Joint Industry Plan; Notice of Filing of Amendment to the National Market System Plan Governing the Consolidated Audit Trail Regarding Reporting of Certain Verbal Activity, Floor and Upstairs Activity, 67499-67505 [2024-18565]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 89, Number 161 (Tuesday, August 20, 2024)]
[Notices]
[Pages 67499-67505]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-18565]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100727; File No. 4-698]


Joint Industry Plan; Notice of Filing of Amendment to the 
National Market System Plan Governing the Consolidated Audit Trail 
Regarding Reporting of Certain Verbal Activity, Floor and Upstairs 
Activity

August 14, 2024.

I. Introduction

    On August 2, 2024, the Consolidated Audit Trail, LLC (``CAT LLC''), 
on behalf of the following parties to the National Market System Plan 
Governing the Consolidated Audit Trail (the ``CAT NMS Plan'' or 
``Plan''): \1\ BOX 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., Financial Industry 
Regulatory Authority, Inc., Investors Exchange LLC, Long-Term Stock 
Exchange, Inc., MEMX, LLC, Miami International Securities Exchange LLC, 
MIAX Emerald, LLC, MIAX PEARL, LLC, Nasdaq BX, Inc., Nasdaq GEMX, LLC, 
Nasdaq ISE, LLC, Nasdaq MRX, LLC, Nasdaq PHLX LLC, The NASDAQ Stock 
Market LLC, New York Stock Exchange LLC, NYSE American LLC, NYSE Arca, 
Inc., NYSE Chicago, Inc., and NYSE National, Inc. (collectively, the 
``Participants,'' ``self-regulatory organizations,'' or ``SROs'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
pursuant to Section 11A(a)(3) of the Securities Exchange Act of 1934 
(``Exchange Act''),\2\ and Rule 608 thereunder,\3\ a proposed amendment 
to the CAT NMS Plan to amend existing requirements for the consolidated 
audit trail (``CAT'') regarding the reporting of certain verbal 
activity, floor and upstairs activity (the ``Verbal Quotes 
Amendment'').\4\ Set forth in Section II is the statement of purpose 
and summary of the amendment, along with information required by Rules 
608(a)(4) and 608(a)(5) under the Exchange Act,\5\ and Exhibit A, which 
contains the proposed revisions to the CAT NMS Plan, all substantially 
as prepared and submitted by the Participants to the Commission.\6\ The 
Commission is publishing this notice to solicit comments from 
interested persons on the amendment.\7\
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    \1\ The CAT NMS Plan is a national market system plan approved 
by the Commission pursuant to Section 11A of the Exchange Act and 
the rules and regulations thereunder. See Securities Exchange Act 
Release No. 79318 (November 15, 2016), 81 FR 84696 (November 23, 
2016). The full text of the CAT NMS Plan is available at 
www.catnmsplan.com.
    \2\ 15 U.S.C 78k-1(a)(3).
    \3\ 17 CFR 242.608.
    \4\ See Letter from Brandon Becker, CAT NMS Plan Operating 
Committee Chair, to Vanessa Countryman, Secretary, Commission, dated 
March 27, 2024 (the ``Transmittal Letter'').
    \5\ See 17 CFR 242.608(a)(4) and 17 CFR 242.608(a)(5).
    \6\ See Transmittal Letter, supra note 4. Unless otherwise 
defined herein, capitalized terms used herein are defined as set 
forth in the CAT NMS Plan.
    \7\ 17 CFR 242.608.
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II. Description of the Plan

    CAT LLC proposes to amend the CAT NMS Plan to clearly and 
permanently exclude the following activities from reporting to the 
Central Repository:
    i. floor broker verbal announcements of firm orders on an exchange 
that are otherwise reported as systematized orders;
    ii. market maker verbal announcements of firm quotes on an exchange 
trading floor;
    iii. telephone discussions between an Industry Member and a client 
that may involve firm bid and offer communications; and
    iv. unstructured electronic and verbal communications that are not 
currently captured by Industry Member order management or execution 
systems (e.g., Bloomberg chats, text messages)

(the foregoing (i)-(iv), collectively, the ``Exempt Activities'').
    CAT LLC has consistently reiterated its longstanding view that the 
Exempt Activities were never contemplated by Rule 613 or the CAT NMS 
Plan, and has noted that there is no discussion in the CAT NMS Plan or 
the CAT NMS Plan Adopting Release regarding these activities.\8\ 
Likewise, the Financial Information Forum (``FIF'') has also made clear 
that unstructured verbal and electronic upstairs activities are not 
reportable to CAT under Rule 613 because they represent indications of 
interest--not orders.\9\ The Participants believe that the analysis in 
the December 2022 FIF Letter explaining why unstructured verbal and 
electronic upstairs activities are not reportable to CAT under Rule 613 
(including the challenges that would be associated with reporting those 
activities) applies equally to communications on exchange trading 
floors. Nevertheless, because the Commission has expressed a different 
interpretation of Rule 613 and the CAT NMS Plan,\10\ CAT LLC previously 
requested, and the Commission granted, temporary exemptive relief 
related to reporting of the Exempt Activities through July 31, 2026 
(the ``July 2023 Exemptive Order'').\11\
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    \8\ Letter from Brandon Becker, CAT NMS Plan Operating Committee 
Chair, to Vanessa Countryman, Secretary, Commission (Mar. 31, 2023), 
https://www.catnmsplan.com/sites/default/files/2023-03/03.31.23-CAT-Exemption-Request-Verbal-Floor-and-Upstairs-Activity.pdf (the 
``March 2023 Exemption Request''); Letter from Michael Simon, CAT 
NMS Plan Operating Committee Chair, to Vanessa Countryman, 
Secretary, Commission (July 1, 2020) (the ``July 2020 Exemption 
Request''), https://www.catnmsplan.com/sites/default/files/2020-07/07.01.2020-Exemptive-Request-Re-Verbal-Activity.pdf. While seeking 
to clarify the Plan in this regard, the Participants continue to 
believe that the Exempt Activities are not required to be reported 
by Rule 613 or the CAT NMS Plan. Nothing herein should be construed 
to the contrary with respect to this position. To the extent the SEC 
disagrees with the proposed amendments to the CAT NMS Plan outlined 
herein, the Participants reserve all of their rights with respect to 
the Participants' position that reporting of the Exempt Activities 
to CAT was never contemplated by Rule 613 or the CAT NMS Plan.
    \9\ Letter from Howard Meyerson, Managing Director, Financial 
Information Forum, to Commission at 11-12 (Dec. 16, 2022) 
(``December 2022 FIF Letter'').
    \10\ Exchange Act Release No. 90405 (Nov. 12, 2020), 85 FR 73544 
(Nov. 18, 2020) (``November 2020 Exemptive Order''), https://www.sec.gov/rules/exorders/2020/34-90405.pdf.
    \11\ Exchange Act Release No. 98023 (July 28, 2023), 88 FR 51369 
(Aug. 3, 2023) (``July 2023 Exemptive Order''), https://www.sec.gov/files/rules/exorders/2023/34-98023.pdf. In June 2022, CAT LLC 
submitted a request for permanent exemptive relief; however, the 
Commission did not respond to this request. Accordingly, CAT LLC is 
now submitting this Plan amendment. See Letter from Michael Simon, 
CAT NMS Plan Operating Committee Chair, to Vanessa Countryman, 
Secretary, Commission (June 3, 2022) (the ``June 2022 Exemption 
Request''), https://catnmsplan.com/sites/default/files/2022-06/06.03.2022-CAT-Exemption-Request-Verbal-Floor-and-UpstairsActivity-Final.pdf.

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[[Page 67500]]

    To provide certainty to market participants moving forward given 
the conflicting interpretations of Rule 613 and the CAT NMS Plan, and 
to avoid the significant cost burdens that would be imposed by 
requiring the reporting of the Exempt Activities, the Verbal Quotes 
Amendment would explicitly and permanently exclude the Exempt 
Activities from CAT reporting. At a time when the Participants are 
seeking to reduce CAT-related costs, any potential marginal regulatory 
benefit of such reporting is substantially outweighed by the 
significant costs and burdens required to do so, including the billions 
of dollars in additional associated costs required to implement and 
maintain the reporting requirements.
    As discussed further below, the Verbal Quotes Amendment should be 
approved because:
     In addition to the substantial direct costs of building 
and maintaining the CAT itself, CAT Reporters would incur significant 
implementation and maintenance costs in order to report the Exempt 
Activities. CAT LLC is focused on identifying changes to the CAT NMS 
Plan that would reduce overall CAT costs, and requiring the Exempt 
Activities to be reported directly conflicts with those cost-saving 
efforts.
     When it originally granted exemptive relief, the 
Commission recognized that capturing data concerning the Exempt 
Activities would require significant manual human intervention, but 
theorized that future technological and business developments, 
including artificial intelligence, might make reporting the Exempt 
Activities cost-effective in the future. While recent advancements in 
artificial intelligence have garnered considerable attention, current 
technology is not sophisticated enough to reliably, accurately, and 
consistently capture, parse, analyze, and report these interactions in 
the current trading environments and workflows given stringent CAT 
reporting requirements.
     Therefore, the Exempt Activities could only be reported 
using manual means. Consequently, the costs to Participants and 
Industry Members of reporting the Exempt Activities to the Central 
Repository are estimated to be in the billions of dollars per year and 
would impose additional ongoing operational, technological, and support 
burdens on Participants and Industry Members.
     In addition to imposing substantial costs, manually 
reviewing verbal and unstructured electronic activities would be 
inconsistent and prone to error because human reviewers would be 
required to determine whether verbal and unstructured electronic 
activities involve a firm bid or offer, which is a necessarily 
subjective determination.
     Thus, any investment by Participants and Industry Members 
to develop the necessary operational capacity, procedures, and 
technological infrastructure to report the Exempt Activities to the CAT 
would not be cost-justified because that reporting would be costly, 
resource-intensive, inconsistent, and prone to error. That is, the 
costs associated with any such investment would significantly outweigh 
any potential marginal regulatory benefit that might be achieved if the 
Exempt Activities were reported to the CAT.
     Requiring reporting of the Exempt Activities to the CAT 
also would impose added ongoing operational burdens, disrupt trading, 
and give firms and market makers an incentive to use indications of 
interest that are not reportable to CAT rather than firm orders or bids 
or offers. Such a shift in market practice would ultimately be to the 
detriment of investors.
    Each of these issues is discussed further below.
    The proposed changes to the CAT NMS Plan to implement the Verbal 
Quotes Amendment are set forth in Exhibit A to this filing.

Requirements Pursuant to Rule 608(a)

A. Description of the Proposed Amendments to the CAT NMS Plan

1. Permanently Exclude the Exempt Activities From CAT Reporting
a. CAT Reporting Requirements
    Under Rule 613(c)(7) of Regulation NMS and Sections 6.3(d) and 
6.4(d) of the CAT NMS Plan, reportable events are based on, among other 
things, the receipt, routing, and execution of orders.\12\ Rule 
613(j)(8) and the CAT NMS Plan provide that ``orders'' include: ``(i) 
Any order received by a member of a national securities exchange or 
national securities association from any person; (ii) Any order 
originated by a member of a national securities exchange or national 
securities association; or (iii) Any bid or offer.'' A ``bid'' or 
``offer'' is defined in Regulation NMS as the bid price or offer price 
communicated by a member of an exchange or association to any broker-
dealer or to any customer, at which it is willing to buy or sell one or 
more round lots of an NMS security, as principal or agent, but 
excluding indications of interest.\13\ In the Rule 613 Adopting 
Release, the SEC indicates that for purposes of Rule 613 
``[i]ndications of interest are different than orders because they are 
not firm offers to trade, but are essentially invitations to 
negotiate.'' \14\ Because indications of interest and other non-firm 
indications of a willingness to buy or sell a security are not 
``orders'' or ``bids'' or ``offers'' under SEC rules, actions involving 
them do not constitute reportable events under the CAT NMS Plan.\15\ 
Firm indications of a willingness to buy or sell a security are orders, 
bids, or offers and have certain reportable events associated with them 
pursuant to the CAT NMS Plan.
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    \12\ Rule 613(j)(9) provides that ``[t]he term reportable event 
shall include, but not be limited to, the original receipt or 
origination, modification, cancellation, routing, and execution (in 
whole or in part) of an order, or receipt of a routed order.''
    \13\ 17 CFR 242.600(b)(8) (emphasis added).
    \14\ Exchange Act Release No. 67457 (July 18, 2012), 77 FR 
45722, 45747 (Aug. 1, 2012) (emphasis added) (``Rule 613 Adopting 
Release'').
    \15\ See Consolidated Audit Trail, Exchange Act Release No. 
67457 (July 18, 2012), 77 FR 45722, 45747 (Aug. 1, 2012) (``The 
Commission, however, is not including indications of interest in the 
definition of `order' for purposes of the consolidated audit trail 
because the Commission believes that the utility of the information 
such data would provide to regulators would not justify the costs of 
reporting the information.''). See also FAQ B3 and B38 regarding 
indications of interest (``IOI'') and requests for quotes (``RFQ''), 
available at www.catnmsplan.com/faq/.
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b. Current Commission Exemptive Order
    Reporting the Exempt Activities to the Central Repository currently 
is not required pursuant to the July 2023 Exemptive Order, which will 
expire on July 31, 2026.\16\ Accordingly, the Participants are filing 
the Verbal Quotes Amendment with the Commission to permanently exclude 
the Exempt Activities from reporting to the Central Repository. If 
approved, the Verbal Quotes Amendment would supersede the July 2023 
Exemptive Order in its entirety and, therefore, render the reporting 
provisions required in the July 2023 Exemptive Order moot.
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    \16\ See July 2023 Exemptive Order; November 2020 Exemptive 
Order.
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c. Proposed Revisions to the CAT NMS Plan
    To provide clarity to market participants, CAT LLC proposes to

[[Page 67501]]

amend the CAT NMS Plan to state that the Exempt Activities do not fall 
within the scope of Participant Data or Recorded Industry Member Data 
that Participants and Industry Members, as applicable, must record and 
report to the Central Repository. Specifically, CAT LLC proposes to add 
new Section 6.3(g) to the CAT NMS Plan. New Section 6.3(g) would be 
entitled ``Verbal Activity, Floor and Upstairs Activity'' and would 
state the following:

    ``(g) Verbal Activity, Floor and Upstairs Activity. 
Notwithstanding any other provision of SEC Rule 613 or the CAT NMS 
Plan, the following categories of data shall not be reportable to 
the Central Repository under Section 6.3(d):
    (i) floor broker verbal announcements of firm orders on an 
exchange that are otherwise reported as systematized orders;
    (ii) market maker verbal announcements of firm quotes on an 
exchange trading floor;
    (iii) telephone discussions between an Industry Member and a 
client that may involve firm bid and offer communications; and
    (iv) unstructured electronic and verbal communications that are 
not currently captured by Industry Member order management or 
execution systems (e.g., electronic chats, text messages).''

    In addition, CAT LLC proposes to add references to new Section 
6.3(g) to Section 6.3(d) and Section 6.4(d)(i) of the CAT NMS Plan. 
Specifically, CAT LLC proposes to add the parenthetical phrase 
``(subject to the exclusions outlined in Section 6.3(g))'' to Section 
6.3(d) and Section 6.4(d)(i) of the CAT NMS Plan.
    For the avoidance of doubt, the proposed Plan amendment is intended 
to have an effect similar to permanent incorporation into the CAT NMS 
Plan of the existing Commission-approved provisions of the July 2023 
Exemptive Order. It is not intended to affect activity that is 
currently reported to CAT or to otherwise modify the categories in the 
July 2023 Exemptive Order as applied to date. In addition, for the 
avoidance of doubt, the term ``client'' in romanette (iii) above is 
intended to include both a non-Industry Member customer of the Industry 
Member or another Industry Member.
2. Justifications for the Verbal Quotes Amendment
a. Overall CAT Costs Are Unsustainable and Must Be Reduced, Not 
Increased
    Overall CAT costs include not only the direct costs incurred by CAT 
LLC in building and maintaining the CAT, but also the costs incurred by 
CAT Reporters in order to comply with CAT reporting requirements. 
Market participants, FINRA, SEC Commissioners, and members of Congress 
have all raised significant concerns about the extent of CAT costs.\17\ 
CAT LLC is focused on identifying changes to the CAT NMS Plan that 
would reduce both the costs imposed on CAT LLC to build and maintain 
the CAT and the costs imposed on Participants and Industry Members to 
comply with CAT reporting requirements. Among other initiatives, CAT 
LLC has recently filed Plan amendments and exemptive requests aimed at 
reducing direct costs associated with building and maintaining the 
CAT.\18\ The direct costs of building and maintaining the CAT are 
significant, and, therefore, costs that would be incurred by 
Participants and Industry Members to comply with CAT reporting 
requirements should be carefully controlled, especially in the absence 
of a fully implemented funding model.\19\ Here, the costs that would be 
incurred by Participants and Industry Members, collectively, related to 
reporting data concerning the Exempt Activities are estimated to be in 
the billions in the aggregate. Requiring CAT Reporters to incur these 
costs over the next two years in order to begin reporting the Exempt 
Activities, along with the additional costs that would be required to 
maintain that reporting, directly conflicts with CAT LLC's ongoing 
cost-saving efforts. Moreover, as described in more detail below, any 
potential marginal utility of the information such data would provide 
to regulators would not justify the added costs and burdens of 
reporting the information.
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    \17\ See, e.g., Letter from Rep. Bill Huizenga, Chairman, House 
Subcommittee on Oversight and Investigations, and Rep. Ann Wagner, 
Chairman, House Subcommittee on Capital Markets, to Deborah J. 
Jeffrey, Inspector General, Commission (Dec. 11, 2023) (``Huizenga-
Wagner Letter''); Letter from Joseph Corcoran, Managing Director, 
Associate General Counsel, SIFMA, Ellen Greene, Managing Director, 
Equities & Options Market Structure, SIFMA, Howard Meyerson, 
Managing Director, Financial Information Forum, to Commission (July 
31, 2023); Hester Peirce, Who's Paying?: Statement on the CAT's 
Funding Model (Sept. 6, 2023) https://www.sec.gov/news/statement/peirce-statement-cat-funding-090623 (``Peirce Dissent''); Robert 
Cook, President and CEO, FINRA, Testimony Before the House Financial 
Services Subcommittee on Capital Markets, Examining the Agenda of 
Regulators, SROs (Self-Regulatory Organizations), and Standards-
Setters for Accounting, Auditing (Dec. 12, 2023) https://plus.cq.com/doc/congressionaltranscripts-7899923?3.
    \18\ See, e.g., Exchange Act Release No. 99938 (Apr. 10, 2024), 
89 FR 26983 (Apr. 16, 2024) (proposing cost savings amendments 
expected to result in approximately $23 million in annual cost 
savings in the first year with limited impact on the regulatory 
function of the CAT).
    \19\ Although the Commission recently has approved a funding 
model, it has determined to temporarily suspend the Participants' 
fee filings to recover any historical costs incurred prior to 
January 1, 2022. CAT reporting should not be expanded to introduce 
new CAT costs absent a fully implemented funding model. Exchange Act 
Release No. 98290 (Sept. 6, 2023), 88 FR 62628 (Sept. 12, 2023), 
https://www.sec.gov/files/rules/sro/nms/2023/34-98290.pdf.
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b. It Remains Technologically Infeasible to Reliably, Accurately, and 
Consistently Collect Data Concerning the Exempt Activities for CAT 
Reporting Without Human Intervention
    It would be unreasonable to impose a technologically infeasible 
requirement on CAT Reporters. Without human intervention, it remains 
technologically infeasible to reliably, accurately, and consistently 
collect and report data concerning the Exempt Activities, which include 
verbal floor activity and unstructured verbal and electronic upstairs 
activity. The Commission has recognized that manually capturing and 
reporting verbal and electronic activity through human intervention 
would be impracticable and not cost-effective.\20\ Accordingly, the 
Commission's original November 2020 Exemptive Order was premised on the 
Commission's belief that future technological breakthroughs in 
artificial intelligence would make collecting information concerning 
the Exempt Activities more feasible by the time the temporary exemptive 
relief expires. These developments have not materialized in a way that 
would allow market participants to effectively and reliably capture 
data associated with the Exempt Activities for reporting to the Central 
Repository without human intervention. For example, FIF has provided 
the Commission with numerous examples of the challenges associated with 
verbal and unstructured electronic communications to illustrate why it 
is not feasible for Industry Members to automate the reporting of the 
Exempt Activities to the CAT.\21\
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    \20\ November 2020 Exemptive Order at 73547.
    \21\ See December 2022 FIF Letter at 5, 14-18. While the 
December 2022 FIF Letter focuses on these challenges in the context 
of upstairs activities, these same challenges exist for Industry 
Members and Participants on exchange trading floors.
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    To be sure, many market participants are exploring how recent 
advancements in artificial intelligence, including machine learning, 
natural language processing, and voice recognition technology, may be 
used in various business functions. Nevertheless, current artificial 
intelligence technology is not sophisticated enough to reliably, 
accurately, and consistently capture, parse, analyze, and report these 
interactions in the current trading environments and workflows given 
stringent CAT reporting requirements. A number of Industry Members have 
conducted internal analyses on this question and concluded that there 
is

[[Page 67502]]

currently no artificial intelligence software or algorithm with a 
feasible architecture to accurately capture and report the Exempt 
Activities to the CAT in an automated manner.\22\ In particular, those 
Industry Members provided detailed explanations regarding why natural 
language processing is not suitable for this purpose.\23\
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    \22\ December 2022 FIF Letter at 5.
    \23\ December 2022 FIF Letter at 19.
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    Notably, it has been four years since the Commission posited that 
technological and business developments could advance to such an extent 
that automated processes could be used to capture and report the Exempt 
Activities to the CAT in an efficient and reliable manner. Given the 
amount of time that has passed since the Commission first contemplated 
those developments and the amount of further advancement that is still 
required, it is exceedingly unlikely that the necessary developments 
will materialize in the next two years. Furthermore, even if those 
developments were to materialize, the potential regulatory benefit of 
reporting the Exempt Activities to the CAT is limited given the scope 
of data related to the Exempt Activities that it already reported, as 
outlined further in Section A.2.d below.\24\
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    \24\ Therefore, even if the contemplated technological and 
business developments permitting automated reporting of the Exempt 
Activities did potentially occur someday, they would still need to 
be evaluated from a cost-benefit perspective before requiring the 
Exempt Activities to be reported to the CAT.
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    In short, because the technological and business developments 
anticipated in the current temporary exemptive relief have not 
materialized in a manner that lends itself to the efficient and 
accurate reporting of the Exempt Activities, the only way for 
Participants and Industry Members to report data associated with the 
Exempt Activities to the CAT would be to manually capture that data 
through human intervention, which the Commission has recognized would 
not be practical or cost-effective, as discussed in more detail below. 
Again, any potential marginal utility of the information such data 
would provide to regulators would not justify the added costs and 
burdens of reporting the information.
c. Because Reporting the Exempt Activities Would Require Substantial 
Human Intervention, the Costs of Reporting the Exempt Activities to the 
Central Repository Would Be Significant and Vastly Outweigh Any 
Potential Marginal Regulatory Benefit
    Importantly, the costs associated with reporting the Exempt 
Activities would include more than just the direct costs to CAT LLC 
associated with CAT reporting. Rather, they would also include 
substantial costs incurred by Participants and Industry Members in 
addition to the costs incurred by CAT LLC.\25\ For example, because the 
Exempt Activities have never been reportable to an audit trail, 
Participants and Industry Members would need to establish, implement, 
and maintain procedures to collect and record data associated with the 
Exempt Activities in the Central Repository. These costs would be 
especially significant as applied to the Exempt Activities because 
there is currently no effective way for Participants and Industry 
Members to collect the required data to be reported to the Central 
Repository in a cost-justified or consistent manner.\26\
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    \25\ See Peirce Dissent; Huizenga-Wagner Letter.
    \26\ In addition to financial costs, reporting the Exempt 
Activities to CAT would impose significant ongoing and resource-
intensive operational, technological, and support burdens on 
Participants and Industry Members.
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    As discussed in greater detail above, the technological and 
business developments on which the current temporary exemptive relief 
is based, including developments in artificial intelligence, have not 
materialized. Therefore, the only way for the Participants and Industry 
Members to report the Exempt Activities to the CAT would be to manually 
capture these events by requiring a human being to listen to every 
verbal interaction of every floor broker, market maker, or upstairs 
trader either live or from tape, and/or to sift through electronic 
communications to determine if and precisely when a quote was given and 
whether it was firm. This manual review would be impracticable and 
costly because it would require Industry Members that are floor brokers 
and floor-based market makers, many of which are small firms, to hire 
additional staff and develop new technology resources to capture and 
analyze data associated with the Exempt Activities.\27\ The 
Participants estimate that the discussions of each floor broker and 
floor-based market maker would need to be tracked on a one-to-one basis 
by a full-time equivalent (``FTE'') responsible for parsing and 
interpreting when a CAT-reportable event has occurred.\28\ It would not 
be practicable for floor brokers or floor-based market makers to 
capture their own verbal interactions in real time without severely 
impacting existing workflows and those floor brokers' and floor-based 
market makers' ability to participate in fast-moving markets because 
doing so would require them to pause and turn their attention away from 
the market to record their verbalized quote.\29\ With respect to 
upstairs activities, similar manual intervention would be required to 
consistently capture, parse, analyze, and report data concerning the 
Exempt Activities.\30\ Any such manual reporting processes would be 
inconsistent and prone to error because human reviewers would be 
required to determine whether verbal and unstructured electronic 
activities involve a firm bid or offer, which is a necessarily 
subjective determination. Indeed, the Commission has previously 
acknowledged that ``the reporting of such orders and quotes [i.e., the 
Exempt Activities] involves complexity and/or costs, especially because 
capture of this information may require significant manual 
intervention.'' \31\
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    \27\ Letter from Mike Simon, CAT NMS Plan Operating Committee 
Chair, to Vanessa Countryman, Secretary, Commission, Appendix A at 
11 (June 3, 2022), https://www.catnmsplan.com/sites/default/files/2022-06/06.03.2022-CAT-Exemption-Request-Verbal-Floor-and-Upstairs-Activity-Final.pdf (``June 2022 Exemption Request'').
    \28\ Id.
    \29\ Id.
    \30\ Id.
    \31\ November 2020 Exemptive Order at 73547.
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    The Participants previously estimated the costs associated with 
developing the operational and technological infrastructure necessary 
for Participants to report the Exempt Activities to the CAT. In 
particular, $64.35 million to $112.86 million per year would be 
required to designate an FTE for each floor broker and floor-based 
market maker with an additional one-time cost of $20 million to $30 
million on top of direct personnel costs to build the additional space 
required to support the increased number of personnel performing the 
manual reviews because the relevant exchanges do not currently have 
room for the additional staff to be present on the exchange floor.\32\ 
Similarly, Industry Members would be required to hire additional staff 
and to update their technology systems to manually capture and report 
the Exempt Activities to the CAT, which Industry Members estimate would 
cost the industry a total of more than $4.4 billion per year.\33\ These 
estimated costs are substantial, and there is no reason to believe that 
they would have decreased

[[Page 67503]]

since they were previously calculated.\34\ These costs may very well be 
passed through to investors. Furthermore, the manual nature of the 
reviews would also make it exceedingly likely that a CAT Reporter will 
miss the requirement to report CAT data by T+1 at 8:00 a.m. ET.
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    \32\ See June 2022 Exemption Request at Appendix A. The 
Participants estimate that each FTE would cost between $130,000 and 
$228,000 annually, inclusive of compensation and benefits. On the 
relevant NYSE, Cboe, and Nasdaq exchanges alone, there are 
approximately 495 floor brokers and designated market makers 
requiring an FTE to interpret their communications.
    \33\ December 2022 FIF Letter at 6, 20-21.
    \34\ See June 2022 Exemption Request at Appendix A; December 
2022 FIF Letter at 6, 20-21. If a new rulemaking were proposed to 
make the Exempt Activities reportable to CAT, then the Participants 
would update these cost estimates as part of the detailed cost-
benefit analysis that would be required in connection with 
considering a new reporting requirement.
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    Requiring reporting of the Exempt Activities to the CAT also would 
disrupt trading and reduce the benefits of floor trading because of the 
added burdens it would impose on open outcry bidding and offering, 
which would ultimately be to the detriment of investors. The difficulty 
in capturing and reporting verbal and unstructured electronic 
activities will give firms and markets an incentive to use indications 
of interest that are not reportable to CAT rather than firm orders or 
bids or offers. The CAT was intended to enhance audit trails for 
regulators, not impact how Industry Members source market liquidity and 
trade.
    Because current estimates of the costs that Participants and 
Industry Members would need to incur to report the Exempt Activities to 
the Central Repository are substantial, vastly outweigh any limited 
potential regulatory benefit (i.e., because reporting would be 
inconsistent and prone to error) and would disrupt trading and reduce 
the use of firm quotations and orders, the CAT NMS Plan should be 
amended to clarify that the Exempt Activities are excluded from CAT 
reporting. To the extent the Commission would seek to impose such an 
obligation in the future, it should be accomplished through formal 
rulemaking, which should include a cost-benefit analysis of any 
potential marginal utility of the information such data would provide 
to regulators that would justify the added costs and burdens of 
reporting the information.
d. Including the Exempt Activities in the Central Repository Would 
Provide Limited Added Benefit for Regulatory and Surveillance Purposes
    The Participants do not believe that reporting the Exempt 
Activities to the CAT would provide enough value from a regulatory or 
surveillance perspective to outweigh their substantial costs. On all 
exchanges with floor trading, every order must be systematized upon 
receipt by the floor broker on the floor of the exchange and is 
reportable to the CAT. An order is ``systematized'' when (A) the order 
is sent electronically to the floor broker's system at the exchange; or 
(B) the order is manually systematized by the floor broker upon receipt 
outside of the floor broker's system and prior to representation in the 
floor trading crowd.\35\ To the extent a floor broker is not holding a 
systematized order, the floor broker is not eligible to represent any 
firm bid or offer, or to request firm quotes from in-crowd market 
participants on the floor of an exchange.\36\ Accordingly, all firm 
bids or offers represented by a floor broker must be associated with 
orders that have already been systematized. Conversely, any activity by 
the floor broker prior to systematization cannot be related to an 
order, bid, or offer pursuant to the CAT NMS Plan. Because the 
Participants require that any firm verbal interest expressed by a floor 
broker must be related to a CAT reportable systematized order, and any 
resulting trade must be reported to CAT, all verbal interest expressed 
by a floor broker that may be a CAT Reportable Event is already 
reported to CAT. Further, any cancellation or change to an order 
transmitted to an exchange floor broker must occur within the 
systematized order record. In short, every order verbalized on an 
exchange floor by a floor broker has already been systematized, and 
that systematization is already reportable to the CAT. Likewise, with 
respect to upstairs activity, manual orders (including any orders 
following from indications of interest) are already reportable to the 
CAT. And trades, whether occurring on an exchange floor or off-floor, 
are also already reportable to the CAT. The Reportable Events that are 
currently captured for exchange floor transactions are adequate to 
achieve CAT's regulatory purposes. The additional information that 
would be associated with the Exempt Activities does not need to be 
captured to allow for effective surveillance and regulation of exchange 
floor activity.
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    \35\ See, e.g., Consolidated Options Audit Trail System 
(``COATS'') requirements, such as Cboe Rule 5.7(f). NYSE options 
exchanges require that particular elements of an order be 
systematized so that the exchange may fulfill requirements for COATS 
reporting. See NYSE Arca Rule 6.67-O and NYSE American Rule 955NY.
    \36\ See NYSE Rule 7.35B, NYSE Arca Rule 6.67-O, NYSE American 
Rule 955NY and Cboe Rule 5.91(a)(4).
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    Similarly, with respect to bilateral negotiations in upstairs 
activity, such as between customers and broker-dealers, or between two 
broker-dealers, the Reportable Events that are currently captured when 
the broker either creates an order when dealing with a customer, or 
accepts an order from another broker-dealer, and when the trade 
execution occurs are adequate to achieve CAT's regulatory purposes. In 
these ``event types,'' all necessary information required to fulfill 
CAT reporting requirements--customer, broker-dealer, time stamps, FDID, 
etc.--are captured. The additional information that would be associated 
with the Exempt Activities does not need to be captured to allow for 
effective surveillance of upstairs activity.
    The ultimate regulatory value-add of expanding the existing CAT 
reporting to include the Exempt Activities is minimal given the scope 
of the data associated with the Exempt Activities that is already 
reported. Moreover, because they are not widely disseminated, 
communications related to the Exempt Activities do not lend themselves 
to the types of market manipulation considered in the adoption of Rule 
613.\37\ Any small incremental value added for regulatory purposes 
would be significantly outweighed by costs imposed on Industry Members, 
their customers, and the Participants, as well as the disruption to 
trading on Participant trading floors.
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    \37\ See, e.g., Exchange Act Release No. 67457 (July 18, 2012), 
77 FR 45722 (Aug. 1, 2012) (explaining that the CAT would be useful 
in investigating frontrunning, spoofing and layering in today's 
high-speed electronic markets).
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B. Governing or Constituent Documents

    Not applicable.

C. Implementation of Amendment

    The Participants propose to implement the proposal upon approval of 
the proposed amendment to the CAT NMS Plan.

D. Development and Implementation Phases

    Not applicable.

E. Analysis of Impact on Competition

    CAT LLC does not believe that the proposed amendment would result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. The proposed amendment 
would continue the status quo under the current temporary exemptive 
relief related to the Exempt Activities. Therefore, the proposed 
amendment does not introduce any new competition concerns. Indeed, CAT 
LLC believes that the proposed amendment will have a positive impact on 
competition, efficiency, and capital formation. The

[[Page 67504]]

proposed amendment will provide clarity to market participants about 
their regulatory obligations and result in substantial savings in costs 
and cost avoidance opportunities while continuing to provide minimal 
impact on the regulatory use of CAT Data. Such substantial savings and 
cost avoidance opportunities would inure to the benefit of all 
participants in the markets for NMS Securities and OTC Equity 
Securities, including Participants, Industry Members, and most 
importantly, the investors. Furthermore, CAT LLC believes that any 
action to require the reporting of the Exempt Activities to CAT would 
impose a significant burden on competition that would be unnecessary 
and not appropriate for the reasons cited herein. To the extent that 
the Commission would seek to impose such an obligation in the future, 
it should be accomplished through formal rulemaking that includes a 
cost-benefit analysis and an analysis of the impact on competition.

F. Written Understanding or Agreements Relating to Interpretation of, 
or Participation in Plan

    Not applicable.

G. Approval by Plan Sponsors in Accordance With Plan

    Section 12.3 of the CAT NMS Plan states that, subject to certain 
exceptions, the CAT NMS Plan may be amended from time to time only by a 
written amendment, authorized by the affirmative vote of not less than 
two-thirds of all of the Participants, that has been approved by the 
SEC pursuant to Rule 608 of Regulation NMS under the Exchange Act or 
has otherwise become effective under Rule 608 of Regulation NMS under 
the Exchange Act. In addition, the proposed amendment was discussed 
during Operating Committee meetings. The Participants, by a vote of the 
Operating Committee taken on July 2, 2024, have authorized the filing 
of this proposed amendment with the SEC in accordance with the CAT NMS 
Plan.

H. Description of Operation of Facility Contemplated by the Proposed 
Amendment

    Not applicable.

I. Terms and Conditions of Access

    Not applicable.

J. Method of Determination and Imposition, and Amount of, Fees and 
Charges

    Not applicable.

K. Method and Frequency of Processor Evaluation

    Not applicable.

L. Dispute Resolution

    Not applicable.
* * * * *

EXHIBIT A

Proposed Revisions to the CAT NMS Plan

    Additions italicized; deletions [bracketed]
* * * * *

ARTICLE VI

FUNCTIONS AND ACTIVITIES OF CAT SYSTEM

* * * * *
    Section 6.3. Data Recording and Reporting by Participants.

* * * * *

    (d) Participant Data. Subject to Section 6.3(c), and Appendix D, 
Reporting and Linkage Requirements, and in accordance with the 
Technical Specifications, each Participant shall record and 
electronically report to the Central Repository the following details 
for each order and each Reportable Event (subject to the exclusions 
outlined in Section 6.3(g)), as applicable (``Participant Data''):

* * * * *

    (g) Verbal Activity, Floor and Upstairs Activity. Notwithstanding 
any other provision of SEC Rule 613 or the CAT NMS Plan, the following 
categories of data shall not be reportable to the Central Repository 
under Section 6.3(d):
    (i) floor broker verbal announcements of firm orders on an exchange 
that are otherwise reported as systematized orders;
    (ii) market maker verbal announcements of firm quotes on an 
exchange trading floor;
    (iii) telephone discussions between an Industry Member and a client 
that may involve firm bid and offer communications; and
    (iv) unstructured electronic and verbal communications that are not 
currently captured by Industry Member order management or execution 
systems (e.g., electronic chats, text messages).

* * * * *

    Section 6.4. Data Recording and Reporting by Industry Members.

* * * * *

    (d) Required Industry Member Data.
    (i) Subject to Section 6.4(c) and Section 6.4(d)(iii) with respect 
to Options Market Makers, and consistent with Appendix D, Reporting and 
Linkage Requirements, and the Technical Specifications, each 
Participant shall, through its Compliance Rule, require its Industry 
Members to record and electronically report to the Central Repository 
for each order and each Reportable Event the information referred to in 
Section 6.3(d) (subject to the exclusions outlined in Section 6.3(g)), 
as applicable (``Recorded Industry Member Data'').
* * * * *

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the amendment is 
consistent with the Exchange Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number 4-698 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 4-698. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed amendment that are filed with 
the Commission, and all written communications relating to the proposed 
amendment 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 a.m. and 3 
p.m. Copies of the filing also will be available for inspection and 
copying at the principal offices of the Participants. Do not include 
personal identifiable information in submissions; you should submit 
only information that you wish to make available publicly. We may 
redact in part or withhold entirely from publication

[[Page 67505]]

submitted material that is obscene or subject to copyright protection. 
All submissions should refer to file number 4-698 and should be 
submitted on or before September 10, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(85).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-18565 Filed 8-19-24; 8:45 am]
BILLING CODE 8011-01-P