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 (http://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 (http://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 (http://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 (http://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 http://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

[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.

----------------------------------------------------------------------------------------------------------------
                                                                    Monthly CAT    Quarterly CAT   CAT fees paid
                              Tier                                      fee             fee          annually
----------------------------------------------------------------------------------------------------------------
1...............................................................         $21,125         $63,375        $253,500
2...............................................................          12,940          38,820         155,280
----------------------------------------------------------------------------------------------------------------

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

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

----------------------------------------------------------------------------------------------------------------
                                                                    Monthly CAT    Quarterly CAT   CAT fees paid
                              Tier                                      fee             fee          annually
----------------------------------------------------------------------------------------------------------------
1...............................................................         $19,205         $57,615        $230,460
2...............................................................          13,204          39,612         158,448
----------------------------------------------------------------------------------------------------------------

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 (http://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 (http://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