Joint Industry Plan; Order of Summary Abrogation of Amendment No. 2 to the National Market System Plan Governing the Consolidated Audit Trail by 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., NYSE MKT LLC and NYSE National, Inc., 35005-35013 [2017-15768]

Download as PDF Federal Register / Vol. 82, No. 143 / Thursday, July 27, 2017 / Notices Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments [FR Doc. 2017–15772 Filed 7–26–17; 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: 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– PEARL–2017–32 on the subject line. mstockstill on DSK30JT082PROD with NOTICES 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–PEARL–2017–32. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (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 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 also will 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– PEARL–2017–32, and should be submitted on or before August 17, 2017. 20 17 CFR 200.30–3(a)(12). VerDate Sep<11>2014 19:17 Jul 26, 2017 Jkt 241001 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.20 Eduardo A. Aleman, Assistant Secretary. BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-81189; File No. 4–698] Joint Industry Plan; Order of Summary Abrogation of Amendment No. 2 to the National Market System Plan Governing the Consolidated Audit Trail by 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., NYSE MKT LLC and NYSE National, Inc. July 21, 2017. I. Introduction Notice is hereby given that the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 11A of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 608 thereunder,2 is summarily abrogating Amendment No. 2 to the National Market System Plan Governing the Consolidated Audit Trail (‘‘CAT NMS Plan’’ or ‘‘Plan’’). On May 23, 2017 3 participants of the CAT NMS Plan (‘‘Participants’’) 4 filed with the Commission a proposal to U.S.C. 78k–1. CFR 242.608. 3 The Participants initially submitted the amendment on May 9, 2017, but subsequently withdrew the amendment and refiled the current submission on May 23, 2017. 4 The Participants are: 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., NYSE MKT LLC and NYSE National, Inc. PO 00000 1 15 2 17 Frm 00083 Fmt 4703 Sfmt 4703 35005 amend the Plan (‘‘Amendment No. 2’’),5 pursuant to Section 11A of the Act,6 and Rule 608 thereunder.7 The Amendment, which was effective upon filing pursuant to Rule 608(b)(3)(i) of Regulation NMS,8 sets forth the Consolidated Audit Trail (‘‘CAT’’) fees to be paid by the Participants. II. Description of the Amendment Prior to filing Amendment No. 2, the Participants filed the CAT NMS Plan with the Commission,9 pursuant to Section 11A of the Act 10 and Rule 608 of Regulation NMS thereunder,11 to create, implement and maintain the CAT. The Plan was published for comment in the Federal Register on May 17, 2016,12 and approved by the Commission, as modified, on November 15, 2016.13 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’’).14 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 5 See Letter from Michael Simon, Chair, CAT NMS Plan Operating Committee, to Brent J. Fields, Secretary, Commission, dated May 22, 2017 (‘‘Letter’’). See also Securities Exchange Act Release No. 80930 (June 14, 2017), 82 FR 28180 (June 20, 2017) (‘‘Notice’’), available at https://www.sec.gov/ rules/sro/nms/2017/34-80930.pdf. 6 15 U.S.C. 78k–1. 7 17 CFR 242.608. 8 17 CFR 242.608(b)(3)(i). 9 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. 10 15 U.S.C. 78k–1. 11 17 CFR 242.608. 12 Securities Exchange Act Release No. 77724 (April 27, 2016), 81 FR 30614 (May 17, 2016) (‘‘CAT NMS Plan Notice’’). 13 Securities Exchange Act Release No. 79318 (November 15, 2016), 81 FR 84696 (November 23, 2016) (‘‘Approval Order’’). 14 Section 11.1(b) of the CAT NMS Plan. E:\FR\FM\27JYN1.SGM 27JYN1 35006 Federal Register / Vol. 82, No. 143 / Thursday, July 27, 2017 / Notices affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).’’ 15 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 [ ] 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.’’ 16 The Participants submitted this Amendment No. 2 to the Plan to establish the CAT Fees to be charged to themselves, as Execution Venues.17 In addition, the Participants submitted proposed rule changes to adopt fees to be charged to Industry Members, including Industry Members that are Execution Venue ATSs (‘‘Industry Member Fee Filings’’), which are described below.18 The text of the Industry Member Fee Filings is substantially similar to Amendment No. 2. On June 30, 2017, the Commission temporarily suspended the Industry Member Fee Filings and instituted proceedings to determine whether those filings should be approved or disapproved.19 The Plan specifies 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.’’ 20 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 [ ] Act’’ and the ‘‘avoid[ance of] any disincentives such as placing an inappropriate burden on competition and reduction in market quality.’’ 21 To establish the CAT Fees permitted by the Plan, the Participants submitted Amendment No. 2. As noted above, Amendment No. 2 adopted fees applicable to the Participants, as Execution Venues, which are described below.22 A. Execution Venue Tiers 23 1. NMS Stocks and OTC Equity Securities Amendment No. 2 establishes fixed fees to be paid by Execution Venues 24 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.25 Under Amendment No. 2, 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’’).26 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’’).27 The following table sets forth the specific Equity Execution Venue Percentages and Equity Execution Recovery Allocations: 28 Percentage of equity execution venues Equity execution venue tier mstockstill on DSK30JT082PROD with NOTICES Tier 1 ............................................................................................................................................ Tier 2 ............................................................................................................................................ 15 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 5, at 28181– 28183 for additional description of the CAT NMS Plan requirements. 16 See Section 11.2(b) and (e) of the CAT NMS Plan. 17 See Letter, supra note 5. See also Notice, supra note 5. 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).’’ 18 For additional details regarding these fees, see, e.g., Securities Exchange Act Release Nos. 80675 (May 15, 2017), 82 FR 23100 (May 19, 2017) (SR– MIAX–2017–18); 80676 (May 15, 2017), 82 FR 23083 (May 19, 2017) (SR–PEARL–2017–20); 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, VerDate Sep<11>2014 19:17 Jul 26, 2017 Jkt 241001 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); 80694 (May 16, 2017), 82 FR 23416 (May 22, 2017) (SR–NYSEMKT– 2017–26); 80710 (May 17, 2017), 82 FR 23639 (May 23, 2017) (SR–FINRA–2017–011); 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); 80725 (May 18, 2017), 82 FR 23935 (May 24, 2017) (SR–PHLX–2017–37); 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); 80784 (May 26, 2017), 82 FR 25448 (June 1, 2017) (SR– BatsEDGA–2017–13); 80809 (May 30, 2017), 82 FR 25837 (June 5, 2017) (SR–BatsBYX–2017–11); 80822 (May 31, 2017), 82 FR 26148 (June 6, 2017) (SRBatsBZX–2017–38); and 80821 (May 31, 2017), 82 FR 26177 (June 6, 2017) (SR–BatsEDGX–2017–22). 19 See Securities Exchange Act Release No. 81067 (June 30, 2017), 82 FR 31656 (July 7, 2017). PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 25.00 75.00 Percentage of execution venue recovery Percentage of total recovery 26.00 49.00 6.50 12.25 20 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 5, at 28181– 28183 for additional description of the CAT NMS Plan requirements. 21 See Section 11.2(c) and (e) of the CAT NMS Plan. 22 For additional details regarding these fees, see, e.g., Notice, supra note 5. 23 Amendment No. 2 establishes different tiers for Equity and Options Execution Venues. 24 See supra note 17. For purposes of determining the CAT Fees for ATSs, the Participants categorized ATSs (excluding ATSs that do not execute orders) as Execution Venues. The Commission notes that the CAT Fees for Execution Venue ATSs were proposed in the Industry Member Fee Filings and that Amendment No. 2 addresses fees applicable to the Participants, as Execution Venues. 25 Section 11.3(a)(i) of the CAT NMS Plan; see also, e.g., Notice, supra note 5, at 28186. 26 See, e.g., Notice, supra note 5, at 28186. 27 See, e.g., id. 28 See, e.g., id. E:\FR\FM\27JYN1.SGM 27JYN1 35007 Federal Register / Vol. 82, No. 143 / Thursday, July 27, 2017 / Notices Percentage of equity execution venues Equity execution venue tier Total ............................................................................................................................... 2. Listed Options Amendment No. 2 establishes 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.29 Under Amendment No. 2, 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’’).30 The Participants noted that the percentage of costs recovered by each Options Execution Percentage of execution venue recovery Percentage of total recovery 75 18.75 100 Venue tier will be determined by predefined percentage allocations (the ‘‘Options Execution Venue Recovery Allocation’’).31 The following table sets forth the specific Options Execution Venue Percentages and Options Execution Venue Recovery Allocations: 32 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 3. Tier Assignments B. Industry Member Tiers 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.33 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.34 Amendment No. 2 describes the fixed fees to be established by the Industry Member Fee Filings to be payable by Industry Members, based on message traffic.35 Each Industry Member (other than Execution Venue ATSs 36) will be ranked by message traffic and assigned to one of nine tiers that have been predefined by percentages (the ‘‘Industry Member Percentages’’).37 The Percentage of industry members Industry member tier Tier Tier Tier Tier Tier Tier Tier Tier Tier 1 2 3 4 5 6 7 8 9 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’’).38 The following table sets forth the specific Industry Member Percentages and Industry Member Recovery Allocations:39 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 mstockstill on DSK30JT082PROD 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.40 The Participants stated 29 Section 11.3(a)(ii) of the CAT NMS Plan; see also, e.g., Notice, supra note 5, at 28187. 30 See, e.g., Notice, supra note 5, at 28187. 31 See, e.g., id. 32 See, e.g., id. 33 See, e.g., id. at 28188. 34 See, e.g., id. 35 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 5, at 28183. 36 The Participants defined ‘‘Execution Venue ATSs’’ as alternative trading systems that execute transactions in Eligible Securities. See, e.g., Notice, supra note 5, at 28181. 37 See, e.g., id. at 2810328183. 38 See, e.g., id. e.g., id. at 28184–5. 40 See, e.g., id. at 28185. 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 39 See, Continued VerDate Sep<11>2014 21:48 Jul 26, 2017 Jkt 241001 PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 E:\FR\FM\27JYN1.SGM 27JYN1 35008 Federal Register / Vol. 82, No. 143 / Thursday, July 27, 2017 / Notices 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.41 After an Industry Member begins reporting to the CAT, the Participants noted that ‘‘message traffic’’ will be calculated based on the Industry Member’s Reportable Events.42 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.43 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.44 D. Fee Levels The Participants explained that the sum of the CAT Fees is designed to 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, 2016.45 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. For Equity Execution Venues: 46 Monthly CAT fee Tier 1 ................................................................................................................................................... 2 ................................................................................................................................................... $21,125 12,940 Quarterly CAT fee CAT fees paid annually $63,375 38,820 $253,500 155,280 For Options Execution Venues: 47 Monthly CAT fee Tier 1 ................................................................................................................................................... 2 ................................................................................................................................................... $19,205 13,204 Quarterly CAT fee CAT Fees paid annually $57,615 39,612 $230,460 158,448 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 For Industry Members (other than Execution Venue ATSs): 48 Monthly CAT fee Tier 1 2 3 4 5 6 7 8 9 ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... E. Initial and Periodic Tier Reassignments mstockstill on DSK30JT082PROD with NOTICES The Operating Committee will assign fee tiers every three months based on 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-makers. See, e.g., Notice, supra note 5, at 28185 n.29. 41 See, e.g., id. at 28185. 42 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 VerDate Sep<11>2014 21:48 Jul 26, 2017 Jkt 241001 market share or message traffic, as applicable, from the prior three months.49 For the initial tier assignments, the Participants stated that 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. 31. 43 See, e.g., id. at 28188. 44 See, e.g., id. 45 See, e.g., id. The Participants further noted that CAT-related costs incurred prior to November 21, 2016 will be addressed via a separate filing. See, e.g., id. at n.34. PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 $33,668 27,051 19,239 6,655 4,163 2,560 501 145 22 the Company will calculate the relevant tier for each CAT Reporter using the prior three months of data.50 The Participants explained the Company 46 See, e.g., id. at 28189. e.g., id. 48 See, e.g., id. 49 See, e.g., id. at 28194. 50 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 40–42 supra and accompanying text. 47 See, E:\FR\FM\27JYN1.SGM 27JYN1 Federal Register / Vol. 82, No. 143 / Thursday, July 27, 2017 / Notices will calculate subsequent tier assignments using the three months of data prior to the relevant tri-monthly date.51 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.52 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.53 F. 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.’’ 54 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.55 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.56 The Participants further stated that any changes to the number of tiers in the funding model or the fees assigned to each tier will be filed with the Commission pursuant to Rule 608 of the Act and become effective in accordance with the requirements of Rule 608.57 Pursuant to Rule 608(b)(3)(i) under Regulation NMS,58 the Participants designated Amendment No. 2 as establishing or changing a fee or other charge collected on their behalf in connection with access to, or use of, the facilities contemplated by the Plan. As a result, Amendment No. 2 was effective upon filing with the Commission. On June 14, 2017, the Commission issued notice of Amendment No. 2.59 III. Summary of Comments and Participants’ Response While no comments were received on Amendment No. 2 to the CAT NMS 51 See, e.g., Notice, supra note 5, at 28194. e.g., id. 53 See, e.g., id. 54 See, e.g., id. 55 See, e.g., id. 56 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. 57 See, e.g., id. 58 17 CFR 242.608(b)(3)(i). 59 See supra note 5. mstockstill on DSK30JT082PROD with NOTICES 52 See, VerDate Sep<11>2014 19:17 Jul 26, 2017 Jkt 241001 Plan, the Commission received a number of comment letters on the Industry Member Fee Filings, and a response to such comments from the Participants. Because the text of the Industry Member Fee Filings is substantially similar to this Amendment No. 2, the Commission believes the comment letters are relevant to this Order and has summarized the comments on the Industry Member Fee Filings below.60 Necessity of the CAT One commenter asks whether the CAT is a ‘‘worthwhile endeavor,’’ 61 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.62 The commenter also believes 60 Since the Industry Member Fee Filings were designed to adopt fees to be charged to Industry Members to fund CAT, the Commission considered 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/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/cboe20170401819670–154195.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-201722/batsedgx201722-154443.pdf. The Commission also received a comment letter which is not pertinent to the Industry Member Fee Filings and Amendment No. 2. 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/srbatsbzx-2017-38/batsbzx201738-1785545153152.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. 61 See FIA Letter, supra note 60, at 2. 62 See id. See also Cerny & O’Malley Letter, supra note 60, at 4 (suggesting that the CAT will not capture any new violative activity not currently disclosed under current surveillance practices). PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 35009 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.63 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.64 In response to the comment questioning the utility of the CAT, the Participants explain that they are obligated to build the CAT by Rule 613.65 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.66 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.67 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.68 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 incurred before the approval of the CAT NMS Plan.69 In their response, the Participants state that Rule 613 of Regulation NMS (‘‘Rule 613’’) 70 contemplates brokerdealers contributing to the funding of CAT.71 Because the CAT improves 63 See FIA Letter, supra note 60, at 2. MFA Letter, supra note 60, at 2. 65 See Response from Participants, supra note 60, at 17. 66 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 60, at 18 n.103. 67 See Response from Participants, supra note 60, at 18. 68 See SIFMA Letter, supra note 60, at 2–4. 69 See FIA Letter, supra note 60, at 2–3; see also SIFMA Letter, supra note 60, at 3–4. 70 17 CFR 242.613. 71 See Response from Participants, supra note 60, at 3. 64 See E:\FR\FM\27JYN1.SGM 27JYN1 35010 Federal Register / Vol. 82, No. 143 / Thursday, July 27, 2017 / Notices regulatory oversight of the securities markets, the Participants believe that it would be equitable to require brokerdealers and Participants to fund the CAT.72 The Participants further believe that Rule 613 and the Approval Order 73 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.74 Industry Member Input Three commenters argue that the funding decisions would have benefited from greater involvement from Industry Members.75 Two commenters assert that the Participants’ development of the funding model should have involved collaboration with the broker-dealer community.76 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.77 Another commenter believes that the proposed fees lack substantive input from the Industry Members.78 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.79 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 80 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.81 Further, the Participants assert that the proposed 72 See id. at 4. supra note 13. 74 See Response from Participants, supra note 60, at 7–8. 75 See SIFMA Letter; FIA Letter; MFA Letter, supra note 60. 76 See SIFMA Letter, supra note 60, at 2–3; see FIA Letter, supra note 60, at 2 (stating ‘‘we struggle to understand how excluding other market participants and taking input only from the Plan Participants is anything but prejudicial’’). 77 See FIA Letter, supra note 60, at 2. 78 See SIFMA Letter, supra note 60, at 2–3. 79 See MFA Letter, supra note 60, at 2. 80 See supra note 12. 81 See Response from Participants, supra note 60, at 2–3. fees provide the opportunity for public comment on the fees.82 Conflicts of Interest Three commenters raise concerns about Participant conflicts of interest in setting the CAT fees.83 One commenter argues that, through the Industry Member Fee Filings, 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.84 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.85 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.86 Another commenter argues that the Participants have a clear conflict of interest when setting their own cost allocation.87 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.88 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.89 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).90 The Participants also refer to the application of the Company mstockstill on DSK30JT082PROD with NOTICES 73 See VerDate Sep<11>2014 19:17 Jul 26, 2017 Jkt 241001 id. at 2. SIFMA Letter, FIA Letter, MFA Letter, supra note 60. 84 See SIFMA Letter, supra note 60, at 2–3. 85 See id. at 2–3. 86 See id. 87 See FIA Letter, supra note 60, at 2. 88 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. 89 See MFA Letter, supra note 60, at 2. 90 See Response from Participants, supra note 60, at 11. PO 00000 82 See 83 See Frm 00088 Fmt 4703 Sfmt 4703 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.91 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.92 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.93 Allocation of Fees Several commenters raise concerns about the proposed allocation of CAT fees.94 One commenter argues that the Industry Member Fee Filings are not an equitable allocation of reasonable fees under Section 6(b)(4) or Section 15A(b)(5) of the Act.95 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 96 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.97 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 of regulatory reporting processes.98 A third commenter notes that it is unable to understand the justification for the 75% allocation to broker-dealers,99 and the fourth commenter believes that the Participants are disproportionately imposing fees on Industry Members, 91 See id. id. at 11–12. 93 See id. at 11, 18. 94 See SIFMA Letter; Cerny & O’Malley Letter, FIA Letter; MFA Letter, supra note 60. 95 See SIFMA Letter, supra note 60, at 3. 96 See id. at 3 n.4. 97 See id. at 3. 98 See Cerny & O’Malley Letter, supra note 60, at 2. 99 See FIA Letter, supra note 60, at 3. 92 See E:\FR\FM\27JYN1.SGM 27JYN1 Federal Register / Vol. 82, No. 143 / Thursday, July 27, 2017 / Notices which could put Industry Members at a competitive disadvantage.100 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.101 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.102 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.103 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.104 The Participants also note that the cost allocation takes into account that there are approximately 25 times more Industry Members that would report to the CAT than Execution Venues.105 Tiering Methodology Two commenters believe that the proposed tiering methodology is inequitable and unreasonable.106 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.107 One of the commenters notes that, although the Participants proposed nine tiers for Industry Members, they have only proposed two tiers for Execution Venues,108 ‘‘claiming that additional 100 See 101 See MFA Letter, supra note 60, at 2. Response from Participants, supra note 60, at 5. 102 See id. id. at 15. 104 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. 105 See id. at 15. 106 See SIFMA Letter; FIA Letter, supra note 60. 107 See FIA Letter, supra note 60, at 3; SIFMA Letter, supra note 60, 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’’). 108 See SIFMA Letter, supra note 60, at 4. mstockstill on DSK30JT082PROD with NOTICES 103 See VerDate Sep<11>2014 19:17 Jul 26, 2017 Jkt 241001 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.’’ 109 Both commenters believe the result will ‘‘maximize costs for broker-dealers and minimize costs for Plan Participants.’’ 110 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.111 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.112 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.113 The Participants believe such a result would be inequitable; therefore, they decided to base fees for Execution Venues and broker-dealers on different criteria.114 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.115 The Participants state that adding more tiers will significantly increase fees for Tier 1 and Tier 2 id. FIA Letter, supra note 60, at 3; see also SIFMA Letter, supra note 60, at 4. 111 See FIA Letter, supra note 60, at 3. 112 See Response from Participants, supra note 60, at 6. 113 See id. at 6. 114 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. 115 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. PO 00000 109 See 35011 Execution Venues with the result of fees for Tier 1 Execution Venues being much higher than fees for Tier 1 Industry Members.116 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).117 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,’’ 118 and provides predictability of payment obligations.119 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.120 Options Market-Maker Fees One commenter believes that the proposed fees will be unsustainable for small options market-makers.121 The commenter explains that because the 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 . . . .’’ 122 The commenter notes 110 See Frm 00089 Fmt 4703 Sfmt 4703 116 See id. at 14. id.; Section 11.2(c) of the CAT NMS Plan. 118 See Response from Participants, supra note 60, at 14. 119 See id. 120 See id. 121 See Cerny & O’Malley Letter, supra note 60, at 1. The commenter notes that options marketmakers 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 40 supra. 122 See Cerny & O’Malley Letter, supra note 60, at 1. 117 See E:\FR\FM\27JYN1.SGM 27JYN1 35012 Federal Register / Vol. 82, No. 143 / Thursday, July 27, 2017 / Notices 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.123 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.124 The commenter argues that this result is not equitable or fair to smaller market participants.125 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.126 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.127 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.128 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.129 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.130 ATS Fees One commenter objects to the proposed fees for ATSs, which are the same fees as Participants under the Industry Member Fee Filings, 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.131 123 See id. at 3. id. at 4. 125 See id. 126 See id. at 2. 127 See id. at 3. 128 See id. at 3, 4, 5. 129 See Response from Participants, supra note 60, at 6, 17. 130 See id. at 17 n.96; see also note 40, supra. 131 See SIFMA Letter, supra note 60, 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. mstockstill on DSK30JT082PROD with NOTICES 124 See VerDate Sep<11>2014 19:17 Jul 26, 2017 Jkt 241001 Another commenter objects to the Industry Member Fee Filings’ treatment of smaller Equity Execution Venues (such as low volume ATSs), opining that such treatment is unfair and anticompetitive.132 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.’’ 133 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.134 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.’’ 135 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.136 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.’’ 137 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.’’ 138 132 See OTC Markets Letter, supra note 60, at 1– 2. id. at 9. id. 135 See Response from Participants, supra note 60, at 16. 136 See id. at 6–7. 137 See id. at 16. 138 See id. PO 00000 133 See 134 See Frm 00090 Fmt 4703 Sfmt 4703 OTC Equity Securities Execution Venues One commenter objects to the Industry Member Fee Filings’ treatment of Execution Venues for OTC Equity securities, opining that it is unfair and anti-competitive.139 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.140 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.141 The commenter states that the number of trades in OTC Equity Securities is relatively small,142 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 . . . .’’ 143 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.144 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 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.145 The commenter believes that this unfairly burdens the market for OTC Equity Securities.146 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.147 Specifically, the commenter believes that there should be 139 See OTC Markets Letter, supra note 60, at 1– 2. 140 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. 142 See id. at 4. 143 See id. at 7. 144 See id. 145 See id. at 3. 146 See id. 147 See id. at 8. 141 See E:\FR\FM\27JYN1.SGM 27JYN1 Federal Register / Vol. 82, No. 143 / Thursday, July 27, 2017 / Notices 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.148 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.149 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’’ 150 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.’’ 151 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.152 IV. Discussion Pursuant to Section 11A of the Act 153 and Rule 608(b)(3)(iii) of Regulation NMS thereunder,154 at any time within 60 days of the filing of any such amendment, the Commission may summarily abrogate the amendment and require that the amendment be re-filed in accordance with paragraph (a)(1) of Rule 608 155 and reviewed in accordance with paragraph (b)(2) of Rule 608,156 if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of mstockstill on DSK30JT082PROD with NOTICES 148 See 149 See id. at 9. Response from Participants, supra note 60, at 16. 150 See id. 151 See id. 152 See id. 153 15 U.S.C. 78k–1. 154 17 CFR 242.608. 155 17 CFR 242.608(a)(1). 156 17 CFR 242.608(b)(2). VerDate Sep<11>2014 19:17 Jul 26, 2017 investors, or the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system or otherwise in furtherance of the purposes of the Act. Concerns have been raised regarding Amendment No. 2 and the Commission believes that the justifications provided by the Participants are not sufficient for the Commission to determine whether Amendment No. 2 is consistent with the Act. Accordingly, the Commission believes that the procedures provided by Rule 608(b)(2) 157 will provide a more appropriate mechanism for determining whether Amendment No. 2 is consistent with the Act. The Commission believes that Amendment No. 2 raises 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. Moreover, the Commission does not believe that the Participants have provided an adequate justification to support a determination that 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 or that the fees will not result in an undue or inappropriate burden on competition. The Commission also does not believe that the Participants have adequately explained that the CAT Fees are consistent with the funding principles set forth in the CAT NMS Plan, which require that the allocation of ‘‘costs among Participants and Industry Members . . . is consistent with the [ ] 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’’ 158 and required that such fees ‘‘avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality.’’ Further, the Commission believes that Amendment No. 2 raises 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 decision to group Execution Venues for OTC Equity Securities and NMS Stocks in one tier structure raises questions about the effect on competition, 157 17 CFR 242.608(b)(2). 11.2(b) of the CAT NMS Plan. 158 Section Jkt 241001 PO 00000 Frm 00091 Fmt 4703 Sfmt 9990 35013 recognizing that the application of share volume may lead to different outcomes as applied to OTC Equity Securities and NMS Stocks. Similarly, the decision to place Execution Venues representing less than 1% of NMS market share in the same tier structure as other Equity Execution Venues raises questions about burdens on competition. The Commission believes that the Participants have not provided adequate justification to support a conclusion that their tier structure will not result in an undue or inappropriate burden on competition. V. Conclusion For the reasons discussed above, the Commission believes that the procedures provided by Rule 608(b)(2) of Regulation NMS 159 will provide a more appropriate mechanism for determining whether Amendment No. 2 is consistent with the Act. Therefore, the Commission finds that it is necessary or appropriate in the public interest, for the protection of investors, or the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system or otherwise in furtherance of the purposes of the Act, to abrogate Amendment No. 2. It is therefore ordered, pursuant to Section 11A of the Act,160 and Rule 608 thereunder,161 that Amendment No. 2 to the CAT NMS Plan be, and hereby is, summarily abrogated. If the Participants choose to re-file Amendment No. 2, they must do so pursuant to Section 11A of the Act and Amendment No. 2 must be re-filed in accordance with paragraph (a)(1) of Rule 608 of Regulation NMS 162 for review in accordance with paragraph (b)(2) of Rule 608 of Regulation NMS.163 By the Commission. Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–15768 Filed 7–26–17; 8:45 am] BILLING CODE 8011–01–P 159 17 CFR 242.608(b)(2). U.S.C. 78k–1. 161 17 CFR 242.608. 162 17 CFR 242.608(a)(1). 163 17 CFR 242.608(b)(2). 160 15 E:\FR\FM\27JYN1.SGM 27JYN1

Agencies

[Federal Register Volume 82, Number 143 (Thursday, July 27, 2017)]
[Notices]
[Pages 35005-35013]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-15768]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81189; File No. 4-698]


Joint Industry Plan; Order of Summary Abrogation of Amendment No. 
2 to the National Market System Plan Governing the Consolidated Audit 
Trail by 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., NYSE MKT LLC and NYSE National, Inc.

July 21, 2017.

I. Introduction

    Notice is hereby given that the Securities and Exchange Commission 
(``Commission''), pursuant to Section 11A of the Securities Exchange 
Act of 1934 (``Act''),\1\ and Rule 608 thereunder,\2\ is summarily 
abrogating Amendment No. 2 to the National Market System Plan Governing 
the Consolidated Audit Trail (``CAT NMS Plan'' or ``Plan'').
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    \1\ 15 U.S.C. 78k-1.
    \2\ 17 CFR 242.608.
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    On May 23, 2017 \3\ participants of the CAT NMS Plan 
(``Participants'') \4\ filed with the Commission a proposal to amend 
the Plan (``Amendment No. 2''),\5\ pursuant to Section 11A of the 
Act,\6\ and Rule 608 thereunder.\7\ The Amendment, which was effective 
upon filing pursuant to Rule 608(b)(3)(i) of Regulation NMS,\8\ sets 
forth the Consolidated Audit Trail (``CAT'') fees to be paid by the 
Participants.
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    \3\ The Participants initially submitted the amendment on May 9, 
2017, but subsequently withdrew the amendment and refiled the 
current submission on May 23, 2017.
    \4\ The Participants are: 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., NYSE MKT LLC and NYSE National, Inc.
    \5\ See Letter from Michael Simon, Chair, CAT NMS Plan Operating 
Committee, to Brent J. Fields, Secretary, Commission, dated May 22, 
2017 (``Letter''). See also Securities Exchange Act Release No. 
80930 (June 14, 2017), 82 FR 28180 (June 20, 2017) (``Notice''), 
available at https://www.sec.gov/rules/sro/nms/2017/34-80930.pdf.
    \6\ 15 U.S.C. 78k-1.
    \7\ 17 CFR 242.608.
    \8\ 17 CFR 242.608(b)(3)(i).
---------------------------------------------------------------------------

II. Description of the Amendment

    Prior to filing Amendment No. 2, the Participants filed the CAT NMS 
Plan with the Commission,\9\ pursuant to Section 11A of the Act \10\ 
and Rule 608 of Regulation NMS thereunder,\11\ to create, implement and 
maintain the CAT. The Plan was published for comment in the Federal 
Register on May 17, 2016,\12\ and approved by the Commission, as 
modified, on November 15, 2016.\13\ 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'').\14\
---------------------------------------------------------------------------

    \9\ 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.
    \10\ 15 U.S.C. 78k-1.
    \11\ 17 CFR 242.608.
    \12\ Securities Exchange Act Release No. 77724 (April 27, 2016), 
81 FR 30614 (May 17, 2016) (``CAT NMS Plan Notice'').
    \13\ Securities Exchange Act Release No. 79318 (November 15, 
2016), 81 FR 84696 (November 23, 2016) (``Approval Order'').
    \14\ 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

[[Page 35006]]

affiliations between or among CAT Reporters, whether Execution Venues 
and/or Industry Members).'' \15\ 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 [ ] 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.'' \16\
---------------------------------------------------------------------------

    \15\ 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 5, at 28181-28183 for additional description of the CAT NMS 
Plan requirements.
    \16\ See Section 11.2(b) and (e) of the CAT NMS Plan.
---------------------------------------------------------------------------

    The Participants submitted this Amendment No. 2 to the Plan to 
establish the CAT Fees to be charged to themselves, as Execution 
Venues.\17\ In addition, the Participants submitted proposed rule 
changes to adopt fees to be charged to Industry Members, including 
Industry Members that are Execution Venue ATSs (``Industry Member Fee 
Filings''), which are described below.\18\ The text of the Industry 
Member Fee Filings is substantially similar to Amendment No. 2. On June 
30, 2017, the Commission temporarily suspended the Industry Member Fee 
Filings and instituted proceedings to determine whether those filings 
should be approved or disapproved.\19\
---------------------------------------------------------------------------

    \17\ See Letter, supra note 5. See also Notice, supra note 5. 
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).''
    \18\ For additional details regarding these fees, see, e.g., 
Securities Exchange Act Release Nos. 80675 (May 15, 2017), 82 FR 
23100 (May 19, 2017) (SR-MIAX-2017-18); 80676 (May 15, 2017), 82 FR 
23083 (May 19, 2017) (SR-PEARL-2017-20); 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); 80694 (May 16, 2017), 
82 FR 23416 (May 22, 2017) (SR-NYSEMKT-2017-26); 80710 (May 17, 
2017), 82 FR 23639 (May 23, 2017) (SR-FINRA-2017-011); 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); 80725 (May 
18, 2017), 82 FR 23935 (May 24, 2017) (SR-PHLX-2017-37); 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); 80784 (May 
26, 2017), 82 FR 25448 (June 1, 2017) (SR-BatsEDGA-2017-13); 80809 
(May 30, 2017), 82 FR 25837 (June 5, 2017) (SR-BatsBYX-2017-11); 
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).
    \19\ See Securities Exchange Act Release No. 81067 (June 30, 
2017), 82 FR 31656 (July 7, 2017).
---------------------------------------------------------------------------

    The Plan specifies 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.'' \20\ 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 [ ] Act'' and the ``avoid[ance of] any 
disincentives such as placing an inappropriate burden on competition 
and reduction in market quality.'' \21\
---------------------------------------------------------------------------

    \20\ 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 5, at 28181-28183 for additional description of the CAT NMS 
Plan requirements.
    \21\ See Section 11.2(c) and (e) of the CAT NMS Plan.
---------------------------------------------------------------------------

    To establish the CAT Fees permitted by the Plan, the Participants 
submitted Amendment No. 2. As noted above, Amendment No. 2 adopted fees 
applicable to the Participants, as Execution Venues, which are 
described below.\22\
---------------------------------------------------------------------------

    \22\ For additional details regarding these fees, see, e.g., 
Notice, supra note 5.
---------------------------------------------------------------------------

A. Execution Venue Tiers 23
---------------------------------------------------------------------------

    \23\ Amendment No. 2 establishes different tiers for Equity and 
Options Execution Venues.
---------------------------------------------------------------------------

1. NMS Stocks and OTC Equity Securities
    Amendment No. 2 establishes fixed fees to be paid by Execution 
Venues \24\ 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.\25\
---------------------------------------------------------------------------

    \24\ See supra note 17. For purposes of determining the CAT Fees 
for ATSs, the Participants categorized ATSs (excluding ATSs that do 
not execute orders) as Execution Venues. The Commission notes that 
the CAT Fees for Execution Venue ATSs were proposed in the Industry 
Member Fee Filings and that Amendment No. 2 addresses fees 
applicable to the Participants, as Execution Venues.
    \25\ Section 11.3(a)(i) of the CAT NMS Plan; see also, e.g., 
Notice, supra note 5, at 28186.
---------------------------------------------------------------------------

    Under Amendment No. 2, 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'').\26\ 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'').\27\
---------------------------------------------------------------------------

    \26\ See, e.g., Notice, supra note 5, at 28186.
    \27\ See, e.g., id.
---------------------------------------------------------------------------

    The following table sets forth the specific Equity Execution Venue 
Percentages and Equity Execution Recovery Allocations: \28\
---------------------------------------------------------------------------

    \28\ 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
                                                                 -----------------------------------------------

[[Page 35007]]

 
        Total...................................................             100              75           18.75
----------------------------------------------------------------------------------------------------------------

2. Listed Options
    Amendment No. 2 establishes 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.\29\ Under Amendment No. 2, 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'').\30\ 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'').\31\
---------------------------------------------------------------------------

    \29\ Section 11.3(a)(ii) of the CAT NMS Plan; see also, e.g., 
Notice, supra note 5, at 28187.
    \30\ See, e.g., Notice, supra note 5, at 28187.
    \31\ See, e.g., id.
---------------------------------------------------------------------------

    The following table sets forth the specific Options Execution Venue 
Percentages and Options Execution Venue Recovery Allocations: \32\
---------------------------------------------------------------------------

    \32\ 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.\33\ 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.\34\
---------------------------------------------------------------------------

    \33\ See, e.g., id. at 28188.
    \34\ See, e.g., id.
---------------------------------------------------------------------------

B. Industry Member Tiers

    Amendment No. 2 describes the fixed fees to be established by the 
Industry Member Fee Filings to be payable by Industry Members, based on 
message traffic.\35\ Each Industry Member (other than Execution Venue 
ATSs \36\) will be ranked by message traffic and assigned to one of 
nine tiers that have been predefined by percentages (the ``Industry 
Member Percentages'').\37\ 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'').\38\
---------------------------------------------------------------------------

    \35\ 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 5, at 28183.
    \36\ The Participants defined ``Execution Venue ATSs'' as 
alternative trading systems that execute transactions in Eligible 
Securities. See, e.g., Notice, supra note 5, at 28181.
    \37\ See, e.g., id. at 2810328183.
    \38\ See, e.g., id.
---------------------------------------------------------------------------

    The following table sets forth the specific Industry Member 
Percentages and Industry Member Recovery Allocations:\39\
---------------------------------------------------------------------------

    \39\ See, e.g., id. at 28184-5.

----------------------------------------------------------------------------------------------------------------
                                                                              Percentage of
                  Industry member tier                     Percentage of     industry member     Percentage of
                                                         industry  members       recovery        total 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.\40\ The Participants stated

[[Page 35008]]

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.\41\ After an Industry Member begins reporting 
to the CAT, the Participants noted that ``message traffic'' will be 
calculated based on the Industry Member's Reportable Events.\42\
---------------------------------------------------------------------------

    \40\ See, e.g., id. at 28185. 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-makers. See, e.g., Notice, supra note 5, at 28185 n.29.
    \41\ See, e.g., id. at 28185.
    \42\ 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. 31.
---------------------------------------------------------------------------

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.\43\ 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.\44\
---------------------------------------------------------------------------

    \43\ See, e.g., id. at 28188.
    \44\ See, e.g., id.
---------------------------------------------------------------------------

D. Fee Levels

    The Participants explained that the sum of the CAT Fees is designed 
to 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.\45\ 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.
---------------------------------------------------------------------------

    \45\ See, e.g., id. The Participants further noted that CAT-
related costs incurred prior to November 21, 2016 will be addressed 
via a separate filing. See, e.g., id. at n.34.
---------------------------------------------------------------------------

    For Equity Execution Venues: \46\
---------------------------------------------------------------------------

    \46\ See, e.g., id. at 28189.

----------------------------------------------------------------------------------------------------------------
                                                                    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: \47\
---------------------------------------------------------------------------

    \47\ 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
----------------------------------------------------------------------------------------------------------------

    For Industry Members (other than Execution Venue ATSs): \48\
---------------------------------------------------------------------------

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

----------------------------------------------------------------------------------------------------------------
                                                                    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
----------------------------------------------------------------------------------------------------------------

E. Initial and Periodic Tier Reassignments

    The Operating Committee will assign fee tiers every three months 
based on market share or message traffic, as applicable, from the prior 
three months.\49\ 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.\50\ The Participants 
explained the Company

[[Page 35009]]

will calculate subsequent tier assignments using the three months of 
data prior to the relevant tri-monthly date.\51\ 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.\52\ 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.\53\
---------------------------------------------------------------------------

    \49\ See, e.g., id. at 28194.
    \50\ 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 40-42 supra and 
accompanying text.
    \51\ See, e.g., Notice, supra note 5, at 28194.
    \52\ See, e.g., id.
    \53\ See, e.g., id.
---------------------------------------------------------------------------

F. 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.'' \54\ 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.\55\ 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.\56\ The Participants further stated that any changes to 
the number of tiers in the funding model or the fees assigned to each 
tier will be filed with the Commission pursuant to Rule 608 of the Act 
and become effective in accordance with the requirements of Rule 
608.\57\
---------------------------------------------------------------------------

    \54\ See, e.g., id.
    \55\ See, e.g., id.
    \56\ 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.
    \57\ See, e.g., id.
---------------------------------------------------------------------------

    Pursuant to Rule 608(b)(3)(i) under Regulation NMS,\58\ the 
Participants designated Amendment No. 2 as establishing or changing a 
fee or other charge collected on their behalf in connection with access 
to, or use of, the facilities contemplated by the Plan. As a result, 
Amendment No. 2 was effective upon filing with the Commission. On June 
14, 2017, the Commission issued notice of Amendment No. 2.\59\
---------------------------------------------------------------------------

    \58\ 17 CFR 242.608(b)(3)(i).
    \59\ See supra note 5.
---------------------------------------------------------------------------

III. Summary of Comments and Participants' Response

    While no comments were received on Amendment No. 2 to the CAT NMS 
Plan, the Commission received a number of comment letters on the 
Industry Member Fee Filings, and a response to such comments from the 
Participants. Because the text of the Industry Member Fee Filings is 
substantially similar to this Amendment No. 2, the Commission believes 
the comment letters are relevant to this Order and has summarized the 
comments on the Industry Member Fee Filings below.\60\
---------------------------------------------------------------------------

    \60\ Since the Industry Member Fee Filings were designed to 
adopt fees to be charged to Industry Members to fund CAT, the 
Commission considered 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 the Industry Member Fee Filings and Amendment No. 
2. 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.
---------------------------------------------------------------------------

Necessity of the CAT
    One commenter asks whether the CAT is a ``worthwhile endeavor,'' 
\61\ 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.\62\ 
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.\63\ 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.\64\
---------------------------------------------------------------------------

    \61\ See FIA Letter, supra note 60, at 2.
    \62\ See id. See also Cerny & O'Malley Letter, supra note 60, at 
4 (suggesting that the CAT will not capture any new violative 
activity not currently disclosed under current surveillance 
practices).
    \63\ See FIA Letter, supra note 60, at 2.
    \64\ See MFA Letter, supra note 60, 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.\65\ 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.\66\ 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.\67\
---------------------------------------------------------------------------

    \65\ See Response from Participants, supra note 60, at 17.
    \66\ 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 60, at 18 n.103.
    \67\ See Response from Participants, supra note 60, 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.\68\ 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 incurred before the 
approval of the CAT NMS Plan.\69\
---------------------------------------------------------------------------

    \68\ See SIFMA Letter, supra note 60, at 2-4.
    \69\ See FIA Letter, supra note 60, at 2-3; see also SIFMA 
Letter, supra note 60, at 3-4.
---------------------------------------------------------------------------

    In their response, the Participants state that Rule 613 of 
Regulation NMS (``Rule 613'') \70\ contemplates broker-dealers 
contributing to the funding of CAT.\71\ Because the CAT improves

[[Page 35010]]

regulatory oversight of the securities markets, the Participants 
believe that it would be equitable to require broker-dealers and 
Participants to fund the CAT.\72\ The Participants further believe that 
Rule 613 and the Approval Order \73\ 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.\74\
---------------------------------------------------------------------------

    \70\ 17 CFR 242.613.
    \71\ See Response from Participants, supra note 60, at 3.
    \72\ See id. at 4.
    \73\ See supra note 13.
    \74\ See Response from Participants, supra note 60, at 7-8.
---------------------------------------------------------------------------

Industry Member Input
    Three commenters argue that the funding decisions would have 
benefited from greater involvement from Industry Members.\75\ Two 
commenters assert that the Participants' development of the funding 
model should have involved collaboration with the broker-dealer 
community.\76\ 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.\77\ Another commenter believes that the proposed fees lack 
substantive input from the Industry Members.\78\ 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.\79\
---------------------------------------------------------------------------

    \75\ See SIFMA Letter; FIA Letter; MFA Letter, supra note 60.
    \76\ See SIFMA Letter, supra note 60, at 2-3; see FIA Letter, 
supra note 60, at 2 (stating ``we struggle to understand how 
excluding other market participants and taking input only from the 
Plan Participants is anything but prejudicial'').
    \77\ See FIA Letter, supra note 60, at 2.
    \78\ See SIFMA Letter, supra note 60, at 2-3.
    \79\ See MFA Letter, supra note 60, 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 \80\ 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.\81\ Further, the Participants assert that the proposed fees 
provide the opportunity for public comment on the fees.\82\
---------------------------------------------------------------------------

    \80\ See supra note 12.
    \81\ See Response from Participants, supra note 60, at 2-3.
    \82\ See id. at 2.
---------------------------------------------------------------------------

Conflicts of Interest
    Three commenters raise concerns about Participant conflicts of 
interest in setting the CAT fees.\83\ One commenter argues that, 
through the Industry Member Fee Filings, 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.\84\ 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.\85\ 
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.\86\
---------------------------------------------------------------------------

    \83\ See SIFMA Letter, FIA Letter, MFA Letter, supra note 60.
    \84\ See SIFMA Letter, supra note 60, at 2-3.
    \85\ See id. at 2-3.
    \86\ See id.
---------------------------------------------------------------------------

    Another commenter argues that the Participants have a clear 
conflict of interest when setting their own cost allocation.\87\ 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.\88\ 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.\89\
---------------------------------------------------------------------------

    \87\ See FIA Letter, supra note 60, at 2.
    \88\ 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.
    \89\ See MFA Letter, supra note 60, 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).\90\ 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.\91\ 
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.\92\
---------------------------------------------------------------------------

    \90\ See Response from Participants, supra note 60, at 11.
    \91\ See id.
    \92\ 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.\93\
---------------------------------------------------------------------------

    \93\ See id. at 11, 18.
---------------------------------------------------------------------------

Allocation of Fees
    Several commenters raise concerns about the proposed allocation of 
CAT fees.\94\ One commenter argues that the Industry Member Fee Filings 
are not an equitable allocation of reasonable fees under Section 
6(b)(4) or Section 15A(b)(5) of the Act.\95\ 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 \96\ 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.\97\ 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 
of regulatory reporting processes.\98\ A third commenter notes that it 
is unable to understand the justification for the 75% allocation to 
broker-dealers,\99\ and the fourth commenter believes that the 
Participants are disproportionately imposing fees on Industry Members,

[[Page 35011]]

which could put Industry Members at a competitive disadvantage.\100\
---------------------------------------------------------------------------

    \94\ See SIFMA Letter; Cerny & O'Malley Letter, FIA Letter; MFA 
Letter, supra note 60.
    \95\ See SIFMA Letter, supra note 60, at 3.
    \96\ See id. at 3 n.4.
    \97\ See id. at 3.
    \98\ See Cerny & O'Malley Letter, supra note 60, at 2.
    \99\ See FIA Letter, supra note 60, at 3.
    \100\ See MFA Letter, supra note 60, 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.\101\ 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.\102\
---------------------------------------------------------------------------

    \101\ See Response from Participants, supra note 60, at 5.
    \102\ 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.\103\ 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.\104\ The Participants also 
note that the cost allocation takes into account that there are 
approximately 25 times more Industry Members that would report to the 
CAT than Execution Venues.\105\
---------------------------------------------------------------------------

    \103\ See id. at 15.
    \104\ 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.
    \105\ See id. at 15.
---------------------------------------------------------------------------

Tiering Methodology
    Two commenters believe that the proposed tiering methodology is 
inequitable and unreasonable.\106\ 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.\107\ One of the commenters notes that, although the 
Participants proposed nine tiers for Industry Members, they have only 
proposed two tiers for Execution Venues,\108\ ``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.'' \109\ Both commenters 
believe the result will ``maximize costs for broker-dealers and 
minimize costs for Plan Participants.'' \110\ 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.\111\
---------------------------------------------------------------------------

    \106\ See SIFMA Letter; FIA Letter, supra note 60.
    \107\ See FIA Letter, supra note 60, at 3; SIFMA Letter, supra 
note 60, 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'').
    \108\ See SIFMA Letter, supra note 60, at 4.
    \109\ See id.
    \110\ See FIA Letter, supra note 60, at 3; see also SIFMA 
Letter, supra note 60, at 4.
    \111\ See FIA Letter, supra note 60, 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.\112\ 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.\113\ 
The Participants believe such a result would be inequitable; therefore, 
they decided to base fees for Execution Venues and broker-dealers on 
different criteria.\114\
---------------------------------------------------------------------------

    \112\ See Response from Participants, supra note 60, at 6.
    \113\ See id. at 6.
    \114\ 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.\115\ 
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.\116\ 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).\117\
---------------------------------------------------------------------------

    \115\ 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.
    \116\ See id. at 14.
    \117\ 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,'' \118\ and provides 
predictability of payment obligations.\119\ 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.\120\
---------------------------------------------------------------------------

    \118\ See Response from Participants, supra note 60, at 14.
    \119\ See id.
    \120\ See id.
---------------------------------------------------------------------------

Options Market-Maker Fees
    One commenter believes that the proposed fees will be unsustainable 
for small options market-makers.\121\ The commenter explains that 
because the 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 . . . .'' \122\ The commenter notes

[[Page 35012]]

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.\123\ 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.\124\ 
The commenter argues that this result is not equitable or fair to 
smaller market participants.\125\
---------------------------------------------------------------------------

    \121\ See Cerny & O'Malley Letter, supra note 60, 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 40 supra.
    \122\ See Cerny & O'Malley Letter, supra note 60, at 1.
    \123\ See id. at 3.
    \124\ See id. at 4.
    \125\ 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.\126\ 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.\127\ 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.\128\
---------------------------------------------------------------------------

    \126\ See id. at 2.
    \127\ See id. at 3.
    \128\ 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.\129\ 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.\130\
---------------------------------------------------------------------------

    \129\ See Response from Participants, supra note 60, at 6, 17.
    \130\ See id. at 17 n.96; see also note 40, supra.
---------------------------------------------------------------------------

ATS Fees
    One commenter objects to the proposed fees for ATSs, which are the 
same fees as Participants under the Industry Member Fee Filings, 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.\131\
---------------------------------------------------------------------------

    \131\ See SIFMA Letter, supra note 60, 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 Industry Member Fee Filings' 
treatment of smaller Equity Execution Venues (such as low volume ATSs), 
opining that such treatment is unfair and anti-competitive.\132\ 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.'' \133\ 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.\134\
---------------------------------------------------------------------------

    \132\ See OTC Markets Letter, supra note 60, at 1-2.
    \133\ See id. at 9.
    \134\ 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.'' \135\ 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.\136\
---------------------------------------------------------------------------

    \135\ See Response from Participants, supra note 60, at 16.
    \136\ 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.'' \137\ 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.'' \138\
---------------------------------------------------------------------------

    \137\ See id. at 16.
    \138\ See id.
---------------------------------------------------------------------------

OTC Equity Securities Execution Venues
    One commenter objects to the Industry Member Fee Filings' treatment 
of Execution Venues for OTC Equity securities, opining that it is 
unfair and anti-competitive.\139\ 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.\140\ 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.\141\ The commenter states that the number 
of trades in OTC Equity Securities is relatively small,\142\ 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 . . 
. .'' \143\ 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.\144\ 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 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.\145\ The commenter believes that this unfairly burdens the market 
for OTC Equity Securities.\146\ 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.\147\ 
Specifically, the commenter believes that there should be

[[Page 35013]]

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.\148\
---------------------------------------------------------------------------

    \139\ See OTC Markets Letter, supra note 60, at 1-2.
    \140\ See id. at 1, 3, 5.
    \141\ 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.
    \142\ See id. at 4.
    \143\ See id. at 7.
    \144\ See id.
    \145\ See id. at 3.
    \146\ See id.
    \147\ See id. at 8.
    \148\ 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.\149\ 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'' \150\ 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.'' \151\ 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.\152\
---------------------------------------------------------------------------

    \149\ See Response from Participants, supra note 60, at 16.
    \150\ See id.
    \151\ See id.
    \152\ See id.
---------------------------------------------------------------------------

IV. Discussion

    Pursuant to Section 11A of the Act \153\ and Rule 608(b)(3)(iii) of 
Regulation NMS thereunder,\154\ at any time within 60 days of the 
filing of any such amendment, the Commission may summarily abrogate the 
amendment and require that the amendment be re-filed in accordance with 
paragraph (a)(1) of Rule 608 \155\ and reviewed in accordance with 
paragraph (b)(2) of Rule 608,\156\ if it appears to the Commission that 
such action is necessary or appropriate in the public interest, for the 
protection of investors, or the maintenance of fair and orderly 
markets, to remove impediments to, and perfect the mechanisms of, a 
national market system or otherwise in furtherance of the purposes of 
the Act. Concerns have been raised regarding Amendment No. 2 and the 
Commission believes that the justifications provided by the 
Participants are not sufficient for the Commission to determine whether 
Amendment No. 2 is consistent with the Act. Accordingly, the Commission 
believes that the procedures provided by Rule 608(b)(2) \157\ will 
provide a more appropriate mechanism for determining whether Amendment 
No. 2 is consistent with the Act.
---------------------------------------------------------------------------

    \153\ 15 U.S.C. 78k-1.
    \154\ 17 CFR 242.608.
    \155\ 17 CFR 242.608(a)(1).
    \156\ 17 CFR 242.608(b)(2).
    \157\ 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

    The Commission believes that Amendment No. 2 raises 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. Moreover, the Commission does not believe that the Participants 
have provided an adequate justification to support a determination that 
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 or that the fees will not 
result in an undue or inappropriate burden on competition. The 
Commission also does not believe that the Participants have adequately 
explained that the CAT Fees are consistent with the funding principles 
set forth in the CAT NMS Plan, which require that the allocation of 
``costs among Participants and Industry Members . . . is consistent 
with the [ ] 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'' \158\ 
and required that such fees ``avoid any disincentives such as placing 
an inappropriate burden on competition and a reduction in market 
quality.''
---------------------------------------------------------------------------

    \158\ Section 11.2(b) of the CAT NMS Plan.
---------------------------------------------------------------------------

    Further, the Commission believes that Amendment No. 2 raises 
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 decision 
to group Execution Venues for OTC Equity Securities and NMS Stocks in 
one tier structure raises questions about the effect on competition, 
recognizing that the application of share volume may lead to different 
outcomes as applied to OTC Equity Securities and NMS Stocks. Similarly, 
the decision to place Execution Venues representing less than 1% of NMS 
market share in the same tier structure as other Equity Execution 
Venues raises questions about burdens on competition. The Commission 
believes that the Participants have not provided adequate justification 
to support a conclusion that their tier structure will not result in an 
undue or inappropriate burden on competition.

V. Conclusion

    For the reasons discussed above, the Commission believes that the 
procedures provided by Rule 608(b)(2) of Regulation NMS \159\ will 
provide a more appropriate mechanism for determining whether Amendment 
No. 2 is consistent with the Act. Therefore, the Commission finds that 
it is necessary or appropriate in the public interest, for the 
protection of investors, or the maintenance of fair and orderly 
markets, to remove impediments to, and perfect the mechanisms of, a 
national market system or otherwise in furtherance of the purposes of 
the Act, to abrogate Amendment No. 2.
---------------------------------------------------------------------------

    \159\ 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 11A of the Act,\160\ 
and Rule 608 thereunder,\161\ that Amendment No. 2 to the CAT NMS Plan 
be, and hereby is, summarily abrogated. If the Participants choose to 
re-file Amendment No. 2, they must do so pursuant to Section 11A of the 
Act and Amendment No. 2 must be re-filed in accordance with paragraph 
(a)(1) of Rule 608 of Regulation NMS \162\ for review in accordance 
with paragraph (b)(2) of Rule 608 of Regulation NMS.\163\
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    \160\ 15 U.S.C. 78k-1.
    \161\ 17 CFR 242.608.
    \162\ 17 CFR 242.608(a)(1).
    \163\ 17 CFR 242.608(b)(2).

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-15768 Filed 7-26-17; 8:45 am]
 BILLING CODE 8011-01-P