Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing of Amendment No. 2 to a Proposed Rule Change To Adopt Rule 7004 and Chapter XV, Section 11, 58944-58971 [2017-27009]
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Federal Register / Vol. 82, No. 239 / Thursday, December 14, 2017 / Notices
tiers compared to the cost per unit in
more active tiers creates regulatory
economies of scale that favor larger
competitors and, if so:
(a) How those economies of scale
compare to operational economies of
scale; and
(b) Whether those economies of scale
reduce or increase the current
advantages enjoyed by larger
competitors or otherwise alter the
competitive landscape.
(20) Commenters’ views on whether
the fees could affect competition
between and among national securities
exchanges and FINRA, in light of the
fact that implementation of the fees does
not require the unanimous consent of all
such entities, and, specifically:
(a) Whether any of the national
securities exchanges or FINRA are
disadvantaged by the fees; and
(b) If so, whether any such
disadvantages would be of a magnitude
that would alter the competitive
landscape.
(21) Commenters’ views on any
potential burden imposed by the fees on
competitive quoting and other liquidity
provision in the market, including,
specifically:
(a) Commenters’ views on the kinds of
disincentives that discourage liquidity
provision and/or disincentives that the
Commission should consider in its
analysis;
(b) Commenters’ views as to whether
the fees could disincentivize the
provision of liquidity; and
(c) Commenters’ views as to whether
the fees limit any disincentives to
provide liquidity.
(22) Commenters’ views as to whether
the amendment adequately responds to
and/or addresses comments received on
related filings.
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Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number
SR–IEX–2017–16 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–IEX–2017–16. 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 website (https://www.sec.gov/
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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 website 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.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–IEX–2017–16, and should
be submitted on or before January 4,
2018.99
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017–27018 Filed 12–13–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82288; File No. SR–PHLX–
2017–037]
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Notice of Filing of
Amendment No. 2 to a Proposed Rule
Change To Adopt Rule 7004 and
Chapter XV, Section 11
December 11, 2017.
On May 12, 2017, Nasdaq PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’ or ‘‘BX’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to adopt a fee schedule to
establish the fees for Industry Members
related to the National Market System
Plan Governing the Consolidated Audit
Trail (‘‘CAT NMS Plan’’). The proposed
99 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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rule change was published in the
Federal Register for comment on May
24, 2017.3 The Commission received
seven comment letters on the proposed
rule change,4 and a response to
comments from the Participants.5 On
June 30, 2017, the Commission
temporarily suspended and initiated
proceedings to determine whether to
approve or disapprove the proposed
rule change.6 The Commission
thereafter received seven comment
letters,7 and a response to comments
3 See Securities Exchange Act Release No. 80725
(May 18, 2017), 82 FR 23935 (May 24, 2017)
(‘‘Original Proposal’’).
4 Since the CAT NMS Plan Participants’ proposed
rule changes to adopt fees to be charged to Industry
Members to fund the consolidated audit trail are
substantively identical, the Commission is
considering all comments received on the proposed
rule changes regardless of the comment file to
which they were submitted. See text accompanying
notes 13–16 infra, for a list of the CAT NMS Plan
Participants. 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), 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), 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), 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), 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), 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), available at: https://www.sec.gov/
comments/sr-batsedgx-2017-22/batsedgx201722154443.pdf. The Commission also received a
comment letter which is not pertinent to these
proposed rule changes. See Letter from Christina
Crouch, Smart Ltd., to Brent J. Fields, Secretary,
Commission (dated June 5, 2017), available at:
https://www.sec.gov/comments/sr-batsbzx-2017-38/
batsbzx201738-1785545-153152.htm.
5 See Letter from CAT NMS Plan Participants to
Brent J. Fields, Secretary, Commission (dated June
29, 2017), available at: https://www.sec.gov/
comments/sr-batsbyx-2017-11/batsbyx2017111832632-154584.pdf.
6 See Securities Exchange Act Release No. 81067
(June 30, 2017), 82 FR 31656 (July 7, 2017).
7 See Letter from W. Hardy Callcott, Partner,
Sidley Austin LLP, to Brent J. Fields, Secretary,
Commission (dated July 27, 2017), available at:
https://www.sec.gov/comments/sr-batsbyx-2017-11/
batsbyx201711-2148338-157737.pdf; Letter from
Kevin Coleman, General Counsel and Chief
Compliance Officer, Belvedere Trading LLC, to
Brent J. Fields, Secretary, Commission (dated July
28, 2017), available at: https://www.sec.gov/
comments/sr-batsbyx-2017-11/batsbyx2017112148360-157740.pdf; Letter from Joanna Mallers,
Secretary, FIA Principal Traders Group, to Brent J.
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Federal Register / Vol. 82, No. 239 / Thursday, December 14, 2017 / Notices
from the Participants.8 On November 6,
2017, the Exchange filed Amendment
No. 1 to the proposed rule change.9 On
November 9, 2017, the Commission
extended the time period within which
to approve the proposed rule change or
disapprove the proposed rule change to
January 14, 2018.10 On December 4,
2017, the Exchange filed Amendment
No. 2 to the proposed rule change, as
described in Items I and II below, which
Items have been prepared by the
Exchange.11 The Commission is
publishing this notice to solicit
comments from interested persons on
Amendment No. 2.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
On May 12, 2017, Nasdaq PHLX LLC
filed with the Securities and Exchange
Commission (‘‘Commission’’ or ‘‘SEC’’)
proposed rule change SR-Phlx-2017–37
(the ‘‘Original Proposal’’), pursuant to
which the Exchange proposed to adopt
a fee schedule to establish the fees for
Industry Members related to the
National Market System Plan Governing
the Consolidated Audit Trail (the ‘‘CAT
NMS Plan’’ or ‘‘Plan’’).12 On November
Fields, Secretary, Commission (dated July 28, 2017),
available at: https://www.sec.gov/comments/srbatsbyx-2017-11/batsbyx201711-2151228157745.pdf; Letter from Theodore R. Lazo,
Managing Director and Associate General Counsel,
SIFMA, to Brent J. Fields, Secretary, Commission
(dated July 28, 2017), available at: https://
www.sec.gov/comments/sr-batsbyx-2017-11/
batsbyx201711-2150977-157744.pdf; Letter from
Stuart J. Kaswell, Executive Vice President and
Managing Director, General Counsel, Managed
Funds Association, to Brent J. Fields, Secretary,
Commission (dated July 28, 2017), available at:
https://www.sec.gov/comments/sr-batsbyx-2017-11/
batsbyx201711-2150818-157743.pdf; Letter from
John Kinahan, Chief Executive Officer, Group One
Trading, L.P., to Brent J. Fields, Secretary,
Commission (dated August 10, 2017), available at:
https://www.sec.gov/comments/sr-finra-2017-011/
finra2017011-2214568-160619.pdf; Letter from
Joseph Molluso, Executive Vice President and CFO,
Virtu Financial, to Brent J. Fields, Commission
(dated August 18, 2017), available at: https://
www.sec.gov/comments/sr-finra-2017-011/
finra2017011-2238648-160830.pdf.
8 See Letter from Michael Simon, Chair, CAT
NMS Plan Operating Committee, to Brent J. Fields,
Commission, Secretary (dated November 2, 2017),
available at https://www.sec.gov/comments/srbatsbyx-2017-11/batsbyx201711-2674608161412.pdf.
9 Amendment No. 1 to the proposed rule change
replaced and superseded the Original Proposal in
its entirety. Amendment No. 1 is available on the
Commission’s website for Phlx at: https://
www.sec.gov/comments/sr-phlx-2017-37/
phlx201737-2669581-161442.pdf.
10 See Securities Exchange Act Release No. 82049
(November 9, 2017), 82 FR 53549 (November 16,
2017).
11 Amendment No. 2 replaces and supersedes
Amendment No. 1 in its entirety.
12 Unless otherwise specified, capitalized terms
used in this fee filing are defined as set forth herein,
the CAT Compliance Rule Series, in the CAT NMS
Plan, or the Original Proposal.
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6, 2017, the Exchange filed an
amendment to the Original Proposal
(‘‘Amendment No. 1’’), which replaced
the Original Proposal in its entirety. The
Exchange is now filing this Amendment
No. 2 to replace Amendment No. 1 in
its entirety. This Amendment No. 2
describes the changes from the Original
Proposal.
With this Amendment, the Exchange
is including Exhibit 4, which reflects the
changes to the text of the proposed rule
change as set forth in the Original
Proposal, and Exhibit 5, which reflects
all proposed changes to the Exchange’s
current rule text.
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaq.cchwallstreet.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
BOX Options Exchange LLC, Cboe
BYX Exchange, Inc., Cboe BZX
Exchange, Inc., Cboe EDGA Exchange,
Inc., Cboe EDGX Exchange, Inc., Cboe
C2 Exchange, Inc., Cboe Exchange,
Inc.,13 Chicago Stock Exchange, Inc.,
Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’), Investors’
Exchange LLC, Miami International
Securities Exchange, LLC, MIAX
PEARL, LLC, Nasdaq BX, Inc., Nasdaq
GEMX, LLC, Nasdaq ISE, LLC, Nasdaq
MRX, LLC,14 Nasdaq PHLX LLC, The
13 Note that Bats BYX Exchange, Inc., Bats BZX
Exchange, Inc., Bats EDGA Exchange, Inc., Bats
EDGX Exchange, Inc., LLC, C2 Options Exchange,
Incorporated, and Chicago Board Options Exchange,
Incorporated, have been renamed Cboe BYX
Exchange, Inc., Cboe BZX Exchange, Inc., Cboe
EDGA Exchange, Inc., Cboe EDGX Exchange, Inc.,
Cboe C2 Exchange, Inc., Cboe Exchange, Inc.,
respectively.
14 ISE Gemini, LLC, ISE Mercury, LLC and
International Securities Exchange, LLC have been
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58945
Nasdaq Stock Market LLC, New York
Stock Exchange LLC, NYSE American
LLC,15 NYSE Arca, Inc. and NYSE
National, Inc.16 (collectively, the
‘‘Participants’’) filed with the
Commission, pursuant to Section 11A of
the Exchange Act 17 and Rule 608 of
Regulation NMS thereunder,18 the CAT
NMS Plan.19 The Participants filed the
Plan to comply with Rule 613 of
Regulation NMS under the Exchange
Act. The Plan was published for
comment in the Federal Register on
May 17, 2016,20 and approved by the
Commission, as modified, on November
15, 2016.21 The Plan is designed to
create, implement and maintain a
consolidated audit trail (‘‘CAT’’) that
would capture customer and order event
information for orders in NMS
Securities and OTC Equity Securities,
across all markets, from the time of
order inception through routing,
cancellation, modification, or execution
in a single consolidated data source.
The Plan accomplishes this by creating
CAT NMS, LLC (the ‘‘Company’’), of
which each Participant is a member, to
operate the CAT.22 Under the CAT NMS
Plan, the Operating Committee of the
Company (‘‘Operating Committee’’) has
discretion to establish funding for the
Company to operate the CAT, including
establishing fees that the Participants
will pay, and establishing fees for
Industry Members that will be
implemented by the Participants (‘‘CAT
Fees’’).23 The Participants are required
to file with the SEC under Section 19(b)
renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC,
and Nasdaq ISE, LLC, respectively. See Securities
Exchange Act Release No. 80248 (March 15, 2017),
82 FR 14547 (March 21, 2017); Securities Exchange
Act Release No. 80326 (March 29, 2017), 82 FR
16460 (April 4, 2017); and Securities Exchange Act
Release No. 80325 (March 29, 2017), 82 FR 16445
(April 4, 2017).
15 NYSE MKT LLC has been renamed NYSE
American LLC. See Securities Exchange Act Release
No. 80283 (March 21, 2017), 82 FR 15244 (March
27, 2017).
16 National Stock Exchange, Inc. has been
renamed NYSE National, Inc. See Securities
Exchange Act Release No. 79902 (January 30, 2017),
82 FR 9258 (February 3, 2017).
17 15 U.S.C. 78k–1.
18 17 CFR 242.608.
19 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 24, 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.
20 Securities Exchange Act Release No. 77724
(April 27, 2016), 81 FR 30614 (May 17, 2016).
21 Securities Exchange Act Release No. 79318
(November 15, 2016), 81 FR 84696 (November 23,
2016) (‘‘Approval Order’’).
22 The Plan also serves as the limited liability
company agreement for the Company.
23 Section 11.1(b) of the CAT NMS Plan.
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Federal Register / Vol. 82, No. 239 / Thursday, December 14, 2017 / Notices
of the Exchange Act any such CAT Fees
applicable to Industry Members that the
Operating Committee approves.24
Accordingly, the Exchange submitted
the Original Proposal to propose the
Consolidated Audit Trail Funding Fees,
which would require Industry Members
that are SRO members to pay the CAT
Fees determined by the Operating
Committee.
The Commission published the
Original Proposal for public comment in
the Federal Register on May 22, 2017,25
and received comments in response to
the Original Proposal or similar fee
filings by other Participants.26 On June
30, 2017, the Commission suspended,
and instituted proceedings to determine
whether to approve or disapprove, the
Original Proposal.27 The Commission
received seven comment letters in
response to those proceedings.28
In response to the comments on the
Original Proposal, the Operating
Committee determined to make the
following changes to the funding model:
(1) Adds two additional CAT Fee tiers
for Equity Execution Venues; (2)
discounts the OTC Equity Securities
market share of Execution Venue ATSs
trading OTC Equity Securities as well as
the market share of the FINRA over-thecounter reporting facility (‘‘ORF’’) by
the average shares per trade ratio
between NMS Stocks and OTC Equity
Securities (calculated as 0.17% based on
available data from the second quarter
of 2017) when calculating the market
share of Execution Venue ATS trading
OTC Equity Securities and FINRA; (3)
discounts the Options Market Maker
quotes by the trade to quote ratio for
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24 Id.
25 See Securities Exchange Act Release No. 80725
(May 18, 2017), 82 FR 23935 (May 24, 2017) (SR–
PHLX–2017–37).
26 For a summary of comments, see generally
Securities Exchange Act Release No. 81067 (June
30, 2017), 82 FR 31656 (July 7, 2017) (‘‘Suspension
Order’’).
27 Suspension Order.
28 See Letter from Stuart J. Kaswell, Executive
Vice President, Managing Director and General
Counsel, Managed Funds Association, to Brent J.
Fields, Secretary, SEC (July 28, 2017) (‘‘MFA
Letter’’); Letter from Theodore R. Lazo, Managing
Director and Associate General Counsel, SIFMA, to
Brent J. Fields, Secretary, SEC (July 28, 2017)
(‘‘SIFMA Letter’’); Joanna Mallers, Secretary, FIA
Principal Traders Group, to Brent J. Fields,
Secretary, SEC (July 28, 2017) (‘‘FIA Principal
Traders Group Letter’’); Letter from Kevin Coleman,
General Counsel & Chief Compliance Officer,
Belvedere Trading LLC, to Brent J. Fields, Secretary,
SEC (July 28, 2017) (‘‘Belvedere Letter’’); Letter
from W. Hardy Callcott, Sidley Austin LLP, to Brent
J. Fields, Secretary, SEC (July 27, 2017) (‘‘Sidley
Letter’’); Letter from John Kinahan, Chief Executive
Officer, Group One Trading, L.P., to Brent J. Fields,
Secretary, SEC (Aug. 10, 2017) (‘‘Group One
Letter’’); and Letter from Joseph Molluso, Executive
Vice President, Virtu Financial, to Brent J. Fields,
Secretary, SEC (Aug. 18, 2017) (‘‘Virtu Financial
Letter’’).
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options (calculated as 0.01% based on
available data for June 2016 through
June 2017) when calculating message
traffic for Options Market Makers; (4)
discounts equity market maker quotes
by the trade to quote ratio for equities
(calculated as 5.43% based on available
data for June 2016 through June 2017)
when calculating message traffic for
equity market makers; (5) decreases the
number of tiers for Industry Members
(other than the Execution Venue ATSs)
from nine to seven; (6) changes the
allocation of CAT costs between Equity
Execution Venues and Options
Execution Venues from 75%/25% to
67%/33%; (7) adjusts tier percentages
and recovery allocations for Equity
Execution Venues, Options Execution
Venues and Industry Members (other
than Execution Venue ATSs); (8)
focuses the comparability of CAT Fees
on the individual entity level, rather
than primarily on the comparability of
affiliated entities; (9) commences
invoicing of CAT Reporters as promptly
as possible following the latest of the
operative date of the Consolidated Audit
Trail Funding Fees for each of the
Participants and the operative date of
the CAT NMS Plan amendment
adopting CAT Fees for Participants; and
(10) requires the proposed fees to
automatically expire two years from the
operative date of the CAT NMS Plan
amendment adopting CAT Fees for
Participants. As discussed in detail
below, the Exchange proposes to amend
the Original Proposal to reflect these
changes.
(1) Executive Summary
The following provides an executive
summary of the CAT funding model
approved by the Operating Committee,
as well as Industry Members’ rights and
obligations related to the payment of
CAT Fees calculated pursuant to the
CAT funding model, as amended by this
Amendment. A detailed description of
the CAT funding model and the CAT
Fees, as amended by this Amendment,
as well as the changes made to the
Original Proposal follows this executive
summary.
(A) CAT Funding Model
• CAT Costs. The CAT funding model
is designed to establish CAT-specific
fees to collectively recover the costs of
building and operating the CAT from all
CAT Reporters, including Industry
Members and Participants. The overall
CAT costs used in calculating the CAT
Fees in this fee filing are comprised of
Plan Processor CAT costs and non-Plan
Processor CAT costs incurred, and
estimated to be incurred, from
November 21, 2016 through November
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21, 2017. Although the CAT costs from
November 21, 2016 through November
21, 2017 were used in calculating the
CAT Fees, the CAT Fees set forth in this
fee filing would be in effect until the
automatic sunset date, as discussed
below. (See Section 3(a)(2)(E) below)
• Bifurcated Funding Model. The
CAT NMS Plan requires a bifurcated
funding model, where costs associated
with building and operating the CAT
would be borne by (1) Participants and
Industry Members that are Execution
Venues for Eligible Securities through
fixed tier fees based on market share,
and (2) Industry Members (other than
alternative trading systems (‘‘ATSs’’)
that execute transactions in Eligible
Securities (‘‘Execution Venue ATSs’’))
through fixed tier fees based on message
traffic for Eligible Securities. (See
Section 3(a)(2) below)
• Industry Member Fees. Each
Industry Member (other than Execution
Venue ATSs) will be placed into one of
seven tiers of fixed fees, based on
‘‘message traffic’’ in Eligible Securities
for a defined period (as discussed
below). Prior to the start of CAT
reporting, ‘‘message traffic’’ will be
comprised of historical equity and
equity options orders, cancels, quotes
and executions provided by each
exchange and FINRA over the previous
three months. After an Industry Member
begins reporting to the CAT, ‘‘message
traffic’’ will be calculated based on the
Industry Member’s Reportable Events
reported to the CAT. Industry Members
with lower levels of message traffic will
pay a lower fee and Industry Members
with higher levels of message traffic will
pay a higher fee. To avoid disincentives
to quoting behavior, Options Market
Maker and equity market maker quotes
will be discounted when calculating
message traffic. (See Section 3(a)(2)(B)
below)
• Execution Venue Fees. Each Equity
Execution Venue will be placed in one
of four tiers of fixed fees based on
market share, and each Options
Execution Venue will be placed in one
of two tiers of fixed fees based on
market share. Equity Execution Venue
market share will be determined by
calculating each Equity Execution
Venue’s proportion of the total volume
of NMS Stock and OTC Equity shares
reported by all Equity Execution Venues
during the relevant time period. For
purposes of calculating market share,
the OTC Equity Securities market share
of Execution Venue ATSs trading OTC
Equity Securities as well as the market
share of the FINRA ORF will be
discounted. Similarly, market share for
Options Execution Venues will be
determined by calculating each Options
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Execution Venue’s proportion of the
total volume of Listed Options contracts
reported by all Options Execution
Venues during the relevant time period.
Equity Execution Venues with a larger
market share will pay a larger CAT Fee
than Equity Execution Venues with a
smaller market share. Similarly, Options
Execution Venues with a larger market
share will pay a larger CAT Fee than
Options Execution Venues with a
smaller market share. (See Section
3(a)(2)(C) below)
• Cost Allocation. For the reasons
discussed below, in designing the
model, the Operating Committee
determined that 75 percent of total costs
recovered would be allocated to
Industry Members (other than Execution
Venue ATSs) and 25 percent would be
allocated to Execution Venues. In
addition, the Operating Committee
determined to allocate 67 percent of
Execution Venue costs recovered to
Equity Execution Venues and 33 percent
to Options Execution Venues. (See
Section 3(a)(2)(D) below)
• Comparability of Fees. The CAT
funding model charges CAT Reporters
with the most CAT-related activity
(measured by market share and/or
message traffic, as applicable)
comparable CAT Fees. (See Section
3(a)(2)(F) below)
(B) CAT Fees for Industry Members
• Fee Schedule. The quarterly CAT
Fees for each tier for Industry Members
are set forth in the two fee schedules in
the Consolidated Audit Trail Funding
Fees, one for Equity ATSs and one for
Industry Members other than Equity
ATSs. (See Section 3(a)(3)(B) below)
• Quarterly Invoices. Industry
Members will be billed quarterly for
CAT Fees, with the invoices payable
within 30 days. The quarterly invoices
will identify within which tier the
Industry Member falls. (See Section
3(a)(3)(C) below)
• Centralized Payment. Each Industry
Member will receive from the Company
one invoice for its applicable CAT Fees,
not separate invoices from each
Participant of which it is a member.
Each Industry Member will pay its CAT
Fees to the Company via the centralized
system for the collection of CAT Fees
established by the Operating Committee.
(See Section 3(a)(3)(C) below)
• Billing Commencement. Industry
Members will begin to receive invoices
for CAT Fees as promptly as possible
following the latest of the operative date
of the Consolidated Audit Trail Funding
Fees for each of the Participants and the
operative date of the Plan amendment
adopting CAT Fees for Participants. (See
Section 3(a)(2)(G) below)
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• Sunset Provision. The Consolidated
Audit Trail Funding Fees will sunset
automatically two years from the
operative date of the CAT NMS Plan
amendment adopting CAT Fees for
Participants. (See Section 3(a)(2)(J)
below)
(2) Description of the CAT Funding
Model
Article XI of the CAT NMS Plan
requires the Operating Committee to
approve the operating budget, including
projected costs of developing and
operating the CAT for the upcoming
year. In addition to a budget, Article XI
of the CAT NMS Plan provides that the
Operating Committee has discretion to
establish funding for the Company,
consistent with a bifurcated funding
model, where costs associated with
building and operating the Central
Repository would be borne by (1)
Participants and Industry Members that
are Execution Venues through fixed tier
fees based on market share, and (2)
Industry Members (other than Execution
Venue ATSs) through fixed tier fees
based on message traffic. In its order
approving the CAT NMS Plan, the
Commission determined that the
proposed funding model was
‘‘reasonable’’ 29 and ‘‘reflects a
reasonable exercise of the Participants’
funding authority to recover the
Participants’ costs related to the
CAT.’’ 30
More specifically, the Commission
stated in approving the CAT NMS Plan
that ‘‘[t]he Commission believes that the
proposed funding model is reasonably
designed to allocate the costs of the CAT
between the Participants and Industry
Members.’’ 31 The Commission further
noted the following:
The Commission believes that the
proposed funding model reflects a reasonable
exercise of the Participants’ funding
authority to recover the Participants’ costs
related to the CAT. The CAT is a regulatory
facility jointly owned by the Participants and
. . . the Exchange Act specifically permits
the Participants to charge their members fees
to fund their self-regulatory obligations. The
Commission further believes that the
proposed funding model is designed to
impose fees reasonably related to the
Participants’ self-regulatory obligations
because the fees would be directly associated
with the costs of establishing and
maintaining the CAT, and not unrelated SRO
services.32
Accordingly, the funding model
approved by the Operating Committee
29 Approval
Order at 84796.
at 84794.
31 Id. at 84795.
32 Id. at 84794.
30 Id.
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58947
imposes fees on both Participants and
Industry Members.
As discussed in Appendix C of the
CAT NMS Plan, in developing and
approving the approved funding model,
the Operating Committee considered the
advantages and disadvantages of a
variety of alternative funding and cost
allocation models before selecting the
proposed model.33 After analyzing the
various alternatives, the Operating
Committee determined that the
proposed tiered, fixed fee funding
model provides a variety of advantages
in comparison to the alternatives.
In particular, the fixed fee model, as
opposed to a variable fee model,
provides transparency, ease of
calculation, ease of billing and other
administrative functions, and
predictability of a fixed fee. Such factors
are crucial to estimating a reliable
revenue stream for the Company and for
permitting CAT Reporters to reasonably
predict their payment obligations for
budgeting purposes. Additionally, a
strictly variable or metered funding
model based on message volume would
be far more likely to affect market
behavior and place an inappropriate
burden on competition.
In addition, reviews from varying
time periods of current broker-dealer
order and trading data submitted under
existing reporting requirements showed
a wide range in activity among brokerdealers, with a number of broker-dealers
submitting fewer than 1,000 orders per
month and other broker-dealers
submitting millions and even billions of
orders in the same period. Accordingly,
the CAT NMS Plan includes a tiered
approach to fees. The tiered approach
helps ensure that fees are equitably
allocated among similarly situated CAT
Reporters and furthers the goal of
lessening the impact on smaller firms.34
In addition, in choosing a tiered fee
structure, the Operating Committee
concluded that the variety of benefits
offered by a tiered fee structure,
discussed above, outweighed the fact
that CAT Reporters in any particular tier
would pay different rates per message
traffic order event or per market share
(e.g., an Industry Member with the
largest amount of message traffic in one
tier would pay a smaller amount per
order event than an Industry Member in
the same tier with the least amount of
message traffic). Such variation is the
natural result of a tiered fee structure.35
33 Section B.7, Appendix C of the CAT NMS Plan,
Approval Order at 85006.
34 Section B.7, Appendix C of the CAT NMS Plan,
Approval Order at 85006.
35 Moreover, as the SEC noted in approving the
CAT NMS Plan, ‘‘[t]he Participants also have
Continued
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The Operating Committee considered
several approaches to developing a
tiered model, including defining fee
tiers based on such factors as size of
firm, message traffic or trading dollar
volume. After analyzing the alternatives,
it was concluded that the tiering should
be based on message traffic which will
reflect the relative impact of CAT
Reporters on the CAT System.
Accordingly, the CAT NMS Plan
contemplates that costs will be allocated
across the CAT Reporters on a tiered
basis in order to allocate higher costs to
those CAT Reporters that contribute
more to the costs of creating,
implementing and maintaining the CAT
and lower costs to those that contribute
less.36 The fees to be assessed at each
tier are calculated so as to recoup a
proportion of costs appropriate to the
message traffic or market share (as
applicable) from CAT Reporters in each
tier. Therefore, Industry Members
generating the most message traffic will
be in the higher tiers, and will be
charged a higher fee. Industry Members
with lower levels of message traffic will
be in lower tiers and will be assessed a
smaller fee for the CAT.37
Correspondingly, Execution Venues
with the highest market shares will be
in the top tier, and will be charged
higher fees. Execution Venues with the
lowest market shares will be in the
lowest tier and will be assessed smaller
fees for the CAT.38
The CAT NMS Plan states that
Industry Members (other than Execution
Venue ATSs) will be charged based on
message traffic, and that Execution
Venues will be charged based on market
share.39 While there are multiple factors
that contribute to the cost of building,
maintaining and using the CAT,
processing and storage of incoming
message traffic is one of the most
significant cost drivers for the CAT.40
Thus, the CAT NMS Plan provides that
the fees payable by Industry Members
(other than Execution Venue ATSs) will
be based on the message traffic
generated by such Industry Member.41
In contrast to Industry Members,
which determine the degree to which
they produce message traffic that
constitute CAT Reportable Events, the
CAT Reportable Events of the Execution
Venues are largely derivative of
offered a reasonable basis for establishing a funding
model based on broad tiers, in that it may be easier
to implement.’’ Approval Order at 84796.
36 Approval Order at 85005.
37 Id.
38 Id.
39 Section 11.3(a) and (b) of the CAT NMS Plan.
40 Section B.7, Appendix C of the CAT NMS Plan,
Approval Order at 85005.
41 Section 11.3(b) of the CAT NMS Plan.
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quotations and orders received from
Industry Members that they are required
to display. The business model for
Execution Venues (other than FINRA),
however, is focused on executions in
their markets. As a result, the Operating
Committee believes that it is more
equitable to charge Execution Venues
based on their market share rather than
their message traffic.
Focusing on message traffic would
make it more difficult to draw
distinctions between large and small
Execution Venues and, in particular,
between large and small options
exchanges. For instance, the Operating
Committee analyzed the message traffic
of Execution Venues and Industry
Members for the period of April 2017 to
June 2017 and placed all CAT Reporters
into a nine-tier framework (i.e., a single
tier may include both Execution Venues
and Industry Members). The Operating
Committee’s analysis found that the
majority of exchanges (15 total) were
grouped in Tiers 1 and 2. Moreover,
virtually all of the options exchanges
were in Tiers 1 and 2.42 Given the
resulting concentration of options
exchanges in Tiers 1 and 2 under this
approach, the analysis shows that a
funding model for Execution Venues
based on message traffic would make it
more difficult to distinguish between
large and small options exchanges, as
compared to the proposed fee approach
that bases fees for Execution Venues on
market share.
The CAT NMS Plan’s funding model
also is structured to avoid a ‘‘reduction
in market quality.’’ 43 The tiered, fixed
fee funding model is designed to limit
the disincentives to providing liquidity
to the market. For example, the
Operating Committee expects that a firm
that has a large volume of quotes would
likely be categorized in one of the upper
tiers, and would not be assessed a fee
for this traffic directly as they would
under a more directly metered model. In
contrast, strictly variable or metered
funding models based on message
volume are far more likely to affect
market behavior. In approving the CAT
NMS Plan, the SEC stated that ‘‘[t]he
Participants also offered a reasonable
basis for establishing a funding model
based on broad tiers, in that it may be
. . . less likely to have an incremental
deterrent effect on liquidity
provision.’’ 44
The funding model also is structured
to avoid a reduction market quality
42 The Operating Committee notes that this
analysis did not place MIAX PEARL in Tier 1 or
Tier 2 since the exchange commenced trading on
February 6, 2017.
43 Section 11.2(e) of the CAT NMS Plan.
44 Approval Order at 84796.
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because it discounts Options Market
Maker and equity market maker quotes
when calculating message traffic for
Options Market Makers and equity
market makers, respectively. As
discussed in more detail below, the
Operating Committee determined to
discount the Options Market Maker
quotes by the trade to quote ratio for
options when calculating message traffic
for Options Market Makers. Similarly, to
avoid disincentives to quoting behavior
on the equities side as well, the
Operating Committee determined to
discount equity market maker quotes by
the trade to quote ratio for equities
when calculating message traffic for
equity market makers. The proposed
discounts recognize the value of the
market makers’ quoting activity to the
market as a whole.
The CAT NMS Plan is further
structured to avoid potential conflicts
raised by the Operating Committee
determining fees applicable to its own
members—the Participants. First, the
Company will operate on a ‘‘breakeven’’ basis, with fees imposed to cover
costs and an appropriate reserve. Any
surpluses will be treated as an
operational reserve to offset future fees
and will not be distributed to the
Participants as profits.45 To ensure that
the Participants’ operation of the CAT
will not contribute to the funding of
their other operations, Section 11.1(c) of
the CAT NMS Plan specifically states
that ‘‘[a]ny surplus of the Company’s
revenues over its expenses shall be
treated as an operational reserve to
offset future fees.’’ In addition, as set
forth in Article VIII of the CAT NMS
Plan, the Company ‘‘intends to operate
in a manner such that it qualifies as a
‘business league’ within the meaning of
Section 501(c)(6) of the [Internal
Revenue] Code.’’ To qualify as a
business league, an organization must
‘‘not [be] organized for profit and no
part of the net earnings of [the
organization can] inure[] to the benefit
of any private shareholder or
individual.’’ 46 As the SEC stated when
approving the CAT NMS Plan, ‘‘the
Commission believes that the
Company’s application for Section
501(c)(6) business league status
addresses issues raised by commenters
about the Plan’s proposed allocation of
profit and loss by mitigating concerns
that the Company’s earnings could be
used to benefit individual
Participants.’’ 47 The Internal Revenue
Service recently has determined that the
Company is exempt from federal income
45 Id.
at 84792.
U.S.C. 501(c)(6).
47 Approval Order at 84793.
46 26
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tax under Section 501(c)(6) of the
Internal Revenue Code.
The funding model also is structured
to take into account distinctions in the
securities trading operations of
Participants and Industry Members. For
example, the Operating Committee
designed the model to address the
different trading characteristics in the
OTC Equity Securities market.
Specifically, the Operating Committee
proposes to discount the OTC Equity
Securities market share of Execution
Venue ATSs trading OTC Equity
Securities as well as the market share of
the FINRA ORF by the average shares
per trade ratio between NMS Stocks and
OTC Equity Securities to adjust for the
greater number of shares being traded in
the OTC Equity Securities market,
which is generally a function of a lower
per share price for OTC Equity
Securities when compared to NMS
Stocks. In addition, the Operating
Committee also proposes to discount
Options Market Maker and equity
market maker message traffic in
recognition of their role in the securities
markets. Furthermore, the funding
model creates separate tiers for Equity
and Options Execution Venues due to
the different trading characteristics of
those markets.
Finally, by adopting a CAT-specific
fee, the Operating Committee will be
fully transparent regarding the costs of
the CAT. Charging a general regulatory
fee, which would be used to cover CAT
costs as well as other regulatory costs,
would be less transparent than the
selected approach of charging a fee
designated to cover CAT costs only.
A full description of the funding
model is set forth below. This
description includes the framework for
the funding model as set forth in the
CAT NMS Plan, as well as the details as
to how the funding model will be
applied in practice, including the
number of fee tiers and the applicable
fees for each tier. The complete funding
model is described below, including
those fees that are to be paid by the
Participants. The proposed
Consolidated Audit Trail Funding Fees,
however, do not apply to the
Participants; the proposed Consolidated
Audit Trail Funding Fees only apply to
Industry Members. The CAT Fees for
Participants will be imposed separately
by the Operating Committee pursuant to
the CAT NMS Plan.
(A) Funding Principles
Section 11.2 of the CAT NMS Plan
sets forth the principles that the
Operating Committee applied in
establishing the funding for the
Company. The Operating Committee has
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considered these funding principles as
well as the other funding requirements
set forth in the CAT NMS Plan and in
Rule 613 in developing the proposed
funding model. The following are the
funding principles in Section 11.2 of the
CAT NMS Plan:
• To create transparent, predictable
revenue streams for the Company that
are aligned with the anticipated costs to
build, operate and administer the CAT
and other costs of the Company;
• To establish an allocation of the
Company’s related costs among
Participants and Industry Members that
is consistent with the Exchange Act,
taking into account the timeline for
implementation of the CAT and
distinctions in the securities trading
operations of Participants and Industry
Members and their relative impact upon
the Company’s resources and
operations;
• To establish a tiered fee structure in
which the fees charged to: (i) CAT
Reporters that are Execution Venues,
including ATSs, are based upon the
level of market share; (ii) Industry
Members’ non-ATS activities are based
upon message traffic; (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 Venue
and/or Industry Members);
• To provide for ease of billing and
other administrative functions;
• To avoid any disincentives such as
placing an inappropriate burden on
competition and a reduction in market
quality; and
• To build financial stability to
support the Company as a going
concern.
(B) Industry Member Tiering
Under Section 11.3(b) of the CAT
NMS Plan, the Operating Committee is
required to establish fixed fees to be
payable by Industry Members, based on
message traffic generated by such
Industry Member, with the Operating
Committee establishing at least five and
no more than nine tiers.
The CAT NMS Plan clarifies that the
fixed fees payable by Industry Members
pursuant to Section 11.3(b) shall, in
addition to any other applicable
message traffic, include message traffic
generated by: (i) An ATS that does not
execute orders that is sponsored by such
Industry Member; and (ii) routing orders
to and from any ATS sponsored by such
Industry Member. In addition, the
Industry Member fees will apply to
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58949
Industry Members that act as routing
broker-dealers for exchanges. The
Industry Member fees will not be
applicable, however, to an ATS that
qualifies as an Execution Venue, as
discussed in more detail in the section
on Execution Venue tiering.
In accordance with Section 11.3(b),
the Operating Committee approved a
tiered fee structure for Industry
Members (other than Execution Venue
ATSs) as described in this section. In
determining the tiers, the Operating
Committee considered the funding
principles set forth in Section 11.2 of
the CAT NMS Plan, seeking to create
funding tiers that take into account the
relative impact on CAT System
resources of different Industry Members,
and that establish comparable fees
among the CAT Reporters with the most
Reportable Events. The Operating
Committee has determined that
establishing seven tiers results in an
allocation of fees that distinguishes
between Industry Members with
differing levels of message traffic. Thus,
each such Industry Member will be
placed into one of seven tiers of fixed
fees, based on ‘‘message traffic’’ for a
defined period (as discussed below).
A seven tier structure was selected to
provide a wide range of levels for tiering
Industry Members such that Industry
Members submitting significantly less
message traffic to the CAT would be
adequately differentiated from Industry
Members submitting substantially more
message traffic. The Operating
Committee considered historical
message traffic from multiple time
periods, generated by Industry Members
across all exchanges and as submitted to
FINRA’s Order Audit Trail System
(‘‘OATS’’), and considered the
distribution of firms with similar levels
of message traffic, grouping together
firms with similar levels of message
traffic. Based on this, the Operating
Committee determined that seven tiers
would group firms with similar levels of
message traffic, charging those firms
with higher impact on the CAT more,
while lowering the burden on Industry
Members that have less CAT-related
activity. Furthermore, the selection of
seven tiers establishes comparable fees
among the largest CAT Reporters.
Each Industry Member (other than
Execution Venue ATSs) will be ranked
by message traffic and tiered by
predefined Industry Member
percentages (the ‘‘Industry Member
Percentages’’). The Operating
Committee determined to use
predefined percentages rather than fixed
volume thresholds to ensure that the
total CAT Fees collected recover the
expected CAT costs regardless of
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changes in the total level of message
traffic. To determine the fixed
percentage of Industry Members in each
tier, the Operating Committee analyzed
historical message traffic generated by
Industry Members across all exchanges
and as submitted to OATS, and
considered the distribution of firms
with similar levels of message traffic,
grouping together firms with similar
levels of message traffic. Based on this,
the Operating Committee identified
seven tiers that would group firms with
similar levels of message traffic.
The percentage of costs recovered by
each Industry Member tier will be
determined by predefined percentage
allocations (the ‘‘Industry Member
Recovery Allocation’’). In determining
the fixed percentage allocation of costs
recovered for each tier, the Operating
Committee considered the impact of
CAT Reporter message traffic on the
CAT System as well as the distribution
of total message volume across Industry
Members while seeking to maintain
comparable fees among the largest CAT
Reporters. Accordingly, following the
determination of the percentage of
Industry Members in each tier, the
Operating Committee identified the
percentage of total market volume for
each tier based on the historical message
traffic upon which Industry Members
had been initially ranked. Taking this
into account along with the resulting
percentage of total recovery, the
percentage allocation of costs recovered
for each tier were assigned, allocating
higher percentages of recovery to tiers
with higher levels of message traffic
while avoiding any inappropriate
burden on competition. Furthermore, by
using percentages of Industry Members
and costs recovered per tier, the
Operating Committee sought to include
elasticity within the funding model,
allowing the funding model to respond
to changes in either the total number of
Industry Members or the total level of
message traffic.
The following chart illustrates the
breakdown of seven Industry Member
tiers across the monthly average of total
equity and equity options orders,
cancels, quotes and executions in the
second quarter of 2017 as well as
message traffic thresholds between the
largest of Industry Member message
traffic gaps. The Operating Committee
referenced similar distribution
illustrations to determine the
appropriate division of Industry
Member percentages in each tier by
considering the grouping of firms with
similar levels of message traffic and
seeking to identify relative breakpoints
in the message traffic between such
groupings. In reviewing the chart and its
corresponding table, note that while
these distribution illustrations were
referenced to help differentiate between
Industry Member tiers, the proposed
funding model is driven by fixed
percentages of Industry Members across
tiers to account for fluctuating levels of
message traffic over time. This approach
also provides financial stability for the
CAT by ensuring that the funding model
will recover the required amounts
regardless of changes in the number of
Industry Members or the amount of
message traffic. Actual messages in any
tier will vary based on the actual traffic
in a given measurement period, as well
as the number of firms included in the
measurement period. The Industry
Member Percentages and Industry
Member Recovery Allocation for each
tier will remain fixed with each
Industry Member’s tier to be reassigned
periodically, as described below in
Section 3(a)(2)(I).
Approximate message traffic
per Industry Member (Q2 2017)
(orders, quotes, cancels
and executions)
Industry Member tier
Tier
Tier
Tier
Tier
Tier
1
2
3
4
5
................................................................................................................................................................
................................................................................................................................................................
................................................................................................................................................................
................................................................................................................................................................
................................................................................................................................................................
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>10,000,000,000
1,000,000,000–10,000,000,000
100,000,000–1,000,000,000
1,000,000–100,000,000
100,000–1,000,000
14DEN1
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Federal Register / Vol. 82, No. 239 / Thursday, December 14, 2017 / Notices
Approximate message traffic
per Industry Member (Q2 2017)
(orders, quotes, cancels
and executions)
Industry Member tier
Tier 6 ................................................................................................................................................................
Tier 7 ................................................................................................................................................................
Based on the above analysis, the
Operating Committee approved the
following Industry Member Percentages
and Industry Member Recovery
Allocations:
Percentage
of Industry
Members
Industry Member tier
1
2
3
4
5
6
7
Percentage
of Industry
Member
recovery
Percentage
of total
recovery
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
0.900
2.150
2.800
7.750
8.300
18.800
59.300
12.00
20.50
18.50
32.00
10.00
6.00
1.00
9.00
15.38
13.88
24.00
7.50
4.50
0.75
Total ......................................................................................................................................
sradovich on DSK3GMQ082PROD with NOTICES
Tier
Tier
Tier
Tier
Tier
Tier
Tier
10,000–100,000
<10,000
100
100
75
For the purposes of creating these
tiers based on message traffic, the
Operating Committee determined to
define the term ‘‘message traffic’’
separately for the period before the
commencement of CAT reporting and
for the period after the start of CAT
reporting. The different definition for
message traffic is necessary as there will
be no Reportable Events as defined in
the Plan, prior to the commencement of
CAT reporting. Accordingly, prior to the
start of CAT reporting, ‘‘message traffic’’
will be comprised of historical equity
and equity options orders, cancels,
quotes and executions provided by each
exchange and FINRA over the previous
three months. Prior to the start of CAT
reporting, orders would 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,
including principal orders, cancel/
replace orders, market maker orders
originated by a member of an exchange,
and reserve (iceberg) orders as well as
executions originated by a member of
FINRA, and excluding order rejects,
system-modified orders, order routes
and implied orders.48 In addition, prior
to the start of CAT reporting, cancels
would 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 three48 Consequently, firms that do not have ‘‘message
traffic’’ reported to an exchange or OATS before
they are reporting to the CAT would not be subject
to a fee until they begin to report information to
CAT.
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month period, excluding order
modifications (e.g., order updates, order
splits, partial cancels) and multiple
cancels of a complex order.
Furthermore, prior to the start of CAT
reporting, quotes would 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.
Additionally, prior to the start of CAT
reporting, executions would be
comprised of the total number of equity
and equity option executions received
or originated by a member of an
exchange or FINRA over a three-month
period.
After an Industry Member begins
reporting to the CAT, ‘‘message traffic’’
will be calculated based on the Industry
Member’s Reportable Events reported to
the CAT as will be defined in the
Technical Specifications.49
Quotes of Options Market Makers and
equity market makers will be included
in the calculation of total message traffic
for those market makers for purposes of
tiering under the CAT funding model
both prior to CAT reporting and once
CAT reporting commences.50 To
49 If an Industry Member (other than an Execution
Venue ATS) has no orders, cancels, quotes and
executions prior to the commencement of CAT
Reporting, or no Reportable Events after CAT
reporting commences, then the Industry Member
would not have a CAT Fee obligation.
50 The SEC approved exemptive relief permitting
Options Market Maker quotes to be reported to the
Central Repository by the relevant Options
Exchange in lieu of requiring that such reporting be
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address potential concerns regarding
burdens on competition or market
quality of including quotes in the
calculation of message traffic, however,
the Operating Committee determined to
discount the Options Market Maker
quotes by the trade to quote ratio for
options when calculating message traffic
for Options Market Makers. Based on
available data for June 2016 through
June 2017, the trade to quote ratio for
options is 0.01%. Similarly, to avoid
disincentives to quoting behavior on the
equities side, the Operating Committee
determined to discount equity market
maker quotes by the trade to quote ratio
for equities. Based on available data for
June 2016 through June 2017, the trade
to quote ratio for equities is 5.43%.51
The trade to quote ratio for options and
the trade to quote ratio for equities will
be calculated every three months when
tiers are recalculated (as discussed
below).
done by both the Options Exchange and the Options
Market Maker, as required by Rule 613 of
Regulation NMS. See Securities Exchange Act
Release No. 77265 (March 1, 2017), 81 FR 11856
(March 7, 2016). This exemption applies to Options
Market Maker quotes for CAT reporting purposes
only. Therefore, notwithstanding the reporting
exemption provided for Options Market Maker
quotes, Options Market Maker quotes will be
included in the calculation of total message traffic
for Options Market Makers for purposes of tiering
under the CAT funding model both prior to CAT
reporting and once CAT reporting commences.
51 The trade to quote ratios were calculated based
on the inverse of the average of the monthly equity
SIP and OPRA quote to trade ratios from June
2016—June 2017 that were compiled by the
Financial Information Forum using data from
Nasdaq and SIAC.
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The Operating Committee has
determined to calculate fee tiers every
three months, on a calendar quarter
basis, based on message traffic from the
prior three months. Based on its
analysis of historical data, the Operating
Committee believes that calculating tiers
based on three months of data will
provide the best balance between
reflecting changes in activity by
Industry Members while still providing
predictability in the tiering for Industry
Members. Because fee tiers will be
calculated based on message traffic from
the prior three months, the Operating
Committee will begin calculating
message traffic based on an Industry
Member’s Reportable Events reported to
the CAT once the Industry Member has
been reporting to the CAT for three
months. Prior to that, fee tiers will be
calculated as discussed above with
regard to the period prior to CAT
reporting.
sradovich on DSK3GMQ082PROD with NOTICES
(C) Execution Venue Tiering
Under Section 11.3(a) of the CAT
NMS Plan, the Operating Committee is
required to establish fixed fees payable
by Execution Venues. Section 1.1 of the
CAT NMS Plan defines an Execution
Venue as ‘‘a Participant or an alternative
trading system (‘‘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).’’ 52
The Operating Committee determined
that ATSs should be included within
the definition of Execution Venue. The
Operating Committee believes that it is
appropriate to treat ATSs as Execution
Venues under the proposed funding
model since ATSs have business models
that are similar to those of exchanges,
and ATSs also compete with exchanges.
Given the differences between
Execution Venues that trade NMS
Stocks and/or OTC Equity Securities
and Execution Venues that trade Listed
Options, Section 11.3(a) addresses
Execution Venues that trade NMS
Stocks and/or OTC Equity Securities
separately from Execution Venues that
trade Listed Options. Equity and
Options Execution Venues are treated
separately for two reasons. First, the
differing quoting behavior of Equity and
Options Execution Venues makes
comparison of activity between such
Execution Venues difficult. Second,
Execution Venue tiers are calculated
based on market share of share volume,
and it is therefore difficult to compare
52 Although FINRA does not operate an execution
venue, because it is a Participant, it is considered
an ‘‘Execution Venue’’ under the Plan for purposes
of determining fees.
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market share between asset classes (i.e.,
equity shares versus options contracts).
Discussed below is how the funding
model treats the two types of Execution
Venues.
(I) NMS Stocks and OTC Equity
Securities
Section 11.3(a)(i) of the CAT NMS
Plan states that each Execution Venue
that (i) executes transactions or, (ii) in
the case of a national securities
association, has trades reported by its
members to its trade reporting facility or
facilities for reporting transactions
effected otherwise than on an exchange,
in NMS Stocks or OTC Equity Securities
will pay a fixed fee depending on the
market share of that Execution Venue in
NMS Stocks and OTC Equity Securities,
with the Operating Committee
establishing at least two and not more
than five tiers of fixed fees, based on an
Execution Venue’s NMS Stocks and
OTC Equity Securities market share. For
these purposes, market share for
Execution Venues that execute
transactions will be calculated by share
volume, and 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, provided, however, that
the share volume reported to such
national securities association by an
Execution Venue shall not be included
in the calculation of such national
security association’s market share.
In accordance with Section 11.3(a)(i)
of the CAT NMS Plan, the Operating
Committee approved a tiered fee
structure for Equity Execution Venues
and Option Execution Venues. In
determining the Equity Execution
Venue Tiers, the Operating Committee
considered the funding principles set
forth in Section 11.2 of the CAT NMS
Plan, seeking to create funding tiers that
take into account the relative impact on
system resources of different Equity
Execution Venues, and that establish
comparable fees among the CAT
Reporters with the most Reportable
Events. Each Equity Execution Venue
will be placed into one of four tiers of
fixed fees, based on the Execution
Venue’s NMS Stocks and OTC Equity
Securities market share. In choosing
four tiers, the Operating Committee
performed an analysis similar to that
discussed above with regard to the nonExecution Venue Industry Members to
determine the number of tiers for Equity
Execution Venues. The Operating
Committee determined to establish four
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tiers for Equity Execution Venues, rather
than a larger number of tiers as
established for non-Execution Venue
Industry Members, because the four
tiers were sufficient to distinguish
between the smaller number of Equity
Execution Venues based on market
share. Furthermore, the selection of four
tiers serves to help establish
comparability among the largest CAT
Reporters.
Each Equity Execution Venue will be
ranked by market share and tiered by
predefined Execution Venue
percentages, (the ‘‘Equity Execution
Venue Percentages’’). In determining the
fixed percentage of Equity Execution
Venues in each tier, the Operating
Committee reviewed historical market
share of share volume for Execution
Venues. Equity Execution Venue market
shares of share volume were sourced
from market statistics made publiclyavailable by Bats Global Markets, Inc.
(‘‘Bats’’). ATS market shares of share
volume was sourced from market
statistics made publicly-available by
FINRA. FINRA trade reporting facility
(‘‘TRF’’) and ORF market share of share
volume was sourced from market
statistics made publicly available by
FINRA. Based on data from FINRA and
otcmarkets.com, ATSs accounted for
39.12% of the share volume across the
TRFs and ORFs during the recent tiering
period. A 39.12/60.88 split was applied
to the ATS and non-ATS breakdown of
FINRA market share, with FINRA tiered
based only on the non-ATS portion of
its market share of share volume.
The Operating Committee determined
to discount the OTC Equity Securities
market share of Execution Venue ATSs
trading OTC Equity Securities as well as
the market share of the FINRA ORF in
recognition of the different trading
characteristics of the OTC Equity
Securities market as compared to the
market in NMS Stocks. Many OTC
Equity Securities are priced at less than
one dollar—and a significant number at
less than one penny—per share and
low-priced shares tend to trade in larger
quantities. Accordingly, a
disproportionately large number of
shares are involved in transactions
involving OTC Equity Securities versus
NMS Stocks. Because the proposed fee
tiers are based on market share
calculated by share volume, Execution
Venue ATSs trading OTC Equity
Securities and FINRA would likely be
subject to higher tiers than their
operations may warrant. To address this
potential concern, the Operating
Committee determined to discount the
OTC Equity Securities market share of
Execution Venue ATSs trading OTC
Equity Securities and the market share
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of the FINRA ORF by multiplying such
market share by the average shares per
trade ratio between NMS Stocks and
OTC Equity Securities in order to adjust
for the greater number of shares being
traded in the OTC Equity Securities
market. Based on available data for the
second quarter of 2017, the average
shares per trade ratio between NMS
Stocks and OTC Equity Securities is
0.17%.53 The average shares per trade
ratio between NMS Stocks and OTC
Equity Securities will be recalculated
every three months when tiers are
recalculated.
Based on this, the Operating
Committee considered the distribution
of Execution Venues, and grouped
together Execution Venues with similar
levels of market share. The percentage
of costs recovered by each Equity
Execution Venue tier will be determined
by predefined percentage allocations
(the ‘‘Equity Execution Venue Recovery
Allocation’’). In determining the fixed
percentage allocation of costs to be
recovered from each tier, the Operating
Committee considered the impact of
CAT Reporter market share activity on
the CAT System as well as the
distribution of total market volume
across Equity Execution Venues while
seeking to maintain comparable fees
among the largest CAT Reporters.
Accordingly, following the
determination of the percentage of
Execution Venues in each tier, the
Operating Committee identified the
percentage of total market volume for
each tier based on the historical market
share upon which Execution Venues
had been initially ranked. Taking this
• Percentage
of Equity
Execution
Venues
• Equity Execution Venue tier
•
•
•
•
Tier
Tier
Tier
Tier
1
2
3
4
into account along with the resulting
percentage of total recovery, the
percentage allocation of cost recovery
for each tier were assigned, allocating
higher percentages of recovery to the
tier with a higher level of market share
while avoiding any inappropriate
burden on competition. Furthermore, by
using percentages of Equity Execution
Venues and cost recovery per tier, the
Operating Committee sought to include
elasticity within the funding model,
allowing the funding model to respond
to changes in either the total number of
Equity Execution Venues or changes in
market share.
Based on this analysis, the Operating
Committee approved the following
Equity Execution Venue Percentages
and Recovery Allocations:
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
•
•
•
•
25.00
42.00
23.00
10.00
• 33.25
• 25.73
• 8.00
• 0.02
• 100
• Total ..................................................................................................................................
sradovich on DSK3GMQ082PROD with NOTICES
• Percentage
of Execution
Venue
recovery
• 67
• Percentage
of total
recovery
•
•
•
•
8.31
6.43
2.00
0.01
• 16.75
(II) Listed Options
Section 11.3(a)(ii) of the CAT NMS
Plan states that each Execution Venue
that executes transactions in Listed
Options will pay a fixed fee depending
on the Listed Options market share of
that Execution Venue, with the
Operating Committee establishing at
least two and no more than five tiers of
fixed fees, based on an Execution
Venue’s Listed Options market share.
For these purposes, market share will be
calculated by contract volume.
In accordance with Section 11.3(a)(ii)
of the CAT NMS Plan, the Operating
Committee approved a tiered fee
structure for Options Execution Venues.
In determining the tiers, the Operating
Committee considered the funding
principles set forth in Section 11.2 of
the CAT NMS Plan, seeking to create
funding tiers that take into account the
relative impact on system resources of
different Options Execution Venues,
and that establish comparable fees
among the CAT Reporters with the most
Reportable Events. Each Options
Execution Venue will be placed into one
of two tiers of fixed fees, based on the
Execution Venue’s Listed Options
market share. In choosing two tiers, the
Operating Committee performed an
analysis similar to that discussed above
with regard to Industry Members (other
than Execution Venue ATSs) to
determine the number of tiers for
Options Execution Venues. The
Operating Committee determined to
establish two tiers for Options
Execution Venues, rather than a larger
number, because the two tiers were
sufficient to distinguish between the
smaller number of Options Execution
Venues based on market share.
Furthermore, due to the smaller number
of Options Execution Venues, the
incorporation of additional Options
Execution Venue tiers would result in
significantly higher fees for Tier 1
Options Execution Venues and reduce
comparability between Execution
Venues and Industry Members.
Furthermore, the selection of two tiers
served to establish comparable fees
among the largest CAT Reporters.
Each Options Execution Venue will
be ranked by market share and tiered by
predefined Execution Venue
percentages, (the ‘‘Options Execution
Venue Percentages’’). To determine the
fixed percentage of Options Execution
Venues in each tier, the Operating
Committee analyzed the historical and
publicly available market share of
Options Execution Venues to group
Options Execution Venues with similar
market shares across the tiers. Options
Execution Venue market share of share
volume were sourced from market
statistics made publicly-available by
Bats. The process for developing the
Options Execution Venue Percentages
was the same as discussed above with
regard to Equity Execution Venues.
The percentage of costs to be
recovered from each Options Execution
Venue tier will be determined by
predefined percentage allocations (the
‘‘Options Execution Venue Recovery
Allocation’’). In determining the fixed
percentage allocation of cost recovery
for each tier, the Operating Committee
considered the impact of CAT Reporter
market share activity on the CAT
System as well as the distribution of
total market volume across Options
Execution Venues while seeking to
maintain comparable fees among the
largest CAT Reporters. Furthermore, by
using percentages of Options Execution
Venues and cost recovery per tier, the
Operating Committee sought to include
elasticity within the funding model,
53 The average shares per trade ratio for both NMS
Stocks and OTC Equity Securities from the second
quarter of 2017 was calculated using publicly
available market volume data from Bats and OTC
Markets Group, and the totals were divided to
determine the average number of shares per trade
between NMS Stocks and OTC Equity Securities.
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allowing the funding model to respond
to changes in either the total number of
Options Execution Venues or changes in
market share. The process for
developing the Options Execution
Venue Recovery Allocation was the
same as discussed above with regard to
Equity Execution Venues.
Based on this analysis, the Operating
Committee approved the following
Options Execution Venue Percentages
and Recovery Allocations:
Percentage
of Options
Execution
Venues
Options Execution Venue tier
Percentage
of Execution
Venue
recovery
Percentage
of total
recovery
Tier 1 ............................................................................................................................................
Tier 2 ............................................................................................................................................
75.00
25.00
28.25
4.75
7.06
1.19
Total ......................................................................................................................................
100
33
8.25
sradovich on DSK3GMQ082PROD with NOTICES
(III) Market Share/Tier Assignments
(D) Allocation of Costs
The Operating Committee determined
that, prior to the start of CAT reporting,
market share for Execution Venues
would be sourced from publiclyavailable market data. Options and
equity volumes for Participants will be
sourced from market data made publicly
available by Bats while Execution
Venue ATS volumes will be sourced
from market data made publicly
available by FINRA and OTC Markets.
Set forth in the Appendix are two
charts, one listing the current Equity
Execution Venues, each with its rank
and tier, and one listing the current
Options Execution Venues, each with its
rank and tier.
After the commencement of CAT
reporting, market share for Execution
Venues will be sourced from data
reported to the CAT. Equity Execution
Venue market share will be determined
by calculating each Equity Execution
Venue’s proportion of the total volume
of NMS Stock and OTC Equity shares
reported by all Equity Execution Venues
during the relevant time period (with
the discounting of OTC Equity
Securities market share of Execution
Venue ATSs trading OTC Equity
Securities as well as the market share of
the FINRA ORF, as described above).
Similarly, market share for Options
Execution Venues will be determined by
calculating each Options Execution
Venue’s proportion of the total volume
of Listed Options contracts reported by
all Options Execution Venues during
the relevant time period.
The Operating Committee has
determined to calculate fee tiers for
Execution Venues every three months
based on market share from the prior
three months. Based on its analysis of
historical data, the Operating Committee
believes calculating tiers based on three
months of data will provide the best
balance between reflecting changes in
activity by Execution Venues while still
providing predictability in the tiering
for Execution Venues.
In addition to the funding principles
discussed above, including
comparability of fees, Section 11.1(c) of
the CAT NMS Plan also requires
expenses to be fairly and reasonably
shared among the Participants and
Industry Members. Accordingly, in
developing the proposed fee schedules
pursuant to the funding model, the
Operating Committee calculated how
the CAT costs would be allocated
between Industry Members and
Execution Venues, and how the portion
of CAT costs allocated to Execution
Venues would be allocated between
Equity Execution Venues and Options
Execution Venues. These
determinations are described below.
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(I) Allocation Between Industry
Members and Execution Venues
In determining the cost allocation
between Industry Members (other than
Execution Venue ATSs) and Execution
Venues, the Operating Committee
analyzed a range of possible splits for
revenue recovery from such Industry
Members and Execution Venues,
including 80%/20%, 75%/25%, 70%/
30% and 65%/35% allocations. Based
on this analysis, the Operating
Committee determined that 75 percent
of total costs recovered would be
allocated to Industry Members (other
than Execution Venue ATSs) and 25
percent would be allocated to Execution
Venues. The Operating Committee
determined that this 75%/25% division
maintained the greatest level of
comparability across the funding model.
For example, the cost allocation
establishes fees for the largest Industry
Members (i.e., those Industry Members
in Tiers 1) that are comparable to the
largest Equity Execution Venues and
Options Execution Venues (i.e., those
Execution Venues in Tier 1).
Furthermore, the allocation of total
CAT cost recovery recognizes the
difference in the number of CAT
Reporters that are Industry Members
versus CAT Reporters that are Execution
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Sfmt 4703
Venues. Specifically, the cost allocation
takes into consideration that there are
approximately 23 times more Industry
Members expected to report to the CAT
than Execution Venues (e.g., an
estimated 1541 Industry Members
versus 67 Execution Venues as of June
2017).
(II) Allocation Between Equity
Execution Venues and Options
Execution Venues
The Operating Committee also
analyzed how the portion of CAT costs
allocated to Execution Venues would be
allocated between Equity Execution
Venues and Options Execution Venues.
In considering this allocation of costs,
the Operating Committee analyzed a
range of alternative splits for revenue
recovered between Equity and Options
Execution Venues, including a 70%/
30%, 67%/33%, 65%/35%, 50%/50%
and 25%/75% split. Based on this
analysis, the Operating Committee
determined to allocate 67 percent of
Execution Venue costs recovered to
Equity Execution Venues and 33 percent
to Options Execution Venues. The
Operating Committee determined that a
67%/33% allocation between Equity
and Options Execution Venues
maintained the greatest level of fee
equitability and comparability based on
the current number of Equity and
Options Execution Venues. For
example, the allocation establishes fees
for the larger Equity Execution Venues
that are comparable to the larger
Options Execution Venues. Specifically,
Tier 1 Equity Execution Venues would
pay a quarterly fee of $81,047 and Tier
1 Options Execution Venues would pay
a quarterly fee of $81,379. In addition to
fee comparability between Equity
Execution Venues and Options
Execution Venues, the allocation also
establishes equitability between larger
(Tier 1) and smaller (Tier 2) Execution
Venues based upon the level of market
share. Furthermore, the allocation is
intended to reflect the relative levels of
current equity and options order events.
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(E) Fee Levels
The Operating Committee determined
to establish a CAT-specific fee to
collectively recover the costs of building
and operating the CAT. Accordingly,
under the funding model, the sum of the
CAT Fees is designed to recover the
total cost of the CAT. The Operating
Committee has determined overall CAT
costs to be comprised of Plan Processor
costs and non-Plan Processor costs,
which are estimated to be $50,700,000
in total for the year beginning November
21, 2016.54
The Plan Processor costs relate to
costs incurred and to be incurred
through November 21, 2017 by the Plan
Processor and consist of the Plan
Processor’s current estimates of average
yearly ongoing costs, including
development costs, which total
$37,500,000. This amount is based upon
the fees due to the Plan Processor
pursuant to the Company’s agreement
with the Plan Processor.
The non-Plan Processor estimated
costs incurred and to be incurred by the
Company through November 21, 2017
consist of three categories of costs. The
first category of such costs are third
party support costs, which include legal
fees, consulting fees and audit fees from
November 21, 2016 until the date of
filing as well as estimated third party
support costs for the rest of the year.
These amount to an estimated
$5,200,000. The second category of nonPlan Processor costs are estimated
cyber-insurance costs for the year. Based
on discussions with potential cyberinsurance providers, assuming $2–5
million cyber-insurance premium on
$100 million coverage, the Company has
estimated $3,000,000 for the annual
cost. The final cost figures will be
determined following receipt of final
underwriter quotes. The third category
of non-Plan Processor costs is the CAT
operational reserve, which is comprised
of three months of ongoing Plan
Processor costs ($9,375,000), third party
support costs ($1,300,000) and cyberinsurance costs ($750,000). The
Operating Committee aims to
accumulate the necessary funds to
establish the three-month operating
reserve for the Company through the
CAT Fees charged to CAT Reporters for
the year. On an ongoing basis, the
Operating Committee will account for
any potential need to replenish the
operating reserve or other changes to
total cost during its annual budgeting
process. The following table
summarizes the Plan Processor and nonPlan Processor cost components which
comprise the total estimated CAT costs
of $50,700,000 for the covered period.
Cost category
Cost component
Plan Processor ............................................................................
Operational Costs ......................................................................
Third Party Support Costs .........................................................
Operational Reserve ..................................................................
Cyber-insurance Costs ..............................................................
$37,500,000
5,200,000
55 5,000,000
3,000,000
....................................................................................................
50,700,000
Non-Plan Processor ....................................................................
Estimated Total ....................................................................
Based on these estimated costs and
the calculations for the funding model
described above, the Operating
Committee determined to impose the
following fees: 56
For Industry Members (other than
Execution Venue ATSs):
Percentage
of Industry
Members
Tier
1
2
3
4
5
6
7
........................
........................
........................
........................
........................
........................
........................
0.900
2.150
2.800
7.750
8.300
18.800
59.300
Quarterly
CAT fee
$81,483
59,055
40,899
25,566
7,428
1,968
105
For Execution Venues for NMS Stocks
and OTC Equity Securities:
Percentage
of Equity
Execution
Venues
Tier
1
2
3
4
........................
........................
........................
........................
25.00
42.00
23.00
10.00
Quarterly
CAT Fee
$81,048
37,062
21,126
129
For Execution Venues for Listed
Options:
Amount
Percentage
of Options
Execution
Venues
Tier
1 ........................
2 ........................
75.00
25.00
Quarterly
CAT fee
$81,381
37,629
The Operating Committee has
calculated the schedule of effective fees
for Industry Members (other than
Execution Venue ATSs) and Execution
Venues in the following manner. Note
that the calculation of CAT Fees
assumes 52 Equity Execution Venues,
15 Options Execution Venues and 1,541
Industry Members (other than Execution
Venue ATSs) as of June 2017.
CALCULATION OF ANNUAL TIER FEES FOR INDUSTRY MEMBERS
[‘‘IM’’]
Percentage
of Industry
Members
sradovich on DSK3GMQ082PROD with NOTICES
Industry Member tier
Tier
Tier
Tier
Tier
Tier
1
2
3
4
5
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
54 It is anticipated that CAT-related costs incurred
prior to November 21, 2016 will be addressed via
a separate filing.
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55 This $5,000,000 represents the gradual
accumulation of the funds for a target operating
reserve of $11,425,000.
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0.900
2.150
2.800
7.750
8.300
Percentage
of Industry
Member
recovery
12.00
20.50
18.50
32.00
10.00
Percentage
of total
recovery
9.00
15.38
13.88
24.00
7.50
56 Note that all monthly, quarterly and annual
CAT Fees have been rounded to the nearest dollar.
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CALCULATION OF ANNUAL TIER FEES FOR INDUSTRY MEMBERS—Continued
[‘‘IM’’]
Percentage
of Industry
Members
Industry Member tier
Percentage
of Industry
Member
recovery
Percentage
of total
recovery
Tier 6 ............................................................................................................................................
Tier 7 ............................................................................................................................................
18.800
59.300
6.00
1.00
4.50
0.75
Total ......................................................................................................................................
100
100
75
Estimated
number of
Industry
Members
Industry Member tier
....................................................................................................................................................................................................
....................................................................................................................................................................................................
....................................................................................................................................................................................................
....................................................................................................................................................................................................
....................................................................................................................................................................................................
....................................................................................................................................................................................................
....................................................................................................................................................................................................
14
33
43
119
128
290
914
Total ..............................................................................................................................................................................................
sradovich on DSK3GMQ082PROD with NOTICES
Tier
Tier
Tier
Tier
Tier
Tier
Tier
1
2
3
4
5
6
7
1,541
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58957
Calculation of Annual Tier Fees for
Equity Execution Venues (‘‘EV’’)
Estimated
number of
Equity
Execution
Venues
Tier
Tier
Tier
Tier
1
2
3
4
....................................................................................................................................................................................................
....................................................................................................................................................................................................
....................................................................................................................................................................................................
....................................................................................................................................................................................................
13
22
12
5
Total ..............................................................................................................................................................................................
52
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14DEN1
EN14DE17.028</GPH>
sradovich on DSK3GMQ082PROD with NOTICES
Equity Execution Venue tier
58958
Federal Register / Vol. 82, No. 239 / Thursday, December 14, 2017 / Notices
CALCULATION OF ANNUAL TIER FEES FOR OPTIONS EXECUTION VENUES (‘‘EV’’)
Percentage
of Options
Execution
Venues
Options Execution Venue tier
Percentage
of Execution
Venue
recovery
Percentage
of total
recovery
Tier 1 ............................................................................................................................................
Tier 2 ............................................................................................................................................
75.00
25.00
28.25
4.75
7.06
1.19
Total ......................................................................................................................................
100
33
8.25
Estimated
number of
Options
Execution
Venues
Options Execution Venue tier
11
4
Total ..............................................................................................................................................................................................
15
Type
Industry
Member tier
Industry Members ............................................................................................
Estimated
number of
members
Tier 1 .............
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E:\FR\FM\14DEN1.SGM
14
14DEN1
CAT
fees paid
annually
$325,932
Total
recovery
$4,563,048
EN14DE17.030</GPH>
TRACEABILITY OF TOTAL CAT FEES
EN14DE17.029</GPH>
sradovich on DSK3GMQ082PROD with NOTICES
Tier 1 ....................................................................................................................................................................................................
Tier 2 ....................................................................................................................................................................................................
Federal Register / Vol. 82, No. 239 / Thursday, December 14, 2017 / Notices
58959
TRACEABILITY OF TOTAL CAT FEES—Continued
Estimated
number of
members
Industry
Member tier
Type
Tier
Tier
Tier
Tier
Tier
Tier
Total
recovery
.............
.............
.............
.............
.............
.............
33
43
119
128
290
914
236,220
163,596
102,264
29,712
7,872
420
7,795,260
7,034,628
12,169,416
3,803,136
2,282,880
383,880
........................
1,541
........................
38,032,248
.............
.............
.............
.............
13
22
12
5
324,192
148,248
84,504
516
4,214,496
3,261,456
1,014,048
2,580
Total ..........................................................................................................
........................
52
........................
8,492,580
Options Execution Venues ..............................................................................
Tier 1 .............
Tier 2 .............
11
4
$325,524
$150,516
$3,580,764
$602,064
Total ..........................................................................................................
........................
15
........................
$4,182,828
Total ..................................................................................................
........................
........................
........................
$50,700,000
Excess 57 ...........................................................................................
........................
........................
........................
7,656
Total ..........................................................................................................
Equity Execution Venues ................................................................................
sradovich on DSK3GMQ082PROD with NOTICES
(F) Comparability of Fees
The funding principles require a
funding model in which the fees
charged to 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 Venue and/or Industry
Members). Accordingly, in creating the
model, the Operating Committee sought
to establish comparable fees for the top
tier of Industry Members (other than
Execution Venue ATSs), Equity
Execution Venues and Options
Execution Venues. Specifically, each
Tier 1 CAT Reporter would be required
to pay a quarterly fee of approximately
$81,000.
(G) Billing Onset
Under Section 11.1(c) of the CAT
NMS Plan, to fund the development and
implementation of the CAT, the
Company shall time the imposition and
collection of all fees on Participants and
Industry Members in a manner
reasonably related to the timing when
the Company expects to incur such
development and implementation costs.
The Company is currently incurring
such development and implementation
costs and will continue to do so prior
57 The amount in excess of the total CAT costs
will contribute to the gradual accumulation of the
target operating reserve of $11.425 million.
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Tier
Tier
Tier
Tier
2
3
4
5
6
7
CAT
fees paid
annually
1
2
3
4
to the commencement of CAT reporting
and thereafter. In accordance with the
CAT NMS Plan, all CAT Reporters,
including both Industry Members and
Execution Venues (including
Participants), will be invoiced as
promptly as possible following the latest
of the operative date of the Consolidated
Audit Trail Funding Fees for each of the
Participants and the operative date of
the Plan amendment adopting CAT Fees
for Participants.
(H) Changes to Fee Levels and Tiers
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. The Operating
Committee is authorized to review such
fee schedule on a more regular basis, but
shall not make any changes on more
than a semi-annual basis unless,
pursuant to a Supermajority Vote, the
Operating Committee concludes that
such change is necessary for the
adequate funding of the Company.’’
With 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. In addition, the reviews
will evaluate the estimated ongoing
CAT costs and the level of the operating
reserve. To the extent that the total CAT
costs decrease, the fees would be
PO 00000
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adjusted downward, and to the extent
that the total CAT costs increase, the
fees would be adjusted upward.58
Furthermore, any surplus of the
Company’s revenues over its expenses is
to be included within the operational
reserve to offset future fees. The
limitations on more frequent changes to
the fee, however, are intended to
provide budgeting certainty for the CAT
Reporters and the Company.59 To the
extent that the Operating Committee
approves changes to the number of tiers
in the funding model or the fees
assigned to each tier, then the Operating
Committee will file such changes with
the SEC pursuant to Rule 608 of the
Exchange Act, and the Participants will
file such changes with the SEC pursuant
to Section 19(b) of the Exchange Act and
Rule 19b–4 thereunder, and any such
changes will become effective in
accordance with the requirements of
those provisions.
(I) Initial and Periodic Tier
Reassignments
The Operating Committee has
determined to calculate fee tiers every
three months based on market share or
message traffic, as applicable, from the
58 The CAT Fees are designed to recover the costs
associated with the CAT. Accordingly, CAT Fees
would not be affected by increases or decreases in
other non-CAT expenses incurred by the
Participants, such as any changes in costs related
to the retirement of existing regulatory systems,
such as OATS.
59 Section B.7, Appendix C of the CAT NMS Plan,
Approval Order at 85006.
E:\FR\FM\14DEN1.SGM
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58960
Federal Register / Vol. 82, No. 239 / Thursday, December 14, 2017 / Notices
prior three months. For the initial tier
assignments, the Company will
calculate the relevant tier for each CAT
Reporter using the three months of data
prior to the commencement date. As
with the initial tier assignment, for the
tri-monthly reassignments, the
Company will calculate the relevant tier
using the three months of data prior to
the relevant tri-monthly date. Any
movement of CAT Reporters between
tiers will not change the criteria for each
tier or the fee amount corresponding to
each tier.
In performing the tri-monthly
reassignments, the assignment of CAT
Reporters in each assigned tier is
relative. Therefore, a CAT Reporter’s
assigned tier will depend, not only on
its own message traffic or market share,
but also on the message traffic/market
share across all CAT Reporters. For
example, the percentage of Industry
Members (other than Execution Venue
ATSs) in each tier is relative such that
such Industry Member’s assigned tier
will depend on message traffic
generated across all CAT Reporters as
well as the total number of CAT
Reporters. The Operating Committee
will inform CAT Reporters of their
assigned tier every three months
following the periodic tiering process,
as the funding model will compare an
individual CAT Reporter’s activity to
that of other CAT Reporters in the
marketplace.
The following demonstrates a tier
reassignment. In accordance with the
funding model, the top 75% of Options
Execution Venues in market share are
categorized as Tier 1 while the bottom
25% of Options Execution Venues in
market share are categorized as Tier 2.
In the sample scenario below, Options
Execution Venue L is initially
categorized as a Tier 2 Options
Execution Venue in Period A due to its
market share. When market share is
recalculated for Period B, the market
share of Execution Venue L increases,
and it is therefore subsequently
reranked and reassigned to Tier 1 in
Period B. Correspondingly, Options
Execution Venue K, initially a Tier 1
Options Execution Venue in Period A,
is reassigned to Tier 2 in Period B due
to decreases in its market share.
Period A
Market
share rank
Options Execution Venue
Options
Options
Options
Options
Options
Options
Options
Options
Options
Options
Options
Options
Options
Options
Options
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Period B
A .............
B .............
C .............
D .............
E .............
F ..............
G .............
H .............
I ...............
J ..............
K .............
L ..............
M .............
N .............
O .............
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
For each periodic tier reassignment,
the Operating Committee will review
the new tier assignments, particularly
those assignments for CAT Reporters
that shift from the lowest tier to a higher
tier. This review is intended to evaluate
whether potential changes to the market
or CAT Reporters (e.g., dissolution of a
large CAT Reporter) adversely affect the
tier reassignments.
sradovich on DSK3GMQ082PROD with NOTICES
(J) Sunset Provision
The Operating Committee developed
the proposed funding model by
analyzing currently available historical
data. Such historical data, however, is
not as comprehensive as data that will
be submitted to the CAT. Accordingly,
the Operating Committee believes that it
will be appropriate to revisit the
funding model once CAT Reporters
have actual experience with the funding
model. Accordingly, the Operating
Committee determined to include an
automatic sunsetting provision for the
proposed fees. Specifically, the
Operating Committee determined that
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Tier
1
1
1
1
1
1
1
1
1
1
1
2
2
2
2
Options
Options
Options
Options
Options
Options
Options
Options
Options
Options
Options
Options
Options
Options
Options
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
the CAT Fees should automatically
expire two years after the operative date
of the CAT NMS Plan amendment
adopting CAT Fees for Participants. The
Operating Committee intends to monitor
the operation of the funding model
during this two year period and to
evaluate its effectiveness during that
period. Such a process will inform the
Operating Committee’s approach to
funding the CAT after the two year
period.
(3) Proposed CAT Fee Schedule
The Exchange proposes the
Consolidated Audit Trail Funding Fees
to impose the CAT Fees determined by
the Operating Committee on the
Exchange’s members. The proposed fee
schedule has four sections, covering
definitions, the fee schedule for CAT
Fees, the timing and manner of
payments, and the automatic sunsetting
of the CAT Fees. Each of these sections
is discussed in detail below.
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Market
share rank
Options Execution Venue
Fmt 4703
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A ............
B ............
C ............
D ............
E ............
F .............
I ..............
H ............
G ............
J .............
L .............
K ............
N ............
M ............
O ............
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Tier
1
1
1
1
1
1
1
1
1
1
1
2
2
2
2
(A) Definitions
Paragraph (a) of the proposed fee
schedule sets forth the definitions for
the proposed fee schedule. Paragraph
(a)(1) states that, for purposes of the
Consolidated Audit Trail Funding Fees,
the terms ‘‘CAT’’, ‘‘CAT NMS Plan,’’
‘‘Industry Member,’’ ‘‘NMS Stock,’’
‘‘OTC Equity Security’’, ‘‘Options
Market Maker’’, and ‘‘Participant’’ are
defined as set forth in Rule 910A
(Consolidated Audit Trail—Definitions).
The proposed fee schedule imposes
different fees on Equity ATSs and
Industry Members that are not Equity
ATSs. Accordingly, the proposed fee
schedule defines the term ‘‘Equity
ATS.’’ First, paragraph (a)(2) defines an
‘‘ATS’’ to mean an alternative trading
system as defined in Rule 300(a) of
Regulation ATS under the Securities
Exchange Act of 1934, as amended, that
operates pursuant to Rule 301 of
Regulation ATS. This is the same
definition of an ATS as set forth in
Section 1.1 of the CAT NMS Plan in the
definition of an ‘‘Execution Venue.’’
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Then, paragraph (a)(4) defines an
‘‘Equity ATS’’ as an ATS that executes
transactions in NMS Stocks and/or OTC
Equity Securities.
Paragraph (a)(3) of the proposed fee
schedule defines the term ‘‘CAT Fee’’ to
mean the Consolidated Audit Trail
Funding Fee(s) to be paid by Industry
Members as set forth in paragraph (b) in
the proposed fee schedule.
Finally, Paragraph (a)(6) defines an
‘‘Execution Venue’’ as a Participant or
an ATS (excluding any such ATS that
does not execute orders). This definition
is the same substantive definition as set
forth in Section 1.1 of the CAT NMS
Plan. Paragraph (a)(5) defines an
‘‘Equity Execution Venue’’ as an
Execution Venue that trades NMS
Stocks and/or OTC Equity Securities.
(B) Fee Schedule
The Exchange proposes to impose the
CAT Fees applicable to its Industry
Members through paragraph (b) of the
proposed fee schedule. Paragraph (b)(1)
of the proposed fee schedule sets forth
the CAT Fees applicable to Industry
Members other than Equity ATSs.
Specifically, paragraph (b)(1) states that
the Company will assign each Industry
Member (other than an Equity ATS) to
a fee tier once every quarter, where such
tier assignment is calculated by ranking
each Industry Member based on its total
message traffic (with discounts for
equity market maker quotes and Options
Market Maker quotes based on the trade
to quote ratio for equities and options,
respectively) for the three months prior
to the quarterly tier calculation day and
assigning each Industry Member to a tier
based on that ranking and predefined
Industry Member percentages. The
Industry Members with the highest total
quarterly message traffic will be ranked
in Tier 1, and the Industry Members
with lowest quarterly message traffic
will be ranked in Tier 7. Each quarter,
each Industry Member (other than an
Equity ATS) shall pay the following
CAT Fee corresponding to the tier
assigned by the Company for such
Industry Member for that quarter:
sradovich on DSK3GMQ082PROD with NOTICES
Tier
1
2
3
4
5
6
7
................
................
................
................
................
................
................
Percentage
of Industry
Members
0.900
2.150
2.800
7.750
8.300
18.800
59.300
Quarterly
CAT fee
$81,483
59,055
40,899
25,566
7,428
1,968
105
Paragraph (b)(2) of the proposed fee
schedule sets forth the CAT Fees
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21:28 Dec 13, 2017
Jkt 244001
applicable to Equity ATSs.60 These are
the same fees that Participants that trade
NMS Stocks and/or OTC Equity
Securities will pay. Specifically,
paragraph (b)(2) states that the Company
will assign each Equity ATS to a fee tier
once every quarter, where such tier
assignment is calculated by ranking
each Equity Execution Venue based on
its total market share of NMS Stocks and
OTC Equity Securities (with a discount
for the OTC Equity Securities market
share of Equity ATSs trading OTC
Equity Securities based on the average
shares per trade ratio between NMS
Stocks and OTC Equity Securities) for
the three months prior to the quarterly
tier calculation day and assigning each
Equity ATS to a tier based on that
ranking and predefined Equity
Execution Venue percentages. The
Equity ATSs with the higher total
quarterly market share will be ranked in
Tier 1, and the Equity ATSs with the
lowest quarterly market share will be
ranked in Tier 4. Specifically, paragraph
(b)(2) states that, each quarter, each
Equity ATS shall pay the following CAT
Fee corresponding to the tier assigned
by the Company for such Equity ATS for
that quarter:
Tier
1
2
3
4
Percentage
of Equity
Execution
Venues
................
................
................
................
25.00
42.00
23.00
10.00
Quarterly
CAT fee
$81,048
37,062
21,126
129
(C) Timing and Manner of Payment
Section 11.4 of the CAT NMS Plan
states that the Operating Committee
shall establish a system for the
collection of fees authorized under the
CAT NMS Plan. The Operating
Committee may include such collection
responsibility as a function of the Plan
Processor or another administrator. To
implement the payment process to be
adopted by the Operating Committee,
paragraph (c)(1) of the proposed fee
schedule states that the Company will
provide each Industry Member with one
invoice each quarter for its CAT Fees as
determined pursuant to paragraph (b) of
the proposed fee schedule, regardless of
whether the Industry Member is a
member of multiple self-regulatory
organizations. Paragraph (c)(1) further
states that each Industry Member will
pay its CAT Fees to the Company via
60 Note that no fee schedule is provided for
Execution Venue ATSs that execute transactions in
Listed Options, as no such Execution Venue ATSs
currently exist due to trading restrictions related to
Listed Options.
PO 00000
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58961
the centralized system for the collection
of CAT Fees established by the
Company in the manner prescribed by
the Company. The Exchange will
provide Industry Members with details
regarding the manner of payment of
CAT Fees by Regulatory Notice.
All CAT fees will be billed and
collected centrally through the
Company via the Plan Processor.
Although each Participant will adopt its
own fee schedule regarding CAT Fees,
no CAT Fees or portion thereof will be
collected by the individual Participants.
Each Industry Member will receive from
the Company one invoice for its
applicable CAT fees, not separate
invoices from each Participant of which
it is a member. The Industry Members
will pay the CAT Fees to the Company
via the centralized system for the
collection of CAT fees established by
the Company.61
Section 11.4 of the CAT NMS Plan
also states that Participants shall require
each Industry Member to pay all
applicable authorized CAT Fees within
thirty days after receipt of an invoice or
other notice indicating payment is due
(unless a longer payment period is
otherwise indicated). Section 11.4
further states that, if an Industry
Member fails to pay any such fee when
due, such Industry Member shall pay
interest on the outstanding balance from
such due date until such fee is paid at
a per annum rate equal to the lesser of:
(i) The Prime Rate plus 300 basis points;
or (ii) the maximum rate permitted by
applicable law. Therefore, in accordance
with Section 11.4 of the CAT NMS Plan,
the Exchange proposed to adopt
paragraph (c)(2) of the proposed fee
schedule. Paragraph (c)(2) of the
proposed fee schedule states that each
Industry Member shall pay CAT Fees
within thirty days after receipt of an
invoice or other notice indicating
payment is due (unless a longer
payment period is otherwise indicated).
If an Industry Member fails to pay any
such fee when due, such Industry
Member shall pay interest on the
outstanding balance from such due date
until such fee is paid at a per annum
rate equal to the lesser of: (i) the Prime
Rate plus 300 basis points; or (ii) the
maximum rate permitted by applicable
law.
(D) Sunset Provision
The Operating Committee has
determined to require that the CAT Fees
automatically sunset two years from the
operative date of the CAT NMS Plan
amendment adopting CAT Fees for
Participants. Accordingly, the Exchange
61 Section
E:\FR\FM\14DEN1.SGM
11.4 of the CAT NMS Plan.
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Federal Register / Vol. 82, No. 239 / Thursday, December 14, 2017 / Notices
sradovich on DSK3GMQ082PROD with NOTICES
proposes paragraph (d) of the fee
schedule, which states that ‘‘[t]hese
Consolidated Audit Trailing Funding
Fees will automatically expire two years
after the operative date of the
amendment of the CAT NMS Plan that
adopts CAT fees for the Participants.’’
(4) Changes to Prior CAT Fee Plan
Amendment
The proposed funding model set forth
in this Amendment is a revised version
of the Original Proposal. The
Commission received a number of
comment letters in response to the
Original Proposal.62 The SEC suspended
the Original Proposal and instituted
proceedings to determine whether to
approve or disapprove it.63 Pursuant to
those proceedings, additional comment
letters were submitted regarding the
proposed funding model.64 In
developing this Amendment, the
Operating Committee carefully
considered these comments and made a
number of changes to the Original
Proposal to address these comments
where appropriate.
This Amendment makes the following
changes to the Original Proposal: (1)
Adds two additional CAT Fee tiers for
Equity Execution Venues; (2) discounts
the OTC Equity Securities market share
of Execution Venue ATSs trading OTC
Equity Securities as well as the market
share of the FINRA ORF by the average
shares per trade ratio between NMS
Stocks and OTC Equity Securities
(calculated as 0.17% based on available
data from the second quarter of 2017)
when calculating the market share of
Execution Venue ATSs trading OTC
Equity Securities and FINRA; (3)
discounts the Options Market Maker
quotes by the trade to quote ratio for
options (calculated as 0.01% based on
available data for June 2016 through
June 2017) when calculating message
traffic for Options Market Makers; (4)
discounts equity market maker quotes
by the trade to quote ratio for equities
(calculated as 5.43% based on available
data for June 2016 through June 2017)
when calculating message traffic for
equity market makers; (5) decreases the
number of tiers for Industry Members
(other than the Execution Venue ATSs)
from nine to seven; (6) changes the
allocation of CAT costs between Equity
Execution Venues and Options
Execution Venues from 75%/25% to
67%/33%; (7) adjusts tier percentages
62 For a description of the comments submitted in
response to the Original Proposal, see Suspension
Order.
63 Suspension Order.
64 See MFA Letter; SIFMA Letter; FIA Principal
Traders Group Letter; Belvedere Letter; Sidley
Letter; Group One Letter; and Virtu Financial Letter.
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21:28 Dec 13, 2017
Jkt 244001
and recovery allocations for Equity
Execution Venues, Options Execution
Venues and Industry Members (other
than Execution Venue ATSs); (8)
focuses the comparability of CAT Fees
on the individual entity level, rather
than primarily on the comparability of
affiliated entities; (9) commences
invoicing of CAT Reporters as promptly
as possible following the latest of the
operative date of the Consolidated Audit
Trail Funding Fees for each of the
Participants and the operative date of
the CAT NMS Plan amendment
adopting CAT Fees for Participants; and
(10) requires the proposed fees to
automatically expire two years from the
operative date of the CAT NMS Plan
amendment adopting CAT Fees for the
Participants.
(A) Equity Execution Venues
(i) Small Equity Execution Venues
In the Original Proposal, the
Operating Committee proposed to
establish two fee tiers for Equity
Execution Venues. The Commission and
commenters raised the concern that, by
establishing only two tiers, smaller
Equity Execution Venues (e.g., those
Equity ATSs representing less than 1%
of NMS market share) would be placed
in the same fee tier as larger Equity
Execution Venues, thereby imposing an
undue or inappropriate burden on
competition.65 To address this concern,
the Operating Committee proposes to
add two additional tiers for Equity
Execution Venues, a third tier for
smaller Equity Execution Venues and a
fourth tier for the smallest Equity
Execution Venues.
Specifically, the Original Proposal
had two tiers of Equity Execution
Venues. Tier 1 required the largest
Equity Execution Venues to pay a
quarterly fee of $63,375. Based on
available data, these largest Equity
Execution Venues were those that had
equity market share of share volume
greater than or equal to 1%.66 Tier 2
required the remaining smaller Equity
Execution Venues to pay a quarterly fee
of $38,820.
To address concerns about the
potential for the $38,820 quarterly fee to
65 See
Suspension Order at 31664; SIFMA Letter
at 3.
66 Note that while these equity market share
thresholds were referenced as data points to help
differentiate between Equity Execution Venue tiers,
the proposed funding model is directly driven not
by market share thresholds, but rather by fixed
percentages of Equity Execution Venues across tiers
to account for fluctuating levels of market share
across time. Actual market share in any tier will
vary based on the actual market activity in a given
measurement period, as well as the number of
Equity Execution Venues included in the
measurement period.
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Sfmt 4703
impose an undue burden on smaller
Equity Execution Venues, the Operating
Committee determined to move to a four
tier structure for Equity Execution
Venues. Tier 1 would continue to
include the largest Equity Execution
Venues by share volume (that is, based
on currently available data, those with
market share of equity share volume
greater than or equal to one percent),
and these Equity Execution Venues
would be required to pay a quarterly fee
of $81,048. The Operating Committee
determined to divide the original Tier 2
into three tiers. The new Tier 2 Equity
Execution Venues, which would
include the next largest Equity
Execution Venues by equity share
volume, would be required to pay a
quarterly fee of $37,062. The new Tier
3 Equity Execution Venues would be
required to pay a quarterly fee of
$21,126. The new Tier 4 Equity
Execution Venues, which would
include the smallest Equity Execution
Venues by share volume, would be
required to pay a quarterly fee of $129.
In developing the proposed four tier
structure, the Operating Committee
considered keeping the existing two
tiers, as well as shifting to three, four or
five Equity Execution Venue tiers (the
maximum number of tiers permitted
under the Plan), to address the concerns
regarding small Equity Execution
Venues. For each of the two, three, four
and five tier alternatives, the Operating
Committee considered the assignment of
various percentages of Equity Execution
Venues to each tier as well as various
percentage of Equity Execution Venue
recovery allocations for each alternative.
As discussed below in more detail, each
of these options was considered in the
context of the full model, as changes in
each variable in the model affect other
variables in the model when allocating
the total CAT costs among CAT
Reporters. The Operating Committee
determined that the four tier alternative
addressed the spectrum of different
Equity Execution Venues. The
Operating Committee determined that
neither a two tier structure nor a three
tier structure sufficiently accounted for
the range of market shares of smaller
Equity Execution Venues. The
Operating Committee also determined
that, given the limited number of Equity
Execution Venues, that a fifth tier was
unnecessary to address the range of
market shares of the Equity Execution
Venues.
By increasing the number of tiers for
Equity Execution Venues and reducing
the proposed CAT Fees for the smaller
Equity Execution Venues, the Operating
Committee believes that the proposed
fees for Equity Execution Venues would
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not impose an undue or inappropriate
burden on competition under Section 6
or Section 15A of the Exchange Act.
Moreover, the Operating Committee
believes that the proposed fees
appropriately take into account the
distinctions in the securities trading
operations of different Equity Execution
Venues, as required under the funding
principles of the CAT NMS Plan.67 The
larger number of tiers more closely
tracks the variety of sizes of equity share
volume of Equity Execution Venues. In
addition, the reduction in the fees for
the smaller Equity Execution Venues
recognizes the potential burden of larger
fees on smaller entities. In particular,
the very small quarterly fee of $129 for
Tier 4 Equity Execution Venues reflects
the fact that certain Equity Execution
Venues have a very small share volume
due to their typically more focused
business models.
Accordingly, with this Amendment,
the Exchange proposes to amend
paragraph (b)(2) of the proposed fee
schedule to add the two additional tiers
for Equity Execution Venues, to
establish the percentages and fees for
Tiers 3 and 4 as described, and to revise
the percentages and fees for Tiers 1 and
2 as described.
sradovich on DSK3GMQ082PROD with NOTICES
(ii) Execution Venues for OTC Equity
Securities
In the Original Proposal, the
Operating Committee proposed to group
Execution Venues for OTC Equity
Securities and Execution Venues for
NMS Stocks in the same tier structure.
The Commission and commenters
raised concerns as to whether this
determination to place Execution
Venues for OTC Equity Securities in the
same tier structure as Execution Venues
for NMS Stocks would result in an
undue or inappropriate burden on
competition, recognizing that the
application of share volume may lead to
different outcomes as applied to OTC
Equity Securities and NMS Stocks.68 To
address this concern, the Operating
Committee proposes to discount the
OTC Equity Securities market share of
Execution Venue ATSs trading OTC
Equity Securities as well as the market
share of the FINRA ORF by the average
shares per trade ratio between NMS
Stocks and OTC Equity Securities
(0.17% for the second quarter of 2017)
in order to adjust for the greater number
of shares being traded in the OTC Equity
Securities market, which is generally a
function of a lower per share price for
ranked in Tier 3 and would owe a
quarterly fee of $21,126.
In developing the proposed discount
for Equity Execution Venue ATSs
trading OTC Equity Securities and
FINRA, the Operating Committee
evaluated different alternatives to
address the concerns related to OTC
Equity Securities, including creating a
separate tier structure for Execution
Venues trading OTC Equity Securities
(like the separate tier for Options
Execution Venues) as well as the
proposed discounting method for
Execution Venue ATSs trading OTC
Equity Securities and FINRA. For these
alternatives, the Operating Committee
considered how each alternative would
affect the recovery allocations. In
addition, each of these options was
considered in the context of the full
model, as changes in each variable in
the model affect other variables in the
model when allocating the total CAT
costs among CAT Reporters. The
Operating Committee did not adopt a
separate tier structure for Equity
Execution Venues trading OTC Equity
Securities as they determined that the
proposed discount approach
appropriately addresses the concern.
The Operating Committee determined to
adopt the proposed discount because it
directly relates to the concern regarding
the trading patterns and operations in
the OTC Equity Securities markets, and
is an objective discounting method.
By increasing the number of tiers for
Equity Execution Venues and imposing
a discount on the market share of share
volume calculation for trading in OTC
Equity Securities, the Operating
Committee believes that the proposed
fees for Equity Execution Venues would
not impose an undue or inappropriate
burden on competition under Section 6
or Section 15A of the Exchange Act.
Moreover, the Operating Committee
believes that the proposed fees
appropriately take into account the
distinctions in the securities trading
operations of different Equity Execution
Venues, as required under the funding
principles of the CAT NMS Plan.70 As
discussed above, the larger number of
tiers more closely tracks the variety of
sizes of equity share volume of Equity
Execution Venues. In addition, the
proposed discount recognizes the
different types of trading operations at
Equity Execution Venues trading OTC
Equity Securities versus those trading
NMS Stocks, thereby more closing
matching the relative revenue
generation by Equity Execution Venues
67 Section
68 See
11.2(b) of the CAT NMS Plan.
Suspension Order at 31664–5.
OTC Equity Securities when compared
to NMS Stocks.
As commenters noted, many OTC
Equity Securities are priced at less than
one dollar—and a significant number at
less than one penny—and low-priced
shares tend to trade in larger quantities.
Accordingly, a disproportionately large
number of shares are involved in
transactions involving OTC Equity
Securities versus NMS Stocks, which
has the effect of overstating an
Execution Venue’s true market share
when the Execution Venue is involved
in the trading of OTC Equity Securities.
Because the proposed fee tiers are based
on market share calculated by share
volume, Execution Venue ATSs trading
OTC Equity Securities and FINRA may
be subject to higher tiers than their
operations may warrant.69 The
Operating Committee proposes to
address this concern in two ways. First,
the Operating Committee proposes to
increase the number of Equity Execution
Venue tiers, as discussed above. Second,
the Operating Committee determined to
discount the OTC Equity Securities
market share of Execution Venue ATSs
trading OTC Equity Securities as well as
the market share of the FINRA ORF
when calculating their tier placement.
Because the disparity in share volume
between Execution Venues trading in
OTC Equity Securities and NMS Stocks
is based on the different number of
shares per trade for OTC Equity
Securities and NMS Stocks, the
Operating Committee believes that
discounting the OTC Equity Securities
share volume of such Execution Venue
ATSs as well as the market share of the
FINRA ORF would address the
difference in shares per trade for OTC
Equity Securities and NMS Stocks.
Specifically, the Operating Committee
proposes to impose a discount based on
the objective measure of the average
shares per trade ratio between NMS
Stocks and OTC Equity Securities.
Based on available data from the second
quarter of 2017, the average shares per
trade ratio between NMS Stocks and
OTC Equity Securities is 0.17%.
The practical effect of applying such
a discount for trading in OTC Equity
Securities is to shift Execution Venue
ATSs trading OTC Equity Securities to
tiers for smaller Execution Venues and
with lower fees. For example, under the
Original Proposal, one Execution Venue
ATS trading OTC Equity Securities was
placed in the first CAT Fee tier, which
had a quarterly fee of $63,375. With the
imposition of the proposed tier changes
and the discount, this ATS would be
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70 Section
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trading OTC Equity Securities to their
CAT Fees.
Accordingly, with this Amendment,
the Exchange proposes to amend
paragraph (b)(2) of the proposed fee
schedule to indicate that the OTC
Equity Securities market share for
Equity ATSs trading OTC Equity
Securities as well as the market share of
the FINRA ORF would be discounted. In
addition, as discussed above, to address
concerns related to smaller ATSs,
including those that trade OTC Equity
Securities, the Exchange proposes to
amend paragraph (b)(2) of the proposed
fee schedule to add two additional tiers
for Equity Execution Venues, to
establish the percentages and fees for
Tiers 3 and 4 as described, and to revise
the percentages and fees for Tiers 1 and
2 as described.
sradovich on DSK3GMQ082PROD with NOTICES
(B) Market Makers
In the Original Proposal, the
Operating Committee proposed to
include both Options Market Maker
quotes and equities market maker
quotes in the calculation of total
message traffic for such market makers
for purposes of tiering for Industry
Members (other than Execution Venue
ATSs). The Commission and
commenters raised questions as to
whether the proposed treatment of
Options Market Maker quotes may
result in an undue or inappropriate
burden on competition or may lead to
a reduction in market quality.71 To
address this concern, the Operating
Committee determined to discount the
Options Market Maker quotes by the
trade to quote ratio for options when
calculating message traffic for Options
Market Makers. Similarly, to avoid
disincentives to quoting behavior on the
equities side as well, the Operating
Committee determined to discount
equity market maker quotes by the trade
to quote ratio for equities when
calculating message traffic for equities
market makers.
In the Original Proposal, market
maker quotes were treated the same as
other message traffic for purposes of
tiering for Industry Members (other than
Execution Venue ATSs). Commenters
noted, however, that charging Industry
Members on the basis of message traffic
will impact market makers
disproportionately because of their
continuous quoting obligations.
Moreover, in the context of options
market makers, message traffic would
include bids and offers for every listed
71 See Suspension Order at 31663–4; SIFMA
Letter at 4–6; FIA Principal Traders Group Letter at
3; Sidley Letter at 2–6; Group One Letter at 2–6; and
Belvedere Letter at 2.
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options strikes and series, which are not
an issue for equities.72 The Operating
Committee proposes to address this
concern in two ways. First, the
Operating Committee proposes to
discount Options Market Maker quotes
when calculating the Options Market
Makers’ tier placement. Specifically, the
Operating Committee proposes to
impose a discount based on the
objective measure of the trade to quote
ratio for options. Based on available
data from June 2016 through June 2017,
the trade to quote ratio for options is
0.01%. Second, the Operating
Committee proposes to discount
equities market maker quotes when
calculating the equities market makers’
tier placement. Specifically, the
Operating Committee proposes to
impose a discount based on the
objective measure of the trade to quote
ratio for equities. Based on available
data for June 2016 through June 2017,
this trade to quote ratio for equities is
5.43%.
The practical effect of applying such
discounts for quoting activity is to shift
market makers’ calculated message
traffic lower, leading to the potential
shift to tiers for lower message traffic
and reduced fees. Such an approach
would move sixteen Industry Member
CAT Reporters that are market makers to
a lower tier than in the Original
Proposal. For example, under the
Original Proposal, Broker-Dealer Firm
ABC was placed in the first CAT Fee
tier, which had a quarterly fee of
$101,004. With the imposition of the
proposed tier changes and the discount,
Broker-Dealer Firm ABC, an options
market maker, would be ranked in Tier
3 and would owe a quarterly fee of
$40,899.
In developing the proposed market
maker discounts, the Operating
Committee considered various
discounts for Options Market Makers
and equity market makers, including
discounts of 50%, 25%, 0.00002%, as
well as the 5.43% for option market
makers and 0.01% for equity market
makers. Each of these options were
considered in the context of the full
model, as changes in each variable in
the model affect other variables in the
model when allocating the total CAT
costs among CAT Reporters. The
Operating Committee determined to
adopt the proposed discount because it
directly relates to the concern regarding
the quoting requirement, is an objective
discounting method, and has the
desired potential to shift market makers
to lower fee tiers.
72 Suspension
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Fmt 4703
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By imposing a discount on Options
Market Makers and equities market
makers’ quoting traffic for the
calculation of message traffic, the
Operating Committee believes that the
proposed fees for market makers would
not impose an undue or inappropriate
burden on competition under Section 6
or Section 15A of the Exchange Act.
Moreover, the Operating Committee
believes that the proposed fees
appropriately take into account the
distinctions in the securities trading
operations of different Industry
Members, and avoid disincentives, such
as a reduction in market quality, as
required under the funding principles of
the CAT NMS Plan.73 The proposed
discounts recognize the different types
of trading operations presented by
Options Market Makers and equities
market makers, as well as the value of
the market makers’ quoting activity to
the market as a whole. Accordingly, the
Operating Committee believes that the
proposed discounts will not impact the
ability of small Options Market Makers
or equities market makers to provide
liquidity.
Accordingly, with this Amendment,
the Exchange proposes to amend
paragraph (b)(1) of the proposed fee
schedule to indicate that the message
traffic related to equity market maker
quotes and Options Market Maker
quotes would be discounted. In
addition, the Exchange proposes to
define the term ‘‘Options Market
Maker’’ in paragraph (a)(1) of the
proposed fee schedule.
(C) Comparability/Allocation of Costs
Under the Original Proposal, 75% of
CAT costs were allocated to Industry
Members (other than Execution Venue
ATSs) and 25% of CAT costs were
allocated to Execution Venues. This cost
allocation sought to maintain the
greatest level of comparability across the
funding model, where comparability
considered affiliations among or
between CAT Reporters. The
Commission and commenters expressed
concerns regarding whether the
proposed 75%/25% allocation of CAT
costs is consistent with the Plan’s
funding principles and the Exchange
Act, including whether the allocation
places a burden on competition or
reduces market quality. The
Commission and commenters also
questioned whether the approach of
accounting for affiliations among CAT
Reporters in setting CAT Fees
disadvantages non-affiliated CAT
Reporters or otherwise burdens
73 Section
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competition in the market for trading
services.74
In response to these concerns, the
Operating Committee determined to
revise the proposed funding model to
focus the comparability of CAT Fees on
the individual entity level, rather than
primarily on the comparability of
affiliated entities. In light of the
interconnected nature of the various
aspects of the funding model, the
Operating Committee determined to
revise various aspects of the model to
enhance comparability at the individual
entity level. Specifically, to achieve
such comparability, the Operating
Committee determined to (1) decrease
the number of tiers for Industry
Members (other than Execution Venue
ATSs) from nine to seven; (2) change the
allocation of CAT costs between Equity
Execution Venues and Options
Execution Venues from 75%/25% to
67%/33%; and (3) adjust tier
percentages and recovery allocations for
Equity Execution Venues, Options
Execution Venues and Industry
Members (other than Execution Venue
ATSs). With these changes, the
proposed funding model provides fee
comparability for the largest individual
entities, with the largest Industry
Members (other than Execution Venue
ATSs), Equity Execution Venues and
Options Execution Venues each paying
a CAT Fee of approximately $81,000
each quarter.
(i) Number of Industry Member Tiers
In the Original Proposal, the proposed
funding model had nine tiers for
Industry Members (other than Execution
Venue ATSs). The Operating Committee
determined that reducing the number of
tiers from nine tiers to seven tiers (and
adjusting the predefined Industry
Member Percentages as well) continues
to provide a fair allocation of fees
among Industry Members and
appropriately distinguishes between
Industry Members with differing levels
of message traffic. In reaching this
conclusion, the Operating Committee
considered historical message traffic
generated by Industry Members across
all exchanges and as submitted to
FINRA’s OATS, and considered the
distribution of firms with similar levels
of message traffic, grouping together
firms with similar levels of message
traffic. Based on this, the Operating
Committee determined that seven tiers
would group firms with similar levels of
message traffic, while also achieving
greater comparability in the model for
74 See Suspension Order at 31662–3; SIFMA
Letter at 3; Sidley Letter at 6–7; Group One Letter
at 2; and Belvedere Letter at 2.
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the individual CAT Reporters with the
greatest market share or message traffic.
In developing the proposed seven tier
structure, the Operating Committee
considered remaining at nine tiers, as
well as reducing the number of tiers
down to seven when considering how to
address the concerns raised regarding
comparability. For each of the
alternatives, the Operating Committee
considered the assignment of various
percentages of Industry Members to
each tier as well as various percentages
of Industry Member recovery allocations
for each alternative. Each of these
options was considered in the context of
its effects on the full funding model, as
changes in each variable in the model
affect other variables in the model when
allocating the total CAT costs among
CAT Reporters. The Operating
Committee determined that the seven
tier alternative provided the most fee
comparability at the individual entity
level for the largest CAT Reporters,
while both providing logical breaks in
tiering for Industry Members with
different levels of message traffic and a
sufficient number of tiers to provide for
the full spectrum of different levels of
message traffic for all Industry
Members.
(ii) Allocation of CAT Costs Between
Equity and Options Execution Venues
The Operating Committee also
determined to adjust the allocation of
CAT costs between Equity Execution
Venues and Options Execution Venues
to enhance comparability at the
individual entity level. In the Original
Proposal, 75% of Execution Venue CAT
costs were allocated to Equity Execution
Venues, and 25% of Execution Venue
CAT costs were allocated to Options
Execution Venues. To achieve the goal
of increased comparability at the
individual entity level, the Operating
Committee analyzed a range of
alternative splits for revenue recovery
between Equity and Options Execution
Venues, along with other changes in the
proposed funding model. Based on this
analysis, the Operating Committee
determined to allocate 67 percent of
Execution Venue costs recovered to
Equity Execution Venues and 33 percent
to Options Execution Venues. The
Operating Committee determined that a
67/33 allocation between Equity and
Options Execution Venues enhances the
level of fee comparability for the largest
CAT Reporters. Specifically, the largest
Equity and Options Execution Venues
would pay a quarterly CAT Fee of
approximately $81,000.
In developing the proposed allocation
of CAT costs between Equity and
Options Execution Venues, the
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58965
Operating Committee considered
various different options for such
allocation, including keeping the
original 75%25% allocation, as well as
shifting to a 70%/30%, 67%/33%, or
57.75%/42.25% allocation. For each of
the alternatives, the Operating
Committee considered the effect each
allocation would have on the
assignment of various percentages of
Equity Execution Venues to each tier as
well as various percentages of Equity
Execution Venue recovery allocations
for each alternative. Moreover, each of
these options was considered in the
context of the full model, as changes in
each variable in the model affect other
variables in the model when allocating
the total CAT costs among CAT
Reporters. The Operating Committee
determined that the 67%/33%
allocation between Equity and Options
Execution Venues provided the greatest
level of fee comparability at the
individual entity level for the largest
CAT Reporters, while still providing for
appropriate fee levels across all tiers for
all CAT Reporters.
(iii) Allocation of Costs Between
Execution Venues and Industry
Members
The Operating Committee determined
to allocate 25% of CAT costs to
Execution Venues and 75% to Industry
Members (other than Execution Venue
ATSs), as it had in the Original
Proposal. The Operating Committee
determined that this 75%/25%
allocation, along with the other changes
proposed above, led to the most
comparable fees for the largest Equity
Execution Venues, Options Execution
Venues and Industry Members (other
than Execution Venue ATSs). The
largest Equity Execution Venues,
Options Execution Venues and Industry
Members (other than Execution Venue
ATSs) would each pay a quarterly CAT
Fee of approximately $81,000.
As a preliminary matter, the
Operating Committee determined that it
is appropriate to allocate most of the
costs to create, implement and maintain
the CAT to Industry Members for
several reasons. First, there are many
more broker-dealers expected to report
to the CAT than Participants (i.e., 1,541
broker-dealer CAT Reporters versus 22
Participants). Second, since most of the
costs to process CAT reportable data is
generated by Industry Members,
Industry Members could be expected to
contribute toward such costs. Finally, as
noted by the SEC, the CAT
‘‘substantially enhance[s] the ability of
the SROs and the Commission to
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oversee today’s securities markets,’’ 75
thereby benefitting all market
participants. After making this
determination, the Operating Committee
analyzed several different cost
allocations, as discussed further below,
and determined that an allocation where
75% of the CAT costs should be borne
by the Industry Members (other than
Execution Venue ATSs) and 25%
should be paid by Execution Venues
was most appropriate and led to the
greatest comparability of CAT Fees for
the largest CAT Reporters.
In developing the proposed allocation
of CAT costs between Execution Venues
and Industry Members (other than
Execution Venue ATSs), the Operating
Committee considered various different
options for such allocation, including
keeping the original 75%/25%
allocation, as well as shifting to an 80%/
20%, 70%/30%, or 65%/35%
allocation. Each of these options was
considered in the context of the full
model, including the effect on each of
the changes discussed above, as changes
in each variable in the model affect
other variables in the model when
allocating the total CAT costs among
CAT Reporters. In particular, for each of
the alternatives, the Operating
Committee considered the effect each
allocation had on the assignment of
various percentages of Equity Execution
Venues, Options Execution Venues and
Industry Members (other than Execution
Venue ATSs) to each relevant tier as
well as various percentages of recovery
allocations for each tier. The Operating
Committee determined that the 75%/
25% allocation between Execution
Venues and Industry Members (other
than Execution Venue ATSs) provided
the greatest level of fee comparability at
the individual entity level for the largest
CAT Reporters, while still providing for
appropriate fee levels across all tiers for
all CAT Reporters.
(iv) Affiliations
The funding principles set forth in
Section 11.2 of the Plan require that the
fees charged to 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 Venue and/or Industry
Members). The proposed funding model
satisfies this requirement. As discussed
above, under the proposed funding
75 Securities Exchange Act Release No. 67457
(July 18, 2012), 77 FR 45722, 45726 (August 1,
2012) (‘‘Rule 613 Adopting Release’’).
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model, the largest Equity Execution
Venues, Options Execution Venues, and
Industry Members (other than Execution
Venue ATSs) pay approximately the
same fee. Moreover, the Operating
Committee believes that the proposed
funding model takes into consideration
affiliations between or among CAT
Reporters as complexes with multiple
CAT Reporters will pay the appropriate
fee based on the proposed fee schedule
for each of the CAT Reporters in the
complex. For example, a complex with
a Tier 1 Equity Execution Venue and
Tier 2 Industry Member will a pay the
same as another complex with a Tier 1
Equity Execution Venue and Tier 2
Industry Member.
(v) Fee Schedule Changes
Accordingly, with this Amendment,
the Exchange proposes to amend
paragraphs (b)(1) and (2) of the
proposed fee schedule to reflect the
changes discussed in this section.
Specifically, the Exchange proposes to
amend paragraph (b)(1) and (2) of the
proposed fee schedule to update the
number of tiers, and the fees and
percentages assigned to each tier to
reflect the described changes.
(D) Market Share/Message Traffic
In the Original Proposal, the
Operating Committee proposed to
charge Execution Venues based on
market share and Industry Members
(other than Execution Venue ATSs)
based on message traffic. Commenters
questioned the use of the two different
metrics for calculating CAT Fees.76 The
Operating Committee continues to
believe that the proposed use of market
share and message traffic satisfies the
requirements of the Exchange Act and
the funding principles set forth in the
CAT NMS Plan. Accordingly, the
proposed funding model continues to
charge Execution Venues based on
market share and Industry Members
(other than Execution Venue ATSs)
based on message traffic.
In drafting the Plan and the Original
Proposal, the Operating Committee
expressed the view that the correlation
between message traffic and size does
not apply to Execution Venues, which
they described as producing similar
amounts of message traffic regardless of
size. The Operating Committee believed
that charging Execution Venues based
on message traffic would result in both
large and small Execution Venues
paying comparable fees, which would
be inequitable, so the Operating
Committee determined that it would be
76 Suspension Order at 31663; FIA Principal
Traders Group Letter at 2.
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more appropriate to treat Execution
Venues differently from Industry
Members in the funding model. Upon a
more detailed analysis of available data,
however, the Operating Committee
noted that Execution Venues have
varying levels of message traffic.
Nevertheless, the Operating Committee
continues to believe that a bifurcated
funding model—where Industry
Members (other than Execution Venue
ATSs) are charged fees based on
message traffic and Execution Venues
are charged based on market share—
complies with the Plan and meets the
standards of the Exchange Act for the
reasons set forth below.
Charging Industry Members based on
message traffic is the most equitable
means for establishing fees for Industry
Members (other than Execution Venue
ATSs). This approach will assess fees to
Industry Members that create larger
volumes of message traffic that are
relatively higher than those fees charged
to Industry Members that create smaller
volumes of message traffic. Since
message traffic, along with fixed costs of
the Plan Processor, is a key component
of the costs of operating the CAT,
message traffic is an appropriate
criterion for placing Industry Members
in a particular fee tier.
The Operating Committee also
believes that it is appropriate to charge
Execution Venues CAT Fees based on
their market share. In contrast to
Industry Members (other than Execution
Venue ATSs), which determine the
degree to which they produce the
message traffic that constitutes CAT
Reportable Events, the CAT Reportable
Events of Execution Venues are largely
derivative of quotations and orders
received from Industry Members that
the Execution Venues are required to
display. The business model for
Execution Venues, however, is focused
on executions in their markets. As a
result, the Operating Committee
believes that it is more equitable to
charge Execution Venues based on their
market share rather than their message
traffic.
Similarly, focusing on message traffic
would make it more difficult to draw
distinctions between large and small
exchanges, including options exchanges
in particular. For instance, the
Operating Committee analyzed the
message traffic of Execution Venues and
Industry Members for the period of
April 2017 to June 2017 and placed all
CAT Reporters into a nine-tier
framework (i.e., a single tier may
include both Execution Venues and
Industry Members). The Operating
Committee’s analysis found that the
majority of exchanges (15 total) were
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grouped in Tiers 1 and 2. Moreover,
virtually all of the options exchanges
were in Tiers 1 and 2.77 Given the
concentration of options exchanges in
Tiers 1 and 2, the Operating Committee
believes that using a funding model
based purely on message traffic would
make it more difficult to distinguish
between large and small options
exchanges, as compared to the proposed
bifurcated fee approach.
In addition, the Operating Committee
also believes that it is appropriate to
treat ATSs as Execution Venues under
the proposed funding model since ATSs
have business models that are similar to
those of exchanges, and ATSs also
compete with exchanges. For these
reasons, the Operating Committee
believes that charging Execution Venues
based on market share is more
appropriate and equitable than charging
Execution Venues based on message
traffic.
sradovich on DSK3GMQ082PROD with NOTICES
(E) Time Limit
In the Original Proposal, the
Operating Committee did not impose
any time limit on the application of the
proposed CAT Fees. As discussed
above, the Operating Committee
developed the proposed funding model
by analyzing currently available
historical data. Such historical data,
however, is not as comprehensive as
data that will be submitted to the CAT.
Accordingly, the Operating Committee
believes that it will be appropriate to
revisit the funding model once CAT
Reporters have actual experience with
the funding model. Accordingly, the
Operating Committee proposes to
include a sunsetting provision in the
proposed fee model. The proposed CAT
Fees will sunset two years after the
operative date of the CAT NMS Plan
amendment adopting CAT Fees for
Participants. Specifically, the Exchange
proposes to add paragraph (d) of the
proposed fee schedule to include this
sunsetting provision. Such a provision
will provide the Operating Committee
and other market participants with the
opportunity to reevaluate the
performance of the proposed funding
model.
(F) Tier Structure/Decreasing Cost per
Unit
In the Original Proposal, the
Operating Committee determined to use
a tiered fee structure. The Commission
and commenters questioned whether
the decreasing cost per additional unit
(of message traffic in the case of
77 The Participants note that this analysis did not
place MIAX PEARL in Tier 1 or Tier 2 since the
exchange commenced trading on February 6, 2017.
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Industry Members, or of share volume
in the case of Execution Venues) in the
proposed fee schedules burdens
competition by disadvantaging small
Industry Members and Execution
Venues and/or by creating barriers to
entry in the market for trading services
and/or the market for broker-dealer
services.78
The Operating Committee does not
believe that decreasing cost per
additional unit in the proposed fee
schedules places an unfair competitive
burden on Small Industry Members and
Execution Venues. While the cost per
unit of message traffic or share volume
necessarily will decrease as volume
increases in any tiered fee model using
fixed fee percentages and, as a result,
Small Industry Members and small
Execution Venues may pay a larger fee
per message or share, this comment fails
to take account of the substantial
differences in the absolute fees paid by
Small Industry Members and small
Execution Venues as opposed to large
Industry Members and large Execution
Venues. For example, under the fee
proposals, Tier 7 Industry Members
would pay a quarterly fee of $105, while
Tier 1 Industry Members would pay a
quarterly fee of $81,483. Similarly, a
Tier 4 Equity Execution Venue would
pay a quarterly fee of $129, while a Tier
1 Equity Execution Venue would pay a
quarterly fee of $81,048. Thus, Small
Industry Members and small Execution
Venues are not disadvantaged in terms
of the total fees that they actually pay.
In contrast to a tiered model using fixed
fee percentages, the Operating
Committee believes that strictly variable
or metered funding models based on
message traffic or share volume would
be more likely to affect market behavior
and may present administrative
challenges (e.g., the costs to calculate
and monitor fees may exceed the fees
charged to the smallest CAT Reporters).
(G) Other Alternatives Considered
In addition to the various funding
model alternatives discussed above
regarding discounts, number of tiers and
allocation percentages, the Operating
Committee also discussed other possible
funding models. For example, the
Operating Committee considered
allocating the total CAT costs equally
among each of the Participants, and
then permitting each Participant to
charge its own members as it deems
appropriate.79 The Operating Committee
determined that such an approach
raised a variety of issues, including the
78 Suspension
Order at 31667.
FIA Principal Traders Group Letter at 2;
Belvedere Letter at 4.
79 See
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58967
likely inconsistency of the ensuing
charges, potential for lack of
transparency, and the impracticality of
multiple SROs submitting invoices for
CAT charges. The Operating Committee
therefore determined that the proposed
funding model was preferable to this
alternative.
(H) Industry Member Input
Commenters expressed concern
regarding the level of Industry Member
input into the development of the
proposed funding model, and certain
commenters have recommended a
greater role in the governance of the
CAT.80 The Participants previously
addressed this concern in its letters
responding to comments on the Plan
and the CAT Fees.81 As discussed in
those letters, the Participants discussed
the funding model with the
Development Advisory Group (‘‘DAG’’),
the advisory group formed to assist in
the development of the Plan, during its
original development.82 Moreover,
Industry Members currently have a
voice in the affairs of the Operating
Committee and operation of the CAT
generally through the Advisory
Committee established pursuant to Rule
613(b)(7) and Section 4.13 of the Plan.
The Advisory Committee attends all
meetings of the Operating Committee, as
well as meetings of various
subcommittees and working groups, and
provides valuable and critical input for
the Participants’ and Operating
Committee’s consideration. The
Operating Committee continues to
believe that that Industry Members have
an appropriate voice regarding the
funding of the Company.
(I) Conflicts of Interest
Commenters also raised concerns
regarding Participant conflicts of
interest in setting the CAT Fees.83 The
Participants previously responded to
this concern in both the Plan Response
Letter and the Fee Rule Response
Letter.84 As discussed in those letters,
the Plan, as approved by the SEC,
adopts various measures to protect
against the potential conflicts issues
raised by the Participants’ fee-setting
authority. Such measures include the
80 See
Suspension Order at 31662; MFA Letter at
1–2.
81 Letter from Participants to Brent J. Fields,
Secretary, SEC (Sept. 23, 2016) (‘‘Plan Response
Letter’’); Letter from CAT NMS Plan Participants to
Brent J. Fields, Secretary, SEC (June 29, 2017) (‘‘Fee
Rule Response Letter’’).
82 Fee Rule Response Letter at 2; Plan Response
Letter at 18.
83 See Suspension Order at 31662; FIA Principal
Traders Group at 3.
84 See Plan Response Letter at 16, 17; Fee Rule
Response Letter at 10–12.
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operation of the Company as a not for
profit business league and on a breakeven basis, and the requirement that the
Participants file all CAT Fees under
Section 19(b) of the Exchange Act. The
Operating Committee continues to
believe that these measures adequately
protect against concerns regarding
conflicts of interest in setting fees, and
that additional measures, such as an
independent third party to evaluate an
appropriate CAT Fee, are unnecessary.
sradovich on DSK3GMQ082PROD with NOTICES
(J) Fee Transparency
Commenters also argued that they
could not adequately assess whether the
CAT Fees were fair and equitable
because the Operating Committee has
not provided details as to what the
Participants are receiving in return for
the CAT Fees.85 The Operating
Committee provided a detailed
discussion of the proposed funding
model in the Plan, including the
expenses to be covered by the CAT Fees.
In addition, the agreement between the
Company and the Plan Processor sets
forth a comprehensive set of services to
be provided to the Company with regard
to the CAT. Such services include,
without limitation: User support
services (e.g., a help desk); tools to
allow each CAT Reporter to monitor and
correct their submissions; a
comprehensive compliance program to
monitor CAT Reporters’ adherence to
Rule 613; publication of detailed
Technical Specifications for Industry
Members and Participants; performing
data linkage functions; creating
comprehensive data security and
confidentiality safeguards; creating
query functionality for regulatory users
(i.e., the Participants, and the SEC and
SEC staff); and performing billing and
collection functions. The Operating
Committee further notes that the
services provided by the Plan Processor
and the costs related thereto were
subject to a bidding process.
(K) Funding Authority
Commenters also questioned the
authority of the Operating Committee to
impose CAT Fees on Industry
Members.86 The Participants previously
responded to this same comment in the
Plan Response Letter and the Fee Rule
Response Letter.87 As the Participants
previously noted, SEC Rule 613
specifically contemplates broker-dealers
contributing to the funding of the CAT.
In addition, as noted by the SEC, the
85 See FIA Principal Traders Group at 3; SIFMA
Letter at 3.
86 See Suspension Order at 31661–2; SIFMA
Letter at 2.
87 See Plan Response Letter at 9–10; Fee Rule
Response Letter at 3–4.
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CAT ‘‘substantially enhance[s] the
ability of the SROs and the Commission
to oversee today’s securities markets,’’ 88
thereby benefitting all market
participants. Therefore, the Operating
Committing continues to believe that it
is equitable for both Participants and
Industry Members to contribute to
funding the cost of the CAT.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,89 in general, and furthers the
objectives of Sections 6(b)(4) and 6(b)(5)
of the Act,90 in particular, in that it
provides for the equitable allocation of
reasonable dues, fees, and other charges
among members and issuers and other
persons using any facility, is not
designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers, and is
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, and, in general, to protect
investors and the public interest. As
discussed above, the SEC approved the
bifurcated, tiered, fixed fee funding
model in the CAT NMS Plan, finding it
was reasonable and that it equitably
allocated fees among Participants and
Industry Members. The Exchange
believes that the proposed tiered fees
adopted pursuant to the funding model
approved by the SEC in the CAT NMS
Plan are reasonable, equitably allocated
and not unfairly discriminatory.
The Exchange believes that this
proposal is consistent with the Act
because it implements, interprets or
clarifies the provisions of the Plan, and
is designed to assist the Exchange and
its Industry Members in meeting
regulatory obligations pursuant to the
Plan. In approving the Plan, the SEC
noted that the Plan ‘‘is necessary and
appropriate in the public interest, for
the protection of investors and the
maintenance of fair and orderly markets,
to remove impediments to, and perfect
the mechanism of a national market
system, or is otherwise in furtherance of
the purposes of the Act.’’ 91 To the
extent that this proposal implements,
interprets or clarifies the Plan and
applies specific requirements to
Industry Members, the Exchange
believes that this proposal furthers the
objectives of the Plan, as identified by
the SEC, and is therefore consistent with
the Act.
88 Rule
613 Adopting Release at 45726.
U.S.C. 78f(b).
90 15 U.S.C. 78f(b)(4) and (5).
91 Approval Order at 84697.
89 15
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The Exchange believes that the
proposed tiered fees are reasonable.
First, the total CAT Fees to be collected
would be directly associated with the
costs of establishing and maintaining
the CAT, where such costs include Plan
Processor costs and costs related to
insurance, third party services and the
operational reserve. The CAT Fees
would not cover Participant services
unrelated to the CAT. In addition, any
surplus CAT Fees cannot be distributed
to the individual Participants; such
surpluses must be used as a reserve to
offset future fees. Given the direct
relationship between the fees and the
CAT costs, the Exchange believes that
the total level of the CAT Fees is
reasonable.
In addition, the Exchange believes
that the proposed CAT Fees are
reasonably designed to allocate the total
costs of the CAT equitably between and
among the Participants and Industry
Members, and are therefore not unfairly
discriminatory. As discussed in detail
above, the proposed tiered fees impose
comparable fees on similarly situated
CAT Reporters. For example, those with
a larger impact on the CAT (measured
via message traffic or market share) pay
higher fees, whereas CAT Reporters
with a smaller impact pay lower fees.
Correspondingly, the tiered structure
lessens the impact on smaller CAT
Reporters by imposing smaller fees on
those CAT Reporters with less market
share or message traffic. In addition, the
fee structure takes into consideration
distinctions in securities trading
operations of CAT Reporters, including
ATSs trading OTC Equity Securities,
and equity and options market makers.
Moreover, the Exchange believes that
the division of the total CAT costs
between Industry Members and
Execution Venues, and the division of
the Execution Venue portion of total
costs between Equity and Options
Execution Venues, is reasonably
designed to allocate CAT costs among
CAT Reporters. The 75%/25% division
between Industry Members (other than
Execution Venue ATSs) and Execution
Venues maintains the greatest level of
comparability across the funding model.
For example, the cost allocation
establishes fees for the largest Industry
Members (i.e., those Industry Members
in Tiers 1) that are comparable to the
largest Equity Execution Venues and
Options Execution Venues (i.e., those
Execution Venues in Tier 1).
Furthermore, the allocation of total CAT
cost recovery recognizes the difference
in the number of CAT Reporters that are
Industry Members (other than Execution
Venue ATSs) versus CAT Reporters that
are Execution Venues. Similarly, the
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sradovich on DSK3GMQ082PROD with NOTICES
67%/33% allocation between Equity
and Options Execution Venues also
helps to provide fee comparability for
the largest CAT Reporters.
Finally, the Exchange believes that
the proposed fees are reasonable
because they would provide ease of
calculation, ease of billing and other
administrative functions, and
predictability of a fixed fee. Such factors
are crucial to estimating a reliable
revenue stream for the Company and for
permitting CAT Reporters to reasonably
predict their payment obligations for
budgeting purposes.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange notes that the proposed rule
change implements provisions of the
CAT NMS Plan approved by the
Commission, and is designed to assist
the Exchange in meeting its regulatory
obligations pursuant to the Plan.
Similarly, all national securities
exchanges and FINRA are proposing
this proposed fee schedule to
implement the requirements of the CAT
NMS Plan. Therefore, this is not a
competitive fee filing and, therefore, it
does not raise competition issues
between and among the exchanges and
FINRA.
Moreover, as previously described,
the Exchange believes that the proposed
rule change fairly and equitably
allocates costs among CAT Reporters. In
particular, the proposed fee schedule is
structured to impose comparable fees on
similarly situated CAT Reporters, and
lessen the impact on smaller CAT
Reporters. CAT Reporters with similar
levels of CAT activity will pay similar
fees. For example, Industry Members
(other than Execution Venue ATSs) with
higher levels of message traffic will pay
higher fees, and those with lower levels
of message traffic will pay lower fees.
Similarly, Execution Venue ATSs and
other Execution Venues with larger
market share will pay higher fees, and
those with lower levels of market share
will pay lower fees. Therefore, given
that there is generally a relationship
between message traffic and/or market
share to the CAT Reporter’s size, smaller
CAT Reporters generally pay less than
larger CAT Reporters. Accordingly, the
Exchange does not believe that the CAT
Fees would have a disproportionate
effect on smaller or larger CAT
Reporters. In addition, ATSs and
exchanges will pay the same fees based
on market share. Therefore, the
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Exchange does not believe that the fees
will impose any burden on the
competition between ATSs and
exchanges. Accordingly, the Exchange
believes that the proposed fees will
minimize the potential for adverse
effects on competition between CAT
Reporters in the market.
Furthermore, the tiered, fixed fee
funding model limits the disincentives
to providing liquidity to the market.
Therefore, the proposed fees are
structured to limit burdens on
competitive quoting and other liquidity
provision in the market.
In addition, the Operating Committee
believes that the proposed changes to
the Original Proposal, as discussed
above in detail, address certain
competitive concerns raised by
commenters, including concerns related
to, among other things, smaller ATSs,
ATSs trading OTC Equity Securities,
market making quoting and fee
comparability. As discussed above, the
Operating Committee believes that the
proposals address the competitive
concerns raised by commenters.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has set forth responses
to comments received regarding the
Original Proposal in Section 3(a)(4)
above.
III. Solicitation of Comments on
Amendment No. 2
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether Amendment No. 2 is
consistent with the Act. In particular,
the Commission seeks comment on the
following:
Allocation of Costs
(1) Commenters’ views as to whether
the allocation of CAT costs is consistent
with the funding principle expressed in
the CAT NMS Plan that requires the
Operating Committee to ‘‘avoid any
disincentives such as placing an
inappropriate burden on competition
and a reduction in market quality.’’ 92
(2) Commenters’ views as to whether
the allocation of 25% of CAT costs to
the Execution Venues (including all the
Participants) and 75% to Industry
Members, will incentivize or
disincentivize the Participants to
effectively and efficiently manage the
CAT costs incurred by the Participants
since they will only bear 25% of such
costs.
92 Section
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58969
(3) Commenters’ views on the
determination to allocate 75% of all
costs incurred by the Participants from
November 21, 2016 to November 21,
2017 to Industry Members (other than
Execution Venue ATSs), when such
costs are development and build costs
and when Industry Member reporting is
scheduled to commence a year later,
including views on whether such ‘‘fees,
costs and expenses . . . [are] fairly and
reasonably shared among the
Participants and Industry Members’’ in
accordance with the CAT NMS Plan.93
(4) Commenters’ views on whether an
analysis of the ratio of the expected
Industry Member-reported CAT
messages to the expected SRO-reported
CAT messages should be the basis for
determining the allocation of costs
between Industry Members and
Execution Venues.94
(5) Any additional data analysis on
the allocation of CAT costs, including
any existing supporting evidence.
Comparability
(6) Commenters’ views on the shift in
the standard used to assess the
comparability of CAT Fees, with the
emphasis now on comparability of
individual entities instead of affiliated
entities, including views as to whether
this shift is consistent with the funding
principle expressed in the CAT NMS
Plan that requires the Operating
Committee to establish a fee structure in
which the fees charged to ‘‘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).’’ 95
(7) Commenters’ views as to whether
the reduction in the number of tiers for
Industry Members (other than Execution
Venue ATSs) from nine to seven, the
revised allocation of CAT costs between
Equity Execution Venues and Options
Execution Venues from a 75%/25%
split to a 67%/33% split, and the
adjustment of all tier percentages and
recovery allocations achieves
comparability across individual entities,
and whether these changes should have
93 Section
11.1(c) of the CAT NMS Plan.
Notice for the CAT NMS Plan did not
provide a comprehensive count of audit trail
message traffic from different regulatory data
sources, but the Commission did estimate the ratio
of all SRO audit trail messages to OATS audit trail
messages to be 1.9431. See Securities Exchange Act
Release No. 77724 (April 27, 2016), 81 FR 30613,
30721 n.919 and accompanying text (May 17, 2016).
95 Section 11.2(c) of the CAT NMS Plan.
94 The
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resulted in a change to the allocation of
75% of total CAT costs to Industry
Members (other than Execution Venue
ATSs) and 25% of such costs to
Execution Venues.
Discounts
(8) Commenters’ views as to whether
the discounts for options marketmakers, equities market-makers, and
Equity ATSs trading OTC Equity
Securities are clear, reasonable, and
consistent with the funding principle
expressed in the CAT NMS Plan that
requires the Operating Committee to
‘‘avoid any disincentives such as
placing an inappropriate burden on
competition and a reduction in market
quality,’’ 96 including views as to
whether the discounts for marketmakers limit any potential disincentives
to act as a market-maker and/or to
provide liquidity due to CAT fees.
sradovich on DSK3GMQ082PROD with NOTICES
Calculation of Costs and Imposition of
CAT Fees
(9) Commenters’ views as to whether
the amendment provides sufficient
information regarding the amount of
costs incurred from November 21, 2016
to November 21, 2017, particularly, how
those costs were calculated, how those
costs relate to the proposed CAT Fees,
and how costs incurred after November
21, 2017 will be assessed upon Industry
Members and Execution Venues;
(10) Commenters’ views as to whether
the timing of the imposition and
collection of CAT Fees on Execution
Venues and Industry Members is
reasonably related to the timing of when
the Company expects to incur such
development and implementation
costs.97
(11) Commenters’ views on dividing
CAT costs equally among each of the
Participants, and then each Participant
charging its own members as it deems
appropriate, taking into consideration
the possibility of inconsistency in
charges, the potential for lack of
transparency, and the impracticality of
multiple SROs submitting invoices for
CAT charges.
Burden on Competition and Barriers to
Entry
(12) Commenters’ views as to whether
the allocation of 75% of CAT costs to
Industry Members (other than Execution
Venue ATSs) imposes any burdens on
competition to Industry Members,
including views on what baseline
competitive landscape the Commission
should consider when analyzing the
proposed allocation of CAT costs.
96 Section
97 Section
11.2(e) of the CAT NMS Plan.
11.1(c) of the CAT NMS Plan.
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(13) Commenters’ views on the
burdens on competition, including the
relevant markets and services and the
impact of such burdens on the baseline
competitive landscape in those relevant
markets and services.
(14) Commenters’ views on any
potential burdens imposed by the fees
on competition between and among
CAT Reporters, including views on
which baseline markets and services the
fees could have competitive effects on
and whether the fees are designed to
minimize such effects.
(15) Commenters’ general views on
the impact of the proposed fees on
economies of scale and barriers to entry.
(16) Commenters’ views on the
baseline economies of scale and barriers
to entry for Industry Members and
Execution Venues and the relevant
markets and services over which these
economies of scale and barriers to entry
exist.
(17) Commenters’ views as to whether
a tiered fee structure necessarily results
in less active tiers paying more per unit
than those in more active tiers, thus
creating economies of scale, with
supporting information if possible.
(18) Commenters’ views as to how the
level of the fees for the least active tiers
would or would not affect barriers to
entry.
(19) Commenters’ views on whether
the difference between the cost per unit
(messages or market share) in less active
tiers compared to the cost per unit in
more active tiers creates regulatory
economies of scale that favor larger
competitors and, if so:
(a) How those economies of scale
compare to operational economies of
scale; and
(b) Whether those economies of scale
reduce or increase the current
advantages enjoyed by larger
competitors or otherwise alter the
competitive landscape.
(20) Commenters’ views on whether
the fees could affect competition
between and among national securities
exchanges and FINRA, in light of the
fact that implementation of the fees does
not require the unanimous consent of all
such entities, and, specifically:
(a) Whether any of the national
securities exchanges or FINRA are
disadvantaged by the fees; and
(b) If so, whether any such
disadvantages would be of a magnitude
that would alter the competitive
landscape.
(21) Commenters’ views on any
potential burden imposed by the fees on
competitive quoting and other liquidity
provision in the market, including,
specifically:
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(a) Commenters’ views on the kinds of
disincentives that discourage liquidity
provision and/or disincentives that the
Commission should consider in its
analysis;
(b) Commenters’ views as to whether
the fees could disincentivize the
provision of liquidity; and
(c) Commenters’ views as to whether
the fees limit any disincentives to
provide liquidity.
(22) Commenters’ views as to whether
the amendment adequately responds to
and/or addresses comments received on
related filings.
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
PHLX–2017–037 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–PHLX 2017–37. 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 website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website 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.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–PHXL–2017–37, and
E:\FR\FM\14DEN1.SGM
14DEN1
Federal Register / Vol. 82, No. 239 / Thursday, December 14, 2017 / Notices
should be submitted on or before
January 4, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.98
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017–27009 Filed 12–13–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82264; File No. SR–
NYSEARCA–2017–52]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of
Amendment No. 1 to a Proposed Rule
Change Amending the Consolidated
Audit Trail Funding Fees
December 11, 2017.
On May 10, 2017, NYSE Arca, Inc.
(‘‘Exchange’’ or ‘‘SRO’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
adopt a fee schedule to establish the fees
for Industry Members related to the
National Market System Plan Governing
the Consolidated Audit Trail (‘‘CAT
NMS Plan’’). The proposed rule change
was published in the Federal Register
for comment on May 22, 2017.3 The
Commission received seven comment
letters on the proposed rule change,4
98 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 80698
(May 16, 2017), 82 FR 23457 (May 22, 2017)
(‘‘Original Proposal’’).
4 Since the CAT NMS Plan Participants’ proposed
rule changes to adopt fees to be charged to Industry
Members to fund the consolidated audit trail are
substantively identical, the Commission is
considering all comments received on the proposed
rule changes regardless of the comment file to
which they were submitted. See text accompanying
notes 13–16 infra, for a list of the CAT NMS Plan
Participants. 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), 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), 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), 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), available at: https://
www.sec.gov/comments/sr-cboe-2017-040/
sradovich on DSK3GMQ082PROD with NOTICES
1 15
VerDate Sep<11>2014
21:28 Dec 13, 2017
Jkt 244001
and a response to comments from the
Participants.5 On June 30, 2017, the
Commission temporarily suspended and
initiated proceedings to determine
whether to approve or disapprove the
proposed rule change.6 The Commission
thereafter received seven comment
letters,7 and a response to comments
from the Participants.8 On October 25,
2017, the Exchange filed Amendment
No. 1 to the proposed rule change, as
described in Items I and II below, which
Items have been prepared by the
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), 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), available at: https://www.sec.gov/
comments/sr-batsedgx-2017-22/batsedgx201722154443.pdf. The Commission also received a
comment letter which is not pertinent to these
proposed rule changes. See Letter from Christina
Crouch, Smart Ltd., to Brent J. Fields, Secretary,
Commission (dated June 5, 2017), available at:
https://www.sec.gov/comments/sr-batsbzx-2017-38/
batsbzx201738-1785545-153152.htm.
5 See Letter from CAT NMS Plan Participants to
Brent J. Fields, Secretary, Commission (dated June
29, 2017), available at: https://www.sec.gov/
comments/sr-batsbyx-2017-11/batsbyx2017111832632-154584.pdf.
6 See Securities Exchange Act Release No. 81067
(June 30, 2017), 82 FR 31656 (July 7, 2017).
7 See Letter from W. Hardy Callcott, Partner,
Sidley Austin LLP, to Brent J. Fields, Secretary,
Commission (dated July 27, 2017), available at:
https://www.sec.gov/comments/sr-batsbyx-2017-11/
batsbyx201711-2148338-157737.pdf; Letter from
Kevin Coleman, General Counsel and Chief
Compliance Officer, Belvedere Trading LLC, to
Brent J. Fields, Secretary, Commission (dated July
28, 2017), available at: https://www.sec.gov/
comments/sr-batsbyx-2017-11/batsbyx2017112148360-157740.pdf; Letter from Joanna Mallers,
Secretary, FIA Principal Traders Group, to Brent J.
Fields, Secretary, Commission (dated July 28, 2017),
available at: https://www.sec.gov/comments/srbatsbyx-2017-11/batsbyx201711-2151228157745.pdf; Letter from Theodore R. Lazo,
Managing Director and Associate General Counsel,
SIFMA, to Brent J. Fields, Secretary, Commission
(dated July 28, 2017), available at: https://
www.sec.gov/comments/sr-batsbyx-2017-11/
batsbyx201711-2150977-157744.pdf; Letter from
Stuart J. Kaswell, Executive Vice President and
Managing Director, General Counsel, Managed
Funds Association, to Brent J. Fields, Secretary,
Commission (dated July 28, 2017), available at:
https://www.sec.gov/comments/sr-batsbyx-2017-11/
batsbyx201711-2150818-157743.pdf; Letter from
John Kinahan, Chief Executive Officer, Group One
Trading, L.P., to Brent J. Fields, Secretary,
Commission (dated August 10, 2017), available at:
https://www.sec.gov/comments/sr-finra-2017-011/
finra2017011-2214568-160619.pdf; Letter from
Joseph Molluso, Executive Vice President and CFO,
Virtu Financial, to Brent J. Fields, Commission
(dated August 18, 2017), available at: https://
www.sec.gov/comments/sr-finra-2017-011/
finra2017011-2238648-160830.pdf.
8 See Letter from Michael Simon, Chair, CAT
NMS Plan Operating Committee, to Brent J. Fields,
Commission, Secretary (dated November 2, 2017),
available at: https://www.sec.gov/comments/srbatsbyx-2017-11/batsbyx201711-2674608161412.pdf.
PO 00000
Frm 00180
Fmt 4703
Sfmt 4703
58971
Exchange.9 On November 9, 2017, the
Commission extended the time period
within which to approve the proposed
rule change or disapprove the proposed
rule change to January 14, 2018.10 The
Commission is publishing this notice to
solicit comments from interested
persons on Amendment No. 1.11
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend the
NYSE Arca Equities Fees and Charges
(‘‘Arca Fee Schedule’’), and the NYSE
Arca Options Fees and Charges (‘‘Arca
Options Fee Schedule’’), to adopt the
fees for Industry Members related to the
National Market System Plan Governing
the Consolidated Audit Trail (the ‘‘CAT
NMS Plan’’ or ‘‘Plan’’).12 The Exchange
files this proposed rule change (the
‘‘Amendment’’) to amend the Original
Proposal. This Amendment replaces the
Original Proposal in its entirety, and
also describes the changes from the
Original Proposal. The proposed rule
change is available on the Exchange’s
website at www.nyse.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
9 Amendment No. 1 to the proposed rule change
replaces and supersedes the Original Proposal in its
entirety.
10 See Securities Exchange Act Release No. 82049
(November 9, 2017), 82 FR 53549 (November 16,
2017).
11 The Commission notes that on November 29,
2017, the Exchange filed Amendment No. 2 to the
proposed rule change. Amendment No. 2 is a partial
amendment to the proposed rule change, as
amended by Amendment No. 1. Amendment No. 2
proposes to change the parenthetical regarding the
OTC Equity Securities discount in paragraph (b)(2)
of the proposed fee schedule from ‘‘with a discount
for Equity ATSs exclusively trading OTC Equity
Securities based on the average shares per trade
ratio between NMS Stocks and OTC Equity
Securities’’ to ‘‘with a discount for OTC Equity
Securities market share of Equity ATSs trading OTC
Equity Securities based on the average shares per
trade ratio between NMS Stocks and OTC Equity
Securities.’’ Amendment No. 2 also deletes footnote
45 in Section 3(a) on page 23 of the First
Amendment which reads, ‘‘The discount is only
applied to the market share of Execution Venue
ATSs exclusively trading OTC Equity Securities.
Accordingly, FINRA’s market share, which includes
market share from the OTC Reporting Facility, is
not discounted as a result of its OTC Equity
Securities activity,’’ as the footnote is erroneous and
was included inadvertently. See Securities
Exchange Act Release No. 82265 (December 11,
2017).
12 Unless otherwise specified, capitalized terms
used in this rule filing are defined as set forth
herein, the CAT Compliance Rule Series or in the
CAT NMS Plan.
E:\FR\FM\14DEN1.SGM
14DEN1
]]>Agencies
[Federal Register Volume 82, Number 239 (Thursday, December 14, 2017)]
[Notices]
[Pages 58944-58971]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27009]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82288; File No. SR-PHLX-2017-037]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
of Amendment No. 2 to a Proposed Rule Change To Adopt Rule 7004 and
Chapter XV, Section 11
December 11, 2017.
On May 12, 2017, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'' or
``BX'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt a fee schedule to establish the fees for
Industry Members related to the National Market System Plan Governing
the Consolidated Audit Trail (``CAT NMS Plan''). The proposed rule
change was published in the Federal Register for comment on May 24,
2017.\3\ The Commission received seven comment letters on the proposed
rule change,\4\ and a response to comments from the Participants.\5\ On
June 30, 2017, the Commission temporarily suspended and initiated
proceedings to determine whether to approve or disapprove the proposed
rule change.\6\ The Commission thereafter received seven comment
letters,\7\ and a response to comments
[[Page 58945]]
from the Participants.\8\ On November 6, 2017, the Exchange filed
Amendment No. 1 to the proposed rule change.\9\ On November 9, 2017,
the Commission extended the time period within which to approve the
proposed rule change or disapprove the proposed rule change to January
14, 2018.\10\ On December 4, 2017, the Exchange filed Amendment No. 2
to the proposed rule change, as described in Items I and II below,
which Items have been prepared by the Exchange.\11\ The Commission is
publishing this notice to solicit comments from interested persons on
Amendment No. 2.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 80725 (May 18,
2017), 82 FR 23935 (May 24, 2017) (``Original Proposal'').
\4\ Since the CAT NMS Plan Participants' proposed rule changes
to adopt fees to be charged to Industry Members to fund the
consolidated audit trail are substantively identical, the Commission
is considering all comments received on the proposed rule changes
regardless of the comment file to which they were submitted. See
text accompanying notes 13-16 infra, for a list of the CAT NMS Plan
Participants. 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), 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),
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), 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), 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), 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),
available at: https://www.sec.gov/comments/sr-batsedgx-2017-22/batsedgx201722-154443.pdf. The Commission also received a comment
letter which is not pertinent to these proposed rule changes. See
Letter from Christina Crouch, Smart Ltd., to Brent J. Fields,
Secretary, Commission (dated June 5, 2017), available at: https://www.sec.gov/comments/sr-batsbzx-2017-38/batsbzx201738-1785545-153152.htm.
\5\ See Letter from CAT NMS Plan Participants to Brent J.
Fields, Secretary, Commission (dated June 29, 2017), available at:
https://www.sec.gov/comments/sr-batsbyx-2017-11/batsbyx201711-1832632-154584.pdf.
\6\ See Securities Exchange Act Release No. 81067 (June 30,
2017), 82 FR 31656 (July 7, 2017).
\7\ See Letter from W. Hardy Callcott, Partner, Sidley Austin
LLP, to Brent J. Fields, Secretary, Commission (dated July 27,
2017), available at: https://www.sec.gov/comments/sr-batsbyx-2017-11/batsbyx201711-2148338-157737.pdf; Letter from Kevin Coleman,
General Counsel and Chief Compliance Officer, Belvedere Trading LLC,
to Brent J. Fields, Secretary, Commission (dated July 28, 2017),
available at: https://www.sec.gov/comments/sr-batsbyx-2017-11/batsbyx201711-2148360-157740.pdf; Letter from Joanna Mallers,
Secretary, FIA Principal Traders Group, to Brent J. Fields,
Secretary, Commission (dated July 28, 2017), available at: https://www.sec.gov/comments/sr-batsbyx-2017-11/batsbyx201711-2151228-157745.pdf; Letter from Theodore R. Lazo, Managing Director and
Associate General Counsel, SIFMA, to Brent J. Fields, Secretary,
Commission (dated July 28, 2017), available at: https://www.sec.gov/comments/sr-batsbyx-2017-11/batsbyx201711-2150977-157744.pdf; Letter
from Stuart J. Kaswell, Executive Vice President and Managing
Director, General Counsel, Managed Funds Association, to Brent J.
Fields, Secretary, Commission (dated July 28, 2017), available at:
https://www.sec.gov/comments/sr-batsbyx-2017-11/batsbyx201711-2150818-157743.pdf; Letter from John Kinahan, Chief Executive
Officer, Group One Trading, L.P., to Brent J. Fields, Secretary,
Commission (dated August 10, 2017), available at: https://www.sec.gov/comments/sr-finra-2017-011/finra2017011-2214568-160619.pdf; Letter from Joseph Molluso, Executive Vice President and
CFO, Virtu Financial, to Brent J. Fields, Commission (dated August
18, 2017), available at: https://www.sec.gov/comments/sr-finra-2017-011/finra2017011-2238648-160830.pdf.
\8\ See Letter from Michael Simon, Chair, CAT NMS Plan Operating
Committee, to Brent J. Fields, Commission, Secretary (dated November
2, 2017), available at https://www.sec.gov/comments/sr-batsbyx-2017-11/batsbyx201711-2674608-161412.pdf.
\9\ Amendment No. 1 to the proposed rule change replaced and
superseded the Original Proposal in its entirety. Amendment No. 1 is
available on the Commission's website for Phlx at: https://www.sec.gov/comments/sr-phlx-2017-37/phlx201737-2669581-161442.pdf.
\10\ See Securities Exchange Act Release No. 82049 (November 9,
2017), 82 FR 53549 (November 16, 2017).
\11\ Amendment No. 2 replaces and supersedes Amendment No. 1 in
its entirety.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
On May 12, 2017, Nasdaq PHLX LLC filed with the Securities and
Exchange Commission (``Commission'' or ``SEC'') proposed rule change
SR-Phlx-2017-37 (the ``Original Proposal''), pursuant to which the
Exchange proposed to adopt a fee schedule to establish the fees for
Industry Members related to the National Market System Plan Governing
the Consolidated Audit Trail (the ``CAT NMS Plan'' or ``Plan'').\12\ On
November 6, 2017, the Exchange filed an amendment to the Original
Proposal (``Amendment No. 1''), which replaced the Original Proposal in
its entirety. The Exchange is now filing this Amendment No. 2 to
replace Amendment No. 1 in its entirety. This Amendment No. 2 describes
the changes from the Original Proposal.
---------------------------------------------------------------------------
\12\ Unless otherwise specified, capitalized terms used in this
fee filing are defined as set forth herein, the CAT Compliance Rule
Series, in the CAT NMS Plan, or the Original Proposal.
---------------------------------------------------------------------------
With this Amendment, the Exchange is including Exhibit 4, which
reflects the changes to the text of the proposed rule change as set
forth in the Original Proposal, and Exhibit 5, which reflects all
proposed changes to the Exchange's current rule text.
The text of the proposed rule change is available on the Exchange's
website at https://nasdaq.cchwallstreet.com, at the principal office of
the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
BOX Options Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX
Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc.,
Cboe C2 Exchange, Inc., Cboe Exchange, Inc.,\13\ Chicago Stock
Exchange, Inc., Financial Industry Regulatory Authority, Inc.
(``FINRA''), Investors' Exchange LLC, Miami International Securities
Exchange, LLC, MIAX PEARL, LLC, Nasdaq BX, Inc., Nasdaq GEMX, LLC,
Nasdaq ISE, LLC, Nasdaq MRX, LLC,\14\ Nasdaq PHLX LLC, The Nasdaq Stock
Market LLC, New York Stock Exchange LLC, NYSE American LLC,\15\ NYSE
Arca, Inc. and NYSE National, Inc.\16\ (collectively, the
``Participants'') filed with the Commission, pursuant to Section 11A of
the Exchange Act \17\ and Rule 608 of Regulation NMS thereunder,\18\
the CAT NMS Plan.\19\ The Participants filed the Plan to comply with
Rule 613 of Regulation NMS under the Exchange Act. The Plan was
published for comment in the Federal Register on May 17, 2016,\20\ and
approved by the Commission, as modified, on November 15, 2016.\21\ The
Plan is designed to create, implement and maintain a consolidated audit
trail (``CAT'') that would capture customer and order event information
for orders in NMS Securities and OTC Equity Securities, across all
markets, from the time of order inception through routing,
cancellation, modification, or execution in a single consolidated data
source. The Plan accomplishes this by creating CAT NMS, LLC (the
``Company''), of which each Participant is a member, to operate the
CAT.\22\ Under the CAT NMS Plan, the Operating Committee of the Company
(``Operating Committee'') has discretion to establish funding for the
Company to operate the CAT, including establishing fees that the
Participants will pay, and establishing fees for Industry Members that
will be implemented by the Participants (``CAT Fees'').\23\ The
Participants are required to file with the SEC under Section 19(b)
[[Page 58946]]
of the Exchange Act any such CAT Fees applicable to Industry Members
that the Operating Committee approves.\24\ Accordingly, the Exchange
submitted the Original Proposal to propose the Consolidated Audit Trail
Funding Fees, which would require Industry Members that are SRO members
to pay the CAT Fees determined by the Operating Committee.
---------------------------------------------------------------------------
\13\ Note that Bats BYX Exchange, Inc., Bats BZX Exchange, Inc.,
Bats EDGA Exchange, Inc., Bats EDGX Exchange, Inc., LLC, C2 Options
Exchange, Incorporated, and Chicago Board Options Exchange,
Incorporated, have been renamed Cboe BYX Exchange, Inc., Cboe BZX
Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc.,
Cboe C2 Exchange, Inc., Cboe Exchange, Inc., respectively.
\14\ ISE Gemini, LLC, ISE Mercury, LLC and International
Securities Exchange, LLC have been renamed Nasdaq GEMX, LLC, Nasdaq
MRX, LLC, and Nasdaq ISE, LLC, respectively. See Securities Exchange
Act Release No. 80248 (March 15, 2017), 82 FR 14547 (March 21,
2017); Securities Exchange Act Release No. 80326 (March 29, 2017),
82 FR 16460 (April 4, 2017); and Securities Exchange Act Release No.
80325 (March 29, 2017), 82 FR 16445 (April 4, 2017).
\15\ NYSE MKT LLC has been renamed NYSE American LLC. See
Securities Exchange Act Release No. 80283 (March 21, 2017), 82 FR
15244 (March 27, 2017).
\16\ National Stock Exchange, Inc. has been renamed NYSE
National, Inc. See Securities Exchange Act Release No. 79902
(January 30, 2017), 82 FR 9258 (February 3, 2017).
\17\ 15 U.S.C. 78k-1.
\18\ 17 CFR 242.608.
\19\ 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 24, 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.
\20\ Securities Exchange Act Release No. 77724 (April 27, 2016),
81 FR 30614 (May 17, 2016).
\21\ Securities Exchange Act Release No. 79318 (November 15,
2016), 81 FR 84696 (November 23, 2016) (``Approval Order'').
\22\ The Plan also serves as the limited liability company
agreement for the Company.
\23\ Section 11.1(b) of the CAT NMS Plan.
\24\ Id.
---------------------------------------------------------------------------
The Commission published the Original Proposal for public comment
in the Federal Register on May 22, 2017,\25\ and received comments in
response to the Original Proposal or similar fee filings by other
Participants.\26\ On June 30, 2017, the Commission suspended, and
instituted proceedings to determine whether to approve or disapprove,
the Original Proposal.\27\ The Commission received seven comment
letters in response to those proceedings.\28\
---------------------------------------------------------------------------
\25\ See Securities Exchange Act Release No. 80725 (May 18,
2017), 82 FR 23935 (May 24, 2017) (SR-PHLX-2017-37).
\26\ For a summary of comments, see generally Securities
Exchange Act Release No. 81067 (June 30, 2017), 82 FR 31656 (July 7,
2017) (``Suspension Order'').
\27\ Suspension Order.
\28\ See Letter from Stuart J. Kaswell, Executive Vice
President, Managing Director and General Counsel, Managed Funds
Association, to Brent J. Fields, Secretary, SEC (July 28, 2017)
(``MFA Letter''); Letter from Theodore R. Lazo, Managing Director
and Associate General Counsel, SIFMA, to Brent J. Fields, Secretary,
SEC (July 28, 2017) (``SIFMA Letter''); Joanna Mallers, Secretary,
FIA Principal Traders Group, to Brent J. Fields, Secretary, SEC
(July 28, 2017) (``FIA Principal Traders Group Letter''); Letter
from Kevin Coleman, General Counsel & Chief Compliance Officer,
Belvedere Trading LLC, to Brent J. Fields, Secretary, SEC (July 28,
2017) (``Belvedere Letter''); Letter from W. Hardy Callcott, Sidley
Austin LLP, to Brent J. Fields, Secretary, SEC (July 27, 2017)
(``Sidley Letter''); Letter from John Kinahan, Chief Executive
Officer, Group One Trading, L.P., to Brent J. Fields, Secretary, SEC
(Aug. 10, 2017) (``Group One Letter''); and Letter from Joseph
Molluso, Executive Vice President, Virtu Financial, to Brent J.
Fields, Secretary, SEC (Aug. 18, 2017) (``Virtu Financial Letter'').
---------------------------------------------------------------------------
In response to the comments on the Original Proposal, the Operating
Committee determined to make the following changes to the funding
model: (1) Adds two additional CAT Fee tiers for Equity Execution
Venues; (2) discounts the OTC Equity Securities market share of
Execution Venue ATSs trading OTC Equity Securities as well as the
market share of the FINRA over-the-counter reporting facility (``ORF'')
by the average shares per trade ratio between NMS Stocks and OTC Equity
Securities (calculated as 0.17% based on available data from the second
quarter of 2017) when calculating the market share of Execution Venue
ATS trading OTC Equity Securities and FINRA; (3) discounts the Options
Market Maker quotes by the trade to quote ratio for options (calculated
as 0.01% based on available data for June 2016 through June 2017) when
calculating message traffic for Options Market Makers; (4) discounts
equity market maker quotes by the trade to quote ratio for equities
(calculated as 5.43% based on available data for June 2016 through June
2017) when calculating message traffic for equity market makers; (5)
decreases the number of tiers for Industry Members (other than the
Execution Venue ATSs) from nine to seven; (6) changes the allocation of
CAT costs between Equity Execution Venues and Options Execution Venues
from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery
allocations for Equity Execution Venues, Options Execution Venues and
Industry Members (other than Execution Venue ATSs); (8) focuses the
comparability of CAT Fees on the individual entity level, rather than
primarily on the comparability of affiliated entities; (9) commences
invoicing of CAT Reporters as promptly as possible following the latest
of the operative date of the Consolidated Audit Trail Funding Fees for
each of the Participants and the operative date of the CAT NMS Plan
amendment adopting CAT Fees for Participants; and (10) requires the
proposed fees to automatically expire two years from the operative date
of the CAT NMS Plan amendment adopting CAT Fees for Participants. As
discussed in detail below, the Exchange proposes to amend the Original
Proposal to reflect these changes.
(1) Executive Summary
The following provides an executive summary of the CAT funding
model approved by the Operating Committee, as well as Industry Members'
rights and obligations related to the payment of CAT Fees calculated
pursuant to the CAT funding model, as amended by this Amendment. A
detailed description of the CAT funding model and the CAT Fees, as
amended by this Amendment, as well as the changes made to the Original
Proposal follows this executive summary.
(A) CAT Funding Model
CAT Costs. The CAT funding model is designed to establish
CAT-specific fees to collectively recover the costs of building and
operating the CAT from all CAT Reporters, including Industry Members
and Participants. The overall CAT costs used in calculating the CAT
Fees in this fee filing are comprised of Plan Processor CAT costs and
non-Plan Processor CAT costs incurred, and estimated to be incurred,
from November 21, 2016 through November 21, 2017. Although the CAT
costs from November 21, 2016 through November 21, 2017 were used in
calculating the CAT Fees, the CAT Fees set forth in this fee filing
would be in effect until the automatic sunset date, as discussed below.
(See Section 3(a)(2)(E) below)
Bifurcated Funding Model. The CAT NMS Plan requires a
bifurcated funding model, where costs associated with building and
operating the CAT would be borne by (1) Participants and Industry
Members that are Execution Venues for Eligible Securities through fixed
tier fees based on market share, and (2) Industry Members (other than
alternative trading systems (``ATSs'') that execute transactions in
Eligible Securities (``Execution Venue ATSs'')) through fixed tier fees
based on message traffic for Eligible Securities. (See Section 3(a)(2)
below)
Industry Member Fees. Each Industry Member (other than
Execution Venue ATSs) will be placed into one of seven tiers of fixed
fees, based on ``message traffic'' in Eligible Securities for a defined
period (as discussed below). Prior to the start of CAT reporting,
``message traffic'' will be comprised of historical equity and equity
options orders, cancels, quotes and executions provided by each
exchange and FINRA over the previous three months. After an Industry
Member begins reporting to the CAT, ``message traffic'' will be
calculated based on the Industry Member's Reportable Events reported to
the CAT. Industry Members with lower levels of message traffic will pay
a lower fee and Industry Members with higher levels of message traffic
will pay a higher fee. To avoid disincentives to quoting behavior,
Options Market Maker and equity market maker quotes will be discounted
when calculating message traffic. (See Section 3(a)(2)(B) below)
Execution Venue Fees. Each Equity Execution Venue will be
placed in one of four tiers of fixed fees based on market share, and
each Options Execution Venue will be placed in one of two tiers of
fixed fees based on market share. Equity Execution Venue market share
will be determined by calculating each Equity Execution Venue's
proportion of the total volume of NMS Stock and OTC Equity shares
reported by all Equity Execution Venues during the relevant time
period. For purposes of calculating market share, the OTC Equity
Securities market share of Execution Venue ATSs trading OTC Equity
Securities as well as the market share of the FINRA ORF will be
discounted. Similarly, market share for Options Execution Venues will
be determined by calculating each Options
[[Page 58947]]
Execution Venue's proportion of the total volume of Listed Options
contracts reported by all Options Execution Venues during the relevant
time period. Equity Execution Venues with a larger market share will
pay a larger CAT Fee than Equity Execution Venues with a smaller market
share. Similarly, Options Execution Venues with a larger market share
will pay a larger CAT Fee than Options Execution Venues with a smaller
market share. (See Section 3(a)(2)(C) below)
Cost Allocation. For the reasons discussed below, in
designing the model, the Operating Committee determined that 75 percent
of total costs recovered would be allocated to Industry Members (other
than Execution Venue ATSs) and 25 percent would be allocated to
Execution Venues. In addition, the Operating Committee determined to
allocate 67 percent of Execution Venue costs recovered to Equity
Execution Venues and 33 percent to Options Execution Venues. (See
Section 3(a)(2)(D) below)
Comparability of Fees. The CAT funding model charges CAT
Reporters with the most CAT-related activity (measured by market share
and/or message traffic, as applicable) comparable CAT Fees. (See
Section 3(a)(2)(F) below)
(B) CAT Fees for Industry Members
Fee Schedule. The quarterly CAT Fees for each tier for
Industry Members are set forth in the two fee schedules in the
Consolidated Audit Trail Funding Fees, one for Equity ATSs and one for
Industry Members other than Equity ATSs. (See Section 3(a)(3)(B) below)
Quarterly Invoices. Industry Members will be billed
quarterly for CAT Fees, with the invoices payable within 30 days. The
quarterly invoices will identify within which tier the Industry Member
falls. (See Section 3(a)(3)(C) below)
Centralized Payment. Each Industry Member will receive
from the Company one invoice for its applicable CAT Fees, not separate
invoices from each Participant of which it is a member. Each Industry
Member will pay its CAT Fees to the Company via the centralized system
for the collection of CAT Fees established by the Operating Committee.
(See Section 3(a)(3)(C) below)
Billing Commencement. Industry Members will begin to
receive invoices for CAT Fees as promptly as possible following the
latest of the operative date of the Consolidated Audit Trail Funding
Fees for each of the Participants and the operative date of the Plan
amendment adopting CAT Fees for Participants. (See Section 3(a)(2)(G)
below)
Sunset Provision. The Consolidated Audit Trail Funding
Fees will sunset automatically two years from the operative date of the
CAT NMS Plan amendment adopting CAT Fees for Participants. (See Section
3(a)(2)(J) below)
(2) Description of the CAT Funding Model
Article XI of the CAT NMS Plan requires the Operating Committee to
approve the operating budget, including projected costs of developing
and operating the CAT for the upcoming year. In addition to a budget,
Article XI of the CAT NMS Plan provides that the Operating Committee
has discretion to establish funding for the Company, consistent with a
bifurcated funding model, where costs associated with building and
operating the Central Repository would be borne by (1) Participants and
Industry Members that are Execution Venues through fixed tier fees
based on market share, and (2) Industry Members (other than Execution
Venue ATSs) through fixed tier fees based on message traffic. In its
order approving the CAT NMS Plan, the Commission determined that the
proposed funding model was ``reasonable'' \29\ and ``reflects a
reasonable exercise of the Participants' funding authority to recover
the Participants' costs related to the CAT.'' \30\
---------------------------------------------------------------------------
\29\ Approval Order at 84796.
\30\ Id. at 84794.
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More specifically, the Commission stated in approving the CAT NMS
Plan that ``[t]he Commission believes that the proposed funding model
is reasonably designed to allocate the costs of the CAT between the
Participants and Industry Members.'' \31\ The Commission further noted
the following:
---------------------------------------------------------------------------
\31\ Id. at 84795.
The Commission believes that the proposed funding model reflects
a reasonable exercise of the Participants' funding authority to
recover the Participants' costs related to the CAT. The CAT is a
regulatory facility jointly owned by the Participants and . . . the
Exchange Act specifically permits the Participants to charge their
members fees to fund their self-regulatory obligations. The
Commission further believes that the proposed funding model is
designed to impose fees reasonably related to the Participants'
self-regulatory obligations because the fees would be directly
associated with the costs of establishing and maintaining the CAT,
and not unrelated SRO services.\32\
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\32\ Id. at 84794.
Accordingly, the funding model approved by the Operating Committee
imposes fees on both Participants and Industry Members.
As discussed in Appendix C of the CAT NMS Plan, in developing and
approving the approved funding model, the Operating Committee
considered the advantages and disadvantages of a variety of alternative
funding and cost allocation models before selecting the proposed
model.\33\ After analyzing the various alternatives, the Operating
Committee determined that the proposed tiered, fixed fee funding model
provides a variety of advantages in comparison to the alternatives.
---------------------------------------------------------------------------
\33\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order
at 85006.
---------------------------------------------------------------------------
In particular, the fixed fee model, as opposed to a variable fee
model, provides transparency, ease of calculation, ease of billing and
other administrative functions, and predictability of a fixed fee. Such
factors are crucial to estimating a reliable revenue stream for the
Company and for permitting CAT Reporters to reasonably predict their
payment obligations for budgeting purposes. Additionally, a strictly
variable or metered funding model based on message volume would be far
more likely to affect market behavior and place an inappropriate burden
on competition.
In addition, reviews from varying time periods of current broker-
dealer order and trading data submitted under existing reporting
requirements showed a wide range in activity among broker-dealers, with
a number of broker-dealers submitting fewer than 1,000 orders per month
and other broker-dealers submitting millions and even billions of
orders in the same period. Accordingly, the CAT NMS Plan includes a
tiered approach to fees. The tiered approach helps ensure that fees are
equitably allocated among similarly situated CAT Reporters and furthers
the goal of lessening the impact on smaller firms.\34\ In addition, in
choosing a tiered fee structure, the Operating Committee concluded that
the variety of benefits offered by a tiered fee structure, discussed
above, outweighed the fact that CAT Reporters in any particular tier
would pay different rates per message traffic order event or per market
share (e.g., an Industry Member with the largest amount of message
traffic in one tier would pay a smaller amount per order event than an
Industry Member in the same tier with the least amount of message
traffic). Such variation is the natural result of a tiered fee
structure.\35\
[[Page 58948]]
The Operating Committee considered several approaches to developing a
tiered model, including defining fee tiers based on such factors as
size of firm, message traffic or trading dollar volume. After analyzing
the alternatives, it was concluded that the tiering should be based on
message traffic which will reflect the relative impact of CAT Reporters
on the CAT System.
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\34\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order
at 85006.
\35\ Moreover, as the SEC noted in approving the CAT NMS Plan,
``[t]he Participants also have offered a reasonable basis for
establishing a funding model based on broad tiers, in that it may be
easier to implement.'' Approval Order at 84796.
---------------------------------------------------------------------------
Accordingly, the CAT NMS Plan contemplates that costs will be
allocated across the CAT Reporters on a tiered basis in order to
allocate higher costs to those CAT Reporters that contribute more to
the costs of creating, implementing and maintaining the CAT and lower
costs to those that contribute less.\36\ The fees to be assessed at
each tier are calculated so as to recoup a proportion of costs
appropriate to the message traffic or market share (as applicable) from
CAT Reporters in each tier. Therefore, Industry Members generating the
most message traffic will be in the higher tiers, and will be charged a
higher fee. Industry Members with lower levels of message traffic will
be in lower tiers and will be assessed a smaller fee for the CAT.\37\
Correspondingly, Execution Venues with the highest market shares will
be in the top tier, and will be charged higher fees. Execution Venues
with the lowest market shares will be in the lowest tier and will be
assessed smaller fees for the CAT.\38\
---------------------------------------------------------------------------
\36\ Approval Order at 85005.
\37\ Id.
\38\ Id.
---------------------------------------------------------------------------
The CAT NMS Plan states that Industry Members (other than Execution
Venue ATSs) will be charged based on message traffic, and that
Execution Venues will be charged based on market share.\39\ While there
are multiple factors that contribute to the cost of building,
maintaining and using the CAT, processing and storage of incoming
message traffic is one of the most significant cost drivers for the
CAT.\40\ Thus, the CAT NMS Plan provides that the fees payable by
Industry Members (other than Execution Venue ATSs) will be based on the
message traffic generated by such Industry Member.\41\
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\39\ Section 11.3(a) and (b) of the CAT NMS Plan.
\40\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order
at 85005.
\41\ Section 11.3(b) of the CAT NMS Plan.
---------------------------------------------------------------------------
In contrast to Industry Members, which determine the degree to
which they produce message traffic that constitute CAT Reportable
Events, the CAT Reportable Events of the Execution Venues are largely
derivative of quotations and orders received from Industry Members that
they are required to display. The business model for Execution Venues
(other than FINRA), however, is focused on executions in their markets.
As a result, the Operating Committee believes that it is more equitable
to charge Execution Venues based on their market share rather than
their message traffic.
Focusing on message traffic would make it more difficult to draw
distinctions between large and small Execution Venues and, in
particular, between large and small options exchanges. For instance,
the Operating Committee analyzed the message traffic of Execution
Venues and Industry Members for the period of April 2017 to June 2017
and placed all CAT Reporters into a nine-tier framework (i.e., a single
tier may include both Execution Venues and Industry Members). The
Operating Committee's analysis found that the majority of exchanges (15
total) were grouped in Tiers 1 and 2. Moreover, virtually all of the
options exchanges were in Tiers 1 and 2.\42\ Given the resulting
concentration of options exchanges in Tiers 1 and 2 under this
approach, the analysis shows that a funding model for Execution Venues
based on message traffic would make it more difficult to distinguish
between large and small options exchanges, as compared to the proposed
fee approach that bases fees for Execution Venues on market share.
---------------------------------------------------------------------------
\42\ The Operating Committee notes that this analysis did not
place MIAX PEARL in Tier 1 or Tier 2 since the exchange commenced
trading on February 6, 2017.
---------------------------------------------------------------------------
The CAT NMS Plan's funding model also is structured to avoid a
``reduction in market quality.'' \43\ The tiered, fixed fee funding
model is designed to limit the disincentives to providing liquidity to
the market. For example, the Operating Committee expects that a firm
that has a large volume of quotes would likely be categorized in one of
the upper tiers, and would not be assessed a fee for this traffic
directly as they would under a more directly metered model. In
contrast, strictly variable or metered funding models based on message
volume are far more likely to affect market behavior. In approving the
CAT NMS Plan, the SEC stated that ``[t]he Participants also offered a
reasonable basis for establishing a funding model based on broad tiers,
in that it may be . . . less likely to have an incremental deterrent
effect on liquidity provision.'' \44\
---------------------------------------------------------------------------
\43\ Section 11.2(e) of the CAT NMS Plan.
\44\ Approval Order at 84796.
---------------------------------------------------------------------------
The funding model also is structured to avoid a reduction market
quality because it discounts Options Market Maker and equity market
maker quotes when calculating message traffic for Options Market Makers
and equity market makers, respectively. As discussed in more detail
below, the Operating Committee determined to discount the Options
Market Maker quotes by the trade to quote ratio for options when
calculating message traffic for Options Market Makers. Similarly, to
avoid disincentives to quoting behavior on the equities side as well,
the Operating Committee determined to discount equity market maker
quotes by the trade to quote ratio for equities when calculating
message traffic for equity market makers. The proposed discounts
recognize the value of the market makers' quoting activity to the
market as a whole.
The CAT NMS Plan is further structured to avoid potential conflicts
raised by the Operating Committee determining fees applicable to its
own members--the Participants. First, the Company will operate on a
``break-even'' basis, with fees imposed to cover costs and an
appropriate reserve. Any surpluses will be treated as an operational
reserve to offset future fees and will not be distributed to the
Participants as profits.\45\ To ensure that the Participants' operation
of the CAT will not contribute to the funding of their other
operations, Section 11.1(c) of the CAT NMS Plan specifically states
that ``[a]ny surplus of the Company's revenues over its expenses shall
be treated as an operational reserve to offset future fees.'' In
addition, as set forth in Article VIII of the CAT NMS Plan, the Company
``intends to operate in a manner such that it qualifies as a `business
league' within the meaning of Section 501(c)(6) of the [Internal
Revenue] Code.'' To qualify as a business league, an organization must
``not [be] organized for profit and no part of the net earnings of [the
organization can] inure[] to the benefit of any private shareholder or
individual.'' \46\ As the SEC stated when approving the CAT NMS Plan,
``the Commission believes that the Company's application for Section
501(c)(6) business league status addresses issues raised by commenters
about the Plan's proposed allocation of profit and loss by mitigating
concerns that the Company's earnings could be used to benefit
individual Participants.'' \47\ The Internal Revenue Service recently
has determined that the Company is exempt from federal income
[[Page 58949]]
tax under Section 501(c)(6) of the Internal Revenue Code.
---------------------------------------------------------------------------
\45\ Id. at 84792.
\46\ 26 U.S.C. 501(c)(6).
\47\ Approval Order at 84793.
---------------------------------------------------------------------------
The funding model also is structured to take into account
distinctions in the securities trading operations of Participants and
Industry Members. For example, the Operating Committee designed the
model to address the different trading characteristics in the OTC
Equity Securities market. Specifically, the Operating Committee
proposes to discount the OTC Equity Securities market share of
Execution Venue ATSs trading OTC Equity Securities as well as the
market share of the FINRA ORF by the average shares per trade ratio
between NMS Stocks and OTC Equity Securities to adjust for the greater
number of shares being traded in the OTC Equity Securities market,
which is generally a function of a lower per share price for OTC Equity
Securities when compared to NMS Stocks. In addition, the Operating
Committee also proposes to discount Options Market Maker and equity
market maker message traffic in recognition of their role in the
securities markets. Furthermore, the funding model creates separate
tiers for Equity and Options Execution Venues due to the different
trading characteristics of those markets.
Finally, by adopting a CAT-specific fee, the Operating Committee
will be fully transparent regarding the costs of the CAT. Charging a
general regulatory fee, which would be used to cover CAT costs as well
as other regulatory costs, would be less transparent than the selected
approach of charging a fee designated to cover CAT costs only.
A full description of the funding model is set forth below. This
description includes the framework for the funding model as set forth
in the CAT NMS Plan, as well as the details as to how the funding model
will be applied in practice, including the number of fee tiers and the
applicable fees for each tier. The complete funding model is described
below, including those fees that are to be paid by the Participants.
The proposed Consolidated Audit Trail Funding Fees, however, do not
apply to the Participants; the proposed Consolidated Audit Trail
Funding Fees only apply to Industry Members. The CAT Fees for
Participants will be imposed separately by the Operating Committee
pursuant to the CAT NMS Plan.
(A) Funding Principles
Section 11.2 of the CAT NMS Plan sets forth the principles that the
Operating Committee applied in establishing the funding for the
Company. The Operating Committee has considered these funding
principles as well as the other funding requirements set forth in the
CAT NMS Plan and in Rule 613 in developing the proposed funding model.
The following are the funding principles in Section 11.2 of the CAT NMS
Plan:
To create transparent, predictable revenue streams for the
Company that are aligned with the anticipated costs to build, operate
and administer the CAT and other costs of the Company;
To establish an allocation of the Company's related costs
among Participants and Industry Members that is consistent with the
Exchange Act, taking into account the timeline for implementation of
the CAT and distinctions in the securities trading operations of
Participants and Industry Members and their relative impact upon the
Company's resources and operations;
To establish a tiered fee structure in which the fees
charged to: (i) CAT Reporters that are Execution Venues, including
ATSs, are based upon the level of market share; (ii) Industry Members'
non-ATS activities are based upon message traffic; (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 Venue and/or Industry Members);
To provide for ease of billing and other administrative
functions;
To avoid any disincentives such as placing an
inappropriate burden on competition and a reduction in market quality;
and
To build financial stability to support the Company as a
going concern.
(B) Industry Member Tiering
Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee
is required to establish fixed fees to be payable by Industry Members,
based on message traffic generated by such Industry Member, with the
Operating Committee establishing at least five and no more than nine
tiers.
The CAT NMS Plan clarifies that the fixed fees payable by Industry
Members pursuant to Section 11.3(b) shall, in addition to any other
applicable message traffic, include message traffic generated by: (i)
An ATS that does not execute orders that is sponsored by such Industry
Member; and (ii) routing orders to and from any ATS sponsored by such
Industry Member. In addition, the Industry Member fees will apply to
Industry Members that act as routing broker-dealers for exchanges. The
Industry Member fees will not be applicable, however, to an ATS that
qualifies as an Execution Venue, as discussed in more detail in the
section on Execution Venue tiering.
In accordance with Section 11.3(b), the Operating Committee
approved a tiered fee structure for Industry Members (other than
Execution Venue ATSs) as described in this section. In determining the
tiers, the Operating Committee considered the funding principles set
forth in Section 11.2 of the CAT NMS Plan, seeking to create funding
tiers that take into account the relative impact on CAT System
resources of different Industry Members, and that establish comparable
fees among the CAT Reporters with the most Reportable Events. The
Operating Committee has determined that establishing seven tiers
results in an allocation of fees that distinguishes between Industry
Members with differing levels of message traffic. Thus, each such
Industry Member will be placed into one of seven tiers of fixed fees,
based on ``message traffic'' for a defined period (as discussed below).
A seven tier structure was selected to provide a wide range of
levels for tiering Industry Members such that Industry Members
submitting significantly less message traffic to the CAT would be
adequately differentiated from Industry Members submitting
substantially more message traffic. The Operating Committee considered
historical message traffic from multiple time periods, generated by
Industry Members across all exchanges and as submitted to FINRA's Order
Audit Trail System (``OATS''), and considered the distribution of firms
with similar levels of message traffic, grouping together firms with
similar levels of message traffic. Based on this, the Operating
Committee determined that seven tiers would group firms with similar
levels of message traffic, charging those firms with higher impact on
the CAT more, while lowering the burden on Industry Members that have
less CAT-related activity. Furthermore, the selection of seven tiers
establishes comparable fees among the largest CAT Reporters.
Each Industry Member (other than Execution Venue ATSs) will be
ranked by message traffic and tiered by predefined Industry Member
percentages (the ``Industry Member Percentages''). The Operating
Committee determined to use predefined percentages rather than fixed
volume thresholds to ensure that the total CAT Fees collected recover
the expected CAT costs regardless of
[[Page 58950]]
changes in the total level of message traffic. To determine the fixed
percentage of Industry Members in each tier, the Operating Committee
analyzed historical message traffic generated by Industry Members
across all exchanges and as submitted to OATS, and considered the
distribution of firms with similar levels of message traffic, grouping
together firms with similar levels of message traffic. Based on this,
the Operating Committee identified seven tiers that would group firms
with similar levels of message traffic.
The percentage of costs recovered by each Industry Member tier will
be determined by predefined percentage allocations (the ``Industry
Member Recovery Allocation''). In determining the fixed percentage
allocation of costs recovered for each tier, the Operating Committee
considered the impact of CAT Reporter message traffic on the CAT System
as well as the distribution of total message volume across Industry
Members while seeking to maintain comparable fees among the largest CAT
Reporters. Accordingly, following the determination of the percentage
of Industry Members in each tier, the Operating Committee identified
the percentage of total market volume for each tier based on the
historical message traffic upon which Industry Members had been
initially ranked. Taking this into account along with the resulting
percentage of total recovery, the percentage allocation of costs
recovered for each tier were assigned, allocating higher percentages of
recovery to tiers with higher levels of message traffic while avoiding
any inappropriate burden on competition. Furthermore, by using
percentages of Industry Members and costs recovered per tier, the
Operating Committee sought to include elasticity within the funding
model, allowing the funding model to respond to changes in either the
total number of Industry Members or the total level of message traffic.
The following chart illustrates the breakdown of seven Industry
Member tiers across the monthly average of total equity and equity
options orders, cancels, quotes and executions in the second quarter of
2017 as well as message traffic thresholds between the largest of
Industry Member message traffic gaps. The Operating Committee
referenced similar distribution illustrations to determine the
appropriate division of Industry Member percentages in each tier by
considering the grouping of firms with similar levels of message
traffic and seeking to identify relative breakpoints in the message
traffic between such groupings. In reviewing the chart and its
corresponding table, note that while these distribution illustrations
were referenced to help differentiate between Industry Member tiers,
the proposed funding model is driven by fixed percentages of Industry
Members across tiers to account for fluctuating levels of message
traffic over time. This approach also provides financial stability for
the CAT by ensuring that the funding model will recover the required
amounts regardless of changes in the number of Industry Members or the
amount of message traffic. Actual messages in any tier will vary based
on the actual traffic in a given measurement period, as well as the
number of firms included in the measurement period. The Industry Member
Percentages and Industry Member Recovery Allocation for each tier will
remain fixed with each Industry Member's tier to be reassigned
periodically, as described below in Section 3(a)(2)(I).
[GRAPHIC] [TIFF OMITTED] TN14DE17.027
------------------------------------------------------------------------
Approximate message traffic per
Industry Member (Q2 2017)
Industry Member tier (orders, quotes, cancels and
executions)
------------------------------------------------------------------------
Tier 1.............................. >10,000,000,000
Tier 2.............................. 1,000,000,000-10,000,000,000
Tier 3.............................. 100,000,000-1,000,000,000
Tier 4.............................. 1,000,000-100,000,000
Tier 5.............................. 100,000-1,000,000
[[Page 58951]]
Tier 6.............................. 10,000-100,000
Tier 7.............................. <10,000
------------------------------------------------------------------------
Based on the above analysis, the Operating Committee approved the
following Industry Member Percentages and Industry Member Recovery
Allocations:
----------------------------------------------------------------------------------------------------------------
Percentage of
Percentage of Industry Percentage of
Industry Member tier Industry Member total
Members recovery recovery
----------------------------------------------------------------------------------------------------------------
Tier 1.......................................................... 0.900 12.00 9.00
Tier 2.......................................................... 2.150 20.50 15.38
Tier 3.......................................................... 2.800 18.50 13.88
Tier 4.......................................................... 7.750 32.00 24.00
Tier 5.......................................................... 8.300 10.00 7.50
Tier 6.......................................................... 18.800 6.00 4.50
Tier 7.......................................................... 59.300 1.00 0.75
-----------------------------------------------
Total....................................................... 100 100 75
----------------------------------------------------------------------------------------------------------------
For the purposes of creating these tiers based on message traffic,
the Operating Committee determined to define the term ``message
traffic'' separately for the period before the commencement of CAT
reporting and for the period after the start of CAT reporting. The
different definition for message traffic is necessary as there will be
no Reportable Events as defined in the Plan, prior to the commencement
of CAT reporting. Accordingly, prior to the start of CAT reporting,
``message traffic'' will be comprised of historical equity and equity
options orders, cancels, quotes and executions provided by each
exchange and FINRA over the previous three months. Prior to the start
of CAT reporting, orders would 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, including
principal orders, cancel/replace orders, market maker orders originated
by a member of an exchange, and reserve (iceberg) orders as well as
executions originated by a member of FINRA, and excluding order
rejects, system-modified orders, order routes and implied orders.\48\
In addition, prior to the start of CAT reporting, cancels would 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, excluding order modifications (e.g., order updates,
order splits, partial cancels) and multiple cancels of a complex order.
Furthermore, prior to the start of CAT reporting, quotes would 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. Additionally, prior to the start of CAT
reporting, executions would be comprised of the total number of equity
and equity option executions received or originated by a member of an
exchange or FINRA over a three-month period.
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\48\ Consequently, firms that do not have ``message traffic''
reported to an exchange or OATS before they are reporting to the CAT
would not be subject to a fee until they begin to report information
to CAT.
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After an Industry Member begins reporting to the CAT, ``message
traffic'' will be calculated based on the Industry Member's Reportable
Events reported to the CAT as will be defined in the Technical
Specifications.\49\
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\49\ If an Industry Member (other than an Execution Venue ATS)
has no orders, cancels, quotes and executions prior to the
commencement of CAT Reporting, or no Reportable Events after CAT
reporting commences, then the Industry Member would not have a CAT
Fee obligation.
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Quotes of Options Market Makers and equity market makers will be
included in the calculation of total message traffic for those market
makers for purposes of tiering under the CAT funding model both prior
to CAT reporting and once CAT reporting commences.\50\ To address
potential concerns regarding burdens on competition or market quality
of including quotes in the calculation of message traffic, however, the
Operating Committee determined to discount the Options Market Maker
quotes by the trade to quote ratio for options when calculating message
traffic for Options Market Makers. Based on available data for June
2016 through June 2017, the trade to quote ratio for options is 0.01%.
Similarly, to avoid disincentives to quoting behavior on the equities
side, the Operating Committee determined to discount equity market
maker quotes by the trade to quote ratio for equities. Based on
available data for June 2016 through June 2017, the trade to quote
ratio for equities is 5.43%.\51\ The trade to quote ratio for options
and the trade to quote ratio for equities will be calculated every
three months when tiers are recalculated (as discussed below).
---------------------------------------------------------------------------
\50\ The SEC approved exemptive relief permitting Options Market
Maker quotes to be reported to the Central Repository by the
relevant Options Exchange in lieu of requiring that such reporting
be done by both the Options Exchange and the Options Market Maker,
as required by Rule 613 of Regulation NMS. See Securities Exchange
Act Release No. 77265 (March 1, 2017), 81 FR 11856 (March 7, 2016).
This exemption applies to Options Market Maker quotes for CAT
reporting purposes only. Therefore, notwithstanding the reporting
exemption provided for Options Market Maker quotes, Options Market
Maker quotes will be included in the calculation of total message
traffic for Options Market Makers for purposes of tiering under the
CAT funding model both prior to CAT reporting and once CAT reporting
commences.
\51\ The trade to quote ratios were calculated based on the
inverse of the average of the monthly equity SIP and OPRA quote to
trade ratios from June 2016--June 2017 that were compiled by the
Financial Information Forum using data from Nasdaq and SIAC.
---------------------------------------------------------------------------
[[Page 58952]]
The Operating Committee has determined to calculate fee tiers every
three months, on a calendar quarter basis, based on message traffic
from the prior three months. Based on its analysis of historical data,
the Operating Committee believes that calculating tiers based on three
months of data will provide the best balance between reflecting changes
in activity by Industry Members while still providing predictability in
the tiering for Industry Members. Because fee tiers will be calculated
based on message traffic from the prior three months, the Operating
Committee will begin calculating message traffic based on an Industry
Member's Reportable Events reported to the CAT once the Industry Member
has been reporting to the CAT for three months. Prior to that, fee
tiers will be calculated as discussed above with regard to the period
prior to CAT reporting.
(C) Execution Venue Tiering
Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee
is required to establish fixed fees payable by Execution Venues.
Section 1.1 of the CAT NMS Plan defines an Execution Venue as ``a
Participant or an alternative trading system (``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).''
\52\
---------------------------------------------------------------------------
\52\ Although FINRA does not operate an execution venue, because
it is a Participant, it is considered an ``Execution Venue'' under
the Plan for purposes of determining fees.
---------------------------------------------------------------------------
The Operating Committee determined that ATSs should be included
within the definition of Execution Venue. The Operating Committee
believes that it is appropriate to treat ATSs as Execution Venues under
the proposed funding model since ATSs have business models that are
similar to those of exchanges, and ATSs also compete with exchanges.
Given the differences between Execution Venues that trade NMS
Stocks and/or OTC Equity Securities and Execution Venues that trade
Listed Options, Section 11.3(a) addresses Execution Venues that trade
NMS Stocks and/or OTC Equity Securities separately from Execution
Venues that trade Listed Options. Equity and Options Execution Venues
are treated separately for two reasons. First, the differing quoting
behavior of Equity and Options Execution Venues makes comparison of
activity between such Execution Venues difficult. Second, Execution
Venue tiers are calculated based on market share of share volume, and
it is therefore difficult to compare market share between asset classes
(i.e., equity shares versus options contracts). Discussed below is how
the funding model treats the two types of Execution Venues.
(I) NMS Stocks and OTC Equity Securities
Section 11.3(a)(i) of the CAT NMS Plan states that each Execution
Venue that (i) executes transactions or, (ii) in the case of a national
securities association, has trades reported by its members to its trade
reporting facility or facilities for reporting transactions effected
otherwise than on an exchange, in NMS Stocks or OTC Equity Securities
will pay a fixed fee depending on the market share of that Execution
Venue in NMS Stocks and OTC Equity Securities, with the Operating
Committee establishing at least two and not more than five tiers of
fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity
Securities market share. For these purposes, market share for Execution
Venues that execute transactions will be calculated by share volume,
and 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, provided, however, that the share volume
reported to such national securities association by an Execution Venue
shall not be included in the calculation of such national security
association's market share.
In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the
Operating Committee approved a tiered fee structure for Equity
Execution Venues and Option Execution Venues. In determining the Equity
Execution Venue Tiers, the Operating Committee considered the funding
principles set forth in Section 11.2 of the CAT NMS Plan, seeking to
create funding tiers that take into account the relative impact on
system resources of different Equity Execution Venues, and that
establish comparable fees among the CAT Reporters with the most
Reportable Events. Each Equity Execution Venue will be placed into one
of four tiers of fixed fees, based on the Execution Venue's NMS Stocks
and OTC Equity Securities market share. In choosing four tiers, the
Operating Committee performed an analysis similar to that discussed
above with regard to the non-Execution Venue Industry Members to
determine the number of tiers for Equity Execution Venues. The
Operating Committee determined to establish four tiers for Equity
Execution Venues, rather than a larger number of tiers as established
for non-Execution Venue Industry Members, because the four tiers were
sufficient to distinguish between the smaller number of Equity
Execution Venues based on market share. Furthermore, the selection of
four tiers serves to help establish comparability among the largest CAT
Reporters.
Each Equity Execution Venue will be ranked by market share and
tiered by predefined Execution Venue percentages, (the ``Equity
Execution Venue Percentages''). In determining the fixed percentage of
Equity Execution Venues in each tier, the Operating Committee reviewed
historical market share of share volume for Execution Venues. Equity
Execution Venue market shares of share volume were sourced from market
statistics made publicly-available by Bats Global Markets, Inc.
(``Bats''). ATS market shares of share volume was sourced from market
statistics made publicly-available by FINRA. FINRA trade reporting
facility (``TRF'') and ORF market share of share volume was sourced
from market statistics made publicly available by FINRA. Based on data
from FINRA and otcmarkets.com, ATSs accounted for 39.12% of the share
volume across the TRFs and ORFs during the recent tiering period. A
39.12/60.88 split was applied to the ATS and non-ATS breakdown of FINRA
market share, with FINRA tiered based only on the non-ATS portion of
its market share of share volume.
The Operating Committee determined to discount the OTC Equity
Securities market share of Execution Venue ATSs trading OTC Equity
Securities as well as the market share of the FINRA ORF in recognition
of the different trading characteristics of the OTC Equity Securities
market as compared to the market in NMS Stocks. Many OTC Equity
Securities are priced at less than one dollar--and a significant number
at less than one penny--per share and low-priced shares tend to trade
in larger quantities. Accordingly, a disproportionately large number of
shares are involved in transactions involving OTC Equity Securities
versus NMS Stocks. Because the proposed fee tiers are based on market
share calculated by share volume, Execution Venue ATSs trading OTC
Equity Securities and FINRA would likely be subject to higher tiers
than their operations may warrant. To address this potential concern,
the Operating Committee determined to discount the OTC Equity
Securities market share of Execution Venue ATSs trading OTC Equity
Securities and the market share
[[Page 58953]]
of the FINRA ORF by multiplying such market share by the average shares
per trade ratio between NMS Stocks and OTC Equity Securities in order
to adjust for the greater number of shares being traded in the OTC
Equity Securities market. Based on available data for the second
quarter of 2017, the average shares per trade ratio between NMS Stocks
and OTC Equity Securities is 0.17%.\53\ The average shares per trade
ratio between NMS Stocks and OTC Equity Securities will be recalculated
every three months when tiers are recalculated.
---------------------------------------------------------------------------
\53\ The average shares per trade ratio for both NMS Stocks and
OTC Equity Securities from the second quarter of 2017 was calculated
using publicly available market volume data from Bats and OTC
Markets Group, and the totals were divided to determine the average
number of shares per trade between NMS Stocks and OTC Equity
Securities.
---------------------------------------------------------------------------
Based on this, the Operating Committee considered the distribution
of Execution Venues, and grouped together Execution Venues with similar
levels of market share. The percentage of costs recovered by each
Equity Execution Venue tier will be determined by predefined percentage
allocations (the ``Equity Execution Venue Recovery Allocation''). In
determining the fixed percentage allocation of costs to be recovered
from each tier, the Operating Committee considered the impact of CAT
Reporter market share activity on the CAT System as well as the
distribution of total market volume across Equity Execution Venues
while seeking to maintain comparable fees among the largest CAT
Reporters. Accordingly, following the determination of the percentage
of Execution Venues in each tier, the Operating Committee identified
the percentage of total market volume for each tier based on the
historical market share upon which Execution Venues had been initially
ranked. Taking this into account along with the resulting percentage of
total recovery, the percentage allocation of cost recovery for each
tier were assigned, allocating higher percentages of recovery to the
tier with a higher level of market share while avoiding any
inappropriate burden on competition. Furthermore, by using percentages
of Equity Execution Venues and cost recovery per tier, the Operating
Committee sought to include elasticity within the funding model,
allowing the funding model to respond to changes in either the total
number of Equity Execution Venues or changes in market share.
Based on this analysis, the Operating Committee approved the
following Equity Execution Venue Percentages and Recovery Allocations:
----------------------------------------------------------------------------------------------------------------
Percentage of
Equity Execution Venue tier Equity Percentage of Percentage of
Execution Execution total recovery
Venues Venue recovery
----------------------------------------------------------------------------------------------------------------
Tier 1................................................. 25.00 33.25 8.31
Tier 2................................................. 42.00 25.73 6.43
Tier 3................................................. 23.00 8.00 2.00
Tier 4................................................. 10.00 0.02 0.01
-----------------------------------------------
Total.............................................. 100 67 16.75
----------------------------------------------------------------------------------------------------------------
(II) Listed Options
Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution
Venue that executes transactions in Listed Options will pay a fixed fee
depending on the Listed Options market share of that Execution Venue,
with the Operating Committee establishing at least two and no more than
five tiers of fixed fees, based on an Execution Venue's Listed Options
market share. For these purposes, market share will be calculated by
contract volume.
In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the
Operating Committee approved a tiered fee structure for Options
Execution Venues. In determining the tiers, the Operating Committee
considered the funding principles set forth in Section 11.2 of the CAT
NMS Plan, seeking to create funding tiers that take into account the
relative impact on system resources of different Options Execution
Venues, and that establish comparable fees among the CAT Reporters with
the most Reportable Events. Each Options Execution Venue will be placed
into one of two tiers of fixed fees, based on the Execution Venue's
Listed Options market share. In choosing two tiers, the Operating
Committee performed an analysis similar to that discussed above with
regard to Industry Members (other than Execution Venue ATSs) to
determine the number of tiers for Options Execution Venues. The
Operating Committee determined to establish two tiers for Options
Execution Venues, rather than a larger number, because the two tiers
were sufficient to distinguish between the smaller number of Options
Execution Venues based on market share. Furthermore, due to the smaller
number of Options Execution Venues, the incorporation of additional
Options Execution Venue tiers would result in significantly higher fees
for Tier 1 Options Execution Venues and reduce comparability between
Execution Venues and Industry Members. Furthermore, the selection of
two tiers served to establish comparable fees among the largest CAT
Reporters.
Each Options Execution Venue will be ranked by market share and
tiered by predefined Execution Venue percentages, (the ``Options
Execution Venue Percentages''). To determine the fixed percentage of
Options Execution Venues in each tier, the Operating Committee analyzed
the historical and publicly available market share of Options Execution
Venues to group Options Execution Venues with similar market shares
across the tiers. Options Execution Venue market share of share volume
were sourced from market statistics made publicly-available by Bats.
The process for developing the Options Execution Venue Percentages was
the same as discussed above with regard to Equity Execution Venues.
The percentage of costs to be recovered from each Options Execution
Venue tier will be determined by predefined percentage allocations (the
``Options Execution Venue Recovery Allocation''). In determining the
fixed percentage allocation of cost recovery for each tier, the
Operating Committee considered the impact of CAT Reporter market share
activity on the CAT System as well as the distribution of total market
volume across Options Execution Venues while seeking to maintain
comparable fees among the largest CAT Reporters. Furthermore, by using
percentages of Options Execution Venues and cost recovery per tier, the
Operating Committee sought to include elasticity within the funding
model,
[[Page 58954]]
allowing the funding model to respond to changes in either the total
number of Options Execution Venues or changes in market share. The
process for developing the Options Execution Venue Recovery Allocation
was the same as discussed above with regard to Equity Execution Venues.
Based on this analysis, the Operating Committee approved the
following Options Execution Venue Percentages and Recovery Allocations:
----------------------------------------------------------------------------------------------------------------
Percentage of Percentage of
Options Execution Percentage of
Options Execution Venue tier Execution Venue total
Venues recovery recovery
----------------------------------------------------------------------------------------------------------------
Tier 1.......................................................... 75.00 28.25 7.06
Tier 2.......................................................... 25.00 4.75 1.19
-----------------------------------------------
Total....................................................... 100 33 8.25
----------------------------------------------------------------------------------------------------------------
(III) Market Share/Tier Assignments
The Operating Committee determined that, prior to the start of CAT
reporting, market share for Execution Venues would be sourced from
publicly-available market data. Options and equity volumes for
Participants will be sourced from market data made publicly available
by Bats while Execution Venue ATS volumes will be sourced from market
data made publicly available by FINRA and OTC Markets. Set forth in the
Appendix are two charts, one listing the current Equity Execution
Venues, each with its rank and tier, and one listing the current
Options Execution Venues, each with its rank and tier.
After the commencement of CAT reporting, market share for Execution
Venues will be sourced from data reported to the CAT. Equity Execution
Venue market share will be determined by calculating each Equity
Execution Venue's proportion of the total volume of NMS Stock and OTC
Equity shares reported by all Equity Execution Venues during the
relevant time period (with the discounting of OTC Equity Securities
market share of Execution Venue ATSs trading OTC Equity Securities as
well as the market share of the FINRA ORF, as described above).
Similarly, market share for Options Execution Venues will be determined
by calculating each Options Execution Venue's proportion of the total
volume of Listed Options contracts reported by all Options Execution
Venues during the relevant time period.
The Operating Committee has determined to calculate fee tiers for
Execution Venues every three months based on market share from the
prior three months. Based on its analysis of historical data, the
Operating Committee believes calculating tiers based on three months of
data will provide the best balance between reflecting changes in
activity by Execution Venues while still providing predictability in
the tiering for Execution Venues.
(D) Allocation of Costs
In addition to the funding principles discussed above, including
comparability of fees, Section 11.1(c) of the CAT NMS Plan also
requires expenses to be fairly and reasonably shared among the
Participants and Industry Members. Accordingly, in developing the
proposed fee schedules pursuant to the funding model, the Operating
Committee calculated how the CAT costs would be allocated between
Industry Members and Execution Venues, and how the portion of CAT costs
allocated to Execution Venues would be allocated between Equity
Execution Venues and Options Execution Venues. These determinations are
described below.
(I) Allocation Between Industry Members and Execution Venues
In determining the cost allocation between Industry Members (other
than Execution Venue ATSs) and Execution Venues, the Operating
Committee analyzed a range of possible splits for revenue recovery from
such Industry Members and Execution Venues, including 80%/20%, 75%/25%,
70%/30% and 65%/35% allocations. Based on this analysis, the Operating
Committee determined that 75 percent of total costs recovered would be
allocated to Industry Members (other than Execution Venue ATSs) and 25
percent would be allocated to Execution Venues. The Operating Committee
determined that this 75%/25% division maintained the greatest level of
comparability across the funding model. For example, the cost
allocation establishes fees for the largest Industry Members (i.e.,
those Industry Members in Tiers 1) that are comparable to the largest
Equity Execution Venues and Options Execution Venues (i.e., those
Execution Venues in Tier 1).
Furthermore, the allocation of total CAT cost recovery recognizes
the difference in the number of CAT Reporters that are Industry Members
versus CAT Reporters that are Execution Venues. Specifically, the cost
allocation takes into consideration that there are approximately 23
times more Industry Members expected to report to the CAT than
Execution Venues (e.g., an estimated 1541 Industry Members versus 67
Execution Venues as of June 2017).
(II) Allocation Between Equity Execution Venues and Options Execution
Venues
The Operating Committee also analyzed how the portion of CAT costs
allocated to Execution Venues would be allocated between Equity
Execution Venues and Options Execution Venues. In considering this
allocation of costs, the Operating Committee analyzed a range of
alternative splits for revenue recovered between Equity and Options
Execution Venues, including a 70%/30%, 67%/33%, 65%/35%, 50%/50% and
25%/75% split. Based on this analysis, the Operating Committee
determined to allocate 67 percent of Execution Venue costs recovered to
Equity Execution Venues and 33 percent to Options Execution Venues. The
Operating Committee determined that a 67%/33% allocation between Equity
and Options Execution Venues maintained the greatest level of fee
equitability and comparability based on the current number of Equity
and Options Execution Venues. For example, the allocation establishes
fees for the larger Equity Execution Venues that are comparable to the
larger Options Execution Venues. Specifically, Tier 1 Equity Execution
Venues would pay a quarterly fee of $81,047 and Tier 1 Options
Execution Venues would pay a quarterly fee of $81,379. In addition to
fee comparability between Equity Execution Venues and Options Execution
Venues, the allocation also establishes equitability between larger
(Tier 1) and smaller (Tier 2) Execution Venues based upon the level of
market share. Furthermore, the allocation is intended to reflect the
relative levels of current equity and options order events.
[[Page 58955]]
(E) Fee Levels
The Operating Committee determined to establish a CAT-specific fee
to collectively recover the costs of building and operating the CAT.
Accordingly, under the funding model, the sum of the CAT Fees is
designed to recover the total cost of the CAT. The Operating Committee
has determined overall CAT costs to be comprised of Plan Processor
costs and non-Plan Processor costs, which are estimated to be
$50,700,000 in total for the year beginning November 21, 2016.\54\
---------------------------------------------------------------------------
\54\ It is anticipated that CAT-related costs incurred prior to
November 21, 2016 will be addressed via a separate filing.
---------------------------------------------------------------------------
The Plan Processor costs relate to costs incurred and to be
incurred through November 21, 2017 by the Plan Processor and consist of
the Plan Processor's current estimates of average yearly ongoing costs,
including development costs, which total $37,500,000. This amount is
based upon the fees due to the Plan Processor pursuant to the Company's
agreement with the Plan Processor.
The non-Plan Processor estimated costs incurred and to be incurred
by the Company through November 21, 2017 consist of three categories of
costs. The first category of such costs are third party support costs,
which include legal fees, consulting fees and audit fees from November
21, 2016 until the date of filing as well as estimated third party
support costs for the rest of the year. These amount to an estimated
$5,200,000. The second category of non-Plan Processor costs are
estimated cyber-insurance costs for the year. Based on discussions with
potential cyber-insurance providers, assuming $2-5 million cyber-
insurance premium on $100 million coverage, the Company has estimated
$3,000,000 for the annual cost. The final cost figures will be
determined following receipt of final underwriter quotes. The third
category of non-Plan Processor costs is the CAT operational reserve,
which is comprised of three months of ongoing Plan Processor costs
($9,375,000), third party support costs ($1,300,000) and cyber-
insurance costs ($750,000). The Operating Committee aims to accumulate
the necessary funds to establish the three-month operating reserve for
the Company through the CAT Fees charged to CAT Reporters for the year.
On an ongoing basis, the Operating Committee will account for any
potential need to replenish the operating reserve or other changes to
total cost during its annual budgeting process. The following table
summarizes the Plan Processor and non-Plan Processor cost components
which comprise the total estimated CAT costs of $50,700,000 for the
covered period.
------------------------------------------------------------------------
Cost category Cost component Amount
------------------------------------------------------------------------
Plan Processor................. Operational Costs...... $37,500,000
Third Party Support 5,200,000
Costs.
Non-Plan Processor............. Operational Reserve.... \55\ 5,000,000
Cyber-insurance Costs.. 3,000,000
---------------
Estimated Total............ ....................... 50,700,000
------------------------------------------------------------------------
Based on these estimated costs and the calculations for the funding
model described above, the Operating Committee determined to impose the
following fees: \56\
---------------------------------------------------------------------------
\55\ This $5,000,000 represents the gradual accumulation of the
funds for a target operating reserve of $11,425,000.
\56\ Note that all monthly, quarterly and annual CAT Fees have
been rounded to the nearest dollar.
---------------------------------------------------------------------------
For Industry Members (other than Execution Venue ATSs):
------------------------------------------------------------------------
Percentage
Tier of Industry Quarterly
Members CAT fee
------------------------------------------------------------------------
1............................................. 0.900 $81,483
2............................................. 2.150 59,055
3............................................. 2.800 40,899
4............................................. 7.750 25,566
5............................................. 8.300 7,428
6............................................. 18.800 1,968
7............................................. 59.300 105
------------------------------------------------------------------------
For Execution Venues for NMS Stocks and OTC Equity Securities:
------------------------------------------------------------------------
Percentage
of Equity Quarterly
Tier Execution CAT Fee
Venues
------------------------------------------------------------------------
1............................................. 25.00 $81,048
2............................................. 42.00 37,062
3............................................. 23.00 21,126
4............................................. 10.00 129
------------------------------------------------------------------------
For Execution Venues for Listed Options:
------------------------------------------------------------------------
Percentage
of Options Quarterly
Tier Execution CAT fee
Venues
------------------------------------------------------------------------
1............................................. 75.00 $81,381
2............................................. 25.00 37,629
------------------------------------------------------------------------
The Operating Committee has calculated the schedule of effective
fees for Industry Members (other than Execution Venue ATSs) and
Execution Venues in the following manner. Note that the calculation of
CAT Fees assumes 52 Equity Execution Venues, 15 Options Execution
Venues and 1,541 Industry Members (other than Execution Venue ATSs) as
of June 2017.
Calculation of Annual Tier Fees for Industry Members
[``IM'']
----------------------------------------------------------------------------------------------------------------
Percentage of
Percentage of Industry Percentage of
Industry Member tier Industry Member total recovery
Members recovery
----------------------------------------------------------------------------------------------------------------
Tier 1.......................................................... 0.900 12.00 9.00
Tier 2.......................................................... 2.150 20.50 15.38
Tier 3.......................................................... 2.800 18.50 13.88
Tier 4.......................................................... 7.750 32.00 24.00
Tier 5.......................................................... 8.300 10.00 7.50
[[Page 58956]]
Tier 6.......................................................... 18.800 6.00 4.50
Tier 7.......................................................... 59.300 1.00 0.75
-----------------------------------------------
Total....................................................... 100 100 75
----------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------
Estimated
number of
Industry Member tier Industry
Members
------------------------------------------------------------------------
Tier 1.................................................. 14
Tier 2.................................................. 33
Tier 3.................................................. 43
Tier 4.................................................. 119
Tier 5.................................................. 128
Tier 6.................................................. 290
Tier 7.................................................. 914
---------------
Total............................................... 1,541
------------------------------------------------------------------------
[[Page 58957]]
[GRAPHIC] [TIFF OMITTED] TN14DE17.028
Calculation of Annual Tier Fees for Equity Execution Venues
(``EV'')
------------------------------------------------------------------------
Estimated
number of
Equity Execution Venue tier Equity
Execution
Venues
------------------------------------------------------------------------
Tier 1.................................................. 13
Tier 2.................................................. 22
Tier 3.................................................. 12
Tier 4.................................................. 5
---------------
Total............................................... 52
------------------------------------------------------------------------
[[Page 58958]]
[GRAPHIC] [TIFF OMITTED] TN14DE17.029
Calculation of Annual Tier Fees for Options Execution Venues (``EV'')
----------------------------------------------------------------------------------------------------------------
Percentage of Percentage of
Options Execution Percentage of
Options Execution Venue tier Execution Venue total
Venues recovery recovery
----------------------------------------------------------------------------------------------------------------
Tier 1.......................................................... 75.00 28.25 7.06
Tier 2.......................................................... 25.00 4.75 1.19
-----------------------------------------------
Total....................................................... 100 33 8.25
----------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------
Estimated
number of
Options Execution Venue tier Options
Execution
Venues
------------------------------------------------------------------------
Tier 1.................................................. 11
Tier 2.................................................. 4
---------------
Total............................................... 15
------------------------------------------------------------------------
[GRAPHIC] [TIFF OMITTED] TN14DE17.030
Traceability of Total CAT Fees
----------------------------------------------------------------------------------------------------------------
Estimated
Type Industry Member tier number of CAT fees paid Total recovery
members annually
----------------------------------------------------------------------------------------------------------------
Industry Members.................... Tier 1.................... 14 $325,932 $4,563,048
[[Page 58959]]
Tier 2.................... 33 236,220 7,795,260
Tier 3.................... 43 163,596 7,034,628
Tier 4.................... 119 102,264 12,169,416
Tier 5.................... 128 29,712 3,803,136
Tier 6.................... 290 7,872 2,282,880
Tier 7.................... 914 420 383,880
-----------------------------------------------
Total........................... .......................... 1,541 .............. 38,032,248
----------------------------------------------------------------------------------------------------------------
Equity Execution Venues............. Tier 1.................... 13 324,192 4,214,496
Tier 2.................... 22 148,248 3,261,456
Tier 3.................... 12 84,504 1,014,048
Tier 4.................... 5 516 2,580
-----------------------------------------------
Total........................... .......................... 52 .............. 8,492,580
----------------------------------------------------------------------------------------------------------------
Options Execution Venues............ Tier 1.................... 11 $325,524 $3,580,764
Tier 2.................... 4 $150,516 $602,064
-----------------------------------------------
Total........................... .......................... 15 .............. $4,182,828
----------------------------------------------------------------------------------------------------------------
Total....................... .......................... .............. .............. $50,700,000
-----------------------------------------------
Excess \57\................. .......................... .............. .............. 7,656
----------------------------------------------------------------------------------------------------------------
(F) Comparability of Fees
---------------------------------------------------------------------------
\57\ The amount in excess of the total CAT costs will contribute
to the gradual accumulation of the target operating reserve of
$11.425 million.
---------------------------------------------------------------------------
The funding principles require a funding model in which the fees
charged to 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 Venue and/or Industry Members).
Accordingly, in creating the model, the Operating Committee sought to
establish comparable fees for the top tier of Industry Members (other
than Execution Venue ATSs), Equity Execution Venues and Options
Execution Venues. Specifically, each Tier 1 CAT Reporter would be
required to pay a quarterly fee of approximately $81,000.
(G) Billing Onset
Under Section 11.1(c) of the CAT NMS Plan, to fund the development
and implementation of the CAT, the Company shall time the imposition
and collection of all fees on Participants and Industry Members in a
manner reasonably related to the timing when the Company expects to
incur such development and implementation costs. The Company is
currently incurring such development and implementation costs and will
continue to do so prior to the commencement of CAT reporting and
thereafter. In accordance with the CAT NMS Plan, all CAT Reporters,
including both Industry Members and Execution Venues (including
Participants), will be invoiced as promptly as possible following the
latest of the operative date of the Consolidated Audit Trail Funding
Fees for each of the Participants and the operative date of the Plan
amendment adopting CAT Fees for Participants.
(H) Changes to Fee Levels and Tiers
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. The Operating Committee is authorized to review such fee
schedule on a more regular basis, but shall not make any changes on
more than a semi-annual basis unless, pursuant to a Supermajority Vote,
the Operating Committee concludes that such change is necessary for the
adequate funding of the Company.'' With 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. In
addition, the reviews will evaluate the estimated ongoing CAT costs and
the level of the operating reserve. To the extent that the total CAT
costs decrease, the fees would be adjusted downward, and to the extent
that the total CAT costs increase, the fees would be adjusted
upward.\58\ Furthermore, any surplus of the Company's revenues over its
expenses is to be included within the operational reserve to offset
future fees. The limitations on more frequent changes to the fee,
however, are intended to provide budgeting certainty for the CAT
Reporters and the Company.\59\ To the extent that the Operating
Committee approves changes to the number of tiers in the funding model
or the fees assigned to each tier, then the Operating Committee will
file such changes with the SEC pursuant to Rule 608 of the Exchange
Act, and the Participants will file such changes with the SEC pursuant
to Section 19(b) of the Exchange Act and Rule 19b-4 thereunder, and any
such changes will become effective in accordance with the requirements
of those provisions.
---------------------------------------------------------------------------
\58\ The CAT Fees are designed to recover the costs associated
with the CAT. Accordingly, CAT Fees would not be affected by
increases or decreases in other non-CAT expenses incurred by the
Participants, such as any changes in costs related to the retirement
of existing regulatory systems, such as OATS.
\59\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order
at 85006.
---------------------------------------------------------------------------
(I) Initial and Periodic Tier Reassignments
The Operating Committee has determined to calculate fee tiers every
three months based on market share or message traffic, as applicable,
from the
[[Page 58960]]
prior three months. For the initial tier assignments, the Company will
calculate the relevant tier for each CAT Reporter using the three
months of data prior to the commencement date. As with the initial tier
assignment, for the tri-monthly reassignments, the Company will
calculate the relevant tier using the three months of data prior to the
relevant tri-monthly date. Any movement of CAT Reporters between tiers
will not change the criteria for each tier or the fee amount
corresponding to each tier.
In performing the tri-monthly reassignments, the assignment of CAT
Reporters in each assigned tier is relative. Therefore, a CAT
Reporter's assigned tier will depend, not only on its own message
traffic or market share, but also on the message traffic/market share
across all CAT Reporters. For example, the percentage of Industry
Members (other than Execution Venue ATSs) in each tier is relative such
that such Industry Member's assigned tier will depend on message
traffic generated across all CAT Reporters as well as the total number
of CAT Reporters. The Operating Committee will inform CAT Reporters of
their assigned tier every three months following the periodic tiering
process, as the funding model will compare an individual CAT Reporter's
activity to that of other CAT Reporters in the marketplace.
The following demonstrates a tier reassignment. In accordance with
the funding model, the top 75% of Options Execution Venues in market
share are categorized as Tier 1 while the bottom 25% of Options
Execution Venues in market share are categorized as Tier 2. In the
sample scenario below, Options Execution Venue L is initially
categorized as a Tier 2 Options Execution Venue in Period A due to its
market share. When market share is recalculated for Period B, the
market share of Execution Venue L increases, and it is therefore
subsequently reranked and reassigned to Tier 1 in Period B.
Correspondingly, Options Execution Venue K, initially a Tier 1 Options
Execution Venue in Period A, is reassigned to Tier 2 in Period B due to
decreases in its market share.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Period A Period B
--------------------------------------------------------------------------------------------------------------------------------------------------------
Market share Market share
Options Execution Venue rank Tier Options Execution Venue rank Tier
--------------------------------------------------------------------------------------------------------------------------------------------------------
Options Execution Venue A...................... 1 1 Options Execution Venue A............. 1 1
Options Execution Venue B...................... 2 1 Options Execution Venue B............. 2 1
Options Execution Venue C...................... 3 1 Options Execution Venue C............. 3 1
Options Execution Venue D...................... 4 1 Options Execution Venue D............. 4 1
Options Execution Venue E...................... 5 1 Options Execution Venue E............. 5 1
Options Execution Venue F...................... 6 1 Options Execution Venue F............. 6 1
Options Execution Venue G...................... 7 1 Options Execution Venue I............. 7 1
Options Execution Venue H...................... 8 1 Options Execution Venue H............. 8 1
Options Execution Venue I...................... 9 1 Options Execution Venue G............. 9 1
Options Execution Venue J...................... 10 1 Options Execution Venue J............. 10 1
Options Execution Venue K...................... 11 1 Options Execution Venue L............. 11 1
Options Execution Venue L...................... 12 2 Options Execution Venue K............. 12 2
Options Execution Venue M...................... 13 2 Options Execution Venue N............. 13 2
Options Execution Venue N...................... 14 2 Options Execution Venue M............. 14 2
Options Execution Venue O...................... 15 2 Options Execution Venue O............. 15 2
--------------------------------------------------------------------------------------------------------------------------------------------------------
For each periodic tier reassignment, the Operating Committee will
review the new tier assignments, particularly those assignments for CAT
Reporters that shift from the lowest tier to a higher tier. This review
is intended to evaluate whether potential changes to the market or CAT
Reporters (e.g., dissolution of a large CAT Reporter) adversely affect
the tier reassignments.
(J) Sunset Provision
The Operating Committee developed the proposed funding model by
analyzing currently available historical data. Such historical data,
however, is not as comprehensive as data that will be submitted to the
CAT. Accordingly, the Operating Committee believes that it will be
appropriate to revisit the funding model once CAT Reporters have actual
experience with the funding model. Accordingly, the Operating Committee
determined to include an automatic sunsetting provision for the
proposed fees. Specifically, the Operating Committee determined that
the CAT Fees should automatically expire two years after the operative
date of the CAT NMS Plan amendment adopting CAT Fees for Participants.
The Operating Committee intends to monitor the operation of the funding
model during this two year period and to evaluate its effectiveness
during that period. Such a process will inform the Operating
Committee's approach to funding the CAT after the two year period.
(3) Proposed CAT Fee Schedule
The Exchange proposes the Consolidated Audit Trail Funding Fees to
impose the CAT Fees determined by the Operating Committee on the
Exchange's members. The proposed fee schedule has four sections,
covering definitions, the fee schedule for CAT Fees, the timing and
manner of payments, and the automatic sunsetting of the CAT Fees. Each
of these sections is discussed in detail below.
(A) Definitions
Paragraph (a) of the proposed fee schedule sets forth the
definitions for the proposed fee schedule. Paragraph (a)(1) states
that, for purposes of the Consolidated Audit Trail Funding Fees, the
terms ``CAT'', ``CAT NMS Plan,'' ``Industry Member,'' ``NMS Stock,''
``OTC Equity Security'', ``Options Market Maker'', and ``Participant''
are defined as set forth in Rule 910A (Consolidated Audit Trail--
Definitions).
The proposed fee schedule imposes different fees on Equity ATSs and
Industry Members that are not Equity ATSs. Accordingly, the proposed
fee schedule defines the term ``Equity ATS.'' First, paragraph (a)(2)
defines an ``ATS'' to mean an alternative trading system as defined in
Rule 300(a) of Regulation ATS under the Securities Exchange Act of
1934, as amended, that operates pursuant to Rule 301 of Regulation ATS.
This is the same definition of an ATS as set forth in Section 1.1 of
the CAT NMS Plan in the definition of an ``Execution Venue.''
[[Page 58961]]
Then, paragraph (a)(4) defines an ``Equity ATS'' as an ATS that
executes transactions in NMS Stocks and/or OTC Equity Securities.
Paragraph (a)(3) of the proposed fee schedule defines the term
``CAT Fee'' to mean the Consolidated Audit Trail Funding Fee(s) to be
paid by Industry Members as set forth in paragraph (b) in the proposed
fee schedule.
Finally, Paragraph (a)(6) defines an ``Execution Venue'' as a
Participant or an ATS (excluding any such ATS that does not execute
orders). This definition is the same substantive definition as set
forth in Section 1.1 of the CAT NMS Plan. Paragraph (a)(5) defines an
``Equity Execution Venue'' as an Execution Venue that trades NMS Stocks
and/or OTC Equity Securities.
(B) Fee Schedule
The Exchange proposes to impose the CAT Fees applicable to its
Industry Members through paragraph (b) of the proposed fee schedule.
Paragraph (b)(1) of the proposed fee schedule sets forth the CAT Fees
applicable to Industry Members other than Equity ATSs. Specifically,
paragraph (b)(1) states that the Company will assign each Industry
Member (other than an Equity ATS) to a fee tier once every quarter,
where such tier assignment is calculated by ranking each Industry
Member based on its total message traffic (with discounts for equity
market maker quotes and Options Market Maker quotes based on the trade
to quote ratio for equities and options, respectively) for the three
months prior to the quarterly tier calculation day and assigning each
Industry Member to a tier based on that ranking and predefined Industry
Member percentages. The Industry Members with the highest total
quarterly message traffic will be ranked in Tier 1, and the Industry
Members with lowest quarterly message traffic will be ranked in Tier 7.
Each quarter, each Industry Member (other than an Equity ATS) shall pay
the following CAT Fee corresponding to the tier assigned by the Company
for such Industry Member for that quarter:
------------------------------------------------------------------------
Percentage of
Tier Industry Quarterly CAT
Members fee
------------------------------------------------------------------------
1....................................... 0.900 $81,483
2....................................... 2.150 59,055
3....................................... 2.800 40,899
4....................................... 7.750 25,566
5....................................... 8.300 7,428
6....................................... 18.800 1,968
7....................................... 59.300 105
------------------------------------------------------------------------
Paragraph (b)(2) of the proposed fee schedule sets forth the CAT
Fees applicable to Equity ATSs.\60\ These are the same fees that
Participants that trade NMS Stocks and/or OTC Equity Securities will
pay. Specifically, paragraph (b)(2) states that the Company will assign
each Equity ATS to a fee tier once every quarter, where such tier
assignment is calculated by ranking each Equity Execution Venue based
on its total market share of NMS Stocks and OTC Equity Securities (with
a discount for the OTC Equity Securities market share of Equity ATSs
trading OTC Equity Securities based on the average shares per trade
ratio between NMS Stocks and OTC Equity Securities) for the three
months prior to the quarterly tier calculation day and assigning each
Equity ATS to a tier based on that ranking and predefined Equity
Execution Venue percentages. The Equity ATSs with the higher total
quarterly market share will be ranked in Tier 1, and the Equity ATSs
with the lowest quarterly market share will be ranked in Tier 4.
Specifically, paragraph (b)(2) states that, each quarter, each Equity
ATS shall pay the following CAT Fee corresponding to the tier assigned
by the Company for such Equity ATS for that quarter:
---------------------------------------------------------------------------
\60\ Note that no fee schedule is provided for Execution Venue
ATSs that execute transactions in Listed Options, as no such
Execution Venue ATSs currently exist due to trading restrictions
related to Listed Options.
------------------------------------------------------------------------
Percentage of
Equity Quarterly CAT
Tier Execution fee
Venues
------------------------------------------------------------------------
1....................................... 25.00 $81,048
2....................................... 42.00 37,062
3....................................... 23.00 21,126
4....................................... 10.00 129
------------------------------------------------------------------------
(C) Timing and Manner of Payment
Section 11.4 of the CAT NMS Plan states that the Operating
Committee shall establish a system for the collection of fees
authorized under the CAT NMS Plan. The Operating Committee may include
such collection responsibility as a function of the Plan Processor or
another administrator. To implement the payment process to be adopted
by the Operating Committee, paragraph (c)(1) of the proposed fee
schedule states that the Company will provide each Industry Member with
one invoice each quarter for its CAT Fees as determined pursuant to
paragraph (b) of the proposed fee schedule, regardless of whether the
Industry Member is a member of multiple self-regulatory organizations.
Paragraph (c)(1) further states that each Industry Member will pay its
CAT Fees to the Company via the centralized system for the collection
of CAT Fees established by the Company in the manner prescribed by the
Company. The Exchange will provide Industry Members with details
regarding the manner of payment of CAT Fees by Regulatory Notice.
All CAT fees will be billed and collected centrally through the
Company via the Plan Processor. Although each Participant will adopt
its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof
will be collected by the individual Participants. Each Industry Member
will receive from the Company one invoice for its applicable CAT fees,
not separate invoices from each Participant of which it is a member.
The Industry Members will pay the CAT Fees to the Company via the
centralized system for the collection of CAT fees established by the
Company.\61\
---------------------------------------------------------------------------
\61\ Section 11.4 of the CAT NMS Plan.
---------------------------------------------------------------------------
Section 11.4 of the CAT NMS Plan also states that Participants
shall require each Industry Member to pay all applicable authorized CAT
Fees within thirty days after receipt of an invoice or other notice
indicating payment is due (unless a longer payment period is otherwise
indicated). Section 11.4 further states that, if an Industry Member
fails to pay any such fee when due, such Industry Member shall pay
interest on the outstanding balance from such due date until such fee
is paid at a per annum rate equal to the lesser of: (i) The Prime Rate
plus 300 basis points; or (ii) the maximum rate permitted by applicable
law. Therefore, in accordance with Section 11.4 of the CAT NMS Plan,
the Exchange proposed to adopt paragraph (c)(2) of the proposed fee
schedule. Paragraph (c)(2) of the proposed fee schedule states that
each Industry Member shall pay CAT Fees within thirty days after
receipt of an invoice or other notice indicating payment is due (unless
a longer payment period is otherwise indicated). If an Industry Member
fails to pay any such fee when due, such Industry Member shall pay
interest on the outstanding balance from such due date until such fee
is paid at a per annum rate equal to the lesser of: (i) the Prime Rate
plus 300 basis points; or (ii) the maximum rate permitted by applicable
law.
(D) Sunset Provision
The Operating Committee has determined to require that the CAT Fees
automatically sunset two years from the operative date of the CAT NMS
Plan amendment adopting CAT Fees for Participants. Accordingly, the
Exchange
[[Page 58962]]
proposes paragraph (d) of the fee schedule, which states that ``[t]hese
Consolidated Audit Trailing Funding Fees will automatically expire two
years after the operative date of the amendment of the CAT NMS Plan
that adopts CAT fees for the Participants.''
(4) Changes to Prior CAT Fee Plan Amendment
The proposed funding model set forth in this Amendment is a revised
version of the Original Proposal. The Commission received a number of
comment letters in response to the Original Proposal.\62\ The SEC
suspended the Original Proposal and instituted proceedings to determine
whether to approve or disapprove it.\63\ Pursuant to those proceedings,
additional comment letters were submitted regarding the proposed
funding model.\64\ In developing this Amendment, the Operating
Committee carefully considered these comments and made a number of
changes to the Original Proposal to address these comments where
appropriate.
---------------------------------------------------------------------------
\62\ For a description of the comments submitted in response to
the Original Proposal, see Suspension Order.
\63\ Suspension Order.
\64\ See MFA Letter; SIFMA Letter; FIA Principal Traders Group
Letter; Belvedere Letter; Sidley Letter; Group One Letter; and Virtu
Financial Letter.
---------------------------------------------------------------------------
This Amendment makes the following changes to the Original
Proposal: (1) Adds two additional CAT Fee tiers for Equity Execution
Venues; (2) discounts the OTC Equity Securities market share of
Execution Venue ATSs trading OTC Equity Securities as well as the
market share of the FINRA ORF by the average shares per trade ratio
between NMS Stocks and OTC Equity Securities (calculated as 0.17% based
on available data from the second quarter of 2017) when calculating the
market share of Execution Venue ATSs trading OTC Equity Securities and
FINRA; (3) discounts the Options Market Maker quotes by the trade to
quote ratio for options (calculated as 0.01% based on available data
for June 2016 through June 2017) when calculating message traffic for
Options Market Makers; (4) discounts equity market maker quotes by the
trade to quote ratio for equities (calculated as 5.43% based on
available data for June 2016 through June 2017) when calculating
message traffic for equity market makers; (5) decreases the number of
tiers for Industry Members (other than the Execution Venue ATSs) from
nine to seven; (6) changes the allocation of CAT costs between Equity
Execution Venues and Options Execution Venues from 75%/25% to 67%/33%;
(7) adjusts tier percentages and recovery allocations for Equity
Execution Venues, Options Execution Venues and Industry Members (other
than Execution Venue ATSs); (8) focuses the comparability of CAT Fees
on the individual entity level, rather than primarily on the
comparability of affiliated entities; (9) commences invoicing of CAT
Reporters as promptly as possible following the latest of the operative
date of the Consolidated Audit Trail Funding Fees for each of the
Participants and the operative date of the CAT NMS Plan amendment
adopting CAT Fees for Participants; and (10) requires the proposed fees
to automatically expire two years from the operative date of the CAT
NMS Plan amendment adopting CAT Fees for the Participants.
(A) Equity Execution Venues
(i) Small Equity Execution Venues
In the Original Proposal, the Operating Committee proposed to
establish two fee tiers for Equity Execution Venues. The Commission and
commenters raised the concern that, by establishing only two tiers,
smaller Equity Execution Venues (e.g., those Equity ATSs representing
less than 1% of NMS market share) would be placed in the same fee tier
as larger Equity Execution Venues, thereby imposing an undue or
inappropriate burden on competition.\65\ To address this concern, the
Operating Committee proposes to add two additional tiers for Equity
Execution Venues, a third tier for smaller Equity Execution Venues and
a fourth tier for the smallest Equity Execution Venues.
---------------------------------------------------------------------------
\65\ See Suspension Order at 31664; SIFMA Letter at 3.
---------------------------------------------------------------------------
Specifically, the Original Proposal had two tiers of Equity
Execution Venues. Tier 1 required the largest Equity Execution Venues
to pay a quarterly fee of $63,375. Based on available data, these
largest Equity Execution Venues were those that had equity market share
of share volume greater than or equal to 1%.\66\ Tier 2 required the
remaining smaller Equity Execution Venues to pay a quarterly fee of
$38,820.
---------------------------------------------------------------------------
\66\ Note that while these equity market share thresholds were
referenced as data points to help differentiate between Equity
Execution Venue tiers, the proposed funding model is directly driven
not by market share thresholds, but rather by fixed percentages of
Equity Execution Venues across tiers to account for fluctuating
levels of market share across time. Actual market share in any tier
will vary based on the actual market activity in a given measurement
period, as well as the number of Equity Execution Venues included in
the measurement period.
---------------------------------------------------------------------------
To address concerns about the potential for the $38,820 quarterly
fee to impose an undue burden on smaller Equity Execution Venues, the
Operating Committee determined to move to a four tier structure for
Equity Execution Venues. Tier 1 would continue to include the largest
Equity Execution Venues by share volume (that is, based on currently
available data, those with market share of equity share volume greater
than or equal to one percent), and these Equity Execution Venues would
be required to pay a quarterly fee of $81,048. The Operating Committee
determined to divide the original Tier 2 into three tiers. The new Tier
2 Equity Execution Venues, which would include the next largest Equity
Execution Venues by equity share volume, would be required to pay a
quarterly fee of $37,062. The new Tier 3 Equity Execution Venues would
be required to pay a quarterly fee of $21,126. The new Tier 4 Equity
Execution Venues, which would include the smallest Equity Execution
Venues by share volume, would be required to pay a quarterly fee of
$129.
In developing the proposed four tier structure, the Operating
Committee considered keeping the existing two tiers, as well as
shifting to three, four or five Equity Execution Venue tiers (the
maximum number of tiers permitted under the Plan), to address the
concerns regarding small Equity Execution Venues. For each of the two,
three, four and five tier alternatives, the Operating Committee
considered the assignment of various percentages of Equity Execution
Venues to each tier as well as various percentage of Equity Execution
Venue recovery allocations for each alternative. As discussed below in
more detail, each of these options was considered in the context of the
full model, as changes in each variable in the model affect other
variables in the model when allocating the total CAT costs among CAT
Reporters. The Operating Committee determined that the four tier
alternative addressed the spectrum of different Equity Execution
Venues. The Operating Committee determined that neither a two tier
structure nor a three tier structure sufficiently accounted for the
range of market shares of smaller Equity Execution Venues. The
Operating Committee also determined that, given the limited number of
Equity Execution Venues, that a fifth tier was unnecessary to address
the range of market shares of the Equity Execution Venues.
By increasing the number of tiers for Equity Execution Venues and
reducing the proposed CAT Fees for the smaller Equity Execution Venues,
the Operating Committee believes that the proposed fees for Equity
Execution Venues would
[[Page 58963]]
not impose an undue or inappropriate burden on competition under
Section 6 or Section 15A of the Exchange Act. Moreover, the Operating
Committee believes that the proposed fees appropriately take into
account the distinctions in the securities trading operations of
different Equity Execution Venues, as required under the funding
principles of the CAT NMS Plan.\67\ The larger number of tiers more
closely tracks the variety of sizes of equity share volume of Equity
Execution Venues. In addition, the reduction in the fees for the
smaller Equity Execution Venues recognizes the potential burden of
larger fees on smaller entities. In particular, the very small
quarterly fee of $129 for Tier 4 Equity Execution Venues reflects the
fact that certain Equity Execution Venues have a very small share
volume due to their typically more focused business models.
---------------------------------------------------------------------------
\67\ Section 11.2(b) of the CAT NMS Plan.
---------------------------------------------------------------------------
Accordingly, with this Amendment, the Exchange proposes to amend
paragraph (b)(2) of the proposed fee schedule to add the two additional
tiers for Equity Execution Venues, to establish the percentages and
fees for Tiers 3 and 4 as described, and to revise the percentages and
fees for Tiers 1 and 2 as described.
(ii) Execution Venues for OTC Equity Securities
In the Original Proposal, the Operating Committee proposed to group
Execution Venues for OTC Equity Securities and Execution Venues for NMS
Stocks in the same tier structure. The Commission and commenters raised
concerns as to whether this determination to place Execution Venues for
OTC Equity Securities in the same tier structure as Execution Venues
for NMS Stocks would result in an undue or inappropriate burden on
competition, recognizing that the application of share volume may lead
to different outcomes as applied to OTC Equity Securities and NMS
Stocks.\68\ To address this concern, the Operating Committee proposes
to discount the OTC Equity Securities market share of Execution Venue
ATSs trading OTC Equity Securities as well as the market share of the
FINRA ORF by the average shares per trade ratio between NMS Stocks and
OTC Equity Securities (0.17% for the second quarter of 2017) in order
to adjust for the greater number of shares being traded in the OTC
Equity Securities market, which is generally a function of a lower per
share price for OTC Equity Securities when compared to NMS Stocks.
---------------------------------------------------------------------------
\68\ See Suspension Order at 31664-5.
---------------------------------------------------------------------------
As commenters noted, many OTC Equity Securities are priced at less
than one dollar--and a significant number at less than one penny--and
low-priced shares tend to trade in larger quantities. Accordingly, a
disproportionately large number of shares are involved in transactions
involving OTC Equity Securities versus NMS Stocks, which has the effect
of overstating an Execution Venue's true market share when the
Execution Venue is involved in the trading of OTC Equity Securities.
Because the proposed fee tiers are based on market share calculated by
share volume, Execution Venue ATSs trading OTC Equity Securities and
FINRA may be subject to higher tiers than their operations may
warrant.\69\ The Operating Committee proposes to address this concern
in two ways. First, the Operating Committee proposes to increase the
number of Equity Execution Venue tiers, as discussed above. Second, the
Operating Committee determined to discount the OTC Equity Securities
market share of Execution Venue ATSs trading OTC Equity Securities as
well as the market share of the FINRA ORF when calculating their tier
placement. Because the disparity in share volume between Execution
Venues trading in OTC Equity Securities and NMS Stocks is based on the
different number of shares per trade for OTC Equity Securities and NMS
Stocks, the Operating Committee believes that discounting the OTC
Equity Securities share volume of such Execution Venue ATSs as well as
the market share of the FINRA ORF would address the difference in
shares per trade for OTC Equity Securities and NMS Stocks.
Specifically, the Operating Committee proposes to impose a discount
based on the objective measure of the average shares per trade ratio
between NMS Stocks and OTC Equity Securities. Based on available data
from the second quarter of 2017, the average shares per trade ratio
between NMS Stocks and OTC Equity Securities is 0.17%.
---------------------------------------------------------------------------
\69\ Suspension Order at 31664-5.
---------------------------------------------------------------------------
The practical effect of applying such a discount for trading in OTC
Equity Securities is to shift Execution Venue ATSs trading OTC Equity
Securities to tiers for smaller Execution Venues and with lower fees.
For example, under the Original Proposal, one Execution Venue ATS
trading OTC Equity Securities was placed in the first CAT Fee tier,
which had a quarterly fee of $63,375. With the imposition of the
proposed tier changes and the discount, this ATS would be ranked in
Tier 3 and would owe a quarterly fee of $21,126.
In developing the proposed discount for Equity Execution Venue ATSs
trading OTC Equity Securities and FINRA, the Operating Committee
evaluated different alternatives to address the concerns related to OTC
Equity Securities, including creating a separate tier structure for
Execution Venues trading OTC Equity Securities (like the separate tier
for Options Execution Venues) as well as the proposed discounting
method for Execution Venue ATSs trading OTC Equity Securities and
FINRA. For these alternatives, the Operating Committee considered how
each alternative would affect the recovery allocations. In addition,
each of these options was considered in the context of the full model,
as changes in each variable in the model affect other variables in the
model when allocating the total CAT costs among CAT Reporters. The
Operating Committee did not adopt a separate tier structure for Equity
Execution Venues trading OTC Equity Securities as they determined that
the proposed discount approach appropriately addresses the concern. The
Operating Committee determined to adopt the proposed discount because
it directly relates to the concern regarding the trading patterns and
operations in the OTC Equity Securities markets, and is an objective
discounting method.
By increasing the number of tiers for Equity Execution Venues and
imposing a discount on the market share of share volume calculation for
trading in OTC Equity Securities, the Operating Committee believes that
the proposed fees for Equity Execution Venues would not impose an undue
or inappropriate burden on competition under Section 6 or Section 15A
of the Exchange Act. Moreover, the Operating Committee believes that
the proposed fees appropriately take into account the distinctions in
the securities trading operations of different Equity Execution Venues,
as required under the funding principles of the CAT NMS Plan.\70\ As
discussed above, the larger number of tiers more closely tracks the
variety of sizes of equity share volume of Equity Execution Venues. In
addition, the proposed discount recognizes the different types of
trading operations at Equity Execution Venues trading OTC Equity
Securities versus those trading NMS Stocks, thereby more closing
matching the relative revenue generation by Equity Execution Venues
[[Page 58964]]
trading OTC Equity Securities to their CAT Fees.
---------------------------------------------------------------------------
\70\ Section 11.2(b) of the CAT NMS Plan.
---------------------------------------------------------------------------
Accordingly, with this Amendment, the Exchange proposes to amend
paragraph (b)(2) of the proposed fee schedule to indicate that the OTC
Equity Securities market share for Equity ATSs trading OTC Equity
Securities as well as the market share of the FINRA ORF would be
discounted. In addition, as discussed above, to address concerns
related to smaller ATSs, including those that trade OTC Equity
Securities, the Exchange proposes to amend paragraph (b)(2) of the
proposed fee schedule to add two additional tiers for Equity Execution
Venues, to establish the percentages and fees for Tiers 3 and 4 as
described, and to revise the percentages and fees for Tiers 1 and 2 as
described.
(B) Market Makers
In the Original Proposal, the Operating Committee proposed to
include both Options Market Maker quotes and equities market maker
quotes in the calculation of total message traffic for such market
makers for purposes of tiering for Industry Members (other than
Execution Venue ATSs). The Commission and commenters raised questions
as to whether the proposed treatment of Options Market Maker quotes may
result in an undue or inappropriate burden on competition or may lead
to a reduction in market quality.\71\ To address this concern, the
Operating Committee determined to discount the Options Market Maker
quotes by the trade to quote ratio for options when calculating message
traffic for Options Market Makers. Similarly, to avoid disincentives to
quoting behavior on the equities side as well, the Operating Committee
determined to discount equity market maker quotes by the trade to quote
ratio for equities when calculating message traffic for equities market
makers.
---------------------------------------------------------------------------
\71\ See Suspension Order at 31663-4; SIFMA Letter at 4-6; FIA
Principal Traders Group Letter at 3; Sidley Letter at 2-6; Group One
Letter at 2-6; and Belvedere Letter at 2.
---------------------------------------------------------------------------
In the Original Proposal, market maker quotes were treated the same
as other message traffic for purposes of tiering for Industry Members
(other than Execution Venue ATSs). Commenters noted, however, that
charging Industry Members on the basis of message traffic will impact
market makers disproportionately because of their continuous quoting
obligations. Moreover, in the context of options market makers, message
traffic would include bids and offers for every listed options strikes
and series, which are not an issue for equities.\72\ The Operating
Committee proposes to address this concern in two ways. First, the
Operating Committee proposes to discount Options Market Maker quotes
when calculating the Options Market Makers' tier placement.
Specifically, the Operating Committee proposes to impose a discount
based on the objective measure of the trade to quote ratio for options.
Based on available data from June 2016 through June 2017, the trade to
quote ratio for options is 0.01%. Second, the Operating Committee
proposes to discount equities market maker quotes when calculating the
equities market makers' tier placement. Specifically, the Operating
Committee proposes to impose a discount based on the objective measure
of the trade to quote ratio for equities. Based on available data for
June 2016 through June 2017, this trade to quote ratio for equities is
5.43%.
---------------------------------------------------------------------------
\72\ Suspension Order at 31664.
---------------------------------------------------------------------------
The practical effect of applying such discounts for quoting
activity is to shift market makers' calculated message traffic lower,
leading to the potential shift to tiers for lower message traffic and
reduced fees. Such an approach would move sixteen Industry Member CAT
Reporters that are market makers to a lower tier than in the Original
Proposal. For example, under the Original Proposal, Broker-Dealer Firm
ABC was placed in the first CAT Fee tier, which had a quarterly fee of
$101,004. With the imposition of the proposed tier changes and the
discount, Broker-Dealer Firm ABC, an options market maker, would be
ranked in Tier 3 and would owe a quarterly fee of $40,899.
In developing the proposed market maker discounts, the Operating
Committee considered various discounts for Options Market Makers and
equity market makers, including discounts of 50%, 25%, 0.00002%, as
well as the 5.43% for option market makers and 0.01% for equity market
makers. Each of these options were considered in the context of the
full model, as changes in each variable in the model affect other
variables in the model when allocating the total CAT costs among CAT
Reporters. The Operating Committee determined to adopt the proposed
discount because it directly relates to the concern regarding the
quoting requirement, is an objective discounting method, and has the
desired potential to shift market makers to lower fee tiers.
By imposing a discount on Options Market Makers and equities market
makers' quoting traffic for the calculation of message traffic, the
Operating Committee believes that the proposed fees for market makers
would not impose an undue or inappropriate burden on competition under
Section 6 or Section 15A of the Exchange Act. Moreover, the Operating
Committee believes that the proposed fees appropriately take into
account the distinctions in the securities trading operations of
different Industry Members, and avoid disincentives, such as a
reduction in market quality, as required under the funding principles
of the CAT NMS Plan.\73\ The proposed discounts recognize the different
types of trading operations presented by Options Market Makers and
equities market makers, as well as the value of the market makers'
quoting activity to the market as a whole. Accordingly, the Operating
Committee believes that the proposed discounts will not impact the
ability of small Options Market Makers or equities market makers to
provide liquidity.
---------------------------------------------------------------------------
\73\ Section 11.2(b) of the CAT NMS Plan.
---------------------------------------------------------------------------
Accordingly, with this Amendment, the Exchange proposes to amend
paragraph (b)(1) of the proposed fee schedule to indicate that the
message traffic related to equity market maker quotes and Options
Market Maker quotes would be discounted. In addition, the Exchange
proposes to define the term ``Options Market Maker'' in paragraph
(a)(1) of the proposed fee schedule.
(C) Comparability/Allocation of Costs
Under the Original Proposal, 75% of CAT costs were allocated to
Industry Members (other than Execution Venue ATSs) and 25% of CAT costs
were allocated to Execution Venues. This cost allocation sought to
maintain the greatest level of comparability across the funding model,
where comparability considered affiliations among or between CAT
Reporters. The Commission and commenters expressed concerns regarding
whether the proposed 75%/25% allocation of CAT costs is consistent with
the Plan's funding principles and the Exchange Act, including whether
the allocation places a burden on competition or reduces market
quality. The Commission and commenters also questioned whether the
approach of accounting for affiliations among CAT Reporters in setting
CAT Fees disadvantages non-affiliated CAT Reporters or otherwise
burdens
[[Page 58965]]
competition in the market for trading services.\74\
---------------------------------------------------------------------------
\74\ See Suspension Order at 31662-3; SIFMA Letter at 3; Sidley
Letter at 6-7; Group One Letter at 2; and Belvedere Letter at 2.
---------------------------------------------------------------------------
In response to these concerns, the Operating Committee determined
to revise the proposed funding model to focus the comparability of CAT
Fees on the individual entity level, rather than primarily on the
comparability of affiliated entities. In light of the interconnected
nature of the various aspects of the funding model, the Operating
Committee determined to revise various aspects of the model to enhance
comparability at the individual entity level. Specifically, to achieve
such comparability, the Operating Committee determined to (1) decrease
the number of tiers for Industry Members (other than Execution Venue
ATSs) from nine to seven; (2) change the allocation of CAT costs
between Equity Execution Venues and Options Execution Venues from 75%/
25% to 67%/33%; and (3) adjust tier percentages and recovery
allocations for Equity Execution Venues, Options Execution Venues and
Industry Members (other than Execution Venue ATSs). With these changes,
the proposed funding model provides fee comparability for the largest
individual entities, with the largest Industry Members (other than
Execution Venue ATSs), Equity Execution Venues and Options Execution
Venues each paying a CAT Fee of approximately $81,000 each quarter.
(i) Number of Industry Member Tiers
In the Original Proposal, the proposed funding model had nine tiers
for Industry Members (other than Execution Venue ATSs). The Operating
Committee determined that reducing the number of tiers from nine tiers
to seven tiers (and adjusting the predefined Industry Member
Percentages as well) continues to provide a fair allocation of fees
among Industry Members and appropriately distinguishes between Industry
Members with differing levels of message traffic. In reaching this
conclusion, the Operating Committee considered historical message
traffic generated by Industry Members across all exchanges and as
submitted to FINRA's OATS, and considered the distribution of firms
with similar levels of message traffic, grouping together firms with
similar levels of message traffic. Based on this, the Operating
Committee determined that seven tiers would group firms with similar
levels of message traffic, while also achieving greater comparability
in the model for the individual CAT Reporters with the greatest market
share or message traffic.
In developing the proposed seven tier structure, the Operating
Committee considered remaining at nine tiers, as well as reducing the
number of tiers down to seven when considering how to address the
concerns raised regarding comparability. For each of the alternatives,
the Operating Committee considered the assignment of various
percentages of Industry Members to each tier as well as various
percentages of Industry Member recovery allocations for each
alternative. Each of these options was considered in the context of its
effects on the full funding model, as changes in each variable in the
model affect other variables in the model when allocating the total CAT
costs among CAT Reporters. The Operating Committee determined that the
seven tier alternative provided the most fee comparability at the
individual entity level for the largest CAT Reporters, while both
providing logical breaks in tiering for Industry Members with different
levels of message traffic and a sufficient number of tiers to provide
for the full spectrum of different levels of message traffic for all
Industry Members.
(ii) Allocation of CAT Costs Between Equity and Options Execution
Venues
The Operating Committee also determined to adjust the allocation of
CAT costs between Equity Execution Venues and Options Execution Venues
to enhance comparability at the individual entity level. In the
Original Proposal, 75% of Execution Venue CAT costs were allocated to
Equity Execution Venues, and 25% of Execution Venue CAT costs were
allocated to Options Execution Venues. To achieve the goal of increased
comparability at the individual entity level, the Operating Committee
analyzed a range of alternative splits for revenue recovery between
Equity and Options Execution Venues, along with other changes in the
proposed funding model. Based on this analysis, the Operating Committee
determined to allocate 67 percent of Execution Venue costs recovered to
Equity Execution Venues and 33 percent to Options Execution Venues. The
Operating Committee determined that a 67/33 allocation between Equity
and Options Execution Venues enhances the level of fee comparability
for the largest CAT Reporters. Specifically, the largest Equity and
Options Execution Venues would pay a quarterly CAT Fee of approximately
$81,000.
In developing the proposed allocation of CAT costs between Equity
and Options Execution Venues, the Operating Committee considered
various different options for such allocation, including keeping the
original 75%25% allocation, as well as shifting to a 70%/30%, 67%/33%,
or 57.75%/42.25% allocation. For each of the alternatives, the
Operating Committee considered the effect each allocation would have on
the assignment of various percentages of Equity Execution Venues to
each tier as well as various percentages of Equity Execution Venue
recovery allocations for each alternative. Moreover, each of these
options was considered in the context of the full model, as changes in
each variable in the model affect other variables in the model when
allocating the total CAT costs among CAT Reporters. The Operating
Committee determined that the 67%/33% allocation between Equity and
Options Execution Venues provided the greatest level of fee
comparability at the individual entity level for the largest CAT
Reporters, while still providing for appropriate fee levels across all
tiers for all CAT Reporters.
(iii) Allocation of Costs Between Execution Venues and Industry Members
The Operating Committee determined to allocate 25% of CAT costs to
Execution Venues and 75% to Industry Members (other than Execution
Venue ATSs), as it had in the Original Proposal. The Operating
Committee determined that this 75%/25% allocation, along with the other
changes proposed above, led to the most comparable fees for the largest
Equity Execution Venues, Options Execution Venues and Industry Members
(other than Execution Venue ATSs). The largest Equity Execution Venues,
Options Execution Venues and Industry Members (other than Execution
Venue ATSs) would each pay a quarterly CAT Fee of approximately
$81,000.
As a preliminary matter, the Operating Committee determined that it
is appropriate to allocate most of the costs to create, implement and
maintain the CAT to Industry Members for several reasons. First, there
are many more broker-dealers expected to report to the CAT than
Participants (i.e., 1,541 broker-dealer CAT Reporters versus 22
Participants). Second, since most of the costs to process CAT
reportable data is generated by Industry Members, Industry Members
could be expected to contribute toward such costs. Finally, as noted by
the SEC, the CAT ``substantially enhance[s] the ability of the SROs and
the Commission to
[[Page 58966]]
oversee today's securities markets,'' \75\ thereby benefitting all
market participants. After making this determination, the Operating
Committee analyzed several different cost allocations, as discussed
further below, and determined that an allocation where 75% of the CAT
costs should be borne by the Industry Members (other than Execution
Venue ATSs) and 25% should be paid by Execution Venues was most
appropriate and led to the greatest comparability of CAT Fees for the
largest CAT Reporters.
---------------------------------------------------------------------------
\75\ Securities Exchange Act Release No. 67457 (July 18, 2012),
77 FR 45722, 45726 (August 1, 2012) (``Rule 613 Adopting Release'').
---------------------------------------------------------------------------
In developing the proposed allocation of CAT costs between
Execution Venues and Industry Members (other than Execution Venue
ATSs), the Operating Committee considered various different options for
such allocation, including keeping the original 75%/25% allocation, as
well as shifting to an 80%/20%, 70%/30%, or 65%/35% allocation. Each of
these options was considered in the context of the full model,
including the effect on each of the changes discussed above, as changes
in each variable in the model affect other variables in the model when
allocating the total CAT costs among CAT Reporters. In particular, for
each of the alternatives, the Operating Committee considered the effect
each allocation had on the assignment of various percentages of Equity
Execution Venues, Options Execution Venues and Industry Members (other
than Execution Venue ATSs) to each relevant tier as well as various
percentages of recovery allocations for each tier. The Operating
Committee determined that the 75%/25% allocation between Execution
Venues and Industry Members (other than Execution Venue ATSs) provided
the greatest level of fee comparability at the individual entity level
for the largest CAT Reporters, while still providing for appropriate
fee levels across all tiers for all CAT Reporters.
(iv) Affiliations
The funding principles set forth in Section 11.2 of the Plan
require that the fees charged to 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 Venue
and/or Industry Members). The proposed funding model satisfies this
requirement. As discussed above, under the proposed funding model, the
largest Equity Execution Venues, Options Execution Venues, and Industry
Members (other than Execution Venue ATSs) pay approximately the same
fee. Moreover, the Operating Committee believes that the proposed
funding model takes into consideration affiliations between or among
CAT Reporters as complexes with multiple CAT Reporters will pay the
appropriate fee based on the proposed fee schedule for each of the CAT
Reporters in the complex. For example, a complex with a Tier 1 Equity
Execution Venue and Tier 2 Industry Member will a pay the same as
another complex with a Tier 1 Equity Execution Venue and Tier 2
Industry Member.
(v) Fee Schedule Changes
Accordingly, with this Amendment, the Exchange proposes to amend
paragraphs (b)(1) and (2) of the proposed fee schedule to reflect the
changes discussed in this section. Specifically, the Exchange proposes
to amend paragraph (b)(1) and (2) of the proposed fee schedule to
update the number of tiers, and the fees and percentages assigned to
each tier to reflect the described changes.
(D) Market Share/Message Traffic
In the Original Proposal, the Operating Committee proposed to
charge Execution Venues based on market share and Industry Members
(other than Execution Venue ATSs) based on message traffic. Commenters
questioned the use of the two different metrics for calculating CAT
Fees.\76\ The Operating Committee continues to believe that the
proposed use of market share and message traffic satisfies the
requirements of the Exchange Act and the funding principles set forth
in the CAT NMS Plan. Accordingly, the proposed funding model continues
to charge Execution Venues based on market share and Industry Members
(other than Execution Venue ATSs) based on message traffic.
---------------------------------------------------------------------------
\76\ Suspension Order at 31663; FIA Principal Traders Group
Letter at 2.
---------------------------------------------------------------------------
In drafting the Plan and the Original Proposal, the Operating
Committee expressed the view that the correlation between message
traffic and size does not apply to Execution Venues, which they
described as producing similar amounts of message traffic regardless of
size. The Operating Committee believed that charging Execution Venues
based on message traffic would result in both large and small Execution
Venues paying comparable fees, which would be inequitable, so the
Operating Committee determined that it would be more appropriate to
treat Execution Venues differently from Industry Members in the funding
model. Upon a more detailed analysis of available data, however, the
Operating Committee noted that Execution Venues have varying levels of
message traffic. Nevertheless, the Operating Committee continues to
believe that a bifurcated funding model--where Industry Members (other
than Execution Venue ATSs) are charged fees based on message traffic
and Execution Venues are charged based on market share--complies with
the Plan and meets the standards of the Exchange Act for the reasons
set forth below.
Charging Industry Members based on message traffic is the most
equitable means for establishing fees for Industry Members (other than
Execution Venue ATSs). This approach will assess fees to Industry
Members that create larger volumes of message traffic that are
relatively higher than those fees charged to Industry Members that
create smaller volumes of message traffic. Since message traffic, along
with fixed costs of the Plan Processor, is a key component of the costs
of operating the CAT, message traffic is an appropriate criterion for
placing Industry Members in a particular fee tier.
The Operating Committee also believes that it is appropriate to
charge Execution Venues CAT Fees based on their market share. In
contrast to Industry Members (other than Execution Venue ATSs), which
determine the degree to which they produce the message traffic that
constitutes CAT Reportable Events, the CAT Reportable Events of
Execution Venues are largely derivative of quotations and orders
received from Industry Members that the Execution Venues are required
to display. The business model for Execution Venues, however, is
focused on executions in their markets. As a result, the Operating
Committee believes that it is more equitable to charge Execution Venues
based on their market share rather than their message traffic.
Similarly, focusing on message traffic would make it more difficult
to draw distinctions between large and small exchanges, including
options exchanges in particular. For instance, the Operating Committee
analyzed the message traffic of Execution Venues and Industry Members
for the period of April 2017 to June 2017 and placed all CAT Reporters
into a nine-tier framework (i.e., a single tier may include both
Execution Venues and Industry Members). The Operating Committee's
analysis found that the majority of exchanges (15 total) were
[[Page 58967]]
grouped in Tiers 1 and 2. Moreover, virtually all of the options
exchanges were in Tiers 1 and 2.\77\ Given the concentration of options
exchanges in Tiers 1 and 2, the Operating Committee believes that using
a funding model based purely on message traffic would make it more
difficult to distinguish between large and small options exchanges, as
compared to the proposed bifurcated fee approach.
---------------------------------------------------------------------------
\77\ The Participants note that this analysis did not place MIAX
PEARL in Tier 1 or Tier 2 since the exchange commenced trading on
February 6, 2017.
---------------------------------------------------------------------------
In addition, the Operating Committee also believes that it is
appropriate to treat ATSs as Execution Venues under the proposed
funding model since ATSs have business models that are similar to those
of exchanges, and ATSs also compete with exchanges. For these reasons,
the Operating Committee believes that charging Execution Venues based
on market share is more appropriate and equitable than charging
Execution Venues based on message traffic.
(E) Time Limit
In the Original Proposal, the Operating Committee did not impose
any time limit on the application of the proposed CAT Fees. As
discussed above, the Operating Committee developed the proposed funding
model by analyzing currently available historical data. Such historical
data, however, is not as comprehensive as data that will be submitted
to the CAT. Accordingly, the Operating Committee believes that it will
be appropriate to revisit the funding model once CAT Reporters have
actual experience with the funding model. Accordingly, the Operating
Committee proposes to include a sunsetting provision in the proposed
fee model. The proposed CAT Fees will sunset two years after the
operative date of the CAT NMS Plan amendment adopting CAT Fees for
Participants. Specifically, the Exchange proposes to add paragraph (d)
of the proposed fee schedule to include this sunsetting provision. Such
a provision will provide the Operating Committee and other market
participants with the opportunity to reevaluate the performance of the
proposed funding model.
(F) Tier Structure/Decreasing Cost per Unit
In the Original Proposal, the Operating Committee determined to use
a tiered fee structure. The Commission and commenters questioned
whether the decreasing cost per additional unit (of message traffic in
the case of Industry Members, or of share volume in the case of
Execution Venues) in the proposed fee schedules burdens competition by
disadvantaging small Industry Members and Execution Venues and/or by
creating barriers to entry in the market for trading services and/or
the market for broker-dealer services.\78\
---------------------------------------------------------------------------
\78\ Suspension Order at 31667.
---------------------------------------------------------------------------
The Operating Committee does not believe that decreasing cost per
additional unit in the proposed fee schedules places an unfair
competitive burden on Small Industry Members and Execution Venues.
While the cost per unit of message traffic or share volume necessarily
will decrease as volume increases in any tiered fee model using fixed
fee percentages and, as a result, Small Industry Members and small
Execution Venues may pay a larger fee per message or share, this
comment fails to take account of the substantial differences in the
absolute fees paid by Small Industry Members and small Execution Venues
as opposed to large Industry Members and large Execution Venues. For
example, under the fee proposals, Tier 7 Industry Members would pay a
quarterly fee of $105, while Tier 1 Industry Members would pay a
quarterly fee of $81,483. Similarly, a Tier 4 Equity Execution Venue
would pay a quarterly fee of $129, while a Tier 1 Equity Execution
Venue would pay a quarterly fee of $81,048. Thus, Small Industry
Members and small Execution Venues are not disadvantaged in terms of
the total fees that they actually pay. In contrast to a tiered model
using fixed fee percentages, the Operating Committee believes that
strictly variable or metered funding models based on message traffic or
share volume would be more likely to affect market behavior and may
present administrative challenges (e.g., the costs to calculate and
monitor fees may exceed the fees charged to the smallest CAT
Reporters).
(G) Other Alternatives Considered
In addition to the various funding model alternatives discussed
above regarding discounts, number of tiers and allocation percentages,
the Operating Committee also discussed other possible funding models.
For example, the Operating Committee considered allocating the total
CAT costs equally among each of the Participants, and then permitting
each Participant to charge its own members as it deems appropriate.\79\
The Operating Committee determined that such an approach raised a
variety of issues, including the likely inconsistency of the ensuing
charges, potential for lack of transparency, and the impracticality of
multiple SROs submitting invoices for CAT charges. The Operating
Committee therefore determined that the proposed funding model was
preferable to this alternative.
---------------------------------------------------------------------------
\79\ See FIA Principal Traders Group Letter at 2; Belvedere
Letter at 4.
---------------------------------------------------------------------------
(H) Industry Member Input
Commenters expressed concern regarding the level of Industry Member
input into the development of the proposed funding model, and certain
commenters have recommended a greater role in the governance of the
CAT.\80\ The Participants previously addressed this concern in its
letters responding to comments on the Plan and the CAT Fees.\81\ As
discussed in those letters, the Participants discussed the funding
model with the Development Advisory Group (``DAG''), the advisory group
formed to assist in the development of the Plan, during its original
development.\82\ Moreover, Industry Members currently have a voice in
the affairs of the Operating Committee and operation of the CAT
generally through the Advisory Committee established pursuant to Rule
613(b)(7) and Section 4.13 of the Plan. The Advisory Committee attends
all meetings of the Operating Committee, as well as meetings of various
subcommittees and working groups, and provides valuable and critical
input for the Participants' and Operating Committee's consideration.
The Operating Committee continues to believe that that Industry Members
have an appropriate voice regarding the funding of the Company.
---------------------------------------------------------------------------
\80\ See Suspension Order at 31662; MFA Letter at 1-2.
\81\ Letter from Participants to Brent J. Fields, Secretary, SEC
(Sept. 23, 2016) (``Plan Response Letter''); Letter from CAT NMS
Plan Participants to Brent J. Fields, Secretary, SEC (June 29, 2017)
(``Fee Rule Response Letter'').
\82\ Fee Rule Response Letter at 2; Plan Response Letter at 18.
---------------------------------------------------------------------------
(I) Conflicts of Interest
Commenters also raised concerns regarding Participant conflicts of
interest in setting the CAT Fees.\83\ The Participants previously
responded to this concern in both the Plan Response Letter and the Fee
Rule Response Letter.\84\ As discussed in those letters, the Plan, as
approved by the SEC, adopts various measures to protect against the
potential conflicts issues raised by the Participants' fee-setting
authority. Such measures include the
[[Page 58968]]
operation of the Company as a not for profit business league and on a
break-even basis, and the requirement that the Participants file all
CAT Fees under Section 19(b) of the Exchange Act. The Operating
Committee continues to believe that these measures adequately protect
against concerns regarding conflicts of interest in setting fees, and
that additional measures, such as an independent third party to
evaluate an appropriate CAT Fee, are unnecessary.
---------------------------------------------------------------------------
\83\ See Suspension Order at 31662; FIA Principal Traders Group
at 3.
\84\ See Plan Response Letter at 16, 17; Fee Rule Response
Letter at 10-12.
---------------------------------------------------------------------------
(J) Fee Transparency
Commenters also argued that they could not adequately assess
whether the CAT Fees were fair and equitable because the Operating
Committee has not provided details as to what the Participants are
receiving in return for the CAT Fees.\85\ The Operating Committee
provided a detailed discussion of the proposed funding model in the
Plan, including the expenses to be covered by the CAT Fees. In
addition, the agreement between the Company and the Plan Processor sets
forth a comprehensive set of services to be provided to the Company
with regard to the CAT. Such services include, without limitation: User
support services (e.g., a help desk); tools to allow each CAT Reporter
to monitor and correct their submissions; a comprehensive compliance
program to monitor CAT Reporters' adherence to Rule 613; publication of
detailed Technical Specifications for Industry Members and
Participants; performing data linkage functions; creating comprehensive
data security and confidentiality safeguards; creating query
functionality for regulatory users (i.e., the Participants, and the SEC
and SEC staff); and performing billing and collection functions. The
Operating Committee further notes that the services provided by the
Plan Processor and the costs related thereto were subject to a bidding
process.
---------------------------------------------------------------------------
\85\ See FIA Principal Traders Group at 3; SIFMA Letter at 3.
---------------------------------------------------------------------------
(K) Funding Authority
Commenters also questioned the authority of the Operating Committee
to impose CAT Fees on Industry Members.\86\ The Participants previously
responded to this same comment in the Plan Response Letter and the Fee
Rule Response Letter.\87\ As the Participants previously noted, SEC
Rule 613 specifically contemplates broker-dealers contributing to the
funding of the CAT. In addition, as noted by the SEC, the CAT
``substantially enhance[s] the ability of the SROs and the Commission
to oversee today's securities markets,'' \88\ thereby benefitting all
market participants. Therefore, the Operating Committing continues to
believe that it is equitable for both Participants and Industry Members
to contribute to funding the cost of the CAT.
---------------------------------------------------------------------------
\86\ See Suspension Order at 31661-2; SIFMA Letter at 2.
\87\ See Plan Response Letter at 9-10; Fee Rule Response Letter
at 3-4.
\88\ Rule 613 Adopting Release at 45726.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\89\ in general, and furthers the objectives of
Sections 6(b)(4) and 6(b)(5) of the Act,\90\ in particular, in that it
provides for the equitable allocation of reasonable dues, fees, and
other charges among members and issuers and other persons using any
facility, is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers, and is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and, in general, to protect investors
and the public interest. As discussed above, the SEC approved the
bifurcated, tiered, fixed fee funding model in the CAT NMS Plan,
finding it was reasonable and that it equitably allocated fees among
Participants and Industry Members. The Exchange believes that the
proposed tiered fees adopted pursuant to the funding model approved by
the SEC in the CAT NMS Plan are reasonable, equitably allocated and not
unfairly discriminatory.
---------------------------------------------------------------------------
\89\ 15 U.S.C. 78f(b).
\90\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------
The Exchange believes that this proposal is consistent with the Act
because it implements, interprets or clarifies the provisions of the
Plan, and is designed to assist the Exchange and its Industry Members
in meeting regulatory obligations pursuant to the Plan. In approving
the Plan, the SEC noted that the Plan ``is necessary and appropriate in
the public interest, for the protection of investors and the
maintenance of fair and orderly markets, to remove impediments to, and
perfect the mechanism of a national market system, or is otherwise in
furtherance of the purposes of the Act.'' \91\ To the extent that this
proposal implements, interprets or clarifies the Plan and applies
specific requirements to Industry Members, the Exchange believes that
this proposal furthers the objectives of the Plan, as identified by the
SEC, and is therefore consistent with the Act.
---------------------------------------------------------------------------
\91\ Approval Order at 84697.
---------------------------------------------------------------------------
The Exchange believes that the proposed tiered fees are reasonable.
First, the total CAT Fees to be collected would be directly associated
with the costs of establishing and maintaining the CAT, where such
costs include Plan Processor costs and costs related to insurance,
third party services and the operational reserve. The CAT Fees would
not cover Participant services unrelated to the CAT. In addition, any
surplus CAT Fees cannot be distributed to the individual Participants;
such surpluses must be used as a reserve to offset future fees. Given
the direct relationship between the fees and the CAT costs, the
Exchange believes that the total level of the CAT Fees is reasonable.
In addition, the Exchange believes that the proposed CAT Fees are
reasonably designed to allocate the total costs of the CAT equitably
between and among the Participants and Industry Members, and are
therefore not unfairly discriminatory. As discussed in detail above,
the proposed tiered fees impose comparable fees on similarly situated
CAT Reporters. For example, those with a larger impact on the CAT
(measured via message traffic or market share) pay higher fees, whereas
CAT Reporters with a smaller impact pay lower fees. Correspondingly,
the tiered structure lessens the impact on smaller CAT Reporters by
imposing smaller fees on those CAT Reporters with less market share or
message traffic. In addition, the fee structure takes into
consideration distinctions in securities trading operations of CAT
Reporters, including ATSs trading OTC Equity Securities, and equity and
options market makers.
Moreover, the Exchange believes that the division of the total CAT
costs between Industry Members and Execution Venues, and the division
of the Execution Venue portion of total costs between Equity and
Options Execution Venues, is reasonably designed to allocate CAT costs
among CAT Reporters. The 75%/25% division between Industry Members
(other than Execution Venue ATSs) and Execution Venues maintains the
greatest level of comparability across the funding model. For example,
the cost allocation establishes fees for the largest Industry Members
(i.e., those Industry Members in Tiers 1) that are comparable to the
largest Equity Execution Venues and Options Execution Venues (i.e.,
those Execution Venues in Tier 1). Furthermore, the allocation of total
CAT cost recovery recognizes the difference in the number of CAT
Reporters that are Industry Members (other than Execution Venue ATSs)
versus CAT Reporters that are Execution Venues. Similarly, the
[[Page 58969]]
67%/33% allocation between Equity and Options Execution Venues also
helps to provide fee comparability for the largest CAT Reporters.
Finally, the Exchange believes that the proposed fees are
reasonable because they would provide ease of calculation, ease of
billing and other administrative functions, and predictability of a
fixed fee. Such factors are crucial to estimating a reliable revenue
stream for the Company and for permitting CAT Reporters to reasonably
predict their payment obligations for budgeting purposes.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange notes that the
proposed rule change implements provisions of the CAT NMS Plan approved
by the Commission, and is designed to assist the Exchange in meeting
its regulatory obligations pursuant to the Plan. Similarly, all
national securities exchanges and FINRA are proposing this proposed fee
schedule to implement the requirements of the CAT NMS Plan. Therefore,
this is not a competitive fee filing and, therefore, it does not raise
competition issues between and among the exchanges and FINRA.
Moreover, as previously described, the Exchange believes that the
proposed rule change fairly and equitably allocates costs among CAT
Reporters. In particular, the proposed fee schedule is structured to
impose comparable fees on similarly situated CAT Reporters, and lessen
the impact on smaller CAT Reporters. CAT Reporters with similar levels
of CAT activity will pay similar fees. For example, Industry Members
(other than Execution Venue ATSs) with higher levels of message traffic
will pay higher fees, and those with lower levels of message traffic
will pay lower fees. Similarly, Execution Venue ATSs and other
Execution Venues with larger market share will pay higher fees, and
those with lower levels of market share will pay lower fees. Therefore,
given that there is generally a relationship between message traffic
and/or market share to the CAT Reporter's size, smaller CAT Reporters
generally pay less than larger CAT Reporters. Accordingly, the Exchange
does not believe that the CAT Fees would have a disproportionate effect
on smaller or larger CAT Reporters. In addition, ATSs and exchanges
will pay the same fees based on market share. Therefore, the Exchange
does not believe that the fees will impose any burden on the
competition between ATSs and exchanges. Accordingly, the Exchange
believes that the proposed fees will minimize the potential for adverse
effects on competition between CAT Reporters in the market.
Furthermore, the tiered, fixed fee funding model limits the
disincentives to providing liquidity to the market. Therefore, the
proposed fees are structured to limit burdens on competitive quoting
and other liquidity provision in the market.
In addition, the Operating Committee believes that the proposed
changes to the Original Proposal, as discussed above in detail, address
certain competitive concerns raised by commenters, including concerns
related to, among other things, smaller ATSs, ATSs trading OTC Equity
Securities, market making quoting and fee comparability. As discussed
above, the Operating Committee believes that the proposals address the
competitive concerns raised by commenters.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has set forth responses to comments received regarding
the Original Proposal in Section 3(a)(4) above.
III. Solicitation of Comments on Amendment No. 2
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 2
is consistent with the Act. In particular, the Commission seeks comment
on the following:
Allocation of Costs
(1) Commenters' views as to whether the allocation of CAT costs is
consistent with the funding principle expressed in the CAT NMS Plan
that requires the Operating Committee to ``avoid any disincentives such
as placing an inappropriate burden on competition and a reduction in
market quality.'' \92\
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\92\ Section 11.2(e) of the CAT NMS Plan.
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(2) Commenters' views as to whether the allocation of 25% of CAT
costs to the Execution Venues (including all the Participants) and 75%
to Industry Members, will incentivize or disincentivize the
Participants to effectively and efficiently manage the CAT costs
incurred by the Participants since they will only bear 25% of such
costs.
(3) Commenters' views on the determination to allocate 75% of all
costs incurred by the Participants from November 21, 2016 to November
21, 2017 to Industry Members (other than Execution Venue ATSs), when
such costs are development and build costs and when Industry Member
reporting is scheduled to commence a year later, including views on
whether such ``fees, costs and expenses . . . [are] fairly and
reasonably shared among the Participants and Industry Members'' in
accordance with the CAT NMS Plan.\93\
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\93\ Section 11.1(c) of the CAT NMS Plan.
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(4) Commenters' views on whether an analysis of the ratio of the
expected Industry Member-reported CAT messages to the expected SRO-
reported CAT messages should be the basis for determining the
allocation of costs between Industry Members and Execution Venues.\94\
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\94\ The Notice for the CAT NMS Plan did not provide a
comprehensive count of audit trail message traffic from different
regulatory data sources, but the Commission did estimate the ratio
of all SRO audit trail messages to OATS audit trail messages to be
1.9431. See Securities Exchange Act Release No. 77724 (April 27,
2016), 81 FR 30613, 30721 n.919 and accompanying text (May 17,
2016).
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(5) Any additional data analysis on the allocation of CAT costs,
including any existing supporting evidence.
Comparability
(6) Commenters' views on the shift in the standard used to assess
the comparability of CAT Fees, with the emphasis now on comparability
of individual entities instead of affiliated entities, including views
as to whether this shift is consistent with the funding principle
expressed in the CAT NMS Plan that requires the Operating Committee to
establish a fee structure in which the fees charged to ``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).'' \95\
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\95\ Section 11.2(c) of the CAT NMS Plan.
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(7) Commenters' views as to whether the reduction in the number of
tiers for Industry Members (other than Execution Venue ATSs) from nine
to seven, the revised allocation of CAT costs between Equity Execution
Venues and Options Execution Venues from a 75%/25% split to a 67%/33%
split, and the adjustment of all tier percentages and recovery
allocations achieves comparability across individual entities, and
whether these changes should have
[[Page 58970]]
resulted in a change to the allocation of 75% of total CAT costs to
Industry Members (other than Execution Venue ATSs) and 25% of such
costs to Execution Venues.
Discounts
(8) Commenters' views as to whether the discounts for options
market-makers, equities market-makers, and Equity ATSs trading OTC
Equity Securities are clear, reasonable, and consistent with the
funding principle expressed in the CAT NMS Plan that requires the
Operating Committee to ``avoid any disincentives such as placing an
inappropriate burden on competition and a reduction in market
quality,'' \96\ including views as to whether the discounts for market-
makers limit any potential disincentives to act as a market-maker and/
or to provide liquidity due to CAT fees.
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\96\ Section 11.2(e) of the CAT NMS Plan.
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Calculation of Costs and Imposition of CAT Fees
(9) Commenters' views as to whether the amendment provides
sufficient information regarding the amount of costs incurred from
November 21, 2016 to November 21, 2017, particularly, how those costs
were calculated, how those costs relate to the proposed CAT Fees, and
how costs incurred after November 21, 2017 will be assessed upon
Industry Members and Execution Venues;
(10) Commenters' views as to whether the timing of the imposition
and collection of CAT Fees on Execution Venues and Industry Members is
reasonably related to the timing of when the Company expects to incur
such development and implementation costs.\97\
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\97\ Section 11.1(c) of the CAT NMS Plan.
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(11) Commenters' views on dividing CAT costs equally among each of
the Participants, and then each Participant charging its own members as
it deems appropriate, taking into consideration the possibility of
inconsistency in charges, the potential for lack of transparency, and
the impracticality of multiple SROs submitting invoices for CAT
charges.
Burden on Competition and Barriers to Entry
(12) Commenters' views as to whether the allocation of 75% of CAT
costs to Industry Members (other than Execution Venue ATSs) imposes any
burdens on competition to Industry Members, including views on what
baseline competitive landscape the Commission should consider when
analyzing the proposed allocation of CAT costs.
(13) Commenters' views on the burdens on competition, including the
relevant markets and services and the impact of such burdens on the
baseline competitive landscape in those relevant markets and services.
(14) Commenters' views on any potential burdens imposed by the fees
on competition between and among CAT Reporters, including views on
which baseline markets and services the fees could have competitive
effects on and whether the fees are designed to minimize such effects.
(15) Commenters' general views on the impact of the proposed fees
on economies of scale and barriers to entry.
(16) Commenters' views on the baseline economies of scale and
barriers to entry for Industry Members and Execution Venues and the
relevant markets and services over which these economies of scale and
barriers to entry exist.
(17) Commenters' views as to whether a tiered fee structure
necessarily results in less active tiers paying more per unit than
those in more active tiers, thus creating economies of scale, with
supporting information if possible.
(18) Commenters' views as to how the level of the fees for the
least active tiers would or would not affect barriers to entry.
(19) Commenters' views on whether the difference between the cost
per unit (messages or market share) in less active tiers compared to
the cost per unit in more active tiers creates regulatory economies of
scale that favor larger competitors and, if so:
(a) How those economies of scale compare to operational economies
of scale; and
(b) Whether those economies of scale reduce or increase the current
advantages enjoyed by larger competitors or otherwise alter the
competitive landscape.
(20) Commenters' views on whether the fees could affect competition
between and among national securities exchanges and FINRA, in light of
the fact that implementation of the fees does not require the unanimous
consent of all such entities, and, specifically:
(a) Whether any of the national securities exchanges or FINRA are
disadvantaged by the fees; and
(b) If so, whether any such disadvantages would be of a magnitude
that would alter the competitive landscape.
(21) Commenters' views on any potential burden imposed by the fees
on competitive quoting and other liquidity provision in the market,
including, specifically:
(a) Commenters' views on the kinds of disincentives that discourage
liquidity provision and/or disincentives that the Commission should
consider in its analysis;
(b) Commenters' views as to whether the fees could disincentivize
the provision of liquidity; and
(c) Commenters' views as to whether the fees limit any
disincentives to provide liquidity.
(22) Commenters' views as to whether the amendment adequately
responds to and/or addresses comments received on related filings.
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-PHLX-2017-037 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-PHLX 2017-37. 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 website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-PHXL-2017-37, and
[[Page 58971]]
should be submitted on or before January 4, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\98\
\98\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-27009 Filed 12-13-17; 8:45 am]
BILLING CODE 8011-01-P
