0.75 FTEs on an ongoing basis to maintain CAT reporting.\1584\
---------------------------------------------------------------------------
\1584\ See Section IV.F.1.c(2)B.ii, supra.
---------------------------------------------------------------------------
Based on this information the Commission preliminarily believes
that it would take a small OATS-reporting broker-dealer 1,350 ongoing
burden hours per year \1585\ to continue compliance with the Rule. The
Commission believes the burden hours would be associated with work
performed by internal technology, compliance and legal staff in
connection with the ongoing operation of CAT Data reporting. The
Commission preliminarily estimates that it would cost, on average,
approximately $124,373 in ongoing external outsourcing costs \1586\ to
ensure ongoing compliance with Rule 613.
---------------------------------------------------------------------------
\1585\ 1,350 ongoing burden hours = (0.75 FTE for maintenance of
CAT Data reporting systems) x (1,800 working hours per year).
\1586\ See Section IV.F.1.c(2)B.ii, supra. See supra note 1581.
---------------------------------------------------------------------------
Therefore, the Commission preliminarily estimates that the average
ongoing annual burden per small OATS-reporting broker-dealer would be
approximately 1,350 hours, plus $124,373 in external costs, for an
estimated aggregate ongoing burden of 1,088,100 hours \1587\ and an
estimated aggregate ongoing external cost of $100,244,638.\1588\
---------------------------------------------------------------------------
\1587\ The Commission preliminarily estimates that 806 small
OATS-reporting broker-dealers would be impacted by this information
collection. (806 small OATS-reporting broker-dealers x 1,350 burden
hours) = 1,088,100 aggregate ongoing burden hours to ensure ongoing
compliance with Rule 613.
\1588\ $100,244,638 = $124,373 in ongoing outsourcing costs x
806 broker-dealers.
---------------------------------------------------------------------------
B. Non-OATS Reporters
i. Initial Burden Hours and External Cost
In addition to firms that currently report to OATS, the Commission
estimates there are 799 broker-dealers that are currently exempt from
OATS reporting rules due to firm size, or excluded because all of their
order flow is routed to a single OATS reporter, such as a clearing
firm, that would incur CAT reporting obligations.\1589\ A further 24
broker-dealers have SRO memberships only with one Participant; \1590\
the Commission believes this group is comprised mostly of floor brokers
and further preliminarily believes these firms would experience CAT
implementation and ongoing reporting costs similar in magnitude to
small equity broker-
[[Page 30796]]
dealers that currently have no OATS reporting responsibilities.\1591\
---------------------------------------------------------------------------
\1589\ See Section IV.F.1.c(2)B.ii, supra. Rule 613 does not
exclude from data reporting obligations SRO members that quote or
execute transactions in NMS Securities and Listed Options that route
to a single market participant. See also CAT NMS Plan, supra note 3,
at Appendix C, Section B.7(b)(ii)(B)(2).
\1590\ See Section IV.F.1.c(2)B.ii, supra.
\1591\ Id.
---------------------------------------------------------------------------
The Commission assumes these broker-dealers would have very low
levels of CAT reporting, similar to those of the lowest activity firms
that currently report to OATS. For these firms, the Commission assumes
that under CAT they would incur the average estimated service bureau
cost of broker-dealers that currently report fewer than 350,000 OATS
ROEs per month, which is $124,373 annually.\1592\ Furthermore, because
these firms have more limited data reporting requirements than other
firms, the Commission assumes these firms currently have only 0.1 full-
time employees currently dedicated to regulatory data reporting
activities.\1593\ The Commission assumes these firms would require 2
full-time employees for one year to implement CAT.\1594\
---------------------------------------------------------------------------
\1592\ Id.
\1593\ Id.
\1594\ Id.
---------------------------------------------------------------------------
Based on this information, the Commission preliminarily estimates
that the average initial burden to develop and implement the needed
systems changes to capture the required information and transmit it to
the Central Repository in compliance with the Rule for small, non-OATS-
reporting broker-dealers would be approximately 3,600 initial burden
hours.\1595\ The Commission believes the burden hours would be
associated with work performed by internal technology, compliance and
legal staff in connection with the implementation of CAT Data
reporting. The Commission also preliminarily estimates that each small
non-OATS-reporting broker-dealer would incur approximately $124,373 in
initial external outsourcing costs.\1596\
---------------------------------------------------------------------------
\1595\ 3,600 initial burden hours = (2 FTEs for implementation
of CAT Data reporting systems) x (1,800 working hours per year).
\1596\ See supra note 1590.
---------------------------------------------------------------------------
Therefore, the Commission preliminarily estimates that the average
one-time initial burden per small OATS-reporting broker-dealer would be
3,600 burden hours and external costs of $124,373 for an estimated
aggregate initial burden of 2,962,800 hours \1597\ and an estimated
aggregate initial external cost of $102,358,979.\1598\
---------------------------------------------------------------------------
\1597\ The Commission preliminarily estimates that 823 small
non-OATS-reporting broker-dealers would be impacted by this
information collection. (823 small non-OATS-reporting broker-dealers
x 3,600 burden hours) = 2,962,800 aggregate initial burden hours.
\1598\ ($124,373 in outsourcing costs) x (823 small non-OATS-
reporting broker-dealers) = $102,358,979 in aggregate initial
external costs.
---------------------------------------------------------------------------
ii. Ongoing, Annual Burden Hours and External Cost
Small non-OATS-reporting broker-dealers that outsource their
regulatory data reporting would likely face internal staffing burdens
and costs associated with ongoing activity, such as maintaining any
systems that transmit data to their service providers. Based on
conversations with market participants, the Commission estimates these
firms would need 0.75 full-time employees annually to maintain CAT
reporting.
Based on this information the Commission preliminarily believes
that it would take a small non-OATS-reporting broker-dealer 1,350
ongoing burden hours per year \1599\ to continue compliance with the
Rule. The Commission preliminarily estimates that it would cost, on
average, approximately $124,373 in ongoing external outsourcing costs
\1600\ to ensure ongoing compliance with Rule 613. Therefore, the
Commission preliminarily estimates that the average ongoing annual
burden per small non-OATS-reporting broker-dealer would be
approximately 1,350 hours, plus $124,373 in external costs, for an
estimated aggregate ongoing burden of 1,111,050 hours \1601\ and an
estimated aggregate ongoing external cost of $102,358,979.\1602\
---------------------------------------------------------------------------
\1599\ 1,350 ongoing burden hours = (0.75 FTEs for maintenance
of CAT data reporting systems) x (1,800 working hours per year).
\1600\ The Commission assumes these firms would have very low
levels of CAT reporting, similar to those of the lowest activity
firms that currently report to OATS. For these firms, the Commission
assumes that under CAT they would incur the average estimated
service bureau cost of firms that currently OATS report fewer than
350,000 OATS ROEs per month of $124,373 annually.
\1601\ The Commission preliminarily estimates that 823 small
non-OATS-reporting broker-dealers would be impacted by this
information collection. (823 small non-OATS-reporting broker-dealers
x 1,350 burden hours) = 1,111,050 aggregate ongoing burden hours to
ensure ongoing compliance with Rule 613.
\1602\ ($124,373 in ongoing external outsourcing costs) x 823 =
$102,358,979 in aggregate ongoing external costs to ensure ongoing
compliance with Rule 613.
---------------------------------------------------------------------------
E. Collection of Information is Mandatory
Each collection of information discussed above would be a mandatory
collection of information.
F. ConfidentialityC
Rule 613 requires that the information to be collected and
electronically provided to the Central Repository would only be
available to the national securities exchanges, national securities
association, and the Commission for the purpose of performing their
respective regulatory and oversight responsibilities pursuant to the
federal securities laws, rules and regulations. Further, the CAT NMS
Plan is required to include policies and procedures to ensure the
security and confidentiality of all information submitted to the
Central Repository, and to ensure that all SROs and their employees, as
well as all employees of the Central Repository, shall use appropriate
safeguards to ensure the confidentiality of such data and shall agree
not to use such data for any purpose other than surveillance and
regulatory purposes. The Commission will receive confidential
information. To the extent that the Commission does receive
confidential information pursuant to this collection of information,
such information will be kept confidential, subject to the provisions
of applicable law.
G. Recordkeeping Requirements
National securities exchanges and national securities associations
would be required to retain records and information pursuant to Rule
17a-1 under the Exchange Act.\1603\ Broker-dealers would be required to
retain records and information in accordance with Rule 17a-4 under the
Exchange Act.\1604\ The Plan Processor would be required to retain the
information reported to Rule 613(c)(7) and (e)(6) for a period of not
less than five years.\1605\
---------------------------------------------------------------------------
\1603\ 17 CFR 240.17a-1.
\1604\ 17 CFR 240.17a-4.
\1605\ 17 CFR 242.613(c)(7) and (e)(6).
---------------------------------------------------------------------------
H. Request for Comments
Pursuant to 44 U.S.C. 3506(c)(2)(A), the Commission solicits
comment to:
(1) Evaluate whether the proposed collections are necessary for the
proper performance of our functions, including whether the information
shall have practical utility;
(2) Evaluate the accuracy of our estimate of the burden of each
collection of information;
(3) Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected; and
(4) Evaluate whether there are ways to minimize the burden of each
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology.
Persons submitting comments on the collection of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs,
[[Page 30797]]
Washington, DC 20503, and should also send a copy of their comments to
Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F
Street NE., Washington, DC 20549-1090, with reference to File No. 4-
698. Requests for materials submitted to OMB by the Commission with
regard to these collections of information should be in writing, with
reference to File No. 4-698, and be submitted to the Securities and
Exchange Commission, Office of FOIA/PA Services, 100 F Street NE.,
Washington, DC 20549-2736. As OMB is required to make a decision
concerning the collections of information between 30 and 60 days after
publication in the Federal Register, a comment to OMB is best assured
of having its full effect if OMB receives it within 30 days of
publication.
VI. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the CAT NMS Plan
is consistent with the Act. Comments may be submitted by any of the
following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number 4-698 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number 4-698. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the CAT NMS Plan that are filed with the
Commission, and all written communications relating to the CAT NMS Plan
between the Commission and any person, other than those that may be
withheld from the public in accordance with the provisions of 5 U.S.C.
552, will be available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street NE., Washington, DC
20549 on official business days between 10:00 a.m. and 3:00 p.m. Copies
of the submission will also be available for inspection and copying at
the Participants' principal offices. All comments received will be
posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number 4-698 and should be submitted on or before
July 18, 2016.
By the Commission.
Brent J. Fields,
Secretary.
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[FR Doc. 2016-10461 Filed 5-16-16; 8:45 am]
BILLING CODE 8011-01-P
