Justia Agencies And Commissions Securities And Exchange Commission Self-Regulatory Organizations; Bats BYX Exchange, Inc; Bats BZX Exchange, Inc.; Bats EDGA Exchange, Inc.; Bats EDGX Exchange, Inc.; BOX Options Exchange LLC; C2 Options Exchange, Incorporated; Chicago Board Options Exchange, Incorporated; Chicago Stock Exchange, Inc.; Financial Industry Regulatory Authority, Inc.; Investors' Exchange LLC; Miami International Securities Exchange, LLC; MIAX PEARL LLC; NASDAQ BX, Inc.; Nasdaq GEMX, LLC; Nasdaq ISE, LLC; Nasdaq MRX, LLC; NASDAQ PHLX LLC; The NASDAQ Stock Market LLC; New York Stock Exchange LLC; NYSE Arca, Inc. and NYSE MKT LLC; Suspension of and Order Instituting Proceedings To Determine Whether To Approve or Disapprove Proposed Rule Changes To Establish Fees for Industry Members To Fund the Consolidated Audit Trail, 31656-31668 [2017-14245]

Self-Regulatory Organizations; Bats BYX Exchange, Inc; Bats BZX Exchange, Inc.; Bats EDGA Exchange, Inc.; Bats EDGX Exchange, Inc.; BOX Options Exchange LLC; C2 Options Exchange, Incorporated; Chicago Board Options Exchange, Incorporated; Chicago Stock Exchange, Inc.; Financial Industry Regulatory Authority, Inc.; Investors' Exchange LLC; Miami International Securities Exchange, LLC; MIAX PEARL LLC; NASDAQ BX, Inc.; Nasdaq GEMX, LLC; Nasdaq ISE, LLC; Nasdaq MRX, LLC; NASDAQ PHLX LLC; The NASDAQ Stock Market LLC; New York Stock Exchange LLC; NYSE Arca, Inc. and NYSE MKT LLC; Suspension of and Order Instituting Proceedings To Determine Whether To Approve or Disapprove Proposed Rule Changes To Establish Fees for Industry Members To Fund the Consolidated Audit Trail, 31656-31668 [2017-14245]

Download as PDF 31656 Federal Register / Vol. 82, No. 129 / Friday, July 7, 2017 / Notices C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action 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 the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing will also be available for inspection and copying at the principal office of the Exchange. 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 SR– NYSEArca–2017–56 and should be submitted on or before July 28, 2017. Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: A. By order approve or disapprove the proposed rule change, or B. institute proceedings to determine whether the proposed rule change should be disapproved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19 Brent J. Fields, Secretary. IV. Solicitation of Comments [FR Doc. 2017–14242 Filed 7–6–17; 8:45 am] Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: BILLING CODE 8011–01–P 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 SR– NYSEArca–2017–56 in the subject line. asabaliauskas on DSKBBXCHB2PROD with NOTICES VerDate Sep<11>2014 20:56 Jul 06, 2017 Jkt 241001 PO 00000 [Release No. 34–81067; File Nos. SR– BatsBYX–2017–11; SR–BatsBZX–2017–38; SR–BatsEDGA–2017–13; SR–BatsEDGX– 2017–22; SR–BOX–2017–16; SR–BX–2017– 023; SR–C2–2017–017; SR–CBOE–2017– 040; SR–CHX–2017–08; SR–FINRA–2017– 011; SR–GEMX–2017–17; SR–IEX–2017–16; SR–ISE–2017–45; SR–MIAX–2017–18; SR– MRX–2017–04; SR–NASDAQ–2017–046; SR–NYSE–2017–22; SR–NYSEArca–2017– 52; SR–NYSEMKT–2017–26; SR–PEARL– 2017–20; SR–PHLX–2017–37] Self-Regulatory Organizations; Bats BYX Exchange, Inc; Bats BZX Exchange, Inc.; Bats EDGA Exchange, Inc.; Bats EDGX Exchange, Inc.; BOX Options Exchange LLC; C2 Options Exchange, Incorporated; Chicago Board Options Exchange, Incorporated; Chicago Stock Exchange, Inc.; Financial Industry Regulatory Authority, Inc.; Investors’ Exchange LLC; Miami International Securities Exchange, LLC; MIAX PEARL LLC; NASDAQ BX, Inc.; Nasdaq GEMX, LLC; Nasdaq ISE, LLC; Nasdaq MRX, LLC; NASDAQ PHLX LLC; The NASDAQ Stock Market LLC; New York Stock Exchange LLC; NYSE Arca, Inc. and NYSE MKT LLC; Suspension of and Order Instituting Proceedings To Determine Whether To Approve or Disapprove Proposed Rule Changes To Establish Fees for Industry Members To Fund the Consolidated Audit Trail June 30, 2017. I. Introduction On May 1, 2017,1 May 2, 2017,2 May 3, 2017,3 May 8, 2017,4 May 9, 2017,5 May 10, 2017,6 May 12, 2017,7 May 15, Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSEArca–2017–56. This file number should be included in 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 proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the SECURITIES AND EXCHANGE COMMISSION 19 17 CFR 200.30–3(a)(12). Frm 00109 Fmt 4703 Sfmt 4703 1 Miami International Securities Exchange, LLC and MIAX PEARL LLC filed their proposed rule changes on May 1, 2017. 2 The NASDAQ Stock Market LLC and NASDAQ BX, Inc. filed their proposed rule changes on May 2, 2017. 3 Chicago Stock Exchange, Inc. filed its proposed rule change on May 3, 2017. 4 Financial Industry Regulatory Authority, Inc. filed its proposed rule change on May 8, 2017. 5 Investors’ Exchange LLC originally filed its proposed rule change on May 3, 2017 under File No. SR–IEX–2017–13, and subsequently withdrew that filing and filed this proposed rule change on May 9, 2017. 6 The New York Stock Exchange LLC, NYSE Arca, Inc. and NYSE MKT LLC filed their proposed rule changes on May 10, 2017. 7 NASDAQ GEMX LLC, NASDAQ ISE, LLC, NASDAQ MRX, LLC and NASDAQ PHLX LLC originally filed their proposed rule changes on May 3, 2017 under File Nos. SR–GEMX–2017–11, SR– ISE–2017–40, SR–MRX–2017–03, and SR–PHLX– 2017–35, and subsequently withdrew those filings and filed these proposed rule changes on May 12, 2017. E:\FR\FM\07JYN1.SGM 07JYN1 Federal Register / Vol. 82, No. 129 / Friday, July 7, 2017 / Notices asabaliauskas on DSKBBXCHB2PROD with NOTICES 2017,8 May 16, 2017,9 and May 23, 2017,10 Bats BYX Exchange, Inc. (‘‘Bats BYX’’), Bats BZX Exchange, Inc. (‘‘Bats BZX’’), Bats EDGA Exchange, Inc. (‘‘Bats EDGA’’), Bats EDGX Exchange, Inc. (‘‘Bats EDGX’’), BOX Options Exchange LLC (‘‘BOX’’), C2 Options Exchange, Incorporated (‘‘C2’’), Chicago Board Options Exchange, Incorporated (‘‘CBOE’’), Chicago Stock Exchange, Inc. (‘‘CHX’’), Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’), Investors’ Exchange LLC (‘‘IEX’’), Nasdaq ISE, LLC (‘‘ISE’’), Miami International Securities Exchange, LLC (‘‘MIAX’’), MIAX PEARL, LLC (‘‘PEARL’’), NASDAQ BX, Inc. (‘‘BX’’), Nasdaq GEMX, LLC (‘‘GEMX’’), Nasdaq MRX, LLC (‘‘MRX’’), NASDAQ PHLX LLC (‘‘Phlx’’), The Nasdaq Stock Market LLC (‘‘Nasdaq’’), New York Stock Exchange LLC (‘‘NYSE’’), NYSE Arca, Inc. (‘‘NYSE Arca’’) and NYSE MKT LLC (‘‘NYSE MKT’’) (collectively, the ‘‘Participants’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 11 and Rule 19b–4 thereunder,12 proposed rule changes to adopt fees to be charged to Industry Members 13 to fund the consolidated audit trail (‘‘CAT’’).14 The proposed rule changes were immediately effective upon filing with the Commission pursuant to Section 19(b)(3)(A) of the Act.15 The proposed rule changes submitted by MIAX and PEARL were published for comment in the Federal Register on 8 BOX Options Exchange LLC originally filed its proposed rule change on May 11, 2017 under File No. SR–BOX–2017–15, and subsequently withdrew that filing and filed this proposed rule change on May 15, 2017. 9 Bats BYX Exchange, Inc., C2 Options Exchange, Incorporated and Chicago Board Options Exchange, Incorporated filed their proposed rule changes on May 16, 2017. Bats EDGA Exchange, Inc. originally filed its proposed rule change on May 5, 2017 under File No. SR–BatsEDGA–2017–11, and subsequently withdrew that filing on May 11, 2017 and filed this proposed rule change on May 16, 2017. 10 Bats BZX Exchange, Inc. filed its proposed rule changes on May 23, 2017. Bats EDGX Exchange, Inc. originally filed its proposed rule change on May 5, 2017 under File No. SR–BatsEDGX–2017– 20, and subsequently withdrew that filing on May 10, 2017 and filed this proposed rule change on May 23, 2017. 11 15 U.S.C. 78s(b)(1). 12 17 CFR 240.19b–4. 13 Section 1.1 of the CAT NMS Plan defines ‘‘Industry Member’’ as ‘‘a member of a national securities exchange or a member of a national securities association.’’ 14 See infra notes 16–22. 15 15 U.S.C. 78s(b)(3)(A). A proposed rule change may take effect upon filing with the Commission if it is designated by the exchange as ‘‘establishing or changing a due, fee, or other charge imposed by the self-regulatory organization on any person, whether or not the person is a member of the self-regulatory organization.’’ 15 U.S.C. 78s(b)(3)(A)(ii). VerDate Sep<11>2014 20:56 Jul 06, 2017 Jkt 241001 May 19, 2017.16 The proposed rule changes submitted by BX, CHX, IEX, Nasdaq, NYSE, NYSE Arca and NYSE MKT were published for comment in the Federal Register on May 22, 2017.17 The proposed rule change submitted by FINRA was published for comment in the Federal Register on May 23, 2017.18 The proposed rule changes submitted by BOX, GEMX, ISE, MRX and Phlx were published for comment in the Federal Register on May 24, 2017.19 The proposed rule changes submitted by C2, CBOE and Bats EDGA were published for comment in the Federal Register on June 1, 2017.20 The proposed rule change submitted by Bats BYX was published for comment in the Federal Register on June 5, 2017.21 The proposed rule changes submitted by Bats BZX and Bats EDGX were published for comment in the Federal Register on June 6, 2017.22 The Commission has received a number of comment letters on the proposed rule changes, and a response to comments from the Participants.23 16 See Securities Exchange Act Release Nos. 80675 (May 15, 2017), 82 FR 23100 (May 19, 2017) (SR–MIAX–2017–18) (‘‘Notice’’); and 80676 (May 15, 2017), 82 FR 23083 (May 19, 2017) (SR–PEARL– 2017–20). 17 Securities Exchange Act Release Nos. 80697 (May 16, 2017), 82 FR 23398 (May 22, 2017) (SR– BX–2017–023); 80691 (May 16, 2017), 82 FR 23344 (May 22, 2017) (SR–CHX–2017–08); 80692 (May 16, 2017), 82 FR 23325 (May 22, 2017) (SR–IEX–2017– 16); 80696 (May 16, 2017), 82 FR 23439 (May 22, 2017) (SR–NASDAQ–2017–046); 80693 (May 16, 2017), 82 FR 23363 (May 22, 2017) (SR–NYSE– 2017–22); 80698 (May 16, 2017), 82 FR 23457 (May 22, 2017) (SR–NYSEArca–2017–52); and 80694 (May 16, 2017), 82 FR 23416 (May 22, 2017) (SR– NYSEMKT–2017–26). 18 See Securities Exchange Act Release No. 80710 (May 17, 2017), 82 FR 23639 (May 23, 2017) (SR– FINRA–2017–011). 19 See Securities Exchange Act Release Nos. 80721 (May 18, 2017), 82 FR 23864 (May 24, 2017) (SR–BOX–2017–16); 80713 (May 18, 2017), 82 FR 23956 (May 24, 2017) (SR–GEMX–2017–17); 80715 (May 18, 2017), 82 FR 23895 (May 24, 2017) (SR– ISE–2017–45); 80726 (May 18, 2017), 82 FR 23915 (May 24, 2017) (SR–MRX–2017–04); and 80725 (May 18, 2017), 82 FR 23935 (May 24, 2017) (SR– PHLX–2017–37). 20 Securities Exchange Act Release Nos. 80786 (May 26, 2017), 82 FR 25474 (June 1, 2017) (SR– C2–2017–017); 80785 (May 26, 2017), 82 FR 25404 (June 1, 2017) (SR–CBOE–2017–040); and 80784 (May 26, 2017), 82 FR 25448 (June 1, 2017) (SR– BatsEDGA–2017–13). 21 See Securities Exchange Act Release No. 80809 (May 30, 2017), 82 FR 25837 (June 5, 2017) (SR– BatsBYX–2017–11). 22 See Securities Exchange Act Release Nos. 80822 (May 31, 2017), 82 FR 26148 (June 6, 2017) (SR–BatsBZX–2017–38); and 80821 (May 31, 2017), 82 FR 26177 (June 6, 2017) (SR–BatsEDGX–2017– 22). 23 Since the proposed rule changes are designed to adopt fees to be charged to Industry Members to fund CAT, the Commission is considering all comments received regardless of the comment file to which they were submitted. See Letter from Theodore R. Lazo, Managing Director and Associate General Counsel, Securities Industry and Financial PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 31657 Pursuant to Section 19(b)(3)(C) of the Act, the Commission is hereby: (1) temporarily suspending the proposed rule changes; and (2) instituting proceedings to determine whether to approve or disapprove the proposals. II. Summary of the Proposed Rule Change Prior to filing the proposed rule changes, the Participants and NYSE National, Inc.24 filed with the Commission, pursuant to Section 11A of the Exchange Act 25 and Rule 608 of Regulation NMS thereunder,26 a national market system (‘‘NMS’’) plan to create, implement and maintain the CAT (the ‘‘CAT NMS Plan’’ or the ‘‘Plan’’).27 The Plan was published for Markets Association, to Brent J. Fields, Secretary, Commission (dated June 6, 2017) (‘‘SIFMA Letter’’), available at: https://www.sec.gov/comments/srbatsbzx-2017-38/batsbzx201738-1788188153228.pdf; Letter from Patricia L. Cerny and Steven O’Malley, Compliance Consultants, to Brent J. Fields, Secretary, Commission (dated June 12, 2017) (‘‘Cerny & O’Malley Letter’’), available at: https://www.sec.gov/comments/sr-cboe-2017-040/ cboe2017040-1799253-153675.pdf; Letter from Daniel Zinn, General Counsel, OTC Markets Group Inc., to Eduardo A. Aleman, Assistant Secretary, Commission (dated June 13, 2017) (‘‘OTC Markets Letter’’), available at: https://www.sec.gov/ comments/sr-finra-2017-011/finra20170111801717-153703.pdf; Letter from Joanna Mallers, Secretary, FIA Principal Traders Group, to Brent J. Fields, Secretary, Commission (dated June 22, 2017) (‘‘FIA Letter’’), available at: https://www.sec.gov/ comments/sr-cboe-2017-040/cboe2017040-1819670154195.pdf; Letter from Stuart J. Kaswell, Executive Vice President and Managing Director, General Counsel, Managed Funds Association, to Brent J. Fields, Secretary, Commission (dated June 23, 2017) (‘‘MFA Letter’’), available at: https://www.sec.gov/ comments/sr-finra-2017-011/finra20170111822454-154283.pdf; and Letter from Suzanne H. Shatto, Investor, to Commission (dated June 27, 2017) (‘‘Shatto Letter’’), available at: https:// www.sec.gov/comments/sr-batsedgx-2017-22/ batsedgx201722-154443.pdf. The Commission also received a comment letter which is not pertinent to these proposed rule changes. See Letter from Christina Crouch, Smart Ltd., to Brent J. Fields, Secretary, Commission (dated June 5, 2017) (‘‘Smart Letter’’), available at: https://www.sec.gov/ comments/sr-batsbzx-2017-38/batsbzx2017381785545-153152.htm. The Commission also has received a letter from the Participants responding to the comments received. See Letter from CAT NMS Plan Participants to Brent J. Fields, Secretary, Commission (dated June 29, 2017) (‘‘Response from Participants’’), available at https://www.sec.gov/ comments/sr-batsbyx-2017-11/batsbyx2017111832632-154584.pdf. 24 NYSE National, Inc. ceased trading on February 1, 2017. See Securities Exchange Act Release No. 80018 (February 10, 2017), 82 FR 10947 (February 16, 2017) (SR–NSX–2017–04). Therefore, it did not submit a proposed rule change to adopt fees on Industy Members to fund CAT. 25 15 U.S.C. 78k–1. 26 17 CFR 242.608. 27 See Letter from the Participants to Brent J. Fields, Secretary, Commission, dated September 30, 2014; and Letter from Participants to Brent J. Fields, Secretary, Commission, dated February 27, 2015. On December 23, 2015, the Participants submitted an amendment to the CAT NMS Plan. See Letter E:\FR\FM\07JYN1.SGM Continued 07JYN1 31658 Federal Register / Vol. 82, No. 129 / Friday, July 7, 2017 / Notices comment in the Federal Register on May 17, 2016,28 and approved by the Commission, as modified, on November 15, 2016.29 Under the CAT NMS Plan, the Operating Committee of a newly formed company—CAT NMS, LLC (the ‘‘Company’’), of which each Participant is a member—has the discretion to establish funding for the Company to operate the CAT, including establishing fees that the Participants and Industry Members will pay (‘‘CAT Fees’’).30 The Plan specified that, in establishing the funding of the Company, the Operating Committee shall establish ‘‘a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members’ non-ATS activities are based upon message traffic; and (iii) 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).’’ 31 Under the Plan, such fees are to be implemented in accordance with various funding principles, including an ‘‘allocation of the Company’s related costs among Participants and Industry Members that is consistent with the Exchange Act taking into account . . . distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company resources and operations’’ and the ‘‘avoid[ance of] any disincentives such as placing an inappropriate burden on competition and reduction in market quality.’’ 32 To establish CAT Fees, the Participants submitted the proposed rule changes. As noted above, the proposed rule changes adopt fees to be charged to Industry Members, including Industry Members that are Execution Venue ATSs, which are described below.33 The Participants also submitted an amendment to the Plan on May 23, 2017 34 to establish the CAT Fees to be charged to themselves.35 A. Industry Member Tiers The proposed rule changes establish fixed fees to be payable by Industry Members, based on message traffic.36 Under the proposed rule changes, each Industry Member (other than Execution Venue ATSs 37) will be ranked by message traffic and assigned to one of nine tiers that have been predefined by percentages (the ‘‘Industry Member Percentages’’).38 The Participants noted that the percentage of costs recovered by each Industry Member tier will be determined by predefined percentage allocations (the ‘‘Industry Member Recovery Allocation’’).39 The following table sets forth the specific Industry Member Percentages and Industry Member Recovery Allocations: 40 Percentage of industry members Percentage of industry member recovery Percentage of total recovery ............................................................................................................................................................................. ............................................................................................................................................................................. ............................................................................................................................................................................. ............................................................................................................................................................................. ............................................................................................................................................................................. ............................................................................................................................................................................. ............................................................................................................................................................................. ............................................................................................................................................................................. ............................................................................................................................................................................. 0.500 2.500 2.125 4.625 3.625 4.000 17.500 20.125 45.000 8.50 35.00 21.25 15.75 7.75 5.25 4.50 1.50 0.50 6.38 26.25 15.94 11.81 5.81 3.94 3.38 1.13 0.38 Total ....................................................................................................................................................................... 100 100 75 Industry member tier Tier Tier Tier Tier Tier Tier Tier Tier Tier 1 2 3 4 5 6 7 8 9 asabaliauskas on DSKBBXCHB2PROD with NOTICES The Participants explained that, prior to the start of CAT reporting, ‘‘message traffic’’ will be comprised of historical equity and equity options orders, cancels and quotes provided by each exchange and FINRA over the previous three months.41 The Participants stated that prior to the start of CAT reporting, (1) orders will be comprised of the total number of equity and equity options orders received and originated by a member of an exchange or FINRA over the previous three-month period, as well as order routes and executions originated by a member of FINRA, (2) cancels will be comprised of the total number of equity and equity option cancels received and originated by a from Participants to Brent J. Fields, Secretary, Commission, dated December 23, 2015. 28 Securities Exchange Act Release No. 77724 (April 27, 2016), 81 FR 30614 (May 17, 2016) (‘‘CAT NMS Plan Notice’’). 29 Securities Exchange Act Release No. 79318 (November 15, 2016), 81 FR 84696 (November 23, 2016) (‘‘Approval Order’’). 30 Section 11.1(b) of the CAT NMS Plan. 31 Section 11.2(c) of the CAT NMS Plan. See Article XI of the CAT NMS Plan for additional detail; see also, e.g., Notice, supra note 16, at 23102–04 for additional description of the CAT NMS Plan requirements. 32 See Section 11.2(b) and (e) of the CAT NMS Plan. 33 For additional details regarding these fees, see, e.g., Notice, supra note 16. 34 The Participants initially submitted the amendment on May 9, 2017, but subsequently withdrew the amendment and refiled the current submission on May 23, 2017. 35 See Securities Exchange Act Release No. 80930 (June 14, 2017), 82 FR 28180 (June 20, 2017). 36 The CAT NMS Plan provides that the CAT Fees payable by Industry Members shall include message traffic generated by: (i) An ATS that does not execute orders that is sponsored by an Industry Member and (ii) routing orders to and from any ATS sponsored by an Industry Member. See Section 11.3(b) of the CAT NMS Plan. The Participants noted, however, that Industry Member fees will not be applicable to an ATS that qualifies as an Execution Venue. See, e.g., Notice, supra note 16, at 23104. 37 The Participants defined ‘‘Execution Venue ATSs’’ as alternative trading systems that execute transactions in Eligible Securities. See, e.g., Notice, supra note 16, at 23101. 38 See, e.g., id. at 23104. VerDate Sep<11>2014 20:56 Jul 06, 2017 Jkt 241001 PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 member of an exchange or FINRA over a three-month period, and (3) quotes will be comprised of information readily available to the exchanges and FINRA, such as the total number of historical equity and equity options quotes received and originated by a member of an exchange or FINRA over the prior three-month period.42 After an Industry 39 See, e.g., id. e.g., id. at 23105–06. 41 See, e.g., id. at 23106. The Commission approved exemptive relief allowing options marketmaker 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. See Securities Exchange Act Release No. 77265 (March 1, 2017), 81 FR 11856 (March 7, 2016). The Participants stated that this exemption applies to options market-maker quotes for CAT reporting purposes only. Therefore, the Participants indicated that options market-maker quotes will be included in the calculation of total message traffic for options market-maker under their proposed rule changes. See, e.g., Notice, supra note 16, at 23106 n.36. 42 See, e.g., id. at 23106. 40 See, E:\FR\FM\07JYN1.SGM 07JYN1 31659 Federal Register / Vol. 82, No. 129 / Friday, July 7, 2017 / Notices Member begins reporting to the CAT, the Participants noted that ‘‘message traffic’’ will be calculated based on the Industry Member’s Reportable Events.43 B. Execution Venue Tiers For purposes of determining the CAT Fees for ATSs, the Participants categorized ATSs (excluding ATSs that do not execute orders) as Execution Venues.44 Furthermore, the proposed rule changes set different tiers for Equity and Options Execution Venues. 1. NMS Stocks and OTC Equity Securities The proposed rule changes establish fixed fees to be paid by Execution Venues depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities. Market share for Execution Venues will be calculated by share volume, except the market share for a national securities association that 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 be calculated based on share volume of trades reported, excluding the share volume reported to such national securities association by an Execution Venue.45 Under the proposed rule changes, each Equity Execution Venue will be ranked by market share and assigned to one of two tiers that have been predefined by percentages (the ‘‘Equity Execution Venue Percentages’’).46 The Participants noted that the percentage of costs recovered by each Equity Execution Venue tier will be determined by predefined percentage allocations (the ‘‘Equity Execution Venue Recovery Allocation’’).47 The following table sets forth the specific Equity Execution Venue Percentages and Equity Execution Recovery Allocations: 48 Percentage of equity execution venues Percentage of execution venue recovery Percentage of total recovery Tier 1 ............................................................................................................................................ Tier 2 ............................................................................................................................................ 25.00 75.00 26.00 49.00 6.50 12.25 Total ...................................................................................................................................... 100 75 18.75 Equity execution venue tier 2. Listed Options The proposed rule changes establish fixed fees to be paid by Execution Venues depending on the Listed Options market share of that Execution Venue. Market share for Execution Venues will be calculated by contract volume.49 Under the proposed rule changes, each Options Execution Venue will be ranked by market share and assigned to one of two tiers that have been predefined by percentages (the ‘‘Options Execution Venue Percentages’’).50 The Participants noted that the percentage of costs recovered by each Options Execution Venue tier will be determined by predefined percentage allocations (the ‘‘Options Execution Venue Recovery Allocation’’).51 The following table sets forth the specific Options Execution Venue Percentages and Options Execution Venue Recovery Allocations: 52 Percentage of options execution venues Percentage of execution venue recovery Percentage of total recovery Tier 1 ............................................................................................................................................ Tier 2 ............................................................................................................................................ 75.00 25.00 20.00 5.00 5.00 1.25 Total ...................................................................................................................................... 100 25 6.25 Options execution venue tier C. Allocation of Costs The Participants stated that market share for Execution Venues will be sourced from data reported to the CAT System after the commencement of CAT reporting.53 Prior to the commencement of CAT reporting, the Participants stated that market share for Execution Venues will be sourced from publicly-available market data, including data made publicly available by Bats and FINRA.54 asabaliauskas on DSKBBXCHB2PROD with NOTICES 3. Tier Assignments In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Participants stated that the Operating Committee decided that 75% of total costs recovered will be allocated to Industry Members (other than Execution Venue ATSs) and 25% will be allocated to Execution Venues.55 In determining the cost allocation between 43 See, e.g., id. If an Industry Member (other than an Execution Venue ATS) has no orders, cancels or quotes prior to the commencement of CAT reporting, or no Reportable Events after CAT reporting commences, the Participants stated that the Industry Member would not have a CAT Fee obligation. See, e.g., id. at n. 38. 44 See, e.g., id. at 23106. Section 1.1 of the CAT NMS Plan defines ‘‘Execution Venue’’ as ‘‘a Participant or an [ATS] (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).’’ 45 Section 11.3(a)(i) of the CAT NMS Plan; see also, e.g., Notice, supra note 16, at 23106–07. 46 See, e.g., Notice, supra note 16, at 23107. 47 See, e.g., id. 48 See, e.g., id. VerDate Sep<11>2014 20:56 Jul 06, 2017 Jkt 241001 PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 Equity Execution Venues and Options Execution Venues, the Participants stated that the Operating Committee further determined to allocate 75% of Execution Venue costs recovered to Equity Execution Venues and 25% to Options Execution Venues.56 D. Fee Levels The Participants explained that the sum of the CAT Fees is designed to 49 Section 11.3(a)(ii) of the CAT NMS Plan; see also, e.g., Notice, supra note 16, at 23108. 50 See, e.g., Notice, supra note 16, at 23108. 51 See, e.g., id. 52 See, e.g., id. 53 See, e.g., id. 54 See, e.g., id. 55 See, e.g., id. at 23109. 56 See, e.g., id. E:\FR\FM\07JYN1.SGM 07JYN1 31660 Federal Register / Vol. 82, No. 129 / Friday, July 7, 2017 / Notices recover the total costs of building and operating the CAT. They stated that the Operating Committee has estimated overall CAT costs—including development and operational costs, third-party support costs (including historic legal fees, consulting fees, and audit fees), insurance costs, and operational reserve costs—to be $50,700,000 in total for the year beginning November 21, 2016.57 The Participants stated that, based on the Monthly CAT fee Tier 1 2 3 4 5 6 7 8 9 estimated costs and the calculations for the funding model, the Operating Committee determined to impose the following fees. For Industry Members (other than Execution Venue ATSs): 58 ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... $33,668 27,051 19,239 6,655 4,163 2,560 501 145 22 Quarterly CAT fee CAT fees paid annually $101,004 81,153 57,717 19,965 12,489 7,680 1,503 435 66 $404,016 324,612 230,868 79,860 49,956 30,720 6,012 1,740 264 Quarterly CAT fee CAT fees paid annually $63,375 38,820 $253,500 155,280 Quarterly CAT fee CAT fees paid annually $57,615 39,612 $230,460 158,448 For Equity Execution Venues: 59 Monthly CAT fee Tier 1 ................................................................................................................................................... 2 ................................................................................................................................................... $21,125 12,940 For Options Execution Venues: 60 Monthly CAT fee Tier 1 ................................................................................................................................................... 2 ................................................................................................................................................... asabaliauskas on DSKBBXCHB2PROD with NOTICES E. Changes to Fee Levels and Tiers The Participants noted that Section 11.3(d) of the CAT NMS Plan states that ‘‘[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate.’’ 61 The Participants stated that, as part of such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary.62 In addition, the Participants asserted that such reviews would consider the estimated ongoing CAT costs and the level of the operating reserve, in order to adjust CAT Fees as appropriate.63 The Participants further stated that any changes to the CAT Fees will be filed with the Commission 57 See, e.g., id. The Participants further noted that CAT-related costs incurred prior to November 21, 2016 will be addressed via a separate fee filing. See, e.g., id. at n.41. 58 See, e.g., id. at 23110. 59 See, e.g., id. 60 See, e.g., id. 61 See, e.g., id. at 23115. VerDate Sep<11>2014 20:56 Jul 06, 2017 Jkt 241001 pursuant to Section 19(b) of the Exchange Act and become effective in accordance with the requirements of Section 19(b).64 F. Initial and Periodic Tier Reassignments Under the proposed rule changes, the Operating Committee will assign fee tiers every three months based on market share or message traffic, as applicable, from the prior three months.65 For the initial tier assignments, the Participants stated that the Company will calculate the relevant tier for each CAT Reporter using the prior three months of data.66 The Participants explained the Company will calculate subsequent tier assignments using the three months of data prior to the relevant tri-monthly date.67 The Participants noted that any e.g., id. e.g., id. The Participants further noted that any surplus of the Company’s revenues over its expenses will be included within the operational reserve to offset future fees. See, e.g., id. 64 See, e.g., id. 65 See, e.g., id. 66 See, e.g., id. The Participants indicated that such data will be comprised of historical equity and PO 00000 62 See, 63 See, Frm 00113 Fmt 4703 Sfmt 4703 $19,205 13,204 movement of CAT Reporters between tiers will not change the criteria for each tier or the fee amount corresponding to each tier.68 According to the Participants, a CAT Reporter’s assigned tier will depend not only on its own message traffic or market share, but also on the message traffic or market share across all CAT Reporters.69 G. Timing and Manner of Payment The proposed rule changes state that the Company will provide each Industry Member with one invoice each quarter for its CAT Fees, regardless of whether the Industry Member is a member of multiple Participants.70 The proposed rule changes further state that each Industry Member will pay its CAT Fees to the Company via the centralized system for the collection of CAT Fees established by the Company in the equity options orders, cancels, and quotes provided by the Participants over the previous three-month period. See, e.g., id.; see also notes 41–43 supra and accompanying text. 67 See, e.g., Notice, supra note 16, at 23115. 68 See, e.g., id. 69 See, e.g., id. 70 See, e.g., id. at 23116. E:\FR\FM\07JYN1.SGM 07JYN1 Federal Register / Vol. 82, No. 129 / Friday, July 7, 2017 / Notices asabaliauskas on DSKBBXCHB2PROD with NOTICES manner prescribed by the Company.71 The proposed rule changes also state that each Industry Member shall pay its CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated).72 If an Industry Member fails to pay any such fee when due, the proposed rule changes require such Industry Member to 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: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law.73 71 See, e.g., id. The Participants acknowledged, however, that no exact fee collection system has yet been established. See, e.g., id. at 23117. 72 See, e.g., id. 73 See, e.g., id. VerDate Sep<11>2014 20:56 Jul 06, 2017 Jkt 241001 III. Summary of Comments As noted above, the Commission received a number of comment letters on the proposed rule changes 74 objecting to the proposals.75 Necessity of the CAT One commenter asks whether the CAT is a ‘‘worthwhile endeavor,’’ 76 arguing that the CAT is largely 74 See supra note 23. In addition, SIFMA attaches its July 18, 2016 letter regarding the proposed CAT NMS Plan. See Letter from Theodore R. Lazo, Managing Director and Associate General Counsel, and Ellen Greene, Managing Director, Financial Services Operations, to Brent J. Fields, Secretary, Commission (dated July 18, 2016), available at: https://www.sec.gov/comments/sr-batsbzx-2017-38/ batsbzx201738-1788188-153228.pdf. This letter advances many of the same arguments described below, as well as some additional arguments— namely, that: (1) Any funding mechanism for the CAT should be centralized; (2) allocating costs to Industry Members based on message traffic may disadvantage market-makers and broker-dealers who provide liquidity, as compared to those who take liquidity; (3) the Participants should implement a user fee in connection with the use of the CAT for regulatory purposes; (4) the CAT NMS Plan does not distinguish between costs of the CAT associated with collection and processing of data reported by broker-dealers as opposed to costs of the CAT designed to support SRO regulatory uses (noting that allocating costs of the CAT based on message traffic or market share would result in broker-dealers subsidizing the costs of surveillance systems and functions paid for by the Participants through regulatory fees that they already charge their members); (5) the Participants must substantiate the need for a CAT Fee in addition to current regulatory fees; and (6) funding for the CAT system should come through cost savings realized by the Participants from the retirement of old audit trail systems. Id. at 12–19. The Participants responded to these previously-expressed concerns in their response letter. The Participants state that (1) the CAT fee filings will implement a centralized approach to billing through the provision to each Industry Member of one invoice per quarter for CAT fees, regardless of the number of SROs to which the Industry Member belongs (see Response from Participants, supra note 23, at 9); (2) their choice of a tiered, fixed fee funding model would limit disincentives to providing liquidity as compared to strictly variable or metered funding models (see id. at 10); (3) the CAT NMS Plan authorizes a usage fee, but that it is premature to establish it (see id. at 8– 9); (4) data ingestion and processing are primary drivers of the CAT costs, and therefore they believe that data processing is a reasonable basis for assessing CAT Fees (see id. at 8); (5) Rule 613 of Regulation NMS specifically contemplates brokerdealers contributing to the funding of the CAT and the Commission permitted the Participants to recover at least some of the CAT costs from their members (see id. at 3–4); and (6) the Participants have filed proposed rule changes to retire duplicative systems as required by the CAT NMS Plan and that once the Participants become more familiar with the CAT and have revised their surveillance methods, they will review their fees and determine whether to revise such fees (see id. at 9–10, 12). 75 See SIFMA Letter; Cerny & O’Malley Letter; OTC Markets Letter; FIA Letter; MFA Letter; Shatto Letter, supra note 23. The Commission notes that the Shatto Letter agrees with the views expressed in SIFMA’s letter and that the Smart Letter discusses concerns that are not pertinent to the proposed rule changes. Accordingly, those two letters are not further discussed in this section. 76 See FIA Letter, supra note 23, at 2. PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 31661 duplicative of existing electronic audit trails, and suggesting that the goals of the CAT can be accomplished at a fraction of the cost set forth in the filings.77 The commenter also believes that the CAT is not justified in terms of costs and benefits and warns that any costs assessed to broker-dealers will ultimately be passed on to investors.78 Similarly, another commenter believes that fees imposed on broker-dealers are likely to be passed through to investors, effectively limiting investor choice in execution venues.79 In response to the comment questioning the utility of the CAT, the Participants explain that they are obligated to build the CAT by Rule 613.80 Further, the Participants state that the CAT NMS Plan requires them to eliminate existing systems and rules made duplicative by the CAT and that they have already filed proposals to accomplish this for certain such systems and rules.81 The Participants add that the CAT is intended to replace the current audit trails (which vary in data and scope, among other ways) with a single, comprehensive audit trail.82 Funding Authority One commenter challenges the imposition of a CAT Fee on Industry Members, arguing that the Participants have not provided justification for imposing such a fee and that the Industry Members should not be obligated to pay any costs or expenses other than the direct costs to build and operate the CAT.83 Two commenters note that broker-dealers already pay the Participants a significant amount in regulatory funding, and argue that costs other than the direct costs to build and operate the CAT (such as insurance and consulting) should be borne by the Participants as the costs they incur to do business as self-regulatory organizations, as well as any costs 77 See id. See also Cerny & O’Malley Letter, supra note 23, at 4 (suggesting that the CAT will not capture any new violative activity not currently disclosed under current surveillance practices). 78 See FIA Letter, supra note 23, at 2. 79 See MFA Letter, supra note 23, at 2. 80 See Response from Participants, supra note 23, at 17. 81 See id. at 18. As an example of such a filing, the Participants cite to Securities Exchange Act Release No. 80783 (May 26, 2017), 82 FR 25423 (June 1, 2017) (SR–FINRA–2017–013), wherein FINRA proposes to eliminate the Order Audit Trail System. See Response from Participants, supra note 23, at 18 n.103. 82 See Response from Participants, supra note 23, at 18. 83 See SIFMA Letter, supra note 23, at 2–4. E:\FR\FM\07JYN1.SGM 07JYN1 31662 Federal Register / Vol. 82, No. 129 / Friday, July 7, 2017 / Notices incurred before the approval of the CAT NMS Plan.84 In their response, the Participants state that Rule 613 of Regulation NMS (‘‘Rule 613’’) 85 contemplates brokerdealers contributing to the funding of CAT.86 Because the CAT improves regulatory oversight of the securities markets, the Participants believe that it would be equitable to require brokerdealers and Participants to fund the CAT.87 The Participants further believe that Rule 613 and the Approval Order 88 support their recovery of costs related to the creation, implementation and maintenance of the CAT NMS Plan, such as third-party support costs, the operational reserve and insurance costs, through the CAT Fee.89 Industry Member Input asabaliauskas on DSKBBXCHB2PROD with NOTICES Three commenters argue that the funding decisions would have benefited from greater involvement from Industry Members.90 Two commenters assert that the Participants’ development of the funding model should have involved collaboration with the broker-dealer community.91 One commenter opines that if broker-dealers had been involved in the development of the funding model, such participation would have been helpful in understanding why market participants are subject to CAT fees and the rationale for the proposed fee structure.92 Another commenter believes that the proposed fees lack substantive input from the Industry Members.93 The third commenter recommends that the CAT NMS Plan Operating Committee include market participant representatives with respect to funding and data security, to enhance transparency and mitigate potential conflicts of interest.94 In response to the comment that the funding model should have been the result of greater industry collaboration, the Participants assert that market participants were given the opportunity to comment on the funding model 84 See FIA Letter, supra note 23, at 2–3; see also SIFMA Letter, supra note 23, at 3–4. 85 17 CFR 242.613. 86 See Response from Participants, supra note 23, at 3. 87 See id. at 4. 88 See supra note 29. 89 See Response from Participants, supra note 23, at 7–8. 90 See SIFMA Letter; FIA Letter; MFA Letter, supra note 23. 91 See SIFMA Letter, supra note 23, at 2–3; see FIA Letter, supra note 23, at 2 (stating ‘‘we struggle to understand how excluding other market participants and taking input only from the Plan Participants is anything but prejudicial’’). 92 See FIA Letter, supra note 23, at 2. 93 See SIFMA Letter, supra note 23, at 2–3. 94 See MFA Letter, supra note 23, at 2. VerDate Sep<11>2014 20:56 Jul 06, 2017 Jkt 241001 through the CAT NMS Plan Notice 95 and that, in developing the funding model, the Participants considered the input of members of the industry through the ‘‘Development Advisory Group’’ that was formed to provide industry feedback on the development of the CAT NMS Plan.96 Further, the Participants assert that the proposed fees provide the opportunity for public comment on the fees.97 Conflicts of Interest Three commenters raise concerns about Participant conflicts of interest in setting the CAT fees.98 One commenter argues that, through the proposals, the Participants are imposing unreasonable fees on their competitors, the Industry Members, who, as members of the Participants, have no recourse but to pay the fees or risk regulatory action.99 This commenter states that 88% of the total costs of building and operating the CAT are allocated to broker-dealers and ATSs under the proposed fees, suggesting the Participants decided to allocate nearly all of the costs of CAT to their competitors.100 Accordingly, the commenter recommends that an independent third party should have established the proposed CAT Fees to prevent the Participants from setting fees to their benefit.101 Another commenter argues that the Participants have a clear conflict of interest when setting their own cost allocation.102 This commenter states that the not-for-profit structure of the Company is essential to the CAT NMS Plan, seeks assurance that the Company has filed for business league status and, if so, asks whether the application has been approved.103 The third commenter believes the process to establish the CAT fees does not address the Participants’ potential conflicts of interest related to their commercial interests.104 In their response, the Participants explain that it is unnecessary to require an independent third party to establish the CAT Fees, in part because the funding of the CAT is designed to 95 See 96 See supra note 28. Response from Participants, supra note 23, at 2–3. 97 See id. at 2. 98 See SIFMA Letter, FIA Letter, MFA Letter, supra note 23. 99 See SIFMA Letter, supra note 23, at 2–3. 100 See id. at 2–3. 101 See id. 102 See FIA Letter, supra note 23, at 2. 103 See id. at 3. This commenter raises concerns about the impact on the costs and allocations if the Company’s application to become a business league is not approved by the Internal Revenue Service (‘‘IRS’’). Id. 104 See MFA Letter, supra note 23, at 2. PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 protect against any conflicts of interest in the Participants’ ability to set fees, through the operation of the CAT on a break-even basis (such that any fees collected would be used toward CAT costs and an appropriate reserve, and that surpluses would offset fees in future payment).105 The Participants also refer to the application of the Company to be organized as a taxexempt business league, which would require that no part of the Company’s net earnings can inure to the benefit of the Participants and that the Company is not organized for profit.106 Additionally, the Participants note that the obligation to create, develop and maintain the CAT is their own responsibility, so they must have the ability to establish reliable funding and not an independent third party.107 In response to the comment asking about the status of the Company’s application to be organized as a taxexempt business league, the Participants state that the Company filed its IRS application on May 5, 2017, and that the application is currently pending. The Participants explain that if the IRS does not approve the application, the Company will operate as set forth in the Plan, but may be required to pay taxes. They believe that it is premature to include a tax contingency plan in the proposals.108 Allocation of Fees Several commenters raise concerns about the proposed allocation of CAT fees.109 One commenter argues that the proposals are not an equitable allocation of reasonable fees under Section 6(b)(4) or Section 15A(b)(5) of the Exchange Act.110 This commenter notes that the proposed fees allocate approximately 88% of the total costs of building and operating the CAT to broker-dealers and ATSs 111 and questions the ‘‘comparability’’ justification provided by the Participants for allocating 75% of the total CAT costs to Industry Members, stating that the proposed fees are not comparable at the highest tiers.112 Similarly, another commenter opines that the 75%/25% allocation of the CAT costs is inequitable, explaining that the Participants will be able to realize cost savings from the retirement 105 See Response from Participants, supra note 23, at 11. 106 See id. 107 See id. at 11–12. 108 See id. at 11, 18. 109 See SIFMA Letter; Cerny & O’Malley Letter, FIA Letter; MFA Letter, supra note 23. 110 See SIFMA Letter, supra note 23, at 3. 111 See id. at 3 n.4. 112 See id. at 3. E:\FR\FM\07JYN1.SGM 07JYN1 Federal Register / Vol. 82, No. 129 / Friday, July 7, 2017 / Notices of regulatory reporting processes.113 A third commenter notes that it is unable to understand the justification for the 75% allocation to broker-dealers,114 and the fourth commenter believes that the Participants are disproportionately imposing fees on Industry Members, which could put Industry Members at a competitive disadvantage.115 In response to comments regarding the allocation of CAT costs, the Participants first state that the 88% figure cited in the first commenter’s letter is the cost broker-dealers will incur directly to comply with the reporting requirements of the CAT, not the CAT Fees.116 The Participants also note that this is an aggregate number and reflects the fact that there are 75 times more Industry Members that would report to the CAT than Participants.117 In addition, the Participants explain that the Operating Committee believed that the 75%/25% division of total CAT costs between Industry Members and Execution Venues maintained the greatest level of comparability, considering affiliations among or between CAT Reporters.118 The Participants state that although the Tier 1 and 2 fees for Industry Members would be higher than those for Execution Venues, the fees paid by Execution Venue complexes would be higher than those paid by Industry Member complexes.119 The Participants also note that the cost allocation takes into account that there are approximately 24 times more Industry Members that would report to the CAT than Execution Venues.120 Tiering Methodology Two commenters believe that the proposed tiering methodology is inequitable and unreasonable.121 Both commenters raise concerns that the tiers will be applied inequitably because Industry Members will be assessed fees based on their message traffic (the biggest cost component of the CAT), 113 See Cerny & O’Malley Letter, supra note 23, at 2. 114 See FIA Letter, supra note 23, at 3. MFA Letter, supra note 23, at 2. 116 See Response from Participants, supra note 23, at 5. 117 See id. 118 See id. at 15. 119 See id. The Participants note that ‘‘the proposed funding model estimates total fees for associated Participant complexes that are in several cases nearly two to three times larger than the single largest broker-dealer complex.’’ See id. at 6. 120 See id. at 15. The Commission notes that the Notice stated that there are approximately 25 times more Industry Members expected to report to the CAT than Execution Venues. See Notice, supra note 16, at 23109. 121 See SIFMA Letter; FIA Letter, supra note 23. asabaliauskas on DSKBBXCHB2PROD with NOTICES 115 See VerDate Sep<11>2014 20:56 Jul 06, 2017 Jkt 241001 while Participants will be assessed fees on their market share.122 One of the commenters notes that, although the Participants proposed nine tiers for Industry Members, they have only proposed two tiers for Execution Venues,123 ‘‘claiming that additional tiers would have resulted in significantly higher fees for Tier 1 [E]xecution [V]enues and diminish comparability between [E]xecution [V]enues and Industry Members.’’ 124 Both commenters believe the result will ‘‘maximize costs for broker-dealers and minimize costs for Plan Participants.’’ 125 One of the commenters also questions why it makes sense to charge a fixed fee for all market participants within a single tier, and whether the fixed-fee tiers set forth therein could create incentives for market participants to limit their quoting and trading activities as their trading volumes approach higher tiers.126 In response to the comments that the tiering methodology is inequitable and unreasonable because Participants will be assessed fees based on market share, rather than message traffic, the Participants explain that charging broker-dealers based on message traffic is the most equitable means to establish their fees because message traffic is a significant cost driver of CAT. Accordingly, the Participants believe that it is appropriate to use message traffic to assign fee tiers to brokerdealers.127 The Participants state that charging Execution Venues based on message traffic, on the other hand, will result in large and small Execution Venues paying comparable fees as both types of Execution Venues produce similar amounts of message traffic.128 The Participants believe such a result would be inequitable; therefore, they decided to base fees for Execution Venues and broker-dealers on different criteria.129 In response to a commenter’s concern that the Participants only established 122 See FIA Letter, supra note 23, at 3; SIFMA Letter, supra note 23, at 4 (stating ‘‘the Plan Participants proposals inexplicably propose a tiering mechanism for themselves that is based on not their relative impact to the CAT system, but instead on their relative market share’’). 123 See SIFMA Letter, supra note 23, at 4. 124 See id. 125 See FIA Letter, supra note 23, at 3; see also SIFMA Letter, supra note 23, at 4. 126 See FIA Letter, supra note 23, at 3. 127 See Response from Participants, supra note 23, at 6. 128 See id. at 6. 129 See id. The Participants also explain that, while ATSs have varying levels of message traffic, they operate similarly to exchanges and therefore were categorized as Execution Venues. See id. at 6– 7. PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 31663 two tiers for themselves, the Participants state that the CAT NMS Plan permits them to establish only two tiers and that two tiers were sufficient to distinguish between the Execution Venues.130 The Participants state that adding more tiers will significantly increase fees for Tier 1 and Tier 2 Execution Venues with the result of fees for Tier 1 Execution Venues being much higher than fees for Tier 1 Industry Members.131 In turn, the Participants believe that such a result will violate Section 11.2(c) of the CAT NMS Plan, which states that, in establishing the funding of the Company, the Operating Committee shall seek to establish a tiered fee structure in which the fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic) 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).132 In response to the comment asking why it makes sense to charge a fixed fee for all market participants within a single tier and questioning the results of fixed-fee tiering, the Participants explain that the proposed approach ‘‘helps ensure that fees are equitably allocated among similarly situated CAT Reporters, thereby lessening the impact of CAT fees on smaller firms,’’ 133 and provides predictability of payment obligations.134 The Participants also state that the fixed-fee approach provides elasticity to take into account any changes in message traffic levels through the use of predefined fixed percentages instead of fixed volume thresholds, and would not likely cause CAT Reporters to change their behavior (and impact liquidity) to avoid being placed in a higher tier.135 Options Market-Maker Fees One commenter believes that the proposed fees will be unsustainable for small options market-makers.136 The commenter explains that because the 130 See id. at 13. The Participants also state that, unlike for Industry Members, the data for Execution Venues ‘‘did not suggest a break point(s) for the markets with less than 1% market share that would indicate an appropriate threshold for creating a new tier or tiers.’’ Id. 131 See id. at 14. 132 See id.; Section 11.2(c) of the CAT NMS Plan. 133 See Response from Participants, supra note 23, at 14. 134 See id. 135 See id. 136 See Cerny & O’Malley Letter, supra note 23, at 1. The commenter notes that options marketmakers have an obligation to quote ‘‘hundreds of E:\FR\FM\07JYN1.SGM Continued 07JYN1 31664 Federal Register / Vol. 82, No. 129 / Friday, July 7, 2017 / Notices asabaliauskas on DSKBBXCHB2PROD with NOTICES nature of their business requires the generation of quotes, the proposed assessment of fees based on message traffic will place small options marketmakers in the top Industry Member fee tiers, ‘‘[a]lthough this category of brokerdealer is relatively small in terms of net worth . . . .’’ 137 The commenter notes that the top three tier fees for Industry Members are comparable to the largest equity Execution Venues, which it states is neither equitable nor fair.138 The commenter also believes that smaller broker-dealers, such as options marketmakers and other electronic trading firms, will be in the top fee tiers, while larger ‘‘full-service’’ firms that produce fewer electronic messages would be in the lower fee tiers.139 The commenter argues that this result is not equitable or fair to smaller market participants.140 Additionally, the commenter believes that charging Industry Members on the basis of message traffic will disproportionately impact options market-makers because, unlike for equities, message traffic would include options strikes and series.141 Further, the commenter notes that options market-makers have continuous quoting obligations imposed by the exchanges, and consequently, expected increases in the options classes listed by the exchanges will increase CAT fees for options market-makers.142 The commenter adds that the proposed fees may impact the ability of small options market-makers to provide liquidity and that such Industry Members may choose to leave the market-making business in order to avoid quoting requirements.143 In their response, the Participants explain that since message traffic is a major cost component for CAT, they believe it is an appropriate basis for assigning Industry Member fee tiers.144 The Participants note that options market-makers will produce a large amount of message traffic to be processed by the CAT, so the thousands of options series’’ and that this fact was acknowledged by the Commission, which exempted them from submitting their quotes to the Central Repository. See id. at 3; see also note 41 supra. 137 See Cerny & O’Malley Letter, supra note 23, at 1. 138 See id. at 3. 139 See id. at 4. 140 See id. 141 See id. at 2. 142 See id. at 3. 143 See id. at 3, 4, 5. 144 See Response from Participants, supra note 23, at 6, 17. VerDate Sep<11>2014 20:56 Jul 06, 2017 Jkt 241001 Participants intend to charge them CAT fees.145 ATS Fees One commenter objects to the proposed fees for ATSs, which are the same fees as Participants under the proposals, as unreasonable, because it believes the fees would result a significant burden on small ATSs and a barrier to entry for new ATSs that would not similarly apply to the Participants.146 Another commenter objects to the proposals’ treatment of smaller Equity Execution Venues (such as low volume ATSs), opining that such treatment is unfair and anti-competitive.147 The commenter also argues that smaller Execution Venues that were assigned to the second fee tier would be required to pay two-thirds of the fees allocated to ‘‘the enormous NYSE or Nasdaq exchanges.’’ 148 This commenter suggests adding at least one tier for small ATSs executing in the aggregate less than 1% of NMS stocks (based on trade volume), as well as for ATSs executing OTC Equity securities, and allocating approximately 1.5% of the total costs assigned to all Execution Venues to that tier.149 In response to the comment noting that charging ATSs the same CAT fees as Execution Venues would result in a significant burden on smaller ATSs and act as a barrier to entry, the Participants reiterate that two fee tiers for Execution Venues were appropriate because adding tiers would ‘‘compromise the comparability of fees between Execution Venues and Industry Members with the most CAT-related activity. . . . [C]reating additional tiers could have unintended consequences on the funding model such as creating greater discrepancies between the tiers.’’ 150 The Participants also explain that they decided to treat Execution Venues and ATSs in the same way because of the similarities of their business models and estimated burden on CAT.151 In response to the comment recommending the addition of a tier for small ATSs executing in the aggregate less than 1% of NMS stocks, the id. at 17 n. 96; see also note 41, supra. 146 See SIFMA Letter, supra note 23, at 4. SIFMA states that Tier 2 Execution Venues will produce significantly more reports to CAT than Tier 2 ATSs, but points out that Tier 2 Execution Venues and Tier 2 ATSs will be subject to the same CAT Fees. See id. 147 See OTC Markets Letter, supra note 23, at 1– 2. 148 See id. at 9. 149 See id. 150 See Response from Participants, supra note 23, at 16. 151 See id. at 6–7. PO 00000 145 See Frm 00117 Fmt 4703 Sfmt 4703 Participants explain that two fee tiers for Execution Venues were appropriate because adding tiers would ‘‘compromise the comparability of fees between Execution Venues and Industry Members with the most CAT-related activity.’’ 152 The Participants also state that they considered adding more than two tiers of Execution Venue fees, but that doing so would result greatly increase the fees imposed on Tier 1 Equity Execution Venues and ‘‘diminish comparability between Execution Venues and Industry Members in a manner that would be difficult to justify under the funding model.’’ 153 OTC Equity Securities Execution Venues One commenter objects to the proposals’ treatment of Execution Venues for OTC Equity securities, opining that it is unfair and anticompetitive.154 The commenter particularly objects to the assignment of OTC Link ATS to the first fee tier of Execution Venues with large Execution Venues for NMS Stocks.155 The commenter states that OTC Link ATS was placed in the first CAT fee tier because fee tier assignments are inappropriately based on market share calculated from share volume.156 The commenter states that the number of trades in OTC Equity Securities is relatively small,157 as opposed to share volume ‘‘due to the disproportionately large number of shares being traded on the OTC equity market as compared to the NMS market. . . .’’ 158 The commenter explains that many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—and that lowpriced shares tend to trade in larger quantities.159 Because the fee tiers are based on market share calculated from share volume, the commenter points out that OTC Link ATS has the greatest market share of all of the Execution Venues in both NMS Stocks and OTC Equity Securities at 29.90% and 152 See id. at 16. id. 154 See OTC Markets Letter, supra note 23, at 1– 153 See 2. 155 See id. at 1, 3, 5. id. at 6–8. The commenter states that ‘‘[s]hare volume is an inappropriate method for determining market share, because the costs of operating the CAT are not correlated with the number of shares traded in any particular Execution Venue. Instead, CAT’s costs are impacted by the number of orders and executions.’’ See id. at 6. The commenter recommends using the number of trades in lieu of share volume, or dollar volume instead of share volume, for determining market share. See id. at 7–8. 157 See id. at 4. 158 See id. at 7. 159 See id. 156 See E:\FR\FM\07JYN1.SGM 07JYN1 asabaliauskas on DSKBBXCHB2PROD with NOTICES Federal Register / Vol. 82, No. 129 / Friday, July 7, 2017 / Notices accordingly was assigned to the same fee tier as exchanges that the commenter claims have approximately 20 times greater trading revenues than OTC Link ATS.160 The commenter believes that this unfairly burdens the market for OTC Equity Securities.161 The commenter recommends placing Execution Venues for OTC Equity Securities in separate tiers from large Execution Venues for NMS Stocks and allocating costs to tiers based on number of trades to align tiers with CAT usage and costs.162 Specifically, the commenter believes that there should be separate tiers for the Execution Venues for OTC Equity Securities with approximately 0.5% of the total costs assigned to all Execution Venues allocated to that tier, or at least one additional tier for small ATSs executing in the aggregate less than 1% of NMS stocks (based on trade volume) and OTC Equity securities with approximately 1.5% of the total costs assigned to all Execution Venues allocated to that tier.163 In their response, the Participants state that the CAT NMS Plan provides for the use of share volume to calculate market share for Execution Venues that execute transactions in NMS Stocks or OTC Equity Securities.164 The Participants explain that two fee tiers for Execution Venues were appropriate because adding tiers would ‘‘compromise the comparability of fees between Execution Venues and Industry Members with the most CAT-related activity’’ 165 and that they considered adding more than two tiers of Execution Venue fees, but that doing so would result greatly increase the fees imposed on Tier 1 Equity Execution Venues and ‘‘diminish comparability between Execution Venues and Industry Members in a manner that would be difficult to justify under the funding model.’’ 166 The Participants believe that the CAT Fees do not impose an unnecessary or inappropriate burden on competition on OTC Equity Securities Execution Venues in light of the potential negative impact of increasing the number of fee tiers applicable to Execution Venues and the decision to use market share, as calculated by share 160 See id. at 3. id. 162 See id. at 8. 163 See id. at 9. 164 See Response from Participants, supra note 23, at 16. 165 See id. 166 See id. 161 See VerDate Sep<11>2014 20:56 Jul 06, 2017 Jkt 241001 volume, as the basis for Execution Venue CAT Fees.167 IV. Suspension of the Proposed Rule Changes Pursuant to Section 19(b)(3)(C) of the Act,168 at any time within 60 days of the date of filing of an immediately effective proposed rule change in accordance with Section 19(b)(1) of the Act,169 the Commission summarily may temporarily suspend the change in the rules of a self-regulatory organization made thereby if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. The Commission believes a temporary suspension of the proposed rule changes is warranted here.170 In particular, the Commission finds that it is appropriate in the public interest, for the protection of investors, and otherwise in furtherance of the purposes of the Act, to temporarily suspend the proposed rule changes to consider whether the proposed rule changes satisfy the standards under the Act and the rules thereunder requiring, among other things, that the rules of an exchange or a national securities association provide for the equitable allocation of reasonable fees among members, issuers, and other persons using its facilities; promote just and equitable principles of trade; protect investors and the public interest; do not permit unfair discrimination between customers, issuers, brokers or dealers; and do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.171 The proposed rule changes are subject to Section 6 of the Act in the case of the national securities exchanges and Section 15A of the Act in the case of the national securities association, including: (1) Section 6(b)(4) 172 and Section 15A(b)(5),173 which require the rules of an exchange or a national securities association to ‘‘provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons id. U.S.C. 78s(b)(3)(C). 169 15 U.S.C. 78s(b)(1). 170 For purposes of temporarily suspending the proposed rule changes, the Commission has considered the proposed rules’ impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 171 See 15 U.S.C. 78f(b)(4), (5), and (8); 15 U.S.C. 78o–3(b)(5), (6), and (9). 172 15 U.S.C. 78f(b)(4). 173 15 U.S.C. 78o–3(b)(5). PO 00000 167 See 168 15 Frm 00118 Fmt 4703 Sfmt 4703 31665 using its facilities;’’ 174 (2) Section 6(b)(5) and Section 15A(b)(6), which require the rules of an exchange or a national securities association to, among other things, ‘‘promote just and equitable principles of trade . . . protect investors and the public interest; and [to be] not designed to permit unfair discrimination between customers, issuers, brokers, or dealers;’’ 175 and (3) Section 6(b)(8) and Section 15A(b)(9), which require the rules of an exchange or a national securities association to ‘‘not impose any burden on competition not necessary or appropriate in furtherance of the purposes of this chapter.’’ 176 In temporarily suspending the proposed rule changes, the Commission intends to consider whether, among other things, the following aspects of the proposed rule changes are consistent with the Act: • The allocation of 75% of total costs recovered to Industry Members (other than Execution Venue ATSs) and 25% to Execution Venues, and the comparability of fees between the largest Industry Members and Tier 1 Execution Venues. The Participants stated that this 75%/25% division maintains the greatest level of comparability across the funding model, keeping in view that comparability should consider affiliations among or between CAT Reporters.177 The Participants explained that the cost allocation establishes fees for the largest Industry Members that are comparable to the largest Equity Execution Venues and Options Execution Venues.178 In addition, they stated that the cost allocation establishes fees for Execution Venue complexes that are comparable to those of Industry Member complexes.179 Furthermore, the Participants noted that 174 15 U.S.C. 78f(b)(4). U.S.C. 78f(b)(5); 15 U.S.C. 78o–3(b)(6). 176 15 U.S.C. 78f(b)(8); 15 U.S.C. 78o–3(b)(9). 177 See, e.g., Notice, supra note 16, at 23109. The CAT NMS Plan funding principles state that, in establishing the funding of the Company, the Operating Committee shall seek to establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members’ non-ATS activities are based upon message traffic; and (iii) 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). See Section 11.2(c) of the CAT NMS Plan. 178 See, e.g., Notice, supra note 16, at 23109. 179 See id. The Participants also represented that other possible allocations of CAT costs led to much higher fees for larger Industry Members than for larger Execution Venues or vice versa and/or much 175 15 E:\FR\FM\07JYN1.SGM Continued 07JYN1 asabaliauskas on DSKBBXCHB2PROD with NOTICES 31666 Federal Register / Vol. 82, No. 129 / Friday, July 7, 2017 / Notices the allocation of total CAT costs recovered recognizes that there are approximately 25 times more Industry Members expected to report to the CAT than Execution Venues.180 • The determination to rely on market share, as calculated by share volume in NMS Stocks and OTC Equity Securities, to place Equity Execution Venues for OTC Equity Securities and Execution Venues representing less than 1% NMS market share (primarily lower volume ATSs) in the same fee tier structure as Equity Execution Venues for NMS Stocks, as well as the determination to set two fee tiers and charge Equity Execution Venues in Tier 2 approximately two-thirds of the fees allocated to Equity Execution Venues in Tier 1. The CAT NMS Plan permits the Operating Committee to establish at least two and no more than five tiers of fixed fees for Equity Execution Venues.181 The Participants explained that the Operating Committee determined to establish two tiers for Equity Execution Venues, rather than a larger number of tiers, because they believed that two tiers were sufficient to distinguish between the smaller number of Equity Execution Venues based on market share.182 The Participants added that the incorporation of additional Equity Execution Venue tiers will result in significantly higher fees for Tier 1 Equity Execution Venues and diminish comparability between Execution Venues and Industry Members.183 The Participants stated that the Operating Committee considered the distribution of Execution Venues, grouped together Execution Venues with similar levels of market share of share volume, and determined that it was simpler and more appropriate to have fewer, rather than more, Execution Venue fee tiers to distinguish between Execution Venues.184 • The inclusion of options marketmaker quotes in message traffic for purposes of calculating the appropriate fee tier for Industry Members. The Participants stated that, under the proposals, each Industry Member will be placed into one of nine tiers of fixed fees, based on message traffic for a defined period.185 Further, the Participants stated that options marketmaker quotes will be included in the calculation of total message traffic for options market-makers for purposes of higher fees for Industry Member complexes than for Execution Venue complexes or vice versa. See id. 180 See id. 181 See Section 11.3(a)(i) of the CAT NMS Plan. 182 See, e.g., Notice, supra note 16, at 23107. 183 See id. 184 See id. 185 See id. at 23104. VerDate Sep<11>2014 20:56 Jul 06, 2017 Jkt 241001 tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences.186 V. Proceedings To Determine Whether To Approve or Disapprove the Proposed Rule Changes In addition to temporarily suspending the proposal, the Commission also hereby institutes proceedings pursuant to Sections 19(b)(3)(C) 187 and 19(b)(2) of the Act 188 to determine whether the Exchange’s proposed rule change should be approved or disapproved. Institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, as stated below, the Commission seeks and encourages interested persons to provide comments on the proposed rule change to inform the Commission’s analysis of whether to approve or disapprove the proposed rule change. Pursuant to Section 19(b)(2)(B) of the Act,189 the Commission is hereby providing notice of the grounds for disapproval under consideration. The Commission believes that instituting proceedings will allow for additional analysis of, and input from commenters with respect to, the proposed rule change’s consistency with: (1) Section 6(b)(4) 190 and Section 15A(b)(5),191 which require the rules of an exchange or a national securities association to ‘‘provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities;’’ 192 (2) Section 6(b)(5) and Section 15A(b)(6), which require the rules of an exchange or a national securities association to, among other things, ‘‘promote just and equitable principles of trade . . . protect investors and the public interest; and [to be] not designed to permit unfair discrimination between customers, id. at 23106 n.36. U.S.C. 78s(b)(3)(C). Once the Commission temporarily suspends a proposed rule change, Section 19(b)(3)(C) of the Act requires that the Commission institute proceedings under Section 19(b)(2)(B) to determine whether a proposed rule change should be approved or disapproved. 188 15 U.S.C. 78s(b)(2). 189 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act also provides that proceedings to determine whether to disapprove a proposed rule change must be concluded within 180 days of the date of publication of notice of the filing of the proposed rule change. See id. The time for conclusion of the proceedings may be extended for up to 60 days if the Commission finds good cause for such extension and publishes its reasons for so finding, or if the exchange consents to the longer period. See id. 190 15 U.S.C. 78f(b)(4). 191 15 U.S.C. 78o–3(b)(5). 192 15 U.S.C. 78f(b)(4). PO 00000 186 See 187 15 Frm 00119 Fmt 4703 Sfmt 4703 issuers, brokers, or dealers;’’ 193 (3) Section 6(b)(8) and Section 15A(b)(9), which require the rules of an exchange or a national securities association to ‘‘not impose any burden on competition not necessary or appropriate in furtherance of the purposes of this chapter;’’ 194 and (4) the funding principles set forth in the CAT NMS Plan, which state that the Operating Committee shall seek, among other things, ‘‘to establish an allocation of the Company’s related costs among Participants and Industry Members that is consistent with the Exchange Act taking into account . . . distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company resources and operations’’ 195 and ‘‘to avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality.’’ 196 The Commission believes that the proposed rule changes raise questions as to whether the allocation of the total CAT costs recovered between and among Industry Members and Execution Venues is reasonable, equitable, and not unfairly discriminatory under Section 6 and Section 15A of the Act. In particular, the Commission wishes to consider further whether the allocation of 75% of total CAT costs recovered to Industry Members (other than Execution Venue ATSs) and 25% to Execution Venues is equitable and not unfairly discriminatory, and whether the CAT Fees are consistent with the funding principles set forth in the CAT NMS Plan, which state that, in establishing the funding of the Company, the Operating Committee shall seek, among other things, ‘‘to establish an allocation of the Company’s related costs among Participants and Industry Members that is consistent with the Exchange Act taking into account . . . distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company resources and operations’’ 197 and ‘‘to avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality.’’ 198 The Commission also believes the proposed rule changes raise questions as to whether the Participants have addressed the impact of the proposed tiers on Industry Members who are options market makers, who are required to continually quote a two193 15 U.S.C. 78f(b)(5); 15 U.S.C. 78o–3(b)(6). U.S.C. 78f(b)(8); 15 U.S.C. 78o–3(b)(9). 195 Section 11.2(b) of the CAT NMS Plan. 196 Section 11.2(e) of the CAT NMS Plan. 197 Section 11.2(b) of the CAT NMS Plan. 198 Section 11.2(e) of the CAT NMS Plan. 194 15 E:\FR\FM\07JYN1.SGM 07JYN1 Federal Register / Vol. 82, No. 129 / Friday, July 7, 2017 / Notices asabaliauskas on DSKBBXCHB2PROD with NOTICES sided market in hundreds of thousands of options series. Specifically, the Commission wishes to consider further whether the proposed rule changes will result in an undue or inappropriate burden on competition under Section 6 and Section 15A or lead to a reduction in market quality contrary to the funding principles expressed in the CAT NMS Plan.199 Finally, the Commission believes the proposed rule changes raise questions as to whether the determination to place Execution Venues for OTC Equity Securities in the same tier structure as Execution Venues for NMS Stocks will result in an undue or inappropriate burden on competition under Section 6 and Section 15A. Specifically, the Commission wishes to consider whether the Participants’ decision to group Execution Venues for OTC Equity Securities and NMS Stocks in one tier structure, recognizing that the application of share volume may lead to different outcomes as applied to OTC Equity Securities and NMS Stocks. The Commission is also considering whether the determination to place Execution Venues representing less than 1% of NMS market share in the same tier structure as other Equity Execution Venues will result in an undue or inappropriate burden on competition under Section 6 and Section 15A. VI. Commission’s Solicitation of Comments The Commission requests written views, data, and arguments with respect to the concerns identified above as well as any other relevant concerns. Such comments should be submitted by July 28, 2017. Rebuttal comments should be submitted by August 11, 2017. The Commission asks that commenters address the sufficiency and merit of the Participants’ statements in support of the proposal, which are set forth in the proposed rule changes,200 in addition to any other comments they may wish to submit about the proposed rule changes. In particular, the Commission seeks comment on the following: (1) With respect to the proposed allocation of total CAT costs: (a) Commenters’ views on the determination to allocate 75% of total CAT costs recovered to Industry Members (other than Execution Venue ATSs) and 25% to Execution Venues; (b) Commenters’ views on whether the proposed allocation of CAT Fees is consistent with the funding principles 199 See id. (requiring the Operating Committee ‘‘to avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality’’). 200 See, e.g., Notice, supra note 16. VerDate Sep<11>2014 20:56 Jul 06, 2017 Jkt 241001 expressed in the CAT NMS Plan, which state that the Operating Committee shall seek, among other things, ‘‘to establish an allocation of the Company’s related costs among Participants and Industry Members that is consistent with the Exchange Act taking into account . . . distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company resources and operations’’ 201 and ‘‘to avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality’’; 202 (c) Commenters’ views on whether the Participants’ approach to accounting for affiliations among Execution Venues in setting CAT Fees disadvantages nonaffiliated Execution Venues or otherwise burdens competition in the market for trading services; and (d) Commenters’ views on potential alternative allocations of total CAT costs to Industry Members and Execution Venues, including allocations that do not so heavily account for comparability between and among Industry Member Complexes and Execution Venue Complexes. (2) With respect to the proposed CAT Fees for Execution Venues: (a) Commenters’ views on the determination to place Equity Execution Venues for OTC Equity Securities and Equity Execution Venues representing less than 1% NMS market share (primarily lower volume ATSs) in the same fee tier structure as large Equity Execution Venues for NMS Stocks, including views as to whether this approach is consistent with the funding principles outlined in the CAT NMS Plan, views as to how this approach will affect competition in the market for trading services for low-priced NMS Stocks and/or securities not listed on national securities exchanges, and views regarding how these venues can be expected to contribute to CAT message traffic compared to other Equity Execution Venues; (b) Commenters’ views as to whether a separate tier structure should have been created for Equity Execution Venues for OTC Equity Securities, similar to the separate tier structure created for Options Execution Venues; (c) Commenters’ views, and supporting data, on whether charging Execution Venues based on message traffic will result in large and small Execution Venues paying comparable fees; and (d) Commenters’ views on the appropriate number of tiers for PO 00000 201 Section 202 Section 11.2(b) of the CAT NMS Plan. 11.2(e) of the CAT NMS Plan. Frm 00120 Fmt 4703 Sfmt 4703 31667 Execution Venues and the appropriate distribution of fees across such tiers. (3) With respect to the proposed CAT Fees for both Industry Members and Execution Venues, commenters’ views on whether the decreasing cost per additional unit (of message traffic in the case of Industry Members or of share volume in the case of Execution Venues) in the proposed fee schedules burdens competition by disadvantaging small Industry Members and Execution Venues and/or by creating barriers to entry in the market for trading services and/or the market for broker-dealer services.203 (4) With respect to the proposed CAT Fees for Industry Members: (a) Commenters’ views on the determination to include options market-maker quotes in message traffic for purposes of calculating the appropriate fee tier for options marketmakers; and (b) Commenters’ views on the appropriate number of tiers for Industry Members and the appropriate distribution of fees across such tiers. The Commission also requests that commenters provide analysis to support their views, if possible. Interested persons are invited to submit written data, views, and arguments concerning the proposed rule changes, including whether the proposed rule changes are 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 any of: File Nos. SR–BatsBYX–2017–11; SR–BatsBZX– 2017–38; SR–BatsEDGA–2017–13; SR– BatsEDGX–2017–22; SR–BOX–2017–16; SR–BX–2017–023; SR–C2–2017–017; SR–CBOE–2017–040; SR–CHX–2017– 08; SR–FINRA–2017–011; SR–GEMX– 2017–17; SR–IEX–2017–16; SR–ISE– 2017–45; SR–MIAX–2017–18; SR– MRX–2017–04; SR–NASDAQ–2017– 046; SR–NYSE–2017–22; SR– NYSEArca–2017–52; SR–NYSEMKT– 2017–26; SR–PEARL–2017–20; or SR– PHLX–2017–37 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. 203 The fee structure tends to charge more per unit of message traffic to smaller Industry Members, and more per unit of share volume to smaller Execution Venues. E:\FR\FM\07JYN1.SGM 07JYN1 asabaliauskas on DSKBBXCHB2PROD with NOTICES 31668 Federal Register / Vol. 82, No. 129 / Friday, July 7, 2017 / Notices All submissions should refer to any of: File Nos. SR–BatsBYX–2017–11; SR– BatsBZX–2017–38; SR–BatsEDGA– 2017–13; SR–BatsEDGX–2017–22; SR– BOX–2017–16; SR–BX–2017–023; SR– C2–2017–017; SR–CBOE–2017–040; SR–CHX–2017–08; SR–FINRA–2017– 011; SR–GEMX–2017–17; SR–IEX– 2017–16; SR–ISE–2017–45; SR–MIAX– 2017–18; SR–MRX–2017–04; SR– NASDAQ–2017–046; SR–NYSE–2017– 22; SR–NYSEArca–2017–52; SR– NYSEMKT–2017–26; SR–PEARL–2017– 20; or SR–PHLX–2017–37. The file numbers 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 proposed rule changes that are filed with the Commission, and all written communications relating to the proposed rule changess 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 the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Participants. 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 publicly available. All submissions should refer to any of: File Nos. SR– BatsBYX–2017–11; SR–BatsBZX–2017– 38; SR–BatsEDGA–2017–13; SR– BatsEDGX–2017–22; SR–BOX–2017–16; SR–BX–2017–023; SR–C2–2017–017; SR–CBOE–2017–040; SR–CHX–2017– 08; SR–FINRA–2017–011; SR–GEMX– 2017–17; SR–IEX–2017–16; SR–ISE– 2017–45; SR–MIAX–2017–18; SR– MRX–2017–04; SR–NASDAQ–2017– 046; SR–NYSE–2017–22; SR– NYSEArca–2017–52; SR–NYSEMKT– 2017–26; SR–PEARL–2017–20; or SR– PHLX–2017–37 and should be submitted on or before July 28, 2017. Rebuttal comments should be submitted by August 11, 2017. VerDate Sep<11>2014 20:56 Jul 06, 2017 Jkt 241001 VII. Conclusion It is therefore ordered, pursuant to Section 19(b)(3)(C) of the Act,204 that File Nos. SR–BatsBYX–2017–11; SR– BatsBZX–2017–38; SR–BatsEDGA– 2017–13; SR–BatsEDGX–2017–22; SR– BOX–2017–16; SR–BX–2017–023; SR– C2–2017–017; SR–CBOE–2017–040; SR–CHX–2017–08; SR–FINRA–2017– 011; SR–GEMX–2017–17; SR–IEX– 2017–16; SR–ISE–2017–45; SR–MIAX– 2017–18; SR–MRX–2017–04; SR– NASDAQ–2017–046; SR–NYSE–2017– 22; SR–NYSEArca–2017–52; SR– NYSEMKT–2017–26; SR–PEARL–2017– 20; and SR–PHLX–2017–37 be and hereby are, temporarily suspended. In addition, the Commission is instituting proceedings to determine whether the proposed rule changes should be approved or disapproved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.205 Brent J. Fields, Secretary. [FR Doc. 2017–14245 Filed 7–6–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81063; File No. SR–MIAX– 2017–31] Self-Regulatory Organizations; Miami International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend its Fee Schedule Concerning the Options Regulatory Fee June 30, 2017. Pursuant to the provisions of Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on June 23, 2017, Miami International Securities Exchange LLC (‘‘MIAX Options’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. PO 00000 204 15 U.S.C. 78s(b)(3)(C). CFR 200.30–3(a)(57) and (58). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 205 17 Frm 00121 Fmt 4703 Sfmt 4703 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is filing a proposal to amend the MIAX Options Fee Schedule (the ‘‘Fee Schedule’’) to clarify the manner in which the Exchange assesses its Options Regulatory Fee (‘‘ORF’’), and also to align its ORF rule text to rule text recently adopted by the Exchange’s affiliate, MIAX PEARL, LLC (‘‘MIAX PEARL’’), with respect to its ORF.3 The text of the proposed rule change is available on the Exchange’s Web site at https://www.miaxoptions.com/rulefilings, at MIAX’s principal office, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose Currently, the Exchange charges an ORF in the amount of $0.0045 per contract side. The proposed rule change does not change the amount of the ORF, but instead modifies the rule text to clarify how the ORF is assessed and collected. The proposed rule change also aligns the ORF rule text of the Exchange to rule text recently adopted by the Exchange’s affiliate, MIAX PEARL, with respect to its ORF.4 The per-contract ORF will continue to be assessed by MIAX Options to each MIAX Options Member for all options transactions, including Mini Options, cleared or ultimately cleared by the Member which are cleared by the Options Clearing Corporation (‘‘OCC’’) 3 See Securities Exchange Act Release Nos. 80035 (February 14, 2017), 82 FR 11272 (February 21, 2017) (SR–PEARL–2017–09); 80035 (March 30, 2017), 82 FR 18045 (April 10, 2017) (SR–PEARL– 2017–15); 80875 (June 7, 2017), 82 FR 27096 (June 13, 2017) (SR–PEARL–2017–26). The replacement filings did not increase or decrease the amount of the ORF, but rather clarified the application of the ORF. 4 Id. E:\FR\FM\07JYN1.SGM 07JYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 82, Number 129 (Friday, July 7, 2017)]
[Notices]
[Pages 31656-31668]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-14245]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81067; File Nos. SR-BatsBYX-2017-11; SR-BatsBZX-2017-
38; SR-BatsEDGA-2017-13; SR-BatsEDGX-2017-22; SR-BOX-2017-16; SR-BX-
2017-023; SR-C2-2017-017; SR-CBOE-2017-040; SR-CHX-2017-08; SR-FINRA-
2017-011; SR-GEMX-2017-17; SR-IEX-2017-16; SR-ISE-2017-45; SR-MIAX-
2017-18; SR-MRX-2017-04; SR-NASDAQ-2017-046; SR-NYSE-2017-22; SR-
NYSEArca-2017-52; SR-NYSEMKT-2017-26; SR-PEARL-2017-20; SR-PHLX-2017-
37]

Self-Regulatory Organizations; Bats BYX Exchange, Inc; Bats BZX
Exchange, Inc.; Bats EDGA Exchange, Inc.; Bats EDGX Exchange, Inc.; BOX
Options Exchange LLC; C2 Options Exchange, Incorporated; Chicago Board
Options Exchange, Incorporated; Chicago Stock Exchange, Inc.; Financial
Industry Regulatory Authority, Inc.; Investors' Exchange LLC; Miami
International Securities Exchange, LLC; MIAX PEARL LLC; NASDAQ BX,
Inc.; Nasdaq GEMX, LLC; Nasdaq ISE, LLC; Nasdaq MRX, LLC; NASDAQ PHLX
LLC; The NASDAQ Stock Market LLC; New York Stock Exchange LLC; NYSE
Arca, Inc. and NYSE MKT LLC; Suspension of and Order Instituting
Proceedings To Determine Whether To Approve or Disapprove Proposed Rule
Changes To Establish Fees for Industry Members To Fund the Consolidated
Audit Trail

June 30, 2017.
I. Introduction
On May 1, 2017,\1\ May 2, 2017,\2\ May 3, 2017,\3\ May 8, 2017,\4\
May 9, 2017,\5\ May 10, 2017,\6\ May 12, 2017,\7\ May 15,

[[Page 31657]]

2017,\8\ May 16, 2017,\9\ and May 23, 2017,\10\ Bats BYX Exchange, Inc.
(``Bats BYX''), Bats BZX Exchange, Inc. (``Bats BZX''), Bats EDGA
Exchange, Inc. (``Bats EDGA''), Bats EDGX Exchange, Inc. (``Bats
EDGX''), BOX Options Exchange LLC (``BOX''), C2 Options Exchange,
Incorporated (``C2''), Chicago Board Options Exchange, Incorporated
(``CBOE''), Chicago Stock Exchange, Inc. (``CHX''), Financial Industry
Regulatory Authority, Inc. (``FINRA''), Investors' Exchange LLC
(``IEX''), Nasdaq ISE, LLC (``ISE''), Miami International Securities
Exchange, LLC (``MIAX''), MIAX PEARL, LLC (``PEARL''), NASDAQ BX, Inc.
(``BX''), Nasdaq GEMX, LLC (``GEMX''), Nasdaq MRX, LLC (``MRX''),
NASDAQ PHLX LLC (``Phlx''), The Nasdaq Stock Market LLC (``Nasdaq''),
New York Stock Exchange LLC (``NYSE''), NYSE Arca, Inc. (``NYSE Arca'')
and NYSE MKT LLC (``NYSE MKT'') (collectively, the ``Participants'')
filed with the Securities and Exchange Commission (the ``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \11\ and Rule 19b-4 thereunder,\12\ proposed rule changes to
adopt fees to be charged to Industry Members \13\ to fund the
consolidated audit trail (``CAT'').\14\ The proposed rule changes were
immediately effective upon filing with the Commission pursuant to
Section 19(b)(3)(A) of the Act.\15\ The proposed rule changes submitted
by MIAX and PEARL were published for comment in the Federal Register on
May 19, 2017.\16\ The proposed rule changes submitted by BX, CHX, IEX,
Nasdaq, NYSE, NYSE Arca and NYSE MKT were published for comment in the
Federal Register on May 22, 2017.\17\ The proposed rule change
submitted by FINRA was published for comment in the Federal Register on
May 23, 2017.\18\ The proposed rule changes submitted by BOX, GEMX,
ISE, MRX and Phlx were published for comment in the Federal Register on
May 24, 2017.\19\ The proposed rule changes submitted by C2, CBOE and
Bats EDGA were published for comment in the Federal Register on June 1,
2017.\20\ The proposed rule change submitted by Bats BYX was published
for comment in the Federal Register on June 5, 2017.\21\ The proposed
rule changes submitted by Bats BZX and Bats EDGX were published for
comment in the Federal Register on June 6, 2017.\22\ The Commission has
received a number of comment letters on the proposed rule changes, and
a response to comments from the Participants.\23\
---------------------------------------------------------------------------

\1\ Miami International Securities Exchange, LLC and MIAX PEARL
LLC filed their proposed rule changes on May 1, 2017.
\2\ The NASDAQ Stock Market LLC and NASDAQ BX, Inc. filed their
proposed rule changes on May 2, 2017.
\3\ Chicago Stock Exchange, Inc. filed its proposed rule change
on May 3, 2017.
\4\ Financial Industry Regulatory Authority, Inc. filed its
proposed rule change on May 8, 2017.
\5\ Investors' Exchange LLC originally filed its proposed rule
change on May 3, 2017 under File No. SR-IEX-2017-13, and
subsequently withdrew that filing and filed this proposed rule
change on May 9, 2017.
\6\ The New York Stock Exchange LLC, NYSE Arca, Inc. and NYSE
MKT LLC filed their proposed rule changes on May 10, 2017.
\7\ NASDAQ GEMX LLC, NASDAQ ISE, LLC, NASDAQ MRX, LLC and NASDAQ
PHLX LLC originally filed their proposed rule changes on May 3, 2017
under File Nos. SR-GEMX-2017-11, SR-ISE-2017-40, SR-MRX-2017-03, and
SR-PHLX-2017-35, and subsequently withdrew those filings and filed
these proposed rule changes on May 12, 2017.
\8\ BOX Options Exchange LLC originally filed its proposed rule
change on May 11, 2017 under File No. SR-BOX-2017-15, and
subsequently withdrew that filing and filed this proposed rule
change on May 15, 2017.
\9\ Bats BYX Exchange, Inc., C2 Options Exchange, Incorporated
and Chicago Board Options Exchange, Incorporated filed their
proposed rule changes on May 16, 2017. Bats EDGA Exchange, Inc.
originally filed its proposed rule change on May 5, 2017 under File
No. SR-BatsEDGA-2017-11, and subsequently withdrew that filing on
May 11, 2017 and filed this proposed rule change on May 16, 2017.
\10\ Bats BZX Exchange, Inc. filed its proposed rule changes on
May 23, 2017. Bats EDGX Exchange, Inc. originally filed its proposed
rule change on May 5, 2017 under File No. SR-BatsEDGX-2017-20, and
subsequently withdrew that filing on May 10, 2017 and filed this
proposed rule change on May 23, 2017.
\11\ 15 U.S.C. 78s(b)(1).
\12\ 17 CFR 240.19b-4.
\13\ Section 1.1 of the CAT NMS Plan defines ``Industry Member''
as ``a member of a national securities exchange or a member of a
national securities association.''
\14\ See infra notes 16-22.
\15\ 15 U.S.C. 78s(b)(3)(A). A proposed rule change may take
effect upon filing with the Commission if it is designated by the
exchange as ``establishing or changing a due, fee, or other charge
imposed by the self-regulatory organization on any person, whether
or not the person is a member of the self-regulatory organization.''
15 U.S.C. 78s(b)(3)(A)(ii).
\16\ See Securities Exchange Act Release Nos. 80675 (May 15,
2017), 82 FR 23100 (May 19, 2017) (SR-MIAX-2017-18) (``Notice'');
and 80676 (May 15, 2017), 82 FR 23083 (May 19, 2017) (SR-PEARL-2017-
20).
\17\ Securities Exchange Act Release Nos. 80697 (May 16, 2017),
82 FR 23398 (May 22, 2017) (SR-BX-2017-023); 80691 (May 16, 2017),
82 FR 23344 (May 22, 2017) (SR-CHX-2017-08); 80692 (May 16, 2017),
82 FR 23325 (May 22, 2017) (SR-IEX-2017-16); 80696 (May 16, 2017),
82 FR 23439 (May 22, 2017) (SR-NASDAQ-2017-046); 80693 (May 16,
2017), 82 FR 23363 (May 22, 2017) (SR-NYSE-2017-22); 80698 (May 16,
2017), 82 FR 23457 (May 22, 2017) (SR-NYSEArca-2017-52); and 80694
(May 16, 2017), 82 FR 23416 (May 22, 2017) (SR-NYSEMKT-2017-26).
\18\ See Securities Exchange Act Release No. 80710 (May 17,
2017), 82 FR 23639 (May 23, 2017) (SR-FINRA-2017-011).
\19\ See Securities Exchange Act Release Nos. 80721 (May 18,
2017), 82 FR 23864 (May 24, 2017) (SR-BOX-2017-16); 80713 (May 18,
2017), 82 FR 23956 (May 24, 2017) (SR-GEMX-2017-17); 80715 (May 18,
2017), 82 FR 23895 (May 24, 2017) (SR-ISE-2017-45); 80726 (May 18,
2017), 82 FR 23915 (May 24, 2017) (SR-MRX-2017-04); and 80725 (May
18, 2017), 82 FR 23935 (May 24, 2017) (SR-PHLX-2017-37).
\20\ Securities Exchange Act Release Nos. 80786 (May 26, 2017),
82 FR 25474 (June 1, 2017) (SR-C2-2017-017); 80785 (May 26, 2017),
82 FR 25404 (June 1, 2017) (SR-CBOE-2017-040); and 80784 (May 26,
2017), 82 FR 25448 (June 1, 2017) (SR-BatsEDGA-2017-13).
\21\ See Securities Exchange Act Release No. 80809 (May 30,
2017), 82 FR 25837 (June 5, 2017) (SR-BatsBYX-2017-11).
\22\ See Securities Exchange Act Release Nos. 80822 (May 31,
2017), 82 FR 26148 (June 6, 2017) (SR-BatsBZX-2017-38); and 80821
(May 31, 2017), 82 FR 26177 (June 6, 2017) (SR-BatsEDGX-2017-22).
\23\ Since the proposed rule changes are designed to adopt fees
to be charged to Industry Members to fund CAT, the Commission is
considering all comments received regardless of the comment file to
which they were submitted. See Letter from Theodore R. Lazo,
Managing Director and Associate General Counsel, Securities Industry
and Financial Markets Association, to Brent J. Fields, Secretary,
Commission (dated June 6, 2017) (``SIFMA Letter''), available at:
https://www.sec.gov/comments/sr-batsbzx-2017-38/batsbzx201738-1788188-153228.pdf; Letter from Patricia L. Cerny and Steven
O'Malley, Compliance Consultants, to Brent J. Fields, Secretary,
Commission (dated June 12, 2017) (``Cerny & O'Malley Letter''),
available at: https://www.sec.gov/comments/sr-cboe-2017-040/cboe2017040-1799253-153675.pdf; Letter from Daniel Zinn, General
Counsel, OTC Markets Group Inc., to Eduardo A. Aleman, Assistant
Secretary, Commission (dated June 13, 2017) (``OTC Markets
Letter''), available at: https://www.sec.gov/comments/sr-finra-2017-011/finra2017011-1801717-153703.pdf; Letter from Joanna Mallers,
Secretary, FIA Principal Traders Group, to Brent J. Fields,
Secretary, Commission (dated June 22, 2017) (``FIA Letter''),
available at: https://www.sec.gov/comments/sr-cboe-2017-040/cboe2017040-1819670-154195.pdf; Letter from Stuart J. Kaswell,
Executive Vice President and Managing Director, General Counsel,
Managed Funds Association, to Brent J. Fields, Secretary, Commission
(dated June 23, 2017) (``MFA Letter''), available at: https://www.sec.gov/comments/sr-finra-2017-011/finra2017011-1822454-154283.pdf; and Letter from Suzanne H. Shatto, Investor, to
Commission (dated June 27, 2017) (``Shatto Letter''), available at:
https://www.sec.gov/comments/sr-batsedgx-2017-22/batsedgx201722-154443.pdf. The Commission also received a comment letter which is
not pertinent to these proposed rule changes. See Letter from
Christina Crouch, Smart Ltd., to Brent J. Fields, Secretary,
Commission (dated June 5, 2017) (``Smart Letter''), available at:
https://www.sec.gov/comments/sr-batsbzx-2017-38/batsbzx201738-1785545-153152.htm. The Commission also has received a letter from
the Participants responding to the comments received. See Letter
from CAT NMS Plan Participants to Brent J. Fields, Secretary,
Commission (dated June 29, 2017) (``Response from Participants''),
available at https://www.sec.gov/comments/sr-batsbyx-2017-11/batsbyx201711-1832632-154584.pdf.
---------------------------------------------------------------------------

Pursuant to Section 19(b)(3)(C) of the Act, the Commission is
hereby: (1) temporarily suspending the proposed rule changes; and (2)
instituting proceedings to determine whether to approve or disapprove
the proposals.

II. Summary of the Proposed Rule Change

Prior to filing the proposed rule changes, the Participants and
NYSE National, Inc.\24\ filed with the Commission, pursuant to Section
11A of the Exchange Act \25\ and Rule 608 of Regulation NMS
thereunder,\26\ a national market system (``NMS'') plan to create,
implement and maintain the CAT (the ``CAT NMS Plan'' or the
``Plan'').\27\ The Plan was published for

[[Page 31658]]

comment in the Federal Register on May 17, 2016,\28\ and approved by
the Commission, as modified, on November 15, 2016.\29\ Under the CAT
NMS Plan, the Operating Committee of a newly formed company--CAT NMS,
LLC (the ``Company''), of which each Participant is a member--has the
discretion to establish funding for the Company to operate the CAT,
including establishing fees that the Participants and Industry Members
will pay (``CAT Fees'').\30\
---------------------------------------------------------------------------

\24\ NYSE National, Inc. ceased trading on February 1, 2017. See
Securities Exchange Act Release No. 80018 (February 10, 2017), 82 FR
10947 (February 16, 2017) (SR-NSX-2017-04). Therefore, it did not
submit a proposed rule change to adopt fees on Industy Members to
fund CAT.
\25\ 15 U.S.C. 78k-1.
\26\ 17 CFR 242.608.
\27\ See Letter from the Participants to Brent J. Fields,
Secretary, Commission, dated September 30, 2014; and Letter from
Participants to Brent J. Fields, Secretary, Commission, dated
February 27, 2015. On December 23, 2015, the Participants submitted
an amendment to the CAT NMS Plan. See Letter from Participants to
Brent J. Fields, Secretary, Commission, dated December 23, 2015.
\28\ Securities Exchange Act Release No. 77724 (April 27, 2016),
81 FR 30614 (May 17, 2016) (``CAT NMS Plan Notice'').
\29\ Securities Exchange Act Release No. 79318 (November 15,
2016), 81 FR 84696 (November 23, 2016) (``Approval Order'').
\30\ Section 11.1(b) of the CAT NMS Plan.
---------------------------------------------------------------------------

The Plan specified that, in establishing the funding of the
Company, the Operating Committee shall establish ``a tiered fee
structure in which the fees charged to: (i) CAT Reporters that are
Execution Venues, including ATSs, are based upon the level of market
share; (ii) Industry Members' non-ATS activities are based upon message
traffic; and (iii) 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).'' \31\ Under the Plan, such fees are to be implemented in
accordance with various funding principles, including an ``allocation
of the Company's related costs among Participants and Industry Members
that is consistent with the Exchange Act taking into account . . .
distinctions in the securities trading operations of Participants and
Industry Members and their relative impact upon the Company resources
and operations'' and the ``avoid[ance of] any disincentives such as
placing an inappropriate burden on competition and reduction in market
quality.'' \32\
---------------------------------------------------------------------------

\31\ Section 11.2(c) of the CAT NMS Plan. See Article XI of the
CAT NMS Plan for additional detail; see also, e.g., Notice, supra
note 16, at 23102-04 for additional description of the CAT NMS Plan
requirements.
\32\ See Section 11.2(b) and (e) of the CAT NMS Plan.
---------------------------------------------------------------------------

To establish CAT Fees, the Participants submitted the proposed rule
changes. As noted above, the proposed rule changes adopt fees to be
charged to Industry Members, including Industry Members that are
Execution Venue ATSs, which are described below.\33\ The Participants
also submitted an amendment to the Plan on May 23, 2017 \34\ to
establish the CAT Fees to be charged to themselves.\35\
---------------------------------------------------------------------------

\33\ For additional details regarding these fees, see, e.g.,
Notice, supra note 16.
\34\ The Participants initially submitted the amendment on May
9, 2017, but subsequently withdrew the amendment and refiled the
current submission on May 23, 2017.
\35\ See Securities Exchange Act Release No. 80930 (June 14,
2017), 82 FR 28180 (June 20, 2017).
---------------------------------------------------------------------------

A. Industry Member Tiers

The proposed rule changes establish fixed fees to be payable by
Industry Members, based on message traffic.\36\ Under the proposed rule
changes, each Industry Member (other than Execution Venue ATSs \37\)
will be ranked by message traffic and assigned to one of nine tiers
that have been predefined by percentages (the ``Industry Member
Percentages'').\38\ The Participants noted that the percentage of costs
recovered by each Industry Member tier will be determined by predefined
percentage allocations (the ``Industry Member Recovery
Allocation'').\39\
---------------------------------------------------------------------------

\36\ The CAT NMS Plan provides that the CAT Fees payable by
Industry Members shall include message traffic generated by: (i) An
ATS that does not execute orders that is sponsored by an Industry
Member and (ii) routing orders to and from any ATS sponsored by an
Industry Member. See Section 11.3(b) of the CAT NMS Plan. The
Participants noted, however, that Industry Member fees will not be
applicable to an ATS that qualifies as an Execution Venue. See,
e.g., Notice, supra note 16, at 23104.
\37\ The Participants defined ``Execution Venue ATSs'' as
alternative trading systems that execute transactions in Eligible
Securities. See, e.g., Notice, supra note 16, at 23101.
\38\ See, e.g., id. at 23104.
\39\ See, e.g., id.
---------------------------------------------------------------------------

The following table sets forth the specific Industry Member
Percentages and Industry Member Recovery Allocations: \40\
---------------------------------------------------------------------------

\40\ See, e.g., id. at 23105-06.

----------------------------------------------------------------------------------------------------------------
Percentage of
Percentage of industry Percentage of
Industry member tier industry member total recovery
members recovery
----------------------------------------------------------------------------------------------------------------
Tier 1.......................................................... 0.500 8.50 6.38
Tier 2.......................................................... 2.500 35.00 26.25
Tier 3.......................................................... 2.125 21.25 15.94
Tier 4.......................................................... 4.625 15.75 11.81
Tier 5.......................................................... 3.625 7.75 5.81
Tier 6.......................................................... 4.000 5.25 3.94
Tier 7.......................................................... 17.500 4.50 3.38
Tier 8.......................................................... 20.125 1.50 1.13
Tier 9.......................................................... 45.000 0.50 0.38
-----------------------------------------------
Total....................................................... 100 100 75
----------------------------------------------------------------------------------------------------------------

The Participants explained that, prior to the start of CAT
reporting, ``message traffic'' will be comprised of historical equity
and equity options orders, cancels and quotes provided by each exchange
and FINRA over the previous three months.\41\ The Participants stated
that prior to the start of CAT reporting, (1) orders will be comprised
of the total number of equity and equity options orders received and
originated by a member of an exchange or FINRA over the previous three-
month period, as well as order routes and executions originated by a
member of FINRA, (2) cancels will be comprised of the total number of
equity and equity option cancels received and originated by a member of
an exchange or FINRA over a three-month period, and (3) quotes will be
comprised of information readily available to the exchanges and FINRA,
such as the total number of historical equity and equity options quotes
received and originated by a member of an exchange or FINRA over the
prior three-month period.\42\ After an Industry

[[Page 31659]]

Member begins reporting to the CAT, the Participants noted that
``message traffic'' will be calculated based on the Industry Member's
Reportable Events.\43\
---------------------------------------------------------------------------

\41\ See, e.g., id. at 23106. The Commission approved exemptive
relief allowing 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. See Securities Exchange Act Release
No. 77265 (March 1, 2017), 81 FR 11856 (March 7, 2016). The
Participants stated that this exemption applies to options market-
maker quotes for CAT reporting purposes only. Therefore, the
Participants indicated that options market-maker quotes will be
included in the calculation of total message traffic for options
market-maker under their proposed rule changes. See, e.g., Notice,
supra note 16, at 23106 n.36.
\42\ See, e.g., id. at 23106.
\43\ See, e.g., id. If an Industry Member (other than an
Execution Venue ATS) has no orders, cancels or quotes prior to the
commencement of CAT reporting, or no Reportable Events after CAT
reporting commences, the Participants stated that the Industry
Member would not have a CAT Fee obligation. See, e.g., id. at n. 38.
---------------------------------------------------------------------------

B. Execution Venue Tiers

For purposes of determining the CAT Fees for ATSs, the Participants
categorized ATSs (excluding ATSs that do not execute orders) as
Execution Venues.\44\ Furthermore, the proposed rule changes set
different tiers for Equity and Options Execution Venues.
---------------------------------------------------------------------------

\44\ See, e.g., id. at 23106. Section 1.1 of the CAT NMS Plan
defines ``Execution Venue'' as ``a Participant or an [ATS] (as
defined in Rule 300 of Regulation ATS) that operates pursuant to
Rule 301 of Regulation ATS (excluding any such ATS that does not
execute orders).''
---------------------------------------------------------------------------

1. NMS Stocks and OTC Equity Securities
The proposed rule changes establish fixed fees to be paid by
Execution Venues depending on the market share of that Execution Venue
in NMS Stocks and OTC Equity Securities. Market share for Execution
Venues will be calculated by share volume, except the market share for
a national securities association that 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 be calculated based on share volume of
trades reported, excluding the share volume reported to such national
securities association by an Execution Venue.\45\
---------------------------------------------------------------------------

\45\ Section 11.3(a)(i) of the CAT NMS Plan; see also, e.g.,
Notice, supra note 16, at 23106-07.
---------------------------------------------------------------------------

Under the proposed rule changes, each Equity Execution Venue will
be ranked by market share and assigned to one of two tiers that have
been predefined by percentages (the ``Equity Execution Venue
Percentages'').\46\ The Participants noted that the percentage of costs
recovered by each Equity Execution Venue tier will be determined by
predefined percentage allocations (the ``Equity Execution Venue
Recovery Allocation'').\47\
---------------------------------------------------------------------------

\46\ See, e.g., Notice, supra note 16, at 23107.
\47\ See, e.g., id.
---------------------------------------------------------------------------

The following table sets forth the specific Equity Execution Venue
Percentages and Equity Execution Recovery Allocations: \48\
---------------------------------------------------------------------------

\48\ See, e.g., id.

----------------------------------------------------------------------------------------------------------------
Percentage of Percentage of
equity execution Percentage of
Equity execution venue tier execution venue total recovery
venues recovery
----------------------------------------------------------------------------------------------------------------
Tier 1.......................................................... 25.00 26.00 6.50
Tier 2.......................................................... 75.00 49.00 12.25
-----------------------------------------------
Total....................................................... 100 75 18.75
----------------------------------------------------------------------------------------------------------------

2. Listed Options
The proposed rule changes establish fixed fees to be paid by
Execution Venues depending on the Listed Options market share of that
Execution Venue. Market share for Execution Venues will be calculated
by contract volume.\49\ Under the proposed rule changes, each Options
Execution Venue will be ranked by market share and assigned to one of
two tiers that have been predefined by percentages (the ``Options
Execution Venue Percentages'').\50\ The Participants noted that the
percentage of costs recovered by each Options Execution Venue tier will
be determined by predefined percentage allocations (the ``Options
Execution Venue Recovery Allocation'').\51\
---------------------------------------------------------------------------

\49\ Section 11.3(a)(ii) of the CAT NMS Plan; see also, e.g.,
Notice, supra note 16, at 23108.
\50\ See, e.g., Notice, supra note 16, at 23108.
\51\ See, e.g., id.
---------------------------------------------------------------------------

The following table sets forth the specific Options Execution Venue
Percentages and Options Execution Venue Recovery Allocations: \52\
---------------------------------------------------------------------------

\52\ See, e.g., id.

----------------------------------------------------------------------------------------------------------------
Percentage of Percentage of
options execution Percentage of
Options execution venue tier execution venue total recovery
venues recovery
----------------------------------------------------------------------------------------------------------------
Tier 1.......................................................... 75.00 20.00 5.00
Tier 2.......................................................... 25.00 5.00 1.25
-----------------------------------------------
Total....................................................... 100 25 6.25
----------------------------------------------------------------------------------------------------------------

3. Tier Assignments
The Participants stated that market share for Execution Venues will
be sourced from data reported to the CAT System after the commencement
of CAT reporting.\53\ Prior to the commencement of CAT reporting, the
Participants stated that market share for Execution Venues will be
sourced from publicly-available market data, including data made
publicly available by Bats and FINRA.\54\
---------------------------------------------------------------------------

\53\ See, e.g., id.
\54\ See, e.g., id.
---------------------------------------------------------------------------

C. Allocation of Costs

In determining the cost allocation between Industry Members (other
than Execution Venue ATSs) and Execution Venues, the Participants
stated that the Operating Committee decided that 75% of total costs
recovered will be allocated to Industry Members (other than Execution
Venue ATSs) and 25% will be allocated to Execution Venues.\55\ In
determining the cost allocation between Equity Execution Venues and
Options Execution Venues, the Participants stated that the Operating
Committee further determined to allocate 75% of Execution Venue costs
recovered to Equity Execution Venues and 25% to Options Execution
Venues.\56\
---------------------------------------------------------------------------

\55\ See, e.g., id. at 23109.
\56\ See, e.g., id.
---------------------------------------------------------------------------

D. Fee Levels

The Participants explained that the sum of the CAT Fees is designed
to

[[Page 31660]]

recover the total costs of building and operating the CAT. They stated
that the Operating Committee has estimated overall CAT costs--including
development and operational costs, third-party support costs (including
historic legal fees, consulting fees, and audit fees), insurance costs,
and operational reserve costs--to be $50,700,000 in total for the year
beginning November 21, 2016.\57\ The Participants stated that, based on
the estimated costs and the calculations for the funding model, the
Operating Committee determined to impose the following fees.
---------------------------------------------------------------------------

\57\ See, e.g., id. The Participants further noted that CAT-
related costs incurred prior to November 21, 2016 will be addressed
via a separate fee filing. See, e.g., id. at n.41.
---------------------------------------------------------------------------

For Industry Members (other than Execution Venue ATSs): \58\
---------------------------------------------------------------------------

\58\ See, e.g., id. at 23110.

----------------------------------------------------------------------------------------------------------------
Monthly CAT Quarterly CAT CAT fees paid
Tier fee fee annually
----------------------------------------------------------------------------------------------------------------
1............................................................... $33,668 $101,004 $404,016
2............................................................... 27,051 81,153 324,612
3............................................................... 19,239 57,717 230,868
4............................................................... 6,655 19,965 79,860
5............................................................... 4,163 12,489 49,956
6............................................................... 2,560 7,680 30,720
7............................................................... 501 1,503 6,012
8............................................................... 145 435 1,740
9............................................................... 22 66 264
----------------------------------------------------------------------------------------------------------------

For Equity Execution Venues: \59\
---------------------------------------------------------------------------

\59\ See, e.g., id.

For Options Execution Venues: \60\
---------------------------------------------------------------------------

\60\ See, e.g., id.

E. Changes to Fee Levels and Tiers

The Participants noted that Section 11.3(d) of the CAT NMS Plan
states that ``[t]he Operating Committee shall review such fee schedule
on at least an annual basis and shall make any changes to such fee
schedule that it deems appropriate.'' \61\ The Participants stated
that, as part of such reviews, the Operating Committee will review the
distribution of Industry Members and Execution Venues across tiers and
make any updates to the percentage of CAT Reporters allocated to each
tier as may be necessary.\62\ In addition, the Participants asserted
that such reviews would consider the estimated ongoing CAT costs and
the level of the operating reserve, in order to adjust CAT Fees as
appropriate.\63\ The Participants further stated that any changes to
the CAT Fees will be filed with the Commission pursuant to Section
19(b) of the Exchange Act and become effective in accordance with the
requirements of Section 19(b).\64\
---------------------------------------------------------------------------

\61\ See, e.g., id. at 23115.
\62\ See, e.g., id.
\63\ See, e.g., id. The Participants further noted that any
surplus of the Company's revenues over its expenses will be included
within the operational reserve to offset future fees. See, e.g., id.
\64\ See, e.g., id.
---------------------------------------------------------------------------

F. Initial and Periodic Tier Reassignments

Under the proposed rule changes, the Operating Committee will
assign fee tiers every three months based on market share or message
traffic, as applicable, from the prior three months.\65\ For the
initial tier assignments, the Participants stated that the Company will
calculate the relevant tier for each CAT Reporter using the prior three
months of data.\66\ The Participants explained the Company will
calculate subsequent tier assignments using the three months of data
prior to the relevant tri-monthly date.\67\ The Participants noted that
any movement of CAT Reporters between tiers will not change the
criteria for each tier or the fee amount corresponding to each
tier.\68\ According to the Participants, a CAT Reporter's assigned tier
will depend not only on its own message traffic or market share, but
also on the message traffic or market share across all CAT
Reporters.\69\
---------------------------------------------------------------------------

\65\ See, e.g., id.
\66\ See, e.g., id. The Participants indicated that such data
will be comprised of historical equity and equity options orders,
cancels, and quotes provided by the Participants over the previous
three-month period. See, e.g., id.; see also notes 41-43 supra and
accompanying text.
\67\ See, e.g., Notice, supra note 16, at 23115.
\68\ See, e.g., id.
\69\ See, e.g., id.
---------------------------------------------------------------------------

G. Timing and Manner of Payment

The proposed rule changes state that the Company will provide each
Industry Member with one invoice each quarter for its CAT Fees,
regardless of whether the Industry Member is a member of multiple
Participants.\70\ The proposed rule changes further state that each
Industry Member will pay its CAT Fees to the Company via the
centralized system for the collection of CAT Fees established by the
Company in the

[[Page 31661]]

manner prescribed by the Company.\71\ The proposed rule changes also
state that each Industry Member shall pay its CAT Fees within thirty
days after receipt of an invoice or other notice indicating payment is
due (unless a longer payment period is otherwise indicated).\72\ If an
Industry Member fails to pay any such fee when due, the proposed rule
changes require such Industry Member to 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: (i) The Prime Rate plus 300 basis points; or
(ii) the maximum rate permitted by applicable law.\73\
---------------------------------------------------------------------------

\70\ See, e.g., id. at 23116.
\71\ See, e.g., id. The Participants acknowledged, however, that
no exact fee collection system has yet been established. See, e.g.,
id. at 23117.
\72\ See, e.g., id.
\73\ See, e.g., id.
---------------------------------------------------------------------------

III. Summary of Comments

As noted above, the Commission received a number of comment letters
on the proposed rule changes \74\ objecting to the proposals.\75\
---------------------------------------------------------------------------

\74\ See supra note 23. In addition, SIFMA attaches its July 18,
2016 letter regarding the proposed CAT NMS Plan. See Letter from
Theodore R. Lazo, Managing Director and Associate General Counsel,
and Ellen Greene, Managing Director, Financial Services Operations,
to Brent J. Fields, Secretary, Commission (dated July 18, 2016),
available at: https://www.sec.gov/comments/sr-batsbzx-2017-38/batsbzx201738-1788188-153228.pdf. This letter advances many of the
same arguments described below, as well as some additional
arguments--namely, that: (1) Any funding mechanism for the CAT
should be centralized; (2) allocating costs to Industry Members
based on message traffic may disadvantage market-makers and broker-
dealers who provide liquidity, as compared to those who take
liquidity; (3) the Participants should implement a user fee in
connection with the use of the CAT for regulatory purposes; (4) the
CAT NMS Plan does not distinguish between costs of the CAT
associated with collection and processing of data reported by
broker-dealers as opposed to costs of the CAT designed to support
SRO regulatory uses (noting that allocating costs of the CAT based
on message traffic or market share would result in broker-dealers
subsidizing the costs of surveillance systems and functions paid for
by the Participants through regulatory fees that they already charge
their members); (5) the Participants must substantiate the need for
a CAT Fee in addition to current regulatory fees; and (6) funding
for the CAT system should come through cost savings realized by the
Participants from the retirement of old audit trail systems. Id. at
12-19. The Participants responded to these previously-expressed
concerns in their response letter. The Participants state that (1)
the CAT fee filings will implement a centralized approach to billing
through the provision to each Industry Member of one invoice per
quarter for CAT fees, regardless of the number of SROs to which the
Industry Member belongs (see Response from Participants, supra note
23, at 9); (2) their choice of a tiered, fixed fee funding model
would limit disincentives to providing liquidity as compared to
strictly variable or metered funding models (see id. at 10); (3) the
CAT NMS Plan authorizes a usage fee, but that it is premature to
establish it (see id. at 8-9); (4) data ingestion and processing are
primary drivers of the CAT costs, and therefore they believe that
data processing is a reasonable basis for assessing CAT Fees (see
id. at 8); (5) Rule 613 of Regulation NMS specifically contemplates
broker-dealers contributing to the funding of the CAT and the
Commission permitted the Participants to recover at least some of
the CAT costs from their members (see id. at 3-4); and (6) the
Participants have filed proposed rule changes to retire duplicative
systems as required by the CAT NMS Plan and that once the
Participants become more familiar with the CAT and have revised
their surveillance methods, they will review their fees and
determine whether to revise such fees (see id. at 9-10, 12).
\75\ See SIFMA Letter; Cerny & O'Malley Letter; OTC Markets
Letter; FIA Letter; MFA Letter; Shatto Letter, supra note 23. The
Commission notes that the Shatto Letter agrees with the views
expressed in SIFMA's letter and that the Smart Letter discusses
concerns that are not pertinent to the proposed rule changes.
Accordingly, those two letters are not further discussed in this
section.
---------------------------------------------------------------------------

Necessity of the CAT
One commenter asks whether the CAT is a ``worthwhile endeavor,''
\76\ arguing that the CAT is largely duplicative of existing electronic
audit trails, and suggesting that the goals of the CAT can be
accomplished at a fraction of the cost set forth in the filings.\77\
The commenter also believes that the CAT is not justified in terms of
costs and benefits and warns that any costs assessed to broker-dealers
will ultimately be passed on to investors.\78\ Similarly, another
commenter believes that fees imposed on broker-dealers are likely to be
passed through to investors, effectively limiting investor choice in
execution venues.\79\
---------------------------------------------------------------------------

\76\ See FIA Letter, supra note 23, at 2.
\77\ See id. See also Cerny & O'Malley Letter, supra note 23, at
4 (suggesting that the CAT will not capture any new violative
activity not currently disclosed under current surveillance
practices).
\78\ See FIA Letter, supra note 23, at 2.
\79\ See MFA Letter, supra note 23, at 2.
---------------------------------------------------------------------------

In response to the comment questioning the utility of the CAT, the
Participants explain that they are obligated to build the CAT by Rule
613.\80\ Further, the Participants state that the CAT NMS Plan requires
them to eliminate existing systems and rules made duplicative by the
CAT and that they have already filed proposals to accomplish this for
certain such systems and rules.\81\ The Participants add that the CAT
is intended to replace the current audit trails (which vary in data and
scope, among other ways) with a single, comprehensive audit trail.\82\
---------------------------------------------------------------------------

\80\ See Response from Participants, supra note 23, at 17.
\81\ See id. at 18. As an example of such a filing, the
Participants cite to Securities Exchange Act Release No. 80783 (May
26, 2017), 82 FR 25423 (June 1, 2017) (SR-FINRA-2017-013), wherein
FINRA proposes to eliminate the Order Audit Trail System. See
Response from Participants, supra note 23, at 18 n.103.
\82\ See Response from Participants, supra note 23, at 18.
---------------------------------------------------------------------------

Funding Authority
One commenter challenges the imposition of a CAT Fee on Industry
Members, arguing that the Participants have not provided justification
for imposing such a fee and that the Industry Members should not be
obligated to pay any costs or expenses other than the direct costs to
build and operate the CAT.\83\ Two commenters note that broker-dealers
already pay the Participants a significant amount in regulatory
funding, and argue that costs other than the direct costs to build and
operate the CAT (such as insurance and consulting) should be borne by
the Participants as the costs they incur to do business as self-
regulatory organizations, as well as any costs

[[Page 31662]]

incurred before the approval of the CAT NMS Plan.\84\
---------------------------------------------------------------------------

\83\ See SIFMA Letter, supra note 23, at 2-4.
\84\ See FIA Letter, supra note 23, at 2-3; see also SIFMA
Letter, supra note 23, at 3-4.
---------------------------------------------------------------------------

In their response, the Participants state that Rule 613 of
Regulation NMS (``Rule 613'') \85\ contemplates broker-dealers
contributing to the funding of CAT.\86\ Because the CAT improves
regulatory oversight of the securities markets, the Participants
believe that it would be equitable to require broker-dealers and
Participants to fund the CAT.\87\ The Participants further believe that
Rule 613 and the Approval Order \88\ support their recovery of costs
related to the creation, implementation and maintenance of the CAT NMS
Plan, such as third-party support costs, the operational reserve and
insurance costs, through the CAT Fee.\89\
---------------------------------------------------------------------------

\85\ 17 CFR 242.613.
\86\ See Response from Participants, supra note 23, at 3.
\87\ See id. at 4.
\88\ See supra note 29.
\89\ See Response from Participants, supra note 23, at 7-8.
---------------------------------------------------------------------------

Industry Member Input
Three commenters argue that the funding decisions would have
benefited from greater involvement from Industry Members.\90\ Two
commenters assert that the Participants' development of the funding
model should have involved collaboration with the broker-dealer
community.\91\ One commenter opines that if broker-dealers had been
involved in the development of the funding model, such participation
would have been helpful in understanding why market participants are
subject to CAT fees and the rationale for the proposed fee
structure.\92\ Another commenter believes that the proposed fees lack
substantive input from the Industry Members.\93\ The third commenter
recommends that the CAT NMS Plan Operating Committee include market
participant representatives with respect to funding and data security,
to enhance transparency and mitigate potential conflicts of
interest.\94\
---------------------------------------------------------------------------

\90\ See SIFMA Letter; FIA Letter; MFA Letter, supra note 23.
\91\ See SIFMA Letter, supra note 23, at 2-3; see FIA Letter,
supra note 23, at 2 (stating ``we struggle to understand how
excluding other market participants and taking input only from the
Plan Participants is anything but prejudicial'').
\92\ See FIA Letter, supra note 23, at 2.
\93\ See SIFMA Letter, supra note 23, at 2-3.
\94\ See MFA Letter, supra note 23, at 2.
---------------------------------------------------------------------------

In response to the comment that the funding model should have been
the result of greater industry collaboration, the Participants assert
that market participants were given the opportunity to comment on the
funding model through the CAT NMS Plan Notice \95\ and that, in
developing the funding model, the Participants considered the input of
members of the industry through the ``Development Advisory Group'' that
was formed to provide industry feedback on the development of the CAT
NMS Plan.\96\ Further, the Participants assert that the proposed fees
provide the opportunity for public comment on the fees.\97\
---------------------------------------------------------------------------

\95\ See supra note 28.
\96\ See Response from Participants, supra note 23, at 2-3.
\97\ See id. at 2.
---------------------------------------------------------------------------

Conflicts of Interest
Three commenters raise concerns about Participant conflicts of
interest in setting the CAT fees.\98\ One commenter argues that,
through the proposals, the Participants are imposing unreasonable fees
on their competitors, the Industry Members, who, as members of the
Participants, have no recourse but to pay the fees or risk regulatory
action.\99\ This commenter states that 88% of the total costs of
building and operating the CAT are allocated to broker-dealers and ATSs
under the proposed fees, suggesting the Participants decided to
allocate nearly all of the costs of CAT to their competitors.\100\
Accordingly, the commenter recommends that an independent third party
should have established the proposed CAT Fees to prevent the
Participants from setting fees to their benefit.\101\
---------------------------------------------------------------------------

\98\ See SIFMA Letter, FIA Letter, MFA Letter, supra note 23.
\99\ See SIFMA Letter, supra note 23, at 2-3.
\100\ See id. at 2-3.
\101\ See id.
---------------------------------------------------------------------------

Another commenter argues that the Participants have a clear
conflict of interest when setting their own cost allocation.\102\ This
commenter states that the not-for-profit structure of the Company is
essential to the CAT NMS Plan, seeks assurance that the Company has
filed for business league status and, if so, asks whether the
application has been approved.\103\ The third commenter believes the
process to establish the CAT fees does not address the Participants'
potential conflicts of interest related to their commercial
interests.\104\
---------------------------------------------------------------------------

\102\ See FIA Letter, supra note 23, at 2.
\103\ See id. at 3. This commenter raises concerns about the
impact on the costs and allocations if the Company's application to
become a business league is not approved by the Internal Revenue
Service (``IRS''). Id.
\104\ See MFA Letter, supra note 23, at 2.
---------------------------------------------------------------------------

In their response, the Participants explain that it is unnecessary
to require an independent third party to establish the CAT Fees, in
part because the funding of the CAT is designed to protect against any
conflicts of interest in the Participants' ability to set fees, through
the operation of the CAT on a break-even basis (such that any fees
collected would be used toward CAT costs and an appropriate reserve,
and that surpluses would offset fees in future payment).\105\ The
Participants also refer to the application of the Company to be
organized as a tax-exempt business league, which would require that no
part of the Company's net earnings can inure to the benefit of the
Participants and that the Company is not organized for profit.\106\
Additionally, the Participants note that the obligation to create,
develop and maintain the CAT is their own responsibility, so they must
have the ability to establish reliable funding and not an independent
third party.\107\
---------------------------------------------------------------------------

\105\ See Response from Participants, supra note 23, at 11.
\106\ See id.
\107\ See id. at 11-12.
---------------------------------------------------------------------------

In response to the comment asking about the status of the Company's
application to be organized as a tax-exempt business league, the
Participants state that the Company filed its IRS application on May 5,
2017, and that the application is currently pending. The Participants
explain that if the IRS does not approve the application, the Company
will operate as set forth in the Plan, but may be required to pay
taxes. They believe that it is premature to include a tax contingency
plan in the proposals.\108\
---------------------------------------------------------------------------

\108\ See id. at 11, 18.
---------------------------------------------------------------------------

Allocation of Fees
Several commenters raise concerns about the proposed allocation of
CAT fees.\109\ One commenter argues that the proposals are not an
equitable allocation of reasonable fees under Section 6(b)(4) or
Section 15A(b)(5) of the Exchange Act.\110\ This commenter notes that
the proposed fees allocate approximately 88% of the total costs of
building and operating the CAT to broker-dealers and ATSs \111\ and
questions the ``comparability'' justification provided by the
Participants for allocating 75% of the total CAT costs to Industry
Members, stating that the proposed fees are not comparable at the
highest tiers.\112\ Similarly, another commenter opines that the 75%/
25% allocation of the CAT costs is inequitable, explaining that the
Participants will be able to realize cost savings from the retirement

[[Page 31663]]

of regulatory reporting processes.\113\ A third commenter notes that it
is unable to understand the justification for the 75% allocation to
broker-dealers,\114\ and the fourth commenter believes that the
Participants are disproportionately imposing fees on Industry Members,
which could put Industry Members at a competitive disadvantage.\115\
---------------------------------------------------------------------------

\109\ See SIFMA Letter; Cerny & O'Malley Letter, FIA Letter; MFA
Letter, supra note 23.
\110\ See SIFMA Letter, supra note 23, at 3.
\111\ See id. at 3 n.4.
\112\ See id. at 3.
\113\ See Cerny & O'Malley Letter, supra note 23, at 2.
\114\ See FIA Letter, supra note 23, at 3.
\115\ See MFA Letter, supra note 23, at 2.
---------------------------------------------------------------------------

In response to comments regarding the allocation of CAT costs, the
Participants first state that the 88% figure cited in the first
commenter's letter is the cost broker-dealers will incur directly to
comply with the reporting requirements of the CAT, not the CAT
Fees.\116\ The Participants also note that this is an aggregate number
and reflects the fact that there are 75 times more Industry Members
that would report to the CAT than Participants.\117\
---------------------------------------------------------------------------

\116\ See Response from Participants, supra note 23, at 5.
\117\ See id.
---------------------------------------------------------------------------

In addition, the Participants explain that the Operating Committee
believed that the 75%/25% division of total CAT costs between Industry
Members and Execution Venues maintained the greatest level of
comparability, considering affiliations among or between CAT
Reporters.\118\ The Participants state that although the Tier 1 and 2
fees for Industry Members would be higher than those for Execution
Venues, the fees paid by Execution Venue complexes would be higher than
those paid by Industry Member complexes.\119\ The Participants also
note that the cost allocation takes into account that there are
approximately 24 times more Industry Members that would report to the
CAT than Execution Venues.\120\
---------------------------------------------------------------------------

\118\ See id. at 15.
\119\ See id. The Participants note that ``the proposed funding
model estimates total fees for associated Participant complexes that
are in several cases nearly two to three times larger than the
single largest broker-dealer complex.'' See id. at 6.
\120\ See id. at 15. The Commission notes that the Notice stated
that there are approximately 25 times more Industry Members expected
to report to the CAT than Execution Venues. See Notice, supra note
16, at 23109.
---------------------------------------------------------------------------

Tiering Methodology
Two commenters believe that the proposed tiering methodology is
inequitable and unreasonable.\121\ Both commenters raise concerns that
the tiers will be applied inequitably because Industry Members will be
assessed fees based on their message traffic (the biggest cost
component of the CAT), while Participants will be assessed fees on
their market share.\122\ One of the commenters notes that, although the
Participants proposed nine tiers for Industry Members, they have only
proposed two tiers for Execution Venues,\123\ ``claiming that
additional tiers would have resulted in significantly higher fees for
Tier 1 [E]xecution [V]enues and diminish comparability between
[E]xecution [V]enues and Industry Members.'' \124\ Both commenters
believe the result will ``maximize costs for broker-dealers and
minimize costs for Plan Participants.'' \125\ One of the commenters
also questions why it makes sense to charge a fixed fee for all market
participants within a single tier, and whether the fixed-fee tiers set
forth therein could create incentives for market participants to limit
their quoting and trading activities as their trading volumes approach
higher tiers.\126\
---------------------------------------------------------------------------

\121\ See SIFMA Letter; FIA Letter, supra note 23.
\122\ See FIA Letter, supra note 23, at 3; SIFMA Letter, supra
note 23, at 4 (stating ``the Plan Participants proposals
inexplicably propose a tiering mechanism for themselves that is
based on not their relative impact to the CAT system, but instead on
their relative market share'').
\123\ See SIFMA Letter, supra note 23, at 4.
\124\ See id.
\125\ See FIA Letter, supra note 23, at 3; see also SIFMA
Letter, supra note 23, at 4.
\126\ See FIA Letter, supra note 23, at 3.
---------------------------------------------------------------------------

In response to the comments that the tiering methodology is
inequitable and unreasonable because Participants will be assessed fees
based on market share, rather than message traffic, the Participants
explain that charging broker-dealers based on message traffic is the
most equitable means to establish their fees because message traffic is
a significant cost driver of CAT. Accordingly, the Participants believe
that it is appropriate to use message traffic to assign fee tiers to
broker-dealers.\127\ The Participants state that charging Execution
Venues based on message traffic, on the other hand, will result in
large and small Execution Venues paying comparable fees as both types
of Execution Venues produce similar amounts of message traffic.\128\
The Participants believe such a result would be inequitable; therefore,
they decided to base fees for Execution Venues and broker-dealers on
different criteria.\129\
---------------------------------------------------------------------------

\127\ See Response from Participants, supra note 23, at 6.
\128\ See id. at 6.
\129\ See id. The Participants also explain that, while ATSs
have varying levels of message traffic, they operate similarly to
exchanges and therefore were categorized as Execution Venues. See
id. at 6-7.
---------------------------------------------------------------------------

In response to a commenter's concern that the Participants only
established two tiers for themselves, the Participants state that the
CAT NMS Plan permits them to establish only two tiers and that two
tiers were sufficient to distinguish between the Execution Venues.\130\
The Participants state that adding more tiers will significantly
increase fees for Tier 1 and Tier 2 Execution Venues with the result of
fees for Tier 1 Execution Venues being much higher than fees for Tier 1
Industry Members.\131\ In turn, the Participants believe that such a
result will violate Section 11.2(c) of the CAT NMS Plan, which states
that, in establishing the funding of the Company, the Operating
Committee shall seek to establish a tiered fee structure in which the
fees charged to the CAT Reporters with the most CAT-related activity
(measured by market share and/or message traffic) 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).\132\
---------------------------------------------------------------------------

\130\ See id. at 13. The Participants also state that, unlike
for Industry Members, the data for Execution Venues ``did not
suggest a break point(s) for the markets with less than 1% market
share that would indicate an appropriate threshold for creating a
new tier or tiers.'' Id.
\131\ See id. at 14.
\132\ See id.; Section 11.2(c) of the CAT NMS Plan.
---------------------------------------------------------------------------

In response to the comment asking why it makes sense to charge a
fixed fee for all market participants within a single tier and
questioning the results of fixed-fee tiering, the Participants explain
that the proposed approach ``helps ensure that fees are equitably
allocated among similarly situated CAT Reporters, thereby lessening the
impact of CAT fees on smaller firms,'' \133\ and provides
predictability of payment obligations.\134\ The Participants also state
that the fixed-fee approach provides elasticity to take into account
any changes in message traffic levels through the use of predefined
fixed percentages instead of fixed volume thresholds, and would not
likely cause CAT Reporters to change their behavior (and impact
liquidity) to avoid being placed in a higher tier.\135\
---------------------------------------------------------------------------

\133\ See Response from Participants, supra note 23, at 14.
\134\ See id.
\135\ See id.
---------------------------------------------------------------------------

Options Market-Maker Fees
One commenter believes that the proposed fees will be unsustainable
for small options market-makers.\136\ The commenter explains that
because the

[[Page 31664]]

nature of their business requires the generation of quotes, the
proposed assessment of fees based on message traffic will place small
options market-makers in the top Industry Member fee tiers,
``[a]lthough this category of broker-dealer is relatively small in
terms of net worth . . . .'' \137\ The commenter notes that the top
three tier fees for Industry Members are comparable to the largest
equity Execution Venues, which it states is neither equitable nor
fair.\138\ The commenter also believes that smaller broker-dealers,
such as options market-makers and other electronic trading firms, will
be in the top fee tiers, while larger ``full-service'' firms that
produce fewer electronic messages would be in the lower fee tiers.\139\
The commenter argues that this result is not equitable or fair to
smaller market participants.\140\
---------------------------------------------------------------------------

\136\ See Cerny & O'Malley Letter, supra note 23, at 1. The
commenter notes that options market-makers have an obligation to
quote ``hundreds of thousands of options series'' and that this fact
was acknowledged by the Commission, which exempted them from
submitting their quotes to the Central Repository. See id. at 3; see
also note 41 supra.
\137\ See Cerny & O'Malley Letter, supra note 23, at 1.
\138\ See id. at 3.
\139\ See id. at 4.
\140\ See id.
---------------------------------------------------------------------------

Additionally, the commenter believes that charging Industry Members
on the basis of message traffic will disproportionately impact options
market-makers because, unlike for equities, message traffic would
include options strikes and series.\141\ Further, the commenter notes
that options market-makers have continuous quoting obligations imposed
by the exchanges, and consequently, expected increases in the options
classes listed by the exchanges will increase CAT fees for options
market-makers.\142\ The commenter adds that the proposed fees may
impact the ability of small options market-makers to provide liquidity
and that such Industry Members may choose to leave the market-making
business in order to avoid quoting requirements.\143\
---------------------------------------------------------------------------

\141\ See id. at 2.
\142\ See id. at 3.
\143\ See id. at 3, 4, 5.
---------------------------------------------------------------------------

In their response, the Participants explain that since message
traffic is a major cost component for CAT, they believe it is an
appropriate basis for assigning Industry Member fee tiers.\144\ The
Participants note that options market-makers will produce a large
amount of message traffic to be processed by the CAT, so the
Participants intend to charge them CAT fees.\145\
---------------------------------------------------------------------------

\144\ See Response from Participants, supra note 23, at 6, 17.
\145\ See id. at 17 n. 96; see also note 41, supra.
---------------------------------------------------------------------------

ATS Fees
One commenter objects to the proposed fees for ATSs, which are the
same fees as Participants under the proposals, as unreasonable, because
it believes the fees would result a significant burden on small ATSs
and a barrier to entry for new ATSs that would not similarly apply to
the Participants.\146\
---------------------------------------------------------------------------

\146\ See SIFMA Letter, supra note 23, at 4. SIFMA states that
Tier 2 Execution Venues will produce significantly more reports to
CAT than Tier 2 ATSs, but points out that Tier 2 Execution Venues
and Tier 2 ATSs will be subject to the same CAT Fees. See id.
---------------------------------------------------------------------------

Another commenter objects to the proposals' treatment of smaller
Equity Execution Venues (such as low volume ATSs), opining that such
treatment is unfair and anti-competitive.\147\ The commenter also
argues that smaller Execution Venues that were assigned to the second
fee tier would be required to pay two-thirds of the fees allocated to
``the enormous NYSE or Nasdaq exchanges.'' \148\ This commenter
suggests adding at least one tier for small ATSs executing in the
aggregate less than 1% of NMS stocks (based on trade volume), as well
as for ATSs executing OTC Equity securities, and allocating
approximately 1.5% of the total costs assigned to all Execution Venues
to that tier.\149\
---------------------------------------------------------------------------

\147\ See OTC Markets Letter, supra note 23, at 1-2.
\148\ See id. at 9.
\149\ See id.
---------------------------------------------------------------------------

In response to the comment noting that charging ATSs the same CAT
fees as Execution Venues would result in a significant burden on
smaller ATSs and act as a barrier to entry, the Participants reiterate
that two fee tiers for Execution Venues were appropriate because adding
tiers would ``compromise the comparability of fees between Execution
Venues and Industry Members with the most CAT-related activity. . . .
[C]reating additional tiers could have unintended consequences on the
funding model such as creating greater discrepancies between the
tiers.'' \150\ The Participants also explain that they decided to treat
Execution Venues and ATSs in the same way because of the similarities
of their business models and estimated burden on CAT.\151\
---------------------------------------------------------------------------

\150\ See Response from Participants, supra note 23, at 16.
\151\ See id. at 6-7.
---------------------------------------------------------------------------

In response to the comment recommending the addition of a tier for
small ATSs executing in the aggregate less than 1% of NMS stocks, the
Participants explain that two fee tiers for Execution Venues were
appropriate because adding tiers would ``compromise the comparability
of fees between Execution Venues and Industry Members with the most
CAT-related activity.'' \152\ The Participants also state that they
considered adding more than two tiers of Execution Venue fees, but that
doing so would result greatly increase the fees imposed on Tier 1
Equity Execution Venues and ``diminish comparability between Execution
Venues and Industry Members in a manner that would be difficult to
justify under the funding model.'' \153\
---------------------------------------------------------------------------

\152\ See id. at 16.
\153\ See id.
---------------------------------------------------------------------------

OTC Equity Securities Execution Venues
One commenter objects to the proposals' treatment of Execution
Venues for OTC Equity securities, opining that it is unfair and anti-
competitive.\154\ The commenter particularly objects to the assignment
of OTC Link ATS to the first fee tier of Execution Venues with large
Execution Venues for NMS Stocks.\155\ The commenter states that OTC
Link ATS was placed in the first CAT fee tier because fee tier
assignments are inappropriately based on market share calculated from
share volume.\156\ The commenter states that the number of trades in
OTC Equity Securities is relatively small,\157\ as opposed to share
volume ``due to the disproportionately large number of shares being
traded on the OTC equity market as compared to the NMS market. . . .''
\158\ The commenter explains that many OTC Equity Securities are priced
at less than one dollar--and a significant number at less than one
penny--and that low-priced shares tend to trade in larger
quantities.\159\ Because the fee tiers are based on market share
calculated from share volume, the commenter points out that OTC Link
ATS has the greatest market share of all of the Execution Venues in
both NMS Stocks and OTC Equity Securities at 29.90% and

[[Page 31665]]

accordingly was assigned to the same fee tier as exchanges that the
commenter claims have approximately 20 times greater trading revenues
than OTC Link ATS.\160\ The commenter believes that this unfairly
burdens the market for OTC Equity Securities.\161\ The commenter
recommends placing Execution Venues for OTC Equity Securities in
separate tiers from large Execution Venues for NMS Stocks and
allocating costs to tiers based on number of trades to align tiers with
CAT usage and costs.\162\ Specifically, the commenter believes that
there should be separate tiers for the Execution Venues for OTC Equity
Securities with approximately 0.5% of the total costs assigned to all
Execution Venues allocated to that tier, or at least one additional
tier for small ATSs executing in the aggregate less than 1% of NMS
stocks (based on trade volume) and OTC Equity securities with
approximately 1.5% of the total costs assigned to all Execution Venues
allocated to that tier.\163\
---------------------------------------------------------------------------

\154\ See OTC Markets Letter, supra note 23, at 1-2.
\155\ See id. at 1, 3, 5.
\156\ See id. at 6-8. The commenter states that ``[s]hare volume
is an inappropriate method for determining market share, because the
costs of operating the CAT are not correlated with the number of
shares traded in any particular Execution Venue. Instead, CAT's
costs are impacted by the number of orders and executions.'' See id.
at 6. The commenter recommends using the number of trades in lieu of
share volume, or dollar volume instead of share volume, for
determining market share. See id. at 7-8.
\157\ See id. at 4.
\158\ See id. at 7.
\159\ See id.
\160\ See id. at 3.
\161\ See id.
\162\ See id. at 8.
\163\ See id. at 9.
---------------------------------------------------------------------------

In their response, the Participants state that the CAT NMS Plan
provides for the use of share volume to calculate market share for
Execution Venues that execute transactions in NMS Stocks or OTC Equity
Securities.\164\ The Participants explain that two fee tiers for
Execution Venues were appropriate because adding tiers would
``compromise the comparability of fees between Execution Venues and
Industry Members with the most CAT-related activity'' \165\ and that
they considered adding more than two tiers of Execution Venue fees, but
that doing so would result greatly increase the fees imposed on Tier 1
Equity Execution Venues and ``diminish comparability between Execution
Venues and Industry Members in a manner that would be difficult to
justify under the funding model.'' \166\ The Participants believe that
the CAT Fees do not impose an unnecessary or inappropriate burden on
competition on OTC Equity Securities Execution Venues in light of the
potential negative impact of increasing the number of fee tiers
applicable to Execution Venues and the decision to use market share, as
calculated by share volume, as the basis for Execution Venue CAT
Fees.\167\
---------------------------------------------------------------------------

\164\ See Response from Participants, supra note 23, at 16.
\165\ See id.
\166\ See id.
\167\ See id.
---------------------------------------------------------------------------

IV. Suspension of the Proposed Rule Changes

Pursuant to Section 19(b)(3)(C) of the Act,\168\ at any time within
60 days of the date of filing of an immediately effective proposed rule
change in accordance with Section 19(b)(1) of the Act,\169\ the
Commission summarily may temporarily suspend the change in the rules of
a self-regulatory organization made thereby if it appears to the
Commission that such action is necessary or appropriate in the public
interest, for the protection of investors, or otherwise in furtherance
of the purposes of the Act. The Commission believes a temporary
suspension of the proposed rule changes is warranted here.\170\
---------------------------------------------------------------------------

\168\ 15 U.S.C. 78s(b)(3)(C).
\169\ 15 U.S.C. 78s(b)(1).
\170\ For purposes of temporarily suspending the proposed rule
changes, the Commission has considered the proposed rules' impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------

In particular, the Commission finds that it is appropriate in the
public interest, for the protection of investors, and otherwise in
furtherance of the purposes of the Act, to temporarily suspend the
proposed rule changes to consider whether the proposed rule changes
satisfy the standards under the Act and the rules thereunder requiring,
among other things, that the rules of an exchange or a national
securities association provide for the equitable allocation of
reasonable fees among members, issuers, and other persons using its
facilities; promote just and equitable principles of trade; protect
investors and the public interest; do not permit unfair discrimination
between customers, issuers, brokers or dealers; and do not impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.\171\
---------------------------------------------------------------------------

\171\ See 15 U.S.C. 78f(b)(4), (5), and (8); 15 U.S.C. 78o-
3(b)(5), (6), and (9).
---------------------------------------------------------------------------

The proposed rule changes are subject to Section 6 of the Act in
the case of the national securities exchanges and Section 15A of the
Act in the case of the national securities association, including: (1)
Section 6(b)(4) \172\ and Section 15A(b)(5),\173\ which require the
rules of an exchange or a national securities association to ``provide
for the equitable allocation of reasonable dues, fees, and other
charges among its members and issuers and other persons using its
facilities;'' \174\ (2) Section 6(b)(5) and Section 15A(b)(6), which
require the rules of an exchange or a national securities association
to, among other things, ``promote just and equitable principles of
trade . . . protect investors and the public interest; and [to be] not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers;'' \175\ and (3) Section 6(b)(8) and Section
15A(b)(9), which require the rules of an exchange or a national
securities association to ``not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of this
chapter.'' \176\
---------------------------------------------------------------------------

\172\ 15 U.S.C. 78f(b)(4).
\173\ 15 U.S.C. 78o-3(b)(5).
\174\ 15 U.S.C. 78f(b)(4).
\175\ 15 U.S.C. 78f(b)(5); 15 U.S.C. 78o-3(b)(6).
\176\ 15 U.S.C. 78f(b)(8); 15 U.S.C. 78o-3(b)(9).
---------------------------------------------------------------------------

In temporarily suspending the proposed rule changes, the Commission
intends to consider whether, among other things, the following aspects
of the proposed rule changes are consistent with the Act:
The allocation of 75% of total costs recovered to Industry
Members (other than Execution Venue ATSs) and 25% to Execution Venues,
and the comparability of fees between the largest Industry Members and
Tier 1 Execution Venues. The Participants stated that this 75%/25%
division maintains the greatest level of comparability across the
funding model, keeping in view that comparability should consider
affiliations among or between CAT Reporters.\177\ The Participants
explained that the cost allocation establishes fees for the largest
Industry Members that are comparable to the largest Equity Execution
Venues and Options Execution Venues.\178\ In addition, they stated that
the cost allocation establishes fees for Execution Venue complexes that
are comparable to those of Industry Member complexes.\179\ Furthermore,
the Participants noted that

[[Page 31666]]

the allocation of total CAT costs recovered recognizes that there are
approximately 25 times more Industry Members expected to report to the
CAT than Execution Venues.\180\
---------------------------------------------------------------------------

\177\ See, e.g., Notice, supra note 16, at 23109. The CAT NMS
Plan funding principles state that, in establishing the funding of
the Company, the Operating Committee shall seek to establish a
tiered fee structure in which the fees charged to: (i) CAT Reporters
that are Execution Venues, including ATSs, are based upon the level
of market share; (ii) Industry Members' non-ATS activities are based
upon message traffic; and (iii) 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). See Section 11.2(c) of
the CAT NMS Plan.
\178\ See, e.g., Notice, supra note 16, at 23109.
\179\ See id. The Participants also represented that other
possible allocations of CAT costs led to much higher fees for larger
Industry Members than for larger Execution Venues or vice versa and/
or much higher fees for Industry Member complexes than for Execution
Venue complexes or vice versa. See id.
\180\ See id.
---------------------------------------------------------------------------

The determination to rely on market share, as calculated
by share volume in NMS Stocks and OTC Equity Securities, to place
Equity Execution Venues for OTC Equity Securities and Execution Venues
representing less than 1% NMS market share (primarily lower volume
ATSs) in the same fee tier structure as Equity Execution Venues for NMS
Stocks, as well as the determination to set two fee tiers and charge
Equity Execution Venues in Tier 2 approximately two-thirds of the fees
allocated to Equity Execution Venues in Tier 1. The CAT NMS Plan
permits the Operating Committee to establish at least two and no more
than five tiers of fixed fees for Equity Execution Venues.\181\ The
Participants explained that the Operating Committee determined to
establish two tiers for Equity Execution Venues, rather than a larger
number of tiers, because they believed that two tiers were sufficient
to distinguish between the smaller number of Equity Execution Venues
based on market share.\182\ The Participants added that the
incorporation of additional Equity Execution Venue tiers will result in
significantly higher fees for Tier 1 Equity Execution Venues and
diminish comparability between Execution Venues and Industry
Members.\183\ The Participants stated that the Operating Committee
considered the distribution of Execution Venues, grouped together
Execution Venues with similar levels of market share of share volume,
and determined that it was simpler and more appropriate to have fewer,
rather than more, Execution Venue fee tiers to distinguish between
Execution Venues.\184\
---------------------------------------------------------------------------

\181\ See Section 11.3(a)(i) of the CAT NMS Plan.
\182\ See, e.g., Notice, supra note 16, at 23107.
\183\ See id.
\184\ See id.
---------------------------------------------------------------------------

The inclusion of options market-maker quotes in message
traffic for purposes of calculating the appropriate fee tier for
Industry Members. The Participants stated that, under the proposals,
each Industry Member will be placed into one of nine tiers of fixed
fees, based on message traffic for a defined period.\185\ Further, the
Participants stated that options market-maker quotes will be included
in the calculation of total message traffic for options market-makers
for purposes of tiering under the CAT funding model both prior to CAT
reporting and once CAT reporting commences.\186\
---------------------------------------------------------------------------

\185\ See id. at 23104.
\186\ See id. at 23106 n.36.
---------------------------------------------------------------------------

V. Proceedings To Determine Whether To Approve or Disapprove the
Proposed Rule Changes

In addition to temporarily suspending the proposal, the Commission
also hereby institutes proceedings pursuant to Sections 19(b)(3)(C)
\187\ and 19(b)(2) of the Act \188\ to determine whether the Exchange's
proposed rule change should be approved or disapproved. Institution of
proceedings does not indicate that the Commission has reached any
conclusions with respect to any of the issues involved. Rather, as
stated below, the Commission seeks and encourages interested persons to
provide comments on the proposed rule change to inform the Commission's
analysis of whether to approve or disapprove the proposed rule change.
---------------------------------------------------------------------------

\187\ 15 U.S.C. 78s(b)(3)(C). Once the Commission temporarily
suspends a proposed rule change, Section 19(b)(3)(C) of the Act
requires that the Commission institute proceedings under Section
19(b)(2)(B) to determine whether a proposed rule change should be
approved or disapproved.
\188\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

Pursuant to Section 19(b)(2)(B) of the Act,\189\ the Commission is
hereby providing notice of the grounds for disapproval under
consideration. The Commission believes that instituting proceedings
will allow for additional analysis of, and input from commenters with
respect to, the proposed rule change's consistency with: (1) Section
6(b)(4) \190\ and Section 15A(b)(5),\191\ which require the rules of an
exchange or a national securities association to ``provide for the
equitable allocation of reasonable dues, fees, and other charges among
its members and issuers and other persons using its facilities;'' \192\
(2) Section 6(b)(5) and Section 15A(b)(6), which require the rules of
an exchange or a national securities association to, among other
things, ``promote just and equitable principles of trade . . . protect
investors and the public interest; and [to be] not designed to permit
unfair discrimination between customers, issuers, brokers, or
dealers;'' \193\ (3) Section 6(b)(8) and Section 15A(b)(9), which
require the rules of an exchange or a national securities association
to ``not impose any burden on competition not necessary or appropriate
in furtherance of the purposes of this chapter;'' \194\ and (4) the
funding principles set forth in the CAT NMS Plan, which state that the
Operating Committee shall seek, among other things, ``to establish an
allocation of the Company's related costs among Participants and
Industry Members that is consistent with the Exchange Act taking into
account . . . distinctions in the securities trading operations of
Participants and Industry Members and their relative impact upon the
Company resources and operations'' \195\ and ``to avoid any
disincentives such as placing an inappropriate burden on competition
and a reduction in market quality.'' \196\
---------------------------------------------------------------------------

\189\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act
also provides that proceedings to determine whether to disapprove a
proposed rule change must be concluded within 180 days of the date
of publication of notice of the filing of the proposed rule change.
See id. The time for conclusion of the proceedings may be extended
for up to 60 days if the Commission finds good cause for such
extension and publishes its reasons for so finding, or if the
exchange consents to the longer period. See id.
\190\ 15 U.S.C. 78f(b)(4).
\191\ 15 U.S.C. 78o-3(b)(5).
\192\ 15 U.S.C. 78f(b)(4).
\193\ 15 U.S.C. 78f(b)(5); 15 U.S.C. 78o-3(b)(6).
\194\ 15 U.S.C. 78f(b)(8); 15 U.S.C. 78o-3(b)(9).
\195\ Section 11.2(b) of the CAT NMS Plan.
\196\ Section 11.2(e) of the CAT NMS Plan.
---------------------------------------------------------------------------

The Commission believes that the proposed rule changes raise
questions as to whether the allocation of the total CAT costs recovered
between and among Industry Members and Execution Venues is reasonable,
equitable, and not unfairly discriminatory under Section 6 and Section
15A of the Act. In particular, the Commission wishes to consider
further whether the allocation of 75% of total CAT costs recovered to
Industry Members (other than Execution Venue ATSs) and 25% to Execution
Venues is equitable and not unfairly discriminatory, and whether the
CAT Fees are consistent with the funding principles set forth in the
CAT NMS Plan, which state that, in establishing the funding of the
Company, the Operating Committee shall seek, among other things, ``to
establish an allocation of the Company's related costs among
Participants and Industry Members that is consistent with the Exchange
Act taking into account . . . distinctions in the securities trading
operations of Participants and Industry Members and their relative
impact upon the Company resources and operations'' \197\ and ``to avoid
any disincentives such as placing an inappropriate burden on
competition and a reduction in market quality.'' \198\
---------------------------------------------------------------------------

\197\ Section 11.2(b) of the CAT NMS Plan.
\198\ Section 11.2(e) of the CAT NMS Plan.
---------------------------------------------------------------------------

The Commission also believes the proposed rule changes raise
questions as to whether the Participants have addressed the impact of
the proposed tiers on Industry Members who are options market makers,
who are required to continually quote a two-

[[Page 31667]]

sided market in hundreds of thousands of options series. Specifically,
the Commission wishes to consider further whether the proposed rule
changes will result in an undue or inappropriate burden on competition
under Section 6 and Section 15A or lead to a reduction in market
quality contrary to the funding principles expressed in the CAT NMS
Plan.\199\
---------------------------------------------------------------------------

\199\ See id. (requiring the Operating Committee ``to avoid any
disincentives such as placing an inappropriate burden on competition
and a reduction in market quality'').
---------------------------------------------------------------------------

Finally, the Commission believes the proposed rule changes raise
questions as to whether the determination to place Execution Venues for
OTC Equity Securities in the same tier structure as Execution Venues
for NMS Stocks will result in an undue or inappropriate burden on
competition under Section 6 and Section 15A. Specifically, the
Commission wishes to consider whether the Participants' decision to
group Execution Venues for OTC Equity Securities and NMS Stocks in one
tier structure, recognizing that the application of share volume may
lead to different outcomes as applied to OTC Equity Securities and NMS
Stocks. The Commission is also considering whether the determination to
place Execution Venues representing less than 1% of NMS market share in
the same tier structure as other Equity Execution Venues will result in
an undue or inappropriate burden on competition under Section 6 and
Section 15A.

VI. Commission's Solicitation of Comments

The Commission requests written views, data, and arguments with
respect to the concerns identified above as well as any other relevant
concerns. Such comments should be submitted by July 28, 2017. Rebuttal
comments should be submitted by August 11, 2017. The Commission asks
that commenters address the sufficiency and merit of the Participants'
statements in support of the proposal, which are set forth in the
proposed rule changes,\200\ in addition to any other comments they may
wish to submit about the proposed rule changes. In particular, the
Commission seeks comment on the following:
---------------------------------------------------------------------------

\200\ See, e.g., Notice, supra note 16.
---------------------------------------------------------------------------

(1) With respect to the proposed allocation of total CAT costs:
(a) Commenters' views on the determination to allocate 75% of total
CAT costs recovered to Industry Members (other than Execution Venue
ATSs) and 25% to Execution Venues;
(b) Commenters' views on whether the proposed allocation of CAT
Fees is consistent with the funding principles expressed in the CAT NMS
Plan, which state that the Operating Committee shall seek, among other
things, ``to establish an allocation of the Company's related costs
among Participants and Industry Members that is consistent with the
Exchange Act taking into account . . . distinctions in the securities
trading operations of Participants and Industry Members and their
relative impact upon the Company resources and operations'' \201\ and
``to avoid any disincentives such as placing an inappropriate burden on
competition and a reduction in market quality''; \202\
---------------------------------------------------------------------------

\201\ Section 11.2(b) of the CAT NMS Plan.
\202\ Section 11.2(e) of the CAT NMS Plan.
---------------------------------------------------------------------------

(c) Commenters' views on whether the Participants' approach to
accounting for affiliations among Execution Venues in setting CAT Fees
disadvantages non-affiliated Execution Venues or otherwise burdens
competition in the market for trading services; and
(d) Commenters' views on potential alternative allocations of total
CAT costs to Industry Members and Execution Venues, including
allocations that do not so heavily account for comparability between
and among Industry Member Complexes and Execution Venue Complexes.
(2) With respect to the proposed CAT Fees for Execution Venues:
(a) Commenters' views on the determination to place Equity
Execution Venues for OTC Equity Securities and Equity Execution Venues
representing less than 1% NMS market share (primarily lower volume
ATSs) in the same fee tier structure as large Equity Execution Venues
for NMS Stocks, including views as to whether this approach is
consistent with the funding principles outlined in the CAT NMS Plan,
views as to how this approach will affect competition in the market for
trading services for low-priced NMS Stocks and/or securities not listed
on national securities exchanges, and views regarding how these venues
can be expected to contribute to CAT message traffic compared to other
Equity Execution Venues;
(b) Commenters' views as to whether a separate tier structure
should have been created for Equity Execution Venues for OTC Equity
Securities, similar to the separate tier structure created for Options
Execution Venues;
(c) Commenters' views, and supporting data, on whether charging
Execution Venues based on message traffic will result in large and
small Execution Venues paying comparable fees; and
(d) Commenters' views on the appropriate number of tiers for
Execution Venues and the appropriate distribution of fees across such
tiers.
(3) With respect to the proposed CAT Fees for both Industry Members
and Execution Venues, commenters' views on whether the decreasing cost
per additional unit (of message traffic in the case of Industry Members
or of share volume in the case of Execution Venues) in the proposed fee
schedules burdens competition by disadvantaging small Industry Members
and Execution Venues and/or by creating barriers to entry in the market
for trading services and/or the market for broker-dealer services.\203\
---------------------------------------------------------------------------

\203\ The fee structure tends to charge more per unit of message
traffic to smaller Industry Members, and more per unit of share
volume to smaller Execution Venues.
---------------------------------------------------------------------------

(4) With respect to the proposed CAT Fees for Industry Members:
(a) Commenters' views on the determination to include options
market-maker quotes in message traffic for purposes of calculating the
appropriate fee tier for options market-makers; and
(b) Commenters' views on the appropriate number of tiers for
Industry Members and the appropriate distribution of fees across such
tiers.
The Commission also requests that commenters provide analysis to
support their views, if possible.
Interested persons are invited to submit written data, views, and
arguments concerning the proposed rule changes, including whether the
proposed rule changes are 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 any
of: File Nos. SR-BatsBYX-2017-11; SR-BatsBZX-2017-38; SR-BatsEDGA-2017-
13; SR-BatsEDGX-2017-22; SR-BOX-2017-16; SR-BX-2017-023; SR-C2-2017-
017; SR-CBOE-2017-040; SR-CHX-2017-08; SR-FINRA-2017-011; SR-GEMX-2017-
17; SR-IEX-2017-16; SR-ISE-2017-45; SR-MIAX-2017-18; SR-MRX-2017-04;
SR-NASDAQ-2017-046; SR-NYSE-2017-22; SR-NYSEArca-2017-52; SR-NYSEMKT-
2017-26; SR-PEARL-2017-20; or SR-PHLX-2017-37 on the subject line.

Paper Comments

Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

[[Page 31668]]

All submissions should refer to any of: File Nos. SR-BatsBYX-2017-11;
SR-BatsBZX-2017-38; SR-BatsEDGA-2017-13; SR-BatsEDGX-2017-22; SR-BOX-
2017-16; SR-BX-2017-023; SR-C2-2017-017; SR-CBOE-2017-040; SR-CHX-2017-
08; SR-FINRA-2017-011; SR-GEMX-2017-17; SR-IEX-2017-16; SR-ISE-2017-45;
SR-MIAX-2017-18; SR-MRX-2017-04; SR-NASDAQ-2017-046; SR-NYSE-2017-22;
SR-NYSEArca-2017-52; SR-NYSEMKT-2017-26; SR-PEARL-2017-20; or SR-PHLX-
2017-37. The file numbers 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 proposed rule changes that
are filed with the Commission, and all written communications relating
to the proposed rule changess 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 the
hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be
available for inspection and copying at the principal office of the
Participants. 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
publicly available. All submissions should refer to any of: File Nos.
SR-BatsBYX-2017-11; SR-BatsBZX-2017-38; SR-BatsEDGA-2017-13; SR-
BatsEDGX-2017-22; SR-BOX-2017-16; SR-BX-2017-023; SR-C2-2017-017; SR-
CBOE-2017-040; SR-CHX-2017-08; SR-FINRA-2017-011; SR-GEMX-2017-17; SR-
IEX-2017-16; SR-ISE-2017-45; SR-MIAX-2017-18; SR-MRX-2017-04; SR-
NASDAQ-2017-046; SR-NYSE-2017-22; SR-NYSEArca-2017-52; SR-NYSEMKT-2017-
26; SR-PEARL-2017-20; or SR-PHLX-2017-37 and should be submitted on or
before July 28, 2017. Rebuttal comments should be submitted by August
11, 2017.

VII. Conclusion

It is therefore ordered, pursuant to Section 19(b)(3)(C) of the
Act,\204\ that File Nos. SR-BatsBYX-2017-11; SR-BatsBZX-2017-38; SR-
BatsEDGA-2017-13; SR-BatsEDGX-2017-22; SR-BOX-2017-16; SR-BX-2017-023;
SR-C2-2017-017; SR-CBOE-2017-040; SR-CHX-2017-08; SR-FINRA-2017-011;
SR-GEMX-2017-17; SR-IEX-2017-16; SR-ISE-2017-45; SR-MIAX-2017-18; SR-
MRX-2017-04; SR-NASDAQ-2017-046; SR-NYSE-2017-22; SR-NYSEArca-2017-52;
SR-NYSEMKT-2017-26; SR-PEARL-2017-20; and SR-PHLX-2017-37 be and hereby
are, temporarily suspended. In addition, the Commission is instituting
proceedings to determine whether the proposed rule changes should be
approved or disapproved.
---------------------------------------------------------------------------

\204\ 15 U.S.C. 78s(b)(3)(C).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\205\
---------------------------------------------------------------------------

\205\ 17 CFR 200.30-3(a)(57) and (58).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2017-14245 Filed 7-6-17; 8:45 am]
BILLING CODE 8011-01-P

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