Joint Industry Plan; Order Approving an Amendment to the National Market System Plan Governing the Consolidated Audit Trail, as Modified by the Commission, Regarding the Reporting of Certain Verbal Activity, Floor and Upstairs Activity, 26337-26352 [2025-11331]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 90, Number 117 (Friday, June 20, 2025)]
[Notices]
[Pages 26337-26352]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-11331]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-103275; File No. 4-698]


Joint Industry Plan; Order Approving an Amendment to the National 
Market System Plan Governing the Consolidated Audit Trail, as Modified 
by the Commission, Regarding the Reporting of Certain Verbal Activity, 
Floor and Upstairs Activity

June 16, 2025.

I. Introduction

    On August 2, 2024, 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

[[Page 26338]]

(``Exchange Act''),\2\ and Rule 608 of Regulation NMS,\3\ a proposed 
amendment (``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 
\4\ activity (the ``Verbal Quotes Amendment''). The Proposed Amendment 
was published for comment in the Federal Register on August 20, 
2024.\5\ On November 18, 2024, the Commission instituted proceedings to 
determine whether to disapprove the Proposed Amendment or to approve 
the Proposed Amendment with any changes or subject to any conditions 
the Commission deems necessary or appropriate.\6\ On February 12, 2025, 
the Commission designated a longer period within which to conclude 
proceedings regarding the Proposed Amendment.\7\ On April 17, 2025, the 
Commission extended the period within which to conclude proceedings 
regarding the Proposed Amendment to June 16, 2025.\8\ This order 
approves the Proposed Amendment, as modified herein, with such changes 
the Commission deems necessary or appropriate, which are described in 
detail below. For the reasons discussed below, the Commission finds 
that the Proposed Amendment, as modified, is 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 Exchange Act. A copy of the Proposed Amendment, 
marked to reflect the modifications the Commission has made, is 
attached in Appendix A to this order.
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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 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016). The 
latest version of the CAT NMS Plan is available at https://catnmsplan.com/about-cat/cat-nms-plan.
    \2\ 15 U.S.C. 78k-1(a)(3) (stating that the Commission is 
authorized to, among other things, ``by rule or order, to authorize 
or require self-regulatory organizations to act jointly with respect 
to matters as to which they share authority under this chapter in 
planning, developing, operating, or regulating a national market 
system (or a subsystem thereof) or one or more facilities 
thereof'').
    \3\ 17 CFR 242.608.
    \4\ ``Upstairs'' is a term used to describe the off-exchange 
market. For example, trading that occurs within a broker-dealer firm 
or between two broker-dealers in the over-the-counter market would 
be described as occurring ``upstairs.''
    \5\ See Notice of Filing of Amendment to the National Market 
System Plan Governing the Consolidated Audit Trail, Exchange Act 
Release No. 100727 (Aug. 14, 2024), 89 FR 67499 (``Notice''). 
Comments received in response to the Notice can be found on the 
Commission's website at https://www.sec.gov/comments/4-698/4-698-e.htm.
    \6\ See Exchange Act Release No. 101648, 89 FR 92726 (Nov. 22, 
2024).
    \7\ See Exchange Act Release No. 102404, 90 FR 9941 (Feb. 19, 
2025).
    \8\ See Exchange Act Release No. 102882, 90 FR 16902 (Apr. 22, 
2025).
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II. Background

    Rule 613(j)(9) of Regulation NMS and Section 1.1 of the CAT NMS 
Plan define the term ``reportable event'' as including, but not limited 
to, the original receipt or origination, modification, cancellation, 
routing, and execution (in whole or in part) of an order, and receipt 
of a routed order.\9\ The term ``order'' is defined in Rule 613(j)(8) 
of Regulation NMS and Section 1.1 of the CAT NMS Plan as including: (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.\10\ ``Bid or offer'' 
is defined in Rule 600(b)(16) of Regulation NMS as the bid price or the 
offer price communicated by a member of a national securities exchange 
or a member of a national securities 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.\11\ Rule 613 and the CAT NMS Plan both require 
that the Industry Members and the Participants record and report 
certain details for quotes \12\ and orders that meet the definition of 
order and CAT reportable event.\13\
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    \9\ 17 CFR 242.613(j)(9); CAT NMS Plan, Section 1.1.
    \10\ 17 CFR 242.613(j)(8); CAT NMS Plan, Section 1.1 (stating 
that ``Order'' or ``order'' has, ``with respect to Eligible 
Securities, the meaning set forth in SEC Rule 613(j)(8).'').
    \11\ 17 CFR 242.600(b)(16).
    \12\ Quotation is defined in Rule 600(b)(86) of Regulation NMS 
to mean a bid or an offer. 17 CFR 242.600(b)(86).
    \13\ See CAT NMS Plan, supra note 1, at Section 6.3(d) 
and.6.4(d). Many unstructured verbal or manual communications on 
exchange floors and ``upstairs'' are reportable events under Rule 
613 and the CAT NMS Plan because firm verbal quotes and orders, 
whether they occur on an exchange floor or ``upstairs,'' are 
reportable to CAT if they are a firm bid or offer. See Securities 
Exchange Act Release No. 90405 (Nov. 12, 2020), 85 FR 73544, 73546-
547 (Nov. 18, 2020) (``November 2020 Exemptive Order'').
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    On November 12, 2020, pursuant to Section 36(a)(1) of the Exchange 
Act,\14\ and Rule 608(e) of the Exchange Act,\15\ the Commission 
granted the Participants an exemption, until July 31, 2023, from the 
requirement in Section 6.4(d) of the CAT NMS Plan that requires each 
Participant, through its Compliance Rule, to require its Industry 
Members to record and electronically report to the Central Repository: 
(1) Floor broker verbal announcements of firm orders on an exchange 
that are otherwise reported as systematized orders; (2) market maker 
verbal announcements of firm quotes on an exchange trading floor; (3) 
telephone discussions between an Industry Member and a client that may 
involve firm bid and offer communications; and (4) unstructured 
electronic and verbal communications that are not currently captured by 
Industry Member order management or execution systems (e.g., electronic 
chats, text messages) (the foregoing (1)-(4), collectively, the 
``Exempt Activities''), subject to certain conditions.\16\ On July 28, 
2023 pursuant to Section 36(a)(1) of the Exchange Act,\17\ and Rule 
608(e) of the Exchange Act,\18\ the Commission granted the Participants 
further temporary exemptive relief for the reporting of the Exempt 
Activities, until July 31, 2026, subject to certain conditions.\19\
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    \14\ 15 U.S.C. 78mm(a)(1).
    \15\ 17 CFR 242.608(e).
    \16\ See November 2020 Exemptive Order, supra note 13.
    \17\ 15 U.S.C. 78mm(a)(1).
    \18\ 17 CFR 242.608(e).
    \19\ Securities Exchange Act Release No. 98023, 88 FR 51369 
(Aug. 3, 2023) (the ``July 2023 Exemptive Order'').
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III. Description of the Proposal

    CAT LLC proposes to amend the CAT NMS Plan to permanently exclude 
the Exempt Activities from reporting to the Central Repository. 
Specifically, CAT LLC proposes to amend Article VI, Section 6.3 of the 
CAT NMS Plan to add a new subsection 6.3(g) which would state that, 
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, both Section 6.3(d), relating to Participant 
reporting requirements, and Section 6.4(d)(i), relating to Industry 
Member reporting requirements, would be amended to reference the 
exclusions outlined in Section 6.3(g).
    CAT LLC states that the Verbal Quotes Amendment is intended to have 
an effect similar to permanent incorporation into the CAT NMS Plan of

[[Page 26339]]

the existing Commission-approved temporary exemptive relief within the 
July 2023 Exemptive Order, without the added conditions to relief.\20\ 
CAT LLC states that the Verbal Quotes Amendment is not intended to 
affect activity that is currently reported to CAT or to otherwise 
modify the categories in the July 2023 Exemptive Order.\21\
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    \20\ See id. The July 2023 Exemptive Order conditioned relief on 
the Participants providing the Commission a written status update on 
the reporting of these quotes and orders by July 31, 2025, 
including, for both verbal activity on exchange floors and upstairs 
activity separately, an analysis of the feasibility of traders 
contemporaneously recording firm bid and offer information for 
verbal and manual quotes and orders, and an implementation plan for 
the reporting of these quotes and orders. See July 2023 Exemptive 
Order, 88 FR at 51370-71.
    \21\ See Notice, at 67501.
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    CAT LLC states that the Verbal Quotes Amendment is merited because 
of the impact on overall CAT costs of requiring reporting of the Exempt 
Activities.\22\ CAT LLC states that 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.\23\ With respect to Participant reporting, CAT 
LLC states that $64.35 million to $112.86 million per year would be 
required to designate a full-time equivalent 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.\24\ CAT LLC further states that the Verbal Quotes 
Amendment is appropriate because it is technologically infeasible to 
reliably, accurately, and consistently collect and report data 
concerning the Exempt Activities without human intervention.\25\
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    \22\ See id.
    \23\ See id. at 67502. A letter cited by CAT LLC provides 
additional detail on these estimates. See Letter from Howard 
Meyerson, Managing Director, Financial Information Forum, at 20 
(Dec. 16, 2022) (``December 2022 FIF Letter'').
    \24\ See Notice, at 67501.
    \25\ See id.
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    CAT LLC also states that no technological developments have 
occurred that would make reporting the Exempt Activities cost-
effective.\26\ CAT LLC states that 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.\27\ CAT 
LLC states that 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, but that a number of Industry 
Members have conducted internal analyses and concluded that there is 
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.\28\ CAT LLC states that, 
given that the technology has not developed in the four years since the 
original November 2020 Exemptive Order, it is exceedingly unlikely that 
it will develop to a usable point over the next two years.\29\ 
Moreover, because there is no existing technological solution, CAT LLC 
states that reporting the Exempt Activities would require substantial 
human intervention, which would also add significantly to the 
costs.\30\ Specifically, CAT LLC states that 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.\31\ CAT LLC further 
states that reporting the Exempt Activities would also 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. CAT LLC further states 
that 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 and that the CAT was intended to enhance audit 
trails for regulators, not impact how Industry Members source market 
liquidity and trade.\32\
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    \26\ See id. at 67502-03.
    \27\ See id. at 67501.
    \28\ See id. at 67501-02 (citing December 2022 FIF Letter, at 
5).
    \29\ See id. at 67502.
    \30\ See id. at 67502-03.
    \31\ See id. at 67502.
    \32\ See id. at 67503.
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    CAT LLC states that the reporting of Exempt Activities would not 
provide enough value from a regulatory or surveillance perspective to 
outweigh their substantial costs.\33\ CAT LLC states that 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.\34\ CAT LLC states that 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\ CAT LLC states that 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. CAT LLC states 
that therefore all firm bids or offers represented by a floor broker 
must be associated with orders that have already been systematized.\36\ 
CAT LLC states that 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.\37\ In addition, CAT 
LLC states that any cancellation or change to an order transmitted to 
an exchange floor broker must occur within the systematized order 
record.\38\ CAT LLC states that therefore every order verbalized on an 
exchange floor by a floor broker has already been systematized, and 
that systematization is already reportable to the CAT. CAT LLC further 
states that, 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. 
CAT LLC states that the additional information that would be associated 
with the Exempt Activities does not need to be captured to allow for 
effective

[[Page 26340]]

surveillance and regulation of exchange floor activity.\39\
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    \33\ See id.
    \34\ See id.
    \35\ See id.
    \36\ See id.
    \37\ See id.
    \38\ See id.
    \39\ See id.
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    CAT LLC states therefore that 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.\40\ CAT LLC further states that 
communications related to the Exempt Activities do not lend themselves 
to the types of market manipulation considered in the adoption of Rule 
613 because such communications are not widely disseminated.\41\ CAT 
LLC states that 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.\42\ In addition, 
CAT LLC states that it 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.\43\
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    \40\ See id.
    \41\ See id.
    \42\ See id.
    \43\ See id. at 67500-01 (stating that costs that would be 
incurred by Participants and Industry Members to comply with CAT 
reporting requirements should be carefully controlled).
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IV. Discussion

A. The Applicable Standard of Review

    Rule 608(a) of Regulation NMS states that any two or more self-
regulatory organizations, acting jointly, may file a national market 
system plan or may propose an amendment to an effective national market 
system plan by submitting the text of the plan or amendment to the 
Commission by email, together with a statement of the purpose of such 
plan or amendment and, to the extent applicable, the documents and 
information required by paragraphs (a)(4) and (5) of Rule 608.\44\ 
Under Rule 608(b)(2) of Regulation NMS, the Commission shall approve a 
national market system plan or proposed amendment to an effective 
national market system plan, with such changes or subject to such 
conditions as the Commission may deem necessary or appropriate, if it 
finds that such plan or amendment is necessary or 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 
mechanisms of, a national market system, or otherwise in furtherance of 
the purposes of the Exchange Act.\45\ The Commission shall disapprove a 
national market system plan or proposed amendment if it does not make 
such a finding.\46\
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    \44\ 17 CFR 242.608(a).
    \45\ 17 CFR 242.608(b)(2).
    \46\ See id. Approval or disapproval of a national market system 
plan, or an amendment to an effective national market system plan 
(other than an amendment initiated by the Commission), shall be by 
order. Id. In addition, Rule 700(b)(3)(ii) of the Commission's Rules 
of Practice states that ``[t]he burden to demonstrate that a NMS 
plan filing is consistent with the Exchange Act and the rules and 
regulations issued thereunder that are applicable to NMS plans is on 
the plan participants that filed the NMS plan filing.'' 17 CFR 
201.700(b)(3)(ii). ``Any failure of the plan participants that filed 
the NMS plan filing to provide such detail and specificity may 
result in the Commission not having a sufficient basis to make an 
affirmative finding that a NMS plan filing is consistent with the 
Exchange Act and the rules and regulations issued thereunder that 
are applicable to NMS plans.'' Id.
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    For the reasons described below, the Commission deems it 
appropriate to modify the Proposed Amendment as described below and 
finds that the Proposed Amendment, as modified herein, is consistent 
with the requirements of Section 11A and Rule 608 thereunder, and is 
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 mechanisms of, a national market system, or otherwise 
in furtherance of the purposes of the Exchange Act.\47\
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    \47\ 17 CFR 242.608(b)(2).
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B. Comment Letters

    The Commission received a comment letter from the NYSE 
Exchanges,\48\ which, among other things, expressed support for the 
Verbal Quotes Amendment.\49\ The commenter states that, as outlined in 
the Proposal, any potential regulatory benefit of verbal quoting 
activity data is substantially outweighed by the significant costs and 
burdens.\50\ The Commission further received a comment letter 
supporting the NYSE Letter's recommendation to approve the Verbal 
Quotes Amendment, and additionally stating that the Commission should 
review all of its orders granting temporary exemptive relief from CAT 
reporting requirements with a view to making them permanent, and that 
full cost-benefit analyses should be required for any future CAT 
guidance and rulemakings that impose new requirements.\51\
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    \48\ The NYSE Exchanges include New York Stock Exchange LLC, 
NYSE American LLC, NYSE Arca, Inc., NYSE National, Inc. and NYSE 
Texas, Inc. (collectively, ``NYSE'').
    \49\ See Letter from Jaime Klima, General Counsel, NYSE, dated 
April 24, 2025, available at https://www.sec.gov/comments/4-698/4698-598195-1737842.pdf (``NYSE Letter'').
    \50\ See id. at 3.
    \51\ See Letter from Joseph Corcoran, Managing Director and 
Associate General Counsel and Gerald O'Hara, Vice President and 
Assistant General Counsel, Securities Industry and Financial Markets 
Association, dated June 6, 2025, available at https://www.sec.gov/comments/4-698/4698-610487-1785814.pdf.
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    The Commission also received three comment letters from one 
commenter supportive of the Verbal Quotes Amendment.\52\ This commenter 
supports the Verbal Quotes Amendment by stating that: (i) automated 
capture of the Exempt Activities is not possible based on current 
technology; (ii) the costs for manually capturing, interpreting and 
reporting the Exempt Activities will be significant; \53\ (iii) the CAT 
NMS Plan and the Commission's approval order do not address these 
significant costs; (iv) Industry Members will curtail their current 
verbal activity in the absence of relief, which could result in reduced 
execution quality for customer orders and reduced market liquidity; (v) 
prices communicated in upstairs one-to-one unstructured communications 
are not firm because they are not binding on the communicating party 
and always require a further affirmative action by the communicating 
party; (vi) that the regulatory value of the data is not clear; and 
(vii) the Exempt Activities could be defined as ``pre-order 
communications,'' but are not orders under Commission Rule 613 because 
they cannot result in a trade execution unless an order is transmitted 
and received subsequent to such a pre-order communication and prior to 
the time of trade execution.'' \54\
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    \52\ See Letter from Howard Meyerson, Managing Director, 
Financial Information Forum (``FIF''), dated September 9, 2024, 
available at https://www.sec.gov/comments/4-698/4698-518035-1490942.pdf (``September 2024 FIF Letter''), enclosing December 2022 
FIF Letter; Letter from Howard Meyerson, Managing Director, FIF, 
dated December 6, 2024, available at https://www.sec.gov/comments/4-698/4698-558515-1603022.pdf (``December 2024 FIF Letter''); Letter 
from Howard Meyerson, Managing Director, FIF, dated April 28, 2025, 
available at https://www.sec.gov/comments/4-698/4698-596335-1730023.pdf (``April 2025 FIF Letter'').
    \53\ FIF states that the annual cost to report the Exempt 
Activities would be in excess of $4.4 billion, subject to an 
increase for inflation in the period of time following the 
submission of the December 2022 FIF Letter. See September 2024 FIF 
Letter, at 2; December 2024 FIF Letter, at 2; April 2025 FIF Letter 
at 12.
    \54\ See September 2024 FIF Letter, at 2-4; see also April 2025 
FIF Letter (requesting that the Commission confirm that pre-order 
communications are not reportable to CAT or provide a permanent 
exemption from the requirement for firms to report these pre-order 
communications to CAT).
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    This commenter further states that manual pre-order communications 
are far more costly to capture and report to

[[Page 26341]]

CAT as compared to electronic activity, while having significantly less 
surveillance value than orders.\55\ The commenter also states that CAT 
Plan Participants have estimated total CAT operating expenses for 2025 
of $248,846,076, which is a 14.8% increase over the 2024 estimated CAT 
operating expenses for 2024, and that this type of annual cost increase 
is not sustainable in the long-term.\56\ The commenter states that the 
Commission should focus on ways to reduce CAT operating costs prior to 
introducing any new mandates to CAT that would involve significant 
costs for industry members (and ultimately customers), including 
disruption of current trading practices that have developed over many 
years.\57\
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    \55\ See September 2024 FIF Letter, at 2-4.
    \56\ See December 2024 FIF Letter, at 3.
    \57\ See id.
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    This commenter further states that if the Commission considers that 
the Exempt Activities are orders, bids or offers under Commission Rule 
613 and does not provide permanent relief for reporting the Exempt 
Activities, it would be necessary for the Commission to: (i) provide 
support for this position based on Commission precedent; \58\ (ii) 
publicly communicate its reasoning in writing; (iii) clearly explain 
the conditions under which specific verbal activity would be or would 
not be reportable to CAT; and (iv) ensure that the CAT system and CAT 
documentation are updated to clearly describe the required reporting 
(including how specific fields, such as duration, should be 
reported).\59\ This commenter also states that the Commission would 
need to complete these four steps at least three years prior to any 
implementation of CAT reporting for the Exempt Activities.\60\
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    \58\ The commenter states that unstructured verbal and 
electronic upstairs activities are not reportable to CAT under Rule 
613 because they represent indications of interest--not orders. See 
December 2022 FIF Letter, at 11-12. CAT LLC states 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. See Notice, at 67499.
    \59\ See September 2024 FIF Letter, at 4.
    \60\ See id.
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C. Categories of Verbal and Manual Activities

    The Commission views the activities covered by this amendment as 
fitting into two categories: (1) verbal activity on exchange floors, 
which are defined in the Proposed Amendment and in proposed 
modifications to the CAT NMS Plan as floor broker verbal announcements 
of firm orders on an exchange that are otherwise reported as 
systematized orders and market maker verbal announcements of firm 
quotes on an exchange trading floor; \61\ and (2) ``upstairs'' verbal 
and manual activity, which is defined in the Proposed Amendment and the 
proposed modifications to the CAT NMS Plan as telephone discussions 
between an Industry Member and a client that may involve firm bid and 
offer communications and unstructured electronic and verbal 
communications that are not currently captured by Industry Member order 
management or execution systems (e.g., electronic chats, text 
messages).\62\ For the purposes of analyzing the Proposed Amendment and 
this order the Commission has considered these categories separately 
and ultimately believes it is appropriate to treat each category 
differently.
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    \61\ See proposed CAT NMS Plan Section 6.3(g)(i) and (ii). See 
Notice, at 67504.
    \62\ See proposed CAT NMS Plan Section 6.3(g)(i) and (ii). See 
Notice, at 67504.
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    As discussed further below, while the Commission is approving the 
amendment with respect to the upstairs verbal and manual activity as 
proposed, the Commission deems it appropriate to modify the proposed 
amendment to Section 6.3 of the Plan for (1) floor broker verbal 
announcements of firm orders on an exchange that are otherwise reported 
as systematized orders and (2) market maker verbal announcements of 
firm quotes on an exchange trading floor to add the phrase ``until July 
31, 2030,'' in front of Sections 6.3(g)(i) and 6.3(g)(ii) of the 
Plan.\63\
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    \63\ 17 CFR 242.608(b)(2). The approved CAT NMS Plan amendment 
language, as modified by the Commission, is in Appendix A. The 
Commission recognizes that CAT LLC disputes that the Exempt 
Activities are required under Section 6.3(d) of the Plan. See 
Notice, at 67499. The Commission does not intend the modified 
amendment to establish any new Plan requirements or to resolve any 
dispute over whether the Exempt Activities are required under the 
Plan. Rather, the Commission understands the amendment to exclude 
the specified categories of data (either permanently or until July 
31, 2030) to the extent those categories of data are reportable 
under Section 6.3(d).
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1. Verbal Activity on Exchange Floors
    Under the July 2023 Exemptive Order, Participants and Industry 
Members are not required to report any information relating to the 
verbalization of floor orders by floor brokers,\64\ or the quotes 
verbalized by floor market makers in response to the verbalization of 
floor orders by floor brokers. The July 2023 Exemptive Order exempts 
the reporting to the CAT of any other firm bid or offers made verbally 
prior to submission of crossed orders for electronic execution. In 
reliance on this exemption, floor brokers' announcements of orders on 
an exchange floor are not reported to CAT and floor market maker bids 
and offers in response to floor brokers verbal orders are not reported 
to the CAT today. Because confirmed trades on exchange floors must be 
submitted electronically by floor brokers for execution, information 
regarding matching interest verbally expressed by floor market makers 
that is ultimately part of the executed trade is reported to the CAT, 
but this can be an incomplete picture of what was expressed by floor 
market makers because the order and the trade submitted and reported to 
the CAT would only show the amount of market maker interest that was 
matched for execution, and not the full amount that was offered. Market 
maker interest that is verbally expressed in open outcry that does not 
become part of the executed trade is not reported to the CAT currently 
in any fashion.
---------------------------------------------------------------------------

    \64\ The floor broker's systemization of the order prior to its 
verbalization of the floor, however, is reported to the CAT today.
---------------------------------------------------------------------------

    Thus, regulators currently have little insight into verbal floor 
activity except through the reporting of systematized and executed 
floor orders and surveillance by physical oversight of the open outcry 
process, primarily by exchange officials. The reporting of verbal 
activity on exchange floors would help regulators better identify 
potential violations of broker-dealer best execution obligations, firm 
bid/offer obligations and exchange priority rules.\65\ Information on 
verbal quotes and orders on exchange floors would also help regulators 
in understanding market structure, including the competition for orders 
and execution quality. Reporting would also help regulators identify 
instances of floor participants backing away from quotes and orders, 
such as floor brokers routing orders elsewhere after open outcry (e.g., 
in order to obtain a ``clean cross'' or otherwise limit floor market 
maker

[[Page 26342]]

participation), and issues relating to the allocation of trades to 
floor participants.
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    \65\ When adopting Rule 613, the Commission stated that many of 
the benefits of a consolidated audit trail can only be achieved if 
all orders and quotations are included, and that it is important for 
the consolidated audit trail to capture information for all 
principal orders and market maker quotations because principal 
orders and market maker quotations represent a significant amount of 
order and transaction activity in the U.S. markets. See Securities 
Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722, 45746 
(Aug. 1, 2012). The Commission continued to state that the 
consolidated audit trail would allow regulators to efficiently 
surveil for manipulative and other illegal activity by market making 
and other proprietary trading firms, and that including principal 
orders and market maker quotations in the consolidated audit trail 
would permit the SROs to more efficiently monitor the market for 
violations of SRO rules. Id.
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    The information provided by CAT LLC does not meet its burden to 
establish that providing a permanent exception to reporting obligations 
for verbal activity on exchange floors is necessary or appropriate. As 
discussed in greater detail below, of the twenty five national 
securities exchanges, only five options exchanges and one equity 
exchange have physical trading floors, but floor trading can represent 
a substantial portion of trading volume for those exchanges.\66\ In 
addition, while floor trading can make up a small percentage of options 
trades, the notional volume of floor trading can be much larger, 
highlighting that trades on floors can be very large and an important 
trading method for market participants and as such it needs to be 
included in CAT for effective regulatory oversight purposes.\67\
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    \66\ See infra Section V.A.2.a. An analysis of data from OPRA 
Option Trade Reports shows that, in Q4 2024, trading on exchanges 
floors made up 41.6% of options trading in terms of notional volume 
and 7.7% of executed options contracts. See infra note 105. The 
Commission understands that the nature of trading activity on the 
equity trading floor differs from the options floors, including the 
importance of the closing auction on the equity trading floor. 
According to New York Stock Exchange LLC, the closing auction on the 
equity trading floor is the single largest liquidity event of the 
day and can account for over 20% of daily volume, and the community 
of floor brokers and designated market makers on the equity floor 
contribute over 35% of that close liquidity, on average. See NYSE 
Auctions, ``The Closing Auction,'' available at: https://www.nyse.com/auctions. Due to these differences, the regulatory 
value of the Exempt Activities insofar as they relate to equity 
floor trading would likely differ from the regulatory value of 
information regarding verbal and manual activity on options trading 
floors, as would the relative difficulty in capturing such verbal 
and manual activity. CAT LLC and commenters do not distinguish 
between equities and options floors in their request or analyses.
    \67\ See infra note 105 (explaining that the largest single-day 
percentage of floor trading (in terms of notional volume) was 64.4% 
in Q4 2024, even though floor trades made up just 0.24% of options 
trades in Q4 2024 on average and 0.35% at most). The Commission does 
not have specific data on what portion of trades that occur upstairs 
involve reportable firm verbal or manual communications, but a 
commenter states that well under one-hundredth of one percent of 
orders would involve a manual pre-order communication. See September 
2024 FIF Letter, at 5.
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    The Commission recognizes that the reporting of such information 
will impose costs on the Participants and Industry Members, but while 
there are costs to reporting the Exempt Activities on trading floors, 
the costs provided by CAT LLC and a commenter are likely overstated. 
CAT LLC estimates that it would cost $64.35 million to $112.86 million 
per year to designate a full-time employee 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.\68\ However, this estimate is based on an assumption 
that every floor broker and every floor-based market maker would need a 
full-time employee solely to report to the CAT, and is based on a 
commenter's estimate of costs that include both floor and upstairs 
verbal and manual activity.\69\ But, as discussed below, the Commission 
believes that this methodology may overstate the costs of reporting 
this information to CAT because floor verbal activity is distinct from 
verbal and manual activity on the upstairs market insofar as much of 
the relevant information that would be reported to CAT is already 
systematized, floor brokers and floor market makers have handheld and 
other electronic devices to facilitate the open outcry process,\70\ and 
floor verbal activity is governed by exchange rules.
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    \68\ See Notice, at 67502.
    \69\ See id. at 67502-03.
    \70\ To the extent systematized orders are or can be reflected 
in handhelds or other electronic devices, it may be easier to report 
responses to such orders because some of the required data will 
already be systemized (e.g., symbol, side and other key terms of the 
order).
---------------------------------------------------------------------------

    CAT LLC and a commenter state that Industry Members have analyzed 
the issue and have concluded that there is 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.\71\ However, the verbal and manual activity 
scenarios, examples, and discussion of the challenges of natural 
language processing attached to the December 2022 FIF Letter all relate 
to upstairs verbal and manual activity.\72\ CAT LLC states that the 
same challenges exist for Industry Members and Participants on exchange 
trading floors, but as discussed below, activity on exchange trading 
floors is different than upstairs activity because of exchange rules 
and the nature of floor activity. In addition, unlike upstairs verbal 
and manual activity, and as stated by CAT LLC, every floor order must 
be systematized by the floor broker prior to representation and is 
reportable to the CAT, and 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.\73\ Thus, capturing verbal quote and order 
information on an exchange floor does not involve the same complexity 
and/or costs as capturing upstairs verbal and manual activity.\74\
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    \71\ See Notice, at 67501-02; September 2024 FIF Letter, at 2 
(citing December 2022 FIF Letter, at 5).
    \72\ See December 2022 FIF Letter, at Attachment I, II, and IV.
    \73\ See Notice, at 67503.
    \74\ For example, the December 2022 FIF Letter provides several 
upstairs scenarios in which a determination of what communications 
are CAT reportable would require both careful analysis and more 
clarity in CAT reporting rules. See December 2022 FIF Letter, at 
Attachment I, II, and IV.
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    Industry Members engaged in floor activities are subject to 
exchange rules that govern when orders and quotes vocalized in open 
outcry on exchange floors are firm.\75\ Floor brokers are required to 
announce order(s) that the floor broker is representing to the trading 
crowd prior to submitting the systematized order for execution.\76\ 
Responses from floor market makers are firm quotes under the exchange 
rules--for example, Nasdaq PHLX LLC rules specify that, among other 
things, during public outcry once the trading crowd has provided a 
quote, it will remain in effect until (A) a reasonable amount of time 
has passed, or (B) there is a significant change in the price of the 
underlying security, or (C) the market given in response to the request 
has been improved.\77\ These verbalized orders and quotes in open 
outcry are ``firm,'' and even though they are firm for a short period 
of time, they are reportable CAT events much like the routing of an 
immediate-or-cancel order on electronic markets, which is ``firm'' only 
upon receipt and immediately canceled if not executed.
---------------------------------------------------------------------------

    \75\ See, e.g., BOX Exchange LLC (``BOX'') Rule 7580(e)(2); NYSE 
Arca LLC (``Arca'') Rule 6.73-O (stating that for a floor bid or 
offer ``to be effective, a bid or offer must . . . be made by open 
outcry at the trading post where the option is traded'').
    \76\ The Commission believes that existing exchange rules 
requiring systemization prior to open outcry would reduce risk that 
reporting would be inconsistent and prone to error, unlike the 
upstairs market.
    \77\ See Nasdaq PHLX, LLC Rules, Options 8, Section 2(a)(9). See 
also Exchange Act Release No. 90880 (Jan. 8, 2021), 86 FR 3217, 3221 
(Jan. 14, 2021) (SR-Phlx-2021-03) (stating that ``Floor Market Maker 
quotes are considered firm when announced in open outcry and once 
accepted the transaction may be effectuated within FBMS,'' and ``a 
Floor Market Maker that experiences issues with internet connection, 
makes an error or otherwise is unaware of recent news in a 
particular option, would be held to a quote verbalized in open 
outcry''); Cboe Exchange, Inc. Rule 5.52(a) (stating that ``Market-
Maker bids and offers are firm for all orders under this Rule and 
Rule 602 of Regulation NMS under the Exchange Act [ ] for the number 
of contracts specified in the bid or offer, except if'' certain 
exceptions apply).
---------------------------------------------------------------------------

    The Participants and Industry Members could establish methods for 
capturing verbal order and quote information communicated on exchange

[[Page 26343]]

floors that are more cost-effective and efficient than the proposal 
that each floor participant be required to hire a full-time employee 
solely for CAT reporting. For example, CAT LLC states that orders on 
exchange trading floors are electronically systematized for execution, 
and executions resulting from the verbal representation of these orders 
and floor market maker responses will continue to be required to be 
reported to the CAT.\78\ Thus, to capture verbal order information, the 
initial floor broker verbalizations of systematized orders would 
require the addition of a timestamp identifying when the floor broker 
verbally announced the order in open outcry, but otherwise the material 
terms of the verbal order are already systematized electronically. 
Additionally, floor brokers generally use handhelds or other electronic 
devices when on the floor to facilitate the required systematization of 
orders, to facilitate the reporting of when a floor broker initially 
announces an order in open outcry and any verbalized revisions to that 
order in negotiations with the trading crowd. Thus, for simple floor 
trades that involve the verbal representation of a systematized order 
by a floor broker and subsequent submission for electronic execution 
with floor market maker responses included as appropriate, floor 
brokers could satisfy verbal reporting obligations by electronically 
communicating when these already systematized orders were presented 
verbally to the trading crowd, potentially through handheld devices or 
electronic equipment already used for the systematization of the order. 
The same devices and electronic equipment could be used to record 
verbal modifications and cancellations of that systematized order--and 
at least for modifications, such verbal modifications already must be 
systematized by the floor broker if the order is to be submitted 
electronically for execution. Participants or Industry Members could 
develop updated software for those handhelds or other electronic 
devices that would allow those devices to be used to record the 
reportable floor-based verbal quote or order activities, and the 
Commission notes that at least one exchange currently requires floor 
brokers to electronically record the time at which the floor broker 
initially represents a systematized order to the trading crowd.\79\
---------------------------------------------------------------------------

    \78\ See Notice, at 67502-03. In addition, CAT LLC states that 
any cancellation or change to an order transmitted to an exchange 
floor broker must occur within the systematized order record. Id.
    \79\ See Rules of Cboe Exchange, Inc., at Chapter 5, Section G, 
Rule 5.91(a)(4), available at: https://cdn.cboe.com/resources/regulation/rule_book/C1_Exchange_Rule_Book.pdf (stating that a floor 
broker's use of due diligence in handling and executing an order 
includes, among other things, ``subject to the requirement to 
systematize orders prior to representation pursuant to Rule 5.7(f), 
electronically recording the time via a PAR workstation at which the 
Floor Broker initially represents the order to the trading crowd''). 
Cboe Exchange, Inc. rules also state that the use of hand signal 
communications on the Exchange's trading floor may be used to 
initiate an order, to increase or decrease the size of an order, to 
change an order's limit price, to cancel an order, or to activate a 
market order, and that any initiation, cancellation, or change of an 
order relayed to a Floor Broker through the use of hand signals also 
must be systematized. See Cboe Exchange, Inc. Rule 5.7, 
Interpretation and Policies .02. While this activity is prior to the 
open outcry process, the Commission believes that the requirements 
in the Cboe rules suggest that floor brokers may not require a new 
full-time staff member for each individual floor broker trader to 
record verbal and manual activity that occurs in open outcry. This 
is another example of floor brokers being required to electronically 
systematize verbally or manually conveyed information, in addition 
to the existing requirement that floor brokers electronically record 
and electronically report matching floor market maker interest that 
is verbally expressed in open outcry, all of which is currently 
required and done without severely impacting existing workflows or 
floor brokers' ability to participate in fast-moving markets.
---------------------------------------------------------------------------

    With respect to floor market maker quotes, the Commission 
understands that floor market makers provide verbal quotes based on 
already electronically systematized information (i.e., no floor market 
makers are currently sua sponte providing verbal quotes on exchange 
floors without real-time awareness of the market for relevant 
securities). CAT LLC has not established that it is necessary to have a 
full-time employee to capture the timing of vocalization of that 
interest because it may be possible for already systematized electronic 
information to form the basis for CAT reporting by exchanges or floor 
participants. Floor market maker or exchange provided systems could be 
modified to allow floor market makers to quickly notate when a quote is 
verbally expressed in response to a floor broker's bid or offer, based 
on already electronic information containing the material terms of the 
quote. Alternatively, floor brokers could be required pursuant to 
exchange rules to record all verbal responses by floor market makers on 
their handheld devices or other electronic devices, and not just record 
the responses of floor market makers required for execution, which 
floor brokers are already required to do for matching interest verbally 
expressed by floor market makers. Due to potential alternative means of 
reporting verbal activity on exchange floors, the Commission does not 
believe that the cost estimates CAT LLC has provided demonstrate that 
it is necessary or appropriate to permanently remove the reporting of 
floor-based verbal quotes and orders from the CAT NMS Plan.
    Given the concerns raised about costs and implementation by CAT LLC 
and commenter, the Commission is providing the Participants and 
Industry Members five years to implement cost-effective reporting of 
floor-based verbal quotes and orders. Amending the CAT NMS Plan to 
codify a deadline of July 31, 2030, for the reporting of verbal quotes 
and orders that occur on exchange floors provides Participants and 
Industry Members an appropriate amount of time to modify existing 
technology and update processes necessary for cost-effective reporting 
of verbal quotes and orders on exchange floors. In addition, it would 
provide sufficient time for Participants to update technical 
specifications and guidance such as reporting scenarios and FAQs, as 
well as any other changes required.\80\
---------------------------------------------------------------------------

    \80\ A commenter has previously noted that current CAT 
documentation does not provide sufficient guidance for reporting 
floor trading activity. See December 2022 FIF Letter, at 8-9. The 
Commission agrees with the commenter that changes to CAT 
documentation and the CAT system will be required to facilitate the 
reporting of floor verbal quotes and orders, and believes that five 
years should be sufficient time to accomplish those changes.
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2. Upstairs Verbal and Manual Activity
    Unlike verbal activity on exchange floors, the Commission believes 
it is appropriate for CAT LLC to amend the CAT NMS Plan to permanently 
exclude the requirement that Participants and Industry Members report 
the Exempt Activities insofar as they relate to verbal and manual 
activity that occurs outside of exchange facilities, specifically: (1) 
telephone discussions between an Industry Member and a client that may 
involve firm bid and offer communications; and (2) unstructured 
electronic and verbal communications that are not currently captured by 
Industry Member order management or execution systems (e.g., electronic 
chats or text messages).
    As discussed above, the Commission believes that verbal and manual 
activity that occurs off exchange floors is distinct from activity that 
occurs on exchange floors. Unlike on-exchange floor verbal quotes and 
orders, which CAT LLC states involve verbal announcements of firm 
orders by floor brokers that have already been systematized,\81\ CAT 
LLC and

[[Page 26344]]

commenters have not stated that telephone discussions and unstructured 
electronic and verbal communications by Industry Members involve 
communications of firm bids or offers that have already been 
systematized. In addition, upstairs verbal and manual activity is 
unlike the vocalization of on-exchange floor market bids and offers and 
floor market maker quotes, which is governed by exchange rules.
---------------------------------------------------------------------------

    \81\ See Notice, at 67503.
---------------------------------------------------------------------------

    Therefore, unlike floor orders, reporting of these unstructured 
electronic and verbal communications would require significant business 
and technological changes across broker-dealers and the CAT to 
accommodate the capture, systematization and reporting of this 
activity. A commenter estimates the costs of reporting of verbal and 
manual order information to be over $4.4 billion \82\ The Commission 
believes this overall estimate is overstated because, among other 
reasons, the analysis assumes that every one of the estimated traders 
that use verbal or manual quotes and orders would each need a full-time 
employee to comply with the reporting requirement and that each of 
those full-time employees would have a salary of $522,651. However, the 
Commission recognizes the need to reduce costs and believes that in the 
absence of technological advances to accurately capture and report 
upstairs verbal and manual activity in a cost-effective manner, it is 
not appropriate to require that Industry Members modify systems, 
workflows, physical infrastructure and hire additional staff for the 
manual and expensive endeavor of reporting upstairs verbal and manual 
order information.
---------------------------------------------------------------------------

    \82\ See supra note 23.
---------------------------------------------------------------------------

    The upstairs verbal and manual communications covered by this 
aspect of the Proposed Amendment include a wide range of activity, 
including firm bids or offers made by broker-dealers to another broker-
dealer or customer(s) via telephone calls, text messages, instant 
messaging applications, emails, or other unstructured electronic means, 
and potentially involving multiple methods of communication and/or 
involving multiple parties.\83\ While this information would help 
regulators better identify potential violations of securities laws and 
regulations, including violations of best execution obligations, firm 
bid/offer obligations, and additionally help regulators in 
understanding market structure including providing a better 
understanding of the range and amount of verbal and manual activity in 
the upstairs market and the behavior of market participants, as 
described above, CAT LLC and a commenter estimate that the costs of 
reporting upstairs verbal and manual activity would be magnitudes 
greater than reporting floor verbal quotes and orders.\84\ In the 
upstairs market there are no exchange rules that govern how verbal and 
manual activity occurs, including no requirement that upstairs orders 
be systematized before verbal or manual bids and offers are made, and 
thus reporting of Exempt Activities in the upstairs market would be a 
significantly manual activity in the absence of technological 
developments that would lead to the efficient and accurate reporting of 
upstairs verbal and manual activity, imposing significant costs on 
market participants. Thus, unlike for floor-based activity, the 
regulatory value of reporting of verbal and manual activity that occurs 
off exchange floors does not justify the costs of requiring the 
reporting of this activity.
---------------------------------------------------------------------------

    \83\ A commenter provided verbal activity scenarios that include 
scenarios involving simultaneous voice and chat communications, chat 
messages referencing terms of a separate FIX order transmission, and 
communications involving multiple discussions spanning significant 
time periods, multiple languages, and multiple methods of 
communication. See September 2022 FIF Letter, Attachment I.
    \84\ See supra notes 23 and 24, and accompanying text.
---------------------------------------------------------------------------

    In addition, CAT LLC and a commenter state that requiring the 
reporting of telephone discussions between an Industry Member and a 
client that may involve firm bid and offer communications, and 
unstructured electronic and verbal communications that are not 
currently captured by Industry Member order management or execution 
systems (e.g., electronic chats or text messages), could negatively 
modify market participant behavior and market structure. According to 
CAT LLC and a commenter, without permanent relief from reporting these 
firm bids and offers, Industry Members would be incentivized to provide 
non-firm indications of interest to other Industry Members and 
customers, which could result in reduced execution quality, reduced 
market liquidity, and potentially disrupt trading. The Commission 
agrees, especially in light of the difficulty of determining when 
upstairs verbal and manual communications are ``firm.'' While the 
reporting of these upstairs activities would have regulatory value, the 
potential effect on market participant behavior and market structure 
would likely negatively impact their regulatory value. The Commission 
does not believe a similar concern exists on exchange floors, where 
firms are subject to exchange rules on the firmness of vocalizations on 
the exchange floor, and there is less ambiguity about when a vocalized 
bid or offer is firm.
    Pursuant to the CAT NMS Plan as amended, Industry Members will 
still be obligated to report the same information related to verbal or 
manual orders and executions as they do today. As stated by CAT LLC, 
the Verbal Quotes Amendment is not intended to affect activity that is 
currently reported to CAT.\85\ For example, on exchange trading floors 
executions resulting from the verbal representation of floor broker 
orders and floor market maker responses will continue be required to be 
reported to the CAT.\86\ In addition, for verbal or manual trades made 
upstairs, executions will still be subject to existing reporting 
requirements, such as the requirement to report to CAT 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.\87\
---------------------------------------------------------------------------

    \85\ See Notice, at 67501.
    \86\ See id. at 67502-03. In addition, CAT LLC states that any 
cancellation or change to an order transmitted to an exchange floor 
broker must occur within the systematized order record. Id.
    \87\ See id. at 67503.
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V. Efficiency, Competition, and Capital Formation

    In determining whether to approve a proposed amendment to the CAT 
NMS Plan, and whether such amendment is in the public interest, Rule 
613 requires the Commission to consider the potential effects of the 
proposed amendment on efficiency, competition, and capital 
formation.\88\ The Commission has reviewed the arguments about such 
effects put forth by CAT LLC and independently analyzed the likely 
effects of the Proposed Amendment on efficiency, competition, and 
capital formation. Based on its analysis, the Commission concludes that 
the Proposed Amendment, as modified herein, could have a positive 
impact on operational efficiency, a negative impact on regulatory 
efficiency, and a mixed effect on market efficiency. The Proposed 
Amendment, as modified herein, is also expected to have a mixture of 
positive and negative impacts on competition, and it is not expected to 
have any meaningful impact on capital formation. These effects are 
discussed below.
---------------------------------------------------------------------------

    \88\ 17 CFR 242.613(a)(5).

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[[Page 26345]]

A. Baseline

1. Regulatory Baseline and Current Market Practice
    In analyzing the impact of the Proposed Amendment on efficiency, 
competition and capital formation, the Commission considered the 
baseline to consist of the current regulatory framework for the Exempt 
Activities, which includes the requirement to report the Exempt 
Activities to CAT under Rule 613 and the CAT NMS Plan, as well as 
market practice under the November 2020 and July 2023 Exemptive Orders. 
In particular, the baseline represents the current state of the world, 
including the existing Commission-approved temporary exemptive relief 
within the July 2023 Exemptive Order, which expires on July 31, 2026, 
and the extent to which market participants have undertaken certain 
actions toward the reporting of the Exempt Activities.
    The CAT NMS Plan requires the reporting of ``Manual Order Events,'' 
which, as defined by the CAT NMS Plan, are non-electronic 
communications of order-related information for which CAT Reporters 
must record and report the time of the event.\89\ As the Commission 
stated in the November 2020 Exemptive Order and reiterates here, Rule 
613 and the CAT NMS Plan both require the capture and reporting of 
verbal quotes and orders, because they are a subset of Manual Order 
Events.\90\
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    \89\ See CAT NMS Plan at Section 1.1 (defining ``Manual Order 
Events'' as ``a non-electronic communication of order-related 
information for which CAT Reporters must record and report the time 
of the event'' and defining ``CAT Reporter'' as ``each national 
securities exchange, national securities association and Industry 
Member that is required to record and report information to the 
Central Repository pursuant to SEC Rule 613(c).''). See also supra 
notes 9-13 and corresponding text for further discussion of 
reporting requirements under CAT.
    \90\ See November 2020 Exemptive Order, supra note 13, at 73547.
---------------------------------------------------------------------------

    Due to the temporary exemptive relief for the reporting of the 
Exempt Activities under the November 2020 Exemptive Order, and its 
subsequent extension under the July 2023 Exemptive Order, the Exempt 
Activities are currently not being reported to the CAT. Thus, the 
benefits of having information about the Exempt Activities in the CAT, 
which are primarily expected to be benefits related to regulatory 
activities such as market surveillance, examinations and 
investigations, and more efficient execution of numerous other 
regulatory functions, have not been realized.\91\ In the CAT NMS Plan 
Approval Order, the Commission explained how investors benefit from the 
CAT-enabled improvements to such regulatory activities.\92\ In the 
November 2020 Exemptive Order, the Commission stated that collecting 
verbal quotes and orders would provide regulatory benefits that do not 
currently exist.\93\ The Commission also stated that regulators do not 
have detailed information relating to most verbal quotes and orders, 
which would allow regulators to more capably perform regulatory and 
surveillance functions, and that it does not believe it is appropriate 
to exclude such quotes and orders from CAT reporting, which often are 
more complex and/or involve larger-sized orders.\94\
---------------------------------------------------------------------------

    \91\ See Securities Exchange Act Release No. 78318 (Nov. 15, 
2016), 81 FR 84696 (Nov. 23, 2016) (``CAT NMS Plan Approval 
Order''), at 84833-40 for a discussion of the regulatory benefits of 
CAT, including the regulatory benefits of reporting exempt 
activities. One regulatory benefit of reporting exempt activities is 
that it allows regulators to access data in a single data source. 
See also CAT NMS Plan Approval Order, at 84738 for a discussion on a 
recommendation by a commenter that certain broker-dealers using 
manual orders should be exempt from CAT reporting obligations. The 
Commission stated that such an exemption would result in an audit 
trail that does not capture all orders by all participants in the 
securities markets. The Commission further stated that data from all 
broker-dealers is necessary for regulatory purposes and did not 
provide an exemption for firms using manual orders as recommended. 
In addition, CAT includes data on principal orders, market maker 
quotes, and quote sent times for options market maker quotes, which 
were not all captured by the SRO audit trails that existed when CAT 
was approved. See id. at 84811. Also, when approving the CAT NMS 
Plan, the Commission explained that centralized linking should 
generally promote the accuracy and efficiency of the resulting data. 
See id. at 84826. In the notice of the CAT NMS Plan, the Commission 
explained that the inability to link all records affects the 
accuracy of the resulting data and can force an inefficient manual 
linkage process that would delay the completion of the data 
collection and analysis portion of the examination, investigation, 
or reconstruction. See Securities Exchange Act Release No. 77724, 81 
FR 30614, at 30670 for a discussion of the regulatory benefits of 
linking and combining data.
    \92\ A discussion of the expected benefits and regulatory usage 
of the CAT NMS Plan is available in the CAT NMS Plan Approval Order. 
See CAT NMS Plan Approval Order, at 84816-40.
    \93\ See November 2020 Exemptive Order, supra note 13, at 73547. 
The Commission gave the example that the reporting of firm verbal 
quotes from floor market makers would allow regulators to determine 
whether a market maker has ``backed away'' from a firm quote. The 
Commission did not reference the regulatory benefits of the Exempt 
Activities in the July 2023 Exemptive Order.
    \94\ See id.
---------------------------------------------------------------------------

    The current lack of reporting of the Exempt Activities in CAT data 
suggests also that market participants have likely not incurred the 
full implementation costs of reporting the Exempt Activities. In the 
November 2020 Exemptive Order granting the initial temporary exemption 
for reporting the Exempt Activities, the Commission acknowledged the 
difficulties of implementing the reporting of such events, and that the 
exchanges with floors and Industry Members did not have the means to 
collect the information necessary for reporting verbal activity on 
exchange floors or upstairs.\95\ The Commission reiterated in the July 
2023 Exemptive Order that extending the temporary exemptive relief 
should allow Participants and Industry Members time to collaborate, 
develop, and implement a reporting framework, guidelines, FAQs, and 
scenarios necessary for effective and efficient reporting of floor-
based verbal quotes and orders and upstairs activity.\96\
---------------------------------------------------------------------------

    \95\ See id.
    \96\ See July 2023 Exemptive Order, supra note 19, at 51370.
---------------------------------------------------------------------------

    Both CAT LLC and one commenter to the Proposed Amendment commented 
on lingering technological problems and provided estimates of the costs 
of reporting the Exempt Activities. CAT LLC estimates that these costs 
could be in the billions and states that it is technologically 
infeasible to reliably, accurately, and consistently collect and report 
data concerning the Exempt Activities, and that no technological 
developments have occurred that would make reporting the Exempt 
Activities cost effective.\97\ A commenter projected an annual cost in 
excess of $4.4 billion to manually capture the Exempt Activities.\98\ 
The Commission recognizes that reporting the Exempt Activities to CAT 
will impose costs on the Participants and Industry Members, but the 
Commission believes that the costs provided by CAT LLC and this 
commenter are likely overstated, particularly for floor-based verbal 
activity.\99\ CAT LLC also stated that, since current technology is not 
sophisticated enough to reliably capture and report the Exempt 
Activities, such activities could only be reported manually, which 
would lead to inconsistent reporting that is prone to error due to the 
need for human

[[Page 26346]]

review.\100\ The Commission recognizes current technological challenges 
with reporting the Exempt Activities, particularly in the upstairs 
market.\101\
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    \97\ See supra note 26.
    \98\ See September 2024 FIF Letter, at 2; December 2024 FIF 
Letter, at 2; December 2022 FIF Letter, at 6-8 and 20-21; April 2025 
FIF Letter, at 6. This cost estimate is based on the assumption 
that, for each trader at a firm, one full-time compliance person at 
that firm will be required to review all of the phone conversations 
and unstructured electronic communications of that trader and 
manually input this data into a quote capture system. See December 
2022 FIF Letter, at 6-8.
    \99\ See supra Section IV.C, acknowledging that the reporting of 
such information will impose costs on the Participants and Industry 
Members, but noting that the Commission believes that the costs 
provided by CAT LLC and a commenter are likely overstated.
    \100\ See Notice, at 67500. That the automated capture of the 
Exempt Activities is not possible based on current technology was 
supported by a commenter; see September 2024 FIF Letter, at 2; 
December 2022 FIF Letter, at 5 and 14-19.
    \101\ See supra Section IV.C.2 for a discussion of technological 
and other challenges involved in reporting activity in the upstairs 
market. See also Notice, at 67500.
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2. Competition Baseline
    The Exempt Activities consist of activities that occur in two 
separate subcategories within the market for trading services: first, 
verbal floor activity, which takes place on exchanges' trading floors; 
and second, unstructured verbal and electronic upstairs activity, which 
occurs on the so-called ``upstairs'' market.\102\ The following 
discusses the competitive landscape of each of these markets.
---------------------------------------------------------------------------

    \102\ ``Upstairs'' is a term used to describe the off-exchange 
market. See supra note 4.
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a. Exchange Floor Trading
    The market for exchange trading services in options and equities 
consists of 25 national securities exchanges currently operating, of 
which five options exchanges and one equity exchange have physical 
trading floors \103\ that typically operate alongside electronic 
markets. The Commission understands that floor trading in the equity 
markets is limited to certain order types and times of day; \104\ 
however, in the options market, floor trading can represent a 
substantial portion of trading volume.
---------------------------------------------------------------------------

    \103\ This includes the New York Stock Exchange, LLC in the 
equity market, as well as BOX Exchange LLC; Cboe Exchange, Inc.; 
Nasdaq PHLX LLC; NYSE American LLC; and NYSE Arca, Inc. in the 
options market. One additional options exchange, MIAX SAPPHIRE, LLC, 
expects to open a physical trading floor on June 30, 2025. See, 
e.g., https://www.miaxglobal.com/alert/2024/12/06/miax-sapphire-options-exchange-trading-floor-update-notification-important. In 
addition, several of these exchanges have so-called ``virtual 
trading floors,'' which allow market participants remote access to 
an electronic program with video, audio, and chat functions that is 
intended to take the place of open outcry in the event that the 
exchange's physical trading floor becomes inoperable. See Securities 
Exchange Act Release No. 90658 (Dec. 14, 2020) (Cboe Exchange, Inc.; 
Order Granting Accelerated Approval of a Proposed Rule Change) and 
Securities Exchange Act Release No. 91714 (Apr. 29, 2021) (Notice of 
Filing of Proposed Rule Change to Adopt BOX Rule 7670 to Establish a 
Virtual Trading Floor on BOX).
    \104\ In particular, the Commission understands that most floor 
trading in the equity market happens at market close, particularly 
in NYSE's Closing Auction, through the use of discretionary orders 
(``D-orders''), which are orders exclusively available through NYSE 
floor brokers that allow orders to be entered or cancelled up until 
one second before the auction clears (vs. 15 minutes for other types 
of orders). See, e.g., ``D-ORDERTM orders: The Floor 
Broker's modern trading tool,'' available at https://www.nyse.com/article/trading/d-order, stating that interest represented via the 
floor currently contributes more than one-third of NYSE's total 
Closing Auction volume; see also ``NYSE Closing Auction: price 
discovery opportunities reach new highs'' (August 29, 2024), 
available at https://www.nyse.com/data-insights/nyse-closing-auction-price-discovery-opportunities-reach-new-highs, stating that 
as of Aug. 2024, Closing D-Orders account for over 46% of the NYSE 
Closing Auction executed volume.
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    A Commission staff analysis of data from OPRA Option Trade Reports 
shows that, in the fourth quarter of 2024, trading on options exchange 
floors made up 41.6% of options trading in terms of notional volume and 
7.7% of executed options contracts.\105\ The analysis considers various 
measures meant to capture exchanges' share of floor trading (including 
the percentage of floor trades, contract volume, and notional trading 
volume) across the five options exchanges with physical trading floors 
during the fourth quarter of 2024. Also included is a measure of the 
exchanges' overall market share (measured as the percentage of total 
notional options trading volume taking place on that exchange).
---------------------------------------------------------------------------

    \105\ The analysis uses data from OPRA Option Trade Reports, 
collected from MIDAS. Floor trades are defined as options trades 
that are marked in OPRA with message types SLFT (Single Leg Floor 
Trade), MLFT (Multi Leg floor trade), MFSL (Multi Leg floor trade 
against single leg(s)), TLFT (Stock Options floor trade), TFSL 
(Stock Options floor trade against single leg(s)), and CBMO (Multi 
Leg Floor Trade of Proprietary Products). See OPRA Pillar Input 
Specification (Dec. 6, 2024), available at https://cdn.opraplan.com/documents/OPRA_Pillar_Output_Specification.pdf. Floor trading can 
also represent a much larger portion of trading volume on any given 
day; for example, the largest single-day percentage of floor trading 
(in terms of notional volume) was 64.4% in Q4 2024. At the same 
time, floor trades made up just 0.24% of options trades in Q4 2024 
on average (single-day maximum of 0.35%), highlighting that trades 
on the floor tend to be very large.
---------------------------------------------------------------------------

    Table 1 shows that floor market share (in terms of the notional 
value of floor trading volume) tends to be less concentrated across the 
five options exchanges than their overall market share (in terms of 
overall notional trading volume).

                        Table 1--Floor Trading Market Share by Options Exchange, Q4 2024
----------------------------------------------------------------------------------------------------------------
                                         Floor market       Floor market       Floor market      Overall market
          Options exchange            share (% of floor  share (% of floor  share (% of floor  share (% of total
                                           trades)        contract volume)   notional volume)   notional volume)
----------------------------------------------------------------------------------------------------------------
BOX Exchange LLC....................               45.0               26.5                9.0                5.6
Cboe Exchange, Inc..................               46.1               31.2               80.1               50.7
Nasdaq PHLX LLC.....................                6.7               25.8                8.5                8.1
NYSE American LLC...................                1.4                9.4                1.7                2.9
NYSE Arca, Inc......................                0.8                7.1                0.7                7.4
----------------------------------------------------------------------------------------------------------------
This table shows various statistics meant to capture the distribution of shares of floor trading across the
  options exchanges that offer physical trading floors. Column 1 measures the number of options floor trades on
  each exchange, divided by the total number of options floor trades across all exchanges. Column 2 measures the
  number of options contracts traded on a given exchange's trading floor, divided by the total number of options
  contracts traded across all exchange floors. Column 3 measures the total notional value of options traded on a
  given exchange's trading floor, divided by the sum of notional options volume traded across all exchange
  floors. Columns 1-3 use data from OPRA Option Trade Reports, collected from MIDAS. Floor trades are defined as
  options trades that are marked in OPRA with message types SLFT (Single Leg Floor Trade), MLFT (Multi Leg floor
  trade), MFSL (Multi Leg floor trade against single leg(s)), TLFT (Stock Options floor trade), TFSL (Stock
  Options floor trade against single leg(s)), and CBMO (Multi Leg Floor Trade of Proprietary Products). See OPRA
  Pillar Input Specification (Dec. 6, 2024), available at https://cdn.opraplan.com/documents/OPRA_Pillar_Output_Specification.pdf. Overall Market Share in column 4 is calculated as the sum of notional
  volume traded on a given exchange, as a percentage of the total notional volume traded across all options
  exchanges (including those without trading floors), using data for Q4 2024 from CBOE's U.S. Options Market
  Volume Summary, available at https://www.cboe.com/us/options/market_statistics/. The sum of Column 4 is less
  than 100% because it only includes the respective market shares of options exchanges with trading floors. The
  market share of the overall options market belonging to exchanges that do not operate trading floors is not
  included in Column 4.


[[Page 26347]]

    It is difficult to interpret this further because, unlike in the 
equities markets, the products traded on options exchange trading 
floors tend to be proprietary products that are not cross-listed across 
options exchanges and, as a result, are traded exclusively on the 
listing exchange.\106\ To the extent that these products do not have 
substantially similar substitute products that are traded on other 
exchanges, the degree to which options exchange floors compete with one 
another or with electronic exchanges for order flow would be 
limited.\107\ Furthermore, the differences between market shares in 
terms of floor trade numbers and floor notional volume show that there 
is variation across exchanges in terms of average floor trade sizes. 
For example, while BOX Exchange, LLC handles 45% of all options floor 
trades, it handles only around a quarter of floor trading in terms of 
notional value, implying that this exchange likely handles a large 
number of smaller-sized trades. Lastly, the significant differences 
between floor market share and overall market share for some exchanges 
implies that the amount of floor trading as a percentage of an 
exchange's total options trading varies significantly across 
exchanges.\108\ As such, floor trading may be of varying importance to 
different exchanges' business models.
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    \106\ For example, the Commission understands that options floor 
trading on Cboe tends to be concentrated in S&P 500 Index (SPX) 
options, Cboe Volatility Index (VIX) options, Russell 2000 Index 
(RUT) and SPDR S&P 500 ETF Trust (SPY) options, most of which are 
proprietary Cboe products.
    \107\ For certain options, there are substitute products that 
are traded on other exchanges, but these may not be perfect 
substitutes. For example, any options exchange can develop products 
with SPY as underlying to list those products and other options 
exchanges indeed trade options on SPY, which could compete with SPX 
options. Other options exchanges also have options on volatility 
indices meant to compete with VIX options.
    \108\ For example, based on OPRA Option Trade Reports data, 
floor trading represented more than 70% of the notional value of 
options traded on BOX Exchange LLC in Q4 2024, but just 9.6% of the 
notional value of options traded on NYSE Arca over the same time 
period.
---------------------------------------------------------------------------

    In some cases, exchange trading floors may compete directly with 
electronic limit order books for both orders and participants, though 
this competition may be limited. For example, exchange trading floors 
are often used for larger and complex orders that benefit from more 
human intervention,\109\ implying that exchange trading floors have a 
competitive advantage for these types of orders.\110\ At the same time, 
there is mixed evidence that market participants are easily able to 
substitute electronic markets for exchange floor trading on equity 
exchanges, e.g., following the closure of exchange floors during the 
COVID-19 pandemic.\111\
---------------------------------------------------------------------------

    \109\ See, e.g., supra note 94. Order sizes on trading floors 
vary widely, and as mentioned above, it appears likely that BOX 
Exchange handles a large number of smaller-sized trades.
    \110\ Some electronic exchanges have sought to create features 
meant to compete for capture some order flow that floor exchanges 
attract. For example, the International Securities Exchange 
introduced a ``facilitation mechanism'' to compete for order flow 
that tended to be directed to exchange floors. See Securities 
Exchange Act Release No. 49056 (Jan. 12, 2004), 69 FR 2798, 2799 
(Jan. 20, 2004) (Notice of Filing of Proposed Rule Change and 
Amendment No. 1 thereto by International Securities Exchange, Inc., 
Relating to Pricing of Block and Facilitation Trades).
    \111\ See, e.g., Cox, J., & Woods, D, COVID-19 and market 
structure dynamics, 147 Journal of Banking & Finance, 106362 (2023), 
finding that the closing of the NYSE floor was not consequential for 
U.S. markets since many electronic trading platforms and trading 
algorithms have replaced the role of human traders. But see 
Brogaard, J., Ringgenberg, M. C., & Roesch, D, 80(1) Does floor 
trading matter?, The Journal of Finance, 375-414 (2024), finding 
that liquidity deteriorated during the floor closures, as in-person 
human interaction facilitates the transfer of valuable information 
in a way that cannot be easily replaced with algorithms.
---------------------------------------------------------------------------

    Floor brokers and floor market makers operate on exchange trading 
floors.\112\ Some market participants employ floor brokers to trade on 
their behalf; these market participants are likely to be institutional 
traders engaged in large and/or complex trades. The Commission is not 
able to estimate the total number of entities that engage in floor 
trading on exchange floors across both equity and options exchanges. 
The Commission estimates that there are currently 21 firms that 
maintain floor brokers in equity markets; \113\ due to the higher 
overall share of floor trading on options markets, it is likely that 
there are more firms that are active in floor trading on options 
exchanges. The baseline also consists of the existing capacity 
constraints on physical exchange trading floors, which may limit the 
number of market makers and broker-dealers that can engage in floor 
trading.
---------------------------------------------------------------------------

    \112\ Floor brokers are typically individuals that register to 
participate on an exchange trading floor for the purpose of 
accepting and handling orders; floor market makers are market makers 
that have a physical presence on an exchange's trading floor and 
have quoting obligations, providing quotes electronically, in open 
outcry, and/or otherwise verbally.
    \113\ See NYSE, Trading Floor Broker Directory, available at 
https://www.nyse.com/trading-floor-broker-directory (last visited 
April 30, 2025).
---------------------------------------------------------------------------

    As the Exempt Activities have, up to now, been exempted from CAT 
reporting requirements, the Commission does not have quantitative 
information on, and is unable to quantify, the extent to which the 
Exempt Activities are used in floor trading, and neither CAT LLC in the 
Proposed Amendment nor any commenter to the Proposed Amendment offer 
quantitative estimates of these Exempt Activities. However, the 
Commission is able to quantify the market share of floor trading, e.g., 
see Table 1, which reports market shares of floor trading of options 
exchanges.
b. Upstairs Activity
    The upstairs market has traditionally functioned through 
intermediaries (i.e., broker-dealers), who facilitate block trading by 
locating counterparties for large trades (typically large institutional 
investors whose trades are liquidity-motivated and not based on 
information).\114\ The importance of the upstairs market for 
facilitating institutional trading has likely decreased over recent 
years, due to the growing use of algorithms and smart order routers, 
which permit institutional investors and their broker-dealers to break 
large parent orders up into smaller child orders for the purposes of 
routing (thus serving as a substitute to the use of the upstairs 
market),\115\ as well as the growing importance of Alternative Trading 
Systems (``ATSs'').\116\ According to one industry report, the upstairs 
market represented about 14.4% of off-exchange trading as of the third 
quarter of 2021.\117\ Major participants in this market include large 
banks, for whom balance sheet adjustments often require trading in 
large blocks, as well as ETF market makers and institutional brokers 
that specialize in block trading.\118\ Confirming the purpose of the 
upstairs market as facilitating large-sized trades, the report found 
that, for these participants, a significant majority of their upstairs 
trading is done in block

[[Page 26348]]

sizes.\119\ According to one commenter, the upstairs market provides 
price discovery and assists in minimizing market impact, particularly 
for stocks and options that are less liquid or have wider spreads.\120\
---------------------------------------------------------------------------

    \114\ See, e.g., Madhavan, A., & Cheng, M., In search of 
liquidity: Block trades in the upstairs and downstairs markets, The 
Review of Financial Studies, 175-203 (1997).
    \115\ See Beason T. & Wahal S., The Anatomy of Trading 
Algorithms (working paper Jan. 21, 2021), available at https://ssrn.com/abstract=3497001 (retrieved from SSRN Elsevier database).
    \116\ For example, academic papers have found evidence that high 
frequency traders and other institutional investors make up a 
substantial fraction of odd-lot trades. See, e.g., Hardy J., et al., 
Are All Odd-lots the Same? Odd-lot Transactions By Order Submission 
and Trader Type, 79 Journal of Banking & Finance, 1 (2017); O'Hara 
M., et al., What's Not There: Odd lots and Market Data, 69 Journal 
of Finance, 2199 (2014).
    \117\ See Rosenblatt Securities, A Closer Look at Off-Exchange 
and Retail Market Share (November 4, 2021), available at https://www.rbltresearch.com/ngdox/viewer/fcec4a21-4ab3-4583-8f98-7111bde9cae0 (``Rosenblatt''). In order to arrive at an estimate of 
the size of the upstairs market, the authors of this report exclude 
from FINRA's non-ATS OTC data all trading that is unlikely to be 
upstairs trading, such as OTC closing trade prints and trading by 
off-exchange venues that they know to not be engaged in upstairs 
trading, including wholesalers and single-dealer platforms (SDPs). 
The same report estimated that off-exchange trading made up 44% of 
total equity trading in October 2021.
    \118\ See, e.g., Rosenblatt, at 6.
    \119\ See Rosenblatt, at 7-8.
    \120\ See December 2022 FIF Letter, at 3.
---------------------------------------------------------------------------

    As the Exempt Activities have been exempted from CAT reporting 
requirements, the Commission does not have information related to, and 
is unable to estimate, the extent to which the Exempt Activities are 
used in the upstairs market. However, according to one commenter, less 
than one out of ten thousand orders in the upstairs trading market 
involve the Exempt Activities.\121\ There may be barriers to entry to 
the upstairs market for market makers in the form of reputational 
capital.\122\ Additionally, there may be barriers to entry to the 
upstairs market in the form of the costs of setting up the 
infrastructure for market makers to engage in the Exempt Activities in 
the upstairs market (such as acquiring email and chat functionalities) 
however, such costs are likely to be small.
---------------------------------------------------------------------------

    \121\ See September 2024 FIF Letter, at 5.
    \122\ For example, academic literature has shown that 
reputational capital is highly valued among upstairs market makers. 
See, e.g., Smith, B.F., Turnbull, D.A.S., & White, R.W., Upstairs 
market for principal and agency trades: Analysis of adverse 
information and price effects, The Journal of Finance, 1723-1746 
(2001).
---------------------------------------------------------------------------

B. Efficiency

    The Commission analyzed three types of efficiency impacts from the 
Proposed Amendment, as modified herein: operational efficiency in terms 
of CAT operations \123\ or the processes for collecting and reporting 
CAT data; regulatory efficiency in terms of the impact on regulatory 
activities; and market efficiency in terms of trading and price 
formation. The Commission expects the Proposed Amendment, as modified 
herein, to have some impacts on efficiency, some of which may be 
positive and some of which may be negative. The Commission expects the 
impacts of the Proposed Amendment, as modified herein, to be different 
for the upstairs market and for floor trading. Amending the CAT NMS 
Plan to permanently exclude the Exempt Activities for the upstairs 
market will result in permanent operational efficiency gains and 
regulatory efficiency losses. For floor trading, amending the CAT NMS 
Plan to codify a deadline of July 31, 2030, for reporting the Exempt 
Activities to the CAT will result in temporary operational efficiency 
gains and regulatory efficiency losses that will end when the temporary 
exemption expires on July 31, 2030. However, the Proposed Amendment, as 
modified herein, is expected to have only minor effects on market 
efficiency for both the upstairs market and floor trading, as discussed 
below. A permanent exemption for floor trading would have resulted in 
marginally more cost savings but with a reduction in regulatory 
efficiency.
---------------------------------------------------------------------------

    \123\ Economically, operational efficiency refers to the 
effective use of resources to generate a given output. In the case 
of CAT, the output refers to CAT data, which are generated for 
regulatory purposes. The analysis of operational efficiency is 
simplified by focusing on the use of resources as measured by the 
cost savings, net of implementation costs, whereas the efficiency 
effects of changes in CAT data are discussed separately (as impacts 
on regulatory efficiency).
---------------------------------------------------------------------------

1. Operational Efficiency
a. Upstairs Market
    By making the exemption permanent and eliminating the possibility 
that the Exempt Activities in the upstairs market will be required to 
be reported, the Proposed Amendment, as modified herein, will 
incrementally increase operational efficiency, because the Exempt 
Activities for the upstairs market will not be included in CAT. This 
means that the Central Repository will not incur the costs of 
processing and storing the CAT data stemming from the Exempt Activities 
in the upstairs market. These costs savings, and thus the improvements 
to operational efficiency, are likely to be small as long as the Exempt 
Activities in the upstairs market constitute only a relatively small 
share of overall market activity currently reported to CAT. The 
Proposed Amendment, as modified herein, will also improve the 
operational efficiency of CAT by eliminating any potential costs by CAT 
LLC or the Plan Processor, which could be substantial, in developing 
technical specifications and providing guidance on which upstairs 
activities would be required to be recorded and reported.\124\
---------------------------------------------------------------------------

    \124\ See supra Section IV.C for a discussion of additional 
costs of including the Exempt Activities in the upstairs market 
because there are no exchange rules that govern when or whether a 
particular communication by an Industry member is ``firm'' and thus 
reportable to CAT.
---------------------------------------------------------------------------

b. Floor Trading
    By extending the temporary exemption for the reporting of the 
Exempt Activities for floor trading, the Proposed Amendment, as 
modified herein, will have a small temporary positive impact on 
operational efficiency. In particular, delaying the CAT reporting 
requirement for the Exempt Activities for floor trading from July 31, 
2026, to July 31, 2030, will delay the costs associated with processing 
and storing of these data until July 31, 2030, and result in temporary 
improvements to operational efficiency during this time. These 
improvements to operational efficiency, are likely to be relatively 
small because we do not expect that reporting the Exempt Activities for 
floor trading following the expiration of the exemption on July 31, 
2030, will require significantly more processing and storage in the 
Central Repository relative to current CAT data.
    Participants and Industry Members who will eventually be required 
to record and report the Exempt Activities could also experience an 
operational efficiency improvement from the delay. In particular, the 
delay will provide time to explore more efficient solutions to 
systematize verbal activity so that Participants and Industry Members 
can collect and report data on the Exempt Activities for floor 
trading.\125\
---------------------------------------------------------------------------

    \125\ See discussion in Section IV.C.1 for further information 
on how the material terms of verbal orders and quotes are already 
systematized electronically. This discussion also explains why the 
costs put forth by CAT LLC appear overstated with respect to the 
Exempt Activities for floor trading. See also supra note 78.
---------------------------------------------------------------------------

    The Proposed Amendment would have incrementally improved 
operational efficiency relative to extending the expiration of the 
temporary exemption for floor trading because it would have made the 
exemption permanent and eliminated, rather than delay, the requirement 
to report the Exempt Activities for floor trading to CAT. Thus, the 
Proposed Amendment, would have resulted in lower costs associated with 
processing and storing CAT data because the Exempt Activities for floor 
trading would never be included in CAT. The Commission believes these 
cost savings and the resulting improvements to operational efficiency 
of the CAT would have been small because we expect the Exempt 
Activities would not require significantly more processing and storage 
in the Central Repository than current CAT data.
2. Regulatory Efficiency
a. Upstairs Market
    The Proposed Amendment, as modified herein, is expected reduce 
regulatory efficiency with respect to the oversight of trading in the 
upstairs market. In particular, the Proposed Amendment, as modified 
herein, represents a potential loss of information in CAT after July 
31, 2026, because it will make permanent the current temporary 
exemption of reporting information about the Exempt Activities to CAT 
for the upstairs

[[Page 26349]]

market, which would have been required to be reported after July 31, 
2026.\126\ The Commission has previously stated that the information 
about the Exempt Activities would allow regulators to more capably 
perform regulatory and surveillance functions.\127\ The inclusion of 
this information in CAT would have reduced the effort needed for 
regulators to engage in regulatory oversight of the upstairs market. 
This potential loss of efficiency could increase the time and 
complexity of oversight of the upstairs market relative to having 
access to the Exempt Activities in the upstairs market in CAT, reducing 
regulatory efficiency for the upstairs market after July 31, 2026, 
assuming that recording and reporting such information would eventually 
be feasible.
---------------------------------------------------------------------------

    \126\ See supra Section IV.C for a discussion of the information 
that is missing from CAT because of the exemption for the Exempt 
Activities.
    \127\ See supra note 93, citing the November 2020 Exemptive 
Order, in which the Commission gave the example that the reporting 
of firm verbal quotes from floor market makers would allow 
regulators to determine whether a market maker has ``backed away'' 
from a firm quote. See also supra Section IV.C.2 for a discussion of 
other use cases for CAT data on the Exempt Activities from the 
upstairs market.
---------------------------------------------------------------------------

    The Commission believes that such a potential reduction in 
regulatory efficiency might be limited for two reasons: the potential 
avoidance of reportable activity to CAT and, for the activity reported, 
potential inconsistency and inaccuracy of the Exempt Activities for the 
upstairs market in CAT data. First, in the absence of an exemption, 
Industry Members might be incentivized to avoid CAT reporting by 
increasing their use of non-firm IOIs and other activity that is not 
reported to CAT in place of the currently Exempt Activities that would 
be reported to CAT.\128\ This would reduce the potential regulatory 
gain of including the Exempt Activities in the upstairs market in CAT, 
and thus, reduces the regulatory inefficiencies of not including them.
---------------------------------------------------------------------------

    \128\ See supra Section IV.C.2, which states that according to 
CAT LLC and one commenter, without permanent relief from reporting 
these firm bids and offers, Industry Members would be incentivized 
to provide non-firm indications of interest to other Industry 
Members and customers.
---------------------------------------------------------------------------

    Second, CAT LLC states that the regulatory value of including the 
Exempt Activities for the upstairs market in CAT would be limited.\129\ 
In particular, CAT LLC states that such records would be inconsistent 
and prone to error because recording such information would require 
human reviewers to make subjective determinations of what to 
report.\130\ The Commission agrees that such inconsistencies and errors 
could reduce the regulatory value of including the Exempt Activities 
for the upstairs market in CAT and that this limits the reductions in 
regulatory efficiency.
---------------------------------------------------------------------------

    \129\ See supra note 33 and associated text.
    \130\ See Notice, at 67502-03.
---------------------------------------------------------------------------

    The permanent exemption from CAT reporting requirements for the 
Exempt Activities in the upstairs market could also reduce regulatory 
efficiency if it incentivizes Industry Members to move activity 
currently reported to CAT to the upstairs market. In particular, if 
market participants expected that the Exempt Activities in the upstairs 
market would eventually require reporting to CAT, the permanent 
exemption may reduce the perceived costs of the upstairs market 
relative to alternatives that currently report to CAT. If so, this 
could result in the movement of some activity to the upstairs market 
from those alternatives.\131\ Such activity would then not be available 
in CAT data, resulting in a potential increase in the time and effort 
to engage in certain regulatory activities needing this information, 
reducing regulatory efficiency.
---------------------------------------------------------------------------

    \131\ See infra Section V.C.1, which discusses the impact of the 
Proposed Amendments, as modified, on the competition and entry in 
the upstairs market.
---------------------------------------------------------------------------

b. Floor Trading
    The Proposed Amendment, as modified herein, is expected to have a 
small negative impact on regulatory efficiency for floor trading. The 
Proposed Amendment, as modified herein, will amend the CAT NMS Plan to 
extend the deadline to July 31, 2030, for the reporting of the Exempt 
Activities that occur on exchange floors. To the extent that the Exempt 
Activities would have been required to be reported at the expiration of 
the current temporary exemption on July 31, 2026, this represents a 
delay of information in CAT, at least until the expiration of the 
extended temporary exemption.\132\ The Commission has previously stated 
that the information about the Exempt Activities is valuable for 
regulatory and surveillance functions and would allow regulators to 
more capably perform regulatory and surveillance functions.\133\ 
Therefore, the extension delays an improvement in regulatory 
efficiency.
---------------------------------------------------------------------------

    \132\ See supra Section IV.C for a discussion of the information 
that is missing from CAT because of the exemption for the Exempt 
Activities.
    \133\ See supra Section V.A; see also supra note 93, citing the 
November 2020 Exemptive Order, wherein the Commission stated that 
collecting verbal quotes and orders would provide regulatory 
benefits that do not currently exist. The Commission gave the 
example that the reporting of firm verbal quotes from floor market 
makers would allow regulators to determine whether a market maker 
has ``backed away'' from a firm quote. The Commission also stated 
that regulators do not have detailed information relating to most 
verbal quotes and orders, which would allow regulators to more 
capably perform regulatory and surveillance functions, and that it 
did not believe it is appropriate to exclude such quotes and orders 
from CAT reporting, which often are more complex and/or involve 
larger-sized orders.
---------------------------------------------------------------------------

    CAT LLC stated that much of the information of the Exempt 
Activities is already reported to CAT, including initial customer 
orders and their resulting trades. The Commission understands, however, 
that while information regarding the lifecycles of customer orders 
represented on a floor is included in CAT, information about the market 
maker quotes that bid and offer to interact with those customer orders 
is not reported to CAT. In particular, CAT does not include any 
information about the bids and offers that do not trade against 
customer orders represented on the floor and does not include all 
information of value about the bids and offers that do trade against 
such customer orders. The improved surveillance and commensurate 
regulatory benefits that would be achieved by having direct and timely 
access to this activity in CAT will therefore be delayed until July 31, 
2030, under the Proposed Amendment, as modified.
    The temporary exemption for the Exempt Activities for floor trading 
may also incentivize Industry Members to continue the use or increase 
the use of the Exempt Activities in place of activity reportable to 
CAT,\134\ thereby circumventing having to report those activities to 
CAT. In particular, if some market participants engage in Exempt 
Activities on trading floors because they are not reportable to CAT (or 
because it costs less because they are not reportable) instead of an 
alternative trading activity that requires reporting to CAT, such 
activity will not be reported to CAT until after the temporary 
exemption expires. Therefore, the delay in the exemption could delay 
the inclusion of this activity in CAT and its commensurate improvements 
to regulatory efficiency.
---------------------------------------------------------------------------

    \134\ For example, Industry Members could increase their use of 
verbal quotes rather than entering a limit order that would be added 
to a limit order book.
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    Despite current technological limitations that may hinder the 
ability of market participants to report their floor trading activity 
to CAT, which is scheduled to commence on July 26, 2026, the Proposed 
Amendment, as amended herein, could nevertheless have a positive impact 
on regulatory

[[Page 26350]]

efficiency if a delay in mandated CAT reporting provides the additional 
time (and availability of other critical resources) needed for the 
development of technology that more accurately reflects the Exempt 
Activities on the floor. Regarding current technological limitations, 
CAT LLC states that current technology is not sophisticated enough to 
reliably, accurately, and consistently capture, parse, analyze, and 
report the Exempt Activities.\135\ If the technology available by 2030 
can more accurately capture verbal activity than the technology 
available by 2026, then the extension will promote more accurate data, 
which promotes regulatory efficiency.
---------------------------------------------------------------------------

    \135\ See Notice, at 67500.
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    Since the extension of the exemptive relief from CAT reporting 
requirements for Exempt Activities on trading floors is set to expire 
on July 31, 2030, the associated regulatory efficiency losses stemming 
from this extension discussed above will be temporary. In particular, 
the modification to the Proposed Amendment reduces the regulatory 
efficiency loss relative to the original proposal, because it will 
allow regulators to begin accessing CAT data for Exempt Activities on 
trading floors on July 31, 2030, which would have otherwise been 
permanently exempt under the Proposed Amendment. Having the information 
on the Exempt Activities on the floor eventually in CAT data will 
reduce the potential for regulators to have to request information on 
such Exempt Activities to the extent that there is a record for them 
from Participants and Industry Members when needed. This will improve 
regulatory efficiency. Therefore, the Proposed Amendment, as modified 
herein, will result in improved regulatory efficiency, relative to the 
original Proposed Amendment, although this improved efficiency will be 
delayed until July 31, 2030.
3. Market Efficiency
a. Upstairs Market
    The Proposed Amendment, as modified herein, is expected to lead to 
minor and mixed effects on market efficiency through its application to 
the upstairs market. In particular, it could promote market efficiency 
by removing any current incentives to avoid the upstairs market for 
situations in which the upstairs market provides the most efficient 
executions or avoiding any increased incentives to avoid the upstairs 
market in such situations. On the other hand, it could harm market 
efficiency if it creates incentives to send orders to the upstairs 
market when doing so is not efficient, such as when it reduces pre-
trade transparency.
    The Proposed Amendment, as modified, will promote market efficiency 
if it incentivizes market participants to increase their use of the 
Exempt Activities in the upstairs market when it is efficient for them 
to do so. By making the exemption permanent and eliminating the 
possibility that Exempt Activities in the upstairs market will be 
required to be reported, the Proposed Amendment, as modified herein, 
prevents a future cost increase of such activity. If market 
participants are currently curtailing this activity because of these 
future cost increases,\136\ they may increase such activity when the 
exemption becomes permanent. An increase in the Exempt Activities in 
the upstairs market when it is efficient for them to do so, e.g., 
facilitating block trading in the upstairs market,\137\ promotes market 
efficiency.
---------------------------------------------------------------------------

    \136\ See September 2024 FIF Letter, at 2-4. See also supra note 
54 and associated text.
    \137\ For example, one commenter stated that the upstairs market 
provides an important function for minimizing market impact and 
facilitating price discovery. See December 2022 FIF Letter, at 3. 
While the opportunity to reduce price impact is particularly 
beneficial to market participants seeking to execute large trades, 
any improvement in price discovery provides market-wide efficiency 
gains that accrue to a wide array of market participants.
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    In addition, the Proposed Amendment, as modified, promotes 
efficiency by preventing any increase in incentives to avoid such 
activity, which could alter market structure and result in worse 
execution outcomes. CAT LLC and one commenter state that requiring the 
reporting of the Exempt Activities in the upstairs market to CAT could 
negatively modify market participant behavior and market 
structure.\138\ Specifically, CAT LLC and this commenter state that 
without permanent relief from reporting the Exempt Activities in the 
upstairs market, Industry Members would be incentivized to rely on non-
firm IOIs, which could result in reduced execution quality, reduced 
market liquidity, and potentially disrupt trading. As a result, this 
could have a negative impact on market efficiency. Making the exemption 
permanent prevents this potential negative impact, thus promoting 
efficiency.
---------------------------------------------------------------------------

    \138\ See supra Section IV.C.2 for further discussion.
---------------------------------------------------------------------------

    On the other hand, making the exemption permanent for the upstairs 
market could also have a negative impact on market efficiency. The 
Commission also recognizes that, if the Exempt Activities are used more 
widely in the upstairs market after the exemption is made permanent and 
are used in place of non-exempt activities to a greater degree,\139\ 
market efficiency could be affected by a reduction in pre-trade 
transparency because the Exempt Activities are not disseminated widely 
to the market, while many non-exempt activities are.\140\ For example, 
to the extent that institutional traders (and their brokers) begin to 
utilize the services of upstairs trading desks in lieu of smart order 
routing systems,\141\ this would represent a shift away from a system 
of trading with widely disseminated quotes (i.e., any limit orders 
routed to national securities exchanges via smart order routers would 
be disseminated widely to the market through both the SIP and 
proprietary exchange data products) and towards a system of trading in 
which quotes are not disseminated in publicly available market data. 
This would represent a decrease in pre-trade transparency. A decrease 
in pre-trade transparency may negatively affect the efficiency of the 
trading process and price discovery, which may lead to lower market and 
price efficiency.
---------------------------------------------------------------------------

    \139\ Either in response to the exemption being made permanent 
or in response to changing market structure and conditions in 
conjunction with the fact that the Exempt Activities are not 
required to be reported to CAT.
    \140\ For example, an Exempt Activity could be a bilateral 
negotiation between two parties through messages in a chat that only 
the two parties can see. To the extent that, as a result of the 
Proposed Amendment, these parties begin to make use of such 
bilateral negotiations instead of, e.g., submitting quotes to public 
markets, this could reduce pre-trade transparency.
    \141\ The usage of the upstairs market does not have to be due 
to the Exempt Activities not being required to be reported to CAT, 
it could be due to other factors, e.g., changes in market structure 
or market conditions that favor the upstairs market.
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b. Floor Trading
    The Proposed Amendment, as modified herein, is expected to lead to 
mixed and minor effects on market efficiency for floor trading. By 
extending the temporary exemption for the Exempt Activities for floor 
trading, the Proposed Amendment, as modified herein, would delay the 
costs of CAT Reporting, which may lead market participants to increase 
their use of the Exempt Activities for floor trading when it is 
efficient for them to do so. This could have a positive impact on 
market efficiency. However, because extending the temporary exemption 
only delays the requirement to report the Exempt Activities for floor 
trading, the impact, if any, will be minor.
    The Proposed Amendment would have incrementally improved market 
efficiency relative to extending the

[[Page 26351]]

expiration of the temporary exemption for floor trading because it 
would have made the exemption permanent and eliminated, rather than 
delay, the requirement to report the Exempt Activities for floor 
trading to CAT. Thus, the Proposed Amendment could have led market 
participants to increase their use of the Exempt Activities when it is 
efficient for them to do so permanently rather than at some point 
limiting or reducing their use of the Exempt Activities in response to 
the expiration of the extension on July 31, 2030.
    On the other hand, the Commission recognizes that some market 
participants may have believed that the Commission would provide a 
permanent exemption for floor activities. As such, the modified 
proposal, which only provides a temporary exemption, may increase the 
incentive of some market participants to continue using non-exempt 
activities instead of switching towards floor trading. This, in turn, 
could help prevent a reduction in pre-trade transparency because the 
Exempt Activities are not disseminated widely to the market, while many 
non-exempt activities are.\142\ An increase in pre-trade transparency 
may positively affect the efficiency of the trading process and price 
discovery, which may lead to greater market and price efficiency.
---------------------------------------------------------------------------

    \142\ Verbal quotes on the trading floor are not reported to the 
SIP and therefore provide less pre-trade transparency relative to 
the limit order book, wherein all quotes are reported to the SIP.
---------------------------------------------------------------------------

C. Competition

    The Commission analyzed the potential impact from the Proposed 
Amendment on competition in the financial markets. The Commission 
expects the Proposed Amendment, as modified herein, to provide small 
competitive advantages to the upstairs market and floor trading 
relative to alternatives to these two trading venues, such as 
electronic exchange limit order books in the case of floor trading, and 
smart order routers or ATSs in the case of the upstairs market.\143\ In 
addition, in reducing the operating costs of CAT, these cost savings 
will marginally reduce the competitive advantages and disadvantages 
inherent in the CAT Funding Model.\144\
---------------------------------------------------------------------------

    \143\ See supra Section V.A.2.a for a discussion of the market 
that exchange floor trading competes in. See also supra Section 
V.A.2.b for a discussion of the market that upstairs trading 
competes in.
    \144\ See Securities Exchange Act Release No. 98290 (Sep. 6, 
2023), 88 FR 62628 (Sep. 12, 2023). See also Securities Exchange Act 
Release No. 101901 (Dec. 12, 2024), 89 FR 103033 (Dec. 18, 2024). 
For example, the permanent exemption for the upstairs market under 
the Proposed Amendment, as modified herein, will allow Participants 
to potentially avoid certain potential costs that would be 
distributed through the CAT Funding Model. Examples of these include 
the potential cost of filing for future extensions as well as any 
potential cost associated with future extensions (e.g., in the prior 
November 2020 and July 2023 Exemptive Orders, Participants were 
required to submit a written status update on the reporting of 
Exempt Activities).
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1. Upstairs Market
    Overall, the Commission expects small impacts on competition 
resulting from the permanent exemption for the upstairs market, because 
market participants already use Exempt Activities under the current 
temporary exemption for the upstairs market, and the costs associated 
with building out infrastructure with which to conduct Exempt 
Activities in the upstairs market are likely not to be large as to 
prohibit market participants from pursuing profitable 
opportunities.\145\
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    \145\ The costs for physical infrastructure, such as phone 
lines, chats, and other forms of electronic communication methods, 
are likely to be small in most cases. However, because the upstairs 
market relies on relationships, the largest costs could come from 
hiring employees who have connections and relationships that allow 
them to be efficient and competitive in the upstairs market.
---------------------------------------------------------------------------

    By permanently exempting Exempt Activities and eliminating the 
possibility that the Exempt Activities will be required to be reported 
for the upstairs market, the Proposed Amendment, as modified herein, 
could provide a competitive advantage for Exempt Activities in the 
upstairs market relative to other alternatives and could also increase 
the competition within the upstairs market. In particular, the Exempt 
Activities in the upstairs market will not incur the costs of CAT 
reporting. Having lower costs could put the upstairs market at a 
competitive advantage. In addition, not having to incur the costs of 
CAT reporting of the Exempt Activities could reduce the costs of entry 
into the upstairs market, though this cost reduction could be small 
relative to other costs of entry.\146\
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    \146\ Some cost components of entry in the upstairs market are 
likely to be relatively low, such as acquiring email and chat 
functionalities. However, the overall cost of entry, including the 
opportunity cost of deploying human and other resources to the 
upstairs market instead of other potentially profitable ventures and 
the cost of acquiring reputational capital, are likely to far 
outweigh CAT reporting costs of the Exempt Activities. See, e.g., 
supra note 116 and associated text for a discussion of the costs of 
reputational capital. In addition, the Exempt Activities may 
comprise only a small fraction of the overall upstairs market, 
highlighting the relatively low cost of CAT reporting compared to 
the overall costs of entry and operation in the upstairs market. For 
example, according to one commenter, less than one out of ten 
thousand orders in the upstairs trading market involve the Exempt 
Activities. See September 2024 FIF Letter, at 5. Nevertheless, any 
reduction in costs may encourage entry in the upstairs market for 
firms that were previously considering entry. See also supra Section 
V.A.2.b for discussion of entry costs in the upstairs market.
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2. Floor Trading
    Overall, the Commission expects small impacts on competition due to 
the extension of the temporary exemption for floor trading. By 
extending the temporary exemption for the Exempt Activities and thus 
delaying costs, the Proposed Amendment, as modified herein, could 
provide a competitive advantage in floor trading relative to 
alternatives and could increase the competition to provide floor 
trading. While the extension could encourage or temporarily continue 
the encouragement of floor trading relative to alternatives that report 
to CAT, market participants already use the Exempt Activities under the 
current temporary exemption and the costs associated with building out 
infrastructure with which to conduct additional Exempt Activities on 
trading floors is likely to be small in most cases.\147\
---------------------------------------------------------------------------

    \147\ See supra note 145 for further discussion.
---------------------------------------------------------------------------

    The Proposed Amendment would have incrementally improved the 
competitive advantage of floor trading relative to extending the 
expiration of the temporary extension for floor trading because it 
would have made the exemption permanent and eliminated, rather than 
delayed, the requirement to report the Exempt activities for floor 
trading to CAT. Thus, the Proposed Amendment might have increased the 
competition in floor trading as well as make floor trading more 
competitive relative to alternative trading venues permanently rather 
than until the expiration of the extension on July 31, 2030.

D. Capital Formation

    CAT LLC states that the savings and cost avoidance opportunities 
under the Proposed Amendment will ``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.'' \148\ The Commission expects the Proposed 
Amendment, as modified herein, to have a mixed effect on capital 
formation. It will promote capital formation by improving operational 
efficiency due to a reduction or delay in costs, with the greater cost 
reduction for the Exempt Activities in the upstairs market.\149\ 
However, the mixed effects of the Proposed Amendment, as modified,

[[Page 26352]]

on market efficiency will in turn result in mixed effects on capital 
formation.\150\ In contrast, the negative impact on regulatory 
efficiency \151\ will negatively impact capital formation if it reduces 
the ability of regulators to perform surveillance and other functions. 
This could reduce investor confidence in the markets, leading to an 
increase in the cost of capital. However, as the impact of the Proposed 
Amendment, as modified herein, on regulatory efficiency is expected to 
be limited,\152\ the impact of a reduction in regulatory efficiency on 
capital formation is also expected to be limited.
---------------------------------------------------------------------------

    \148\ See Notice, at 67504.
    \149\ See supra Section IV.C.2 for a discussion of technological 
and other challenges involved in reporting activity in the upstairs 
market.
    \150\ See supra Section V.B.3 for a discussion of the impact of 
the Proposed Amendments, as modified, on market efficiency.
    \151\ See supra Section V.B.2 for a discussion of the regulatory 
inefficiencies related to the lack of information about the Exempt 
Activities in CAT data.
    \152\ See id.
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    Compared to the Proposed Amendment, as modified herein, the 
Proposed Amendment would have had additional or dampening effects on 
capital formation through its differential effects on cost reduction, 
market efficiency, and regulatory efficiency, which are discussed in 
previous sections. For example, the additional cost reduction would 
have resulted in a larger positive effect on capital formation, though 
still not large; \153\ the mixed effects on market efficiency would 
still have resulted in a mixed effect on capital formation; \154\ and 
the reduced regulatory efficiency would have resulted in a larger 
reduction in capital formation.\155\
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    \153\ See supra Section V.A.2.a for a discussion of potential 
CAT-reporting costs that would be incurred by floor brokers under 
the Proposed Amendment, as modified. Such costs would not be 
incurred under the Proposed Amendment.
    \154\ See supra Section V.B.3 for a discussion of the impact of 
the Proposed Amendment on market efficiency.
    \155\ See supra Section V.B.2 for a discussion of the impact of 
the Proposed Amendment on regulatory efficiency.
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VI. Conclusion

    For the reasons set forth above, the Commission finds that the 
Proposed Amendment, as modified herein, is consistent with the 
requirements of Section 11A and Rule 608 thereunder, in that the 
Proposed Amendment, as modified herein, is 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 
mechanisms of a national market system, or otherwise in furtherance of 
the purposes of the Exchange Act.
    It is therefore ordered, pursuant to Section 11A of the Exchange 
Act,\156\ and Rule 608(b)(2) thereunder,\157\ that the Proposed 
Amendment (File No. 4-698), as modified herein, be, and hereby is, 
approved.
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    \156\ 15 U.S.C. 78k-1.
    \157\ 17 CFR 242.608.

    By the Commission.
Stephanie J. Fouse,
Assistant Secretary.

Appendix A

Approved 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) until July 31, 2030, floor broker verbal announcements of 
firm orders on an exchange that are otherwise reported as 
systematized orders;
    (ii) until July 31, 2030, 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'').
* * * * *
[FR Doc. 2025-11331 Filed 6-18-25; 8:45 am]
BILLING CODE 8011-01-P