
[Federal Register Volume 81, Number 95 (Tuesday, May 17, 2016)]
[Notices]
[Pages 30613-31124]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-10461]



[[Page 30613]]

Vol. 81

Tuesday,

No. 95

May 17, 2016

Part II





Securities and Exchange Commission





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Joint Industry Plan; Notice of Filing of the National Market System 
Plan Governing the Consolidated Audit Trail; Notices

  Federal Register / Vol. 81 , No. 95 / Tuesday, May 17, 2016 / 
Notices  

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77724; File No. 4-698]


Joint Industry Plan; Notice of Filing of the National Market 
System Plan Governing the Consolidated Audit Trail

April 27, 2016.

Table of Contents

I. Introduction
II. Background
III. Description of the Plan
    A. Statement of Purpose and Request for Comment
    1. Background
    2. Request for Exemption from Certain Requirements under Rule 
613
    3. Requirements Pursuant to Rule 608(a)
    B. Summary of Additional CAT NMS Plan Provisions and Request for 
Comment
    1. Reporting Procedures
    2. Timeliness of Data Reporting
    3. Uniform Format
    4. Clock Synchronization
    5. Time Stamp Granularity
    6. CAT-Reporter-ID
    7. Customer-ID
    8. Order Allocation Information
    9. Options Market Maker Quotes
    10. Error Rates
    11. Regulatory Access
    12. Security, Confidentiality, and Use of Data
IV. Economic Analysis
    A. Introduction
    B. Summary of Expected Economic Effects
    C. Framework for Economic Analysis
    1. Economic Framework
    2. Existing Uncertainties
    3. Request for Comment on the Framework
    D. Baseline
    1. Current State of Regulatory Activities
    2. Current State of Trade and Order Data
    3. Request for Comment on the Baseline
    E. Benefits
    1. Improvements in Data Qualities
    2. Improvements to Regulatory Activities
    3. Other Provisions of the CAT NMS Plan
    4. Request for Comment on the Benefits
    F. Costs
    1. Analysis of Expected Costs
    2. Aggregate Costs to Industry
    3. Further Analysis of Costs
    4. Second-Order Effects and Other Security-related Costs
    5. Request for Comment on the Costs
    G. Efficiency, Competition, and Capital Formation
    1. Competition
    2. Efficiency
    3. Capital Formation
    4. Related Considerations Affecting Competition, Efficiency and 
Capital Formation
    5. Request for Comment on Efficiency, Competition, and Capital 
Formation
    H. Alternatives
    1. Alternatives to the Approaches the Exemption Order Permitted 
to be Included in the Plan
    2. Alternatives to Certain Specific Approaches in the CAT NMS 
Plan
    3. Alternatives to the Scope of Certain Specific Elements in the 
CAT NMS Plan
    4. Alternatives to the CAT NMS Plan
    5. Request for Comment on the Alternatives
    I. Request for Comment on the Economic Analysis
V. Paperwork Reduction Act
    A. Summary of Collection of Information under Rule 613
    1. Central Repository
    2. Data Collection and Reporting
    3. Collection and Retention of NBBO, Last Sale Data and 
Transaction Reports
    4. Surveillance
    5. Participant Rule Filings
    6. Written Assessment of Operation of the Consolidated Audit 
Trail
    7. Document on Expansion to Other Securities
    B. Proposed Use of Information
    1. Central Repository
    2. Data Collection and Reporting
    3. Collection and Retention of NBBO, Last Sale Data and 
Transaction Reports
    4. Surveillance
    5. Written Assessment of Operation of the Consolidated Audit 
Trail
    6. Document on Expansion to Other Securities
    C. Respondents
    1. National Securities Exchanges and National Securities 
Associations
    2. Members of National Securities Exchanges and National 
Securities Association
    D. Total Initial and Annual Reporting and Recordkeeping Burden
    1. Burden on National Securities Exchanges and National 
Securities Associations
    2. Burden on Members of National Securities Exchanges and 
National Securities Associations
    E. Collection of Information is Mandatory
    F. Confidentiality
    G. Recordkeeping Requirements
    H. Request for Comments
VI. Solicitation of Comments

I. Introduction

    Pursuant to Section 11A of the Securities Exchange Act of 1934 (the 
``Act'') \1\ and Rule 608 thereunder,\2\ notice is hereby given that on 
February 27, 2015, BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX 
Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board 
Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA 
Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory 
Authority, Inc., International Securities Exchange, LLC, ISE Gemini, 
LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., 
NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock 
Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE 
Arca, Inc. (collectively, ``SROs'' or ``Participants''), filed with the 
Securities and Exchange Commission (the ``Commission'' or ``SEC'') a 
National Market System Plan Governing the Consolidated Audit Trail (the 
``CAT NMS Plan'' or ``Plan'').\3\ On December 24, 2015, the SROs 
submitted an Amendment to the CAT NMS Plan.\4\ A copy of the CAT NMS 
Plan, as modified by the Amendment, is attached as Exhibit A hereto. 
The Commission is publishing this Notice to solicit comments on the CAT 
NMS Plan. The Commission also is publishing notice of, and soliciting 
comment on, an analysis of the potential economic effects of 
implementing the CAT NMS Plan, as set forth in Section IV of this 
Notice, and the collection of information requirements in the CAT NMS 
Plan as required by the Paperwork Reduction Act, as set forth in 
Section V of this Notice.
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    \1\ 15 U.S.C. 78k-1.
    \2\ 17 CFR 242.608.
    \3\ See Letter from Participants to Brent J. Fields, Secretary, 
Commission, dated February 27, 2015. Pursuant to Rule 613, the SROs 
were required to file the CAT NMS Plan on or before April 28, 2013. 
At the SROs' request, the Commission granted exemptions to extend 
the deadline for filing the CAT NMS Plan to December 6, 2013, and 
then to September 30, 2014. See Securities Exchange Act Release Nos. 
69060 (March 7, 2013), 78 FR 15771 (March 12, 2013); 71018 (December 
6, 2013), 78 FR 75669 (December 12, 2013). The SROs filed the CAT 
NMS Plan on September 30, 2014 (the ``Initial CAT NMS Plan''). See 
Letter from the SROs, to Brent J. Fields, Secretary, Commission, 
dated September 30, 2014. The CAT NMS Plan filed on February 27, 
2015, was an amendment to and replacement of the Initial CAT NMS 
Plan (the ``Amended and Restated CAT NMS Plan''). On December 24, 
2015, the SROs submitted an Amendment to the Amended and Restated 
CAT NMS Plan. See Letter from Participants to Brent J. Fields, 
Secretary, Commission, dated December 23, 2015 (the ``Amendment''). 
On February 9, 2016, the Participants filed with the Commission an 
identical, but unmarked, version of the Amended and Restated CAT NMS 
Plan, dated February 27, 2015, as modified by the Amendment, as well 
as a copy of the request for proposal issued by the Participants to 
solicit Bids from parties interested in serving as the Plan 
Processor for the consolidated audit trail. See Exhibit A and infra 
note 29. Unless the context otherwise requires, the ``CAT NMS Plan'' 
shall refer to the Amended and Restated CAT NMS Plan, as modified by 
the Amendment. The Commission notes that the application of ISE 
Mercury, LLC for registration as a national securities exchange was 
granted on January 29, 2016. See Securities Exchange Act Release No. 
76998 (January 29, 2016), 81 FR 6066 (February 4, 2016). The 
Commission understands that ISE Mercury, LLC will become a 
Participant in the CAT NMS Plan and thus is accounted for as a 
Participant for purposes of this Notice.
    \4\ See Amendment, supra note 3.
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II. Background

    The Commission believes that the regulatory data infrastructure on 
which the SROs and the Commission currently must rely generally is 
outdated and inadequate to effectively oversee a complex, dispersed, 
and highly automated national market system. In performing their 
oversight responsibilities, regulators today must

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attempt to cobble together disparate data from a variety of existing 
information systems lacking in completeness, accuracy, accessibility, 
and/or timeliness--a model that neither supports the efficient 
aggregation of data from multiple trading venues nor yields the type of 
complete and accurate market activity data needed for robust market 
oversight.
    Currently, FINRA and some of the exchanges maintain their own 
separate audit trail systems for certain segments of this trading 
activity, which vary in scope, required data elements and format. In 
performing their market oversight responsibilities, SRO and Commission 
Staffs today must rely heavily on data from these various SRO audit 
trails. However, as noted in Section IV.D below, there are shortcomings 
in the completeness, accuracy, accessibility, and timeliness of these 
existing audit trail systems. Some of these shortcomings are a result 
of the disparate nature of the systems, which make it impractical, for 
example, to follow orders through their entire lifecycle as they may be 
routed, aggregated, re-routed, and disaggregated across multiple 
markets. The lack of key information in the audit trails that would be 
useful for regulatory oversight, such as the identity of the customers 
who originate orders, or even the fact that two sets of orders may have 
been originated by the same customer, is another shortcoming.\5\
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    \5\ The Commission notes that the SROs have taken steps in 
recent years to update their audit trail requirements. For example, 
NYSE, NYSE Amex LLC (n/k/a ``NYSE MKT LLC'') (``NYSE Amex''), and 
NYSE ARCA, Inc. (``NYSE Arca'') have adopted audit trail rules that 
coordinate with FINRA's OATS requirements. See Securities Exchange 
Act Release No. 65523 (October 7, 2011), 76 FR 64154 (October 17, 
2011) (concerning NYSE); Securities Exchange Act Release No. 65524 
(October 7, 2011), 76 FR 64151 (October 17, 2011) (concerning NYSE 
Amex); Securities Exchange Act Release No. 65544 (October 12, 2011), 
76 FR 64406 (October 18, 2011) (concerning NYSE Arca). This allows 
the SROs to submit their data to FINRA pursuant to a Regulatory 
Service Agreement (``RSA''), which FINRA can then reformat and 
combine with OATS data. Despite these efforts, however, significant 
deficiencies remain. See Section IV.D.2, infra.
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    Though SRO and Commission Staff also have access to sources of 
market activity data other than SRO audit trails, these systems each 
suffer their own drawbacks. For example, data obtained from the 
electronic blue sheet (``EBS'') \6\ system and equity cleared reports 
\7\ comprise only trade executions, and not orders or quotes. In 
addition, like data from existing audit trails, data from these sources 
lacks key elements important to regulators, such as the identity of the 
customer in the case of equity cleared reports. Furthermore, recent 
experience with implementing incremental improvements to the EBS system 
has illustrated some of the overall limitations of the current 
technologies and mechanisms used by the industry to collect, record, 
and make available market activity data for regulatory purposes.\8\
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    \6\ EBSs are trading records requested by the Commission and 
SROs from broker-dealers that are used in regulatory investigations 
to identify buyers and sellers of specific securities.
    \7\ The Commission uses the National Securities Clearing 
Corporation's (``NSCC'') equity cleared report for initial 
regulatory inquiries. This report is generated on a daily basis by 
the SROs and is provided to the NSCC in a database accessible by the 
Commission, and shows the number of trades and daily volume of all 
equity securities in which transactions took place, sorted by 
clearing member. The information provided is end-of-day data and is 
searchable by security name and CUSIP number.
    \8\ See Securities Exchange Act Release No. 64976 (July 27, 
2011), 76 FR 46960 (August 3, 2011) (``Large Trader Release'').
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    Recognizing these shortcomings, on July 11, 2012, the Commission 
adopted Rule 613 of Regulation NMS under the Act.\9\ Rule 613 required 
the SROs to submit a national market system (``NMS'') plan to create, 
implement, and maintain a consolidated audit trail (``CAT'') that would 
capture customer and order event information for orders in NMS 
securities, across all markets, from the time of order inception 
through routing, cancellation, modification, or execution in a single, 
consolidated data source.\10\ On February 27, 2015, the SROs submitted 
the CAT NMS Plan.\11\
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    \9\ See Securities Exchange Act Release No. 67457 (July 18, 
2012), 77 FR 45722 (August 1, 2012) (``Adopting Release''); see also 
Securities Exchange Act Release No. 62174 (May 26, 2010), 75 FR 
32556 (June 8, 2010) (``Proposing Release'').
    \10\ See 17 CFR 242.613(a)(1), (c)(1), (c)(7).
    \11\ See supra note 3.
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    The SROs also submitted a separate NMS plan and an exemptive 
request letter related to the CAT NMS Plan. Specifically, on September 
3, 2013, the SROs filed an NMS Plan pursuant to Rule 608 governing the 
SROs' review, evaluation, and ultimate selection of the Plan Processor 
\12\ for the consolidated audit trail (the ``Selection Plan'').\13\ The 
Selection Plan was published for comment in the Federal Register on 
November 21, 2013 and approved by the Commission on February 21, 
2014.\14\ Subsequently, the SROs filed three amendments to the 
Selection Plan, two of which were approved by the Commission on June 
17, 2015 and September 24, 2015 \15\ The CAT NMS Plan reflects the 
process approved by the Commission for reviewing, evaluating and 
ultimately selecting the Plan Processor, as set forth in the Selection 
Plan, as amended. Second, on January 30, 2015, the SROs filed an 
application,\16\ pursuant to Rule 0-12 under the Act,\17\ requesting 
that the Commission grant exemptions from certain requirements of Rule 
613. The Commission granted the exemptions on March 1, 2016.\18\ The 
CAT NMS Plan

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published for comment in this Notice reflects the exemptive relief 
granted by the Commission.
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    \12\ As set forth in Section 1.1 of the CAT NMS Plan, the Plan 
Processor ``means the Initial Plan Processor or any other Person 
selected by the Operating Committee pursuant to SEC Rule 613 and 
Sections 4.3(b)(i) and 6.1, and with regard to the Initial Plan 
Processor, the Selection Plan, to perform the CAT processing 
functions required by SEC Rule 613 and set forth in [the CAT NMS 
Plan].''
    \13\ See Securities Exchange Act Release No. 70892 (November 15, 
2013), 78 FR 69910 (November 21, 2013) (``Selection Plan Notice'').
    \14\ See id.; see also Securities Exchange Act Release No. 
71596, 79 FR 11152 (February 27, 2014) (``Selection Plan Approval 
Order'').
    \15\ See Securities Exchange Act Release Nos. 75192 (June 17, 
2015), 80 FR 36028 (June 23, 2015) (Order Approving Amendment No. 1 
to the Selection Plan); 75980 (September 24, 2015), 80 FR 58796 
(September 30, 2015) (Order Approving Amendment No. 2 to the 
Selection Plan); Letter from SROs to Brent J. Fields, Secretary, 
Commission, dated March 29, 2016; see also Securities Exchange Act 
Release Nos. 74223 (February 6, 2015), 80 FR 7654 (February 11, 
2015) (Notice of Amendment No. 1 to the Selection Plan); 75193 (June 
17, 2015), 80 FR 36006 (June 23, 2015) (Notice of Amendment No. 2 to 
the Selection Plan).
    \16\ See Letter from Participants to Brent J. Fields, Secretary, 
Commission, dated January 30, 2015 (``Exemptive Request Letter''). 
Specifically, the SROs request exemptive relief from the Rule's 
requirements related to: (1) The reporting of Options Market Maker 
quotations, as required under Rule 613(c)(7)(ii) and (iv); (2) the 
reporting and use of the Customer-ID under Rule 613(c)(7)(i)(A), 
(iv)(F), (viii)(B) and 613(c)(8); (3) the reporting of the CAT-
Reporter-ID, as required under Rule 613(c)(7)(i)(C), (ii)(D), 
(ii)(E), (iii)(D), (iii)(E), (iv)(F), (v)(F), (vi)(B), and (c)(8); 
(4) the linking of executions to specific subaccount allocations, as 
required under Rule 613(c)(7)(vi)(A); and (5) the time stamp 
granularity requirement of Rule 613(d)(3) for certain manual order 
events subject to reporting under Rule 613(c)(7)(i)(E), (ii)(C), 
(iii)(C) and (iv)(C). On April 3, 2015, the SROs filed a supplement 
related to the requested exemption for Rule 613(c)(7)(vi)(A). See 
Letter from Robert Colby, FINRA, on behalf of the SROs, to Brent J. 
Fields, Secretary, Commission, dated April 3, 2015 (``April 2015 
Supplement''). This supplement provided examples of how the proposed 
relief related to allocations would operate. On September 2, 2015, 
the SROs filed a second supplement to the Exemptive Request Letter. 
See Letter from the SROs to Brent J. Fields, Secretary, Commission, 
dated September 2, 2015 (``September 2015 Supplement''). This 
supplement to the Exemptive Request Letter further addressed the use 
of an ``effective date'' in lieu of a ``date account opened.'' 
Unless the context otherwise requires, the ``Exemption Request'' 
shall refer to the Exemptive Request Letter, as supplemented by the 
April 2015 Supplement and the September 2015 Supplement.
    \17\ 17 CFR 240.0-12.
    \18\ See Securities Exchange Act Release No. 77265 (March 1, 
2016), 81 FR 11856 (March 7, 2016) (``Exemption Order''). The 
Commission requests comment specifically on the advantages and 
disadvantages of each aspect of the relief granted in the Exemption 
Order and whether the approaches permitted by the Exemption Order to 
be included in the CAT NMS Plan are preferable to those originally 
permitted by Rule 613. See Request for Comment Nos. 168-170 (Options 
Market Maker Quotes), 135-161 (Customer ID), 128-134 (CAT-Reporter-
ID), 162-167 (Linking Order Executions to Allocations) and 114-127 
(Time Stamp Granularity), infra.
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III. Description of the Plan

    As described further in this Section III of this Notice, the SROs 
propose to conduct the activities of the CAT through CAT NMS, LLC, a 
jointly owned limited liability company formed under Delaware state 
law; and to that end, the SROs submitted the CAT NMS, LLC's limited 
liability company agreement (the ``LLC Agreement''), including exhibits 
and appendices attached thereto, to the Commission as the CAT NMS Plan. 
The SROs also submitted a cover letter that included a description of 
the CAT NMS Plan, along with the information required by Rule 608(a)(4) 
and (5) under the Act,\19\ which is set forth below in Section III.A of 
this Notice as substantially prepared and submitted by the SROs. Set 
forth in Section III.B is a summary of additional CAT NMS Plan 
provisions and requests for comment.\20\
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    \19\ 17 CFR 242.608(a)(4) and (a)(5).
    \20\ All capitalized terms not otherwise defined herein shall 
have the meaning ascribed to them in Rule 613, the Adopting Release, 
or the CAT NMS Plan, as applicable.
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    The LLC Agreement, attached hereto as Exhibit A, sets forth a 
governing structure, whereby the Operating Committee will manage the 
CAT NMS, LLC, and each SRO will be a member of, and have one vote 
within, the Operating Committee.\21\ The LLC Agreement details the 
Operating Committee's procedures for selecting the Plan Processor,\22\ 
who will be contracted to build the CAT, as well as the functions and 
activities of the Plan Processor. The LLC Agreement also sets forth the 
responsibilities of the Central Repository which, under the oversight 
of the Plan Processor, will receive, consolidate and retain the CAT 
Data.\23\ The LLC Agreement also lists the requirements regarding the 
recording and reporting of CAT Data by the SROs as well as by broker-
dealers, the security and confidentiality safeguards for CAT Data, 
surveillance requirements, fees and costs associated with operating the 
CAT, as well as other reporting and Technical Specifications and 
requirements.\24\
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    \21\ See CAT NMS Plan, supra note 3, at Article IV.
    \22\ See id. at Article V; see also Order Approving Amendment 
No. 1 to the Selection Plan and Order Approving Amendment No. 2 to 
the Selection Plan, supra note 15.
    \23\ See CAT NMS Plan, supra note 3, at Article VI.
    \24\ See id.
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    In Appendix C to the LLC Agreement, the SROs address the 
considerations listed in Rule 613(a)(1), providing information and 
analysis regarding the specific features, details, costs, and processes 
related to the CAT NMS Plan. Appendix D to the LLC Agreement provides 
an outline of the CAT's minimum functional and technical requirements 
for the Plan Processor.

A. Statement of Purpose and Request for Comment

    The following statement of purpose provided herein is substantially 
as prepared and submitted by the SROs to the Commission.\25\ Throughout 
the statement of purpose, the Commission has inserted requests for 
comment. The portion of this Notice prepared by the Commission will re-
commence in Section III.B.
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    \25\ See CAT NMS Plan, supra note 3.
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* * * * *
1. Background
    On July 11, 2012, the Commission adopted Rule 613 \26\ to require 
the national securities exchanges and national securities association 
to jointly submit a national market system plan to create, implement, 
and maintain a consolidated audit trail and central repository.\27\ 
Rule 613 outlines a broad framework for the creation, implementation, 
and maintenance of the consolidated audit trail, including the minimum 
elements the Commission believes are necessary for an effective 
consolidated audit trail.\28\
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    \26\ 17 CFR 242.613.
    \27\ 17 CFR 242.613(a)(1).
    \28\ See Adopting Release, supra note 9, at 45743.
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    Since the adoption of Rule 613, the Participants have worked to 
formulate an effective Plan. To this end, the Participants have, among 
other things, developed a plan for selecting the Plan Processor, 
solicited and evaluated Bids, and engaged diverse industry participants 
in the development of the Plan. Throughout, the Participants have 
sought to implement a process that is fair, transparent, and consistent 
with the standards and considerations in Rule 613.
a. The Request for Proposal and Selection Plan
    On February 26, 2013, the Participants published a request for 
proposal (``RFP'') soliciting Bids from parties interested in serving 
as the Plan Processor.\29\ The Participants concluded that publication 
of an RFP was necessary to ensure that potential alternative solutions 
to creating the Plan and the CAT could be presented and considered, and 
that a detailed and meaningful cost-benefit analysis could be 
performed. The Participants asked any potential bidders to notify the 
Participants of their intent to bid by March 5, 2013. Initially, 31 
firms submitted intentions to bid, four of which were Participants or 
affiliates of Participants. In the following weeks and months, the 
Participants engaged with potential bidders with respect to, among 
other things, the selection process, selection criteria, and potential 
bidders' questions and concerns.\30\
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    \29\ See Appendix A of the CAT NMS Plan for the Consolidated 
Audit Trail National Market System Plan Request for Proposal (issued 
February 26, 2013, version 3.0 updated March 4, 2014). Other 
materials related to the RFP are available at http://catnmsplan.com/process/.
    \30\ In an effort to ensure Bidders were aware of all 
information provided in response to Bidders' questions related to 
the RFP, the Participants published answers to questions received 
from Bidders available at http://catnmsplan.com/process/.
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    On September 4, 2013, the Participants filed with the Commission a 
national market system plan to govern the process for Participant 
review of the Bids submitted in response to the RFP, the procedure for 
evaluating the Bids, and, ultimately, selection of the Plan Processor 
(the ``Selection Plan'').\31\ The Commission approved the Selection 
Plan as filed on February 21, 2014.\32\ On March 21, 2014, the 
Participants received ten Bids in response to the RFP.
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    \31\ See Selection Plan Notice, supra note 13.
    \32\ See Selection Plan Approval Order, supra note 14.
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    The Selection Plan divides the review and evaluation of Bids, and 
the selection of the Plan Processor, into various stages, certain of 
which have been completed to date.\33\ Specifically, pursuant to the 
Selection Plan, the Selection Committee reviewed all Bids and 
determined which Bids contained sufficient information to allow the 
Participants to meaningfully assess and evaluate the Bids. The ten 
submitted Bids were deemed ``Qualified Bids,'' \34\ and so passed to 
the next stage, in which each Bidder presented its Bids in person to 
the Participants on a confidential basis. On July 1, 2014, after 
conducting careful analysis and comparison of the Bids, the Selection 
Committee voted and selected six Shortlisted Bidders, thus eliminating 
four Bidders from continuing in the process.\35\ The Selection 
Committee,

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subject to applicable recusal provisions in the Selection Plan, will 
determine whether Shortlisted Bidders will be provided the opportunity 
to revise their Bids. After the Selection Committee further assesses 
and evaluates the Shortlisted Bids, including any permitted revisions 
to the Bids, the Selection Committee will select the Plan Processor via 
two rounds of voting by the Senior Voting Officers as specified in the 
Plan.\36\
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    \33\ See, e.g., id. at 11154.
    \34\ A list of Qualified Bidders is available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p493591.pdf. The Commission notes that this Web site address has 
been updated to http://www.catnmsplan.com/process/p493591.pdf.
    \35\ The announcement and list of the Shortlisted Bidders is 
available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p542077.pdf. The Commission notes that this 
Web site address has been updated to http://www.catnmsplan.com/pastevents/p542077.pdf. Additionally, the Commission notes that the 
Selection Committee further narrowed the list of Shortlisted Bidders 
to three Shortlisted Bidders. See Participants, SROs Reduce Short 
List Bids from Six to Three for Consolidated Audit Trail (November 
16, 2015), available at http://www.catnmsplan.com/pastevents/catnms_release_downselect_111615.pdf.
    \36\ See Selection Plan Approval Order, supra note 14, at 11154. 
The SEC published a notice of an amendment to the Selection Plan, 
which proposed to amend the Selection Plan in two ways. First, the 
Participants proposed to provide opportunities to accept revised 
Bids prior to approval of the CAT NMS Plan, and second, to allow the 
list of Shortlisted Bids to be narrowed prior to Commission approval 
of the CAT NMS Plan. See Notice of Amendment No. 1 to the Selection 
Plan, supra note 15. In addition, the Participants filed a second 
amendment to the Selection Plan, which would require the recusal of 
a Bidding Participant in a vote in any round by the Selection 
Committee to select the Plan Processor from among the Shortlisted 
Bidders if such Bidding Participant's Bid, a Bid submitted by an 
Affiliate of such Bidding Participant, or a Bid including such 
Bidding Participant or its Affiliate is also considered in that 
round. See Notice of Amendment No. 2 to the Selection Plan, supra 
note 15. The prior Selection Plan required recusal of a Bidding 
Participant under such circumstances in the vote in only the second 
round by the Selection Committee to select the Plan Processor from 
among the Shortlisted Bidders. The Commission notes that Amendment 
Nos. 1 and 2 have been approved. See Order Approving Amendment No. 1 
to the Selection Plan and Order Approving Amendment No. 2 to the 
Selection Plan, supra note 15.
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b. Selection Plan Governance and Operations
    The Selection Plan established an Operating Committee responsible 
for formulating, drafting, and filing with the Commission the Plan and 
for ensuring that the Participants' joint obligations under Rule 613 
were met in a timely and efficient manner.\37\ Each Participant 
selected one individual and one substitute to serve on the Operating 
Committee, with other representatives of each Participant permitted to 
attend Operating Committee meetings.\38\ In formulating the Plan, the 
Participants also engaged multiple persons across a wide range of roles 
and expertise, engaged the consulting firm Deloitte & Touche LLP as a 
project manager, and engaged the law firm Wilmer Cutler Pickering Hale 
and Dorr LLP to serve as legal counsel in drafting the Plan. Within 
this structure, the Participants focused on, among other things, 
comparative analyses of the proposed technologies and operating models, 
development of funding models to support the building and operation of 
the CAT, and detailed review of governance considerations. Since July 
2012, the Participants have held approximately 608 meetings related to 
the CAT.\39\ These governance and organizational structures will 
continue to be in effect until the Commission's final approval of the 
Plan.\40\
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    \37\ Id.
    \38\ Id.
    \39\ Additional information regarding these meetings can be 
found at http://catnmsplan.com/. The Commission notes that the 
number of meetings in the SROs' statement is as of February 27, 
2015. See CAT NMS Plan, supra note 3.
    \40\ See Selection Plan Approval Order, supra note 14, at 11155.
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c. Engagement With Industry Participants
    Throughout the process of developing the Plan, the Participants 
consistently have been engaged in meaningful dialogue with industry 
participants with respect to the development of the CAT. From the 
outset of this process, the Participants have recognized that industry 
input is a critical component in the creation of the Plan. To this end, 
the Participants created a Web site \41\ to update the public on the 
progress of the Plan, published requests for comment on multiple issues 
related to the Plan, held multiple public events to inform the industry 
of the progress of the CAT and to address inquiries, and formed, and 
later expanded, a Development Advisory Group (the ``DAG'') to solicit 
more input from a representative industry group.
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    \41\ The Web site is available at http://catnmsplan.com/.
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    The DAG conducted 43 meetings \42\ to discuss, among other things, 
technical and operational aspects the Participants were considering for 
the Plan. The Participants twice issued press releases soliciting 
participants for the DAG, and a wide spectrum of firms was deliberately 
chosen to provide insight from various industry segments affected by 
the CAT.\43\ The DAG currently consists of the Participants, and 27 
diverse firms and organizations (including broker-dealers of varying 
sizes, the Options Clearing Corporation, a service bureau and three 
industry trade associations) with a variety of subject matter 
expertise.\44\ The DAG meetings have included discussions of topics 
such as Options Market Maker quote reporting, requirements for 
capturing Customer-IDs, time stamps and clock synchronization, 
reporting requirements for order handling scenarios, cost and funding, 
error handling and corrections, and potential elimination of Rules made 
redundant by the CAT.\45\
---------------------------------------------------------------------------

    \42\ In addition to these meetings, DAG subcommittee meetings 
also were held. The Commission notes that the number of meetings in 
the SROs' statement is as of February 27, 2015. See CAT NMS Plan, 
supra note 3.
    \43\ For a list of DAG members, see Summary of the Consolidated 
Audit Trail Initiative at 13 (Jan. 2015), available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p571933.pdf. The Commission notes that the list of DAG members 
appears on page 6 of the linked document, which is dated May 2015.
    \44\ The list of current DAG members is available at http://catnmsplan.com/PastEvents/.
    \45\ See, e.g., Summary of the Consolidated Audit Trail 
Initiative, supra note 43, at 14.
---------------------------------------------------------------------------

    In addition, the CAT Web site includes a variety of resources for 
the public with respect to the development of the CAT. The site 
contains an overview of the process, an expression of the guiding 
principles behind the Plan development, links to relevant regulatory 
actions, gap analyses comparing the requirements of Rule 613 with 
current reporting systems, the CAT implementation timeline, a summary 
of the RFP process, a set of frequently-asked questions (updated on an 
ongoing basis), questions for comment from the industry, industry 
feedback on the development of the Plan, and announcements and notices 
of upcoming events. This Web site, along with the requests for comments 
and many public events (announced on the site), have been a venue for 
public communication with respect to the development of the Plan.
2. Request for Exemption From Certain Requirements Under Rule 613
    Following multiple discussions between the Participants and both 
the DAG and the Bidders, as well as among the Participants themselves, 
the Participants recognized that some provisions of Rule 613 would not 
permit certain solutions to be included in the Plan that the 
Participants determined advisable to effectuate the most efficient and 
cost-effective CAT. Consequently, on January 30, 2015, the Participants 
submitted to the Commission a request for exemptive relief from certain 
provisions of Rule 613 regarding: (1) Options Market Maker quotes; (2) 
Customer-IDs; (3) CAT-Reporter-IDs; (4) linking of executions to 
specific subaccount allocations on Allocation Reports; and (5) time 
stamp granularity for manual order events.\46\ Specifically, the 
Participants requested that the Commission grant an exemption from:
---------------------------------------------------------------------------

    \46\ See Exemptive Request Letter, supra note 16.


[[Page 30618]]


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

    Rule 613(c)(7)(ii) and (iv) for Options Market Makers with 
regard to their options quotes;
    Rule 613(c)(7)(i)(A), (c)(7)(iv)(F), (c)(7)(viii)(B) and (c)(8) 
which relate to the requirements for Customer-IDs;
    Rule 613(c)(7)(i)(C), (c)(7)(ii)(D), (c)(7)(ii)(E), 
(c)(7)(iii)(D), (c)(7)(iii)(E), (c)(7)(iv)(F), (c)(7)(v)(F), 
(c)(7)(vi)(B) and (c)(8) which relate to the requirements for CAT-
Reporter-IDs;
    Rule 613(c)(7)(vi)(A), which requires CAT Reporters to record 
and report the account number of any subaccounts to which the 
execution is allocated; and
    The millisecond time stamp granularity requirement in Rule 
613(d)(3) for certain manual order events subject to time stamp 
reporting under Rules 613(c)(7)(i)(E), 613(c)(7)(ii)(C), 
613(c)(7)(iii)(C), and 613(c)(7)(iv)(C).

The Participants believe that the requested relief is critical to the 
development of a cost-effective approach to the CAT.\47\
---------------------------------------------------------------------------

    \47\ The Commission notes the Participants' request for 
exemptive relief was granted on March 1, 2016. See Exemption Order, 
supra note 18.
---------------------------------------------------------------------------

3. Requirements Pursuant to Rule 608(a)
a. Description of Plan
    Rule 613 requires the Participants to ``jointly file . . . a 
national market system plan to govern the creation, implementation, and 
maintenance of a consolidated audit trail and Central Repository.'' 
\48\ The purpose of the Plan, and the creation, implementation and 
maintenance of a comprehensive audit trail for the U.S. securities 
market described therein, is to ``substantially enhance the ability of 
the SROs and the Commission to oversee today's securities markets and 
fulfill their responsibilities under the federal securities laws.'' 
\49\ It ``will allow for the prompt and accurate recording of material 
information about all orders in NMS securities, including the identity 
of customers, as these orders are generated and then routed throughout 
the U.S. markets until execution, cancellation, or modification. This 
information will be consolidated and made readily available to 
regulators in a uniform electronic format.'' \50\ The SROs note that 
the following summarizes various provisions of the Plan, which is set 
forth in full as Exhibit A to this Notice.
---------------------------------------------------------------------------

    \48\ 17 CFR 242.613(a)(1).
    \49\ See Adopting Release, supra note 9, at 45726.
    \50\ Id. Note that the Plan also includes certain recording and 
reporting obligations for OTC Equity Securities.
---------------------------------------------------------------------------

(1) LLC Agreement
    The Participants propose to conduct the activities related to the 
CAT in a Delaware limited liability company pursuant to a limited 
liability company agreement, entitled the Limited Liability Company 
Agreement of CAT NMS, LLC (``Company''). The Participants will jointly 
own on an equal basis the Company. The Company will create, implement 
and maintain the CAT. The limited liability company agreement (``LLC 
Agreement'') itself, including its appendices, is the proposed Plan, 
which would be a national market system plan as defined in Rule 
600(b)(43) of NMS.
(2) Participants
    Each national securities exchange and national securities 
association currently registered with the Commission would be a 
Participant in the Plan. The names and addresses of each Participant 
are set forth in Exhibit A to the Plan. Article III of the Plan 
provides that any entity approved by the Commission as a national 
securities exchange or national securities association under the 
Exchange Act after the Effective Date may become a Participant by 
submitting to the Company a completed application in the form provided 
by the Company and satisfying each of the following requirements: (1) 
Executing a counterpart of the LLC Agreement as then in effect; and (2) 
paying a fee to the Company in an amount determined by a Majority Vote 
of the Operating Committee as fairly and reasonably compensating the 
Company and the Participants for costs incurred in creating, 
implementing and maintaining the CAT (including such costs incurred in 
evaluating and selecting the Initial Plan Processor and any subsequent 
Plan Processor) and for costs the Company incurs in providing for the 
prospective Participant's participation in the Company, including after 
consideration of certain factors identified in Section 3.3(b) of the 
Agreement (``Participation Fee''). The amendment of the Plan reflecting 
the admission of a new Participant will be effective only when: (1) It 
is approved by the SEC in accordance with Rule 608 or otherwise becomes 
effective pursuant to Rule 608; and (2) the prospective Participant 
pays the Participation Fee.
    A number of factors are relevant to the determination of a 
Participation Fee. Such factors include: (1) The portion of costs 
previously paid by the Company for the development, expansion and 
maintenance of the CAT which, under GAAP, would have been treated as 
capital expenditures and would have been amortized over the five years 
preceding the admission of the prospective Participant; (2) an 
assessment of costs incurred and to be incurred by the Company for 
modifying the CAT or any part thereof to accommodate the prospective 
Participant, which costs are not otherwise required to be paid or 
reimbursed by the prospective Participant; (3) Participation Fees paid 
by other Participants admitted as such after the Effective Date; (4) 
elapsed time from the Effective Date to the anticipated date of 
admittance of the prospective Participant; and (5) such other factors, 
if any, as may be determined to be appropriate by the Operating 
Committee and approved by the Commission. In the event that the Company 
and a prospective Participant do not agree on the amount of the 
Participation Fee, such amount will be subject to review by the SEC 
pursuant to Section 11A(b)(5) of the Exchange Act.
    An applicant for participation in the Company may apply for limited 
access to the CAT System for planning and testing purposes pending its 
admission as a Participant by submitting to the Company a completed 
Application for Limited Access to the CAT System in a form provided by 
the Company, accompanied by payment of a deposit in the amount 
established by the Company, which will be applied or refunded as 
described in such application. To be eligible to apply for such limited 
access, the applicant must have been approved by the SEC as a national 
securities exchange or national securities association under the 
Exchange Act but the applicant has not yet become a Participant of the 
Plan, or the SEC must have published such applicant's Form 1 
Application or From [sic] X-15AA-1 Application to become a national 
securities exchange or a national securities association, respectively.
    All Company Interests will have the same rights, powers, 
preferences and privileges and be subject to the same restrictions, 
qualifications and limitations. Once admitted, each Participant will be 
entitled to one vote on any matter presented to Participants for their 
consideration and to participate equally in any distribution made by 
the Company (other than a distribution made pursuant to Section 10.2 of 
the Plan). Each Participant will have a Company Interest equal to that 
of each other Participant.
    Article III also describes a Participant's ability to Transfer a 
Company Interest. A Participant may only Transfer any Company Interest 
to a national securities exchange or national securities association 
that succeeds to the business of such Participant as a result of a 
merger or consolidation with such Participant or the Transfer of all or 
substantially all of

[[Page 30619]]

the assets or equity of such Participant (``Permitted Transferee''). A 
Participant may not Transfer any Company Interest to a Permitted 
Transferee unless: (1) Such Permitted Transferee executes a counterpart 
of the Plan; and (2) the amendment to the Plan reflecting the Transfer 
is approved by the SEC in accordance with Rule 608 or otherwise becomes 
effective pursuant to Rule 608.
    In addition, Article III addresses the voluntary resignation and 
termination of participation in the Plan. Any Participant may 
voluntarily resign from the Company, and thereby withdraw from and 
terminate its right to any Company Interest, only if: (1) A Permitted 
Legal Basis for such action exists; and (2) such Participant provides 
to the Company and each other Participant no less than thirty days 
prior to the effective date of such action written notice specifying 
such Permitted Legal Basis, including appropriate documentation 
evidencing the existence of such Permitted Legal Basis, and, to the 
extent applicable, evidence reasonably satisfactory to the Company and 
other Participants that any orders or approvals required from the SEC 
in connection with such action have been obtained. A validly 
withdrawing Participant will have the rights and obligations discussed 
below with regard to termination of participation.
    A Participant's participation in the Company, and its right to any 
Company Interest, will terminate as of the earliest of: (1) The 
effective date specified in a valid resignation notice; (2) such time 
as such Participant is no longer registered as a national securities 
exchange or national securities association; or (3) the date of 
termination for failure to pay fees. With regard to the payment of 
fees, each Participant is required to pay all fees or other amounts 
required to be paid under the Plan within thirty days after receipt of 
an invoice or other notice indicating payment is due (unless a longer 
payment period is otherwise indicated) (the ``Payment Date''). If a 
Participant fails to make such a required payment by the Payment Date, 
any balance in the Participant's Capital Account will be applied to the 
outstanding balance. If a balance still remains with respect to any 
such required payment, the Participant will pay interest on the 
outstanding balance from the Payment Date until such fee or amount is 
paid at a per annum rate equal to the lesser of: (1) The Prime Rate 
plus 300 basis points; or (2) the maximum rate permitted by applicable 
law. If any such remaining outstanding balance is not paid within 
thirty days after the Payment Date, the Participants will file an 
amendment to the Plan requesting the termination of the participation 
in the Company of such Participant, and its right to any Company 
Interest, with the SEC. Such amendment will be effective only when it 
is approved by the SEC in accordance with Rule 608 or otherwise becomes 
effective pursuant to Rule 608.
    From and after the effective date of termination of a Participant's 
participation in the Company, profits and losses of the Company will 
cease to be allocated to the Capital Account of the Participant. A 
terminated Participant will be entitled to receive the balance in its 
Capital Account as of the effective date of termination adjusted for 
profits and losses through that date, payable within ninety days of the 
effective date of termination, and will remain liable for its 
proportionate share of costs and expenses allocated to it for the 
period during which it was a Participant, for obligations under Section 
3.8(c) regarding the return of amounts previously distributed (if 
required by a court of competent jurisdiction), for its indemnification 
obligations pursuant to Section 4.1, and for obligations under Section 
9.6 regarding confidentiality, but it will have no other obligations 
under the Plan following the effective date of termination. The Plan 
will be amended to reflect any termination of participation in the 
Company of a Participant, provided that such amendment will be 
effective only when it is approved by the SEC in accordance with Rule 
608 or otherwise becomes effective pursuant to Rule 608.
Request for Comment
    1. Do Commenters believe that the process for a national securities 
exchange and national securities association to become a Participant 
pursuant to and under the CAT NMS Plan is clearly and adequately set 
forth in the CAT NMS Plan? Do Commenters believe that the process for, 
and the circumstances under which a Participant could voluntarily 
terminate its participation as a Participant to the CAT NMS Plan is 
clearly and adequately set forth in the CAT NMS Plan? If not, what 
additional details should be provided? Do Commenters believe that these 
two processes are appropriate and reasonable?
    2. Do Commenters believe that the process and enumerated factors 
for determining the Participation Fee are clear and reasonable under 
the CAT NMS Plan? If not, what additional modifications, if any, should 
be considered in the Participation Fee determination process?
    3. Are restrictions on the transfer of a Company Interest 
appropriate and reasonable? If not, why not? What additional 
limitations or factors, if any, should be imposed on such transfers? 
Please explain.
    4. Do Commenters believe that permitting the termination of a 
Participant that continues to be a registered national securities 
exchange or national securities association from participation in the 
Company is an appropriate recourse for failure to pay Participant fees? 
If not, can Commenters recommend an alternative remedy? Please explain.
    5. Are there other circumstances that should trigger termination of 
participation in the Company? If yes, what are they?
    (3) Management
    Article IV of the Plan establishes the overall governance structure 
for the management of the Company. Specifically, the Participants 
propose that the Company be managed by an Operating Committee.\51\
---------------------------------------------------------------------------

    \51\ The Operating Committee will manage the Company except for 
situations in which the approval of the Participants is required by 
the Plan or by non-waivable provisions of applicable law.
---------------------------------------------------------------------------

    The Operating Committee will consist of one voting member 
representing each Participant and one alternate voting member 
representing each Participant who will have a right to vote only in the 
absence of the Participant's voting member of the Operating Committee. 
Each of the voting and alternate voting members of the Operating 
Committee will be appointed by the Participant that he or she 
represents, will serve at the will of the Participant appointing such 
member and will be subject to the confidentiality obligations of the 
Participant that he or she represents as set forth in Section 9.6. One 
individual may serve as the voting member of the Operating Committee 
for multiple Affiliated Participants, and such individual will have the 
right to vote on behalf of each such Affiliated Participant.
    The Operating Committee will elect, by Majority Vote, one of its 
members to act as Chair for a term of two years. No Person may serve as 
Chair for more than two successive full terms, and no Person then 
appointed to the Operating Committee by a Participant that then serves, 
or whose Affiliate then serves, as the Plan Processor will be eligible 
to serve as the Chair. The Chair will preside at all meetings of the 
Operating Committee, designate a Person to act as Secretary, and 
perform such other duties and possess such other powers as the 
Operating Committee may from time

[[Page 30620]]

to time prescribe. The Chair will not be entitled to a tie-breaking 
vote at any meeting of the Operating Committee.
    Each of the members of the Operating Committee, including the 
Chair, will be authorized to cast one vote for each Participant that he 
or she represents on all matters voted upon by the Operating Committee. 
Action of the Operating Committee will be authorized by Majority Vote 
(except under certain designated circumstances), subject to the 
approval of the SEC whenever such approval is required under the 
Exchange Act and the rules thereunder. For example, the Plan 
specifically notes that a Majority Vote of the Operating Committee is 
required to: (1) Select the Chair; (2) select the members of the 
Advisory Committee (as described below); (3) interpret the Plan (unless 
otherwise noted therein); (4) approve any recommendation by the Chief 
Compliance Officer pursuant to Section 6.2(a)(v)(A); (5) determine to 
hold an Executive Session of the Operating Committee; (6) determine the 
appropriate funding-related policies, procedures and practices 
consistent with Article XI; and (7) any other matter specified 
elsewhere in the Plan (which includes the Appendices to the Plan) as 
requiring a vote, approval or other action of the Operating Committee 
(other than those matters expressly requiring a Supermajority Vote or a 
different vote of the Operating Committee).
    Article IV requires a Supermajority Vote of the Operating 
Committee, subject to the approval of the SEC when required, for the 
following: (1) Selecting a Plan Processor, other than the Initial Plan 
Processor selected in accordance with Article V of the Plan; (2) 
terminating the Plan Processor without cause in accordance with Section 
6.1(p); (3) approving the Plan Processor's appointment or removal of 
the Chief Information Security Officer, Chief Compliance Officer, or 
any Independent Auditor in accordance with Section 6.1(b); (4) entering 
into, modifying or terminating any Material Contract (if the Material 
Contract is with a Participant or an Affiliate of a Participant, such 
Participant and Affiliated Participant will be recused from any vote); 
(5) making any Material Systems Change; (6) approving the initial 
Technical Specifications or any Material Amendment to the Technical 
Specifications proposed by the Plan Processor; (7) amending the 
Technical Specifications on its own motion; and (8) any other matter 
specified elsewhere in the Plan (which includes the Appendices to the 
Plan) as requiring a vote, approval or other action of the Operating 
Committee by a Supermajority Vote.
    A member of the Operating Committee or any Subcommittee thereof (as 
discussed below) shall recuse himself or herself from voting on any 
matter under consideration by the Operating Committee or such 
Subcommittee if such member determines that voting on such matter 
raises a Conflict of Interest. In addition, if the members of the 
Operating Committee or any Subcommittee (excluding the member thereof 
proposed to be recused) determine by Supermajority Vote that any member 
voting on a matter under consideration by the Operating Committee or 
such Subcommittee raises a Conflict of Interest, such member shall be 
recused from voting on such matter. No member of the Operating 
Committee or any Subcommittee will be automatically recused from voting 
on any matter except matters involving Material Contracts as discussed 
in the prior paragraph, as otherwise specified in the Plan, and as 
follows: (1) If a Participant is a Bidding Participant whose Bid 
remains under consideration, members appointed to the Operating 
Committee or any Subcommittee by such Participant or any of its 
Affiliated Participants will be recused from any vote concerning: (a) 
Whether another Bidder may revise its Bid; (b) the selection of a 
Bidder; or (c) any contract to which such Participant or any of its 
Affiliates would be a party in its capacity as Plan Processor; and (2) 
if a Participant is then serving as Plan Processor, is an Affiliate of 
the Person then serving as Plan Processor, or is an Affiliate of an 
entity that is a Material Subcontractor to the Plan Processor, then in 
each case members appointed to the Operating Committee or any 
Subcommittee by such Participant or any of its Affiliated Participants 
shall be recused from any vote concerning: (a) The proposed removal of 
such Plan Processor; or (b) any contract between the Company and such 
Plan Processor.
    Article IV also addresses meetings of the Operating Committee.\52\ 
Meetings of the Operating Committee may be attended by each 
Participant's voting Representative and its alternate voting 
Representative and by a maximum of two nonvoting Representatives of 
each Participant, by members of the Advisory Committee, by the Chief 
Compliance Officer, by other Representatives of the Company and the 
Plan Processor, by Representatives of the SEC and by such other Persons 
that the Operating Committee may invite to attend. The Operating 
Committee, however, may, where appropriate, determine to meet in 
Executive Session during which only voting members of the Operating 
Committee will be present. The Operating Committee, however, may invite 
other Representatives of the Participants, of the Company, of the Plan 
Processor (including the Chief Compliance Officer and the Chief 
Information Security Officer) or the SEC, or such other Persons that 
the Operating Committee may invite to attend, to be present during an 
Executive Session. Any determination of the Operating Committee to meet 
in an Executive Session will be made upon a Majority Vote and will be 
reflected in the minutes of the meeting. In addition, any Person that 
is not a Participant but for which the SEC has published a Form 1 
Application or Form X-15AA-1 to become a national securities exchange 
or national securities association, respectively, will be permitted to 
appoint one primary Representative and one alternate Representative to 
attend regularly scheduled Operating Committee meetings in the capacity 
of a non-voting observer, but will not be permitted to have any 
Representative attend a special meeting, emergency meeting or meeting 
held in Executive Session of the Operating Committee.
---------------------------------------------------------------------------

    \52\ Article IV also addresses, among other things, different 
types of Operating Committee meetings (regular, special and 
emergency), frequency of such meetings, how to call such meetings, 
the location of the meetings, the role of the Chair, and notice 
regarding such meetings.
---------------------------------------------------------------------------

    The Operating Committee may, by Majority Vote, designate by 
resolution one or more Subcommittees it deems necessary or desirable in 
furtherance of the management of the business and affairs of the 
Company. For any Subcommittee, any member of the Operating Committee 
who wants to serve thereon may so serve. If Affiliated Participants 
have collectively appointed one member to the Operating Committee to 
represent them, then such Affiliated Participants may have only that 
member serve on the Subcommittee or may decide not to have only that 
collectively appointed member serve on the Subcommittee. Such member 
may designate an individual other than himself or herself who is also 
an employee of the Participant or Affiliated Participants that 
appointed such member to serve on a Subcommittee in lieu of the 
particular member. Subject to the requirements of the Plan and non-
waivable provisions of Delaware law, a Subcommittee may exercise all 
the powers and authority of the Operating Committee in the management 
of the business and affairs of the Company as so specified in the 
resolution of the

[[Page 30621]]

Operating Committee designating such Subcommittee.
    Article IV requires that the Operating Committee maintain a 
Compliance Subcommittee for the purpose of aiding the Chief Compliance 
Officer as necessary, including with respect to issues involving: (1) 
The maintenance of the confidentiality of information submitted to the 
Plan Processor or Central Repository pursuant to Rule 613, applicable 
law, or the Plan by Participants and Industry Members; (2) the 
timeliness, accuracy, and completeness of information submitted 
pursuant to Rule 613, applicable law or the Plan by Participants and 
Industry Members; and (3) the manner and extent to which each 
Participant is meeting its obligations under Rule 613, Section 3.11, 
and as set forth elsewhere in the Plan and ensuring the consistency of 
the Plan's enforcement as to all Participants.
    Article IV also sets forth the requirements for the formation and 
functioning of an Advisory Committee, which will advise the 
Participants on the implementation, operation and administration of the 
Central Repository, including possible expansion of the Central 
Repository to other securities and other types of transactions.
    Article IV describes the composition of the Advisory Committee. No 
member of the Advisory Committee may be employed by or affiliated with 
any Participant or any of its Affiliates or facilities. The Operating 
Committee will select one member from representatives of each of the 
following categories to serve on the Advisory Committee on behalf of 
himself or herself individually and not on behalf of the entity for 
which the individual is then currently employed: (1) A broker-dealer 
with no more than 150 Registered Persons; (2) a broker-dealer with at 
least 151 and no more than 499 Registered Persons; (3) a broker-dealer 
with 500 or more Registered Persons; (4) a broker-dealer with a 
substantial wholesale customer base; (5) a broker-dealer that is 
approved by a national securities exchange: (a) To effect transactions 
on an exchange as a specialist, market maker or floor broker; or (b) to 
act as an institutional broker on an exchange; (6) a proprietary-
trading broker-dealer; (7) a clearing firm; (8) an individual who 
maintains a securities account with a registered broker or dealer but 
who otherwise has no material business relationship with a broker or 
dealer or with a Participant; (9) a member of academia with expertise 
in the securities industry or any other industry relevant to the 
operation of the CAT System; (10) an institutional investor trading on 
behalf of a public entity or entities; (11) an institutional investor 
trading on behalf of a private entity or entities; and (12) an 
individual with significant and reputable regulatory expertise. The 
members selected to represent categories (1) through (12) above must 
include, in the aggregate, representatives of no fewer than three 
broker-dealers that are active in the options business and 
representatives of no fewer than three broker-dealers that are active 
in the equities business. In addition, upon a change in employment of 
any such selected member, a Majority Vote of the Operating Committee 
will be required for such member to be eligible to continue to serve on 
the Advisory Committee. Furthermore, the SEC's Chief Technology Officer 
(or the individual then currently employed in a comparable position 
providing equivalent services) will serve as an observer of the 
Advisory Committee (but not be a member). The members of the Advisory 
Committee will have a term of three years.\53\
---------------------------------------------------------------------------

    \53\ Four of the initial twelve members of the Advisory 
Committee will have an initial term of one year, and another four of 
the initial twelve members of the Advisory Committee will have an 
initial term of two years.
---------------------------------------------------------------------------

    Members of the Advisory Committee will have the right to attend 
meetings of the Operating Committee or any Subcommittee, to receive 
information concerning the operation of the Central Repository, and to 
submit their views to the Operating Committee or any Subcommittee on 
matters pursuant to the Plan prior to a decision by the Operating 
Committee on such matters. A member of the Advisory Committee will not 
have a right to vote on any matter considered by the Operating 
Committee or any Subcommittee. In addition, the Operating Committee or 
any Subcommittee may meet in Executive Session if the Operating 
Committee or Subcommittee determines by Majority Vote that such an 
Executive Session is advisable.\54\ Although members of the Advisory 
Committee will have the right to receive information concerning the 
operation of the Central Repository, the Operating Committee retains 
the authority to determine the scope and content of information 
supplied to the Advisory Committee, which will be limited to that 
information that is necessary and appropriate for the Advisory 
Committee to fulfill its functions. Any information received by members 
of the Advisory Committee will remain confidential unless otherwise 
specified by the Operating Committee.
---------------------------------------------------------------------------

    \54\ The Operating Committee may solicit and consider views on 
the operation of the Central Repository in addition to those of the 
Advisory Committee.
---------------------------------------------------------------------------

    Article IV also describes the appointment of Officers for the 
Company. Specifically, the Chief Compliance Officer and the Chief 
Information Security Officer, each of whom will be employed solely by 
the Plan Processor and neither of whom will be deemed or construed in 
any way to be an employee of the Company, will be Officers of the 
Company. Neither such Officer will receive or be entitled to any 
compensation from the Company or any Participant by virtue of his or 
her service in such capacity (other than if a Participant is then 
serving as the Plan Processor, compensation paid to such Officer as an 
employee of such Participant). Each such Officer will report directly 
to the Operating Committee. The Chief Compliance Officer will work on a 
regular and frequent basis with the Compliance Subcommittee and/or 
other Subcommittees as may be determined by the Operating Committee. 
Except to the extent otherwise provided in the Plan, including Section 
6.2, each such Officer will have such fiduciary and other duties with 
regard to the Plan Processor as imposed by the Plan Processor on such 
individual by virtue of his or her employment by the Plan Processor.
    In addition, the Plan Processor will inform the Operating Committee 
of the individual who has direct management responsibility for the Plan 
Processor's performance of its obligations with respect to the CAT. 
Subject to approval by the Operating Committee of such individual, the 
Operating Committee will appoint such individual as an Officer. In 
addition, the Operating Committee by Supermajority Vote may appoint 
other Officers as it shall from time to time deem necessary. Any 
Officer appointed pursuant to Section 4.6(b) will have only such duties 
and responsibilities as set forth in the Plan, or as the Operating 
Committee shall from time to time expressly determine. No such Officer 
shall have any authority to bind the Company (which authority is vested 
solely in the Operating Committee) or be an employee of the Company, 
unless in each case the Operating Committee, by Supermajority Vote, 
expressly determines otherwise. No person subject to a ``statutory 
disqualification'' (as defined in Section 3(a)(39) of the Exchange Act) 
may serve as an Officer. It is the intent of the Participants that the 
Company have no employees.

[[Page 30622]]

Request for Comment
    6. Do Commenters believe that the organizational, governance and/or 
managerial structure of CAT NMS, LLC is in the public interest? Why or 
why not?
    7. Do Commenters believe that the organizational, governance, and/
or managerial structure set forth in the CAT NMS Plan, including the 
role of the Operating Committee, is appropriate and reasonable? If not, 
please explain.
    8. The CAT NMS Plan specifies the corporate actions that require a 
Majority Vote and the corporate actions that require a Supermajority 
Vote. Do Commenters believe that such voting procedures are appropriate 
and reasonable? Should any corporate actions require a higher or lower 
voting threshold than specified in the Plan? Are there any corporate 
actions that should require a Supermajority Vote? Please explain.
    9. Do Commenters believe that the CAT NMS Plan should explicitly or 
more clearly specify who should determine whether a systems change or 
amendment is ``material''? If so, who? Please explain.
    10. Do Commenters believe that two successive full terms is an 
appropriate and reasonable term limit for a Person to serve as chair of 
the Operating Committee? If not, please explain.
    11. Section 1.1 defines Conflict of Interest to mean that the 
interest of a Participant (e.g., commercial, reputational, regulatory, 
or otherwise) in the matter that is subject to the vote; (a) 
interferes, or would be reasonably likely to interfere with that 
Participant's objective consideration of the matter; and (b) is, or is 
reasonably likely to be, inconsistent with the purpose and objectives 
of the Company, and the CAT, taking into account all relevant 
considerations, including whether a Participant that may otherwise have 
a conflict of interest has established appropriate safeguards to 
eliminate such conflicts of interest and taking into account the other 
guiding principles set forth in the LLC Agreement. Do Commenters 
believe this definition of ``Conflict of Interest'' is appropriate and 
reasonable? Please explain.
    12. Do Commenters believe that the definition of Conflict of 
Interest of the CAT NMS Plan properly reflects the business interests 
of each Participant and the Operating Committee? If not, please 
explain. Do Commenters believe that the CAT NMS Plan governing 
procedures on Conflicts of Interest and recusals contained in Section 
4.3(d) of the CAT NMS Plan, reasonably and adequately address Conflicts 
of Interest? If not, please explain. Are there other conflicts of 
interest that may arise for any Participant that are not addressed in 
the CAT NMS Plan definitions or governing procedures? If so, what?
    13. Is the CAT NMS Plan clear and reasonable regarding whether it 
permits the Operating Committee to delegate the authority to vote on 
matters to a Subcommittee? If so, in what circumstances? Are there any 
circumstances in which a Subcommittee would or should be prohibited 
from voting in place of the Operating Committee? Please explain.
    14. Do Commenters believe that the Advisory Committee structure and 
provisions set forth in the CAT NMS Plan are appropriate and 
reasonable? Is the size of the Advisory Committee as contemplated by 
the Plan appropriate and reasonable? Are the Advisory Committee member 
categories reasonable and adequately representative of entities 
impacted by the CAT NMS Plan? Would expanding membership on the 
Advisory Committee to any additional types of entities enhance the 
quality of the input it would provide to the Operating Committee? 
Please explain.
    15. Is the mechanism for determining who serves on the Advisory 
Committee (i.e., selection by the Operating Committee) appropriate and 
reasonable? Should Participants be required to publicly solicit 
Advisory Committee membership interest? Should the Advisory Committee 
be able to self-nominate replacement candidates? Please explain.
    16. Do Commenters believe that the CAT NMS Plan's requirement that 
Advisory Committee members serve on the Advisory Committee in their 
personal capacities, and that the Operating Committee members serve on 
the Operating Committee as representatives of their employers who are 
the Plan Participants create different incentives for members of the 
Advisory Committee and members of the Operating Committee? If so, in 
what ways? Do Commenters believe that these differing incentives would 
impact the regulatory objective of the CAT? If so, in what ways?
    17. The CAT NMS Plan outlines the size, tenure and membership 
categories of the Advisory Committee members. Do Commenters believe 
there are any additional or alternative factors that should be taken 
into consideration in structuring the Advisory Committee that would 
benefit the operation of the CAT? If so, what are those additional or 
alternative factors? How would these factors benefit the operation of 
the CAT?
    18. Are the roles and responsibilities of the Advisory Committee 
clearly and adequately set forth in the CAT NMS Plan? If not, why not? 
Should additional details on these roles and responsibilities be 
provided? If so, what additional details should be provided?
    19. Are there any alternatives for involvement by the Advisory 
Committee that could increase the effectiveness of the Advisory 
Committee? For example, should the Advisory Committee be given a vote 
in connection with decisions regarding the CAT NMS Plan, equivalent to 
the vote each Participant has? If so, please specifically identify the 
alternatives for involvement and how those alternatives could increase 
the effectiveness of the CAT.
    20. Do Commenters believe that the Advisory Committee is structured 
in a way that would allow industry to provide meaningful input on the 
implementation, operation, and administration of the CAT? If not, 
please explain and/or provide specific suggestions for improving the 
Advisory Committee structure. Should additional authority be given to 
the Advisory Committee, for example allowing it to initiate its own 
recommendations? Should additional mechanisms through which the 
industry or others could provide input be included in the CAT NMS Plan? 
\55\ Should the Operating Committee be required to respond to the 
Advisory Committee's views, formally or informally, in advance of or 
following a decision by the Operating Committee? Should the Operating 
Committee be required to include Advisory Committee views in filings 
with the Commission? Please explain.
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    \55\ See Section IV.E.4, infra, for additional requests for 
comment on the Advisory Committee.
---------------------------------------------------------------------------

    21. Do Commenters believe that the Plan's provision that prohibits 
the Advisory Committee from attending any Executive Session of the 
Operating Committee is appropriate and reasonable?
    22. Do Commenters believe that the CAT NMS Plan adequately sets 
forth provisions regarding the scope, authority, and duties of the 
Officers of the CAT, as well as the scope and authority of the Plan 
Processor generally? If not, what further provisions should the CAT NMS 
Plan set forth with respect to Officers and the Plan Processor and why?
    23. Do Commenters believe that the Operating Committee and the 
proposed CAT NMS Plan governance structure would ensure effective 
corporate governance, process and action? Why or why not?

[[Page 30623]]

    24. The CAT NMS Plan provides that emergency meetings of the 
Operating Committee may be called at the request of two or more 
Participants, and may be held as soon as practical after such a meeting 
is called. Do Commenters believe that there should be a different 
method for the Operating Committee to meet and take action in the event 
of an emergency? Should the CAT NMS Plan denote certain emergency 
situations in which the Operating Committee must be required to take 
action on an expedited basis? If so, what time period would be 
reasonable to require action by the Operating Committee and what 
mechanisms or processes should the Operating Committee be required to 
follow?
    25. What, if any, impact on the Operating Committee's governance 
and voting do Affiliated Participant groups have? Do Commenters believe 
that the Operating Committee's governance and voting provisions set 
forth in the CAT NMS Plan, including the definitions of Supermajority 
Vote and Majority Vote, are appropriate and reasonable in light of 
these Affiliated Participant groups? What, if any, additional 
governance and voting provisions or protections should be included? Is 
there an alternative model for voting rights that would be more 
appropriate and reasonable, for example distributing votes using a 
measure other than exchange licenses?
    26. Do Commenters believe the use of Executive Session is 
appropriate and reasonable? Is a Majority Vote the appropriate 
mechanism for the Operating Committee to go into Executive Session? 
Should the CAT NMS Plan specify particular scenarios for which an 
Executive Session is or is not appropriate?
    27. Do Commenters believe that the provisions in the CAT NMS Plan 
regarding the mechanics of voting by the Operating Committee, the 
Selection Committee, or other entities are appropriate and reasonable? 
Does the CAT NMS Plan include sufficient detail on when voting should 
be carried out openly (e.g., in the presence of other attendees at a 
committee meeting) as opposed to when voting may be conducted by secret 
ballot or by some other confidential method? What are the advantages 
and disadvantages of different voting methodologies? Would particular 
actions or decisions regarding CAT be better suited to one voting 
methodology over others? Please explain.
    28. Are there any other matters relating to the operation and 
administration of the Plan that should be included in the Plan for the 
Commission's consideration? If so, please identify such matters and 
explain why and how they should be addressed in the Plan.
(4) Initial Plan Processor Selection
    Article V of the Plan sets forth the process for the Participants' 
evaluation of Bids and the selection process for narrowing down the 
Bids and choosing the Initial Plan Processor. The initial steps in the 
evaluation and selection process were and will be performed pursuant to 
the Selection Plan; the final two rounds of evaluation and voting, as 
well as the final selection of the Initial Plan Processor, will be 
performed pursuant to the Plan.\56\
---------------------------------------------------------------------------

    \56\ By its terms, the Selection Plan will terminate upon 
Commission approval of the Plan.
---------------------------------------------------------------------------

    As discussed above, the Selection Committee has selected the 
Shortlisted Bids pursuant to the Selection Plan. After reviewing the 
Shortlisted Bids, the Participants have identified the optimal proposed 
solutions for the CAT and, to the extent possible, included such 
solutions in the Plan.\57\ The Selection Committee will determine, by 
majority vote, whether Shortlisted Bidders will have the opportunity to 
revise their Bids. To reduce potential conflicts of interest, no 
Bidding Participant may vote on whether a Shortlisted Bidder will be 
permitted to revise its Bid if a Bid submitted by or including the 
Participant or an Affiliate of the Participant is a Shortlisted Bid. 
The Selection Committee will review and evaluate all Shortlisted Bids, 
including any permitted revisions submitted by Shortlisted Bidders. In 
performing this review and evaluation, the Selection Committee may 
consult with the Advisory Committee and such other Persons as the 
Selection Committee deems appropriate, which may include the DAG until 
the Advisory Committee is formed.
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    \57\ As noted above, the Participants stated their belief that 
certain exemptive relief is necessary to include in the Plan all of 
the provisions the Participants believe are part of the optimal 
solution for the CAT. The Commission notes that the request for 
exemptive relief was granted on March 1, 2016. See Exemption Order, 
supra note 18.
---------------------------------------------------------------------------

    After receipt of any permitted revisions, the Selection Committee 
will select the Initial Plan Processor from the Shortlisted Bids in two 
rounds of voting where each Participant has one vote via its Voting 
Senior Officer in each round.\58\ No Bidding Participant, however, will 
be entitled to vote in any round if the Participant's Bid, a Bid 
submitted by an Affiliate of the Participant, or a Bid including the 
Participant or an Affiliate of the Participant is considered in such 
round.\59\ In the first round, each Voting Senior Officer, subject to 
the recusal provision in Section 5.2(e)(ii), will select a first and 
second choice, with the first choice receiving two points and the 
second choice receiving one point. The two Shortlisted Bids receiving 
the highest cumulative scores in the first round will advance to the 
second round.\60\ In the event of a tie, the tie will be broken by 
assigning one point per vote to the tied Shortlisted Bids, and the 
Shortlisted Bid with the most votes will advance. If this procedure 
fails to break the tie, a revote will be taken on the tied Bids with 
each vote receiving one point. If the tie persists, the Participants 
will identify areas for discussion, and revotes will be taken until the 
tie is broken.
---------------------------------------------------------------------------

    \58\ If the proposed amendment to the Selection Plan is 
approved, the Selection Committee may determine to narrow the number 
of Shortlisted Bids prior to the two rounds of voting.
    \59\ This recusal provision is included in the Plan, as well as 
in an amendment to the Selection Plan. See Order Approving Amendment 
No. 2 to the Selection Plan, supra note 15.
    \60\ Each round of voting throughout the Plan is independent of 
other rounds.
---------------------------------------------------------------------------

    Once two Shortlisted Bids have been chosen, the Voting Senior 
Officers of the Participants (other than those subject to recusal) will 
vote for a single Shortlisted Bid from the final two to determine the 
Initial Plan Processor. If the tie persists, the Participants will 
identify areas for discussion and, following these discussions, revotes 
will be taken until the tie is broken. As set forth in Article VI of 
the Plan, following the selection of the Initial Plan Processor, the 
Participants will file with the Commission a statement identifying the 
Initial Plan Processor and including the information required by Rule 
608.
(5) Functions and Activities of CAT System
A. Plan Processor
    Article VI describes the responsibilities of the selected Plan 
Processor. The Company, under the direction of the Operating Committee, 
will enter into one or more agreements with the Plan Processor 
obligating the Plan Processor to perform the functions and duties 
contemplated by the Plan to be performed by the Plan Processor, as well 
as such other functions and duties the Operating Committee deems 
necessary or appropriate.
    As set forth in the Plan, the Plan Processor is required to develop 
and, with the prior approval of the Operating Committee, implement 
policies, procedures, and control structures related to the CAT System 
that are consistent with Rule 613(e)(4), Appendix C and Appendix D. The 
Plan

[[Page 30624]]

Processor will: (1) Comply with applicable provisions of 15 U.S. Code 
Sec.  78u-6 (Securities Whistleblower Incentives and Protection) and 
the recordkeeping requirements of Rule 613(e)(8); (2) consistent with 
Appendix D, Central Repository Requirements, ensure the effective 
management and operation of the Central Repository; (3) consistent with 
Appendix D, Data Management, ensure the accuracy of the consolidation 
of the CAT Data reported to the Central Repository; and (4) consistent 
with Appendix D, Upgrade Process and Development of New Functionality, 
design and implement appropriate policies and procedures governing the 
determination to develop new functionality for the CAT including, among 
other requirements, a mechanism by which changes can be suggested by 
Advisory Committee members, Participants, or the SEC. Such policies and 
procedures also shall: (1) Provide for the escalation of reviews of 
proposed technological changes and upgrades to the Operating Committee; 
and (2) address the handling of surveillance, including coordinated, 
Rule 17d-2 under the Exchange Act or Regulatory Surveillance 
Agreement(s) (RSA) surveillance queries and requests for data. Any 
policy, procedure or standard (and any material modification or 
amendment thereto) applicable primarily to the performance of the Plan 
Processor's duties as the Plan Processor (excluding any policies, 
procedures or standards generally applicable to the Plan Processor's 
operations and employees) will become effective only upon approval by 
the Operating Committee. The Plan Processor also will, subject to the 
prior approval of the Operating Committee, establish appropriate 
procedures for escalation of matters to the Operating Committee. In 
addition to other policies, procedures and standards generally 
applicable to the Plan Processor's employees and contractors, the Plan 
Processor will have hiring standards and will conduct and enforce 
background checks (e.g., fingerprint-based) for all of its employees 
and contractors to ensure the protection, safeguarding and security of 
the facilities, systems, networks, equipment and data of the CAT 
System, and will have an insider and external threat policy to detect, 
monitor and remedy cyber and other threats.
    The Plan Processor will enter into appropriate Service Level 
Agreements (``SLAs'') governing the performance of the Central 
Repository, as generally described in Appendix D, Functionality of the 
CAT System, with the prior approval of the Operating Committee. The 
Plan Processor in conjunction with the Operating Committee will 
regularly review and, as necessary, update the SLAs, in accordance with 
the terms of the SLAs. As further contemplated in Appendix C, System 
Service Level Agreements (SLAs), and in Appendix D, System SLAs, the 
Plan Processor may enter into appropriate service level agreements with 
third parties applicable to the Plan Processor's functions related to 
the CAT System (``Other SLAs''), with the prior approval of the 
Operating Committee. The Chief Compliance Officer and/or the 
Independent Auditor will, in conjunction with the Plan Processor and as 
necessary the Operating Committee, regularly review and, as necessary, 
update the Other SLAs, in accordance with the terms of the applicable 
Other SLA. In addition, the Plan Processor: (1) Will, on an ongoing 
basis and consistent with any applicable policies and procedures, 
evaluate and implement potential system changes and upgrades to 
maintain and improve the normal day-to-day operating function of the 
CAT System; (2) in consultation with the Operating Committee, will, on 
an as needed basis and consistent with any applicable operational and 
escalation policies and procedures, implement such material system 
changes and upgrades as may be required to ensure effective functioning 
of the CAT System; and (3) in consultation with the Operating 
Committee, will, on an as needed basis, implement system changes and 
upgrades to the CAT System to ensure compliance with applicable laws, 
regulations or rules (including those promulgated by the SEC or any 
Participant). Furthermore, the Plan Processor will develop and, with 
the prior approval of the Operating Committee, implement a securities 
trading policy, as well as necessary procedures, control structures and 
tools to enforce this policy.
    In addition, the Plan Processor will provide the Operating 
Committee regular reports on the CAT System's operation and 
maintenance. Furthermore, upon request of the Operating Committee or 
any Subcommittee, the Plan Processor will attend any meetings of the 
Operating Committee or such Subcommittee.
    The Plan Processor may appoint such officers of the Plan Processor 
as it deems necessary and appropriate to perform its functions under 
the Plan and Rule 613. The Plan Processor, however, will be required to 
appoint, at a minimum, the Chief Compliance Officer, the Chief 
Information Security Officer, and the Independent Auditor. The 
Operating Committee, by Supermajority Vote, will approve any 
appointment or removal of the Chief Compliance Officer, Chief 
Information Security Officer, or the Independent Auditor.
    The Plan Processor will designate an employee of the Plan Processor 
to serve, subject to the approval of the Operating Committee by 
Supermajority Vote, as the Chief Compliance Officer. The Plan Processor 
will also designate at least one other employee (in addition to the 
person then serving as Chief Compliance Officer), which employee the 
Operating Committee has previously approved, to serve temporarily as 
the Chief Compliance Officer if the employee then serving as the Chief 
Compliance Officer becomes unavailable or unable to serve in such 
capacity (including by reason of injury or illness). Any person 
designated to serve as the Chief Compliance Officer (including to serve 
temporarily) will be appropriately qualified to serve in such capacity 
based on the duties and responsibilities assigned to the Chief 
Compliance Officer and will dedicate such person's entire working time 
to such service (or temporary service) (except for any time required to 
attend to any incidental administrative matters related to such 
person's employment with the Plan Processor that do not detract in any 
material respect from such person's service as the Chief Compliance 
Officer). Article VI sets forth various responsibilities of the Chief 
Compliance Officer. With respect to all of his or her duties and 
responsibilities in such capacity (including those as set forth in the 
Plan), the Chief Compliance Officer will be directly responsible and 
will directly report to the Operating Committee, notwithstanding that 
she or he is employed by the Plan Processor. The Plan Processor, 
subject to the oversight of the Operating Committee, will ensure that 
the Chief Compliance Officer has appropriate resources to fulfill his 
or her obligations under the Plan and Rule 613. The compensation 
(including base salary and bonus) of the Chief Compliance Officer will 
be payable by the Plan Processor, but be subject to review and approval 
by the Operating Committee. The Operating Committee will render the 
Chief Compliance Officer's annual performance review.
    The Plan Processor also will designate an employee of the Plan 
Processor to serve, subject to the approval of the Operating Committee 
by Supermajority Vote, as the Chief Information Security Officer. The 
Plan Processor will also designate at least one other employee (in 
addition to the person then serving as Chief Information Security 
Officer), which employee the Operating

[[Page 30625]]

Committee has previously approved, to serve temporarily as the Chief 
Information Security Officer if the employee then serving as the Chief 
Information Security Officer becomes unavailable or unable to serve in 
such capacity (including by reason of injury or illness). Any person 
designated to serve as the Chief Information Security Officer 
(including to serve temporarily) will be appropriately qualified to 
serve in such capacity based on the duties and responsibilities 
assigned to the Chief Information Security Officer under the Plan and 
will dedicate such person's entire working time to such service (or 
temporary service) (except for any time required to attend to any 
incidental administrative matters related to such person's employment 
with the Plan Processor that do not detract in any material respect 
from such person's service as the Chief Information Security Officer).
    The Plan Processor, subject to the oversight of the Operating 
Committee, will ensure that the Chief Information Security Officer has 
appropriate resources to fulfill the obligations of the Chief 
Information Security Officer set forth in Rule 613 and in the Plan, 
including providing appropriate responses to questions posed by the 
Participants and the SEC. In performing such obligations, the Chief 
Information Security Officer will be directly responsible and directly 
report to the Operating Committee, notwithstanding that he or she is 
employed by the Plan Processor. The compensation (including base salary 
and bonus) of the Chief Information Security Officer will be payable by 
the Plan Processor, but be subject to review and approval by the 
Operating Committee, and the Operating Committee will render the Chief 
Information Security Officer's annual performance review. Consistent 
with Appendices C and D, the Chief Information Security Officer will be 
responsible for creating and enforcing appropriate policies, 
procedures, standards, control structures and real time tools to 
monitor and address data security issues for the Plan Processor and the 
Central Repository, as described in the Plan. At regular intervals, to 
the extent that such information is available to the Company, the Chief 
Information Security Officer will report to the Operating Committee the 
activities of the Financial Services Information Sharing and Analysis 
Center (``FS-ISAC'') or comparable bodies to the extent that the 
Company has joined FS-ISAC or other comparable body.
    The Plan Processor will afford to Participants and the Commission 
such access to the Representatives of the Plan Processor as any 
Participant or the Commission may reasonably request solely for the 
purpose of performing such Person's regulatory and oversight 
responsibilities pursuant to the federal securities laws, rules, and 
regulations or any contractual obligations. The Plan Processor will 
direct such Representatives to reasonably cooperate with any inquiry, 
investigation, or proceeding conducted by or on behalf of any 
Participant or the Commission related to such purpose.
    The Operating Committee will review the Plan Processor's 
performance under the Plan at least once each year, or more often than 
once each year upon the request of two Participants that are not 
Affiliated Participants. The Operating Committee will notify the SEC of 
any determination made by the Operating Committee concerning the 
continuing engagement of the Plan Processor as a result of the 
Operating Committee's review of the Plan Processor and will provide the 
SEC with a copy of any reports that may be prepared in connection 
therewith.
    The Operating Committee, by Supermajority Vote, may remove the Plan 
Processor from such position at any time. However, the Operating 
Committee, by Majority Vote, may remove the Plan Processor from such 
position at any time if it determines that the Plan Processor has 
failed to perform its functions in a reasonably acceptable manner in 
accordance with the provisions of the Plan or that the Plan Processor's 
expenses have become excessive and are not justified. In making such a 
determination, the Operating Committee will consider, among other 
factors: (1) The reasonableness of the Plan Processor's response to 
requests from Participants or the Company for technological changes or 
enhancements; (2) results of any assessments performed pursuant to 
Section 6.6; (3) the timeliness of conducting preventative and 
corrective information technology system maintenance for reliable and 
secure operations; (4) compliance with requirements of Appendix D; and 
(5) such other factors related to experience, technological capability, 
quality and reliability of service, costs, back-up facilities, failure 
to meet service level agreement(s) and regulatory considerations as the 
Operating Committee may determine to be appropriate.
    In addition, the Plan Processor may resign upon two year's (or such 
other shorter period as may be determined by the Operating Committee by 
Supermajority Vote) prior written notice. The Operating Committee will 
fill any vacancy in the Plan Processor position by Supermajority Vote, 
and will establish a Plan Processor Selection Subcommittee to evaluate 
and review Bids and make a recommendation to the Operating Committee 
with respect to the selection of the successor Plan Processor.
Request for Comment
    29. The CAT NMS Plan, Section 6.1 (Plan Processor) sets forth 
details regarding the Plan Processor's responsibilities. Do Commenters 
believe that the enumerated responsibilities of the Plan Processor are 
appropriate and reasonable? Please explain.
    30. Do Commenters believe that the CAT NMS Plan provides the 
Operating Committee with sufficient authority to maintain oversight of 
the Plan Processor? Is the Plan Processor given too much discretion? 
Too little? Please explain.
    31. The CAT NMS Plan provides in Section 6.1(s) that a Plan 
Processor may resign upon giving two years notice of such resignation. 
Do Commenters believe that two years is a sufficient amount of notice 
to ensure a replacement Plan Processor could be selected? Is two years 
too long a period to require notice of resignation? Why or why not?
    32. The CAT NMS Plan includes two provisions governing removal of 
the Plan Processor. Section 6.1(q) allows the Operating Committee to 
remove the Plan Processor at any time by a Supermajority Vote. Do 
Commenters believe it is appropriate for the Operating Committee to 
have authority to remove the Plan Processor without cause upon a 
Supermajority Vote? Why or why not?
    33. Section 6.1(r) of the CAT NMS Plan allows the Operating 
Committee to remove the Plan Processor by a Majority Vote if it 
determines that the Plan Processor has failed to perform its functions 
in a reasonably acceptable manner in accordance with the provisions of 
the CAT LLC Agreement or that the Plan Processor's expenses have become 
excessive and are not justified. Do Commenters believe it is 
appropriate and reasonable for the Operating Committee to have the 
authority to remove the Plan Processor on these bases using a Majority 
Vote? Why or why not, and with respect to which of these bases? Do 
Commenters believe there are other grounds upon which the Operating 
Committee should have the ability to remove the Plan Processor upon a 
Majority Vote?
    34. The CAT NMS Plan states that the Plan Processor must implement 
policies and procedures consistent with Rule

[[Page 30626]]

613(e)(4). Further, Rule 613(e)(4) requires that the CAT NMS Plan 
include policies and procedures to be used by the Plan Processor to 
ensure: (1) The security and confidentiality of all information 
reported to the Central Repository; (2) the timeliness, accuracy, 
integrity, and completeness of the data provided to the Central 
Repository; and (3) the accuracy of the consolidation by the Plan 
Processor of the data provided to the Central Repository. Do Commenters 
believe that such policies and procedures are adequately described in 
Appendix D of the CAT NMS Plan? Do Commenters believe such policies and 
procedures are appropriate and reasonable? Do Commenters believe that 
additions or deletions should be made to the policies and procedures? 
If so, please describe.
    35. The CAT NMS Plan provides that the CCO and CISO, while Officers 
of CAT NMS, LLC, would be employees of the Plan Processor. Do 
Commenters believe that this arrangement creates any conflicts of 
interest that could undermine the ability of the CCO and CISO to 
effectively carry out their responsibilities under the CAT NMS Plan? 
Please describe any such conflicts of interest and explain how they 
could affect the performance of the CCO or CISO's CAT-related duties.
    36. The CAT NMS Plan provides that the Operating Committee must 
approve the CCO and CISO selected by the Plan Processor by 
Supermajority Vote, that the CCO and CISO shall dedicate their entire 
working time to their service as CCO or CISO, that the Operating 
Committee shall have oversight over the Plan Processor's compensation 
of and provision of resources to the CCO and CISO, and that the CCO and 
CISO shall report directly to and receive annual performance reviews 
from the Operating Committee.\61\ Do Commenters believe that these 
provisions adequately address any conflicts of interest resulting from 
the CCO and CISO being employees of the Plan Processor? Are there 
additional steps that could be taken to insulate the CCO and CISO from 
being unduly influenced by the Plan Processor?
---------------------------------------------------------------------------

    \61\ See CAT NMS Plan, supra note 3, at Sections 6.2(a)(i)-(iv), 
b(i)-(iv).
---------------------------------------------------------------------------

    37. The CAT NMS Plan provides that the CCO and CISO would not, to 
the extent permitted under applicable law, have fiduciary or similar 
duties to CAT NMS, LLC, but that they may have fiduciary or similar 
duties to the Plan Processor to the extent that their employment with 
the Plan Processor entails such duties.\62\ Do Commenters believe that 
these provisions could affect the ability of the CCO and CISO to carry 
out their CAT-related duties? Would any alternative provisions be 
preferable? For example, should the Plan remain silent regarding the 
CCO and CISO's fiduciary or other duties to the Plan Processor and CAT 
NMS, LLC? Should the Plan require the CCO and CISO to affirmatively 
undertake fiduciary or similar duties to CAT NMS, LLC? Should the Plan 
Processor be required to select individuals who do not have fiduciary 
or similar duties to the Plan Processor to be the CCO or CISO? What are 
the advantages and disadvantages to each approach?
---------------------------------------------------------------------------

    \62\ See id. at Section 4.6(a), 4.7(c).
---------------------------------------------------------------------------

    38. Is the mechanism by which changes to CAT functionality can be 
suggested to the Plan Processor by the Advisory Committee members, 
Participants, or the SEC appropriate and reasonable? Why or why not?
    39. Is the Operating Committee's role in the hiring of the CCO, 
CISO, and Independent Auditor appropriate and reasonable? Should the 
Advisory Committee be consulted on these decisions? Why or why not?
B. Central Repository
    The Central Repository, under the oversight of the Plan Processor, 
and consistent with Appendix D, Central Repository Requirements, will 
receive, consolidate, and retain all CAT Data. The Central Repository 
will collect (from a SIP or pursuant to an NMS Plan) and retain on a 
current and continuing basis, in a format compatible with the 
Participant Data and Industry Member Data, all data, including the 
following: (1) Information, including the size and quote condition, on 
quotes, including the National Best Bid and National Best Offer for 
each NMS Security; (2) Last Sale Reports and transaction reports 
reported pursuant to an effective transaction reporting plan filed with 
the SEC pursuant to, and meeting the requirements of, Rules 601 and 
608; (3) trading halts, LULD price bands and LULD indicators; and (4) 
summary data.\63\
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    \63\ In the CAT NMS Plan as attached hereto as Exhibit A, 
Section 6.5(a)(ii)(D) was amended to clarify that ``summary data'' 
refers to ``summary data or reports described in the specifications 
for each of the SIPs and disseminated by the respective SIP.''
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    Consistent with Appendix D, Data Retention Requirements, the 
Central Repository will retain the information collected pursuant to 
paragraphs (c)(7) and (e)(7) of Rule 613 in a convenient and usable 
standard electronic data format that is directly available and 
searchable electronically without any manual intervention by the Plan 
Processor for a period of not less than six years. Such data when 
available to the Participant regulatory Staff and the SEC will be 
linked. In addition, the Plan Processor will implement and comply with 
the records retention policy contemplated by Section 6.1(d)(i).
    Consistent with Appendix D, Data Access, the Plan Processor will 
provide Participants and the SEC access to the Central Repository 
(including all systems operated by the Central Repository), and access 
to and use of the CAT Data stored in the Central Repository, solely for 
the purpose of performing their respective regulatory and oversight 
responsibilities pursuant to the federal securities laws, rules and 
regulations or any contractual obligations. The Plan Processor will 
create and maintain a method of access to the CAT Data stored in the 
Central Repository that includes the ability to run searches and 
generate reports. The method in which the CAT Data is stored in the 
Central Repository will allow the ability to return results of queries 
that are complex in nature including market reconstruction and the 
status of order books at varying time intervals. The Plan Processor 
will, at least annually and at such earlier time promptly following a 
request by the Operating Committee, certify to the Operating Committee 
that only the Participants and the SEC have access to the Central 
Repository (other than access provided to any Industry Member for the 
purpose of correcting CAT Data previously reported to the Central 
Repository by such Industry Member).\64\
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    \64\ See CAT NMS Plan, supra note 3, at Appendix C, The Security 
and Confidentiality of Information Reported to the Central 
Repository, and Appendix D, Data Security, describe the security and 
confidentiality of the CAT Data, including how access to the Central 
Repository is controlled.
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Request for Comment
    40. Do Commenters believe that the requirements presented in 
Appendix D, Central Repository Requirements, are sufficiently detailed 
to guide the Plan Processor in how to build and operate the Central 
Repository with regard to receiving, consolidating, and retaining data? 
If not, what additional information should the requirements contain? 
Are there any requirements that should be eliminated? Will such 
provisions give the Plan Processor too much discretion or flexibility 
in how to build and operate the Central Repository with regard to 
receiving, consolidating, and retaining data? Please identify and 
explain why such requirements are not necessary or appropriate.
    41. Do Commenters believe that the information provided in Appendix 
D, Data Access, is sufficiently detailed to

[[Page 30627]]

inform the Plan Processor and regulators how access to data will be 
granted? Are the controls and security provisions related to regulatory 
access to data appropriate and reasonable? Should additional provisions 
be included? If so, please identify and explain why such provisions are 
necessary. Should any provisions be modified or eliminated? Will such 
provisions give the Plan Processor too much discretion or flexibility 
in how to build and operate the Central Repository with regard to 
regulator access to the data? If so, please identify and explain why 
such provisions should be modified or not included in the CAT NMS Plan.
    42. The CAT NMS Plan does not mandate a specific method for primary 
data storage of CAT Data, but does require that the storage solution 
would meet the security, reliability, and accessibility requirements 
for the CAT, including storage of personally identifiable information 
(``PII'') data, separately. The CAT NMS Plan also indicates several 
considerations in the selection of a storage solution including 
maturity, cost, complexity, and reliability of the storage method. The 
Commission requests comment on whether the CAT NMS Plan should mandate 
a particular data storage method. Why or why not? What are the 
advantages and disadvantages for CAT of the various storage methods?
C. Data Recording and Reporting by Participants
    The Plan also sets forth the requirements regarding the data 
recording and reporting by Participants.\65\ Each Participant will 
record and electronically report to the Central Repository the 
following details for each order and each Reportable Event,\66\ as 
applicable (``Participant Data''; also referred to as ``Recorded 
Industry Member Data'', as discussed in the next Section):
---------------------------------------------------------------------------

    \65\ Participants may, but are not required to, coordinate 
compliance with the recording and reporting efforts through the use 
of regulatory services agreements and/or agreements adopted pursuant 
to Rule 17d-2 under the Exchange Act.
    \66\ The CAT NMS Plan defines ``Reportable Event'' as 
``includ[ing], but . . . not limited to, the original receipt or 
origination, modification, cancellation, routing, execution (in 
whole or in part) and allocation of an order, and receipt of a 
routed order.'' See CAT NMS Plan, supra note 3, at Section 1.1.

for original receipt or origination of an order: (1) Firm Designated 
ID(s) (FDIs) for each customer; (2) CAT-Order-ID; (3) SRO-Assigned 
Market Participant Identifier of the Industry Member receiving or 
originating the order; (4) date of order receipt or origination; (5) 
time of order receipt or origination (using time stamps pursuant to 
Section 6.8); (6) the Material Terms of the Order; \67\ and (7) 
other information as may be determined by the Operating 
Committee.\68\
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    \67\ For a discussion of the Material Terms of the Order 
required by Rule 613, see Adopting Release, supra note 9, at 45750-
52. The Commission notes that the Participants include in the Plan a 
requirement for the reporting of the OTC equity security symbol as 
one of the ``Material Terms of the Order.'' See CAT NMS Plan, supra 
note 3, at Section 1.1.
    \68\ In the CAT NMS Plan as attached hereto as Exhibit A, the 
provisions of Section 6.3 enabling the Operating Committee to 
require Participants to record and report ``other information'' were 
removed.

for the routing of an order: (1) CAT-Order-ID; (2) date on which the 
order is routed; (3) time at which the order is routed (using time 
stamps pursuant to Section 6.8); (4) SRO-Assigned Market Participant 
Identifier of the Industry Member or Participant routing the order; 
(5) SRO-Assigned Market Participant Identifier of the Industry 
Member or Participant to which the order is being routed; (6) if 
routed internally at the Industry Member, the identity and nature of 
the department or desk to which the order is routed; (7) the 
Material Terms of the Order; and (8) other information as may be 
determined by the Operating Committee.\69\
---------------------------------------------------------------------------

    \69\ Id.

for the receipt of an order that has been routed, the following 
information: (1) CAT-Order-ID; (2) date on which the order is 
received; (3) time at which the order is received (using time stamps 
pursuant to Section 6.8); (4) SRO-Assigned Market Participant 
Identifier of the Industry Member or Participant receiving the 
order; (5) SRO-Assigned Market Participant Identifier of the 
Industry Member or Participant routing the order; (6) the Material 
Terms of the Order; and (7) other information as may be determined 
by the Operating Committee.\70\
---------------------------------------------------------------------------

    \70\ Id.

if the order is modified or cancelled: (1) CAT-Order-ID; (2) date 
the modification or cancellation is received or originated; (3) time 
at which the modification or cancellation is received or originated 
(using time stamps pursuant to Section 6.8); (4) price and remaining 
size of the order, if modified; (5) other changes in Material Terms, 
if modified; (6) whether the modification or cancellation 
instruction was given by the Customer, or was initiated by the 
Industry Member or Participant; and (7) other information as may be 
determined by the Operating Committee.\71\
---------------------------------------------------------------------------

    \71\ Id.

if the order is executed, in whole or in part: (1) CAT-Order-ID; (2) 
date of execution; (3) time of execution (using time stamps pursuant 
to Section 6.8); (4) execution capacity (principal, agency or 
riskless principal); (5) execution price and size; (6) the SRO-
Assigned Market Participant Identifier of the Participant or 
Industry Member executing the order; and (7) whether the execution 
was reported pursuant to an effective transaction reporting plan or 
the Plan for Reporting of Consolidated Options Last Sale Reports and 
---------------------------------------------------------------------------
Quotation Information; and

other information or additional events as may be determined by the 
Operating Committee \72\ or otherwise prescribed in Appendix D, 
Reporting and Linkage Requirements.
---------------------------------------------------------------------------

    \72\ Id.

    As contemplated in Appendix D, Data Types and Sources, each 
Participant will report Participant Data to the Central Repository for 
consolidation and storage in a format specified by the Plan Processor, 
approved by the Operating Committee and compliant with Rule 613. As 
further described in Appendix D, Reporting and Linkage Requirements, 
each Participant is required to record the Participant Data 
contemporaneously with the Reportable Event. In addition, each 
Participant must report the Participant Data to the Central Repository 
by 8:00 a.m. Eastern Time on the Trading Day following the day that the 
Participant recorded the Participant Data. Participants may voluntarily 
report the Participant Data prior to the 8:00 a.m. Eastern Time 
deadline.
    Each Participant that is a national securities exchange is required 
to comply with the above recording and reporting requirements for each 
NMS Security registered or listed for trading on such exchange or 
admitted to unlisted trading privileges on such exchange. Each 
Participant that is a national securities association is required to 
comply with the above recording and reporting requirements for each 
Eligible Security for which transaction reports are required to be 
submitted to the association.
D. Data Reporting and Recording by Industry Members
    The Plan also sets forth the data reporting and recording 
requirements for Industry Members. Specifically, 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, 
each Participant, through its Compliance Rule, will 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), as applicable (``Recorded Industry 
Member Data'')--that is, Participant Data discussed above. In addition, 
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, each Participant, through its Compliance Rule, 
will require its Industry Members to record and report to the Central 
Repository the following (``Received Industry Member Data'' and,

[[Page 30628]]

collectively with the Recorded Industry Member Data, ``Industry Member 
Data''): (1) If the order is executed, in whole or in part: (a) An 
Allocation Report that includes the Firm Designated ID when an 
execution is allocated (in whole or in part); \73\ (b) SRO-Assigned 
Market Participant Identifier of the clearing broker or prime broker, 
if applicable; and (c) CAT-Order-ID of any contra-side order(s); (2) if 
the trade is cancelled, a cancelled trade indicator; and (3) for 
original receipt or origination of an order, information of sufficient 
detail to identify the Customer.
---------------------------------------------------------------------------

    \73\ In the Amendment to the CAT NMS Plan, language in Section 
6.4(d) that read, ``that includes the Firm Designated ID when an 
execution is allocated (in whole or in part)'' was removed because 
the definition of ``Allocation Report'' includes this information.
---------------------------------------------------------------------------

    With respect to the reporting obligations of an Options Market 
Maker with regard to its quotes in Listed Options, Reportable Events 
required pursuant to Section 6.3(d)(ii) and (iv) will be reported to 
the Central Repository by an Options Exchange in lieu of the reporting 
of such information by the Options Market Maker. Each Participant that 
is an Options Exchange will, through its Compliance Rule, require its 
Industry Members that are Options Market Makers to report to the 
Options Exchange the time at which a quote in a Listed Option is sent 
to the Options Exchange (and, if applicable, any subsequent quote 
modifications and/or cancellation time when such modification or 
cancellation is originated by the Options Market Maker). Such time 
information also will be reported to the Central Repository by the 
Options Exchange in lieu of reporting by the Options Market Maker.\74\
---------------------------------------------------------------------------

    \74\ See Section III.B.9, infra, and accompanying requests for 
comment.
---------------------------------------------------------------------------

    Each Participant will, through its Compliance Rule, require its 
Industry Members to record and report to the Central Repository other 
information or additional events as prescribed in Appendix D, Reporting 
and Linkage Requirements.
    As contemplated in Appendix D, Data Types and Sources, each 
Participant will require its Industry Members to report Industry Member 
Data to the Central Repository for consolidation and storage in a 
format(s) specified by the Plan Processor, approved by the Operating 
Committee and compliant with Rule 613. As further described in Appendix 
D, Reporting and Linkage Requirements, each Participant will require 
its Industry Members to record Recorded Industry Member Data 
contemporaneously with the applicable Reportable Event. In addition, 
consistent with Appendix D, Reporting and Linkage Requirements, each 
Participant will require its Industry Members to report: (1) Recorded 
Industry Member Data to the Central Repository by 8:00 a.m. Eastern 
Time on the Trading Day following the day the Industry Member records 
such Recorded Industry Member Data; and (2) Received Industry Member 
Data to the Central Repository by 8:00 a.m. Eastern Time on the Trading 
Day following the day the Industry Member receives such Received 
Industry Member Data. Each Participant will permit its Industry Members 
to voluntarily report Industry Member Data prior to the applicable 8:00 
a.m. Eastern Time deadline.\75\
---------------------------------------------------------------------------

    \75\ See Section III.B.2, infra, and accompanying requests for 
comment.
---------------------------------------------------------------------------

    Each Participant that is a national securities exchange must 
require its Industry Members to report Industry Member Data for each 
NMS Security registered or listed for trading on such exchange or 
admitted to unlisted trading privileges on such exchange. Each 
Participant that is a national securities association must require its 
Industry Members to report Industry Member Data for each Eligible 
Security for which transaction reports are required to be submitted to 
the association.
Request for Comment
    43. Sections 6.3(d) and 6.4(d) of the CAT NMS Plan set forth the 
details that Participants and Industry Members must report to the 
Central Repository. Do Commenters believe that these details will be 
sufficient to allow the Central Repository to link information to 
accurately reflect the lifecycle of an order? If not, what additional 
information should be required to be reported for this purpose?
    44. Sections 6.3 and 6.4 of the CAT NMS Plan require Participants 
and Industry Members to record and report to the Central Repository 
other information or additional events as may be prescribed in Appendix 
D, Reporting and Linkage Requirements. Do Commenters believe that the 
CAT NMS Plan is sufficiently clear regarding the ``other information or 
additional events as may be prescribed in Appendix D'' that may be 
required? Please explain. Are these ``other information or additional 
events prescribed in Appendix D'' appropriate and reasonable? Please 
explain.
    45. The CAT NMS Plan does not specify the format in which CAT 
Reporters must submit data, and states the Plan Processor will specify 
the format. Do Commenters believe that the CAT NMS Plan should specify 
a particular format? If so, what format? Please explain.
E. Regular Written Assessment
    As described in Article VI, the Participants are required to 
provide the Commission with a written assessment of the operation of 
the CAT that meets the requirements set forth in Rule 613, Appendix D, 
and the Plan at least every two years or more frequently in connection 
with any review of the Plan Processor's performance under the Plan 
pursuant to Section 6.1(m).\76\ The Chief Compliance Officer will 
oversee this assessment and will provide the Participants a reasonable 
time to review and comment upon the written assessment prior to its 
submission to the SEC. In no case will the written assessment be 
changed or amended in response to a comment from a Participant; rather 
any comment by a Participant will be provided to the SEC at the same 
time as the written assessment.
---------------------------------------------------------------------------

    \76\ The Commission notes that the applicable provision in the 
Amendment is Section 6.1(n).
---------------------------------------------------------------------------

Request for Comment
    46. Do Commenters believe that the details and requirements 
regarding the regular written assessment of the operation of the CAT 
provided in Section 6.6 of the CAT NMS Plan are appropriate and 
reasonable? Would additional details or requirements for this 
assessment be beneficial?
    47. Do Commenters believe that the Chief Compliance Officer should 
oversee the regular written assessment, as is required by Section 6.6? 
If not, would another party be better suited to this role?
F. Time Stamps and Synchronization of Business Clocks
    Section 6.8 of the Plan discusses time stamps and the 
synchronization of Business Clocks. Each Participant is required to 
synchronize its Business Clocks (other than such Business Clocks used 
solely for Manual Order Events) at a minimum to within 50 milliseconds 
of the time maintained by the National Institute of Standards and 
Technology, consistent with industry standards. In addition, each 
Participant must, through its Compliance Rule, require its Industry 
Members to: (1) Synchronize their respective Business Clocks (other 
than such Business Clocks used solely for Manual Order Events) at a 
minimum to within 50 milliseconds of the time maintained by the 
National Institute of Standards and Technology, and maintain such a 
synchronization; (2)

[[Page 30629]]

certify periodically that their Business Clocks meet the requirements 
of the Compliance Rule; and (3) report to the Plan Processor and the 
Participant any violation of the Compliance Rule pursuant to the 
thresholds set by the Operating Committee. Furthermore, each 
Participant is required to synchronize its Business Clocks and, through 
its Compliance Rule, require its Industry Members to synchronize their 
Business Clocks used solely for Manual Order Events at a minimum to 
within one second of the time maintained by the National Institute of 
Standards and Technology, consistent with industry standards, and 
maintain such synchronization. Each Participant will require its 
Industry Members to certify periodically (according to a schedule 
defined by the Operating Committee) that their Business Clocks used 
solely for Manual Order Events meet the requirements of the Compliance 
Rule. The Compliance Rule of a Participant shall require its Industry 
Members using Business Clocks solely for Manual Order Events to report 
to the Plan Processor any violation of the Compliance Rule pursuant to 
the thresholds set by the Operating Committee. The Participants stated 
their belief that pursuant to Rule 613(d)(1) that these synchronization 
standards are consistent with current industry standards.
    Each Participant shall, and through its Compliance Rule require its 
Industry Members to, report information required by Rule 613 and this 
Agreement to the Central Repository in milliseconds. To the extent that 
any Participant utilizes time stamps in increments finer than the 
minimum required by the Plan, the Participant is required to make 
reports to the Central Repository utilizing such finer increment when 
reporting CAT Data to the Central Repository so that all Reportable 
Events reported to the Central Repository could be adequately 
sequenced. Each Participant will, through its Compliance Rule: (1) 
Require that, to the extent that its Industry Members utilize time 
stamps in increments finer than the minimum required in the Plan, such 
Industry Members will utilize such finer increment when reporting CAT 
Data to the Central Repository; and (2) provide that a pattern or 
practice of reporting events outside of the required clock 
synchronization time period without reasonable justification or 
exceptional circumstances may be considered a violation of SEC Rule 613 
and the Plan. Notwithstanding the preceding sentences, each Participant 
and Industry Member will be permitted to record and report Manual Order 
Events to the Central Repository in increments up to and including one 
second, provided that Participants and Industry Members will be 
required to record and report the time when a Manual Order Event has 
been captured electronically in an order handling and execution system 
of such Participant or Industry Member in milliseconds. In conjunction 
with Participants' and other appropriate Industry Member advisory 
groups, the Chief Compliance Officer will annually evaluate and make a 
recommendation to the Operating Committee as to whether industry 
standards have evolved such that the required synchronization should be 
shortened or the required time stamp should be in finer increments. The 
Operating Committee will make determinations regarding the need to 
revise the synchronization and time stamp requirements.
Request for Comment \77\
---------------------------------------------------------------------------

    \77\ See Sections III.B.4 and III.B.5, infra, for additional 
requests for comment on clock synchronization and time stamp 
granularity.
---------------------------------------------------------------------------

    48. Do Commenters believe that the CAT NMS Plan's requirement that 
Participants and Industry Members synchronize their Business Clocks to 
within 50 milliseconds of the time maintained by the National Institute 
of Standards and Technology (``NIST'') is appropriate and reasonable? 
Do Commenters agree with the Participants that this clock offset 
tolerance represents current industry standards? Would a tighter clock 
offset tolerance be feasible?
    49. Do Commenters believe that the CAT NMS Plan's requirement that 
Participants and Industry Members report information to the Central 
Repository in milliseconds is appropriate and reasonable? Would a more 
granular time stamp requirement be feasible? Do Commenters agree with 
the Participants that time stamp granularity to the millisecond 
represents current industry standards?
    50. How should ``industry standard,'' for purposes of the CAT NMS 
Plan's clock synchronization and time stamping requirements, be 
determined? Do Commenters believe that ``industry standard'' should be 
based on current industry practice? If not, how should ``industry 
standard'' be defined? What other factors, if any, should be considered 
in defining such ``industry standards''?
G. Technical Specifications
    Section 6.9 of the Plan establishes the requirements involving the 
Plan Processor's Technical Specifications. The Plan Processor will 
publish Technical Specifications that are at a minimum consistent with 
Appendices C and D, and updates thereto as needed, providing detailed 
instructions regarding the submission of CAT Data by Participants and 
Industry Members to the Plan Processor for entry into the Central 
Repository. The Technical Specifications will be made available on a 
publicly available Web site to be developed and maintained by the Plan 
Processor. The initial Technical Specifications and any Material 
Amendments thereto will require the approval of the Operating Committee 
by Supermajority Vote.
    The Technical Specifications will include a detailed description of 
the following: (1) The specifications for the layout of files and 
records submitted to the Central Repository; (2) the process for the 
release of new data format specification changes; (3) the process for 
industry testing for any changes to data format specifications; (4) the 
procedures for obtaining feedback about and submitting corrections to 
information submitted to the Central Repository; (5) each data element, 
including permitted values, in any type of report submitted to the 
Central Repository; (6) any error messages generated by the Plan 
Processor in the course of validating the data; (7) the process for 
file submissions (and re-submissions for corrected files); (8) the 
storage and access requirements for all files submitted; (9) metadata 
requirements for all files submitted to the CAT System; (10) any 
required secure network connectivity; (11) data security standards, 
which will, at a minimum: (a) Satisfy all applicable regulations 
regarding database security, including provisions of Regulation Systems 
Compliance and Integrity under the Exchange Act (``Reg SCI''); (b) to 
the extent not otherwise provided for under the Plan (including 
Appendix C thereto), set forth such provisions as may be necessary or 
appropriate to comply with Rule 613(e)(4); and (c) comply with industry 
best practices; and (12) any other items reasonably deemed appropriate 
by the Plan Processor and approved by the Operating Committee.
    Amendments to the Technical Specifications may be made only in 
accordance with Section 6.9(c). The process for amending the Technical 
Specifications varies depending on whether the change is material. An 
amendment will be deemed ``material'' if it would require a Participant 
or an Industry Member to engage in significant changes to the coding 
necessary to submit information to the Central Repository pursuant to 
the Plan, or if it is required to safeguard the

[[Page 30630]]

security or confidentiality of the CAT Data. Except for Material 
Amendments to the Technical Specifications, the Plan Processor will 
have the sole discretion to amend and publish interpretations regarding 
the Technical Specifications; however, all non-Material Amendments made 
to the Technical Specifications and all published interpretations will 
be provided to the Operating Committee in writing at least ten days 
before being published. Such non-Material Amendments and published 
interpretations will be deemed approved ten days following provision to 
the Operating Committee unless two unaffiliated Participants call for a 
vote to be taken on the proposed amendment or interpretation. If an 
amendment or interpretation is called for a vote by two or more 
unaffiliated Participants, the proposed amendment must be approved by 
Majority Vote of the Operating Committee. Once a non-Material Amendment 
has been approved or deemed approved by the Operating Committee, the 
Plan Processor will be responsible for determining the specific changes 
to the Central Repository and providing technical documentation of 
those changes, including an implementation timeline.
    Material Amendments to the Technical Specifications require 
approval of the Operating Committee by Supermajority Vote. The 
Operating Committee, by Supermajority Vote, may amend the Technical 
Specifications on its own motion.
Request for Comment
    51. Do Commenters believe that the list of items to be included in 
the Technical Specifications, as set forth in Section 6.9(b) of the CAT 
NMS Plan, is appropriate and reasonable? Do Commenters believe that 
detailed descriptions of any of the listed items should be included in 
the CAT NMS Plan rather than in the Technical Specifications? Do 
Commenters believe that the list addresses all of the areas that should 
be included in the Technical Specifications? Are there other aspects of 
the CAT that require Technical Specifications? If so, please identify 
and explain why the additional Technical Specifications are needed.
    52. Do Commenters believe the Plan Processor should have sole 
discretion to amend and publish interpretations regarding the Technical 
Specifications, except for Material Amendments? Why or why not? What 
discretion or input, if any, should the Operating Committee or other 
parties, including the Advisory Committee, have in amending and 
publishing Technical Specifications interpretations?
    53. How should Technical Specifications be communicated to the 
industry? Why?
    54. What are the incentives for the Operating Committee to review 
the Plan Processor's interpretation of Technical Specifications and 
verify that the interpretation is consistent with the regulatory 
objectives of the Plan? What are the best practices to ensure 
sufficient review by the Operating Committee? What provisions of the 
Plan are in place to ensure that the Operating Committee follows these 
practices? What provisions, if any, could be strengthened? Please 
explain and provide supporting examples and evidence, if available.
    55. The CAT NMS Plan provides that non-Material Amendments and 
published interpretations will be deemed approved ten days following 
provision to the Operating Committee, unless two unaffiliated 
Participants call for a vote to be taken on the proposed amendment or 
interpretation. Do Commenters have any views on this process? If so, 
please explain.
    56. Do Commenters have any views regarding the definition of 
Material Amendments? Is the definition too broad? Too narrow? Please 
explain. Do Commenters have any views on who should be responsible for 
determining whether an amendment to the Technical Specifications is a 
Material Amendment? Do Commenters believe the CAT NMS Plan clearly 
states who shall have the responsibility to make the determination? Do 
Commenters have any views on how the determination should be made? 
Please explain.
    57. The CAT NMS Plan requires that Material Amendments be approved 
by the Operating Committee by Supermajority Vote and allows the 
Operating Committee to amend the Technical Specifications on its own 
motion by Supermajority Vote. Do Commenters have any views on these 
processes? If so, please explain.
    58. The CAT NMS Plan provides that the Plan Processor's business 
continuity planning must include a secondary site for critical staff, 
capable of recovery and restoration of services within 48 hours, with 
the goal of next day recovery. Should the CAT NMS Plan provide 
additional details regarding ``the goal of next day recovery''? Do 
Commenters believe a 48-hour recovery and restoration period is too 
long? Too short? Please explain. Should the CAT NMS Plan impose any 
other requirements on the Plan Processor to better assure the Plan 
Processor is able to transition to the secondary site within the 
specified time frames? If so, what?
H. Surveillance
    Surveillance issues are described in Section 6.10. Using the tools 
provided for in Appendix D, Functionality of the CAT System, each 
Participant will develop and implement a surveillance system, or 
enhance existing surveillance systems, reasonably designed to make use 
of the consolidated information contained in the Central Repository. 
Unless otherwise ordered by the SEC, within fourteen months after the 
Effective Date, each Participant must initially implement a new or 
enhanced surveillance system(s) as required by Rule 613 and Section 
6.10(a) of the Plan. Participants may, but are not required to, 
coordinate surveillance efforts through the use of regulatory services 
agreements and agreements adopted pursuant to Rule 17d-2 under the 
Exchange Act.
    Consistent with Appendix D, Functionality of the CAT System, the 
Plan Processor will provide Participants and the SEC with access to all 
CAT Data stored in the Central Repository. Regulators will have access 
to processed CAT Data through two different methods: (1) An online 
targeted query tool; and (2) user-defined direct queries and bulk 
extracts. The online targeted query tool will provide authorized users 
with the ability to retrieve CAT Data via an online query screen that 
includes the ability to choose from a variety of pre-defined selection 
criteria. Targeted queries must include date(s) and/or time range(s), 
as well as one or more of a variety of fields. The user-defined direct 
queries and bulk extracts will provide authorized users with the 
ability to retrieve CAT Data via a query tool or language that allows 
users to query all available attributes and data sources.
    Extraction of CAT Data will be consistent with all permission 
rights granted by the Plan Processor. All CAT Data returned will be 
encrypted, and PII data will be masked unless users have permission to 
view the PII contained in the CAT Data that has been requested.
    The Plan Processor will implement an automated mechanism to monitor 
direct query usage. Such monitoring will include automated alerts to 
notify the Plan Processor of potential issues with bottlenecks or 
excessively long queues for queries or CAT Data extractions. The Plan 
Processor will provide the Operating Committee or its designee(s) 
details as to how the monitoring will be accomplished and the metrics 
that will be used to trigger alerts.
    The Plan Processor will reasonably assist regulatory Staff 
(including those of Participants) with creating queries. Without 
limiting the manner in which

[[Page 30631]]

regulatory Staff (including those of Participants) may submit queries, 
the Plan Processor will submit queries on behalf of regulatory Staff 
(including those of Participants) as reasonably requested. The Plan 
Processor will staff a CAT help desk, as described in Appendix D, CAT 
Help Desk, to provide technical expertise to assist regulatory Staff 
(including those of Participants) with questions about the content and 
structure of the CAT Data.
Request for Comment
    59. What features of the CAT NMS Plan will facilitate the creation 
of enhanced surveillance systems? Are the minimum functional and 
technical requirements for the Plan Processor set forth in Appendix D 
consistent with the creation of enhanced surveillance systems? What, if 
any, additional requirements or details should be provided in the CAT 
NMS Plan to ensure that the Plan facilitates the creation of enhanced 
surveillance systems?
    60. Under the CAT NMS Plan, will regulatory Staff have appropriate 
access to the Central Repository? Specifically, do Commenters believe 
that the online targeted query tool and user-defined direct queries and 
bulk extracts described in Sections 8.1 and 8.2 of Appendix D will 
enable regulatory Staff to use the data in the Central Repository to 
carry out their surveillance, analysis, and other regulatory functions? 
If not, why not and what should be added? Does the CAT NMS Plan provide 
sufficient detail to determine if regulators will have appropriate 
access? If not, what additional details should be provided?
    61. Do Commenters believe that the provisions in Section 
6.10(c)(ii) of the CAT NMS Plan regarding permission rights granted by 
the Plan Processor, encryption, and masking of PII are appropriate and 
reasonable? Would these provisions affect the ability of Commission or 
SRO regulatory Staff to access and use the data in the Central 
Repository? If so, what additional or different provisions would 
mitigate the impact on regulatory access to and use of the data?
    62. Do Commenters believe that the query monitoring mechanism to be 
implemented by the Plan Processor, as described in Section 6.10(c)(iii) 
of the CAT NMS Plan, is appropriately designed to help enable 
regulators to carry out their regulatory functions? If not, what 
additional details or functionality should be provided? Will the 
provisions regarding Plan Processor assistance of regulatory Staff and 
submission of regulatory Staff queries (Sections 6.10(c)(iv)-(v) of the 
CAT NMS Plan) and the CAT user support functionality (as described in 
Section 10.2 of Appendix D) provide sufficient assistance to regulators 
in carrying out their regulatory functions?
I. Information Security Program
    As set forth in Section 6.12, the Plan Processor is required to 
develop and maintain a comprehensive information security program for 
the Central Repository that contains, at a minimum, the specific 
requirements detailed in Appendix D, Data Security. The information 
security program must be approved and reviewed at least annually by the 
Operating Committee.
Request for Comment
    63. Do Commenters believe the CAT NMS Plan should include a 
discussion of policies and procedures applicable to members of the 
Advisory Committee to ensure the security and confidentiality of the 
operation of the CAT (for example, requiring members of the Advisory 
Committee to enter into a non-disclosure agreement with the Company)? 
If so, what additional measures should be considered?
    64. Do Commenters believe the CAT NMS Plan should detail the 
policies and procedures applicable to regulatory users of the CAT that 
would ensure the security and confidentiality of the CAT Data and the 
operation of the CAT? If so, what measures should be considered? Do 
Commenters have any views on how such policies and procedures should be 
enforced? Please explain.
(6) Financial Matters
    Articles VII and VIII of the Plan address certain financial matters 
related to the Company. In particular, the Plan states that, subject to 
certain special allocations provided for in Section 8.2, any net profit 
or net loss will be allocated among the Participants equally. In 
addition, subject to Section 10.2, cash and property of the Company 
will not be distributed to the Participants unless the Operating 
Committee approves by Supermajority Vote a distribution after fully 
considering the reason that such distribution must or should be made to 
the Participants, including the circumstances contemplated under 
Section 8.3, Section 8.6, and Section 9.3. To the extent a distribution 
is made, all Participants will participate equally in any such 
distribution except as otherwise provided in Section 10.2.
    Article XI addresses the funding of the Company. On an annual basis 
the Operating Committee will approve an operating budget for the 
Company. The budget will include the projected costs of the Company, 
including the costs of developing and operating the CAT System for the 
upcoming year, and the sources of all revenues to cover such costs, as 
well as the funding of any reserve that the Operating Committee 
reasonably deems appropriate for prudent operation of the Company.
    Subject to certain funding principles set forth in Article XI, the 
Operating Committee will have discretion to establish funding for the 
Company, including: (1) Establishing fees that the Participants will 
pay; and (2) establishing fees for Industry Members that will be 
implemented by Participants. In establishing the funding of the 
Company, the Operating Committee will seek to: (1) Create transparent, 
predictable revenue streams for the Company that are aligned with the 
anticipated costs to build, operate and administer the CAT and the 
other costs of the Company; (2) establish an allocation of the 
Company's related costs among Participants and Industry Members that is 
consistent with the Exchange Act, taking into account the timeline for 
implementation of the CAT and distinctions in the securities trading 
operations of Participants and Industry Members and their relative 
impact upon Company resources and operations; (3) establish a tiered 
fee structure in which the fees charged to: (a) CAT Reporters that are 
Execution Venues, including ATSs, are based upon the level of market 
share, (b) Industry Members' non-ATS activities are based upon message 
traffic, and (c) the CAT Reporters with the most CAT-related activity 
(measured by market share and/or message traffic, as applicable) are 
generally comparable (where, for these comparability purposes, the 
tiered fee structure takes into consideration affiliations between or 
among CAT Reporters, whether Execution Venues and/or Industry Members); 
(4) provide for ease of billing and other administrative functions; (5) 
avoid any disincentives such as placing an inappropriate burden on 
competition and a reduction in market quality; and (6) build financial 
stability to support the Company as a going concern. The Participants 
will file with the SEC under Section 19(b) of the Exchange Act any such 
fees on Industry Members that the Operating Committee approves, and 
such fees will be labeled as ``Consolidated Audit Trail Funding Fees.''
    To fund the development and implementation of the CAT, the Company 
will time the imposition and collection of all fees on Participants and 
Industry Members in a manner

[[Page 30632]]

reasonably related to the timing when the Company expects to incur such 
development and implementation costs. In determining fees for 
Participants and Industry Members, the Operating Committee shall take 
into account fees, costs and expenses (including legal and consulting 
fees and expenses) incurred by the Participants on behalf of the 
Company prior to the Effective Date in connection with the creation and 
implementation of the CAT, and such fees, costs and expenses shall be 
fairly and reasonably shared among the Participants and Industry 
Members. Consistent with Article XI, the Operating Committee will adopt 
policies, procedures, and practices regarding the budget and budgeting 
process, assignment of tiers, resolution of disputes, billing and 
collection of fees, and other related matters. As a part of its regular 
review of fees for the CAT, the Operating Committee will have the right 
to change the tier assigned to any particular Person pursuant to this 
Article XI.\78\ Any such changes will be effective upon reasonable 
notice to such Person.
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    \78\ The Commission notes that Section 11.1(b) of the CAT NMS 
Plan states that the Participants would file fees for Industry 
Members approved by the Operating Committee with the Commission. The 
Operating Committee may only change the tier to which a Person is 
assigned in accordance with a fee schedule filed with the 
Commission.
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    The Operating Committee will establish fixed fees to be payable by 
Execution Venues as follows. Each Execution Venue that executes 
transactions, or, in the case of a national securities association, has 
trades reported by its members to its trade reporting facility or 
facilities for reporting transactions effected otherwise than on an 
exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee 
depending on the market share of that Execution Venue in NMS Stocks and 
OTC Equity Securities. The Operating Committee will establish at least 
two and no more than five tiers of fixed fees, based on an Execution 
Venue's NMS Stocks and OTC Equity Securities market share. For these 
purposes, market share will be calculated by share volume. In addition, 
each Execution Venue that executes transactions in Listed Options will 
pay a fixed fee depending on the Listed Options market share of that 
Execution Venue. The Operating Committee will establish at least two 
and no more than five tiers of fixed fees, based on an Execution 
Venue's Listed Options market share, with market share calculated by 
contract volume. Changes to the number of tiers after approval of the 
Plan would require a Supermajority Vote of the Operating Committee and 
Commission approval under Section 19(b) of the Exchange Act, as would 
the establishment of the initial fee schedule and any changes to the 
fee schedule within the tier structure.\79\
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    \79\ The Commission notes that the Participants could choose to 
submit the proposed fee schedule to the Commission as individual 
SROs pursuant to Rule 19b-4 or jointly as Participants to an NMS 
plan pursuant to Rule 608 of Regulation NMS. Because the proposed 
fee schedule would establish fees, whether the Participants 
individually file it pursuant to Section 19(b)(3)(A)(ii) of the Act, 
or jointly file it pursuant to Rule 608(b)(3)(i) of Regulation NMS, 
the proposed fee schedule could take effect upon filing with the 
Commission. See 15 U.S.C. 78s(b)(3)(A)(ii); 17 CFR 242.608(b)(3)(i).
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    The Operating Committee also will establish fixed fees payable by 
Industry Members, based on the message traffic generated by such 
Industry Member. The Operating Committee will establish at least five 
and no more than nine tiers of fixed fees, based on message traffic. 
For the avoidance of doubt, the fixed fees payable by Industry Members 
pursuant to this paragraph will, in addition to any other applicable 
message traffic, include message traffic generated by: (1) An ATS that 
does not execute orders that is sponsored by such Industry Member; and 
(2) routing orders to and from any ATS system sponsored by such 
Industry Member.
    Furthermore, the Operating Committee may establish any other fees 
ancillary to the operation of the CAT that it reasonably determines 
appropriate, including: Fees for the late or inaccurate reporting of 
information to the CAT; fees for correcting submitted information; and 
fees based on access and use of the CAT for regulatory and oversight 
purposes (and not including any reporting obligations).\80\
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    \80\ As it relates to any fees that the Operating Committee may 
impose for access and use of the CAT for regulatory and oversight 
purposes, the Commission interprets the provisions in the Plan 
relating to the collection of fees as applying only to Participants 
and Industry Members, and thus the Commission would not be subject 
to such fees.
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    The Company will make publicly available a schedule of effective 
fees and charges adopted pursuant to the Plan as in effect from time to 
time. Such schedule will be developed after the Plan Processor is 
selected. The Operating Committee will review the fee schedule on at 
least an annual basis and will make any changes to such fee schedule 
that it deems appropriate. The Operating Committee is authorized to 
review the fee schedule on a more regular basis, but will not make any 
changes on more than a semi-annual basis unless, pursuant to a 
Supermajority Vote, the Operating Committee concludes that such change 
is necessary for the adequate funding of the Company.
    The Operating Committee will establish a system for the collection 
of fees authorized under the Plan. The Operating Committee may include 
such collection responsibility as a function of the Plan Processor or 
another administrator. Alternatively, the Operating Committee may use 
the facilities of a clearing agency registered under Section 17A of the 
Exchange Act to provide for the collection of such fees.
    Each Participant will require each Industry Member to pay all 
applicable fees authorized under Article XI within thirty days after 
receipt of an invoice or other notice indicating payment is due (unless 
a longer payment period is otherwise indicated). If an Industry Member 
fails to pay any such fee when due, such Industry Member will pay 
interest on the outstanding balance from such due date until such fee 
is paid at a per annum rate equal to the lesser of: (1) The Prime Rate 
plus 300 basis points; or (2) the maximum rate permitted by applicable 
law. Each Participant will pay all applicable fees authorized under 
Article XI as required by Section 3.7(b).
    Disputes with respect to fees the Company charges Participants 
pursuant to Article XI will be determined by the Operating Committee or 
a Subcommittee designated by the Operating Committee. Decisions by the 
Operating Committee on such matters shall be binding on Participants, 
without prejudice to the rights of any Participant to seek redress from 
the SEC pursuant to SEC Rule 608 or in any other appropriate forum. The 
Participants will adopt rules requiring that disputes with respect to 
fees charged to Industry Members pursuant to Article XI be determined 
by the Operating Committee or a Subcommittee. Decisions by the 
Operating Committee or Subcommittee on such matters will be binding on 
Industry Members, without prejudice to the rights of any Industry 
Member to seek redress from the SEC pursuant to SEC Rule 608 or in any 
other appropriate forum.
Request for Comment
    65. Do Commenters believe that the provisions in the CAT NMS Plan 
regarding the funding and budget of the Company to operate the CAT (as 
described in Article XI) are appropriate and reasonable? Specifically, 
do Commenters believe that the tiered funding model described in 
Section 11.2(c) of the CAT NMS Plan and the fixed-tier funding model 
described in

[[Page 30633]]

Section 11.3 of the CAT NMS Plan are appropriate and reasonable?
    66. What are Commenters' views regarding the methodology in the CAT 
NMS Plan to establish and impose fees on Participants and the industry? 
Do Commenters believe that the fee system described in Sections 11.2 
and 11.3 of the CAT NMS Plan will result in an equitable and fair 
allocation of CAT-related fees between Participants, other types of 
Execution Venues, and Industry Members? Will the fee system in the 
Plan, including consideration of the distinctions in securities trading 
operations, impose higher costs upon or result in any competitive 
advantage to some types of Execution Venues or Industry Members as 
opposed to others? If yes, are those differences in fees appropriate 
and reasonable? Will this proposed fee system create incentives to 
execute orders in certain Execution Venues over others? What 
alternative fee systems, if any, would be more appropriate?
    67. Do Commenters believe that assessing fees based on market share 
and message traffic, as described in Sections 11.2 and 11.3 of the CAT 
NMS Plan, is appropriate and reasonable? Specifically, is it 
appropriate and reasonable to base Industry Member fees on message 
traffic and Execution Venue fees on market share? Will this method of 
calculating fees impose higher costs upon or result in any competitive 
advantage to some types of Execution Venues or Industry Members as 
opposed to others? What fee calculation method, if any, would be more 
appropriate?
    68. Are the tier levels appropriate and reasonable? Why or why not? 
Is the number of tiers contemplated (2-5 for Execution Venues and 5-9 
for Industry Members) appropriate and reasonable? Why or why not?
    69. Do Commenters believe that giving the right to the Operating 
Committee to change the fee tier assigned to any particular Person as 
set forth in Section 11.1(d) of the CAT NMS Plan is appropriate and 
reasonable? If not, why not? What alternative process, if any, would be 
more appropriate?
    70. Do Commenters believe that giving the right to the Operating 
Committee to change the fee tier assigned to any particular Person as 
set forth in Section 11.1(d) of the CAT NMS Plan conflicts with the 
tier structure of fees as set forth in Section 11.2(c) of the CAT NMS 
Plan, which will be based on the market share for Execution Venues, and 
message traffic for Industry Members? Why or why not?
    71. Section 11.1(d) of the CAT NMS Plan also provides that any 
change to a Person's fee tier will be effective upon reasonable notice 
to such Person. Do Commenters believe that a notice to any such Person 
is necessary, given that the CAT NMS Plan provides that a Person will 
change fee tiers based on market share or message traffic, as 
applicable? Why or why not? What should constitute reasonable notice?
    72. Do Commenters believe the Operating Committee's ability to 
establish additional fees for ``access and use of the CAT for 
regulatory and oversight purposes'' (as described in Section 11.3(c) of 
the CAT NMS Plan) is appropriate and reasonable? Would this provision 
affect the ability of regulatory Staff to access and use the data in 
the Central Repository? If so, what additional or different provisions 
would mitigate the impact upon regulatory access to and use of the 
data?
    73. Do Commenters believe that the funding provisions in Section 
11.1 of the CAT NMS Plan provide sufficient authority and guidance to 
the Operating Committee to establish and maintain such reserves as are 
reasonably deemed appropriate by the Operating Committee for the 
prudent operation of the Company? If not, why not?
    74. Do Commenters believe that the provisions in the CAT NMS Plan 
regarding the collection of fees (Section 11.4 of the CAT NMS Plan) and 
fee disputes (Section 11.5 of the CAT NMS Plan) are appropriate and 
reasonable? If not, what alternatives do Commenters suggest?
    75. Do Commenters believe the CAT NMS Plan provides sufficient 
detail regarding the proposed cost allocation among the Plan Processor 
and regulators with respect to hardware and software costs that may be 
required in order to use CAT Data? If not, what are the risks of not 
providing sufficient detail and what requirements should be set forth 
in the CAT NMS Plan? For example, since there will only be one Plan 
Processor, what are the risks of significant costs for regulators to 
the extent regulators will need to contract with the Plan Processor for 
additional computing resources, storage costs and data transfer costs?
    76. Should the Operating Committee be required to consult the 
Advisory Committee when setting fees and performing regular reviews of 
fees? Please explain.
(7) Amendments
    Section 12.3 of the CAT NMS Plan, which governs amendments to the 
Plan, states that, except with respect to the addition of new 
Participants (Section 3.3), the transfer of Company Interest (Section 
3.4), the termination of a Participant's participation in the Plan 
(Section 3.7), amendments to the Selection Plan (Section 5.3 [sic]) and 
special allocations (Section 8.2), any change to the Plan requires a 
written amendment authorized by the affirmative vote of not less than 
two-thirds of all of the Participants, or with respect to Section 3.8 
by the affirmative vote of all the Participants. Such proposed 
amendment must be approved by the Commission pursuant to Rule 608 or 
otherwise becomes effective under Rule 608. Notwithstanding the 
foregoing, to the extent that the SEC grants exemptive relief 
applicable to any provision of this Agreement, Participants and 
Industry Members will be entitled to comply with such provision 
pursuant to the terms of the exemptive relief so granted at the time 
such relief is granted irrespective of whether the LLC Agreement has 
been amended.
(8) Compliance Rule Applicable to Industry Members
    Under Article III, each Participant agrees to comply with and 
enforce compliance by its Industry Members with the provisions of Rule 
613 and the Plan, as applicable, to the Participant and its Industry 
Members. Accordingly, the Participants will endeavor to promulgate 
consistent rules (after taking into account circumstances and 
considerations that may impact Participants differently) requiring 
compliance by their respective Industry Members with the provisions of 
Rule 613 and the Plan.
(9) Plan Appendices
    The Plan includes three appendices.\81\ Appendix A provides the 
Consolidated Audit Trail National Market System Plan Request for 
Proposal, as issued February 26, 2013 and subsequently updated. In 
addition, Rule 613(a)(1) requires that the Plan discuss twelve 
considerations that explain the choices made by the Participants to 
meet the requirements specified in Rule 613 for the CAT. In accordance 
with this requirement, the Participants have addressed each of the 
twelve considerations in Appendix C. Finally, Appendix D describes the 
technical requirements for the Plan Processor.
---------------------------------------------------------------------------

    \81\ Appendix B is reserved for future use.
---------------------------------------------------------------------------

b. Governing or Constituent Documents
    Rule 608 requires copies of all governing or constituent documents 
relating to any person (other than a self-regulatory organization) 
authorized to implement or administer such plan on behalf of its 
sponsors. The Participants will submit to the Commission such

[[Page 30634]]

documents related to the Plan Processor when the Plan Processor is 
selected.
c. Development and Implementation Phases
    The terms of the Plan will be effective immediately upon approval 
of the Plan by the Commission (the ``Effective Date''). The Plan sets 
forth each of the significant phases of development and implementation 
contemplated by the Plan, together with the projected date of 
completion of each phase. These include the following, each of which is 
subject to orders otherwise by the Commission:

    Within two months after the Effective Date, the Participants 
will jointly select the winning Shortlisted Bid and the Plan 
Processor pursuant to the process set forth in Article V. Following 
the selection of the Initial Plan Processor, the Participants will 
file with the Commission a statement identifying the Plan Processor 
and including the information required by Rule 608;
    Within four months after the Effective Date, each Participant 
will, and, through its Compliance Rule, will require its Industry 
Members to, synchronize its or their Business Clocks and certify to 
the Chief Compliance Officer (in the case of Participants) or the 
applicable Participant (in the case of Industry Members) that it has 
met this requirement;
    Within six months after the Effective Date, the Participants 
must jointly provide to the SEC a document outlining how the 
Participants could incorporate into the CAT information with respect 
to equity securities that are not NMS Securities,\82\ including 
Primary Market Transactions in securities that are not NMS 
Securities, which document will include details for each order and 
Reportable Event that may be required to be provided, which market 
participants may be required to provide the data, the implementation 
timeline, and a cost estimate;
---------------------------------------------------------------------------

    \82\ In the Amendment to the CAT NMS Plan, Section 6.11 excludes 
OTC Equity Securities from the document the Participants would 
submit to the Commission, since the Participants plan to include OTC 
Equity Securities as well as NMS Securities in the initial phase in 
of CAT.
---------------------------------------------------------------------------

    Within one year after the Effective Date, each Participant must 
report Participant Data to the Central Repository;
    Within fourteen months after the Effective Date, each 
Participant must implement a new or enhanced surveillance system(s);
    Within two years after the Effective Date, each Participant 
must, through its Compliance Rule, require its Industry Members 
(other than Small Industry Members) to report Industry Member Data 
to the Central Repository; and
    Within three years after the Effective Date, each Participant 
must, through its Compliance Rule, require its Small Industry 
Members to provide Industry Member Data to the Central Repository.

    In addition, Industry Members and Participants will be required to 
participate in industry testing with the Central Repository on a 
schedule to be determined by the Operating Committee. Furthermore, 
Appendix C, A Plan to Eliminate Existing Rules and Systems (SEC Rule 
613(a)(1)(ix)), and Appendix D, Data Types and Sources, set forth 
additional implementation details concerning the elimination of rules 
and systems.
    The Chief Compliance Officer will appropriately document objective 
milestones to assess progress toward the implementation of this 
Agreement.
Request for Comment
    77. Under the CAT NMS Plan, the SROs' rules would require that 
their members become CAT Reporters. What mechanism should there be to 
ensure that all CAT Reporters would participate in all pre-
implementation activities, including connectivity and testing? Please 
explain.
    78. Do Commenters believe that the CAT NMS Plan allows for 
sufficient pre-implementation testing support for CAT Reporters, 
including providing CAT Reporter feedback and accuracy reports? If not, 
what requirements should be added to the CAT NMS Plan?
    79. Do Commenters believe that full implementation of the CAT would 
allow for the retirement of OATS? Please explain. Are any identified 
gaps with respect to OATS' data elements not addressed in the CAT NMS 
Plan? If yes, what are they?
    80. The CAT NMS Plan provides for a single Plan Processor. As such, 
do Commenters believe there are adequate and appropriate incentives for 
continuous CAT innovation and cost reductions by the Plan Processor and 
the Participants? If not, explain and describe what additional 
incentives may be implemented in the CAT NMS Plan or related 
documentation. What competition might be encouraged to lead to further 
innovations and reduced costs for future CAT technologies?
    81. Do Commenters believe that the proposed CAT NMS Plan sets forth 
acceptable milestones to measure the progress of developing and 
implementing the CAT? Why or why not?
    82. The CAT NMS Plan sets forth significant phases of development 
and implementation and a projected timetable for each stage. Are these 
projections appropriate and reasonable? If not, why not, and what is a 
more appropriate and reasonable timeline?
    83. The CAT NMS Plan's ``Access to the Central Repository for 
Regulators'' Section \83\ sets forth a milestone requiring the 
publication of the finalized document detailing methods of access to 
the Central Repository one (1) month before Participants are required 
to begin reporting. Do Commenters believe this allows sufficient time 
for Participants to build applications to access the Central Repository 
when CAT goes live? If not, please explain and describe any related 
modifications to this Section.
---------------------------------------------------------------------------

    \83\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
C.10(d).
---------------------------------------------------------------------------

d. Analysis of Impact on Competition \84\
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    \84\ The Commission reiterates that Section III.A of this 
Notice, including this subsection III.A.3.d, is substantially as 
prepared and submitted by the SROs to the Commission. The 
Commission's Economic Analysis in respect of the Plan's impact on 
competition is set forth in Section IV of this Notice.
---------------------------------------------------------------------------

    The Plan states that it does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Exchange Act. Section 8 of Appendix C, An Analysis of the Impact on 
Competition, Efficiency and Capital Formation, discusses the 
competition impact of the Plan in detail.\85\ In addition, the 
Participants do not believe that the Plan introduces terms that are 
unreasonably discriminatory for the purposes of Section 11A(c)(1)(D) of 
the Exchange Act.\86\ As noted in Section III.A.3.a, supra, the 
Participants are aware that potential conflicts of interest are raised 
because a Participant, or an Affiliate of a Participant, may be both 
submitting a Bid (or participating in a Bid (e.g., as a subcontractor)) 
and participating in the evaluation of Bids to select the Plan 
Processor. As described in Section III.A.3.a, the Selection Plan 
previously approved by the Commission and incorporated in the Plan 
includes multiple provisions designed to mitigate the potential impact 
of these conflicts by imposing restrictions on the Voting Senior 
Officers and by requiring the recusal of Bidding Participants for

[[Page 30635]]

certain votes taken by the Selection Committee.
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    \85\ The Commission notes that as required under Rule 
613(a)(1)(viii), the SROs set forth in the CAT NMS Plan a discussion 
of their analysis of the impact on competition, efficiency and 
capital formation of creating, implementing, and maintaining the CAT 
NMS Plan. See 17 CFR 242.613(a)(1)(viii) and CAT NMS Plan, supra 
note 3, at Appendix C, Section B.8. The SROs' analysis in Section 
B.8 of Appendix C to the CAT NMS Plan, which is more detailed than 
as set forth in this Section III of this Notice, is organized as 
follows: (a) Impact on Competition--both for Participants and 
Broker-Dealers, (b) Impact on Efficiency, (c) Impact on Capital 
Formation, and (d) Impacts of the CAT NMS Plan Governance on 
Efficiency, Competition, and Capital Formation. See CAT NMS Plan, 
supra note 3, at Appendix C, Section B.8. The Commission's analysis 
in respect of the Plan's impact on competition, efficiency and 
capital formation includes discussions of the SROs' analysis 
regarding the same and is in Section IV of this Notice. See Section 
IV.G, infra.
    \86\ 15 U.S.C. 78k-1(c)(1)(D).
---------------------------------------------------------------------------

e. Written Understanding or Agreements Relating to Interpretation of, 
or Participation in, the Plan
    The Participants have no written understandings or agreements 
relating to interpretations of, or participation in, the Plan other 
than those set forth in the Plan itself. For example, Section 
4.3(a)(iii) states that the Operating Committee only may authorize the 
interpretation of the Plan by Majority Vote, Section 6.9(c)(i) 
addresses interpretations of the Technical Specifications, and Section 
8.2 addresses the interpretation of Sections 8.1 and 8.2. In addition, 
Section 3.3 sets forth how any entity registered as a national 
securities exchange or national securities association under the 
Exchange Act may become a Participant.
f. Dispute Resolution
    The Plan does not include a general provision addressing the method 
by which disputes arising in connection with the operation of the Plan 
will be resolved. The Plan does, however, provide the means for 
resolving disputes regarding the Participation Fee. Specifically, 
Article III states that, in the event that the Company and a 
prospective Participant do not agree on the amount of the Participation 
Fee, such amount will be subject to the review by the SEC pursuant to 
Section 11A(b)(5) of the Exchange Act.\87\ In addition, the Plan 
addresses disputes with respect to fees charged to Participants and 
Industry Members pursuant to Article XI. Specifically, such disputes 
will be determined by the Operating Committee or a Subcommittee 
designated by the Operating Committee. Decisions by the Operating 
Committee or such designated Subcommittee on such matters will be 
binding on Participants and Industry Members, without prejudice to the 
rights of any Participant or Industry Member to seek redress from the 
SEC pursuant to Rule 608 or in any other appropriate forum.
---------------------------------------------------------------------------

    \87\ 15 U.S.C. 78k-1(b)(5).
---------------------------------------------------------------------------

* * * * *
    This marks the end of the statement of purpose as set forth above 
and as substantially prepared and submitted by the SROs.
B. Summary of Additional CAT NMS Plan Provisions and Request for 
Comment
    The Commission requests and encourages any interested person to 
comment generally on the proposed CAT NMS Plan. In addition to the 
specific requests for comment throughout the release, the Commission 
requests general comment on all aspects of the proposed CAT NMS Plan. 
The Commission encourages Commenters to provide information regarding 
the advantages and disadvantages of each aspect of the proposed CAT NMS 
Plan. The Commission invites Commenters to provide views and data as to 
the costs and benefits associated with the proposed CAT NMS Plan. The 
Commission also seeks comment regarding other matters that may have an 
effect on the proposed CAT NMS Plan.
1. Reporting Procedures
    The CAT NMS Plan requires CAT Reporters to comply with specific 
reporting procedures when reporting CAT Data to the Central 
Repository.\88\ Specifically, CAT Reporters must format CAT Data to 
comply with the format specifications approved by the Operating 
Committee.\89\ CAT Reporters must record CAT Data contemporaneously 
with the applicable Reportable Event \90\ and report such data to the 
Central Repository by 8:00 a.m. Eastern Time on the next Trading 
Day.\91\ The obligation to report CAT Data applies to ``each NMS 
Security registered or listed for trading on [a national securities] 
exchange or admitted to unlisted trading privileges on such exchange,'' 
and ``each Eligible Security for which transaction reports are required 
to be submitted to such [national securities] association.'' \92\ 
Further, the Participants are required to adopt Compliance Rules \93\ 
that require Industry Members, subject to their SRO jurisdiction, to 
report CAT Data.\94\
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    \88\ See CAT NMS Plan, supra note 3, at Sections 6.3-6.4; 
Appendix D, at Section 2.1.
    \89\ See id. at Sections 6.3(a), 6.4(a). The CAT NMS Plan also 
requires that the Operating Committee-approved format must be a 
format specified by the Plan Processor and Rule 613 compliant.
    \90\ See id. at Section 6.3(b)(i) and Section 6.4(b)(i).
    \91\ See id. at Section 6.3(b)(ii), Section 6.4(b)(ii), and 
Appendix C, Section A.1(a)(ii). Participants may voluntarily report 
CAT Data prior to the 8:00 a.m. Eastern Time deadline. Id. The CAT 
NMS Plan defines ``Trading Day'' as the date ``as is determined by 
the Operating Committee.'' The CAT NMS Plan also provides that ``the 
Operating Committee may establish different Trading Days for NMS 
Stocks (as defined in SEC Rule 600(b)(47), Listed Options, OTC 
Equity Securities, and any other securities that are included as 
Eligible Securities from time to time.'' Id. at Section 1.1.
    \92\ See id. at Section 6.3(c)(i)-(ii) and Section 6.4(c)(i)-
(ii).
    \93\ The CAT NMS Plan defines the ``Compliance Rule'' to mean 
``with respect to a Participant, the rules promulgated by such 
Participant as contemplated by Section 3.11.'' Id. at Section 1.1. 
Section 3.11 of the CAT NMS Plan provides that ``each Participant 
shall comply with and enforce compliance, as required by SEC Rule 
608(c), by its Industry Members with the provisions of SEC Rule 613 
and of [the LLC Agreement], as applicable, to the Participant and 
its Industry Members. The Participants shall endeavor to promulgate 
consistent rules (after taking into account circumstances and 
considerations that may impact Participants differently) requiring 
compliance by their respective Industry Members with the provisions 
of SEC Rule 613 and [the LLC Agreement].'' Id. at Section 3.11.
    \94\ See id. at Section 6.4(c)(i)-(ii).
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    The CAT NMS Plan requires specific data elements of CAT Data that 
must be recorded and reported to the Central Repository upon: (i) 
``original receipt or origination of an order,'' \95\ (ii) ``routing of 
an order,'' \96\ and (iii) ``receipt of an order that has been 
routed.'' \97\ Additionally, the CAT NMS Plan requires that a CAT 
Reporter must record and report data related to an ``order [that] is 
modified or cancelled,'' \98\ and an ``order [that] is executed, in 
whole or in part,'' \99\ as well

[[Page 30636]]

as ``other information or additional events as may be prescribed in 
Appendix D, Reporting and Linkage Requirements.'' \100\ The CAT NMS 
Plan also requires Industry Member CAT Reporters to report additional 
data elements for (i) an ``order [that] is executed, in whole or in 
part,'' \101\ (ii) a ``trade [that] is cancelled,'' \102\ or (iii) 
``original receipt or origination of an order.'' \103\ Further, each 
Participant shall, through Compliance Rules, require Industry Members 
to record and report to the Central Repository information or 
additional events as may be prescribed to accurately reflect the 
complete lifecycle of each Reportable Event.\104\
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    \95\ For ``original receipt or origination of an order,'' the 
CAT NMS Plan specifies the following data elements: (i) Firm 
Designated ID(s) for each Customer; (ii) CAT-Order-ID; (iii) SRO-
Assigned Market Participant Identifier of the Industry Member 
receiving or originating the order; (iv) date of order receipt or 
origination; (v) time of order receipt or origination (using time 
stamps pursuant to Section 6.8 of the CAT NMS Plan); and (vi) 
Material Terms of the Order. Id. at Section 6.3(d)(i).
    \96\ For ``routing of an order,'' the CAT NMS Plan specifies the 
following data elements: (i) CAT-Order-ID; (ii) date on which the 
order is routed; (iii) time at which the order is routed (using time 
stamps pursuant to Section 6.8 of the CAT NMS Plan); (iv) SRO-
Assigned Market Participant Identifier of the Industry Member or 
Participant routing the order; (v) SRO-Assigned Market Participant 
Identifier of the Industry Member or Participant to which the order 
is being routed; (vi) if routed internally at the Industry Member, 
the identity and nature of the department or desk to which the order 
is routed; and (vii) Material Terms of the Order. Id. at Section 
6.3(d)(ii).
    \97\ For ``receipt of an order that has been routed,'' the CAT 
NMS Plan specifies the following data elements: (i) CAT-Order-ID; 
(ii) date on which the order is received; (iii) time at which the 
order is received (using time stamps pursuant to Section 6.8); (iv) 
SRO-Assigned Market Participant Identifier of the Industry Member or 
Participant receiving the order; (v) SRO-Assigned Market Participant 
Identifier of the Industry Member or Participant routing the order; 
and (vi) Material Terms of the Order. Id. at Section 6.3(d)(iii).
    \98\ For an ``order [that] is modified or cancelled,'' the CAT 
NMS Plan specifies the following data elements: (i) CAT-Order-ID; 
(ii) date the modification or cancellation is received or 
originated; (iii) time at which the modification or cancellation is 
received or originated (using time stamps pursuant to Section 6.8 of 
the CAT NMS Plan); (iv) price and remaining size of the order, if 
modified; (v) other changes in the Material Terms of the Order, if 
modified; and (vi) whether the modification or cancellation 
instruction was given by the Customer or was initiated by the 
Industry Member or Participant. Id. at Section 6.3(d)(iv).
    \99\ For an ``order [that] is executed, in whole or in part,'' 
the CAT NMS Plan specifies the following data elements: (i) CAT-
Order-ID; (ii) date of execution; (iii) time of execution (using 
time stamps pursuant to Section 6.8 of the CAT NMS Plan); (iv) 
execution capacity (principal, agency or riskless principal); (v) 
execution price and size; (vi) SRO-Assigned Market Participant 
Identifier of the Participant or Industry Member executing the 
order; and (vii) whether the execution was reported pursuant to an 
effective transaction reporting plan or the Plan for Reporting of 
Consolidated Options Last Sale Reports and Quotation Information. 
Id. at Section 6.3(d)(v).
    \100\ See id. at Section 6.3(d)(vi).
    \101\ For an ``order [that] is executed, in whole or in part,'' 
the CAT NMS Plan specifies the following additional data elements: 
(i) An Allocation Report; (ii) SRO-Assigned Market Participant 
Identifier of the clearing broker or prime broker, if applicable; 
and (iii) CAT-Order-ID of any contra-side order(s). Id. at Section 
6.4(d)(ii)(A).
    \102\ For a ``trade [that] is cancelled,'' the CAT NMS Plan 
specifies the following additional data element: A cancelled trade 
indicator. Id. at Section 6.4(d)(ii)(B).
    \103\ For ``original receipt or origination of an order,'' the 
CAT NMS Plan specifies the following additional data element(s): The 
Firm Designated ID, Customer Account Information, and Customer 
Identifying Information for the relevant Customer. Id. at Section 
6.4(d)(ii)(C).
    \104\ Id. at Appendix D, Section 3.
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Request for Comment
    84. Do Commenters believe that the data recording, reporting, and 
formatting procedures described in the CAT NMS Plan are appropriate and 
reasonable? Would providing additional details or requirements on these 
procedures enhance the quality of CAT Data reported to the Central 
Repository or the efficiency and cost-effectiveness of the CAT?
    85. Do Commenters believe that the CAT NMS Plan, including Appendix 
D thereto, requires sufficient outreach, support, training, guidance 
and/or documentation to ensure that CAT Reporters are able to make data 
transmissions to the Central Repository that are complete and timely? 
If not, please explain. Describe what, if any, further requirements may 
be needed.
    86. Do Commenters believe that the CAT NMS Plan should have a 
formal communications plan, other than the public Web site, to provide 
CAT Reporters the information they would need in order to set-up or 
configure their systems to record and report CAT Data to the Central 
Repository? If so, how, when, and by whom should such information be 
disseminated to CAT Reporters?
    87. Do Commenters believe the Plan should require a specific method 
for entering CAT Data upon each CAT Reportable Event or upon updates 
and corrections to CAT Reportable Events? If so, what method? Please 
explain.
    88. Do Commenters believe that the CAT NMS Plan should include a 
requirement that the Participants and the Plan Processor set forth a 
more detailed schedule, with milestones, for CAT Reporters to adhere to 
in setting-up or configuring their systems to become CAT Data reporting 
compliant? If so, please explain and describe what details and 
milestones should be included in the schedule (e.g., publication of 
Technical Specifications and announcements of CAT Reporter-facing 
technology changes).
2. Timeliness of Data Reporting
    Section 6.3(b)(ii) of the CAT NMS Plan requires each Participant to 
report Participant Data to the Central Repository by 8:00 a.m. Eastern 
Time on the Trading Day following the day the Participant records such 
data.\105\ Additionally, a Participant may voluntarily report such data 
prior to this deadline.\106\ Section 6.4(b)(ii) states that each 
Participant shall, through its Compliance Rule, require its Industry 
Members to report Recorded Industry Member Data to the Central 
Repository by 8:00 a.m. Eastern Time on the Trading Day following the 
day the Industry member records such data, and Received Industry Member 
Data to the Central Repository by 8:00 a.m. Eastern Time on the Trading 
Day following the day the Industry Member receives such data.\107\ 
Section 6.4(b)(ii) of the CAT NMS Plan also states that each 
Participant shall, through its Compliance Rule, permit its Industry 
Members to voluntarily report such data prior to the applicable 8:00 
a.m. Eastern Time deadline.\108\
---------------------------------------------------------------------------

    \105\ See CAT NMS Plan, supra note 3, at Section 6.3(b)(ii); see 
also id. at Appendix C, Section A.1(a)(ii); Appendix D, Sections 
3.1, 6.1.
    \106\ Id. at Section 6.3(b)(ii).
    \107\ Id. at Section 6.4(b)(ii).
    \108\ Id.
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Request for Comment
    89. The CAT NMS Plan requires that all Participants report 
Participant Data to the Central Repository by 8:00 a.m. Eastern Time on 
the Trading Day following the day the Participant records such 
data,\109\ and that Industry Members report Recorded Industry Member 
Data to the Central Repository by 8:00 a.m. Eastern Time on the Trading 
Day following the day the Industry Member records such data \110\ and 
Received Industry Member Data to the Central Repository by 8:00 a.m. 
Eastern Time on the Trading Day following the day the Industry Member 
receives such data.\111\ Do Commenters believe that the CAT NMS Plan 
provides sufficient detail and information to determine whether the 
applicable 8:00 a.m. Eastern Time data reporting deadlines provided in 
the CAT NMS Plan are achievable? If not, why not?
---------------------------------------------------------------------------

    \109\ Id. at Section 6.3(b)(ii).
    \110\ Id. at Section 6.4(b)(ii).
    \111\ Id.
---------------------------------------------------------------------------

    90. Do Commenters believe that CAT Reporters will submit their 
reports at or about the same time? If all or most of the CAT Reporters 
would report at or just before 8:00 a.m. Eastern Time, what, if any, 
impact would there be on the necessary CAT infrastructure? Would this 
place an excessive burden on the Plan Processor? Do Commenters believe 
this would increase operational risk and/or increase costs? If so, 
please explain. Are there alternative reporting mechanisms that could 
reduce such risks?
    91. The CAT NMS Plan provides that the Plan Processor must be able 
to handle two times the historical peak data to ensure that, if a 
significant number of CAT Reporters choose to submit data at or around 
the same time, the Plan Processor could handle the influx of data.\112\ 
Do Commenters believe that the SROs' estimate of capacity is 
sufficient? If not, why not and what capacity should be required?
---------------------------------------------------------------------------

    \112\ Id. at Appendix C, Section A.1(a)(ii); see also id. at 
Section IV.H.2.g., infra.
---------------------------------------------------------------------------

    92. Do Commenters believe that the CAT NMS Plan allocates, or 
requires the Plan Processor to have, sufficient resources to work with 
the approximately 1,800 CAT Reporters that would, under the CAT NMS 
Plan, have to establish secure connections over which CAT Data will 
flow from their systems to the Central Repository? Do Commenters 
believe that the Plan Processor could implement the CAT Reporters' 
Central Repository connections nearly simultaneously without 
compromising testing periods and implementation timelines?
3. Uniform Format
    The CAT NMS Plan does not mandate the format in which data must be 
reported to the Central Repository.\113\ Appendix D states that the 
Plan

[[Page 30637]]

Processor will determine the electronic format in which data must be 
reported, and that the format will be described in the Technical 
Specifications.\114\ Appendix C specifies that CAT Reporters could be 
required to report data either in a uniform electronic format, or in a 
manner that would allow the Central Repository to convert the data to a 
uniform electronic format, for consolidation and storage.\115\ 
Similarly, Sections 6.3(a) and 6.4(a) of the CAT NMS Plan require that 
CAT Reporters report data to the Central Repository in a format or 
formats specified by the Plan Processor, approved by the Operating 
Committee, and compliant with Rule 613.\116\
---------------------------------------------------------------------------

    \113\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
D.12(f); see also id. at Appendix C, Section A.1(a).
    \114\ Id. at Appendix D, Section 2.1. Appendix D states that 
more than one format may be allowed to support the various market 
participants that would report information to the Central 
Repository. Id.; see also id. at Section 6.9.
    \115\ Id. at Appendix C, Section A.1(b).
    \116\ Id. at Section 6.3(a) and Section 6.4(a).
---------------------------------------------------------------------------

    The CAT NMS Plan requires that data reported to the Central 
Repository be stored in an electronic standard format.\117\ 
Specifically, Section 6.5(b)(i) of the CAT NMS Plan requires the 
Central Repository to retain the information collected pursuant to Rule 
613(c)(7) and (e)(7) in a convenient and usable standard electronic 
data format that is directly available and searchable electronically 
without any manual intervention by the Plan Processor for a period of 
not less than six (6) years.\118\ Such data must be linked when it is 
made available to the Participant's regulatory Staff and the 
Commission.\119\
---------------------------------------------------------------------------

    \117\ Pursuant to the Plan, for data consolidation and storage, 
as noted above, such data must be reported in a uniform electronic 
format or in a manner that would allow the Central Repository to 
convert the data to a uniform electronic format. Id. at Appendix C, 
Section A.1(b).
    \118\ Id. at Section 6.5(b)(i).
    \119\ Id.
---------------------------------------------------------------------------

Request for Comment
    93. The CAT NMS Plan provides that CAT Reporters could be required 
to report data either in a uniform electronic format, or in a manner 
that would allow the Central Repository to convert the data to a 
uniform electronic format, for consolidation and storage. Do Commenters 
believe that if data is reported to the Central Repository in a non-
uniform format, the proposed CAT NMS Plan includes sufficient 
requirements or details to determine whether the Central Repository 
could reliably and accurately convert such data to a uniform electronic 
format, for consolidation and storage, without affecting the quality of 
the data? If not, what additional requirements or details should be 
provided in the CAT NMS Plan prior to the Commission's approval of such 
plan?
    94. If Commenters believe that it is not necessary to provide 
additional requirements or details, if any, in the CAT NMS Plan, what 
additional requirements or details should be included in the Technical 
Specifications to determine whether the Central Repository could 
reliably and accurately convert such data to a uniform electronic 
format, for consolidation and storage?
    95. Do Commenters believe the CAT NMS Plan's lack of a mandated 
uniform format in which data must be reported to the Central Repository 
would affect the accuracy of CAT Data collected and maintained under 
the CAT? If so, how? Would reporting data in a uniform format result in 
greater accuracy? If so, please explain.
    96. Do Commenters believe the CAT NMS Plan's lack of a mandated 
uniform format in which data must be reported to the Central Repository 
would affect the completeness of CAT Data collected and maintained 
under the CAT? If so, how? Would reporting data in a uniform format 
result in more complete CAT Data? If so, please explain.
    97. Do Commenters believe the CAT NMS Plan's lack of a mandated 
uniform format in which data must be reported to the Central Repository 
would affect the accessibility of CAT Data collected and maintained 
under the CAT? If so, how? Would reporting data in a uniform format 
result in a different level of accessibility? If so, please explain.
    98. Do Commenters believe allowing CAT Reporters to report data to 
the Central Repository in a non-uniform format would affect the 
timeliness of data collected and maintained under the CAT? How would 
the requirement that the Central Repository convert non-uniform data to 
a uniform format affect the timeliness of the data collected and 
maintained under the CAT? Would reporting data in a uniform format 
result in a different level of timeliness of data reporting? If so, 
please explain.
    99. Do Commenters believe that allowing CAT Reporters to report 
data to the Central Repository in a non-uniform format is more 
efficient and cost-effective than requiring data to be reported in a 
uniform format? Would allowing CAT Reporters to report data to the 
Central Repository in a non-uniform format merely transfer the costs 
from individual CAT Reporters to the Central Repository? Would 
centralization of the costs of converting data to a uniform format 
reduce costs? Please explain.
    100. Do Commenters believe that allowing CAT Reporters to report 
data to the Central Repository in a non-uniform format would affect the 
security and confidentiality of CAT Data? If so, how? Would reporting 
data in a uniform format create different security or confidentiality 
concerns? If so, please explain.
4. Clock Synchronization
    Pursuant to Section 6.8(a) of the CAT NMS Plan, each Participant 
and Industry Member, (through the Compliance Rule adopted by every 
Participant), must synchronize its Business Clocks,\120\ at a minimum, 
to within 50 milliseconds of the time maintained by the NIST, 
consistent with industry standards.\121\ The Participants believe that 
a 50-millisecond clock offset tolerance represents the current industry 
clock synchronization standard.\122\ Industry Members must maintain 
such a clock synchronization standard; certify periodically (according 
to a schedule to be defined by the Operating Committee) that their 
Business Clocks meet the requirements of the Compliance Rule; and 
report to the Plan Processor and the Participant any violation of the 
Compliance Rule pursuant to the thresholds set by the Operating 
Committee.\123\ Pursuant to Section 6.8(c) of the CAT NMS Plan, the 
Chief Compliance Officer, in conjunction with the Participants and 
other appropriate Industry Member advisory groups, annually must 
evaluate and make a recommendation to the Operating Committee as to 
whether the industry standard has evolved such that the clock 
synchronization standard should be tightened.\124\
---------------------------------------------------------------------------

    \120\ The CAT NMS Plan defines a ``Business Clock'' to mean ``a 
clock used to record the date and time of any Reportable Event 
required to be reported under SEC Rule 613.'' Id. at Section 1.1.
    \121\ Id. at Section 6.8(a)(i)-(ii).
    \122\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.3(c).
    \123\ Id. at Section 6.8(a)(ii).
    \124\ Id. at Section 6.8(c).
---------------------------------------------------------------------------

    Appendix C describes the process by which Participants determined 
that a 50-millisecond clock offset tolerance was consistent with 
industry standards.\125\ To that end, the Participants and Industry 
Members reviewed their respective internal clock synchronization 
technology practices,\126\ and reviewed the results of The Financial 
Information Forum (``FIF'') Clock Offset Survey, a clock 
synchronization survey conducted by FIF.\127\ In light of their 
internal reviews

[[Page 30638]]

and the FIF Clock Offset Survey, the Participants concluded that a 
clock offset tolerance of 50 milliseconds represented an aggressive but 
achievable standard.\128\
---------------------------------------------------------------------------

    \125\ Id. at Appendix C, Section D.12(p).
    \126\ Id.
    \127\ Id. at Appendix C, n.236. See Financial Information Forum, 
FIF Clock Offset Survey Preliminary Report (February 17, 2015), 
available at http://www.catnmsplan.com/industryfeedback/p602479.pdf 
and http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p602479.pdf. (``FIF Clock Offset Study'').
    \128\ Id. The Participants note in Appendix C that according to 
the FIF Clock Offset Survey, annual maintenance costs would escalate 
to 102%, 123% and 242% if clock synchronization standards moved to 5 
milliseconds, 1 millisecond and 100 microseconds, respectively, 
indicating that maintenance costs rapidly escalate as clock 
synchronization standards increase beyond 50 milliseconds. Id.
---------------------------------------------------------------------------

    Appendix C discusses mechanisms to ensure compliance with the 50-
millisecond clock offset tolerance.\129\ The Participants anticipate 
that they and Industry Members will adopt policies and procedures to 
verify the required clock synchronization each trading day before the 
market opens, as well as periodically throughout the trading day.\130\ 
The Participants also anticipate that they and Industry Members will 
document their clock synchronization procedures and maintain a log 
recording the time of each clock synchronization performed, and the 
result of such synchronization, specifically identifying any 
synchronization revealing any clock offset between the Participant's or 
Industry Member's Business Clock and the time maintained by the NIST 
exceeding 50 milliseconds.\131\ The CAT NMS Plan states that once both 
large and small broker-dealers begin reporting to the Central 
Repository, and as clock synchronization technology matures further, 
the Participants will assess, in accordance with Rule 613, tightening 
CAT's clock synchronization standards to reflect changes in industry 
standards.\132\
---------------------------------------------------------------------------

    \129\ See id. at Appendix C, Section A.3(c).
    \130\ See id.
    \131\ See id. It was noted that such a log would include results 
for a period of not less than five years ending on the then current 
date. Id.
    \132\ See id. at Appendix C, Section D.12(p).
---------------------------------------------------------------------------

Request for Comment \133\
---------------------------------------------------------------------------

    \133\ See Sections IV.D.3, IV.E.4 and IV.H.5, infra, for further 
clock synchronization related requests for comment.
---------------------------------------------------------------------------

    101. Do Commenters believe that a clock offset tolerance of 50 
milliseconds is appropriate and reasonable, in light of the increase in 
the speed of trading over the last several years? If not, what would an 
appropriate and reasonable standard be?
    102. What are current clock synchronization practices? Do 
Commenters believe that current industry clock synchronization 
practices are sufficiently rigorous in light of current trading speeds? 
If not, please explain.
    103. Would a smaller clock offset tolerance be reasonably 
achievable? If so, please identify such tolerance and any incremental 
additional costs that achieving that smaller clock offset tolerance 
might entail.
    104. If Commenters believe that, in light of the current speed of 
trading, the clock offset tolerance should be more rigorous, what, if 
any transition period would be reasonable and appropriate for reducing 
the clock offset tolerance standards of CAT?
    105. What is the range of clock synchronization practices across 
the industry?
    106. Do Commenters believe the range of clock synchronization 
practices should be considered when considering the appropriate clock 
synchronization standard?
    107. If an SRO or broker-dealer can or does synchronize its clocks 
to an offset tolerance more rigorous than 50 milliseconds, do 
Commenters believe that that SRO or broker-dealer should be required to 
synchronize its clocks to that standard? Why or why not? If so, how, if 
at all, would that affect sequencing of Reportable Events in CAT?
    108. Do Commenters believe that certain categories of market 
participants should be held to a smaller or larger clock offset 
tolerance? If so, what category of market participant and why? How, if 
at all, would that affect sequencing of Reportable Events in CAT?
    109. Do Commenters believe a 50-millisecond clock offset tolerance 
would materially impair the quality and accuracy of CAT Data? If so, 
please explain. Would such a standard undermine the ability of the 
Central Repository to accurately and reliably link order and sequence 
event data across venues, or combine it with other sources of trade and 
order data? If so, please explain. Is there a benefit from applying the 
same uniform clock offset tolerance to all market participants, or 
would a variable clock offset tolerance approach be preferable? For 
example, should a high-volume market participant trading on multiple 
exchanges and ATSs have the same clock offset tolerance as a small 
retail-focused regional office? Would the benefits of a smaller clock 
offset tolerance for service bureaus that report but do not record 
order events be lower than for other types of CAT Reporters? Would the 
benefits of a smaller clock offset tolerance for clearing brokers that 
record and report information available only after an execution be 
lower than for other types of CAT Reporters? Please explain.
    110. The CAT NMS Plan provides that as time synchronization 
standards evolve, the Participants would assess, on an annual basis, 
the ability to tighten the clock synchronization standards for CAT to 
reflect changes in industry standards. Do Commenters believe that this 
would establish an appropriately rigorous process and schedule for the 
Participants to evaluate whether the clock synchronization standard 
should be tightened? Are there any other factors that should affect 
when and how to tighten the clock synchronization standard?
    111. Do Commenters believe the CAT NMS Plan provides adequate 
enforcement provisions to ensure CAT Reporters synchronize Business 
Clocks within the proposed 50-millisecond clock offset tolerance? If 
not, what additional enforcement provisions should the CAT NMS Plan 
provide?
    112. Do Commenters believe that sufficient detail has been provided 
in the CAT NMS Plan concerning the reasonable justification or 
exceptional circumstances that would permit a pattern or practice of 
reporting events outside of the specified clock synchronization 
standard?
    113. The CAT NMS Plan generally requires CAT Reporters to record 
and report Reportable Events with a time stamp of at least to the 
millisecond but provides for a 50 millisecond clock offset tolerance. 
Do Commenters believe the time stamp granularity requirement and the 
clock offset tolerance should correspond more closely or even 
identically? If so, please explain, including what such time stamp 
granularity requirement and clock offset tolerance should be.
5. Time Stamp Granularity
    The CAT NMS Plan requires CAT Reporters to record and report the 
time of each Reportable Event using time stamps reflecting current 
industry standards, which should be at least to the millisecond, except 
with respect to events that involve non-electronic communication of 
information (``Manual Order Events'').\134\ Furthermore, the Plan 
requires

[[Page 30639]]

Participants to adopt rules requiring that CAT Reporters that use time 
stamps in increments finer than milliseconds use those finer increments 
when reporting to the Central Repository.\135\ For Manual Order Events, 
the Participants determined that time stamp granularity at the level of 
a millisecond is not practical.\136\ Accordingly, the CAT NMS Plan 
provides that each Participant and Industry Member shall be permitted 
to record and report Manual Order Events to the Central Repository in 
increments up to and including one second, provided that Participants 
and Industry Members shall be required to record and report the time 
when a Manual Order Event has been captured electronically in an order 
handling and execution system of such Participant or Industry Member 
(``Electronic Capture Time'') in milliseconds.\137\
---------------------------------------------------------------------------

    \134\ See CAT NMS Plan, supra note 3, at Section 1.1. The SROs 
requested exemptive relief from Rule 613 so that the CAT NMS Plan 
may permit CAT Reporters to report Manual Order Events with a time 
stamp granularity of one second, in lieu of a time stamp granularity 
of one millisecond. See Exemptive Request Letter, supra note 16, at 
34. The Commission granted exemptive relief on March 1, 2016 in 
order to allow this alternative to be included in the CAT NMS Plan 
and subject to notice and comment. See Exemption Order, supra note 
18.
    \135\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.3(c).
    \136\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.3(c). The Participants state that they received industry feedback 
through the DAG that suggests that the established business practice 
with respect to Manual Order Events is to manually capture time 
stamps with granularity at the level of a second because finer 
increments cannot be accurately captured when dealing with manual 
processes which, by their nature, take longer to perform than a time 
increment of under one second. Id. The Participants agree that, due 
to the nature of transactions originated over the phone, it is not 
practical to attempt granularity finer than one second, as any such 
finer increment would be inherently unreliable. Id.
    \137\ See CAT NMS Plan, supra note 3, at Section 6.8(b).
---------------------------------------------------------------------------

Request for Comment \138\
---------------------------------------------------------------------------

    \138\ See Section IV.D.3, infra, for further time stamp 
granularity related requests for comment.
---------------------------------------------------------------------------

    114. Are the time stamp granularity standards for both electronic 
and non-electronic reportable events appropriate and reasonable? If 
not, why not and what would be a better alternative?
    115. Do Commenters believe the CAT NMS Plan's time stamp 
granularity requirement is precise enough to reliably and accurately 
sequence Reportable Events? If not, why not? Is there a better time 
stamp approach and what should the requirement(s) be?
    116. To what degree does the millisecond or less time stamp 
granularity requirement enable or prevent regulators' ability to 
sequence events that occur in different execution venues? Please 
explain.
    117. Are certain CAT Reportable Events more time-sensitive than 
other CAT Reportable Events? If so, what events are more time-sensitive 
and why? What systems are more likely to process these more sensitive 
events and to what level of time stamp granularity are such events 
processed? Where are those systems located (i.e., within broker-
dealers, service bureaus, execution venues)? Please explain.
    118. What market participant systems, if any, should have less 
granular time stamp requirements? Why? What time stamp granularity 
standard should these systems have? Why?
    119. What market participant systems, if any, should have more 
granular time stamp requirements? Why? What time stamp granularity 
standard should these systems have? Why?
    120. The Commission granted an exemption from Rule 613 in order to 
allow the alternative of permitting CAT Reporters to report Manual 
Order Events with a time stamp granularity of one second, in lieu of 
the Rule 613 requirement that the CAT NMS Plan require CAT Reporters to 
report with a time stamp granularity of one millisecond, to be included 
in the CAT NMS Plan and subject to notice and comment.\139\ Do 
Commenters believe that the CAT NMS Plan's one-second time stamp 
granularity standard for Manual Order Events is appropriate and 
reasonable? If not, why not? Would a more granular time stamp 
requirement for Manual Order Events be feasible?
---------------------------------------------------------------------------

    \139\ See Exemption Order, supra note 18.
---------------------------------------------------------------------------

    121. What alternative approach with respect to Manual Order Events 
may be preferable? Could the provisions in the CAT NMS Plan related to 
Manual Order Events be more narrowly tailored to, for example, only 
apply to CAT Reporters who are unable to record and report Manual Order 
Events with a time stamp granularity of one millisecond?
    122. The SROs note in the Exemption Request that recording and 
reporting Manual Order Events with a time stamp granularity of at least 
one second would result in little additional benefit, and, in fact, 
could result in adverse consequences such as creating a false sense of 
precision for data that is inherently imprecise, while imposing 
additional costs on CAT Reporters. Do Commenters agree? Why or why not?
    123. If Manual Order Events are recorded and reported with a time 
stamp granularity of one second, what, if any, challenges do Commenters 
believe would arise with respect to the sequencing of order events (for 
the same order) and orders (for a series of orders)? Would the one 
millisecond standard originally provided for in Rule 613 be preferable? 
Please explain.
    124. Do Commenters believe the CAT NMS Plan's requirement that time 
stamp granularity (other than for Manual Order Events) should be to at 
least the millisecond is granular enough in light of current practices? 
If not, why not?
    125. The CAT NMS Plan provides that as time stamp standards evolve, 
the Participants would assess, on an annual basis, the ability to 
require more precise time stamp granularity standards for CAT to 
reflect changes in industry standards. Do Commenters believe that this 
establishes an appropriately rigorous schedule for the Participants to 
evaluate whether time stamp granularity requirements could potentially 
be set to finer increments? Are there any other factors that should 
affect when and how the requirements for time stamp granularity 
increments could be made more precise?
    126. Do Commenters believe the CAT NMS Plan provides adequate 
enforcement provisions to ensure CAT Reporters time stamp Reportable 
Events to a granularity of one millisecond (and for Manual Order Events 
to a granularity of one second)? If not, what additional enforcement 
provisions should the CAT NMS Plan provide?
    127. Do Commenters believe that the CAT NMS Plan's requirement that 
Participants and Industry Members synchronize Business Clocks used 
solely for Manual Order Events to within one second of the time 
maintained by the NIST is appropriate and reasonable? Would a tighter 
clock synchronization standard for Business Clocks used solely for 
Manual Order Events be feasible?
6. CAT-Reporter-ID
    Sections 6.3 and 6.4 of the CAT NMS Plan require CAT Reporters to 
record and report to the Central Repository an SRO-Assigned Market 
Participant Identifier \140\ for orders and certain Reportable Events 
to be used by the Central Repository to assign a unique CAT-Reporter-ID 
\141\ for purposes of identifying each CAT Reporter associated with an 
order or Reportable Event (the ``Existing Identifier Approach'').\142\ 
The CAT NMS Plan

[[Page 30640]]

requires the reporting of SRO-Assigned Market Participant Identifiers 
of: The Industry Member receiving or originating an order; \143\ the 
Industry Member or Participant from which (and to which) an order is 
being routed; \144\ the Industry Member or Participant receiving (and 
routing) a routed order; \145\ the Industry Member or Participant 
executing an order, if an order is executed; \146\ and the clearing 
broker or prime broker, if applicable, if an order is executed.\147\ An 
Industry Member would report to the Central Repository its existing 
SRO-Assigned Market Participant Identifier used by the relevant SRO 
specifically for transactions occurring at that SRO.\148\ Similarly, an 
exchange reporting CAT Reporter information would report data using the 
SRO-Assigned Market Participant Identifier used by the Industry Member 
on that exchange or its systems.\149\ Over-the-counter (``OTC'') orders 
and Reportable Events would be reported with an Industry Member's FINRA 
SRO-Assigned Market Participant Identifier.\150\
---------------------------------------------------------------------------

    \140\ The CAT NMS Plan defines an ``SRO-Assigned Market 
Participant Identifier'' as ``an identifier assigned to an Industry 
Member by an SRO or an identifier used by a Participant.'' See CAT 
NMS Plan, supra note 3, at Section 1.1.
    \141\ Rule 613 defines a CAT-Reporter-ID as ``a code that 
uniquely and consistently identifies [a CAT Reporter] for purposes 
of providing data to the central repository.'' 17 CFR 242.613(j)(2).
    \142\ The SROs requested exemptive relief from Rule 613 so that 
the CAT NMS Plan may permit the Existing Identifier Approach, which 
would allow a CAT Reporter to report an existing SRO-Assigned Market 
Participant Identifier in lieu of requiring the reporting of a 
universal CAT-Reporter-ID. See Exemptive Request Letter, supra note 
16, at 19. The Commission granted exemptive relief on March 1, 2016 
in order to allow this alternative to be included in the CAT NMS 
Plan and subject to notice and comment. See Exemption Order, supra 
note 18.
    \143\ See CAT NMS Plan, supra note 3, at Section 6.3(d)(i) and 
Section 6.4(d)(i).
    \144\ Id. at Section 6.3(d)(ii) and Section 6.4(d)(i).
    \145\ Id. at Section 6.3(d)(iii) and Section 6.4(d)(i).
    \146\ Id. at Section 6.3(d)(v) and Section 6.4(d)(i).
    \147\ Id. at Section 6.4(d)(ii)(A)(2). Industry Members are 
required by the CAT NMS Plan to record and report this information. 
See CAT NMS Plan, supra note 3, at Section 6.4(d)(ii).
    \148\ See Exemption Order, supra note 18, at 31-41.
    \149\ See id. at 20.
    \150\ Id.
---------------------------------------------------------------------------

    The CAT NMS Plan requires the Plan Processor to develop and 
maintain the mechanism to assign (and to change, if necessary) CAT-
Reporter-IDs.\151\ For the Central Repository to link the SRO-Assigned 
Participant Identifier to the CAT-Reporter-ID, each SRO must submit, on 
a daily basis, all SRO-Assigned Market Participant Identifiers used by 
its Industry Members (or itself), as well as information to identify 
the corresponding market participant (for example, a CRD number or 
Legal Entity Identifier (``LEI'')) to the Central Repository.\152\ 
Additionally, each Industry Member shall be required to submit to the 
Central Repository information sufficient to identify such Industry 
Member (e.g., CRD number or LEI, as noted above).\153\ The Plan 
Processor would use the SRO-Assigned Market Participant Identifiers and 
identifying information (i.e., CRD number or LEI) to assign a CAT-
Reporter-ID to each Industry Member and SRO for internal use across all 
data within the Central Repository.\154\ The Plan Processor would 
create and maintain a database in the Central Repository that would map 
the SRO-Assigned Market Participant Identifiers to the appropriate CAT-
Reporter-ID.\155\
---------------------------------------------------------------------------

    \151\ See CAT NMS Plan, supra note 3, at Appendix D, Section 
10.1. Changes to CAT-Reporter-IDs must be reviewed and approved by 
the Plan Processor. Id. The CAT NMS Plan also requires the Central 
Repository to generate and assign a unique CAT-Reporter-ID to all 
reports submitted to the system based on sub-identifiers that are 
currently used by CAT Reporters in their order handling and trading 
processes (described in the Exemption Request as SRO-assigned market 
participant identifiers). See CAT NMS Plan, supra note 3, at 
Appendix D, Section 3; see also Exemption Order, supra note 18, at 
31-41.
    \152\ See CAT NMS Plan, supra note 3, at Section 6.3(e)(i).
    \153\ Id. at Section 6.4(d)(vi).
    \154\ See Exemption Order, supra note 18, at 31-41.
    \155\ Id. at 20.
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    The consolidated audit trail must be able to capture, store, and 
maintain current and historical SRO-Assigned Market Participant 
Identifiers.\156\ The SRO-Assigned Market Participant Identifier must 
also be included on the Plan Processor's acknowledgment of its receipt 
of data files from a CAT Reporter or Data Submitter,\157\ on daily 
statistics provided by the Plan Processor after the Central Repository 
has processed data,\158\ and on a secure Web site that the Plan 
Processor would maintain that would contain each CAT Reporter's daily 
reporting statistics.\159\ In addition, data validations by the Plan 
Processor must include confirmation of a valid SRO-Assigned Market 
Participant Identifier.\160\
---------------------------------------------------------------------------

    \156\ See CAT NMS Plan, supra note 3, at Appendix D, Section 2.
    \157\ See id. at Appendix D, Section 7.1.
    \158\ See id. at Appendix D, Section 7.2.
    \159\ See id. at Appendix D, Section 10.1.
    \160\ See id. at Appendix D, Section 7.2. The CAT NMS Plan also 
notes that both the CAT-Reporter-ID and the SRO-Assigned Market 
Participant Identifier would be data fields for the online targeted 
query tool described in the CAT NMS Plan as providing authorized 
users with the ability to retrieve processed and/or validated 
(unlinked) data via an online query screen. See id. at Appendix D, 
Section 8.1.1.
---------------------------------------------------------------------------

Request for Comment
    128. The Commission granted an exemption from Rule 613 in order to 
allow the Existing Identifier Approach to be included in the CAT NMS 
Plan and subject to notice and comment. The Existing Identifier 
Approach would allow a CAT Reporter to report an existing SRO-Assigned 
Market Participant Identifier in lieu of Rule 613's requirement that a 
CAT Reporter must report a universal CAT-Reporter-ID.\161\ Do 
Commenters believe that allowing the Existing Identifier Approach would 
be more efficient and cost-effective than the Rule 613 approach of 
requiring a CAT-Reporter-ID to be reported for each order and 
reportable event in accordance with Rule 613(c)(7)? \162\ Why or why 
not? Or do Commenters believe that the Rule 613 approach is preferable? 
Why or why not? Would implementation of the Existing Identifier 
Approach merely transfer costs from CAT Reporters to the Central 
Repository?
---------------------------------------------------------------------------

    \161\ See Exemption Order, supra note 18.
    \162\ See supra note 142.
---------------------------------------------------------------------------

    129. Do Commenters believe that the Existing Identifier Approach 
would affect the accuracy of CAT Data? Would the Rule 613 approach 
result in greater accuracy? If so, please explain.
    130. Do Commenters believe that the CAT NMS Plan's proposed 
Existing Identifier Approach would affect the accessibility of CAT 
Data? If so, how? Would the Rule 613 approach result in a different 
level of accessibility? If so, please explain.
    131. Do Commenters believe that the CAT NMS Plan's proposed 
Existing Identifier Approach would affect the timeliness of CAT Data? 
If so, how? Would the Rule 613 approach result in greater timeliness? 
If so, please explain.
    132. Do Commenters believe the Existing Identifier Approach would 
affect the security and confidentiality of CAT Data? If so, how? Would 
the Rule 613 approach result in a different level of security and 
confidentiality? If so, please explain.
    133. What challenges or risks do Commenters believe the Plan 
Processor would face in linking all SRO-Assigned Market Participant 
Identifiers to the appropriate CAT-Reporter-IDs? What, if anything, 
could be done to mitigate those challenges and risks?
    134. The CAT NMS Plan does not require that an Industry Member 
provide its LEI to the Plan Processor as part of the identifying 
information used to assign a CAT-Reporter-ID. The CAT NMS Plan permits 
an Industry Member to report its CRD number in lieu of its LEI for this 
purpose. Do Commenters believe that the CAT NMS Plan should mandate 
that Industry Members provide their LEIs, along with their SRO-Assigned 
Market Participant Identifiers, to the Plan Processor for purposes of 
developing a unique CAT-Reporter-ID? Why or why not?
7. Customer-ID
a. Customer Information Approach
    Rule 613(c)(7)(i)(A) requires that for the original receipt or 
origination of an order, a CAT Reporter report the ``Customer-ID(s) for 
each Customer.'' \163\ ``Customer-ID'' is defined in Rule 613(j)(5) to 
mean ``with respect to a customer, a code that uniquely and

[[Page 30641]]

consistently identifies such customer for purposes of providing data to 
the Central Repository.'' \164\ Rule 613(c)(8) requires that ``[a]ll 
plan sponsors and their members shall use the same Customer-ID and CAT-
Reporter-ID for each customer and broker-dealer.'' \165\
---------------------------------------------------------------------------

    \163\ See 17 CFR 242.613(c)(7)(i)(A).
    \164\ See 17 CFR 242.613(j)(5).
    \165\ See 17 CFR 242.613(c)(8).
---------------------------------------------------------------------------

    In Appendix C, the Participants describe the ``Customer Information 
Approach,'' \166\ an alternative approach to the requirement that a 
broker-dealer report a Customer-ID for every Customer upon original 
receipt or origination of an order.\167\ Under the Customer Information 
Approach, the CAT NMS Plan would require each broker-dealer to assign a 
unique Firm Designated ID to each Customer.\168\ As the Firm Designated 
ID, broker-dealers would be permitted to use an account number or any 
other identifier defined by the firm, provided each identifier is 
unique across the firm for each business date (i.e., a single firm may 
not have multiple separate customers with the same identifier on any 
given date).\169\ According to the CAT NMS Plan, broker-dealers would 
submit an initial set of Customer information to the Central 
Repository, including, as applicable, the Firm Designated ID, the 
Customer's name, address, date of birth, individual tax payer 
identifier number (``ITIN'')/social security number (``SSN''), 
individual's role in the account (e.g., primary holder, joint holder, 
guardian, trustee, person with power of attorney) and LEI,\170\ and/or 
Large Trader ID (``LTID''), if applicable, which would be updated as 
set forth in the CAT NMS Plan.\171\
---------------------------------------------------------------------------

    \166\ The SROs requested exemptive relief from Rule 613 so that 
the CAT NMS Plan may permit the Customer Information Approach, which 
would require each broker-dealer to assign a unique Firm Designated 
ID to each trading account and to submit an initial set of 
information identifying the Customer to the Central Repository, in 
lieu of requiring each broker-dealer to report a Customer-ID for 
each Customer upon the original receipt or origination of an order. 
See Exemptive Request Letter, supra note 16, at 12. The Commission 
granted exemptive relief on March 1, 2016 in order to allow this 
alternative to be included in the CAT NMS Plan and subject to notice 
and comment. See Exemption Order, supra note 18.
    \167\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.1(a)(iii).
    \168\ Id. at Appendix C, Section A.1(a)(iii). The CAT NMS Plan 
defines a ``Firm Designated ID'' as ``a unique identifier for each 
trading account designated by Industry Members for purposes of 
providing data to the Central Repository, where each such identifier 
is unique among all identifiers from any given Industry Member for 
each business date.'' See id. at Section 1.1.
    \169\ Id. at Appendix C, Section A.1(a)(iii).
    \170\ The CAT NMS Plan provides that where a validated LEI is 
available for a Customer or entity, this may obviate a need to 
report other identifier information (e.g., Customer name, address, 
EIN). Id. at Appendix C, Section A.1(a)(iii) n.31.
    \171\ The CAT NMS Plan states that the Participants anticipate 
that Customer information that is initially reported to the CAT 
could be limited to Customer accounts that have, or are expected to 
have, CAT Reportable Event activity. For example, the CAT NMS Plan 
notes accounts that are considered open, but have not traded 
Eligible Securities in a given time frame, may not need to be pre-
established in the CAT, but rather could be reported as part of 
daily updates after they have CAT Reportable Event activity. Id. at 
Appendix C, Section A.1(a)(iii) n.32.
---------------------------------------------------------------------------

    Under the Customer Information Approach, broker-dealers would be 
required to report only the Firm Designated ID for each new order 
submitted to the Central Repository, rather than the ``Customer-ID'' as 
defined by Rule 613(c)(j)(5) and as required by Rule 613(c)(7)(i)(A), 
and the Plan Processor would associate specific Customers and their 
Customer-IDs with individual order events based on the reported Firm 
Designated IDs.\172\ Within the Central Repository, each Customer would 
be uniquely identified by identifiers or a combination of identifiers 
such as an ITIN/SSN, date of birth, and, as applicable, LEI and 
LTID.\173\ The Plan Processor would be required to use these unique 
identifiers to map orders to specific Customers across all broker-
dealers.\174\ To ensure information identifying a Customer is updated, 
broker-dealers would be required to submit to the Central Repository 
daily updates for reactivated accounts, newly established or revised 
Firm Designated IDs, or associated reportable Customer 
information.\175\
---------------------------------------------------------------------------

    \172\ See id. at Appendix C, Section A.1(a)(iii). The CAT NMS 
Plan also requires broker-dealers to report ``Customer Account 
Information'' upon the original receipt of origination of an order. 
See CAT NMS Plan, supra note 3, at Section 1.1, Section 
6.4(d)(ii)(C).
    \173\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.1(a)(iii).
    \174\ Id.
    \175\ The CAT NMS Plan notes that because reporting to the CAT 
is on an end-of-day basis, intra-day changes to information could be 
captured as part of the daily updates to the information. To ensure 
the completeness and accuracy of Customer information and 
associations, in addition to daily updates, broker-dealers would be 
required to submit periodic full refreshes of Customer information 
to the CAT. The scope of the ``full'' Customer information refresh 
would need to be further defined, with the assistance of the Plan 
Processor, to determine the extent to which inactive or otherwise 
terminated accounts would need to be reported. Id. at Appendix C, 
Section A.1(a)(iii) n.33.
---------------------------------------------------------------------------

    Appendix C provides additional requirements that the Plan Processor 
must meet under the Customer Information Approach.\176\ The Plan 
Processor must maintain information of sufficient detail to uniquely 
and consistently identify each Customer across all CAT Reporters, and 
associated accounts from each CAT Reporter, and must document and 
publish, with the approval of the Operating Committee, the minimum list 
of attributes to be captured to maintain this association.\177\ In 
addition, the Plan Processor must maintain valid Customer and Customer 
Account Information \178\ for each trading day and provide a method for 
Participants and the Commission to easily obtain historical changes to 
that information (e.g., name changes, address changes).\179\ The Plan 
Processor also must design and implement a robust data validation 
process for submitted Firm Designated IDs, Customer Account Information 
and Customer Identifying Information, and be able to link accounts that 
move from one CAT Reporter to another due to mergers and acquisitions, 
divestitures, and other events.\180\ Under the Customer Information 
Approach, broker-dealers will initially submit full account lists for 
all active accounts to the Plan Processor and subsequently submit 
updates and changes on a daily basis.\181\ Finally, the Plan Processor 
must have a process to periodically receive full account lists to 
ensure the completeness and accuracy of the account database.\182\
---------------------------------------------------------------------------

    \176\ See id. at Appendix C, Section A.1(a)(iii).
    \177\ Id. Section 9.1 of Appendix D also addresses, among other 
things, the minimum attributes that CAT must capture for Customers 
and the validation process for such attributes. Id. at Appendix D, 
Section 9.1.
    \178\ Id. at Appendix D, Section 9.1. In relevant part, 
``Customer Account Information'' is defined in the Plan to include, 
but not be limited to, account number, account type, customer type, 
date account opened, and large trader identifier (if applicable). 
See id. at Section 1.1.
    \179\ See id. at Appendix C, Section A.1(a)(iii).
    \180\ Id. at Appendix C, Section A.1(a)(iii). The CAT NMS Plan 
defines ``Customer Identifying Information'' to mean ``information 
of sufficient detail to identify a Customer, including, but not 
limited to, (a) with respect to individuals: Name, address, date of 
birth, individual tax payer identification number (``ITIN'')/social 
security number (``SSN''), individual's role in the account (e.g., 
primary holder, joint holder, guardian, trustee, person with the 
power of attorney); and (b) with respect to legal entities: name, 
address, Employer Identification Number (``EIN'')/LEI) or other 
comparable common entity identifier, if applicable; provided, 
however, where the LEI or other common entity identifier is 
provided, information covered by such common entity identifier 
(e.g., name, address) would not need to be separately submitted to 
the Central Repository.'' See id. at Section 1.1.
    \181\ Id. at Appendix C, Section A.1(a)(iii).
    \182\ Id.
---------------------------------------------------------------------------

b. Account Effective Date vs. Account Open Date
    Rule 613(c)(7)(viii)(B) requires broker-dealers to report to the 
Central Repository ``Customer Account Information'' upon the original 
receipt or origination of an order.\183\ The CAT

[[Page 30642]]

NMS Plan defines ``Customer Account Information'' to include, in part, 
the Customer's account number, account type, customer type, date 
account opened and LTID (if applicable).\184\ The Plan, however, 
provides that in two limited circumstances, a broker-dealer could 
report the ``Account Effective Date'' in lieu of the date an account 
was opened.\185\ The first circumstance is where a relationship 
identifier--rather than an actual parent account--has been established 
for an institutional Customer relationship.\186\ In this case, no 
account open date is available for the institutional Customer parent 
relationship because there is no parent account, and for the same 
reason, there is no account number or account type available.\187\ 
Thus, the Plan provides that in this circumstance, a broker-dealer 
could report the ``Account Effective Date'' of the relationship in lieu 
of an account open date.\188\ Further, the Plan provides that where 
such an institutional Customer relationship was established before the 
broker-dealer's obligation to report audit trail data is required, the 
``Account Effective Date'' would be either (i) the date the broker-
dealer established the relationship identifier, or (ii) the date when 
trading began (i.e., the date the first order is received) using the 
relevant relationship identifier, and if both dates are available and 
differ, the earlier date.\189\ Where such relationships are established 
after the broker-dealer's obligation to report audit trail data is 
required, the ``Account Effective Date'' would be the date the broker-
dealer established the relationship identifier and would be no later 
than the date the first order was received.\190\ Regardless of when the 
relationship was established for such institutional Customers, the Plan 
provides that broker-dealers may report the relationship identifier in 
place of Rule 613(c)(7)(viii)(B)'s requirement to report the ``account 
number,'' and report ``relationship'' in place of ``account type.'' 
\191\
---------------------------------------------------------------------------

    \183\ 17 CFR 242.613(c)(7)(viii)(B). ``Customer Account 
Information'' is defined in Rule 613(j)(4) to ``include, but not be 
limited to, account number, account type, customer type, date 
account opened, and large trader identifier (if applicable).'' 17 
CFR 242.613(j)(4).
    \184\ See CAT NMS Plan, supra note 3, at Section 1.1.
    \185\ Id. The SROs requested exemptive relief from Rule 613 so 
that the CAT NMS Plan may permit broker-dealers to report to the 
Central Repository the ``effective date'' of an account in lieu of 
requiring each broker-dealer to report the date the account was 
opened in certain limited circumstances. See Exemptive Request 
Letter, supra note 16, at 13. The Commission granted exemptive 
relief on March 1, 2016 in order to allow this alternative to be 
included in the CAT NMS Plan and subject to notice and comment. See 
Exemption Order, supra note 18.
    \186\ See Exemption Order, supra note 18; see also September 
2015 Supplement, supra note 16, at 4-5.
    \187\ See September 2015 Supplement, supra note 16, at 6.
    \188\ See CAT NMS Plan, supra note 3, at Section 1.1.
    \189\ See id.
    \190\ See id.
    \191\ See id.
---------------------------------------------------------------------------

    The second circumstance where a broker-dealer may report the 
``Account Effective Date'' rather than the date an account was opened 
as required in Rule 613(c)(7)(viii)(B) is when particular legacy system 
data issues prevent a broker-dealer from providing an account open date 
for any type of account (i.e., institutional, proprietary or retail) 
that was established before CAT's implementation.\192\ According to the 
Plan, these legacy system data issues may arise because:
---------------------------------------------------------------------------

    \192\ See id.; see also September 2015 Supplement, supra note 
16, at 7-9.
---------------------------------------------------------------------------

    (1) A broker-dealer has switched back office providers or clearing 
firms and the new back office/clearing firm system identifies the 
account open date as the date the account was opened on the new system;
    (2) A broker-dealer is acquired and the account open date becomes 
the date that an account was opened on the post-merger back office/
clearing firm system;
    (3) Certain broker-dealers maintain multiple dates associated with 
accounts in their systems and do not designate in a consistent manner 
which date constitutes the account open date, as the parameters of each 
date are determined by the individual broker-dealer; or
    (4) No account open date exists for a proprietary account of a 
broker-dealer.\193\
---------------------------------------------------------------------------

    \193\ See CAT NMS Plan, supra note 3, at Section 1.1.
---------------------------------------------------------------------------

    Thus, when legacy systems data issues arise due to one of the four 
reasons above and no account open date is available, the Plan provides 
that broker-dealers would be permitted to report an ``Account Effective 
Date'' in lieu of an account open date.\194\ When the legacy systems 
data issues and lack of account open date are attributable to above 
reasons (1) or (2), the ``Account Effective Date'' would be the date 
the account was established, either directly or via a system transfer, 
at the relevant broker-dealer.\195\ When the legacy systems data issues 
and lack of account open date are attributable to above reason (3), the 
``Account Effective Date'' would be the earliest available date.\196\ 
When the legacy systems data issues and lack of account open date are 
attributable to above reason (4), the ``Account Effective Date'' would 
be (i) the date established for the proprietary account in the broker-
dealer or its system(s), or (ii) the date when proprietary trading 
began in the account, i.e., the date on which the first orders were 
submitted from the account.\197\
---------------------------------------------------------------------------

    \194\ Id.
    \195\ Id.
    \196\ Id.
    \197\ Id.
---------------------------------------------------------------------------

c. Modification/Cancellation
    Rule 613(c)(7)(iv)(F) requires that ``[t]he CAT-Reporter-ID of the 
broker-dealer or Customer-ID of the person giving the modification or 
cancellation instruction'' be reported to the Central Repository.\198\ 
Because the Customer Information Approach no longer requires that a 
Customer-ID be reported upon original receipt or origination of an 
order, and because reporting the Customer-ID of the specific person 
that gave the modification or cancellation instruction would result in 
an inconsistent level of information regarding the identity of the 
person giving the modification or cancellation instruction versus the 
identity of the Customer that originally received or originated an 
order, Section 6.3(d)(iv)(F) of the CAT NMS Plan modifies the 
requirement in Rule 613 and instead requires CAT Reporters to report 
whether the modification or cancellation instruction was ``given by the 
Customer or was initiated by the Industry Member or Participant.'' 
\199\
---------------------------------------------------------------------------

    \198\ 17 CFR 242.613(c)(7)(iv)(F) (emphasis added).
    \199\ See CAT NMS Plan, supra note 3, at Section 6.3(d)(iv)(F). 
The SROs requested exemptive relief from Rule 613 so that the CAT 
NMS Plan may permit CAT Reporters to report whether a modification 
or cancellation instruction was given by the Customer associated 
with the order, or was initiated by the broker-dealer or exchange 
associated with the order, in lieu of requiring CAT Reporters to 
report the Customer-ID of the person giving the modification or 
cancellation instruction. See Exemptive Request Letter, supra note 
16, at 12-13. The Commission granted exemptive relief on March 1, 
2016 in order to allow this alternative to be included in the CAT 
NMS Plan and subject to notice and comment. See Exemption Order, 
supra note 18.
---------------------------------------------------------------------------

Request for Comment
    135. The Commission granted an exemption from Rule 613 in order to 
allow the Customer Information Approach to be included in the CAT NMS 
Plan and subject to notice and comment. The Customer Information 
Approach would require each broker-dealer to assign a unique Firm 
Designated ID to each trading account and to submit an initial set of 
information identifying the Customer to the Central Repository, in lieu 
of Rule 613's requirement that a CAT Reporter must report a Customer-ID 
for each Customer upon the original receipt or

[[Page 30643]]

origination of an order. Do Commenters believe that allowing broker-
dealers to report a Firm Designated ID to the Central Repository is 
more efficient and cost-effective than the Rule 613 approach of 
requiring broker-dealers to report a unique Customer-ID upon original 
receipt or origination of an order? Would allowing CAT Reporters to 
report a Firm Designated ID to the Central Repository merely transfer 
the costs from individual broker-dealers to the Central Repository? Or 
do Commenters believe that the Rule 613 approach is preferable? Why or 
why not?
    136. If broker-dealers are permitted to report a Firm Designated 
ID, do Commenters believe the proposed CAT NMS Plan includes 
sufficiently detailed requirements to determine whether the Plan 
Processor could use the Firm Designated ID to identify a Customer?
    137. Do Commenters believe the CAT NMS Plan's proposal to permit 
reporting a Firm Designated ID would affect the accuracy of CAT Data 
collected and maintained under the CAT compared to the Rule 613 
approach that requires a unique Customer-ID? If so, how? Would 
permitting reporting a Firm Designated ID result in more complete CAT 
Data? If so, please explain.
    138. Do Commenters believe the CAT NMS Plan's proposal to permit 
reporting a Firm Designated ID would affect the accessibility of CAT 
Data collected and maintained under the CAT compared to the Rule 613 
approach? If so, how? Would permitting reporting a Firm Designated ID 
result in CAT Data being more accessible? If so, please explain.
    139. Do Commenters believe allowing broker-dealers to report a Firm 
Designated ID to the Central Repository would affect the timeliness of 
data collected and maintained under the CAT compared to the Rule 613 
approach? Would permitting reporting a Firm Designated ID result in 
more timely CAT Data? If so, please explain.
    140. Do Commenters believe there are any increased risks related to 
allowing a broker-dealer to report a Firm Designated ID rather than a 
unique Customer-ID to the Central Repository? How difficult would it be 
for the Central Repository to utilize a Firm Designated ID for each 
account?
    141. Do Commenters believe that the CAT NMS Plan has provided 
sufficient information to determine whether the Central Repository 
could use a Firm Designated ID to efficiently, reliably and accurately 
link orders and Reportable Events to a Customer?
    142. Do Commenters believe that the CAT NMS Plan includes 
sufficient safeguards or policies to assure that the same Firm 
Designated ID would not be used for multiple Customers?
    143. The CAT NMS Plan does not require that a broker-dealer provide 
an LEI to the Plan Processor as part of the identifying information 
used to assign a Customer-ID at the Central Repository. The CAT NMS 
Plan provides that a broker-dealer must report its LEI, if available, 
but allows a broker-dealer to report another comparable common entity 
identifier, if an LEI is not available. Do Commenters believe that the 
CAT NMS Plan should mandate that broker-dealers provide an LEI as part 
of the information used by the Plan Processor to uniquely identify 
Customers? Why or why not?
    144. Do Commenters believe that reporting the Firm Designated ID, 
rather than a unique Customer-ID, would affect the security and 
confidentiality of CAT Data? If so, how? Would permitting reporting a 
Firm Designated ID result in a different level of security and 
confidentiality of CAT Data? If so, please explain.
    145. The CAT NMS Plan provides that an initial set of Customer 
Account Information and Customer Identifying Information would be 
reported to the Central Repository by broker-dealers upon the 
commencement of reporting audit trail data to the Central Repository by 
that broker-dealer, and that such Customer Identifying Information 
would be updated as set forth in the CAT NMS Plan. Do Commenters 
believe that the approach for reporting an initial set of Customer 
Account Information and Customer Identifying Information and updates to 
such information thereafter as set forth in the CAT NMS Plan would 
affect the quality, accuracy, completeness, accessibility or timeliness 
of the data? If so, what additional requirements or details should be 
provided in the CAT NMS Plan?
    146. Do Commenters believe that allowing broker-dealers to report 
an initial set of Customer Account Information and Customer Identifying 
Information and updates to such information thereafter is more 
efficient and cost-effective than the Rule 613 approach for identifying 
Customers under Rule 613? Or do Commenters believe that the Rule 613 
approach is preferable? Why or why not?
    147. Do Commenters believe there are any increased risks as a 
result of allowing a broker-dealer to report an initial set of Customer 
Account Information and Customer Identifying Information and updates to 
such information thereafter to be reported to the Central Repository? 
How difficult would it be for the Central Repository to ingest the 
Customer Account Information and Customer Identifying information, and 
any updates thereafter?
    148. Do Commenters believe that the CAT NMS Plan provides 
sufficient information to determine whether the Central Repository 
could use the initial set of Customer Account Information and Customer 
Identifying Information and updates to such information thereafter to 
efficiently, reliably and accurately link orders and Reportable Events 
to a Customer?
    149. Do Commenters believe that reporting an initial set of 
Customer Account Information and Customer Identifying Information and 
updates to such information thereafter would affect the security and 
confidentiality of CAT Data? If so, how? Would reporting an initial set 
of Customer Account Information and Customer Identifying Information 
and updates to such information result in a different level of security 
and confidentiality? If so, please explain.
    150. As part of the Customer Identifying Information reported to 
the Central Repository, the CAT NMS Plan requires a broker-dealer to 
report PII such as the Customer's name, address, date of birth, and 
ITIN/SSN. Do Commenters believe there is data that could be reported by 
broker-dealers and used by the Central Repository to identify Customers 
that is not PII? What types of data would this be? If data other than 
PII is used to identify a Customer, do Commenters believe that such 
data would be sufficiently unique to ensure that Customers can be 
accurately identified by the Central Repository?
    151. If data other than PII is used by the Central Repository to 
identify a Customer, would the use of such data affect the quality or 
completeness of the CAT audit trail, as compared to the use of PII to 
identify a Customer?
    152. Do Commenters believe that if broker-dealers reported data 
other than PII to identify Customers, the accessibility and timeliness 
of the data collected and maintained under the CAT would be affected? 
If the data would be affected, in what way(s)?
    153. Would relying on data other than PII to identify a Customer be 
a more efficient and cost-effective way to identify Customers, as 
compared to relying on PII to identify a Customer?
    154. Do Commenters believe that there would be increased risks to 
the reliability of the CAT audit trail data if broker-dealers were 
required to identify a Customer with data that does not include PII?
    155. If broker-dealers report data other than PII to identify 
Customers, do Commenters believe that the Central Repository could 
efficiently, reliably

[[Page 30644]]

and accurately link orders and Reportable Events to a Customer?
    156. Do Commenters believe that the proposed CAT NMS Plan provides 
sufficient information to determine when broker-dealers would report 
the ``Account Effective Date'', rather than the date the Customer's 
account was opened as required by Rule 613? Is there any ambiguity in 
the circumstances under which a broker-dealer would report an ``Account 
Effective Date'' rather than the date a Customer's account was opened?
    157. Do Commenters believe reporting of the ``Account Effective 
Date'' rather than the account open date for a Customer's account under 
the Rule 613 approach would affect the quality, accuracy, completeness, 
accessibility or timeliness of the CAT data? If it does, what 
additional requirements or details should be provided in the CAT NMS 
Plan prior to the Commission's approval of such Plan? Or do Commenters 
believe that the Rule 613 approach is preferable? Why or why not?
    158. Do Commenters believe that reporting the ``Account Effective 
Date'' would provide sufficient information to the Central Repository 
to facilitate the ability of the Plan Processor to link a Customer's 
account with the Customer?
    159. Do Commenters believe that allowing the reporting of the 
``Account Effective Date'' would be more efficient and cost-effective 
than requiring the Rule 613 approach of reporting of a Customer's 
account open date? Or do Commenters believe that the Rule 613 approach 
is preferable? Why or why not? Would allowing CAT Reporters to report 
the ``Account Effective Date'' rather than the date a Customer's 
account was opened merely transfer the costs from individual CAT 
Reporters to the Central Repository?
    160. Do Commenters agree that the proposed approach for reporting 
the ``Account Effective Date,'' which differs depending on whether the 
account was established before or after the commencement of reporting 
audit trail data to the Central Repository as set forth in the CAT NMS 
Plan, is a reasonable approach? Why or why not?
    161. The Commission granted an exemption from Rule 613 to permit 
the alternative of allowing CAT Reporters to report whether the 
modification or cancellation of an order was given by a Customer, or 
initiated by a broker-dealer or exchange, in lieu of requiring the 
reporting of the Customer-ID of the person giving the modification or 
cancellation instruction, to be included in the CAT NMS Plan and 
subject to notice and comment. To what extent does the approach 
permitted by the exemption affect the completeness of the CAT? Would 
the information lost under the approach permitted by the exemption 
affect investigations or surveillances? If so, how?
8. Order Allocation Information
    Section 6.4(d)(ii)(A)(1) of the CAT NMS Plan provides that each 
Participant through its Compliance Rule must require that Industry 
Members record and report to the Central Repository an Allocation 
Report that includes the Firm Designated ID when an execution is 
allocated in whole or part.\200\ The CAT NMS Plan defines an Allocation 
Report as ``a report made to the Central Repository by an Industry 
Member that identifies the Firm Designated ID for any account(s), 
including subaccount(s), to which executed shares are allocated and 
provides the security that has been allocated, the identifier of the 
firm reporting the allocation, the price per share of shares allocated, 
the side of shares allocated, the number of shares allocated to each 
account, and the time of the allocation.'' \201\ The CAT NMS Plan 
explains, for the avoidance of doubt, that an Allocation Report shall 
not be required to be linked to particular orders or executions.\202\
---------------------------------------------------------------------------

    \200\ See CAT NMS Plan, supra note 3, at Section 
6.4(d)(ii)(A)(1); see also April 2015 Supplement, supra note 16. The 
SROs requested exemptive relief from Rule 613 so that the CAT NMS 
Plan may permit Industry Members to record and report to the Central 
Repository an Allocation Report that includes the Firm Designated ID 
when an execution is allocated in whole or part in lieu of requiring 
the reporting of the account number for any subaccount to which an 
execution is allocated, as is required by Rule 613. See Exemptive 
Request Letter, supra note 16, at 26-27. The Commission granted 
exemptive relief on March 1, 2016 in order to allow this alternative 
to be included in the CAT NMS Plan and subject to notice and 
comment. See Exemption Order, supra note 18.
    \201\ See CAT NMS Plan, supra note 3, at Section 1.1; see also 
April 2015 Supplement, supra note 16.
    \202\ See CAT NMS Plan, supra note 3, at Section 1.1.
---------------------------------------------------------------------------

Request for Comment
    162. The Commission granted an exemption from Rule 613 in order to 
allow the alternative of permitting the CAT NMS Plan to provide that 
Industry Members record and report to the Central Repository an 
Allocation Report that includes the Firm Designated ID when an 
execution is allocated in whole or part. This alternative is in lieu of 
the requirement in Rule 613 that Industry Members must report the 
account number for any subaccount to which an execution is 
allocated.\203\ Do Commenters believe that providing the information 
required in an Allocation Report as a means to identify order events 
and information related to the subaccount allocation information (the 
``Allocation Report Approach'') would be more efficient and cost-
effective than the Rule 613 approach requiring the reporting of the 
account number for any subaccount to which an execution is allocated? 
Or do Commenters believe that the Rule 613 approach is preferable? Why 
or why not?
---------------------------------------------------------------------------

    \203\ See Exemption Order, supra note 18.
---------------------------------------------------------------------------

    163. Do Commenters believe that the Allocation Report Approach 
would affect the completeness of CAT Data? If so, how? Would the 
Allocation Report Approach result in more complete CAT Data? If so, 
please explain.
    164. Do Commenters believe that the Allocation Report Approach 
would affect the accessibility of allocation information? If so, how? 
Would the Allocation Report Approach result in more accessible CAT 
Data? If so, please explain.
    165. Do Commenters believe that the Allocation Report Approach 
would affect the timeliness of allocation information? If so, how? 
Would the Allocation Report Approach result in more timely CAT Data? If 
so, please explain.
    166. Do Commenters believe the Allocation Report Approach would 
affect the security and confidentiality of CAT Data? If so, how? Would 
the Allocation Report Approach result in a different level of security 
or confidentiality? If so, please explain.
    167. Do Commenters believe that the Allocation Report Approach 
described by the SROs is feasible? What challenges or risks would CAT 
Reporters face in providing such information? What challenges or risks 
would the Plan Processor face when ingesting such information and 
linking it to the appropriate Customers' accounts?
9. Options Market Maker Quotes
    Section 6.4(d)(iii) of the CAT NMS Plan states that, with respect 
to the reporting obligations of an Options Market Maker under Sections 
6.3(d)(ii) and (iv) regarding its quotes \204\ in Listed Options, such 
quotes shall be reported to the Central Repository by the relevant 
Options Exchange in lieu of reporting by the Options Market Maker.\205\ 
Section

[[Page 30645]]

6.4(d)(iii) further states that each Participant that is an Options 
Exchange shall, through its Compliance Rule, require its Industry 
Members that are Options Market Makers to report to the Options 
Exchange the time at which a quote in a Listed Option is sent to the 
Options Exchange (and, if applicable, the time of any subsequent quote 
modification and/or cancellation where such modification or 
cancellation is originated by the Options Market Maker).\206\ Such time 
information also shall be reported to the Central Repository by the 
Options Exchange in lieu of reporting by the Options Market Maker.\207\
---------------------------------------------------------------------------

    \204\ Rule 613(c)(7) provides that the CAT NMS Plan must require 
reporting of the details for each order and each Reportable Event, 
including the routing and modification or cancellation of an order. 
17 CFR 242.613(c)(7). Rule 613(j)(8) defines ``order'' to include 
``any bid or offer.'' 17 CFR 242.613(j)(8).
    \205\ See CAT NMS Plan, supra note 3, at Section 6.4(d)(iii). 
The SROs requested exemptive relief from Rule 613 so that the CAT 
NMS Plan may permit Options Market Maker quotes to be reported to 
the Central Repository by the relevant Options Exchange in lieu of 
requiring that such reporting be done by both the Options Exchange 
and the Options Market Maker, as is required by Rule 613. See 
Exemptive Request Letter, supra note 16, at 2. In accord with the 
exemptive relief requested, the SROs committed to require Options 
Market Makers to report to the Exchange the time at which a quote in 
a Listed Option is sent to the Options Exchange. Id. at 3. The 
Commission granted exemptive relief on March 1, 2016 in order to 
allow this alternative to be included in the CAT NMS Plan and 
subject to notice and comment. See Exemption Order, supra note 18.
    \206\ See CAT NMS Plan, supra note 3, at Section 6.4(d)(iii).
    \207\ Id.
---------------------------------------------------------------------------

Request for Comment
    168. The Commission granted an exemption from Rule 613 in order to 
allow the alternative of permitting Options Exchanges to report Options 
Market Maker quotes to the Central Repository in lieu of requiring such 
reporting by both the Options Exchange and the Options Market Maker as 
is required by Rule 613, to be included in the CAT NMS Plan and subject 
to notice and comment.\208\ Do Commenters believe that permitting 
exchanges to report quote information sent to them by Options Market 
Makers, including the Quote Sent Time, to the Central Repository would 
affect the completeness or quality of CAT Data? If so, what information 
would be missing?
---------------------------------------------------------------------------

    \208\ See Exemption Order, supra note 18.
---------------------------------------------------------------------------

    169. Under Rule 613, Options Market Makers would report their 
quotes to the Central Repository and time stamps would be attached to 
such quotes. Under the exemption, Options Market Makers would include 
the Quote Sent Time when sending quote information to the Options 
Exchanges. What, if any, are the risks of permitting the Options 
Exchanges to report information Options Market Makers otherwise would 
be required to report?
    170. Do Commenters believe that the cost savings from permitting 
Options Exchanges to report information Options Market Makers would 
otherwise have to report makes this a preferable approach than Rule 
613?
10. Error Rates
    The CAT NMS Plan defines Error Rate as ``the percentage of 
[R]eportable [E]vents collected by the [C]entral [R]epository in which 
the data reported does not fully and accurately reflect the order event 
that occurred in the market.'' \209\ Under the CAT NMS Plan, the 
Operating Committee sets the maximum Error Rate that the Central 
Repository would tolerate from a CAT Reporter reporting data to the 
Central Repository.\210\ The Operating Committee reviews and resets the 
maximum Error Rate, at least annually.\211\ If a CAT Reporter reports 
CAT Data to the Central Repository with errors such that their error 
percentage exceeds the maximum Error Rate, then such CAT Reporter would 
not be in compliance with the CAT NMS Plan or Rule 613.\212\ As such, 
``the Participants as Participants or the SEC may take appropriate 
action for failing to comply with the reporting obligations under the 
CAT NMS Plan and SEC Rule 613.'' \213\ The CAT NMS Plan, however, does 
not detail what specific compliance enforcement provisions would apply 
if a CAT Reporter exceeds the maximum Error Rate.
---------------------------------------------------------------------------

    \209\ See CAT NMS Plan, supra note 3, at Section 1.1; see also 
Rule 613(j)(6).
    \210\ See id. at Section 6.5(d)(i).
    \211\ See id. at Appendix C, Section A.3(b).
    \212\ See id. at Appendix C, Section A.3(b) and Rule 613(g) and 
(h).
    \213\ See id. at Appendix C, Section A.3(b).
---------------------------------------------------------------------------

    The CAT NMS Plan sets the initial maximum Error Rate at 5% for any 
data reported pursuant to subparagraphs (3) and (4) of Rule 
613(c).\214\ The SROs highlight that ``the Central Repository will 
require new reporting elements and methods for CAT Reporters and there 
will be a learning curve when CAT Reporters begin to submit data to the 
Central Repository'' in support of a 5% initial rate.\215\ Further, the 
SROs state that ``many CAT Reporters may have never been obligated to 
report data to an audit trail.'' \216\ The SROs believe an initial 
maximum Error Rate of 5% ``strikes the balance of making allowances for 
adapting to a new reporting regime, while ensuring that the data 
provided to regulators will be capable of being used to conduct 
surveillance and market reconstruction.'' \217\ In the CAT NMS Plan, 
the Participants compared the contemplated Error Rates of CAT Reporters 
to the error rates of OATS reporters in the time periods immediately 
following three significant OATS releases in the last ten years.\218\ 
The Participants state that for the three comparative OATS releases: 
\219\ An average of 2.42% of order events did not pass systemic 
validations; an average of 0.36% of order events were not submitted in 
a timely manner; an average of 0.86% of orders were unsuccessfully 
matched to a trade reporting facility trade report; an average of 3.12% 
of OATS Route Reports were unsuccessfully matched to an exchange order; 
and an average of 2.44% of OATS Route Reports were unsuccessfully 
matched to a report by another reporting entity.\220\
---------------------------------------------------------------------------

    \214\ See id. at Section 6.5(d)(i).
    \215\ See id. at Appendix C, Section A.3(b).
    \216\ See id.
    \217\ See id.
    \218\ See id. The SROs note that the three comparative releases 
are known as ``(1) OATS Phase III, which required manual orders to 
be reported to OATS; (2) OATS for OTC Securities which required OTC 
equity securities to be reported to OATS; and (3) OATS for NMS which 
required all NMS stocks to be reported to OATS.'' Id.
    \219\ See id. The SROs note that the calculated ``combined 
average error rates for the time periods immediately following [the 
OATS] release across five significant categories for these three 
releases'' was used in setting in the initial maximum Error Rate. 
Id.
    \220\ See id.
---------------------------------------------------------------------------

    The Participants, moreover, anticipate reviewing and resetting the 
maximum Error Rate once Industry Members (excluding Small Industry 
Members) begin to report to the Central Repository and again once Small 
Industry Members report to the Central Repository.\221\
---------------------------------------------------------------------------

    \221\ See id.
---------------------------------------------------------------------------

    The Participants thus propose a phased approach to lowering the 
maximum Error Rates among CAT Reporters based on the period of time 
reporting to the Central Repository and whether the CAT Reporters are 
Participants, large broker-dealers or small broker-dealers.\222\ The 
Plan sets forth a goal of the following maximum Error Rates \223\ where 
``Year(s)'' refers to year(s) after the CAT NMS Plan's date of 
effectiveness:
---------------------------------------------------------------------------

    \222\ See id.
    \223\ See id.

[[Page 30646]]



                                      Table 1--Maximum Error Rates Schedule
----------------------------------------------------------------------------------------------------------------
                                                    One year %      Two years %    Three years %   Four years %
----------------------------------------------------------------------------------------------------------------
Participants....................................               5               1               1               1
Large Industry Members..........................             N/A               5               1               1
Small Industry Members..........................             N/A             N/A               5               1
----------------------------------------------------------------------------------------------------------------

    The CAT NMS Plan requires that the Plan Processor to: (i) Measure 
and report errors every business day; \224\ (ii) provide CAT Reporters 
daily statistics and error reports as they become available, including 
a description of such errors; \225\ (iii) provide monthly reports to 
CAT Reporters that detail a CAT Reporter's performance and comparison 
statistics; \226\ (iv) define educational and support programs for CAT 
Reporters to minimize Error Rates; \227\ and (v) identify, daily, all 
CAT Reporters exceeding the maximum allowable Error Rate.\228\ To 
timely correct data-submitted errors to the Central Repository, the 
Participants require that the Central Repository receive and process 
error corrections at all times.\229\ Further, the CAT NMS Plan requires 
that CAT Reporters be able to submit error corrections to the Central 
Repository through a web-interface or via bulk uploads or file 
submissions, and that the Plan Processor, subject to the Operating 
Committee's approval, support the bulk replacement of records and the 
reprocessing of such records.\230\ The Participants, furthermore, 
require that the Plan Processor identify CAT Reporter data submission 
errors based on the Plan Processor's validation processes.\231\
---------------------------------------------------------------------------

    \224\ See id. The CAT NMS Plan sets forth that the Plan 
Processor shall provide the Operating Committee with regular Error 
Rate reports. Id. at Section 6.1(o)(v). The Error Rate reports shall 
include each of the following--if the Operating Committee deems them 
necessary or advisable--``Error Rates by day and by delta over time, 
and Compliance Thresholds by CAT Reporter, by Reportable Event, by 
age before resolution, by symbol, by symbol type (e.g., ETF and 
Index) and by event time (by hour and cumulative on the hour)[.]'' 
Id.
    \225\ See id. at Appendix C, Section A.3(b).
    \226\ See id.
    \227\ See id. at Appendix D, Section 10.1. The CAT NMS Plan sets 
forth support programs that shall include educational programs, 
including FAQs, a dedicated help desk, industry-wide trainings, 
certifications, industry-wide testing, maintaining Technical 
Specifications with defined intervals for new releases/updates, 
emailing CAT Reporter data outliers, conducting annual assessments, 
using test environments prior to releasing new code to production, 
and imposing CAT Reporter attendance requirements for testing 
sessions and educational and industry-wide trainings. Id.
    \228\ See id. at Appendix D, Section 10.4.
    \229\ See id. at Appendix C, Section A.3(b).
    \230\ See id.
    \231\ See id. At a minimum, the processes would include 
validating the data's file format, CAT Data format, type, 
consistency, range, logic, validity, completeness, timeliness and 
linkage. See id. at Appendix D, Section 7.2.
---------------------------------------------------------------------------

Request for Comment \232\
---------------------------------------------------------------------------

    \232\ See Section IV.E.4, infra, for further Error Rate related 
requests for comment.
---------------------------------------------------------------------------

    171. Do Commenters believe the CAT NMS Plan's initial maximum Error 
Rate of 5% for CAT Data reported to the Central Repository is 
appropriate in light of OATS' current error rate of less than 1%? \233\ 
Why or why not?
---------------------------------------------------------------------------

    \233\ See Section IV.E.1.b(1), infra.
---------------------------------------------------------------------------

    172. Please provide examples of error rates that are generally 
accepted with respect to other regulatory data reporting systems. At 
what error rate should data be considered materially unreliable? Please 
explain.
    173. Do Commenters believe the CAT NMS Plan's initial maximum Error 
Rate of 5% would negatively affect the quality of CAT Data? Why or why 
not? In explaining why or why not, please address each quality 
(accuracy, completeness, timeliness and accessibility) separately.
    174. Do Commenters believe that it was reasonable for the 
Participants to compare the contemplated Error Rates of CAT Reporters 
to the error rates of OATS reporters in the time periods immediately 
following three significant OATS releases in the last ten years? Why or 
why not?
    175. If not 5%, what initial maximum Error Rate do Commenters 
believe Participants and Industry Members should be subject to and why?
    176. What impact, if any, do Commenters believe a 5% initial 
maximum Error Rate would have on Industry Members' costs of compliance? 
Please describe the costs of correcting audit trail data. Given the 
costs of correcting audit trail data, do Commenters believe that 
establishing a lower maximum Error Rate could be less costly to 
Industry Members? Why or why not? How much less costly?
    177. What impact, if any, do Commenters believe a 5% initial 
maximum Error Rate would have on the timing of the retirement of any 
redundant audit trail systems and any related costs? Please explain. 
Should the actual Error Rate for CAT Data affect the timing of the 
retirement of any redundant audit trail systems? If so, why? If not, 
why not?
    178. Do Commenters believe the CAT NMS Plan's target maximum Error 
Rate of 1% for CAT Data reported to the Central Repository pursuant to 
the CAT NMS Plan's phased approach is the appropriate target maximum 
Error Rate in light of current industry standards? If not, why not? If 
not 1%, what target maximum Error Rate do Commenters believe 
Participants and Industry Members should be subject to and why?
    179. Do Commenters believe there are any increased risks as a 
result of allowing CAT Data subject to an initial maximum Error Rate of 
5% to be reported to the CAT? How difficult would it be for the Central 
Repository to process and analyze CAT Data based on data reported 
subject to an initial maximum Error Rate of 5%? Specifically, what are 
the increased risks, if any, of CAT Data reported subject to an Error 
Rate of 5% in respect of combining or linking data within the Central 
Repository or across other sources of trade and order data currently 
available to regulators?
    180. Do Commenters believe there are any increased risks as a 
result of allowing CAT Data subject to a target maximum Error Rate of 
1% to be reported to the CAT? How difficult would it be for the Central 
Repository to process and analyze CAT Data based on data reported 
subject to a target maximum Error Rate of 1%? Specifically, what are 
the increased risks, if any, of CAT Data reported subject to an Error 
Rate of 1% in respect of combining or linking data within the Central 
Repository or across other sources of trade and order data currently 
available to regulators?
    181. The CAT NMS Plan provides that the Participants would review 
and reset, at least on an annual basis, the maximum Error Rate. Do 
Commenters believe that this establishes an appropriately rigorous 
schedule for the Participants to evaluate whether the maximum Error 
Rate could potentially be set to a lower rate? Are there any other 
factors that should affect when and how the maximum Error Rate is set?
    182. The CAT NMS Plan provides as a goal a four-year phased 
approach schedule to lower the maximum Error

[[Page 30647]]

Rate segmented by Participants, large broker-dealers and small broker-
dealers. Do Commenters believe a phased schedule is appropriate and 
reasonable? Do Commenters believe establishing segments is appropriate 
and reasonable, and if so are these the appropriate Error Rate 
groupings? What alternative groupings, if any, do Commenters believe 
are the appropriate Error Rate groupings?
    183. Do Commenters believe that the CAT NMS Plan is clear whether 
the four-year phased approach is a goal? Should it be more than a goal? 
Please explain.
    184. Do Commenters believe the phased approach for CAT 
implementation, whereby SROs would begin reporting CAT Data one year 
prior to other CAT Reporters and two years prior to small CAT 
Reporters, would affect the quality of the CAT Data and the number of 
available CAT Data items in the audit trail?
    185. Do Commenters believe the CAT NMS Plan provides adequate 
enforcement provisions to ensure CAT Reporters submit data to the 
Central Repository no higher than the maximum Error Rate? If not, what 
additional enforcement provisions should the CAT NMS Plan provide?
    186. Do Commenters believe that there should be a lower initial 
maximum Error Rate and/or a more accelerated or slower reduction of the 
target maximum Error Rate? Would an accelerated reduction of the target 
maximum Error Rate facilitate the earlier retirement of any redundant 
audit trail system? What should the initial maximum Error Rate and/or 
what should be the schedule for reducing the target maximum Error Rate?
    187. What framework and criteria should regulators adopt when 
determining whether to retire potentially redundant regulatory data 
reporting systems? Please explain when and how such retirement should 
take place.
    188. Do Commenters believe the CAT NMS Plan sets forth sufficient 
consequences for a CAT Reporter exceeding the maximum Error Rates? If 
not, what should be those consequences?
    189. Do Commenters believe that some errors are of greater concern 
than others? If so, what types of errors are more or less problematic? 
Should the type of error be considered when calculating Error Rates? If 
so, how should the Plan Processor take into account different types of 
errors when calculating Error Rates? How should the Participants take 
into account different types of errors when setting Error Rates?
11. Regulatory Access
    Under Section 6.5(c) of the CAT NMS Plan, the Plan Processor must 
provide regulators access to the Central Repository for regulatory and 
oversight purposes and create a method of accessing CAT Data that 
includes the ability to run complex searches and generate reports.\234\ 
Section 6.10(c) requires regulator access by two different methods: (1) 
An online targeted query tool with predefined selection criteria to 
choose from; and (2) user-defined direct queries and bulk extractions 
of data via a query tool or language allowing querying of all available 
attributes and data sources.\235\ Additional requirements concerning 
regulator access appear in Section 8 of Appendix D.\236\
---------------------------------------------------------------------------

    \234\ See CAT NMS Plan, supra note 3, at Section 6.5(c). 
Appendix C provides objective milestones to assess progress 
concerning regulator access to the Central Repository. See id. at 
Appendix C, Section C.10(d).
    \235\ Id. at Section 6.10(c). Section 6.10(c) also requires the 
Plan Processor to reasonably assist regulatory staff with queries, 
submit queries on behalf of regulatory staff as requested, and 
maintain a help desk to assist regulatory staff with questions 
concerning CAT Data. Id.
    \236\ See id. at Appendix D, Section 8.
---------------------------------------------------------------------------

    The CAT NMS Plan requires that CAT must support a minimum of 3,000 
regulatory users and at least 600 such users accessing CAT concurrently 
without an unacceptable decline in performance.\237\ Moreover, CAT must 
support an arbitrary number of user roles and, at a minimum, include 
defined roles for both basic and advanced regulatory users.\238\
---------------------------------------------------------------------------

    \237\ Id. at Appendix D, Section 8.1.
    \238\ Id.
---------------------------------------------------------------------------

a. Online Targeted Query Tool
    Sections 8.1.1, 8.1.2, and 8.1.3 of Appendix D contain further 
specifications for the online targeted query tool.\239\ The tool must 
allow for retrieval of processed and/or validated (unlinked) data via 
an online query screen that includes a choice of a variety of pre-
defined selection criteria.\240\ Targeted queries must include date(s) 
and/or time range(s), as well as one or more of a variety of fields 
listed in Section 8.1.1 (e.g., product type, CAT-Reporter-ID, and 
Customer-ID).\241\ Targeted queries would be logged such that the Plan 
Processor could provide monthly reports to the SROs concerning metrics 
on performance and data usage of the search tool.\242\ The CAT NMS Plan 
further requires that acceptable response times for the targeted search 
be in increments of less than one minute; for complex queries scanning 
large volumes of data or large result sets (over one million records) 
response times must be available within 24 hours of the request; and 
queries for data within one business date of a 12-month period must 
return results within three hours regardless of the complexity of 
criteria.\243\ Under the CAT NMS Plan, regulators may access all CAT 
Data except for PII data (access to which would be limited to an 
authorized subset of Participant and Commission employees) and the Plan 
Processor must work with regulators to implement a process for 
providing them with access and routinely verifying a list of active 
users.\244\
---------------------------------------------------------------------------

    \239\ Id. at Appendix D, Sections 8.1.1-8.1.3.
    \240\ Id. at Appendix D, Section 8.1.1.
    \241\ Id.
    \242\ Id.
    \243\ Id. at Appendix D, Section 8.1.2. Appendix D, Section 
8.1.2 contains further performance requirements applicable to data 
and the architecture of the online query tool. Id.
    \244\ Id. at Appendix D, Section 8.1.3.
---------------------------------------------------------------------------

b. User-Defined Direct Queries and Bulk Extraction of Data
    Section 8.2 of Appendix D outlines the requirements for user-
defined direct queries and bulk extraction of data, which regulators 
would use to obtain large data sets for internal surveillance or market 
analysis.\245\ Under the CAT NMS Plan, regulators must be able to 
create, save, and schedule dynamic queries that would run directly 
against processed and/or unlinked CAT Data.\246\ Additionally, CAT must 
provide an open application program interface (``API'') that allows use 
of analytic tools and database drivers to access CAT Data.\247\ Queries 
submitted through the open API must be auditable and the CAT System 
must contain the same level of control, monitoring, logging, and 
reporting as the online targeted query tool.\248\ The Plan Processor 
must also provide procedures and training to regulators that would use 
the direct query feature.\249\ Sections 8.2.1 and 8.2.2 of Appendix D 
contain additional specifications for user-defined direct queries and 
bulk data extraction, respectively.\250\
---------------------------------------------------------------------------

    \245\ Id. at Appendix D, Section 8.2.
    \246\ Id.
    \247\ Id.
    \248\ Id. Direct queries must not return or display PII data but 
rather display non-PII unique identifiers (e.g., Customer-ID or Firm 
Designated ID). The PII corresponding to these identifiers could be 
gathered using the PII workflow described in Appendix D, Data 
Security, PII Data Requirements. See id. at Appendix D, Section 
4.1.6.
    \249\ Id. at Appendix D, Section 8.2.
    \250\ Id. at Appendix D, Sections 8.2.1 and 8.2.2.
---------------------------------------------------------------------------

c. Regulatory Access Schedule
    Section A.2 of Appendix C addresses the time and method by which 
CAT

[[Page 30648]]

Data would be available to regulators.\251\ Section A.2(a) requires 
that data be available to regulators any point after the data enters 
the Central Repository and passes basic format validations.\252\ After 
errors are communicated to CAT Reporters on T+1, CAT Reporters would be 
required to report corrected data back to the Central Repository by 8 
a.m. Eastern Time on T+3.\253\ Regulators must then have access to 
corrected and linked Order and Customer data by 8:00 a.m. Eastern Time 
on T+5.\254\ Section A.2(b) generally describes Bidders' approaches 
regarding regulator access and use of CAT Data and notes that although 
the SROs set forth the standards the Plan Processor must meet, they do 
not endorse any particular approach.\255\ Section A.2(c) outlines 
requirements the Plan Processor must meet for report building and 
analysis regarding data usage by regulators, consistent with, and in 
addition to, the specifications outlined in Section 8 of Appendix 
D.\256\
---------------------------------------------------------------------------

    \251\ Id. at Appendix C, Section A.2.
    \252\ Id. at Appendix C, Section A.2(a). Appendix C, Section 
A.3(e) indicates this would be no later than noon EST on T+1. Id. at 
Appendix C, Section A.3(e).
    \253\ Id. at Appendix C, Section A.1(a)(iv); Appendix D, Section 
6.1.
    \254\ Id. at Appendix C, Section A.2(a).
    \255\ Id. at Appendix C, Section A.2(b).
    \256\ Id. at Appendix C, Section A.2(c). Appendix C, Section 
A.2(d) addresses system service level agreements that the SROs and 
Plan Processor would enter into. Id. at Appendix C, Section A.2(d).
---------------------------------------------------------------------------

Request for Comment \257\
---------------------------------------------------------------------------

    \257\ See Section IV.H.5, infra, for further regulatory access 
related requests for comment.
---------------------------------------------------------------------------

    190. Do Commenters believe the CAT NMS Plan's ``Functionality of 
the CAT System'' Section (Section 8 of Appendix D) describes with 
sufficient detail how a regulator would access, use and analyze CAT 
Data? If not, describe what, if any, additional requirements and 
details should be provided and how.
    191. Do Commenters believe the CAT NMS Plan's ``Functionality of 
the CAT System'' Section sufficiently addresses all regulators' end-
user requirements? If not, please explain. Describe what, if any, 
additional requirements and details should be provided and how.
    192. If Commenters believe that the CAT NMS Plan's ``Functionality 
of the CAT System'' Section does not cover all regulators' end-user 
requirements, please describe how regulators would integrate their 
applications in a timely and reasonable manner.
    193. The CAT NMS Plan permits the CAT to be implemented in a way 
that would (1) require regulators to download entire data sets and 
analyze such data within the regulator or the regulators' cloud or (2) 
permit regulators to analyze sets of data within the CAT using 
applications or programs selected by the Commission. What do Commenters 
believe are the advantages and disadvantages to each approach?
    194. Do Commenters believe the CAT NMS Plan's T+5 schedule for 
regulatory access to corrected and linked Order and Customer data is 
the appropriate schedule in light of current industry standards? If 
not, why not? Do Commenters believe that the SROs' determination of 
current industry standards is reasonable or appropriate? Do Commenters 
believe that it is appropriate to base the timing for regulatory access 
on industry standards? Why or why not?
    195. If the T+5 schedule is not appropriate, when do Commenters 
believe regulatory access to corrected and linked Order and Customer 
data should be provided and why? Do Commenters believe the SROs' should 
include in the CAT NMS Plan detailed provisions with milestones in 
achieving a more accelerated regulatory access schedule to corrected 
and linked Order and Customer data?
    196. Do Commenters believe the Plan's proposed error correction 
timeframe--i.e., communication of errors on T+1, corrected data 
resubmitted by CAT Reporters by T+3, and corrected data available to 
regulators by T+5--is feasible and appropriate in light of current 
industry standards? If not, why not, and how long do Commenters believe 
these error correction timeframes should be and why? Are shorter 
timeframes feasible and appropriate in light of current industry 
standards? Why or why not?
    197. To what extent do Commenters believe the CAT NMS Plan's T+5 
regulatory access schedule to corrected and linked Order and Customer 
data would affect the accuracy, completeness, accessibility and/or 
timeliness of CAT Data collected and maintained under the CAT? How?
    198. To what extent do Commenters believe the Plan's three-day 
window of error correction would affect the accuracy, completeness, 
accessibility and/or timeliness of CAT Data collected and maintained 
under the CAT? How?
    199. Regulators' technology teams would be required to work with 
the Plan Processor to integrate their applications under the CAT NMS 
Plan. What, if any, are the risks to this approach? Should the Plan 
Processor be required to enter into support contracts with regulators? 
If so, please explain. Describe what, if any, service contract terms 
should be set forth in the CAT NMS Plan or set forth in any related 
documents. Do Commenters have any concerns about the security or 
confidentiality of CAT Data resulting from a service contract between 
the Plan Processor and the regulators? If so, please explain. If 
Commenters have any security or confidentiality concerns resulting from 
a service contract between the Plan Processor and the regulators, 
please specify any appropriate service contract terms that would 
address the concerns.
    200. How do Commenters believe the Plan Processor should set 
pricing for a regulator seeking additional functionality from the Plan 
Processor under the CAT? What, if anything, do Commenters believe 
should govern pricing for additional functionality by the Plan 
Processor? For example, should pricing or contract standards (e.g., 
reasonable, commercially reasonable, etc.), agreed-upon profit 
margins--or minimums and maximums, etc.--be included under the CAT NMS 
Plan or any related documentation? If so, please explain.
    201. Do Commenters believe the CAT NMS Plan appropriately 
encourages or incentivizes the Participants and the Plan Processor to 
incorporate new technology and to innovate? Does the CAT NMS Plan 
appropriately encourage or incentivize the Plan Processor to have a 
flexible and scalable solution? Do Commenters believe that the CAT NMS 
Plan would result in a CAT that has adequate system flexibility and 
scalability to incorporate improvements in technology and future 
regulatory, analytic and data capture needs? Why or why not?
    202. Does the regulatory access approach set forth in the CAT NMS 
Plan provide regulators with sufficient tools to maximize their 
regulatory activities, actions, and improve their surveillances? If 
not, why not and what should be added?
    203. The CAT NMS Plan provides that targeted queries and data 
extractions would be logged so that the Plan Processor can provide the 
Operating Committee, the Participants, and the Commission with monthly 
performance and usage reports including data such as the user ID of the 
person submitting the query and the parameters of the query. Do 
Commenters believe that the data to be recorded in these logs and 
provided in these reports to each Participant and to the SEC would be 
appropriate and useful? Should any data elements be added or removed 
from these reports?
    204. Do Commenters believe it is appropriate for the Plan Processor 
and the Operating Committee to also have access to these logs and 
monthly performance and usage reports? How should the Plan Processor 
and

[[Page 30649]]

Operating Committee be permitted to use these logs and reports? To the 
extent that these logs and reports are accessible by the Plan Processor 
and the Operating Committee, should any data elements be added or 
removed? Should additional details or requirements be added to the CAT 
NMS Plan to clarify what the content of these logs and reports would be 
and which parties would have access to them?
12. Security, Confidentiality, and Use of Data
    The CAT NMS Plan provides that the Plan Processor is responsible 
for the security and confidentiality of all CAT Data received and 
reported to the Central Repository, including during all communications 
between CAT Reporters and the Plan Processor, data extraction, data 
manipulation and transformation, loading to and from the Central 
Repository, and data maintenance by the Central Repository.\258\ The 
Plan Processor must, among other things, require that individuals with 
access to the Central Repository agree to use CAT Data only for 
appropriate surveillance and regulatory activities and to employ 
safeguards to protect the confidentiality of CAT Data.\259\
---------------------------------------------------------------------------

    \258\ See CAT NMS Plan, supra note 3, at Section 6.5(f)(i), 
(iv).
    \259\ Id. at Section 6.5(f)(i).
---------------------------------------------------------------------------

    In addition, the Plan Processor must develop a comprehensive 
information security program as well as a training program that 
addresses the security and confidentiality of all information 
accessible from the CAT and the operational risks associated with 
accessing the Central Repository.\260\ The Plan Processor must also 
designate one of its employees as Chief Information Security Officer; 
among other things, the Chief Information Security Officer is 
responsible for creating and enforcing appropriate policies, 
procedures, and control structures regarding data security.\261\ The 
Technical Specifications, which the Plan Processor must publish, must 
include a detailed description of the data security standards for 
CAT.\262\
---------------------------------------------------------------------------

    \260\ Id. at Sections 6.1(m), 6.12.
    \261\ Id. at Section 6.2(b).
    \262\ Id. at Section 6.9.
---------------------------------------------------------------------------

    Appendix D of the CAT NMS Plan sets forth minimum data security 
requirements for CAT that the Plan Processor must meet.\263\ For 
example, Appendix D enumerates various connectivity, data transfer, and 
encryption requirements such as that the CAT System must have encrypted 
internet connectivity, CAT Reporters must connect to CAT infrastructure 
using secure methods such as private lines or virtual private network 
connections over public lines, CAT Data must be encrypted in flight 
using industry standard best practices, PII data must be encrypted both 
at rest and in flight, and CAT Data stored in a public cloud must be 
encrypted at rest.\264\ Additional requirements regarding data storage, 
data access, breach management, and PII data are also specified in 
Appendix D.\265\
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    \263\ Id. at Appendix D, Section 4.
    \264\ Id. at Appendix D, Section 4.1.1, 4.1.2.
    \265\ Id. at Appendix D, Section 4.1.3-4.1.6.
---------------------------------------------------------------------------

    In addition, the Participants must establish and enforce policies 
and procedures that ensure the confidentiality of the CAT Data obtained 
from the Central Repository, limit the use of CAT Data obtained from 
the Central Repository solely for surveillance and regulatory 
purposes,\266\ implement effective information barriers between each 
Participant's regulatory and non-regulatory Staff with regard to CAT 
Data, and limit access to CAT Data to designated persons.\267\ However, 
a Participant may use the Raw Data \268\ it reports to the Central 
Repository for ``commercial or other'' purposes if not prohibited by 
applicable law, rule or regulation.\269\
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    \266\ The Commission notes that regulatory purposes includes, 
among other things, analysis and reconstruction of market events, 
market analysis and research to inform policy decisions, market 
surveillance, examinations, investigations, and other enforcement 
functions.
    \267\ Id. at Section 6.5(f)(ii), (g).
    \268\ Raw data is defined as ``Participant Data and Industry 
Member Data that has not been through any validation or otherwise 
checked by the CAT System.'' Id. at Section 1.1.
    \269\ Id. at Section 6.5(f)(i).
---------------------------------------------------------------------------

Request for Comment
    205. Do Commenters believe that the CAT NMS Plan appropriately 
allocates responsibility for the security and confidentiality of CAT 
Data among the Participants, the Plan Processor, and other parties? If 
not, how should these responsibilities be allocated?
    206. Do Commenters believe that the data security requirements set 
out in Appendix D are appropriate and reasonable? Should any additional 
details or requirements be provided?
    207. What, if any, specific details or requirements regarding data 
security and confidentiality do Commenters believe should be included 
in the information security program, training program, and Technical 
Specifications to be developed by the Plan Processor? Should additional 
details on the content of these programs and specifications be 
provided?
    208. What, if any, specific details or requirements regarding data 
confidentiality do Commenters believe should be included in the 
policies and procedures to be developed by the Participants? Should 
additional details on the content of these policies and procedures be 
provided?
    209. Do Commenters believe that the CAT NMS Plan includes 
sufficient safeguards to prevent the misuse of CAT Data by employees or 
agents of the Participants or other persons with access to the Central 
Repository? For example, do Commenters believe that requiring 
information barriers between regulatory and non-regulatory staff \270\ 
and permitting the use of CAT Data only for regulatory, surveillance, 
and commercial or other purposes as permitted by law \271\ are 
effective measures to prevent the misuse of CAT Data? Should the CAT 
NMS Plan set forth additional detail regarding the distinction between 
regulatory and non-regulatory staff and between the appropriate and 
inappropriate use of CAT Data for commercial or other purposes? Should 
the CAT NMS Plan prescribe any specific information barriers? If so, 
what should be prescribed in the CAT NMS Plan?
---------------------------------------------------------------------------

    \270\ See id. at Section 6.5(f)(ii)(A).
    \271\ See id. at Section 6.5(f)(i)(A).
---------------------------------------------------------------------------

    210. Do Commenters believe the data access and breach management 
provisions described in Appendix D of the CAT NMS Plan \272\ are 
effective mechanisms for monitoring and preventing the misuse of CAT 
Data? Why or why not? Would any additional details or requirements make 
these provisions more effective?
---------------------------------------------------------------------------

    \272\ See id. at Appendix D, Sections 4.1.4, 4.1.5.
---------------------------------------------------------------------------

    211. Which persons or entities should have the responsibility to 
monitor for and prevent the misuse of CAT Data? For example, should the 
Chief Compliance Officer or the Chief Information Security Officer have 
this responsibility? Why or why not? Should additional details be 
provided to clarify where this responsibility lies?
    212. Do Commenters believe it is appropriate for Participants to be 
permitted to use all Raw Data reported to the Central Repository for 
commercial purposes? If not, what particular types of Raw Data would be 
inappropriate to use for commercial purposes?
    213. Do Commenters believe that the CAT NMS Plan adequately 
addresses the protection and security of PII in CAT? If not, why not 
and what should be added to the CAT NMS Plan? For example, should the 
CAT NMS Plan provide that PII is accessible only when required, that 
PII be properly masked,

[[Page 30650]]

and/or that it be safeguarded such that it would not be improperly 
accessible?
    214. Do Commenters believe that there are alternative methods or 
information that could be used in lieu of requiring the reporting of 
Customer PII to the Central Repository that, without diminishing the 
quality of CAT Data available to regulators or impairing regulators' 
ability to use CAT Data to carry out their functions, would create less 
risk of a breach of the security or confidentiality of the personal 
information of Customers? If so, what methods or information, 
specifically, could serve as such an alternative to PII? \273\
---------------------------------------------------------------------------

    \273\ See Section III.B.7, supra, for additional PII related 
requests for comment.
---------------------------------------------------------------------------

    215. Do Commenters believe that the CAT NMS Plan includes adequate 
requirements regarding the operational security of the CAT System? 
What, if any, additional details or requirements should be provided? 
Should the CAT NMS Plan require the Plan Processor to have the ability 
to monitor for threats, attacks, and anomalous activity on a 24/7 basis 
through a Security Operations Center (``SOC'') or a similar capability? 
What would be the costs and benefits of such a requirement?
    216. Appendix C of the CAT NMS Plan discusses solutions for 
encrypting data at rest and in motion. Appendix D of the CAT NMS Plan 
states that all CAT Data must be encrypted in flight, and PII Data must 
encrypted in flight and at rest. Do Commenters believe that the Plan's 
data encryption requirements are adequate for CAT Data and PII Data? 
Why or why not? Do Commenters believe that the CAT NMS Plan provides 
sufficient information and clarity regarding data encryption 
requirements? Do Commenters believe that there is a particular method 
for data encryption, in motion and/or at rest, that should be used?
    217. Appendix D, Section 4.1.1 of the CAT NMS Plan states that the 
CAT System must have ``encrypted internet connectivity.'' What are the 
risks, if any, of allowing Internet access from the Central Repository, 
even if encrypted? Please explain. Do Commenters believe that the 
encrypted connection requirement in the CAT NMS Plan should apply to 
communication paths from the Central Repository to the Internet and/or 
connections from CAT to/from trusted parties? What challenges would the 
Plan Processor face in implementing either option? Does one option 
provide more robust security than the other? Why or why not?
    218. To the extent the requirement for ``encrypted internet 
connectivity'' applies to connectivity between the Central Repository 
and trusted parties such as the Commission and the Participants, do 
Commenters believe that the CAT NMS Plan should require that these 
parties and the Plan Processor enter into formal Memoranda of 
Understanding or Interconnection Security Agreements that document the 
technical, operational, and management details regarding the interface 
between the CAT System and these parties? Why or why not?
    219. With respect to industry standards, do Commenters believe that 
the CAT NMS Plan should be updated to include standards and 
requirements of other NIST Special Publications (``SPs'') that were not 
mentioned in Appendix D (e.g., NIST SP 800-86 for incident handling, 
800-44 for securing public-facing web servers, 800-146 for cloud 
security)? Why or why not?
    220. Do Commenters believe that the Plan should be updated more 
broadly to include the NIST family of guidance documents? Why or why 
not?
    221. Throughout the Plan, there are numerous references to 
leveraging ``industry best practices'' pertaining to compliance 
subjects such as system assessments and disaster recovery/business 
continuity planning. How do ``industry best practices'' compare to NIST 
guidance in these areas? Do Commenters believe that the Plan Processor 
should implement NIST guidance for the Plan rather than industry best 
practices? Why or why not?
    222. The CAT NMS Plan states that the Plan Processor must conduct 
third party risk assessments at regular intervals to verify that 
security controls implemented are in accordance with NIST SP 800-
53.\274\ Do Commenters believe that the CAT NMS Plan should adopt the 
meaning and terminology of Security Assessment and Authorization as 
defined by the NIST and/or other NIST guidance in the CAT NMS Plan, 
particularly within the requirements set forth in Appendix D to the CAT 
NMS Plan? Why or why not?
---------------------------------------------------------------------------

    \274\ See CAT NMS Plan, supra note 3, at Appendix D, Section 
5.3.
---------------------------------------------------------------------------

    223. Do Commenters believe that the CAT NMS Plan should include 
requirements regarding how the Plan Processor should categorize data 
from a security perspective? For example, should the Plan Processor be 
required to implement data categorization standards consistent with 
Federal Information Processing Standard (``FIPS'') 199 or NIST SP 800-
60? Why or why not? Would including data categorization requirements in 
the CAT NMS Plan improve data integrity, availability, segmentation, 
auditing, and incident response? Why or why not?
    224. The CAT NMS Plan provides that CAT must follow NIST SP 800-
137--Information Security Continuous Monitoring for Federal Information 
Systems and Organizations in addition to a limited number of related 
monitoring provisions.\275\ Do Commenters believe that the CAT NMS Plan 
provides sufficient and robust information related to continuous 
monitoring program requirements? Why or why not?
---------------------------------------------------------------------------

    \275\ See id. at Sections 6.1(g), 6.10(c), Appendix C, Section 
A.4, Appendix D, Sections 2.2, 4.1.2, 4.1.4, 4.2, 8.3, 8.4.
---------------------------------------------------------------------------

    225. Do Commenters believe the CAT NMS Plan adequately sets forth 
the roles and responsibilities of independent third party risk 
assessment functions, including the consistent description of their 
specific functions and performance frequency? For example, are the CAT 
NMS Plan independent third party risk assessment provisions consistent 
with ``industry best practices''? Or should the CAT require a greater 
or lesser performance frequency than as described in the CAT NMS Plan? 
As another example, do the technical assessments described in Section 
6.2, Appendix C, Section A.5, and the NIST SP 800-53 requirements noted 
in Appendix D, Section 4.2, adequately and clearly establish the roles 
and responsibilities of the parties assessing the technical aspects of 
the CAT?
    226. Do Commenters believe the CAT NMS Plan should specify the 
general audit and independent assessment requirements and the proper 
timeframes for when those assessments should occur? For instance, are 
there assessments that may need to occur on an annual basis? If so, 
what are those assessments? Are there assessments that may need to 
occur more frequently? If so, what are those assessments and why do 
they need to occur more frequently?
    227. Do Commenters believe that the CAT NMS Plan requirements for 
conducting ad hoc penetration testing and an application security code 
audit by a reputable third-party in Appendix D, Section 4.1.3 ``prior 
to launch'' and periodically as defined by SLAs are consistent with 
industry best practices? Should additional testing or audits be 
required? Why or why not? Should testing or audits be required to occur 
more frequently than required by the CAT NMS Plan and SLAs? Why or why 
not?
    228. Do Commenters believe that the third party risk assessments 
and penetration tests required by the CAT

[[Page 30651]]

NMS Plan could themselves compromise the security or confidentiality of 
CAT Data? Please explain.
    229. In Section 6.2(b)(vi) of the CAT NMS Plan, the Chief 
Information Security Officer is required to report to the Operating 
Committee the activities of the Financial Services Information Sharing 
and Analysis Center (``FS-ISAC'') or other comparable body. Do 
Commenters believe there are other cyber and threat intelligence 
bodies, in addition to FS-ISAC, that the Plan Processor should join? 
Why or why not?
    230. Do Commenters believe the CAT NMS Plan effectively describes 
the verification process when CAT Reporters connect to the Central 
Repository network? For example, which specific individual(s) at a CAT 
Reporter would be allowed access to CAT for reporting and verification 
purposes? Should there be a public key exchange process?
    231. Do Commenters believe the CAT NMS Plan provides sufficient 
detail regarding the ability of CAT to determine whether a regulator's 
queries are shielded from the Plan Processor (including its staff, 
officers, and administrators) as well as other regulators and users of 
CAT? If not, what specifically should be added to the CAT NMS Plan?
    232. Do Commenters believe that the CAT NMS Plan should require an 
audit of all CAT Reporters' data security? If so, which person or 
entity should have responsibility for such an audit, and what should 
the scope and elements of the audit be? Please estimate the cost of 
such audits. What other changes, if any, should be made to the CAT NMS 
Plan to provide for the allocation of sufficient resources whereby such 
an audit could be carried out?
    233. Do Commenters believe the CAT NMS Plan should require the Plan 
Processor to provide a ``blanket'' security authorization to operate 
(``ATO'') document (or its equivalent) prior to CAT Reporters sending 
CAT Data?

IV. Economic Analysis

A. Introduction

    When adopting Rule 613, the Commission noted that the adopted Rule 
permitted the SROs to consider a wider array of solutions than did the 
proposed Rule. The Commission stated its belief that, as a result, 
``the economic consequences of the consolidated audit trail now will 
become apparent only over the course of the multi-step process for 
developing and approving an NMS plan that will govern the creation, 
implementation, and maintenance of a consolidated audit trail.'' \276\ 
In particular, the Commission noted its belief that ``the costs and 
benefits of creating a consolidated audit trail, and the consideration 
of specific costs as related to specific benefits, is more 
appropriately analyzed once the SROs narrow the expanded array of 
choices they have under the adopted Rule and develop a detailed NMS 
plan.'' \277\ The Commission also noted that a ``robust economic 
analysis of . . . the actual creation and implementation of a 
consolidated audit trail itself . . . requires information on the 
plan's detailed features (and their associated cost estimates) that 
will not be known until the SROs submit their NMS plan to the 
Commission for its consideration.'' \278\ Accordingly, the Commission 
deferred its economic analysis of the actual creation, implementation, 
and maintenance of the CAT until after submission of an NMS plan.
---------------------------------------------------------------------------

    \276\ See Adopting Release, supra note 9, at 45725-6.
    \277\ Id.
    \278\ Id. at 45726.
---------------------------------------------------------------------------

    To assist in that analysis, Rule 613, as adopted, requires that the 
SROs: (1) Provide an estimate of the costs associated with creating, 
implementing, and maintaining the consolidated audit trail under the 
terms of the NMS plan submitted to the Commission for its 
consideration; (2) discuss the costs, benefits, and rationale for the 
choices made in developing the NMS plan submitted; and (3) provide 
their own analysis of the submitted NMS plan's potential impact on 
competition, efficiency and capital formation.\279\ The Commission 
stated that it believed that these estimates and analyses would help 
inform public comment regarding the CAT NMS Plan and would help inform 
the Commission as it evaluates whether to approve the CAT NMS 
Plan.\280\
---------------------------------------------------------------------------

    \279\ Id.; see also 17 CFR 242.613(a)(1)(vii), (viii), (xi), 
(xii).
    \280\ See Adopting Release, supra note 9, at 45726. Rule 
613(a)(5) requires that ``[i]n determining whether to approve the 
national market system plan, or any amendment thereto, and whether 
the national market system plan or any amendment thereto is in the 
public interest under [Rule] 608(b)(2), the Commission shall 
consider the impact of the national market system plan or amendment, 
as applicable, on efficiency, competition, and capital formation.'' 
17 CFR 242.613(a)(5).
---------------------------------------------------------------------------

    The Commission is sensitive to the economic effects of the CAT NMS 
Plan,\281\ including its costs and benefits and its impact on 
efficiency, competition and capital formation. In the Adopting Release 
for Rule 613, the Commission considered the economic effects of the 
actions the SROs were required to take upon approval of the adopted 
Rule, specifically the requirement that the SROs develop an NMS plan, 
utilizing their own resources and undertaking their own research, that 
addresses the specific details, cost estimates, considerations, and 
other requirements of the Rule.\282\ As noted in the Adopting Release, 
however, Rule 613 provided the SROs with ``flexibility in how they 
[chose] to meet the requirements of the adopted Rule,'' \283\ allowing 
the SROs to consider a number of different approaches in developing the 
CAT NMS Plan.
---------------------------------------------------------------------------

    \281\ See CAT NMS Plan, supra note 3.
    \282\ See Adopting Release, supra note 9, at 45726.
    \283\ Id. at 45725.
---------------------------------------------------------------------------

    In accordance with the approach articulated by the Commission in 
the Adopting Release, the Commission is hereby publishing its economic 
analysis of the CAT NMS Plan and is soliciting comment thereon. This 
Section reflects the Commission's preliminary analysis and conclusions 
regarding the economic effects of the creation, implementation and 
maintenance of the CAT pursuant to the details proposed in the NMS plan 
submitted to the Commission for its consideration. The analysis is 
divided into eight topics: (1) A summary of the expected economic 
effects of approving the CAT NMS Plan; (2) a description of the 
economic framework for analyzing the economic effects of approving the 
CAT NMS Plan; (3) a discussion of the current, or ``Baseline,'' audit 
trail data available to regulators, and the sources of such data; (4) a 
discussion of the potential benefits of the CAT NMS Plan; (5) a 
discussion of the potential costs of the CAT NMS Plan; (6) an economic 
analysis of the CAT NMS Plan's impact on efficiency, competition, and 
capital formation; (7) a discussion of alternatives to various features 
of the CAT NMS Plan and to the CAT NMS Plan itself; and (8) a request 
for comment on the Commission's preliminary economic analysis.

B. Summary of Expected Economic Effects

    As the Commission explained in the Adopting Release, the Commission 
believes that the regulatory data infrastructure on which the SROs and 
the Commission currently must rely is outdated for effective oversight 
of a complex, dispersed, and highly automated national market 
system.\284\ In performing their oversight responsibilities, regulators 
today must attempt to cobble together disparate data from a variety of 
existing information systems, each lacking in completeness,

[[Page 30652]]

accuracy, accessibility, and/or timeliness--a model that neither 
supports the efficient aggregation of data from multiple trading venues 
nor yields the type of complete and accurate market activity data 
needed for robust market oversight.\285\ The Commission has analyzed 
the expected economic effects of the CAT NMS Plan in light of these 
existing shortcomings and the goal of improving the ability of SROs and 
the Commission to perform their regulatory activities to the benefit of 
investors.\286\
---------------------------------------------------------------------------

    \284\ See id. at 45723.
    \285\ See id.
    \286\ The Commission noted current SRO audit trail limitations 
in the Proposing Release and the Adopting Release. See Proposing 
Release, supra note 9, at 32563-68; Adopting Release, supra note 9, 
at 45726-30. Rule 613 is designed to address these limitations.
---------------------------------------------------------------------------

    In general, the Commission preliminarily believes that, if 
approved, the CAT NMS Plan would result in benefits by improving the 
quality of the data available to regulators in four areas that affect 
the ultimate effectiveness of core regulatory efforts--completeness, 
accuracy, accessibility and timeliness.\287\ The Commission 
preliminarily believes that the improvements in these data qualities 
that would be realized from approval of the CAT NMS Plan would 
substantially improve regulators' ability to perform analysis and 
reconstruction of market events, and market analysis and research to 
inform policy decisions, as well as perform other regulatory 
activities, in particular market surveillance, examinations, 
investigations, and other enforcement functions. Regulators depend on 
data for many of these activities and the improvements in the data 
qualities would thus improve the efficiency and effectiveness of such 
regulatory activities. As explained further below, these improvements 
could benefit investors by giving regulators more and better regulatory 
tools to provide investors with a more effectively regulated trading 
environment,\288\ which could increase capital formation, liquidity, 
and price efficiency. Data improvements could enhance regulators' 
ability to provide investors and the public with more timely and 
accurate analysis and reconstruction of market events, and to develop 
more effective responses to such events.\289\ Improved understanding of 
emerging market issues resulting from enhanced market analysis and 
research could inform regulatory policies that improve investor 
protection through better market quality, more transparency, and more 
efficient prices.
---------------------------------------------------------------------------

    \287\ See Adopting Release, supra note 9, at 45727 (discussing 
four ``qualities'' of trade and order data that impact the 
effectiveness of core SRO and Commission regulatory efforts: 
Accuracy, completeness, accessibility, and timeliness); see also 
Section IV.E, infra, for a detailed discussion of the expected 
benefits of the CAT NMS Plan.
    \288\ See Section IV.E.2, infra.
    \289\ See Section IV.E.2.a, infra.
---------------------------------------------------------------------------

    In terms of completeness, the Plan requires the reporting of 
certain additional data fields, events, and products.\290\ More 
importantly, the CAT NMS Plan requires certain data elements useful for 
regulatory analysis to be available from a single data source. Having 
relevant data elements available from a single source would simplify 
regulators' data collection process and facilitate more efficient 
analyses and surveillances that incorporate cross-market and cross-
product data.
---------------------------------------------------------------------------

    \290\ See CAT NMS Plan, supra note 3, at Sections 6.3, 6.4; see 
also 17 CFR 242.613(c)(7).
---------------------------------------------------------------------------

    With respect to the accuracy of available data, the Commission 
preliminarily believes that the requirements in the Plan would improve 
data accuracy significantly. For example, the Commission expects that 
the requirements to store the CAT Data in a uniform linked format and 
the use of consistent identifiers for customers and market participants 
would result in fewer inaccuracies as compared to current data sources. 
These accuracy improvements should significantly reduce the time 
regulators spend processing the data and finding solutions when faced 
with inaccurate data. The Commission preliminarily believes that the 
requirements in the Plan for clock synchronization and time stamp 
granularity would improve the accuracy of data with respect to the 
timing of market events, but the improvements would be modest. The 
Commission preliminarily believes that the Plan would improve 
regulators' ability to determine the sequence of a small percentage of 
market events relative to all surrounding events.\291\
---------------------------------------------------------------------------

    \291\ The CAT NMS Plan would also require that CAT Reporters' 
business clocks be synchronized to within 50 milliseconds of the 
time maintained by the NIST, which would increase the precision of 
the time stamps provided by the 39% of broker-dealers who currently 
synchronize their clocks with less precision than what is called for 
by the Plan. See supra note 125. Independent of the potential time 
clock synchronization benefits, the order linking data that would be 
captured in CAT should increase the proportion of events that could 
be sequenced accurately. This reflects the fact that some records 
pertaining to the same order could be sequenced by their placement 
in an order lifecycle (e.g., an order submission must have occurred 
before its execution) without relying on time stamps. This 
information may also be used to partially sequence surrounding 
events.
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    The Commission also preliminarily believes that the Plan would 
increase the accessibility of data for SROs and the Commission, because 
regulators would be able to access the CAT Data directly.\292\ This, 
coupled with the improvements in completeness, would vastly increase 
the scope of information readily available to regulators and 
significantly reduce the number of data requests from the several 
hundred thousand requests regulators make each year. The increased 
scope of readily available information should facilitate more data-
driven regulatory policy decisions, broaden the potential 
surveillances, expand the opportunities for SRO and Commission analysis 
to help target broker-dealers and investment advisers for examinations 
and help to perform those examinations.
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    \292\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.2, Appendix D, Section 8.1; see also 17 CFR 242.613(e)(2).
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    Finally, the Commission preliminarily believes that the CAT NMS 
Plan would improve the timeliness of available data. Because regulators 
would be able to access uncorrected data the day after an order event 
and would be able to access corrected and linked data five days after 
an order event,\293\ many data elements would be available to 
regulators more quickly than they are currently and the amount of time 
regulators would need to acquire and process data before running 
analyses would be reduced. For example, the corrected and linked data 
available on T+5 would identify the customer account associated with 
all order events, information that currently takes ten days or longer 
for regulators to obtain and then need to link to other data sources 
for use. These improvements in timeliness, combined with improvements 
in completeness, accessibility, and accuracy discussed above, would 
improve the efficiency of regulatory analysis and reconstruction of 
market events, as well as market analysis and research that informs 
policy decisions, and make market surveillance, examinations, 
investigations, and other enforcement functions more efficient, 
allowing, for example, the SROs and the Commission to review tips and 
complaints more effectively.
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    \293\ CAT Data would be reported by 8:00 a.m. Eastern Time on 
day T+1 and made available to regulators in raw form after it is 
received and passes basic formatting validations with an error 
correction process completed by 8:00 a.m. Eastern Time on day T+5. 
While the Plan does not specify exactly when these validations would 
be complete, the requirement to link records by 12:00 p.m. Eastern 
Time on day T+1 gives a practical upper bound on this timeline. See 
CAT NMS Plan, supra note 3, at Appendix C, Sections A.2(a), A.3(a), 
Appendix D, Section 6.2.
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    The Commission notes that the Plan lacks information regarding the 
details of certain elements of the Plan likely to affect the costs and 
benefits associated

[[Page 30653]]

with it, primarily because those details have not yet been determined, 
and this lack of information creates some uncertainty about the 
expected economic effects. As discussed further below, lack of 
specificity surrounding the processes for converting data formats and 
linking related order events creates uncertainty as to the anticipated 
improvements in accuracy because such processes have the potential to 
create new data inaccuracies. Lack of specificity surrounding the 
process for regulators to access the CAT Data also creates uncertainty 
around the expected improvements in accessibility. For example, while 
the Plan indicates that regulators would have an on-line targeted query 
tool and a tool for user-defined direct queries or bulk 
extraction,\294\ the Plan itself does not provide an indication for how 
user-friendly the tools would be or the particular skill set needed to 
use the tools for user-defined direct queries. However, the Commission 
has analyzed the expected economic effects of the Plan to the extent 
possible with the information available, noting areas of uncertainty in 
its analysis where applicable. The Commission has also considered 
whether certain provisions related to the operation and administration 
of the Plan could mitigate some of the uncertainties.\295\
---------------------------------------------------------------------------

    \294\ See CAT NMS Plan, supra note 3, at Appendix D, Sections 
8.1.1, 8.1.2.
    \295\ See Section IV.E.3.d, infra.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that more effective and 
efficient regulation of securities markets and market participants 
resulting from approval of the CAT NMS Plan could significantly benefit 
investors and the integrity of the market. For example, the Commission 
preliminarily believes that more effective and efficient surveillance 
and enforcement would detect a higher proportion of violative market 
activity. This additional detection could not only reduce violative 
behavior through potential enforcement actions, but through deterrence 
if market participants believe violative activities are more likely to 
be detected. Because violative activity degrades market quality and 
imposes costs on investors and market participants, reductions in 
violative activity would benefit investors and market integrity. 
Likewise, more effective and efficient risk assessment and risk-based 
examinations should more effectively facilitate the selection of market 
participants for examination who have characteristics that elevate 
their risk of violating the rules. Decreasing the amount of violative 
activity by targeting exams in this way would provide investors with a 
more effectively regulated trading environment and hence better market 
quality. Further, access to audit trail data that is comprehensive, 
accurate, and timely could improve regulatory reconstruction of market 
events, market analysis, and research resulting in an improved 
understanding of emerging market issues and regulatory policies that 
better encourage industry competition, thus improving investor 
protection through better transparency and more efficient prices.\296\
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    \296\ See Section IV.E.2.a, IV.E.2.b, infra.
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    Further, regulatory initiatives that are based on a more thorough 
understanding of underlying events and their causes, and that are 
narrowly tailored to address any market deficiency, could improve 
market quality and thus benefit investors. Moreover, access to more 
complete and linked audit trail data would improve regulators' ability 
to analyze and reconstruct market events, allowing regulators to 
provide investors and the public with more accurate explanations of 
market events, to develop more effective responses to such events, and 
to use the information to assist in retrospective analyses of their 
rules and pilots.
    The Commission has also evaluated the potential costs that would 
result from approval of the CAT NMS Plan. In particular, using 
information included in the Plan, information gathered from market 
participants through discussions, surveys of market participants, and 
other relevant information, the Commission has preliminarily estimated 
the potential costs associated with building and maintaining the 
Central Repository as well as the costs to report data to the Central 
Repository. Currently, the 20 Participants spend $154.1 million 
annually on reporting regulatory data and performing surveillance, 
while the approximately 1,800 broker-dealers anticipated to have CAT 
reporting responsibilities spend $1.6 billion annually on regulatory 
data reporting, for total current industry costs of $1.7 billion 
annually for regulatory data reporting and surveillance by SROs. The 
Commission preliminarily estimates the cost of the Plan as 
approximately $2.4 billion in initial aggregate implementation costs 
and recurring annual costs of $1.7 billion.\297\ The primary driver of 
the annual costs is the data reporting costs for broker-dealers, which 
are estimated to be $1.5 billion per year. For both large and small 
broker-dealers, the primary driver of both current $1.6 billion 
reporting costs and projected $1.5 billion CAT reporting costs is costs 
associated with staffing. Estimates of the costs to build the Central 
Repository are based on Bids that vary in a range as high as $92 
million. Current estimates of annual operating costs are based on Bids 
that vary in a range up to $135 million. The eventual magnitude of 
Central Repository costs is dependent on the Participants' selection of 
the Plan Processor, and may ultimately differ from estimates discussed 
above if Bids are revised as the bidding process progresses. 
Furthermore, the Plan anticipates a period of duplicative reporting 
responsibilities preceding the retirement of potentially duplicative 
regulatory data reporting systems; these duplicative reporting costs 
are likely to be significant.\298\
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    \297\ See Section IV.F.2, Table 9, infra.
    \298\ The economic analysis discusses duplicative reporting 
costs in Section IV.F.2, infra.
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    Drawing from the discussion in the CAT NMS Plan,\299\ the 
Commission expects that, if approved, the Plan would have a number of 
additional economic effects, including effects on efficiency, 
competition, and capital formation. The Commission preliminarily 
believes that the Plan generally promotes competition. However, the 
Commission recognizes that the Plan could increase barriers to entry 
because of the costs to comply with the Plan. Further, the Commission's 
analysis identifies several limiting factors to competition but Plan 
provisions and Commission oversight could address such limiting 
factors. The Commission preliminarily believes that the Plan would 
improve regulatory analysis and reconstruction of market events, as 
well as market analysis and research that informs policy decisions. In 
addition, the Plan would improve enforcement related activities, 
including the efficiency of regulatory activities such as market 
surveillance, examinations, investigations, and other enforcement 
functions that could enhance market efficiency by reducing violative 
activity that harms market efficiency. Finally, the Commission 
preliminarily believes that the Plan could have positive effects on 
capital formation and allocative efficiency and that the threat of a 
security breach at the Central Repository is unlikely to significantly 
harm capital formation. The Commission recognizes that the Plan's 
likely effects on competition, efficiency and capital formation are 
dependent to some extent on the

[[Page 30654]]

performance and decisions of the Plan Processor and the Operating 
Committee in implementing the Plan, and thus there is necessarily some 
uncertainty in the Commission's analysis. Nonetheless, the Commission 
believes that the Plan contains certain governance provisions, as well 
as provisions relating to the selection and removal of the Plan 
Processor, that mitigate this uncertainty by promoting decision-making 
that could, on balance, have positive effects on competition, 
efficiency, and capital formation.
---------------------------------------------------------------------------

    \299\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.8; see also Section IV.G, infra.
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    The Commission notes that while the Participants developed the Plan 
in compliance with Rule 613 by considering information from industry 
representatives, the Commission has discretion to approve the Plan 
subject to changes or conditions that the Commission deems necessary or 
appropriate.\300\ Therefore, as a part of this economic analysis, the 
Commission analyzed numerous alternatives to provisions of the CAT NMS 
Plan and to the CAT NMS Plan itself. The Commission analyzes 
alternatives to the approaches the Exemption Order permitted the 
Participants to include in the Plan; \301\ alternatives to certain 
specific approaches in the Plan; alternatives to the scope of certain 
specific elements of the Plan; and the broad alternative of modifying 
OATS or another existing system to meet the requirements of Rule 613 
instead of approving the Plan. Finally, the Commission requests comment 
on alternatives discussed in this economic analysis, alternatives 
considered in the Plan, and on whether the Commission should consider 
any additional alternatives.
---------------------------------------------------------------------------

    \300\ See 17 CFR 242.608(b)(1) (``No national market system plan 
. . . shall become effective unless approved by the Commission . . 
.''); 17 CFR 242.608(b)(2) (``Within 120 days of the date of 
publication of notice of filing of a national market system plan . . 
. the Commission shall approve such 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 Act.'').
    \301\ See Exemption Order, supra note 18.
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C. Framework for Economic Analysis

    As discussed above, the Commission is conducting an economic 
analysis of the CAT NMS Plan filed by the SROs on February 27, 2015, as 
amended, as anticipated in the Adopting Release for Rule 613.\302\ In 
particular, the Commission has carefully evaluated the information in 
the CAT NMS Plan, including the twelve considerations required by Rule 
613 \303\ and the details of the decisions left to the discretion of 
the SROs. The Commission has also considered information drawn from 
outside the Plan in order to assess potential economic effects not 
addressed therein. To provide context for this analysis, this Section 
describes the economic framework for the analysis and seeks to identify 
uncertainties within that framework.
---------------------------------------------------------------------------

    \302\ See Adopting Release, supra note 9, at 45789.
    \303\ See 17 CFR 242.613(a)(1).
---------------------------------------------------------------------------

1. Economic Framework
a. Benefits
    The CAT NMS Plan would create a new data source that could replace 
the use of some current data sources for many regulatory activities. As 
such, the economic benefits of the CAT NMS Plan would come from any 
expanded and more efficient regulatory activities facilitated by 
improvements to the data regulators use. Therefore, the framework for 
examining benefits in this economic analysis involves first considering 
whether and to what degree the CAT Data would improve on the Baseline 
of current trading and order data in terms of the four qualities of 
accuracy, completeness, accessibility, and timeliness.\304\
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    \304\ See Adopting Release, supra note 9, at 45727.
---------------------------------------------------------------------------

    Through these improvements in the data, the economic analysis then 
considers the degree to which the Plan would result in improvements to 
regulatory activities such as the analysis and reconstruction of market 
events, in addition to market analysis and research conducted by SROs 
and Commission Staff, as well as market surveillance, examinations, 
investigations, and other enforcement functions. These potential 
improvements, based on the regulatory objectives of the CAT NMS Plan 
described in the Adopting Release,\305\ relate to the overall goal of 
substantially enhancing the ability of the SROs and the Commission to 
oversee securities markets and fulfill their regulatory 
responsibilities under the securities laws. The economic analysis 
explores how the improvements to these regulatory activities provide 
economic benefits to investors and the market. Among other things, 
potential benefits that could result from the CAT NMS Plan include 
benefits rooted in changes in the behavior of market participants. For 
example, requirements to report certain data elements or events to the 
CAT could have the beneficial effect of deterring rule violations 
because the inclusion of certain data fields and improvements in the 
ability to surveil for violations could increase the perceived costs of 
violating rules and regulations. Potential benefits could also stem 
from improved investor protection, such as from more effective 
surveillance and more informed, data-driven rulemaking.
---------------------------------------------------------------------------

    \305\ See id. at 45730.
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(1) Data Qualities
    In the Adopting Release, the Commission identified four qualities 
of trade and order data that impact the effectiveness of core SRO and 
Commission regulatory efforts: Accuracy, completeness, accessibility, 
and timeliness.\306\ In assessing the potential benefits of the CAT NMS 
Plan, the Commission's economic analysis compares the data that would 
be available under the Plan to the trading and order data currently 
available to regulators to determine whether and to what degree the 
Plan would improve the available data with respect to those four 
qualities.
---------------------------------------------------------------------------

    \306\ See id. at 45727. Accuracy refers to whether the data 
about a particular order or trade is correct and reliable. 
Completeness refers to whether a data source represents all market 
activity of interest to regulators, and whether the data is 
sufficiently detailed to provide the information regulators require. 
While current data sources provide the trade and order data required 
by existing rules and regulations, those sources generally do not 
provide all of the information of interest to regulators in one 
consolidated audit trail. Accessibility refers to how the data is 
stored, how practical it is to assemble, aggregate, and process the 
data, and whether all appropriate regulators could acquire the data 
they need. Timeliness refers to when the data is available to 
regulators and how long it would take to process before it could be 
used for regulatory analysis. As explained in the Baseline, Section 
IV.D, infra, the trading and order data currently available to 
regulators suffers from deficiencies in all four dimensions.
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(2) Regulatory Activities
    Any economic benefits would derive from how such improved data 
would affect regulatory activities. Therefore, to analyze the potential 
benefits of the CAT NMS Plan, the economic analysis also evaluates the 
potential of the CAT NMS Plan to meet the regulatory objectives set out 
in the Adopting Release for Rule 613. The objectives are: Improvements 
in the analysis and reconstruction of broad-based market events; 
improvements in market analysis in support of regulatory decisions; and 
improvements in market surveillance, investigations, and other 
enforcement activities.\307\
---------------------------------------------------------------------------

    \307\ See Adopting Release, supra note 9, at 45730.
---------------------------------------------------------------------------

A. Analysis and Reconstruction of Broad-Based Market Events
    The economic analysis considers whether and to what extent the CAT 
NMS Plan would facilitate regulators'

[[Page 30655]]

performance of analysis and reconstruction of market events, 
potentially helping to better inform both regulators and investors 
about such market events and speeding the regulatory response following 
market events. Regulators perform reconstructions of market events so 
that they and the public can be informed by an accurate accounting of 
what happened (and, possibly, why it happened). As discussed in the 
Benefits Section,\308\ market reconstructions can take a significant 
amount of time, in large measure due to various deficiencies in the 
currently available trading and order data in terms of the four 
qualities described above.\309\ The sooner regulators complete a 
reconstruction and analysis of a market event, the sooner investors can 
be informed and the sooner regulators can begin reviewing the event to 
determine what happened, who was affected and how, and whether the 
analysis supports potential regulatory responses.\310\ In addition, the 
improved ability for regulators to generate prompt and complete market 
reconstructions could provide improved market knowledge, which could 
assist regulators in conducting retrospective analysis of their rules 
and pilots.
---------------------------------------------------------------------------

    \308\ See Section IV.E.2.a, infra.
    \309\ See Section IV.C.1.a(1), supra.
    \310\ See Adopting Release, supra note 9, at 45732.
---------------------------------------------------------------------------

B. Market Analysis in Support of Regulatory Decisions
    The economic analysis considers whether and to what extent the CAT 
NMS Plan would enhance the ability of the SROs and the Commission to 
conduct market analysis and research, including analysis of market 
structure, and the degree to which it would improve regulators' market 
knowledge and facilitate consideration of policy questions of interest. 
The SROs and Commission Staff conduct data-driven analysis on market 
structure, in direct support of both rulemaking and other regulatory 
decisions such as SRO rule approvals. The Commission also relies on 
such analysis to improve understanding of market structure in ways that 
could inform policy. Finally, SROs conduct market analysis and research 
on their own regulatory initiatives. Improvements in the ability to 
conduct market analysis could further improve analysis related to 
regulatory decisions and potentially influence those regulatory 
decisions to the benefit of investors and the markets more generally.
C. Market Surveillance and Investigations
    The economic analysis examines whether the CAT NMS Plan would 
improve market surveillance and investigations, potentially resulting 
in more effective oversight of trading, better investor protection, and 
deterrence of violative behavior. As described in more detail in the 
Baseline Section,\311\ both SROs and the Commission conduct market 
surveillance, examinations, investigations, and other enforcement 
functions targeting illegal activities such as insider trading, wash 
sales, or manipulative practices. Improvements in market surveillance 
and investigations could come in the form of ``facilitating risk-based 
examinations, allowing more accurate and faster surveillance for 
manipulation, improving the process for evaluating tips, complaints, 
and referrals . . ., and promoting innovation in cross-market and 
principal order surveillance.'' \312\
---------------------------------------------------------------------------

    \311\ See Section 0, infra.
    \312\ See Adopting Release, supra note 9, at 45730.
---------------------------------------------------------------------------

b. Costs
    The economic analysis evaluates the costs of building and operating 
the Central Repository; the costs of CAT reporting for Participants, 
broker-dealers, and service bureaus; and other CAT-related costs. Where 
the CAT NMS Plan provides estimates of these costs, the economic 
analysis evaluates those estimates and re-estimates them when 
necessary. The economic analysis also discusses the drivers of these 
costs, and whether broker-dealers may or may not pass these costs down 
to their customers. In addition, the economic analysis assesses whether 
the CAT NMS Plan has the potential to result in cost savings. Rule 613 
requires the Plan to discuss ``[a] plan to eliminate existing rules and 
systems (or components thereof) that would be rendered duplicative by 
the consolidated audit trail.'' \313\ As a part of its consideration of 
the costs of the CAT NMS Plan, the economic analysis considers costs 
from duplicative reporting for some period of time as well as potential 
cost savings from the retirement of duplicative regulatory reporting 
systems.
---------------------------------------------------------------------------

    \313\ 17 CFR 242.613(a)(1)(ix).
---------------------------------------------------------------------------

    The economic analysis also considers whether the CAT NMS Plan could 
result in second order effects, such as changes to the behavior of 
market participants, that impose certain costs. For example, the CAT 
NMS Plan's tiered funding model could lead to costly efforts by market 
participants to try to control their tiers in order to affect their fee 
payments, such as reducing activity levels near the end of an activity 
level measuring period to avoid being classified as a higher activity 
level firm. In addition, Participants, their members, and investors 
could incur costs if their private information were accessed in the 
event of a security breach of the Central Repository. The economic 
analysis considers these and other elements of the Plan that could lead 
to distortions in behavior by market participants.
2. Existing Uncertainties
    The Commission has carefully analyzed the information in the CAT 
NMS Plan, as well as other relevant data, in order to assess the 
economic effects of the Plan. As discussed throughout the analysis, in 
certain cases the Commission lacks information needed to evaluate all 
of the potential economic effects of the CAT NMS Plan, creating 
uncertainty in some potential benefits and costs. The primary drivers 
of uncertainty include the fee schedule applicable to funding the 
Central Repository (the ``Funding Model''), which has not yet been 
finalized, the deferral of decisions on certain discretionary elements 
including the Technical Specifications applicable to the CAT, and a 
lack of detailed information that would enable the Commission to assess 
certain economic effects with greater precision. The implications of 
each primary area of uncertainty for the Commission's economic analysis 
are discussed below.
    First, as noted above, the economic analysis evaluates information 
provided in the CAT NMS Plan on the economic effects of the Plan, as 
well as information drawn from outside of the Plan. However, the 
Commission lacks detailed information regarding some of the individual 
costs and discretionary decisions in the Plan, including the Funding 
Model. Specifically, the Plan does not outline the proportion of CAT 
costs that would be allocated to Participants versus broker-dealers. 
This uncertainty limits the Commission's ability to evaluate the 
economic effects of the Plan in some cases. However, the Commission has 
analyzed the expected economic effects of the Plan to the extent 
possible with the information available, and where the Commission can 
identify such areas of uncertainty, the economic analysis addresses 
this uncertainty. In addition, the Commission requests comments to help 
resolve such uncertainties during the consideration of the CAT NMS 
Plan.
    Second, certain elements of the CAT NMS Plan would not be finalized 
until after the selection of a ``Plan

[[Page 30656]]

Processor.'' \314\ Among these are the security and confidentiality 
procedures of the Central Repository,\315\ the precise methods by which 
regulators would access data in the Central Repository,\316\ and the 
complete Technical Specifications.\317\ The Plan also provides the Plan 
Processor the ``sole discretion'' to publish interpretations of the 
Technical Specifications, including interpretations of permitted values 
in data elements.\318\
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    \314\ See CAT NMS Plan, supra note 3, at Article VI. The Plan 
Participants have engaged in a bidding process to select a Plan 
Processor, and the leading candidate bidders have proposed different 
solutions. In certain instances, the Plan Participants have decided 
to adopt the solutions proposed by whichever bidder they select.
    \315\ See Section 0, infra, for additional discussion of risks 
and uncertainties related to data security.
    \316\ Rule 613(e)(1) requires the CAT NMS Plan to create a 
Central Repository to collect, link, and store CAT Data and to make 
that data available to regulators. See 17 CFR 242.613(e)(1).
    \317\ The CAT NMS Plan contains minimum standards and principles 
for setting many of Technical Specifications, see CAT NMS Plan, 
supra note 3, at Section 6.9, and the Commission's economic analysis 
reflects those minimum standards and principles. However, because 
the detailed Technical Specifications are not yet finalized by the 
Participants, the Commission cannot fully assess any corresponding 
costs and benefits.
    \318\ See id. at Section 6.9.
---------------------------------------------------------------------------

    Because these and other elements of the Plan have not yet been 
finalized, the Commission cannot assess how and to what extent they 
could affect the overall economic effects of the Plan. The Commission's 
economic analysis is therefore limited to the extent that the economic 
effects of the Plan depend on decisions that would be made after 
approval of the Plan. However, the Commission has identified these 
areas of uncertainty and has assessed the economic effects of the Plan 
to the best of its ability in light of these existing uncertainties.
    Given the range of possible outcomes with respect to both the costs 
and benefits of the CAT NMS Plan that depend on future decisions, the 
Commission also recognizes the importance of provisions of the Plan 
related to the operation and administration of the CAT. In particular, 
governance provisions of the Plan related to voting by the Operating 
Committee and the involvement of the Advisory Committee may help 
promote better decision-making by the relevant parties. Such provisions 
could mitigate concerns about potential uncertainty in the economic 
effects of the Plan by giving the Commission greater confidence that 
its expected benefits would be achieved in an efficient manner and that 
costs resulting from inefficiencies would be avoided. As part of this 
economic analysis, the Commission therefore considers these features of 
the Plan.\319\
---------------------------------------------------------------------------

    \319\ See Section 0, infra.
---------------------------------------------------------------------------

3. Request for Comment on the Framework
    The Commission requests comment on all aspects of the Framework for 
the Economic Analysis on the CAT NMS Plan. In particular, the 
Commission seeks responses to the following questions:
    234. Do Commenters believe that the general economic framework 
applied in this analysis is appropriate? If not, which considerations 
should be added or removed?
    235. Do Commenters agree with the approach to identifying benefits 
of the CAT NMS Plan? Are there important sources of benefits that are 
not discussed here? Are the data qualities important for regulatory 
uses? Are there additional data qualities that the Commission should 
consider? Are the regulatory objectives important and beneficial for 
investors? Are there additional regulatory objectives that the 
Commission should consider?
    236. Do Commenters agree with the approach taken in this analysis 
for examining the costs of CAT? Please explain.
    237. Do the Commenters agree with the approach for analyzing second 
order effects? Are there other sources of economic effects that the 
Commission should consider?
    238. Do Commenters agree with the Commission's characterization of 
uncertainties in the economic analysis? How important are these 
uncertainties to the Commission's consideration of the CAT NMS Plan? 
Are there other sources of uncertainty that the Commission should 
consider?
    239. Do Commenters agree with the Commission's preliminary 
assessment that governance provisions of the Plan related to voting by 
the Operating Committee and the involvement of the Advisory Committee 
may help promote better decision-making by the relevant parties and 
thus mitigate concerns associated with uncertainties in the economic 
effects of the Plan? Please explain.

D. Baseline

    The CAT NMS Plan would create a new regulatory dataset that SROs 
and the Commission would use to supplement or replace their current 
data sources. The Adopting Release states that ``improvements [in the 
quality of audit trail data] should have the potential to result in the 
following: (1) [I]mproved market surveillance and investigations; (2) 
improved analysis and reconstructions of broad-based market events; and 
(3) improved market analysis.'' \320\ To assess the overall economic 
impact of the CAT NMS Plan, the economic analysis uses as the Baseline 
the current state of trade and order data and the current state of 
regulatory activity that relies on that data. The Baseline discusses 
the currently available sources of data, limits in available data that 
could impact regulatory activity, how regulators currently use the 
available data, and the burden that producing that data imposes on SROs 
and broker-dealers.
---------------------------------------------------------------------------

    \320\ See Adopting Release, supra note 9, at 45730.
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1. Current State of Regulatory Activities
    The SROs and the Commission use data to analyze and reconstruct 
market events, conduct market analysis and research in support of 
regulatory decision-making, and conduct market surveillance, 
examinations, investigations, and other enforcement functions. The 
trend in this area is to use more automated and data-intensive methods 
as regulators' activities adjust to the data and technology available. 
The following Sections describe these regulatory activities and how 
regulators currently use data.
a. Analysis and Reconstruction of Market Events
    In the Adopting Release, the Commission described how it expected 
CAT Data to significantly improve the ability of regulators to 
reconstruct market events so that the public might be informed by an 
accurate and timely accounting of the events in question.\321\ In a 
market reconstruction, regulators seek to provide an accurate and 
factual accounting of what transpired during a market event of interest 
by conducting a thorough analysis of the available market data. These 
events often encompass activity in many securities across multiple 
trading venues, requiring the linking and analysis of data from 
multiple sources. Examples of recent market reconstructions include the 
Commodity Futures Trading Commission (``CFTC'') and SEC's analysis of 
the May 6, 2010 ``Flash Crash,'' \322\ analysis of equity market

[[Page 30657]]

volatility on August 24, 2015,\323\ and the multi-agency report on the 
U.S. Treasuries market on October 15, 2014.\324\
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    \321\ See id. at 45732-33.
    \322\ See Findings Regarding the Market Events of May 6, 2010: 
Report of the Staffs of the CFTC and SEC to the Joint Advisory 
Committee on Emerging Regulatory Issues (September 30, 2010) 
(``Flash Crash Analysis''), available at http://www.sec.gov/news/studies/2010/marketevents-report.pdf.
    \323\ See Staff of the Office of Analytics and Research, 
Division of Trading and Markets, Research Note: Equity Market 
Volatility on August 24, 2015 (Dec. 2015) available at http://www.sec.gov/marketstructure/research/equity_market_volatility.pdf; 
see also Austin Gerig and Keegan Murphy, The Determinants of ETF 
Trading Pauses on August 24th, 2015, White Paper (February 2016) 
available at http://www.sec.gov/marketstructure/research/determinants_eft_trading_pauses.pdf.
    \324\ See U.S. Department of the Treasury, Board of Governors of 
the Federal Reserve System, Federal Reserve Bank of New York, U.S. 
Securities and Exchange Commission, and U.S. Commodity Futures 
Trading Commission, Joint Staff Report: The U.S. Treasury Market on 
October 15, 2014 (July 13, 2015), available at http://www.sec.gov/reportspubs/special-studies/treasury-market-volatility-10-14-2014-joint-report.pdf.
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b. Market Analysis and Research
    In the Adopting Release, the Commission described how it expected 
CAT Data to improve the ability of regulators to monitor overall market 
structure and better understand its relationship with market behavior, 
so that the Commission and the SROs could be better informed in their 
policy decisions.\325\ The Commission and SRO Staffs conduct data-
driven analysis on market structure, in direct support of both 
rulemaking and other regulatory decisions such as SRO rule approvals as 
well as retrospective analyses of rules and pilots. The Commission also 
relies on data analysis to inform its market structure policy. SROs 
also conduct market analysis and research on their own regulatory 
initiatives. Examples of data-driven market analysis include reports on 
OTC trading,\326\ small capitalization stock trading,\327\ the Limit 
Up-Limit Down Pilot,\328\ short selling,\329\ and high frequency 
trading.\330\
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    \325\ See Adopting Release, supra note 9, at 45733.
    \326\ See Laura Tuttle, Alternative Trading Systems: Description 
of ATS Trading in National Market System Stocks (October 2013) 
available at http://www.sec.gov/divisions/riskfin/whitepapers/alternative-trading-systems-10-2013.pdf; Laura Tuttle, OTC Trading: 
Description of Non-ATS OTC Trading in National Market System Stocks 
(March 2014), available at http://www.sec.gov/dera/staff-papers/white-papers/otc-trading-white-paper-03-2014.pdf.
    \327\ See Securities Exchange Act Release No. 74892, Order 
Approving the National Market System Plan to Implement a Tick Size 
Pilot Program (May 6, 2015), 80 FR 27514, 27534, 27541 (May 13, 
2015); see also Charles Collver, A Characterization of Market 
Quality for Small Capitalization US Equities (September 2014), 
available at http://www.sec.gov/marketstructure/research/small_cap_liquidity.pdf.
    \328\ See SRO Supplemental Joint Assessment, available at http://www.sec.gov/comments/4-631/4-631.shtml; Memo to File from the 
Division of Economic and Risk Analysis regarding the Cornerstone 
Analysis of the Impact of Straddle States on Options Market Quality 
(February 8, 2016), available at http://www.sec.gov/comments/4-631/4631-42.pdf; see also Gerig and Murphy, supra note 323.
    \329\ See Memo to Chairman Christopher Cox from Daniel Aromi and 
Cecilia Caglio regarding an Analysis of Short Selling Activity 
during the First Weeks of September 2008, (December 16, 2008) 
available at http://www.sec.gov/comments/s7-08-09/s70809-369.pdf; 
Memo to Chairman Christopher Cox from Daniel Aromi and Cecilia 
Caglio regarding an Analysis of a Short Sale Price Test Using 
Intraday Quote and Trade Data (December 17, 2008) available at 
http://www.sec.gov/comments/s7-08-09/s70809-368.pdf; Memo from the 
Office of Economic Analysis regarding an Analysis of the July 
Emergency Order Requiring a Pre-borrow on Short Sales (January 14, 
2009) available at http://www.sec.gov/spotlight/shortsales/oeamemo011409.pdf.
    \330\ See Austin Gerig, High-Frequency Trading Synchronizes 
Prices in Financial Markets, available at http://www.sec.gov/dera/staff-papers/working-papers/dera-wp-hft-synchronizes.pdf; see also 
Staff of the Office of Analytics and Research, Division of Trading 
and Markets, Research Note: Equity Market Volatility on August 24, 
2015 (December 2015) available at http://www.sec.gov/marketstructure/research/equity_market_volatility.pdf.
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c. Market Surveillance and Investigations
    Regulators perform market surveillance and investigation functions 
that rely on access to multiple types of market data. In the Adopting 
Release, the Commission discussed how data limitations impact 
surveillance and investigations, including risk-based examinations, 
market manipulation investigations, tips and complaints, and cross-
market and principal order surveillance.\331\ The following Sections 
update and broaden the discussion from the Adopting Release to describe 
the current state of SRO surveillance and SRO and Commission 
examinations and enforcement investigations.
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    \331\ See Adopting Release, supra note 9, at 45730-32.
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(1) Current SRO Surveillance
    Rule 613(f) requires the SROs to develop and implement a 
surveillance system, or enhance existing surveillance systems, 
reasonably designed to make use of the CAT Data.\332\ For the purposes 
of this economic analysis, the Commission considers surveillance to 
involve SROs running automated processes on routinely collected or in-
house data to identify potential violations of rules or regulations. As 
such, surveillance does not include processes run on data that the SROs 
request only when needed. SRO surveillance can help protect investors 
by having systems in place that can be used to detect fraudulent 
behavior and anomalous trading. For instance, SROs use surveillance 
systems, developed internally or by a third party, to detect violations 
of trading rules, market abuse, or unusual behavior, in real time, 
within one day, or within a few weeks of the activity in question. The 
exchanges are responsible for surveillance of their own exchanges, and 
FINRA is responsible for off-exchange and cross-market surveillance. 
FINRA also provides surveillance services to U.S. equity and options 
exchanges through regulatory services agreements with nearly every 
equity market and all options exchanges.\333\ FINRA also currently 
conducts several cross-market surveillance patterns, such as 
surveillance focused on wash sales, front running, relationship 
trading, and high frequency trading.
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    \332\ See 17 CFR 242.613(f).
    \333\ See Richard G. Ketchum, FINRA Chairman and CEO, Testimony 
Before the Subcommittee on Capital Markets and Government Sponsored 
Enterprises Committee on Financial Services (May 1, 2015), available 
at https://www.finra.org/newsroom/speeches/050115-testimony-subcommittee-capital-markets-and-government-sponsored-enterprises; 
Richard G. Ketchum, FINRA Chairman and CEO, Testimony Before the 
Subcommittee on Securities, Insurance and Investment, United States 
Senate (March 3, 2016), available at http://www.finra.org/newsroom/speeches/030316-testimony-subcommittee-securities-insurance-and-investment-united-states.
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    FINRA has responsibility to oversee and regulate OTC trading of 
exchange-listed and non-exchange-listed securities, as well as trading 
in corporate and municipal debt instruments and other fixed income 
instruments. Also, FINRA conducts cross-market surveillance for 
approximately 99% of the listed equity market and approximately 70% of 
the listed options market.\334\ To conduct cross-market surveillance, 
FINRA uses a variety of online and offline surveillance techniques and 
programs to reconstruct market activity, using trading data and quote 
information that is captured throughout the trading day, as well as 
order audit trail data reported daily. FINRA's cross-market 
surveillance is able to identify a single broker-dealer's manipulative 
activity across multiple markets, as well as manipulative activity of 
multiple market participants acting in concert across multiple 
markets.\335\
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    \334\ See Richard G. Ketchum, FINRA Chairman and CEO, Testimony 
Before the Subcommittee on Securities, Insurance and Investment, 
United States Senate (March 3, 2016), available at http://www.finra.org/newsroom/speeches/030316-testimony-subcommittee-securities-insurance-and-investment-united-states.
    \335\ See FINRA 2015 Regulatory and Examinations Priorities 
Letter, at 14, available at https://www.finra.org/sites/default/files/p602239.pdf; see also FINRA 2016 Regulatory and Examinations 
Priorities Letter, at 12, available at https://www.finra.org/sites/default/files/2016-regulatory-and-examination-priorities-letter.pdf.
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    Additional surveillance is conducted by exchange-operating SROs, 
some of it

[[Page 30658]]

conducted as trading activity occurs. This surveillance can include 
detection of market manipulation, violations of trading rules, and 
other unusual behavior.
(2) Examinations
    In the Adopting Release, the Commission explained how it expected 
CAT Data to facilitate risk-based examinations.\336\ SROs currently 
conduct exams of broker-dealers for violations of trading-related 
federal laws, rules, and regulations and for violations of SRO rules 
and regulations.\337\ In 2015, FINRA's Member Regulation Department 
conducted approximately 2,400 broker-dealer examinations.\338\ The 
Commission currently conducts exams of broker-dealers, transfer agents, 
investment advisers, investment companies, municipal advisers, clearing 
agencies, the national securities exchanges, other SROs such as FINRA 
and the Municipal Securities Rulemaking Board, and the Public Company 
Accounting Oversight Board (``PCAOB''). The Commission conducted 493 
broker-dealer examinations in 2014 and 484 in 2015, 70 exams of the 
national securities exchanges and FINRA in 2014 and 21 in 2015. In 
addition, the Commission conducted 1,237 investment adviser and 
investment company examinations in 2014 and 1,358 in 2015. Virtually 
all investment adviser examinations and a significant proportion of the 
Commission's other examinations involve analysis of trading and order 
data.
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    \336\ See Adopting Release, supra note 9, at 45730-31.
    \337\ SEC Rule 17d-2 permits SROs to propose joint plans among 
two or more SROs for the allocation of regulatory responsibility. 
Where 17d-2 agreements are in place, SROs have joint plans with 
respect to their common members (i.e., members of both/all the SROs 
party to an agreement under Rule 17d-2) for common rules (i.e., 
rules that are identical or substantially identical). Commission 
approval of a plan filed pursuant to Rule 17d-2 relieves an SRO of 
those regulatory responsibilities allocated by the plan to another 
SRO. See 17 CFR 240.17d-2. Exchanges also enter into Regulatory 
Services Agreements (``RSAs'') whereby one SRO contractually agrees 
to perform regulatory services for another. However, RSAs do not 
relieve the contracting SRO from regulatory responsibility for the 
performance of any regulatory services allocated pursuant to the RSA 
and are not filed with the Commission for approval.
    \338\ This estimate is based on Staff discussions with FINRA. 
See also FINRA overview of Member Regulation available at http://www.finra.org/industry/member-regulation.
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    Examinations of broker-dealers and investment advisers involve 
intensive analysis of trading data. Examinations seek to determine 
whether the entity being examined is: Conducting its activities in 
accordance with the federal securities laws, rules adopted under these 
laws, and SRO rules; adhering to the disclosures it has made to its 
clients, customers, the general public, SROs and/or the Commission; and 
implementing supervisory systems and/or compliance policies and 
procedures that are reasonably designed to ensure that the entity's 
operations are in compliance with the applicable legal 
requirements.\339\
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    \339\ See SEC, Examination Information for Entities Subject to 
Examination or Inspection by the Commission (June, 2014), available 
at http://www.sec.gov/about/offices/ocie/ocie_exambrochure.pdf.
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    The Commission and certain SROs, such as FINRA, use a risk-based 
approach to select candidates and to determine exam scope and 
focus.\340\ ``Risk-based examinations'' seek to increase regulatory 
efficiency by using preliminary data analysis to direct examination 
resources towards entities and activities where risks of violative or 
illegal activity are the highest. The Commission uses risk and data 
analysis before opening an exam to identify broker-dealers and 
investment advisers for areas of focus such as suspicious trading, as 
well as during an exam to identify the particular activities of a 
broker-dealer or investment adviser that could trigger certain 
compliance and supervisory risks.
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    \340\ FINRA conducts regulatory examinations by contract on 
behalf of all the options and equities exchanges, except for the 
Chicago Stock Exchange, Inc. (``CHX'') and the National Stock 
Exchange, Inc. (``NSX''). Accordingly most exchanges also employ a 
risk-based approach to examination selection and scope. CHX examines 
members on a cycle basis. NSX recently resumed operations in 
December, 2015. See Securities Exchange Act Release No. 76640 
(December 14, 2015), 80 FR 79122 (December 18, 2015).
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    Because of the data-intensive nature of examinations, the 
Commission and SROs have systems, such as the Commission's National 
Exam Analytics Tool (``NEAT''), to combine, standardize, and analyze 
exam data. The NEAT system allows examiners to import trade blotter 
data to conduct commission analysis, cross trades analysis, bunch price 
analysis, trading pattern analysis, and restricted trade analysis. 
However, as discussed further below, there are limitations on the trade 
blotter data imported by the NEAT system.\341\
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    \341\ See Section IV.D.2.b, infra.
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(3) Enforcement Investigations
    The Adopting Release details how the Commission expects the CAT 
Data to aid in the analysis of potential manipulation.\342\ The 
Commission and SROs undertake numerous investigations to enforce the 
securities laws and related rules and regulations, including 
investigations of market manipulations (e.g., marking the close, order 
layering, spoofing,\343\ wash sales, trading ahead), insider trading, 
and issuer repurchase violations. As noted below, the Commission 
estimates that 30-50% of enforcement investigations use trade and order 
data, and any of these types of investigations, in addition to numerous 
other investigations, could potentially utilize CAT Data.\344\
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    \342\ See Adopting Release, supra note 9, at 45731.
    \343\ Layering and spoofing are manipulations where orders are 
placed close to the best buy or sell price with no intention to 
trade in an effort to falsely overstate the liquidity in a security.
    \344\ See infra note 345 and accompanying text. The percentage 
of enforcement investigations that could be expected to utilize CAT 
Data depends on the percentage of investigations that involve 
broker-dealers, investment advisers and investment companies.
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    SROs rely primarily on surveillance to initiate investigations 
based on anomalies in the trading of securities. The Commission 
initiates enforcement investigations when SROs or others submit 
reliable tips, complaints, or referrals, or when the Commission becomes 
aware of anomalies indicative of manipulation. After the detection of 
potential anomalies, a tremendous amount of time and resources are 
expended in gathering and interpreting trade and order data to 
construct an accurate picture of when trades were actually executed, 
what market conditions were in effect at the time of the trade, which 
traders participated in the trade, and which beneficial owners were 
affected by the trade. In 2015, the Commission filed 807 enforcement 
actions, including 39 related to insider trading, 43 related to market 
manipulation, 124 related to broker-dealers, 126 related to investment 
advisers/investment companies, and one related to exchange or SRO 
duties. In 2014, the Commission filed 755 enforcement actions, 
including 52 related to insider trading, 63 related to market 
manipulation, 166 related to broker-dealers, and 130 related to 
investment advisers/investment companies, many of which involved trade 
and order data.\345\ Similarly, FINRA brought 1,397 disciplinary 
actions in 2014 and 1,512 in 2015.\346\
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    \345\ See Year-by-Year SEC Enforcement Statistics, available at 
https://www.sec.gov/news/newsroom/images/enfstats.pdf. The total 
number of actions filed is not necessarily the same as the number of 
investigations. An investigation may result in no filings, one 
filing, or multiple filings. Additionally, trade and order data may 
be utilized in enforcement investigations that do not lead to any 
filings.
    \346\ See FINRA statistics available at http://www.finra.org/newsroom/statistics.

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[[Page 30659]]

(4) Tips and Complaints
    The Adopting Release discussed how the Commission expected CAT Data 
to improve the processes used by the SROs and the Commission for 
evaluating tips and complaints.\347\ Market participants or those with 
experience in analyzing market data sometimes notice atypical trading 
or quoting patterns in publicly available market data, and these 
observations sometimes result in a tip or complaint to a regulator. 
Regulators investigate thousands of tips and complaints each year. In 
fiscal years 2014 and 2015, the Commission received around 15,000 
entries in its Tips, Complaints and Referrals (``TCR'') system, 
approximately one third of which related to manipulation, insider 
trading, market events, or other trading and pricing issues.
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    \347\ See Adopting Release, supra note 9, at 45731-32.
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    Analysis of tips and complaints follows three general stages. 
First, regulators ensure that the tip or complaint contains sufficient 
information to facilitate analysis. The second stage involves a 
triaging effort in which regulators may use directly accessible data or 
make phone calls and other informal queries to determine if the tip or 
complaint is credible. For tips and complaints that seem credible, the 
third stage involves a more in-depth investigation or examination, 
which follows the processes described above for examinations and 
enforcement investigations.
2. Current State of Trade and Order Data
    To assess how and to what degree the CAT NMS Plan would affect the 
trade and order data available to regulators, the economic analysis 
considers what data regulators use currently and the limitations in 
that data.
a. Current Sources of Trade and Order Data
    The SROs and the Commission currently use a range of trading and 
order data sources for the regulatory activities discussed above. The 
types of data and ease of use can vary widely from one source to the 
next. Some data sources provide access to in-depth information on a 
narrow slice of the market, while others reveal more limited 
information but with broader market coverage. This Section reviews the 
primary sources of data currently available to regulators, describing 
the content of the data provided and examples of their specialized 
uses. There are limitations on each of the data sources discussed below 
that reduce their usefulness for regulatory purposes. These limitations 
and their impact on the ability of the SROs and the Commission to use 
the data sources for regulatory purposes are explained in Section 
IV.D.2.b below.
(1) SRO Data
    Most SROs maintain audit trails that contain the trade and order 
data that they obtain from members. Regulators have access to at least 
three sources of audit trail data. First, the National Association of 
Securities Dealers (``NASD'') \348\ established its Order Audit Trail 
System (``OATS'') \349\ in 1998, which required NASD (n/k/a FINRA) 
members to report certain trade and order data regarding NASDAQ-listed 
equity securities.\350\ OATS was later expanded to include OTC equity 
securities and all NMS stocks.\351\ Second, beginning in 2000, several 
of the current options exchanges implemented the Consolidated Options 
Audit Trail System (``COATS'').\352\ Finally, each equity and options 
exchange keeps an audit trail of orders and trades that occur on its 
market.\353\
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    \348\ In 2007, NASD and the member-related functions of NYSE 
Regulation, Inc., the regulatory subsidiary of New York Stock 
Exchange LLC (``NYSE''), were consolidated. As part of this 
regulatory consolidation, the NASD changed its name to FINRA. See 
Securities Exchange Act Release No. 56146 (July 26, 2007), 72 FR 
42190 (August 1, 2007). FINRA and the National Futures Association 
(``NFA'') are currently the only national securities associations 
registered with the Commission; however, the NFA has a limited 
purpose registration with the Commission under Section 15A(k) of the 
Exchange Act. 15 U.S.C. 78o-3(k); see also Securities Exchange Act 
Release No. 44823 (September 20, 2001), 66 FR 49439 (September 27, 
2001).
    \349\ See Securities Exchange Act Release No. 39729 (March 6, 
1998), 63 FR 12559 (March 13, 1998) (order approving proposed rules 
comprising OATS) (``OATS Approval Order'').
    \350\ The FINRA Web site states: ``FINRA has established the 
Order Audit Trail System (OATS), as an integrated audit trail of 
order, quote, and trade information for all NMS stocks and OTC 
equity securities. FINRA uses this audit trail system to recreate 
events in the life cycle of orders and more completely monitor the 
trading practices of member firms.'' FINRA, OATS, available at 
http://www.finra.org/industry/oats (listing further information on 
OATS).
    \351\ See Securities Exchange Act Release No. 63311 (November 
12, 2010), 75 FR 70757 (November 18, 2010) (order approving proposed 
rule change by FINRA relating to the expansion of OATS to all NMS 
stocks).
    \352\ See, e.g., In the Matter of Certain Activities of Options 
Exchanges, Order Instituting Public Administrative Proceedings 
Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, 
Making Findings and Imposing Remedial Sanctions, Securities Exchange 
Act Release No. 43268 (September 11, 2000) (``Options Settlement 
Order''); Securities Exchange Act Release No. 50996 (January 7, 
2005), 70 FR 2436 (January 13, 2005) (order approving proposed rule 
change by Chicago Board Options Exchange, Incorporated (``CBOE'') 
relating to Phase V of COATS).
    \353\ See, e.g., infra notes 358-364 and accompanying text. For 
example, the NYSE tracks counterparties on every trade in its 
Consolidated Equity Audit Trail Data (``CAUD'') system, and records 
electronic order events in a System Order Data (``SOD'') database. 
See Proposing Release, supra note 9, at 32564-68 (proposing 
Consolidated Audit Trail and discussing equity exchange audit 
trails). The SROs provided data in various proprietary formats to 
the Commission in support of the investigation of the May 6th, 2010 
``Flash Crash.'' These data sources are briefly discussed in the 
Flash Crash Analysis, supra note 322.
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    Specifically, for each of these stages in the life of an order, 
FINRA Rule 7440 requires the recording and reporting of the following 
information, as applicable, including but not limited to: For the 
receipt or origination of the order, the date and time the order was 
first originated or received by the reporting member, a unique order 
identifier, the market participant symbol of the receiving reporting 
member, and the material terms of the order; \354\ for the internal or 
external routing of an order, the unique order identifier, the market 
participant symbol of the member to which the order was transmitted, 
the identification and nature of the department to which the order was 
transmitted if transmitted internally, the date and time the order was 
received by the market participant or department to which the order was 
transmitted, the material terms of the order as transmitted,\355\ the 
date and time the order was transmitted, and the market participant 
symbol of the member who transmitted the order; for the modification or 
cancellation of an order, a new unique order identifier, original 
unique order identifier, the date and time a modification or 
cancellation was originated or received, and the date and time the 
order was first received or originated; \356\ and for the execution of 
an order, in whole or in part, the unique order identifier, the 
designation of the order as fully or partially executed, the number of 
shares to which a partial

[[Page 30660]]

execution applies and the number of unexecuted shares remaining, the 
date and time of execution, the execution price, the capacity in which 
the member executed the transaction, the identification of the market 
where the trade was reported, and the date and time the order was 
originally received. FINRA Rule 7440 also requires reporting of the 
account type,\357\ the identification of the department or terminal 
where an order is received from a customer, the identification of the 
department or terminal where an order is originated by a reporting 
member, and the identification of a reporting agent if the agent has 
agreed to take on the responsibilities of a reporting member under Rule 
7450.
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    \354\ The specific information required to be reported includes: 
The number of shares; designation as a buy or sell or short sale; 
designation of the order as market, limit, stop, or stop limit; 
limit or stop price; date on which the order expires and if the time 
in force is less than one day, the time when the order expires; the 
time limit during which the order is in force; any request by a 
customer that a limit order not be displayed, or that a block size 
limit order be displayed, pursuant to Rule 604(b) of Regulation NMS; 
any special handling requests; and identification of the order as 
related to a program trade or index arbitrage trade. See FINRA Rule 
7440(b).
    \355\ The specific information required includes the number of 
shares to which the transmission applies, and whether the order is 
an intermarket sweep order. See FINRA Rule 7440(c).
    \356\ For cancellations or modifications, the following 
information also is required: If the open balance of an order is 
canceled after a partial execution, the number of shares canceled; 
and whether the order was canceled on the instruction of a customer 
or the reporting member. See FINRA Rule 7440(d).
    \357\ ``Account type'' refers to the type of beneficial owner of 
the account for which the order was received or originated. Examples 
include institutional customer, individual customer, employee 
account, market making, and proprietary. See FINRA, OATS Reporting 
Technical Specifications, at 4-2, available at http://www.finra.org/sites/default/files/OATSTechSpec_01112016.pdf.
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    A majority of options exchanges require their members to provide 
the following information with respect to orders entered onto their 
exchange: (1) The material terms of the order; \358\ (2) order receipt 
time; \359\ (3) account type; (4) the time a modification is received; 
(5) the time a cancellation is received; (6) execution time; and (7) 
the clearing member identifier of the parties to the transaction.\360\
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    \358\ The specific information required includes option symbol; 
underlying security; expiration month; exercise price; contract 
volume; call/put; buy/sell; opening/closing transaction; price or 
price limit; and special instructions. See, e.g., BATS Exchange, 
Inc. (``BATS'') Rule 20.7; BOX Options Exchange LLC (``BOX'') 
Chapter V, Section 15; CBOE Chapter VI, Rules 6.24 and 6.51; NASDAQ 
Options Market (``NOM'') Rule Chapter V, Section 7; NYSE Amex Rules 
153, Commentary .01, and 962; NYSE Arca Rules 6.67, 6.68, and 6.69; 
and NASDAQ OMX PHLX LLC (``Phlx'') Rules 1063 and 1080.
    \359\ The required information also includes identification of 
the terminal or individual completing the order ticket. See id.
    \360\ See id.
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    Although SROs that operate exchanges collect much of their audit 
trail information directly from their internal systems, broker-dealers 
also have the responsibility to report regulatory data to SRO audit 
trails. Some broker-dealers perform nearly all of these data reporting 
requirements in-house, whereas others contract with service bureaus to 
accomplish this data reporting.\361\ This reporting can represent a 
significant burden on broker-dealers.
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    \361\ See Section IV.F.1.c(2), infra, for a discussion of how 
broker-dealers decide whether or not to outsource their regulatory 
reporting.
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    Audit trail data have become more useful to regulators over time. 
As noted above, FINRA expanded OATS from covering only NASDAQ listed 
securities to include OTC equity securities and all NMS stocks.\362\ 
Commission Staff understands that FINRA has also begun collecting 
additional SRO audit trail data, provided voluntarily from most 
exchanges, to supplement OATS data. In addition, NYSE, NYSE Amex LLC 
(n/k/a ``NYSE MKT LLC'') (``NYSE Amex''), and NYSE ARCA, Inc. (``NYSE 
Arca'') eliminated their OTS audit trail requirements and replaced them 
to coordinate with the OATS requirements, so that members who are also 
members of either FINRA or NASDAQ (and therefore subject to OATS 
requirements) are able to satisfy their reporting obligations by 
meeting the OATS requirements.\363\ As a result of all of these 
changes, the combined data from these different audit trails \364\ now 
cover most order events in equities.
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    \362\ See supra note 351.
    \363\ See Securities Exchange Act Release No. 65523 (October 7, 
2011), 76 FR 64154 (October 17, 2011) (concerning NYSE); Securities 
Exchange Act Release No. 65524 (October 7, 2011), 76 FR 64151 
(October 17, 2011) (concerning NYSE Amex); Securities Exchange Act 
Release No. 65544 (October 12, 2011), 76 FR 64406 (October 18, 2011) 
(concerning NYSE Arca).
    \364\ Other SRO audit trails have varied reporting requirements. 
Some exchanges have detailed audit trail data submission 
requirements for their members covering order entry, transmittal, 
and execution. See CHX Article 11, Rule 3(b); NASDAQ Rules 6950-6958 
(substantially similar to the OATS rules); NASDAQ OMX BX Rules 6950-
6958 (substantially similar to OATS rules). The audit trail rules of 
the other exchanges incorporate only standard books and records 
requirements in accordance with Section 17 of the Exchange Act, 15 
U.S.C. 78q. See, e.g., NSX Chapter VI, Rule 4.1.; BATS Chapter IV, 
Rule 4.1; CBOE Rule 15.1 (applicable to CBOE Stock Exchange 
(``CBSX'')); International Securities Exchange, LLC (``ISE'') Rule 
1400; NYSE Arca Equities Rule 2.24. One exchange only requires its 
members to make and keep books and records and other correspondence 
in conformity with Section 17 of the Exchange Act and the rules 
thereunder, with all other applicable laws and the rules, 
regulations and statements of policy promulgated thereunder, and 
with the exchange's rules. See NSX Chapter VI, Rule 4.1. Though not 
an audit trail, the Large Options Position Report (``LOPR'') is also 
a source of SRO data that is used for surveillance, examination, and 
enforcement purposes by SRO and Commission staff. The data is 
collected pursuant to FINRA Rule 2360(b)(5), Reporting of Options 
Positions, under which each member must file a report for each 
account in which they have an interest in a position of 200 or more 
options contracts, on the same side of the market. Any increases or 
decreases in this position must also be reported. The Options 
Clearing Corporation (``OCC'') is the service provider for the 
processing of these reports, which are used at will by the SROs for 
surveillance purposes. The Commission also frequently uses LOPR for 
enforcement investigations of insider trading and market 
manipulation cases.
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    SRO audit trail data is used for market reconstructions and market 
analyses, and to inform policy decisions, both by the Commission and by 
SROs. Regulators also use SRO audit trail data extensively for 
surveillance, examinations, investigations, and other enforcement 
functions. Current SRO market surveillance relies primarily on data 
from the SRO audit trails, generated directly from the exchange servers 
and from OATS. Likewise, SRO examinations and investigations pull 
information from their own audit trails before seeking data from 
others. Commission examinations and investigations also rely heavily on 
SRO audit trails to start the process of tracing a particular trade 
from its execution to the order initiations and customer information, 
and the audit trails can be useful for manipulation investigations or 
other regulatory activities that require analyses of microcap 
securities trading activity. There are, however, limitations on SRO 
audit trail data that reduce their usefulness to regulators. For 
example, for the examinations mentioned above, Commission examination 
Staff may undertake a laborious process of linking SRO audit trail data 
with EBS data, because SRO audit trail data does not contain customer 
information.\365\ These and other limitations are discussed in Section 
IV.D.2.b, infra.
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    \365\ See Section IV.D.2.b, infra.
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(2) Equity and Option Cleared Reports
    The SROs and Commission also have access to equity and option 
cleared reports. Clearing broker-dealers report their equity and option 
cleared data on a daily basis and the NSCC and the OCC aggregate the 
data across the market and generate the reports.\366\ The reports show 
the number of trades and daily cleared trade and share volume, by 
clearing member, for each equity and listed option security in which 
transactions took place. Regulators can query these reports directly 
through an internal online system that interfaces with the Depository 
Trust and Clearing Corporation (``DTCC'') data by security name and 
CUSIP number.\367\ The

[[Page 30661]]

originating source of the DTCC cleared equity data is the Securities 
Information Automation Corporation (``SIAC'') and the originating 
source of the cleared options data is the OCC.
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    \366\ NSCC provides clearing, settlement, risk management, 
central counterparty services and a guarantee of completion for 
certain transactions for virtually all broker-to-broker trades 
involving equities, corporate and municipal debt, American 
depositary receipts, exchange-traded funds, and unit investment 
trusts. See DTCC, About DTCC, NSCC, available at http://www.dtcc.com/about/businesses-and-subsidiaries/nscc.aspx. The OCC is 
an equity derivatives clearing organization that is registered as a 
clearing agency under Section 17A of the Act, 15 U.S.C. 78q-1, and 
operates under the jurisdiction of both the Commission and the CFTC. 
See OCC, About OCC, available at http://www.optionsclearing.com/about/corporate-information/what-is-occ.jsp.
    \367\ A CUSIP number is a unique alphanumeric identifier 
assigned to a security and facilitates the clearance and settlement 
of trades in the security. See SEC, Fast Answers, CUSIP Number, 
available at www.sec.gov/answers/cusip.htm.
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    Equity and option cleared reports provide a way for regulators to 
directly access a dataset to see how much trading volume is accounted 
for by a particular clearing broker. As such, these data are often used 
at the beginning of an examination or investigation to start 
identifying the market participants that may have additional data 
needed to pinpoint a particular activity. But there are limitations on 
these reports that reduce their usefulness to regulators. For example, 
the information available on the reports is limited to the date, the 
clearing firm, and the number of transactions cleared by each clearing 
firm on each SRO. These and other limitations are discussed in Section 
IV.D.2.b, infra.
(3) Electronic Blue Sheets
    Broker-dealers provide detailed data to regulators in the form of 
EBS. The EBS data, provided pursuant to Rule 17a-25 under the Act,\368\ 
facilitate investigations by the SROs and Commission Staff, 
particularly in the areas of insider trading and market manipulations. 
The EBS system provides certain detailed execution information in its 
electronic format \369\ upon request by SRO or Commission Staff. This 
information often includes the employer of the beneficial owner of an 
account,\370\ which can be important to insider trading investigations, 
and in some cases, a tax identification number.\371\
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    \368\ 17 CFR 240.17a-25. Rule 17a-25 codified the requirement 
that broker-dealers submit to the Commission, upon request, 
information on their customer and proprietary securities 
transactions in an electronic format. The Rule requires submission 
of the same standard customer and proprietary transaction 
information that SROs request through the EBS system in connection 
with their market surveillance and enforcement inquiries.
    \369\ For a proprietary transaction, Rule 17a-25 requires a 
broker-dealer to provide the following information electronically 
upon request: (1) Clearing house number or alpha symbol used by the 
broker-dealer submitting the information; (2) clearing house 
number(s) or alpha symbol(s) of the broker-dealer(s) on the opposite 
side to the trade; (3) security identifier; (4) execution date; (5) 
quantity executed; (6) transaction price; (7) account number; (8) 
identity of the exchange or market where the transaction was 
executed; (9) prime broker identifier; (10) average price account 
identifier; and (11) the identifier assigned to the account by a 
depository institution. See Rule 17a-25(a)(1), (b)(1)-(3), 17 CFR 
240.17a-25(a)(1), (b)(1)-(3). For customer transactions, the broker-
dealer also is required to include the customer's name, customer's 
address, the customer's tax identification number, and other related 
account information. See Rule 17a-25(a)(2), 17 CFR 240.17a-25(a)(2); 
see also infra note 372 and accompanying text (discussing additional 
information on ``large traders'' reported through EBS).
    \370\ Employer information is required by some SRO EBS rules. 
See, e.g., NYSE and FINRA Rule 8211. While employer information is 
not required under Rule 17a-25, Commission staff sometimes request 
and receive this information.
    \371\ Tax identification numbers are not required to be reported 
in EBS for average price, allocation, riskless principal, foreign 
accounts, and subaccounts.
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    The EBS system also provides additional information on market 
participants who meet the definition of ``large traders'' and have 
self-identified to the Commission as required by Rule 13h-1.\372\ Large 
traders who file Form 13H with the Commission are assigned a ``large 
trader identification number'' by the Commission and must provide that 
number to their brokers for inclusion in the EBS records that are 
maintained by the clearing brokers. Rule 13h-1, subject to relief 
granted by the Commission,\373\ requires that execution time be 
captured (to the second) for certain categories of large traders. Large 
trader data provide the Commission with a way to acquire information 
about the activities of large traders and allow the activities of large 
traders to be more readily aggregated across or partitioned by multiple 
broker-dealers. Regulators generally use data from the EBS system 
extensively in enforcement investigations, for which EBS data are 
vital, particularly insider trading investigations. But again, there 
are limitations on EBS data. For example, EBS data are cumbersome to 
use for broad analyses, such as analysis and reconstruction of market 
events, market analysis and research, and some examinations, because of 
the fragmentation of the data. These and other limitations are 
discussed in Section IV.D.2.b, infra.
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    \372\ See Securities Exchange Act Release No. 64976 (July 27, 
2011), 76 FR 46960 (August 3, 2011). A ``large trader'' is defined 
as a person whose transactions in NMS securities equal or exceed 2 
million shares or $20 million during any calendar day, or 20 million 
shares or $200 million during any calendar month. SEC Rule 13h-1, 17 
CFR 240.13h-1, requires those market participants who meet the 
definition of ``large traders'' to comply with a number of 
requirements, including filing Form 13H with the Commission to 
receive a large trader identification number. Id.
    \373\ See Securities Exchange Act Release No. 76322 (October 30, 
2015), 80 FR 68590 (November 5, 2015).
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(4) Trade Blotters and Order Tickets
    Investment advisers and broker-dealers maintain data in the form of 
order tickets and trade blotters that regulators can obtain on 
request.\374\ Order tickets are in-house records maintained by 
investment advisers and broker-dealers that provide order details, 
including time stamps of order initiation and placement, special order 
types, any special instructions for the order, and plans for the 
allocation of shares and prices across accounts and subaccounts. Order 
tickets also identify account owners. Commission Staff collects order 
tickets regularly for examinations, and occasionally also for market 
manipulation investigations.
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    \374\ Rule 204-2 requires investment advisers to maintain a 
memorandum of each order given by the investment adviser for the 
purchase or sale of any security. 17 CFR 275.204-2(a)(3). Rule 17a-
3(a)(1) requires broker-dealers to maintain a trade blotter. 17 CFR 
240.17a-3(a)(1).
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    Broker-dealers maintain data in trade blotters that are similar to 
EBS. However, the trade blotters also contain more information, 
including the commissions paid in executing each order, time stamps of 
when an order is received and when it is executed (and the number of 
fills), and the pricing information for all executions in the 
order.\375\ SROs use trade blotters in examinations of their members. 
Commission Staff uses trade blotters frequently for examinations, 
including in almost every broker-dealer, investment adviser, and hedge 
fund examination, as well as for insider trading and market 
manipulation investigations. Regulators use trade blotter data to 
determine the order entry time and execution time for trades by a 
particular customer in examinations and enforcement investigations. 
Trade blotters are also the primary data source used in regulatory 
investigations for which subaccount allocation information is important 
for determining violative behavior, such as cherry-picking and front-
running cases. There are limitations on trade blotter and order ticket 
data that reduce their usefulness to regulators, however. For example, 
regulators lack direct access to these data; in order to acquire trade 
blotter and order ticket data, regulators need to send a request to 
each individual broker-dealer to obtain its data, which can be a 
lengthy and cumbersome process. These and other limitations are 
discussed in Section IV.D.2.b, infra.
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    \375\ Regulators could also request a trade confirmation instead 
of a trade blotter. A trade confirmation shows the customer, the 
symbol, execution price, trade date, settlement date and commission. 
A trade blotter is more detailed than a trade confirmation. A trade 
blotter is what a firm itself records and the exact information 
recorded varies by firm. Typically, regulators look to the trade 
confirmation when they have questions about the veracity of a firm's 
blotter, but generally prefer to request the trade blotter due to 
its greater detail.

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[[Page 30662]]

(5) Trading and Order Handling System Data
    Broker-dealers and exchanges also collect and maintain records of 
activity in their order handling systems and internal matching 
systems.\376\ This data may include order receipt, modification or 
routing information not otherwise reported to SROs. Some elements of 
these data exceed the scope of information captured in EBS, SRO audit 
trail, trade blotter, or order ticket data; for example, SRO audit 
trail data sometimes excludes market-making activity. But certain 
market making activity is included in the data that broker-dealers and 
exchanges are required to maintain pursuant to Section 17(a) of the Act 
\377\ and Rule 17a-3 thereunder.\378\ Regulators use these trading and 
order handling system data in investigations and examinations to 
further analyze issues discovered during their analysis of data from 
other sources. Like other current sources of data, there are 
limitations on trading and order handling system data that reduce their 
usefulness to regulators. For example, a lack of standardization 
results in variations in trading and order handling system data across 
broker-dealers. These and other limitations are discussed in Section 
IV.D.2.b, infra.
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    \376\ Internal matching systems of broker-dealers may include 
Alternative Trading Systems (``ATSs'') or automated trading systems 
that provide liquidity to received orders without interacting on a 
registered exchange. The Commission understands that some broker-
dealers rely on their clearing firms to collect and maintain records 
relating to routed orders on their behalf. Broker-dealers that 
operate their own internal matching systems are more likely to 
collect and maintain their own records.
    \377\ 15 U.S.C. 78q(a).
    \378\ 17 CFR 240.17a-3. For example, market makers are only 
required to report information on orders that are executed.
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(6) Public Data
    Exchanges and SROs also make data available to the public, in some 
cases on a commercially-available basis,\379\ that regulators could 
access for their regulatory activities. One type of public data is 
``consolidated'' data feeds that are disseminated by registered 
Securities Information Processors (``SIPs'') pursuant to joint SRO 
plans.\380\ For a fee, the SIPs distribute consolidated market data on 
recent equity and option transactions and the prevailing best quotes at 
each exchange to market data subscribers. In addition, all exchanges 
also make data available through direct data feeds. These feeds contain 
all data included in the SIP feed, but also include depth of book 
information \381\ and, depending on the exchange, may include 
additional data, such as the submission, cancellation and execution of 
all displayed orders and auction imbalance information on the exchange, 
among other things.
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    \379\ In other words, the exchanges and SROs sell the data 
publicly and regulators can purchase it.
    \380\ ICE serves as the operator for the Consolidated Tape 
Association (``CTA'') Plan SIP and the Consolidated Quote System 
(``CQS'') Plan SIP. These SIPs collect and disseminate information 
on quotes and trades in listed securities, other than NASDAQ listed 
securities. The NASDAQ Stock Market LLC serves as the operator for 
the Unlisted Trading Privileges (``UTP'') Plan SIP, which collects 
and disseminates quote and trade information in NASDAQ listed 
securities.
    \381\ An exchange's order book consists of all unexecuted orders 
at each price. Order book data typically includes the depth 
(aggregated number of shares) of the displayed orders at each price 
and might include all prices in the order book or the depth at each 
price over a range of prices. Displayed orders consist of any order 
in which the submitter did not instruct that some or all of the 
order be hidden from display.
---------------------------------------------------------------------------

    The SEC's Market Information Data Analytics System (``MIDAS'') uses 
information disseminated by the SIP feeds, as well as exchange direct 
feeds consisting of data that individual exchanges choose to sell to 
subscribers. In addition, at the request of Commission Staff, most 
equities exchanges produce and make public two datasets with 
information on short sales: A file of short selling volume by stock, 
which contains the short selling and total volume on that exchange by 
symbol, and a file of short selling transactions, which contains trade 
information such as time, volume, and price for each transaction 
involving a short sale.\382\
---------------------------------------------------------------------------

    \382\ See Short Sale Reporting Study, infra note 413, for more 
information on available short selling data and the demands for 
additional short selling data. This study also describes information 
regarding data from Form SH filings. For ten months starting during 
the financial crisis, the Commission required certain institutional 
investors to submit weekly reports of their short selling activity 
and positions.
---------------------------------------------------------------------------

    The Commission and SROs use these publicly available trade and 
order data to conduct market analyses, market reconstructions, 
examinations, and investigations. Because of the accessibility and ease 
of use of the public data, regulators often use it as a starting point 
or a basis of comparison to other data sources. For example, real-time 
surveillance can rely on SIP data, and some insider trading 
surveillance relies on information from other publicly available 
sources such as news sources. Further, investigations into short sale 
market manipulation sometimes start with an analysis of the short 
selling data. Some market analyses by regulators rely on public data 
alone.\383\ However, there are limitations on these data that reduce 
their usefulness to regulators. For example, they do not provide 
customer information, order entry time, information about special order 
handling codes, counterparties, or member identifiers. These and other 
limitations are discussed in Section IV.D.2.b, infra.\384\
---------------------------------------------------------------------------

    \383\ See Collver, supra note 327.
    \384\ See also Staff of the Office of Analytics and Research, 
Division of Trading and Markets, Research Note: Equity Market 
Volatility on August 24, 2015 (December 2015) available at http://www.sec.gov/marketstructure/research/equity_market_volatility.pdf.
---------------------------------------------------------------------------

b. Current Limitations of Trade and Order Data
    Although regulators have access to trade and order data from the 
sources described above,\385\ the available data are, for various 
reasons, limited in terms of the four qualities discussed above. In 
terms of completeness, current sources do not represent all of the 
market activity of interest in sufficient detail in one consolidated 
audit trail. In terms of accuracy, current sources may reflect data 
errors, insufficiently granular clock synchronization and time stamps, 
errors introduced in the process of combining data from different 
sources, a lack of consistent customer and broker-dealer identifiers, 
and data that is too aggregated at the record level to provide the 
information regulators need. With respect to accessibility, the SROs 
and Commission lack direct access to most of the data sources described 
above, and with respect to timeliness, obtaining trade and order data 
from current sources and converting the data into a form in which they 
can be analyzed can involve a significant delay from the time of a 
particular event of interest.\386\ The qualities of market data are 
important to the Commission's ability to fulfill its statutory mission 
in an efficient and effective manner. As a result of the limitations on 
current data sources, regulators are limited in their ability to 
perform the activities outlined in Section IV.D.1, above. Table 2: 
Currently Available Data Sources summarizes the key characteristics of 
the currently available data sources, which are discussed in more 
detail below.
---------------------------------------------------------------------------

    \385\ See Section IV.D.2.a, supra.
    \386\ As discussed above and in the Adopting Release, accuracy 
refers to whether the data about a particular order or trade is 
correct and reliable; completeness refers to whether the data 
represents all market activity of interest or just a subset, and 
whether the data is sufficiently detailed to provide the required 
information; accessibility refers to how the data is stored, how 
practical it is to assemble, aggregate, and process the data, and 
whether all appropriate regulators could acquire the data they need; 
and timeliness refers to when the data is available to regulators 
and how long it would take to process before it could be used for 
regulatory analysis. See supra note 306.

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[[Page 30663]]

[GRAPHIC] [TIFF OMITTED] TN17MY16.327


[[Page 30664]]


(1) Completeness
    ``Completeness'' refers to whether the data represents all market 
activity of interest or just a subset, and whether the data is 
sufficiently detailed to provide the required information.\391\ While 
current data sources provide trade and order data specified by existing 
rules and regulations, those sources do not contain all market activity 
that might be required for certain market inquiries, in sufficient 
detail, within one consolidated audit trail. To obtain information 
regarding a particular market event, regulators may have to piece 
together information from different data sources. Further, some data is 
not required to be reported at all under existing regulations.\392\ 
Therefore, current data sources either cover only a limited number of 
events and products, or lack some data fields that would be useful to 
regulators, each of which impedes effective market surveillance.
---------------------------------------------------------------------------

    \391\ See supra note 306.
    \392\ See, e.g., Adopting Release, supra note 9, at 45726-30, 
45741, 45750 n.286, 45756 n.361 (discussing the incompleteness of 
the data recorded by existing audit trail systems such as OATS, 
acknowledging that ``certain elements are not collected by existing 
audit trails,'' and noting that ``existing SRO audit trails do not 
require customer information to be reported''); see also Proposing 
Release, supra note 9, at 32564-66, 32603 (discussing gaps in 
current required audit trail information and stating that the 
proposed rule would require ``national securities exchanges, 
national securities associations, and their members to capture . . . 
information that is not currently captured under the existing audit 
trail or other regulatory requirements'').
---------------------------------------------------------------------------

A. Events and Products
    There is currently no single data source that covers all market 
activities. EBS data contains executed trades but does not contain 
information on orders or quotes (and thus does not provide information 
on routes, modifications, or cancellations). Similarly, trade blotters 
and order tickets contain only information recorded by that particular 
broker-dealer or investment adviser and may contain limited information 
about full order lifecycles. SRO audit trail data are limited to 
identifying the activity of their members, can have incomplete 
information concerning their members, lack order lifecycle information 
occurring prior to receipt by an exchange, and may not contain 
information regarding principal trading. Furthermore, public 
consolidated and direct data feeds provide data about the entire 
market, but lack information regarding non-displayed orders and do not 
provide sufficient information to identify the different lifecycle 
events of a single order.
    Individual SRO audit trails are extensive but still incomplete in 
their coverage of the activities of the market participants they cover; 
they contain only activity of their own members and many do not 
necessarily contain all activity by their members. For example, FINRA's 
OATS data does not include proprietary orders originated by a trading 
desk in the ordinary course of a member's market making activities, or 
options data. And while OATS collects data from FINRA members with 
respect to orders and trades involving NMS and OTC stocks, OATS does 
not include trade or order activity that occurs on exchanges or at 
broker-dealers that are not FINRA members.\393\ In addition, while 
broker-dealers who are not members of FINRA must be members of an 
exchange SRO, an individual exchange SRO's audit trail data is 
generally limited to activity taking place on that exchange.\394\ 
Because broker-dealers who are not members of FINRA may engage in 
trading activity in off-exchange markets, a substantial portion of the 
trading activity that an exchange SRO supervises is not reported to the 
supervising SRO.\395\
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    \393\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(ii)(A). OATS includes records showing the routing of an order 
to an exchange, but not the outcome of that routing. In performing 
its regulatory oversight of the markets, FINRA has created an 
internal process in which it augments the data it collects via OATS 
with trade execution data from other exchanges with which it has 
regulatory service agreements. This process provides FINRA with a 
wider view of the markets than OATS previously provided, but linking 
data across these sources does not yield fully accurate results. See 
Section IV.D.2.b(2), infra for a discussion of the accuracy of 
linking across data sources. See infra note 1060 for a discussion of 
FINRA's RSAs.
    \394\ Currently, Rule 15b9-1 offers an exemption from FINRA 
membership that applies if the firm is a member of a national 
securities exchange, carries no customer accounts, and has annual 
gross income of no more than $1,000 that is derived from securities 
transactions effected otherwise than on a national securities 
exchange of which it is a member (the `de minimis allowance'). 
Income derived from transactions for that dealer's own account with 
or through another registered broker-dealer do not count toward the 
$1,000 de minimis allowance. However, the national securities 
exchanges have not generally supervised their members' activity 
outside of the markets they operate. The Commission has proposed 
modifications to Rule 15b9-1 that would require a dealer to be a 
member of a registered national securities association to conduct 
most off-exchange activity. See Securities Exchange Act Release No. 
74581 (March 25, 2015), 80 FR 18035, 18042 (April 2, 2015) 
(``Exemption for Certain Exchange Members'') (proposing to amend 
rule 15b9-1 and noting that ``[n]on-Member Firms are not subject to 
oversight by [FINRA] and their off-exchange transactions typically 
are not overseen by the exchanges of which they may be members,'' 
and that ``[e]xchanges traditionally have not assumed the role of 
regulating the totality of the trading of their member-broker-
dealers . . .'').
    \395\ Id. at 18043 n.85. Broker-dealers that are not FINRA 
members accounted for 48% of orders sent directly to ATSs in 2014. 
Therefore, OATS includes incomplete information on a substantial 
portion of off-exchange trading. As of March 2015, 125 of the 
approximately 4,209 registered broker-dealers were not members of 
FINRA. Id. at 18052. Orders from non-FINRA members accounted for 40% 
of orders sent directly to ATSs in 2013, and 32% in 2012. Id. at 
18038 n.21.
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    Further, not all FINRA members are obligated to report to OATS. 
FINRA's rules exempt from reporting certain members that engage in a 
non-discretionary order routing process.\396\ Additionally, FINRA has 
the authority to exempt other members who meet specific criteria from 
the OATS recording and reporting requirements, and has granted 
approximately 50 such exemptions.\397\
---------------------------------------------------------------------------

    \396\ See FINRA Rule 7410 (Definitions). The Rule specifically 
excludes from the definition of ``Reporting Member'' members that 
(1) engage in a non-discretionary order routing process and route 
all of their orders either to a single receiving Reporting Member or 
two Reporting Members, provided orders are routed to each receiving 
Reporting Member on a pre-determined schedule and the time period 
for the schedule does not exceed one year; (2) do not direct or 
maintain control over subsequent routing or execution by the 
receiving Reporting Member; and (3) have a written agreement with 
the receiving Reporting Member that specifies the respective 
functions and responsibilities of each party to effect full 
compliance with the OATS recording and reporting rules. Finally, the 
receiving Reporting Member must record and report all required 
information pertaining to the order.
    \397\ See FINRA Rule 7470 (Exemption to the Order Recording and 
Data Transmission Requirements). The Rule provides that, for good 
cause shown, FINRA may exempt a member from its recording and 
reporting requirements if: (1) The member and current control 
affiliates and associated persons of the member have not been 
subject within the last five years to any final disciplinary action, 
and within the last ten years to any disciplinary action involving 
fraud; (2) the member has annual revenues of less than $2 million; 
(3) the member does not conduct any market making activities in NMS 
stock or OTC securities; (4) the member does not execute principal 
transactions with its customers; and (5) the member does not conduct 
clearing or carrying activities for other firms. This authority 
sunsets on July 10, 2019. Approximately 799 firms that are excluded 
or exempt from OATS would incur CAT reporting obligations if the 
Plan were approved; see also infra note 931, Section IV.F.1.c(2)B.i, 
infra.
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    Exchange audit trails also lack information on the order lifecycle 
events that occur prior to receipt at the exchange.\398\ SRO audit 
trail data available from the Intermarket Surveillance Group (``ISG'') 
\399\ does not

[[Page 30665]]

capture quotes/orders away from a market's inside market (i.e., those 
quotes/orders below the best bid or above the best offer); currently 
identify market participants in a trade only to the clearing broker 
level; do not provide information on the executing broker; and contain 
certain data fields that are not mandatory.\400\
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    \398\ The Commission understands that exchange routing broker-
dealers, which route orders from exchanges to other Execution 
Venues, do substantial business, but it is very hard in current data 
sources to track orders sent to one exchange that are then sent to 
another exchange or off-exchange venue by the exchange routing 
broker-dealer.
    \399\ The ISG was established in the early 1980s and is 
comprised of over 50 international exchanges, market centers, and 
market regulators that perform market surveillance in their 
respective jurisdictions. The purpose of the ISG is to provide a 
framework for the sharing of information and the coordination of 
regulatory efforts among exchanges trading securities, options on 
securities, security futures products, and futures and options on 
broad-based security indexes, to address potential inter-market 
manipulations and trading abuses. In effect, the ISG is an 
information-sharing cooperative governed by a written agreement. ISG 
also provides a forum for ISG members to discuss common regulatory 
concerns, thus enhancing members' ability to efficiently fulfill 
their regulatory responsibilities. As a condition to membership, 
every ISG member must represent that it has the ability to obtain 
and freely share regulatory information and documents with other ISG 
members, generally unencumbered by rules, nationally imposed 
blocking statutes or bank secrecy laws. Regulatory information is 
only shared on an as-needed basis and only upon request, and any 
information shared through ISG must be kept strictly confidential 
and used only for regulatory purposes. The SEC is not a member of 
ISG, nor is ISG subject to regulatory oversight by the SEC.
    \400\ See Comment Letter from FINRA and NYSE Euronext regarding 
Proposing Release (August 9, 2010), available at https://www.sec.gov/comments/s7-11-10/s71110-46.pdf.
---------------------------------------------------------------------------

    Additionally, some SRO audit trails do not include and are not 
required to include activity associated with principal trading, such as 
market-making activity. This may result in the exclusion of a 
significant amount of activity, particularly for firms with substantial 
market-making business activities. Principal trading activity 
represents a significant portion of market activity and there are 
aspects of the current market regime that may result in the 
underreporting of this trading activity. Indeed, an analysis by 
Commission Staff estimates that principal trading accounted for 40.5% 
of all reported transactions and principal activity accounted for 67% 
of all exchange message traffic.\401\ And, because these figures do not 
capture principal activity done by trading on-exchange through other 
broker-dealers, these estimates are likely to be biased downwards.\402\
---------------------------------------------------------------------------

    \401\ The analysis used audit trail data (where orders are 
identified at the broker-dealer level), from 10 exchanges, excluding 
CHX, and OATS reported off-exchange activity. Message traffic was 
defined as order placement, cancellation, or amendment.
    \402\ The fact that off-exchange principal trading of non-FINRA 
member broker-dealers is not fully reported in OATS, may also bias 
these estimates downwards.
---------------------------------------------------------------------------

    Finally, no single current data source integrates both equities and 
options. The lack of any combined equity and options audit trail data 
is a significant impediment to regulators performing cross-product 
surveillance.\403\
---------------------------------------------------------------------------

    \403\ Likewise no single audit trail combines futures with NMS 
Securities either. See Adopting Release, supra note 9, at 45744 for 
a discussion of the potential inclusion of futures in CAT Data.
---------------------------------------------------------------------------

B. Data Fields
    Each of the available data sources discussed above \404\ is missing 
certain data fields that are useful for conducting a variety of 
regulatory activities. Furthermore, certain valuable data fields are 
not contained in any of the data sources discussed above. For example, 
the lack of completeness in the data sources makes it impossible to use 
certain key information, such as customer identifiers and allocation 
information, in market surveillance. Further, even for single-security 
events within a single trading venue, regulators may need to seek data 
from multiple sources such as an SRO audit trail and EBS.\405\
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    \404\ See Section IV.D.2.a, supra.
    \405\ See Section IV.D.2.a, supra, and Section IV.D.2.b(3) 
infra, for a discussion of how regulators access such data.
---------------------------------------------------------------------------

    Most notably, the identity of the customer is unavailable from all 
current data sources that are reported to regulators on a routine 
basis. A unique customer identifier could be useful for many types of 
investigations and examinations such as market manipulation 
investigations and examinations of investment advisers. As noted above, 
some data sources--specifically Large Trader, EBS, trade blotters, and 
order tickets--identify customers.\406\ But these data sources are not 
reported on a routine basis, provide only one part of the order 
lifecycle, and have other inherent limitations.
---------------------------------------------------------------------------

    \406\ Trade confirmation data also identifies customers, but 
trade confirmation data are much more basic than a trade blotter. 
See supra note 375.
---------------------------------------------------------------------------

    Because there is currently no data source that includes customer 
identities across multiple parts an order lifecycle,\407\ regulators 
must engage in a process of linking EBS, trade blotters and order 
tickets with SRO audit trails, which can be a burdensome and imperfect 
process.\408\ For example, trade blotter and order ticket data that 
identifies customers from one broker-dealer may only include customer 
names and thus may not be readily matched to similar data from another 
broker-dealer, or may require substantial effort and uncertainty to 
reconcile across firms. Further, EBS data's limited coverage of trading 
activity and lack of some detailed trade information creates 
inefficiencies in insider trading investigations. These investigations 
often begin with a request for EBS data of trades before a significant 
corporate news event that affected a company's stock price. After 
identifying accounts that made suspicious trades, investigators often 
request additional EBS data of all trades by the accounts during the 
same period. If the additional data reveal suspicious trades by the 
accounts of the securities of other companies, investigators often must 
make a third round of EBS requests for data of trades by all accounts 
in those securities. If trading is done in an omnibus account, 
Commission Staff must ask firms to provide the identity of the account 
holder, and then request account information. To investigate for 
manipulation (e.g., marking the close, order layering, spoofing,\409\ 
wash sales, trading ahead), Commission Staff may also link data from 
multiple sources. First, Commission Staff obtains equity and option 
cleared reports from an internal online system that interfaces with 
data provided by the DTCC. Because the equity and option cleared 
reports do not have trade details, Commission Staff may also request 
trade information through EBS submissions from one or multiple firms. 
If a trade was executed on behalf of another firm, Commission Staff may 
then contact the other firm, until Staff can find out who placed the 
trade and the account holder. The Commission may then obtain granular 
trade information that contains order entry time and order execution 
time from firms or brokers via request or subpoena.\410\
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    \407\ The Commission approved a FINRA rule that would require 
broker-dealers to report to OATS the identity of U.S. registered 
broker-dealers that are not FINRA members and broker-dealers that 
are not registered in the U.S. but have received an SRO-assigned 
identifier in order to access certain FINRA trade reporting 
facilities, from whom they receive or route an order. See Securities 
Exchange Act Release No. 77523 (April 5, 2016), 81 FR 21427 (April 
11, 2016) (Order Approving FINRA Rule to Report Identity of Certain 
Broker-Dealers to OATS). CAT would similarly capture this 
information upon full implementation.
    \408\ For further discussion of the problems associated with 
linking, see Section IV.D.2.b(2)C, infra.
    \409\ See supra note 343.
    \410\ The process to obtain detailed trade information from 
firms and brokers via requests or subpoenas generally takes anywhere 
from two to four weeks depending on the size of the request.
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    The methods for obtaining such information significantly reduce its 
utility, particularly for surveillance and market reconstruction 
purposes. Market reconstructions, for example, cannot take advantage of 
the detail in the EBS and trade blotter data because of the resources 
required to link so many data sources, lack of necessary elements (such 
as time stamps in milliseconds) needed to link data sources (for 
example, matching large trader reports to activity on a particular 
exchange), or the absence of standardized format. To examine a tip or 
complaint, regulators may consolidate data from each affected

[[Page 30666]]

market participant to determine the identities of those responsible for 
the atypical activity in question. To the extent that the activity 
originates from several market participants, regulators must request 
data from each of those market participants, and possibly other market 
participants, to obtain information that could identify the customer(s) 
originating the orders that created the atypical activity.
    For many regulatory activities, lack of completeness results in 
regulators initially relying upon the most accessible data sources, 
with significant information contained only in data sources made 
available by request. Starting regulatory functions with incomplete 
data sources requires regulators to later make data requests and link 
such data request responses. More importantly, however, incomplete or 
unconsolidated data interferes with effective surveillance. Access to 
data through non-routine means makes investigations and examinations 
less efficient, and makes automated surveillance less accurate and less 
effective. For example, the publicly available data discussed above 
\411\ identify exchanges but lack most of the fields found in some SRO 
audit trails or EBS, such as customer information, order entry time, 
order execution time, information about special order handling codes, 
counterparties, and member identifiers. Similarly, equity cleared 
reports contain only the date, the clearing firm, and the volume 
cleared by each clearing firm and not the trade size, trade time, or 
trade location. Option cleared reports contain only the date, the 
clearing firm, number of customer contracts, and number of firm 
contracts for the options.
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    \411\ See Section IV.D.2.a(6), supra.
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    Some valuable data fields, such as modifications that make an order 
non-displayed and other special handling instructions are consistently 
available on only a few data sources or require linking different data 
sources.\412\ The lack of direct, consistent access to order display 
information and special handling instructions creates inefficiencies in 
surveillances, examinations, and investigations that examine hidden 
liquidity and the treatment of customer orders. Data that are not 
directly accessible by regulators at all include buy-to-cover 
information and subaccount allocation information, including the 
allocation time. For example, no current data source allows regulators 
to directly identify when someone is buying to cover a short sale. 
Regulators could use this information to better understand short 
selling and for investigations of short sale manipulation. Indeed, the 
absence of this information during the financial crisis in 2008 reduced 
the efficiency of the reconstruction of investor positions in financial 
companies.\413\
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    \412\ Order display information (i.e., whether the size of the 
order is displayed or non-displayed) is indicated in the ``Customer 
Instruction Flag'' and special handling instructions are indicated 
in the ``Special Handling Code'' of an OATS report. The Customer 
Instruction Flag is mandatory if a limit or stop price is provided. 
A Special Handling Code is required for order modifications, reserve 
size orders, when the order is routed electronically to another 
member, or when the terms and conditions of the order were derived 
from a related options transaction. See FINRA, OATS Reporting 
Technical Specifications, at Appendix A (June 26, 2015), available 
at http://www.finra.org/sites/default/files/TechSpec_20150825.pdf. 
This data is not directly available to all regulators. The 
Commission must request this data from FINRA.
    \413\ Having access to buy-to-cover information was also one of 
the subjects of a Dodd-Frank-mandated study on short sale reporting. 
See SEC, Short Sale Position and Transaction Reporting (June 5, 
2014) (``Short Sale Reporting Study''), available at http://www.sec.gov/dera/reportspubs/special-studies/short-sale-position-and-transaction-reporting.pdf.
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    Subaccount allocation information needed for regulatory activities 
can be difficult for regulators to collect and compile. SRO audit 
trails currently do not require allocation reports and broker-dealers 
may not have records of the time of a subaccount allocation. When 
regulators require an understanding of subaccount allocations for a 
regulatory task, they generally request and sift through trade blotter 
or EBS data in an attempt to identify allocations and the details of 
those allocations. Current trade blotter data contains limited customer 
information on allocations and is not required to contain allocation 
time information at the subaccount level. While the Commission is 
sometimes able to acquire allocation time on trade blotters, not all 
broker-dealers keep records in a manner that facilitates efficient 
regulatory requests for allocation time information.
    The difficulty in obtaining allocation information and the 
difficulty in reconstructing allocations with data from broker-dealers 
limits the efficiency of certain surveillances and examinations. 
Allocation time at the subaccount level is critical for determining 
whether some customers are systematically given more favorable 
allocation treatment than others. For example, when a broker-dealer 
places an order or series of orders for multiple customer accounts that 
generates multiple executions at multiple prices, it is possible that 
different customers receive different prices in the allocation process. 
However, if some customers systematically receive less favorable prices 
than others when they should be receiving the same prices for their 
executions, this could indicate that the broker-dealer is handling 
allocations improperly.\414\
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    \414\ If a group of orders are bundled together for execution, 
when those same orders are allocated, they should receive the same 
(usually average price) allocations. However, if executions are for 
orders that are not bundled together, it might be appropriate that 
customers for those separate orders would receive differently-priced 
allocations.
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(2) Accuracy
    In the Adopting Release, the Commission noted that while ``to some 
extent, errors in reporting audit trail data to the central repository 
will occur,'' the CAT NMS Plan would improve the quality of data 
including improvements to accuracy.\415\ Therefore, the economic 
analysis carefully considers the Baseline of the accuracy of data 
regulators currently use in order to consider whether and to what 
degree the CAT NMS Plan would provide more accurate data.
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    \415\ See Adopting Release, supra note 9, at 45730.
---------------------------------------------------------------------------

    The prospect of inaccurate data can result in regulators expending 
extra resources to run additional quality checks to ensure reliable 
data and conclusions in enforcement investigations, or being unable to 
draw reliable conclusions at all. In addition, risk-based analysis may 
not properly identify a potential risk that justifies further 
examination if the underlying data suffers from inaccuracies. 
Ultimately, inaccurate data results in less efficient investigations as 
well as less effective surveillance and risk analyses. This economic 
analysis considers several forms of data inaccuracy, including data 
errors, inaccurate event sequencing, the inability to link data 
accurately, inconsistent identifiers, and obfuscating levels of 
irreversible data aggregation.
A. Data Errors \416\
    Based on Staff experience, the Commission preliminarily believes 
that data errors affect most current data and can persist even after 
corrections. For

[[Page 30667]]

example, Commission Staff has investigated instances where information 
was inaccurately reported by broker-dealers, most notably in EBS data 
given to the Commission.\417\ In addition, the Commission believes that 
data sources that depend on data translated from back-office systems 
can be less accurate than those that come from trading systems, such as 
trade blotters and data sourced from exchanges' electronic trading 
systems, because the data translation process creates an additional 
source of potential errors in code that may not work as intended. Data 
from trading systems can also contain errors resulting from a coding 
error in the query pulling the data. Such coding errors can affect any 
data including trade blotters. For example, trade blotters are stored 
using the ticker symbol in effect at the time of the trade. If the 
ticker symbol changes between the trade and the data request, the 
coding may fail to take the ticker symbol change into account and fail 
to retrieve the correct data. The Commission has found that trade 
blotter data can often be inaccurate due to improper inclusion of 
cancelled orders or corrections, making accurate reconciliation 
difficult. Furthermore, trade blotter data can lack security 
information including CUSIP, symbol, or description at the subaccount 
level, which are important features for helping regulators determine 
potential violations.\418\
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    \416\ As used herein, the term ``data errors'' refers to 
instances where data reflect false information or are missing 
information such that they do not reflect order events that occurred 
in the market fully and accurately. Under this definition of ``data 
errors,'' a trading error or an order entry error would not be a 
``data error.'' For example, if a trader submitted an order to an 
exchange with an order size of 100,000, an accurate order record 
would contain an order size of 100,000. If the trader actually 
intended to enter the order size as 1,000, the accurate order record 
would still be 100,000 because that would reflect the actual state 
of the market at the time. In other words, the 100,000 order size is 
not a ``data error.'' If the trader later corrected the order size, 
accurate data would reflect the subsequent corrections while still 
preserving the accurate state of the market at the time.
    \417\ For example, Commission staff have experienced frequent 
errors in EBS data such as omitted variables, decimals in the wrong 
places, blank account information, and data for the wrong 
securities. The Commission has instituted actions against entities 
in connection with inaccurate EBS data. See, e.g., Securities 
Exchange Act Release No. 75445 (July 14, 2015), In the Matter of OZ 
Management, LP, Administrative Proceeding File No. 3-16686 (OZ 
Management, LP admitted submitting inaccurate data to four of its 
prime brokers); see also Section IV.D.2.b(4), infra, for a 
discussion of one impact of inaccurate data.
    \418\ In cases where Commission staff has used these data, it 
has found that the frequent omission of these important fields in 
trade blotter data is generally due to the manner in which the data 
is queried by broker-dealers. There are a variety of reasons why 
these fields may be excluded from a query. For example, over time 
firms make changes to their software systems; records stored by 
previous versions, particularly when the records are archived in a 
secondary location, may not be fully compatible with software that 
is written to access more current versions of this data. 
Additionally, sometimes when a broker-dealer or clearing firm merges 
or is acquired, its trade data may be compromised due to 
incompatible systems or inadequate data storage issues. This problem 
was particularly relevant following the financial crisis. 
Consequently, staff does not currently believe that this missing 
information is caused by a failure of broker-dealers to collect and 
retain these variables, but rather that over time this data becomes 
less accessible by software tools and may require hand processing by 
broker-dealers providing this information.
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    Audit trail data contain errors, as well. The CAT NMS Plan reports 
that 2.42% of order events submitted to OATS fail validation 
checks,\419\ resulting in the rejection of almost 425,000 reports per 
day, on average.\420\ While FINRA sends these records back to its 
members to correct, not all data errors are identified because OATS 
limits error correction requests to records with internal 
inconsistencies within a given member's submission. In particular, 
significant error rates in event linking are common because there is no 
cross-participant error resolution process; FINRA estimates that 0.5% 
of OATS routing reports directed to another FINRA member broker-dealer 
cannot currently be linked.\421\ The CAT NMS Plan reports that, 
following the rollouts of three major updates to OATS, 0.86% of Trade 
Reporting Facility (``TRF'') reported trades could not be matched to 
OATS execution reports, 3.12% of OATS route reports could not be 
matched to exchange orders, and 2.44% of inter-firm routes could not be 
matched to a record of the receiving firm's receipt of a routed 
order.\422\
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    \419\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.3(b). When FINRA receives an end-of-day OATS file from a member, 
it performs over 152 validation checks on each order event reported 
to OATS. Each of these checks can result in rejecting an OATS data 
submission and generating an error message. In addition to 
validation checks, FINRA determines whether a file that is 
syntactically correct nevertheless contains errors in content 
related to internally inconsistent information about processing, 
linking, and routing orders. For some errors, FINRA requires the 
member to provide corrections within five business days after 
rejections are available. See OATS Reporting Technical 
Specifications, supra note 357, at 6-1--6-10. Duplicate records and 
records with symbols that are not reportable to OATS may result in 
rejections that do not require repair. Id. at 6-4. Validation checks 
refer to tests of whether data is consistent with a set of rules 
that specify conditions that should be met by valid data. Validation 
checks are typically limited to detecting errors that can be 
discovered by a concise set of logical rules using data within scope 
at the time the validation test is run. An incorrect price that is 
negative would likely be detected by a validation check, while a 
price that was a few cents too low may not. Validation checks that 
apply across multiple records may be difficult to apply across data 
that is submitted at different times.
    \420\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.3(b); see also Adopting Release, supra note 9 at 45729.
    \421\ See Section IV.D.2.b(2)C, infra.
    \422\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.3(b).
---------------------------------------------------------------------------

    Other audit trail data may also contain errors. For example, the 
Commission notes that exchange SROs populate most of the information 
with data from their in-house order and trading records, but a few of 
these exchange SROs also rely on members to complete their audit 
trails.
B. Event Sequencing
    The ability to sequence market events is crucial to the efficacy of 
detecting and investigating some types of manipulation, particularly 
those involving high frequency trading, those in liquid stocks in which 
many order events can occur within microseconds, and those involving 
orders spread across various markets. In today's market, high frequency 
and algorithmic traders can react to changes in the market in a few 
milliseconds or less.\423\ Investigations involving algorithmic 
trading, therefore, can require the ability to sequence the order and 
trade events to within a few milliseconds; however, regulators relying 
on currently available data may have difficulty sequencing events that 
occur within a second on different trading venues or broker-dealer 
systems.\424\ In addition, in one type of trade-based manipulation, a 
manipulator might build a short position in a stock, submit sell orders 
designed to decrease the stock price, and finally buy at an 
artificially low price. To analyze this activity, except when cover 
orders precede the sell activity, it would be necessary to determine 
whether the orders intending to create an artificial price came before 
the orders intending to profit from the artificial price, which becomes 
difficult when the systems on which order events occurring close in 
time to each other have clocks that are not synchronized. Further, 
insufficiently granular time stamps can make sequencing events across 
venues impossible.
---------------------------------------------------------------------------

    \423\ See, e.g., Joel Hasbrouck and Gideon Saar, Low-Latency 
Trading, 16 Journal of Financial Markets 646 (2013) in which the 
authors report apparent HFT response times to market events of 2-3 
milliseconds. Given technology advances, it is likely that response 
times have decreased since their sample period, which ends in June 
2008.
    \424\ Regulators can sequence events occurring on the same venue 
or on the same systems at broker-dealers, but sequencing across 
venues or broker-dealer systems that could have clocks that are not 
synchronized with each other is more difficult.
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    Thus, the sequencing of order events requires both sufficient clock 
synchronization across market participants and time stamps that are 
granular enough for accurate sequencing.\425\ As discussed below,

[[Page 30668]]

current clock synchronization standards make this process difficult.
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    \425\ For example, if two market participants report that two 
non-simultaneous events happened at 10:15:45, then the time stamps 
are not granular enough to sequence the events and regulators would 
need sub-second time stamp granularity to distinguish them. If the 
two market participants each have up to one-second clock drift from 
the actual time, the 10:15:45 time stamps only show that the event 
happened between 10:15:44 and 10:15:46. Only when regulators have 
both adequate time stamp granularity and sufficient clock offset 
tolerances can events be sequenced using time stamps.
---------------------------------------------------------------------------

i. Clock Synchronization
    Clock synchronization refers to the synchronization of the business 
clocks used by market participants for the purposes of recording the 
date and time of market events to a centralized benchmark clock, often 
that maintained by the NIST. Clock synchronization helps to ensure that 
the time stamps used by various participants are consistent, thereby 
allowing regulators to compare time stamps across participants and to 
use multiple time stamps to determine the sequence of market events. 
The ability of regulators to accurately sequence events can be limited 
by the permitted ``offset'' between the clocks--i.e., the length of the 
gap that is permitted between a participant's clock and the time 
maintained by a centralized benchmark clock.\426\ For example, if the 
offset between the clocks is one second, regulators cannot accurately 
determine the correct sequence of events in the market occurring within 
a two-second period, because each clock may be up to one second fast or 
slow.
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    \426\ For example, if a participant's clock records a point in 
time as 11:00:00 and the NIST clock records the same point in time 
as 11:00:01, then the offset between the clocks is one second.
---------------------------------------------------------------------------

    Current rules require most broker-dealers to synchronize their 
system clocks to within one second. In particular, FINRA specifies a 
clock offset tolerance of one second,\427\ and the NASDAQ Stock Market 
and NASDAQ OMX BX require members to comply with FINRA clock 
synchronization rules.\428\ CHX specifies a clock offset tolerance of 
500 milliseconds.\429\ NYSE MKT and NASDAQ OMX PSX require members to 
synchronize their clocks relative to a time source designated by the 
Exchange, but do not specify the standard.\430\ NYSE Arca allows 
options traders to use any time provider source for clock 
synchronization as long as the business clocks it uses on the Exchange 
are accurate to within three seconds of the NIST clock or the United 
States Naval Observatory Master Clock in Washington DC.\431\
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    \427\ See FINRA Rule 7430 (requiring each member to 
``synchronize its business clocks that are used for purposes of 
recording the date and time of any event that must be recorded 
pursuant to the FINRA By-Laws or other FINRA rules, with reference 
to a time source as designated by FINRA, and shall maintain the 
synchronization of such business clocks in conformity with such 
procedures as are prescribed by FINRA.''). Section 2 of the OATS 
Technical Specifications states that all computer system clocks and 
mechanical time stamping devices must be synchronized to within one 
second of the NIST clock and must be synchronized every day. See 
OATS Reporting Technical Specifications, supra note 357, at 2-1. In 
November 2014, FINRA issued a Regulatory Notice seeking comment on a 
proposal to change the clock offset tolerance to be 50 milliseconds. 
This proposal also proposed to move the clock offset tolerance from 
the OATS Technical Specifications to FINRA's books and records rules 
so that the requirements apply to the recording of the date and time 
of any event that FINRA By-Laws or Rules require, not just OATS 
requirements. See FINRA, Equity Trading Initiatives: Synchronization 
of Business Clocks, Regulatory Notice 14-47, available at http://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_14-47.pdf. On February 9, 2016, FINRA filed a 
proposed rule change with the Commission. The proposal would reduce 
the clock offset tolerance for members' computer clocks that are 
used to record events in NMS securities, including standardized 
options, and OTC Equity Securities, from within one second of the 
NIST atomic clock to within a 50-millisecond tolerance of the NIST 
atomic clock. FINRA would require firms with systems that capture 
time in milliseconds to comply with the new 50-millisecond clock 
offset tolerance within six months of the effective date; remaining 
firms that do not have systems which capture time in milliseconds 
would have 18 months from the effective date to comply with the 50-
millisecond standard. The proposal would not change the current one-
second clock offset tolerance of the NIST clock requirement for 
mechanical clocks or time stamping devices. The proposal would 
consolidate and codify the clock synchronization requirements in new 
FINRA Rule 4590. The Commission has published notice of this 
proposed rule change. See Securities Exchange Act Release No. 77196 
(February 19, 2016), 81 FR 9550 (February 25, 2016).
    \428\ See NASDAQ Rule 7430A (``(a) Nasdaq members shall comply 
with FINRA Rule 7430 as if such Rule were part of Nasdaq's rules. 
(b) For purposes of this Rule, references to `the FINRA By-Laws or 
other FINRA rules' shall be construed as references to `the Nasdaq 
Rules'); NASDAQ OMX BX Rule 6953 (``(a) Exchange members shall 
comply with NASD Rule 6953 [superceded by FINRA Rule 7430] as if 
such Rule were part of the Exchange's rules. FINRA is in the process 
of consolidating certain NASD rules into a new FINRA rulebook. If 
the provisions of NASD Rule 6953 are transferred into the FINRA 
rulebook, then Equity Rule 6953 shall be construed to require 
Exchange members to comply with the FINRA rule corresponding to NASD 
Rule 6953 (regardless of whether such rule is renumbered or amended) 
as if such rule were part of the Rules of the Exchange. (b) For 
purposes of this Rule, references to `the By-Laws or other rules of 
the Association' shall be construed as references to `the Rules of 
the Exchange.' '').
    \429\ See CHX Rule 3, Interpretations and Policies .03 (``These 
rules shall not apply to orders sent or received through the 
Exchange's matching system or through any other electronic systems 
that the Exchange expressly recognizes as providing the required 
information in a format acceptable to the Exchange. The Exchange 
will not recognize a non-Exchange system as providing information in 
an acceptable format unless that system has synchronized its 
business clocks for recording data with reference to a time source 
designated by the Exchange and maintains that synchronization in 
conformity with procedures prescribed by the Exchange.''); Rule 4, 
Interpretations and Policies .02 (``Each Participant or layoff 
service provider shall synchronize its business clocks that are used 
for purposes of recording the date and time of any event that must 
be recorded pursuant to this provision with reference to a time 
source as designated by the Exchange, and shall maintain the 
synchronization of such business clocks in conformity with such 
procedures as are prescribed by the Exchange.''); Rule 5, 
Interpretations and Policies .01(a) (``Clock synchronization and 
timing of the determination of improper trade-throughs. The 
Exchange's systems shall routinely, throughout the trading day, use 
processes that capture the time reflected on the atomic clock 
operated by the National Institute of Standards and Technology and 
shall automatically make adjustments to the time recorded in the 
Exchange's Matching System to ensure that the period between the two 
times will not exceed 500 milliseconds. The Exchange shall determine 
whether a trade would create an improper trade-through based on the 
most recent NBBO that has been received and processed by the 
Exchange's systems.'').
    \430\ See NYSE Rule 123, Supplementary Material .23 (``Any 
vendor or proprietary system used by a member or member organization 
on the Floor to record the details of an order or report for 
purposes of this rule must be synchronized with reference to a time 
source as designated by the Exchange.''); NYSE MKT Rule 7430 (``Each 
member organization shall synchronize its business clocks that are 
used for purposes of recording the date and time of any event that 
must be recorded pursuant to the Rules of the Exchange, with 
reference to a time source as designated by the Exchange, and shall 
maintain the synchronization of such business clocks in conformity 
with such procedures as are prescribed by the Exchange.''); NASDAQ 
OMX PSX Rule 3403 (``Each member organization shall synchronize its 
business clocks that are used for purposes of recording the date and 
time of any event that must be recorded pursuant to the rules of the 
Exchange, with reference to a time source as designated by the 
Exchange, and shall maintain the synchronization of such business 
clocks in conformity with such procedures as are prescribed by the 
Exchange.'').
    \431\ See NYSE Arca Options Rule 6.20 (``(a) Each OTP Holder and 
OTP Firm must synchronize, within a time frame established by the 
Exchange, the business clocks that it uses for the purpose of 
recording the date and time of any event that must be recorded 
pursuant to the Rules of the Exchange. OTP Holders and OTP Firms may 
use any time provider source. Each OTP Holder and OTP Firm must, 
however, ensure that the business clocks it uses on the Exchange are 
accurate to within a three-second [sic] of the National Institute of 
Standards and Technology Atomic Clock in Boulder Colorado (`NIST 
Clock') or the United States Naval Observatory Master Clock in 
Washington DC (`USNO Master Clock'). This tolerance includes all of 
the following: (1) The difference between the NIST/USNO standard and 
a time provider's clock; (2) transmission delay from the source; and 
(3) the amount of drift of the OTP Holder or OTP Firm's business 
clock. For purposes of this Rule, `business clocks' mean an OTP 
Holder or OTP Firm's proprietary system clocks. OTP Holders and OTP 
Firms must set forth in their written supervisory procedures, 
required by Rule 11.18, the manner in which synchronization of 
business clocks will be conducted, documented and maintained.'').
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    In practice, some broker-dealers currently synchronize their clocks 
to smaller clock offset tolerances. FIF surveyed market participants to 
gather information on current broker-dealer clock synchronization 
practices.\432\ The

[[Page 30669]]

survey found that 29% of respondents currently synchronize their clocks 
to permit a maximum clock offset of one second from NIST time.\433\ The 
survey further found that 10% of market participants permit a maximum 
offset from NIST time that is between 50 milliseconds and one second, 
21% of respondents permit a 50-millisecond maximum offset, and 18% of 
respondents permit a maximum offset that is less than 50 milliseconds. 
The remaining 22% of survey respondents utilize multiple clock offset 
tolerances across their systems, ranging from five microseconds to one 
second. FIF noted that 69% of firms that achieve a maximum clock offset 
of 50 milliseconds or less are large firms reporting more than three 
million OATS records per month.
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    \432\ See FIF Clock Offset Survey, supra note 127. The 
Commission notes limitations to the survey that could result in 
downward bias and imprecision. Specifically, the broker-dealers 
represented by the survey are primarily complex and large broker-
dealers in terms of market activity levels; consequently, smaller 
broker-dealers are underrepresented. But, as discussed below, the 
exclusion of small broker-dealers is unlikely to materially affect 
industry costs because smaller broker-dealers are unlikely to incur 
significant clock-synchronization costs because the majority of 
broker-dealers rely on service bureau clocks to time stamp their CAT 
Reportable Events.
    \433\ Id.
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    Certain exchanges, the SIPs, and FINRA synchronize their clocks for 
their trading, recordkeeping, and other systems. According to FIF, all 
exchange matching engines meet a clock offset tolerance of 50 
milliseconds.\434\ However, NASDAQ recently stated that all exchanges 
trading NASDAQ securities synchronize their matching engines and 
quotation systems to within 100 microseconds.\435\ The Commission 
understands that the NYSE, the options exchanges, and the SIAC SIP have 
comparable clock synchronization standards. In conversations with 
Commission Staff, the Participants stated that absolute clock offset on 
exchanges averages 36 microseconds.\436\
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    \434\ Id.
    \435\ See NASDAQ, UTP Vendor Alert #2015-7 (April 24, 2015), 
available at https://www.nasdaqtrader.com/TraderNews.aspx?id=UTP2015-07 (describing additional time stamps to 
be reported to the SIP, including information on exchange clock 
synchronization, and stating that ``[e]xchanges use a clock sync 
methodology ensuring that timestamps are accurate within tolerances 
of 100 microseconds or less.'').
    \436\ In response to questions from Commission Staff, the 
Participants surveyed the exchanges to establish their current 
average clock offset. All exchanges that currently operate matching 
engines responded to the survey, which measured the offset from the 
exchange clock to NIST. The Participants noted that the frequency 
with which exchanges measure their clock offset ranges from once per 
second to once per fifteen minutes, and the procedures to correct 
for clock offset vary. Some exchanges correct by slewing, in which 
the offset is gradually corrected, while others use stepping, in 
which the offset is immediately corrected. The process by which 
clock offset is corrected can impact the ability to order events 
time stamped by a single clock because stepping could result in a 
backwards adjustment in recorded time.
---------------------------------------------------------------------------

    Because multiple order events can occur within timeframes of less 
than one second, current clock synchronization requirements and 
practices greatly limit the ability of regulators to accurately 
sequence order events. To examine, among other things, how many events 
can be synchronized with current clock offset tolerances, Commission 
Staff conducted an analysis of the frequency of events using MIDAS 
data.\437\ In the analysis, events are all real-time messages, 
consisting of trades, orders, modifications, cancellations and updates 
from exchange direct feeds and trades from the FINRA TRFs. The analysis 
focused on identifying whether, for each order event, an event at 
another venue occurred within a given time range.\438\ For the purposes 
of the analysis, events at another venue were called an ``unrelated 
event.'' The Commission recognized that order events occurring on the 
same venue have sequence numbers that allow sequencing even if orders 
have the same time stamp. Therefore, the analysis considered only 
whether any unrelated orders existed within a given time range that 
could complicate the sequencing across the market.\439\
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    \437\ The MIDAS system does not contain all of the events in a 
given security that would be in CAT. Therefore, the analysis is 
limited, but still provides useful insights.
    \438\ The methodology to calculate these percentages starts with 
sorting all event messages for every day chronologically by exchange 
time stamp. (MIDAS does not report the exchange time stamp; but it 
provides the difference between the MIDAS time stamp and the 
exchange or TRF time stamp; the analysis uses this value to derive 
the exchange time stamp.) For each event, it calculates the 
difference (Delta) between the current time stamp (t0) 
and the last time stamp (t-1) in the same security on a 
different venue.
    Deltanearest last = t0,venue A - 
maximum(t-1,venue B, t-1,venue C, 
t-1,venue D, t-1,venue E)
    This is the shortest time difference 
(Deltanearest last) between an event on venue A and a 
preceding event on any venue, except for venue A. Next, the analysis 
calculates the time difference (Deltanearest next) 
between the current time stamp (t0) and the next time 
stamp (t1) in the same security on a different venue.
    Deltanearest next = minimum(t1,venue B, 
t1,venue C, t1,venue D, t1,venue E) 
- t0,venue A
    Finally, the analysis uses the shorter of the time differences 
to evaluate whether an event occurs within a particular time period 
of another event in the same security on a different venue.
    Deltanearest = minimum(Deltanearest last, 
Deltanearest next)
    Values are aggregated over one week (June 15, 2015 through June 
19, 2015) for the equities analysis; and the options analysis data 
is from one day (June 15, 2015).
    \439\ Within the analysis, events reported to the TRF are 
treated as occurring on a different trading venue than other recent 
events because TRF data comprises many separate venues (such as ATSs 
and off-exchange market makers). While events within a single 
exchange with identical time stamps can potentially be sequenced 
through record identifiers recorded by the exchange, for TRF trades 
this is often untrue because many venues with independent clocks 
contribute to the aggregate TRF data.

         Table 3--Percentage of Events Close to Unrelated Events
------------------------------------------------------------------------
                                                    Percent of unrelated
                                                           events
        Nearest event time  stamped within         ---------------------
                                                     Equities   Options
------------------------------------------------------------------------
2 seconds.........................................      98.69      93.03
1 second..........................................      97.95      90.99
100 milliseconds..................................      92.16      81.17
50 milliseconds...................................      89.12      76.59
10 milliseconds...................................      83.49      64.46
5 milliseconds....................................      81.28      58.26
2 milliseconds....................................      77.92      49.30
1 millisecond.....................................      74.31      41.13
200 microseconds..................................      57.53      21.58
100 microseconds..................................      48.09      14.51
10 microseconds...................................      21.42       3.13
5 microseconds....................................      14.44       3.12
------------------------------------------------------------------------

    Table 3 shows that 97.95% of the order events for listed equities 
and 91% of order events for listed options in the samples occurred 
within one second of another unrelated order event in the same 
security. At the other extreme in Table 3, 14.44% of the unrelated 
order events for listed equities and 3.12% of the unrelated order 
events for listed options in the same security occurred within 5 
microseconds of another order event in the same security. The 
Commission notes that Table 3 underestimates the true frequency of 
unrelated events within the given time frames because it includes only 
order events that are included in the MIDAS data. As such, the analysis 
is unable to include events such as the placing of hidden orders on 
exchanges, the placing of orders on an ATS, order originations, order 
routes, order receipts, and order cancellations and modifications for 
any order not displayed on an exchange order book. Despite this 
limitation, Table 3 illustrates how the current frequency of order 
events makes sequencing unrelated order events difficult.
ii. Time Stamps
    Given the frequency with which order events can occur, regulators 
need sufficiently granular time stamps to sequence events across orders 
and within order lifecycles. As noted above, even if the clocks 
recording time stamps have no clock offset, the granularity of the time 
stamp can limit regulators' ability to sequence events accurately.\440\
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    \440\ In addition, Craig W. Holden and Stacey Jacobsen, 
Liquidity Measurement Problems in Fast, Competitive Markets: 
Expensive and Cheap Solutions, 69 Journal of Finance 1747 (2014), 
shows that using time stamps in seconds instead of milliseconds can 
yield liquidity measurement problems.
---------------------------------------------------------------------------

    Current data sources have different time stamp granularity 
standards. Many public data sources report time in seconds or 
milliseconds and some,

[[Page 30670]]

including direct data feeds, report time in microseconds or 
nanoseconds. For example, the Options Price Reporting Authority 
(``OPRA'') allows for time stamps in nanoseconds and the other SIPs 
require time stamps in microseconds for equity trades and quotes, 
whereas the short sale transactional data released by exchanges 
contains time stamps in seconds.\441\ Currently, OATS requires time 
stamps in milliseconds for firms that capture time in milliseconds, but 
does not require members to capture time in milliseconds.\442\ EBS 
trade times are recorded only to the second; other EBS records must 
contain time stamps containing only the transaction date. The lack of 
uniform and granular time stamps can limit the ability of regulators to 
sequence events accurately and to link data with information from other 
data sources.
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    \441\ See OPRA Option Price Reporting Authority Binary 
Participant Interface Specification Version 1.7 (January 2015), 
available at http://www.opradata.com/specs/opra_binary_part_spec.pdf; see also NYSE, Modified Timestamps and 
Additional Timestamp Information for Daily TAQ (June 22, 2015), 
available at http://www.nyxdata.com/nysedata/default.aspx?tabid=993&id=2784; UTP Vendor Alert #2015-7, supra note 
435, regarding additional time stamps to be reported to the SIP.
    \442\ See FINRA Rule 7440 (providing that ``[e]ach required 
record of the time of an event shall be expressed in terms of hours, 
minutes, and seconds; provided that the time of an event shall be 
expressed in hours, minutes, seconds, and milliseconds if the 
member's system captures time in milliseconds.''). The Commission 
approved the requirement that time be expressed in milliseconds if 
the member's system captures time in milliseconds on February 27, 
2014. See Securities Exchange Act Release No. 71623 (February 27, 
2014), 79 FR 12558 (March 5, 2014); see also, FINRA, Equity Trade 
Reporting and OATS, Regulatory Notice 14-21 (May 2014), available at 
http://www.finra.org/sites/default/files/NoticeDocument/p506337.pdf.
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C. Linking and Combining Data
    Sometimes one order or market activity event may be reflected in 
information contained in various data sources or in different fields 
within the same data source, and fully understanding that activity 
requires linking information across the different data sources. 
Therefore, regulators analyzing an event or running a surveillance 
pattern often need to link data. For example, cross-market examinations 
require the cumbersome and time-consuming task of linking many 
different data sources.\443\ Regulators combine trading data from 
sources such as public feeds, SRO audit trails, EBS data, and trade 
blotters when reviewing surveillance alerts to determine whether 
violations of rules such as Rule 611 of Regulation NMS occurred \444\ 
or to examine, for example, whether an entity availing itself of a 
market maker exemption is engaging in bona fide market making. In fact, 
the data needed for an examination often consist of many audit trails 
and are stored in non-uniform formats.\445\ In addition, the analysis 
and reconstruction of market events could require linking many 
different data sources, such as a dozen SRO audit trails.
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    \443\ Such linking is typically conducted electronically with an 
algorithm unless the size of the data set is small. This requires 
the person attempting to combine and link the data to write computer 
code to identify and match the records that need to be linked. This 
task involves extensive testing and debugging the first time that 
person tries to combine and link those specific data sources. 
Further, given the variation in formats across broker-dealers and 
other data sources, the code may need to change for each 
investigation, requiring a repeat of the extensive testing and 
debugging process.
    \444\ 17 CFR 242.611.
    \445\ In the context of the CAT NMS Plan, the Commission does 
not distinguish data format from data taxonomy. See Section III.B.3, 
supra. In discussing data format, the Commission combines data 
format with data taxonomy. Id. The distinction between format and 
taxonomy is not significant in the context of the CAT NMS Plan 
because the Plan does not specify either for incoming data and the 
Plan effectively requires uniformity in both for regulator access. 
Id. SRO audit trails currently differ in both format and taxonomy as 
do many other trading and order data sources.
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    Regardless of whether order lifecycle reports are reflected in the 
same or different data sources, the process of linking lifecycle events 
is complex and can create inaccuracies. Merging different data sources 
often involves translating the data sources into the same format,\446\ 
which can be a complex process that is prone to error. Linking records 
within or across data sources also requires the sources to share ``key 
fields'' that facilitate linkage, along with a successful linking 
algorithm. Regulators may be unable to link some data source 
combinations accurately because the data sources do not have key fields 
in common or the key fields are not sufficiently granular. For example, 
regulators cannot always link trade records accurately to EBS records. 
The EBS records contain a symbol and date, but the price and size on 
the records may reflect multiple trades spread over a period of time. 
Sometimes, different data sources may have key fields in common but the 
relationship between the fields is not straightforward. In these cases, 
the algorithm to link them may be necessarily complex and not entirely 
successful. Further, within a single order lifecycle, the order number 
may change when a broker-dealer routes the order to another broker-
dealer or exchange or even to another desk at the same broker-dealer. 
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.
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    \446\ For example, different data sources can format dates and 
times differently or may use different notations to signify that the 
field contains no value.
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D. Customer and Broker-Dealer Identifiers
    The data sources described in Section IV.D.2.a also lack consistent 
customer and broker-dealer identifiers, which limit regulators' ability 
to track the activity of one client or broker-dealer across the market. 
There is no standard convention for how broker-dealers identify 
customers.
    Regulators face challenges in tracking broker-dealers' activities 
across markets due to inconsistent identifiers and a lack of a 
centralized database. These challenges occur primarily in the context 
of regulatory activities that require manual or ad hoc data analysis, 
as is often the case in particular investigations, examinations, and 
market studies. In the case of broker-dealers, SROs generally identify 
their members within their data using market participant identifiers 
(``MPIDs''). However, the MPIDs that identify broker-dealers on 
Execution Venues are not standardized across venues; consequently, a 
broker-dealer identified as ``ABCD'' on one venue may be identified 
differently on another venue, where ``ABCD'' may refer to a different 
broker-dealer entirely. Therefore, aggregating a broker-dealer's 
activity across venues requires verifying the MPIDs assigned to a 
broker-dealer on each venue, usually referencing the broker-dealer by 
its Central Registration Depository (``CRD'') number.\447\ In the 
course of manual data analysis, the Commission notes that its Staff 
have experienced challenges in identifying broker-dealers using CRD 
numbers. These challenges can be due to the fact that, although every 
broker-dealer has a CRD number, a broker-dealer that routes an order 
seldom, if ever, provides a CRD number to the broker-dealer that 
accepts the order.\448\
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    \447\ The CRD is an automated database operated by FINRA that 
stores and maintains information on broker-dealers and their 
registered persons relating to their licensing, registration, 
complaints, professional background, and disciplinary history. Each 
broker-dealer and their registered persons are assigned a CRD number 
for identification.
    \448\ The Commission and the SROs have generally overcome these 
challenges in the context of automated regulatory data analysis, and 
found ways to reduce these challenges in some manual data analysis 
and can efficiently track broker-dealers across venues. The 
Commission understands that FINRA can track broker-dealers across 
venues pursuant to its responsibilities under a plan for allocating 
regulatory responsibilities pursuant to Rule 17d-2. On September 12, 
2008, the Commission declared effective a plan for allocating 
regulatory responsibilities pursuant to Rule 17d-2 filed by the 
American Stock Exchange, LLC, Boston Stock Exchange, Inc., CBOE 
Stock Exchange, LLC, CHX, FINRA, ISE, NASDAQ, NSX, NYSE, NYSE Arca, 
NYSE Regulation, Inc., and Philadelphia Stock Exchange, Inc. (the 
``Participating Organizations,'' which have since been updated to be 
the following SROs: BATS, BYX, CBOE, CHX, EDGA, EDGX, FINRA, NASDAQ 
OMX BX, NASDAQ OMX PHLX, NASDAQ, NSX, NYSE, NYSE MKT [f/k/a NYSE 
Amex], and NYSE Arca) (``Insider Trading Rule 17d-2 Plan''). The 
Insider Trading Rule 17d-2 Plan allocates regulatory responsibility 
over common FINRA members (members of FINRA and at least one of the 
Participating Organizations) (collectively ``Common FINRA Members'') 
for the surveillance, investigation, and enforcement of (i) Federal 
securities laws and rules promulgated by the Commission pertaining 
to insider trading, and (ii) the rules of the Participating 
Organizations that are related to insider trading (``common insider 
trading rules''). Under that Plan, the Participating Organizations, 
other than FINRA, have been relieved of regulatory responsibility 
over Common FINRA Members (i.e., the broker-dealer and its 
associated persons) for surveillance, investigation, and enforcement 
of the common insider trading rules over such persons with respect 
to ``Listed Stocks'' (as defined in that Plan). Accordingly, FINRA 
retains regulatory responsibility for Common FINRA Members with 
respect to the common insider trading rules--irrespective of the 
market(s) on which the relevant trading may occur. Separately, FINRA 
performs investigations and enforcement with respect to non-Common 
FINRA Members pursuant to a regulatory services agreement between 
FINRA and several of the other Participating Organizations. See 
Securities Exchange Act Release No. 58536 (September 12, 2008), 73 
FR 54646 (September 22, 2008); see also Securities Exchange Act 
Release Nos. 58806 (October 17, 2008), 73 FR 63216 (October 23, 
2008); 61919 (April 15, 2010), 75 FR 21051 (April 22, 2010); 63103 
(October 14, 2010), 75 FR 64755 (October 20, 2010); 63750 (January 
21, 2011), 76 FR 4948 (January 27, 2011); and 65991 (December 16, 
2011), 76 FR 79714 (December 22, 2011).

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[[Page 30671]]

    Regulators sometimes find it necessary to analyze trading activity 
at the customer level instead of the broker-dealer level. Consistently 
identifying customer account owners across the multiple broker-dealers 
with whom they transact is difficult and prone to error. Although, for 
example, the EBS system provides the names associated with each account 
traded, these names are drawn from the separate records of each broker-
dealer providing data to the EBS system, and the same party may be 
identified by a different name across multiple broker-dealers. Further, 
the lack of tax identification numbers in many EBS records limits the 
ability for regulators to trace the trading activity of customers 
across broker-dealers. Tax identification numbers are not required to 
be reported in EBS for average price, allocation, riskless principal, 
foreign accounts, and subaccounts. In fact, when one broker-dealer 
executes for a second broker-dealer, the tax identification number is 
that of the second broker-dealer regardless of whether the second 
broker-dealer is trading for a customer.
E. Aggregation
    The practice used in some data records of bundling together data 
from different orders and trades also can make it difficult to 
distinguish the different orders and trades in a given bundle. As an 
example, brokers frequently utilize average-price accounts to execute 
and aggregate multiple trades for one or more customers. In these 
cases, for example with EBS data, the system does not reflect the 
details of each individual trade execution, because it reports only the 
average aggregate prices and volumes of the various trades within a 
series that have been bundled together for reporting purposes. Further, 
information on trade allocations aggregate the trade information to 
such an extent that it is difficult for regulators to identify when 
particular clients may be afforded preferential treatment because it is 
challenging to link subaccount allocations to orders and trades.
    Equity and options cleared reports provide valuable data to 
regulators, but aggregation reduces their usefulness, because the 
reports do not have detailed trade information and do not include 
activity that does not require clearing.\449\ The volume in these 
reports cannot be fully disaggregated and reconciled with the equity 
trade execution volume from other data sources used by the Commission, 
e.g., TAQ and MIDAS, because the volume in the cleared reports is not 
necessarily a summation of all trades. For example, the same trade can 
be reported two or more times, by both the buy and the sell sides, for 
some OTC transactions and for all trades in NASDAQ exchanges.\450\ 
Similarly, option cleared reports bundle together multiple executions 
by compressing or netting them to facilitate clearing. This aggregation 
limits regulators' ability to link records across data sources, as well 
as limiting the accuracy with which the data source reflects market 
events, which is particularly problematic in applications that require 
market reconstruction.
---------------------------------------------------------------------------

    \449\ The option cleared volume from the OCC contains the 
clearing firm, number of customer contracts, and number of firm 
contracts for the options.
    \450\ This scenario of a trade being reported several times is 
generally the result of agreements that permit a broker-dealer to 
clear trades on behalf of another broker-dealer and send trades 
directly to the NSCC. Broker-dealers often enter into these 
agreements to simplify their clearing processes, achieve lower 
transaction costs, and take advantage of extended hours of service.
---------------------------------------------------------------------------

    Finally, issuer repurchase information is aggregated at the monthly 
and quarterly level.\451\ This aggregation limits the use of such data 
in investigations of the timing of issuer repurchases and issuer stock 
price manipulation and in analysis of the use of the Rule 10b-18 issuer 
repurchase safe harbor.\452\
---------------------------------------------------------------------------

    \451\ Issuers report quarterly and monthly repurchases pursuant 
to Item 703 of Regulation S-K. This data includes all issuer 
repurchases, including tender offers and open market repurchases, 
but does not distinguish the type of repurchase. The Commission 
notes that Item 703 provides, in part, that issuers must disclose 
``the number of shares purchased other than through a publicly 
announced plan or program and the nature of the transaction (e.g., 
whether the purchases were made in open-market transactions, tender 
offers, in satisfaction of the company's obligations upon exercise 
of outstanding put options issued by the company, or other 
transactions.'' See 17 CFR 229.703.
    \452\ Rule 10b-18 provides issuers with a ``safe harbor'' from 
liability for manipulation under Section 9(a)(2) of the Act, 15 
U.S.C. 78i(2), and Rule 10b-5 thereunder, 17 CFR 240.10b-5, solely 
by reason of the manner, timing, price, and volume of their 
repurchases when they repurchase common stock in the market in 
accordance with the Section's manner, timing price, and volume 
conditions. See 17 CFR 240.10b-18.
---------------------------------------------------------------------------

(3) Accessibility
    The SROs and Commission also lack direct access--meaning the 
ability to log into a system in a manner that would allow them to 
gather and analyze the data they need--to many of the data sources 
described above. SROs generally have direct access only to their own 
audit trails and the public data feeds.\453\ While SROs control the 
manner in which they access their own data, their investigations in 
some cases require access to the data of other SROs because firms could 
trade across multiple SROs. To access another SRO's data, SROs must 
send requests to the other SROs \454\ or to the ISG.\455\ SROs needing 
information not included in their audit trails or the audit trail of 
another SRO must request such information from their members. The SROs 
might not be able to acquire data from entities that are not members of 
that SRO; non-members are not obligated to provide SROs with data,\456\ 
any data provided by

[[Page 30672]]

the regulator of the non-member firm would be on a voluntary basis, or 
pursuant to the terms of the ISG Agreement.
---------------------------------------------------------------------------

    \453\ FINRA does receive data from certain SROs on a daily basis 
and subsequently has direct access to that data.
    \454\ Commission staff understands that SROs receiving 
information requests from other SROs will typically provide the 
information, although they are not required to do so.
    \455\ See supra note 399.
    \456\ See, e.g., NYSE Rule 2.A.xvi.--Jurisdiction (noting that 
the exchange has jurisdiction over matters related to non-member 
broker-dealers that choose to be regulated by the exchange). The 
Commission may, by rule or order, subject non-members to the rules 
of national securities exchanges if it deems it necessary or 
appropriate in the public interest and for the protection of 
investors, to maintain fair and orderly markets, or to assure equal 
regulation. Section 6(f)(2) of the Act, 15 U.S.C. 78f(f)(2); see 
also Sections 6(b)(1), 15A(b)(2) of the Act, 15 U.S.C. 78f(b)(1), 
78o-3(b)(2) (requiring national securities exchanges and securities 
associations, respectively, to have the capability to enforce 
compliance by their members with applicable Exchange Act 
requirements and exchange or association rules).
---------------------------------------------------------------------------

    The Commission has direct access only to the public data feeds and 
the equity and option cleared data; it lacks direct access to 
information provided in EBS or contained in trade blotters, order 
tickets, order handling data, SRO audit trails, and OATS data. Unlike 
the SROs, the Commission can subpoena data from entities that are not 
registered with the Commission, such as professional traders that are 
neither broker-dealers nor investment advisers.
    If a regulator does not have direct access to data it needs, the 
regulator would request it. This can result in many data requests to 
broker-dealers, SROs, and others,\457\ which are burdensome to fill. 
The Commission recognizes that data requests could impose burdens on 
the entities responding to the request, in addition to the burden on 
the regulators to put the request together. Broker-dealers, investment 
advisers, and SROs responding to a data request must incur costs in 
order to produce, store, and transmit the data for the Commission or 
SRO.\458\ Further, as indicated above, regulators may need to request 
the data needed from many different data providers because of 
fragmentation in the data, and thus one analysis, such as an 
investigation, can generate many data requests.
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    \457\ In the context of an investigation or a court, in 
litigation, the Commission can request or subpoena information from 
entities, including those not registered with the Commission. See 
SEC Rule of Practice 232. Pursuant to their rules, SROs can request 
information from their registered entities; see also supra notes 
454-456 and accompanying text (discussing how SROs request 
information from other parties, including other SROs).
    \458\ See, e.g., CAT NMS Plan, supra note 3, at Appendix C, 
Section B.7(b)(ii)(B) (discussing the current process for broker-
dealers and SROs to respond to data requests, and stating that 
broker-dealers must commit staff to respond to requests for EBS or 
large trader data and may take varied approaches to fulfilling their 
regulatory reporting obligations).
---------------------------------------------------------------------------

    Fragmentation in trade and order data can take many forms. First, 
an analysis may require the same type of data from many market 
participants. Second, the required data fields for an analysis may be 
reflected in different types of data. Finally, an analysis may require 
data on different products covered in separate data sources. The 
fragmentation in the data across market participants is a function of 
the fragmentation of trading and broker-dealer services. In today's 
equity markets, trades execute across 12 exchanges, more than 40 ATSs, 
and around 250 dealers.\459\ With its RSAs, FINRA can consolidate much 
of the SRO audit trails in equities.\460\ In the options markets, 14 
different exchanges trade listed options with no off-exchange trading 
of standardized options and no entity aggregating each audit trail into 
one dataset. The vast majority of stocks trade in more than one 
location and most options trade on multiple exchanges.
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    \459\ See Securities Exchange Act Release No. 76474 at 81008, 
81112, ``Regulation of NMS Stocks'' (November 2015), available at 
http://www.sec.gov/rules/proposed/2015/34-76474.pdf; see also Laura 
Tuttle, OTC Trading: Description of Non-ATS OTC Trading in National 
Market System Stocks (March 2014), available at http://www.sec.gov/dera/staff-papers/white-papers/otc-trading-white-paper-03-2014.pdf.
    \460\ FINRA has access to data from OATS and each equities 
exchange except CHX. See supra note 333 and accompanying text. This 
reduces the data fragmentation as it relates to the number of data 
requests for equities.
---------------------------------------------------------------------------

    Exchange SROs generally limit their data collection to securities 
traded on their own exchanges, and limit the scope of their audit 
trails to transactions occurring on their exchanges. While ATSs and 
dealers report order events in equities to OATS, each of the 12 
equities exchanges has its own audit trail. As a result of this 
structure, a market reconstruction for a single security may involve 
data requests to multiple exchanges. Likewise, a project involving 
options data may require data from each of the 14 options exchanges.
    To acquire broker-dealer order records, EBS, trade blotters, and 
order tickets, regulators need to send a request to each broker-dealer 
to obtain its data. In the Commission's experience requested data can 
suffer from missing variables, truncations, and formatting problems due 
to the way that the data is queried by the broker-dealer. These 
problems can lead to substantial delays in using data and loss in 
regulatory productivity. Many different broker-dealers could have 
trading records in a given security on a given day of interest, so one 
narrow investigation could generate many data requests. As a result, in 
2014 the Commission made 3,722 EBS requests that generated 194,696 
letters to broker-dealers for EBS data. Likewise, the Commission 
understands that FINRA requests further generate about half this number 
of letters. In addition, for examinations of investment advisers and 
investment companies, the Commission makes approximately 1,200 data 
requests per year. Further, an investigation that requires tracing a 
single trade or a set of trades back to an investor or investors can 
generate many data requests. For such investigations, regulators would 
first need to request data from the exchanges or market participants 
executing the trades. This data would tell the regulators which 
members, subscribers, or broker-dealers sent the orders that led to the 
executions. Regulators would then need to go to the members, 
subscribers, and broker-dealers to get information on the orders and 
repeat until they get to the broker-dealer who initiated the order to 
see the customer behind the order.
    Finally, some regulatory activities require data on both equities 
and options. Because current data sources do not contain information 
regarding both equities and options, regulators needing data on both 
types of securities would need to make several data requests. Closely 
related securities are sometimes traded on entirely different 
exchanges, complicating cross-product analyses. For example, COATS data 
covers options trades but excludes the trading of the underlying 
assets. Often investigations or analyses require examining both options 
and their underlying assets, creating the need for regulators to 
request data from multiple sources.
    This data fragmentation also results in disparate requirements for 
industry members to record and report the same information in multiple 
formats. Because each SRO has its own data requirements, a market 
participant that is a member of multiple SROs may be required to report 
audit trail data in numerous formats and interact with multiple 
regulators in response to normal data queries. That said, the 
Commission understands that the number of disparate formats faced by 
each member may have reduced over the past several years.\461\
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    \461\ For example, some exchange audit trails require floor 
brokers who operated on their own systems to submit order records to 
the exchange. These same floor brokers could be members of other 
SROs that require different formats for submitting order reports. 
The Commission understands that the volume of trading conducted on 
an exchange but not on the exchange's systems has declined sharply. 
Therefore, the activity generating the disparate reporting 
requirements has declined.
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(4) Timeliness
    In order to respond promptly to market events, regulators must be 
able to obtain and analyze relevant data in a timely fashion. 
Currently, obtaining trade and order data and converting the

[[Page 30673]]

data into a form in which they can be analyzed can involve a 
significant delay from the time of a particular event of interest. 
Indeed, in some cases the length of time from when an event occurs 
until regulators can use relevant data in an investigation or analysis 
can be weeks or months. This is especially true for trading data that 
includes customer information.
    Some of the data sources described above can be accessed by SROs 
and the Commission without significant delay. For example, SROs and the 
Commission have some real-time direct access to public data and, 
through MIDAS, the Commission has next-day direct access to analytics 
that are based on public data, such as volumes over various time 
horizons. Regulators can also sometimes request and receive trade 
blotter data on the same day as the trade(s) of interest because trade 
blotters are generally stored in systems immediately.\462\ Further, the 
Commission understands that FINRA receives audit trail data from 
exchanges pursuant to RSAs at the end of each trading day. However, it 
has been the Commission's experience that trade blotter data requests 
can take weeks or in excess of a month depending on the scope of the 
request and how accustomed the broker-dealer is with fulfilling such 
requests.
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    \462\ The regulated entities that respond to data requests need 
to query data to respond to the request while still maintaining 
normal operations. Large data requests can take significant 
computing time and thus, may require the respondents to time the 
queries to minimize disruptions. Further, respondents need to write 
code to execute the query. More experienced respondents would have 
existing code that they could modify without significant debugging 
whereas less experienced respondents would need to take time to code 
and debug their queries.
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    Corrected FINRA OATS data may be available less than two weeks 
after an event and uncorrected data on day T+1. In particular, FINRA 
members submit OATS data on a daily basis, submitting end-of-day files 
by 8:00 a.m. Eastern Time the following day or they are marked late by 
FINRA.\463\ FINRA acknowledges receipt of the data an hour after the 
member submits it, before running its validation process. FINRA then 
takes approximately four hours after acknowledging receipt of OATS data 
to determine if the data contain any syntax errors.\464\ In addition to 
the four hours needed to identify errors within a report, it takes 
another 24 hours for context checking, which identifies duplicates or 
secondary events without an originating event. Once a context rejection 
is available, the member has up to five business days to repair the 
rejection.\465\ Reports for files that contain internally inconsistent 
information about processing, linking, and routing orders may be 
available within two business days. FINRA attempts to match the 
inconsistent information against any additional data received up to day 
T+2 for linking errors and day T+30 for routing errors. The timing for 
surveillance programs varies depending on the type of surveillance 
being performed; data is assumed to be completely processed and 
corrected at day T+8.\466\
---------------------------------------------------------------------------

    \463\ FINRA currently receives exchange data from most SROs at 
the end of the trading day. Information on broker-dealer data 
reporting timeframes is available at OATS Reporting Technical 
Specifications, supra note 357, at 8-1; see also Adopting Release, 
supra note 9, at 45768 n.504.
    \464\ See Section IV.D.2.b(2)A, supra (providing more detail on 
the validation and error checking process for OATS and other data 
sources).
    \465\ See OATS Reporting Technical Specifications, supra note 
357, at 6-3. Other types of errors and corrections adhere to 
slightly different time-lines. See, e.g., id. at 6-12.
    \466\ FINRA has the capability to query data that is not fully 
corrected, processed and linked to investigate market activity at 
T+1.
---------------------------------------------------------------------------

    Because market participants generally do not report or compile 
datasets immediately after an order event, there is a delay before 
regulators may access some data sources. For example, the compilation 
of equity and option cleared reports occurs on day T+1 for options and 
day T+3 for equities (i.e., the clearing day) and the electronic query 
access for equities is available from SIAC on day T+3. Additionally, 
when broker-dealers receive a request for EBS, the firm must first fill 
in the EBS report and then, if it does not self-clear, pass the reports 
on to its clearing firm to compile and send to SIAC. The EBS submission 
process can take up to ten business days. More immediate requests for 
cleared options data can be submitted to FINRA, but even this process 
takes up to two days. Because EBS data do not contain order entry time 
and order execution time, regulators must obtain this information from 
firms and brokers using either data requests or subpoenas, and this 
process generally can take from two to four weeks depending on the size 
of the request.
    As discussed above,\467\ the lack of direct access to most data 
sources may further delay the ability of regulators to use data in 
certain cases. When regulators have direct access to a data source, the 
time needed to receive data is only the time it takes for a query to 
run. For example, depending on the scope of the search, it can take 
just a few minutes to return the results of a query of equity and 
option clearing data.\468\ As a result of direct access to their own 
audit trails, some SRO surveillance occurs on the same day as the 
trading activity. FINRA, however, typically gets direct access to 
exchange data, uncorrected OATS data, and corrected OATS data at the 
time it receives it, unlike the exchanges and broker-dealers that have 
some access to the data as it is generated.\469\ However, when 
regulators lack direct access, their data requests can consume 
significant time, including both the time required to put the request 
together and response times from the SROs, broker-dealers, and others 
producing the data.\470\ For example, obtaining complete responses from 
each broker-dealer for an EBS request can take days or weeks depending 
on the scope of the request. Likewise, responses from the ISG for SRO 
audit trail data can take days or weeks.
---------------------------------------------------------------------------

    \467\ See Section IV.D.2.b(3), supra.
    \468\ MIDAS, one example of a direct access data source, queries 
return data in seconds for single ticker, intraday queries and 
within hours for complex multi-ticker, multi-day queries. The data 
response times from MIDAS vary depending on the format of the 
resulting data and the number of other users on the system. A query 
that pulls all message traffic in an equity on a single day would 
take around thirty minutes.
    \469\ FINRA typically collects exchange data at the end of the 
trading day and, as noted above, OATS on T+1. FINRA can begin to 
access each data source, but, as discussed below, FINRA has direct 
access to combined data only after the completion of the OATS error 
process and the processing necessary to reformat and merge the data 
sources.
    \470\ As discussed above, because analysis of some events 
requires the collection of data from numerous sources, the time to 
request and receive data may be significant. The more fragmented the 
necessary data is, the longer it would take regulators to put 
together the data request. Putting together an EBS request, for 
example, could involve first identifying to which broker-dealers to 
send the requests and then manually creating a request letter for 
each broker-dealer. The Commission does recognize, however, that 
regulators can request and receive trade blotter data on the same 
day as the trade event if the request is for a small amount of data 
from an experienced provider. In fact, two years of trade blotter 
data from an experienced investment adviser can take several days 
while two years of data from clearing firms can take six weeks to 
several months.
---------------------------------------------------------------------------

    Once regulators receive requested data, the data often have to be 
processed into a form in which they can be analyzed. As discussed 
above,\471\ it can take considerable time for regulators to combine 
data from different sources and link records from within or across data 
sources. Furthermore, the lack of consistency in format adds complexity 
to projects involving data from multiple data sources, even when the 
project does not involve linking of these different data.\472\ For 
example, the

[[Page 30674]]

Commission understands that FINRA takes approximately three days to 
process exchange data to transform it into a common format and prepare 
it for surveillance. Therefore, FINRA cross-market surveillances and 
surveillance of the off-exchange market typically assumes data is fully 
corrected and processed on T+8.\473\ Any processing that requires 
linking order life-cycle events or other types of data can be time 
consuming to perform, even if all of the data comes from the same data 
source.\474\ In some cases, the laborious process of assembling the 
data delays other critical investigative or analytical steps.
---------------------------------------------------------------------------

    \471\ See Section IV.D.2.b(2)C, supra.
    \472\ Because no single data source is complete, regulators 
often need to combine data across sources to get a full picture. For 
example, regulators may need to compile SRO audit trail records from 
multiple SROs. Not all SROs collect data using the OATS format. The 
different data formats implemented by SROs thus involve a 
significant investment of staff time to reconcile. In addition, each 
options exchange maintains its own COATS audit trail in a different 
format and includes different supplemental data items in its audit 
trail. These differences make it difficult and labor intensive for 
regulators to view options trading activity across multiple markets.
    \473\ FINRA can access data as soon as T+1 when necessary.
    \474\ The first step in linking involves finding a key to link 
the records. The key can be one field or a series of fields in the 
data. The second step involves designing an algorithm to use the key 
to link records. If each data source formats or stores the fields in 
the key differently, the algorithm can be complex. Even within a 
single data source, the creation of the algorithm may be complicated 
because the fields needed to build the key can change with each 
market participant. For example, each member can report a different 
order ID for the same order, and this order ID may even change 
within the same member. The algorithm for linking needs to recognize 
how order IDs change and use additional information in the order 
records to piece an order lifecycle together. As noted above in 
Section IV.D.2.b(2)C, linking algorithms have varying rates of 
success and significant error rates in event linking are common. The 
lack of success could be due to the lack of a cross-participant 
error resolution process, the complexity in the linkage, or 
otherwise missing key information needed for linkage. As a result, 
regulators may invest significant time and resources into linking 
data only to achieve a success rate significantly less than 100%. 
Linking across multiple data sources makes linking even more time 
consuming.
---------------------------------------------------------------------------

    In addition, those who use regulatory data also typically take time 
to ensure the accuracy of the data. When regulators question the 
accuracy of data, they often check several alternative sources until 
they are comfortable that their data are accurate. This checking of 
data accuracy and augmentation process adds time to an investigation or 
analysis. In some cases, regulators may filter out unreliable data or 
refocus an investigation to avoid relying on data after spending time 
and resources unsuccessfully attempting to ensure accuracy.
    As discussed in the Adopting Release, the timely accessibility of 
data to regulators also impacts the efficacy of detecting (and possibly 
mitigating the effects of) some types of market manipulation.\475\ For 
example, some pernicious trading schemes are designed to generate large 
``quick-hit'' profits in which market participants attempt to transfer 
the proceeds from the activity to accounts outside of the reach of 
domestic law enforcement as soon as the offending transactions have 
settled in the brokerage account (typically three days after 
execution). The timeframes currently required to acquire data generally 
complicate the prevention of these asset transfers.
---------------------------------------------------------------------------

    \475\ See Adopting Release, supra note 9, at 45731.
---------------------------------------------------------------------------

3. Request for Comment on the Baseline
    The Commission requests comment on all aspects of the Baseline for 
the economic analysis of the CAT NMS Plan. In particular, the 
Commission seeks responses to the following questions:
    240. Do Commenters agree with the Commission's assessment of the 
Baseline for the economic effects of the CAT NMS Plan? Why or why not?
    241. Do Commenters believe that the Baseline appropriately 
describes current market surveillance, examination, and investigation 
activities by regulators? Why or why not?
    242. Do Commenters believe that the Baseline appropriately 
describes current market event analysis and reconstruction activities 
by regulators? Why or why not?
    243. Do Commenters believe that the Baseline appropriately 
describes market analysis activities by regulators? Why or why not?
    244. Do Commenters believe that the Baseline appropriately 
describes the sources of trade and order data currently available to 
regulators? Why or why not?
    245. Are there additional sources of trade and order data currently 
available to regulators? Please explain and describe those sources in 
detail, including any limitations.
    246. Do Commenters agree with the Commission's assessment of the 
completeness of the trade and order data currently available to 
regulators? Why or why not? Does the fragmented nature of current data 
sources pose significant challenges to regulators seeking complete 
data?
    247. Do Commenters agree with the Commission's assessment of the 
accuracy of the trade and order data currently available to regulators? 
Why or why not?
    248. Do Commenters agree that the error rates in current data 
sources or in responses to ad hoc data requests pose significant 
challenges to regulators? Why or why not? Do Commenters have additional 
statistics on error rates in these data?
    249. Do Commenters agree with the Commission's assessment of the 
Baseline of clock synchronization for broker-dealers, exchanges, and 
others in the securities industry? Please explain. Does the 
Commission's analysis appropriately describe the frequency of orders 
that regulators may need to sequence and the challenges to sequencing 
given current clock synchronization standards? If not, do Commenters 
have more appropriate analyses? How could the Commission improve the 
analysis? Please explain.
    250. Do Commenters believe that the Baseline appropriately 
describes granularity of time stamps in the trade and order data 
currently available to regulators? Please explain.
    251. Do Commenters agree with the Commission's assessment of 
regulators' ability to combine or link data across the sources of trade 
and order data currently available to regulators? Please explain.
    252. Do Commenters believe that the Baseline appropriately 
describes customer and broker-dealer identifiers in the sources of 
trade and order data currently available to regulators? Please explain.
    253. Do Commenters believe that the Baseline appropriately 
describes aggregation within the sources of trade and order data 
currently available to regulators? Please explain.
    254. Do Commenters agree with the Commission's assessment of the 
current ability of regulators to access trade and order data? Why or 
why not?
    255. Do Commenters agree with the Commission's assessment of the 
timeliness of the trade and order data currently available to 
regulators? Why or why not?
    256. Is there any other information that the Commission should 
include in the Baseline? Please explain.

E. Benefits

    As noted in the Framework Section above, the economic benefits of 
the CAT NMS Plan would come from any expanded or more efficient 
regulatory activities facilitated by improvements to the data 
regulators use because the Plan would create a new consolidated data 
source, CAT Data that could replace the use of some current data 
sources for many regulatory activities. Therefore, the Benefits Section 
first describes how CAT Data compares to data regulators currently use 
for regulatory activities. Then this Section describes how the CAT Data 
would improve regulatory

[[Page 30675]]

activities and how these improvements benefit investors.
    The Commission preliminarily believes that the CAT NMS Plan would 
produce data that would improve on current data sources, because CAT 
Data would result in regulators having direct access to consolidated 
audit trail data that would improve many of the regulatory activities 
discussed in the Baseline Section. As summarized in Table 4, if the 
Plan is approved, the Commission preliminarily believes that the Plan 
would generate improvements in the quality of data that regulators 
would have access to in the areas of completeness, accuracy, 
accessibility, and timeliness. The Commission preliminarily believes 
that the improvements in the quality of regulatory data within these 
categories would significantly improve the ability of regulators to 
perform a wide range of regulatory activities, which would lead to 
benefits for investors and markets. In addition, the Commission 
preliminarily believes that certain provisions in the Plan related to 
future upgrades of the Central Repository, the promotion of the 
accuracy of CAT Data, the promotion of the timeliness of CAT Data, and 
the inclusion of specific governance provisions identified by the 
Commission in the Adopting Release for Rule 613, increase the 
likelihood that the potential benefits of the CAT NMS Plan described 
below would be realized.
    In the category of completeness, the ability for regulators to 
access more material data elements from a consolidated source would 
enable regulators to more efficiently carry out investigations, 
examinations, and analyses because regulators could acquire from a 
single source data that they would otherwise need to compile from many 
data sources. This data source would include data elements that 
regulators currently acquire with difficulty (if at all), including 
customer information, allocation records, open/close position 
information for equities, and certain other trade and order information 
not consistently available in SRO audit trails.\476\
---------------------------------------------------------------------------

    \476\ See CAT NMS Plan supra note 3, at Sections 1.1, 6.3 and 
6.4; see also 17 CFR 242.613(c)(7).
---------------------------------------------------------------------------

    In the category of accuracy, the Commission preliminarily believes 
that the Plan would substantially improve data accuracy by requiring 
CAT Data to be collected, compiled, and stored in a uniform linked 
format using consistent identifiers for customers and market 
participants. These requirements should over time result in fewer 
inaccuracies in the data as well as fewer inaccuracies introduced in 
combining data compared to the current data regime.\477\ The CAT NMS 
Plan would also require that CAT Reporters' business clocks be 
synchronized to within 50 milliseconds of the time maintained by the 
NIST, which would increase the precision of the time stamps provided by 
the 39% of broker-dealers who currently synchronize their clocks with 
less precision than what is called for by the Plan. This information 
may also be used to partially sequence surrounding events. However, 
while the Commission preliminarily believes that the requirements in 
the Plan for clock synchronization and time stamp granularity would 
improve the accuracy of data with respect to the sequencing of market 
events, the improvements would be modest, as regulators' would 
experience improvement for a small percentage of market events relative 
to all surrounding events.\478\ Independent of the potential time clock 
synchronization benefits, the order linking data that would be captured 
in CAT should increase the proportion of events that could be sequenced 
accurately. This reflects the fact that some records pertaining to the 
same order could be sequenced by their placement in an order lifecycle 
(e.g., an order submission must have occurred before its execution) 
without relying on time stamps.
---------------------------------------------------------------------------

    \477\ The Commission recognizes that the high initial Error Rate 
tolerance of the CAT NMS Plan could reduce the accuracy of raw CAT 
Data relative to current data sources. However, as stated in the 
Plan ``the Participants expect that error rates after reprocessing 
of error corrections will be de minimis.'' See CAT NMS Plan supra 
note 3, at Appendix C, Section 3(b), n.102.
    \478\ See FIF Clock Offset Survey, supra note 127.
---------------------------------------------------------------------------

    In the category of accessibility, the Commission preliminarily 
believes that the Plan would substantially improve the access of data 
for regulators due to the Plan's requirement for regulators to have 
direct access to CAT Data. While some elements of CAT Data can 
currently be obtained from other sources, it can take regulators weeks 
or months to obtain this data. As opposed to the current state of 
fragmented data with indirect regulatory access, if the CAT NMS Plan is 
approved, regulators would have direct access to consolidated trade and 
order data from a single source. Therefore, instead of requesting data 
from multiple sources, the Plan would allow regulators to log into a 
single system and query data directly from the system. This direct 
access for regulators would dramatically reduce the hundreds of 
thousands of requests that regulators must make each year in order to 
obtain data, thus reducing the burden on the industry.
    In the category of timeliness, the Commission preliminarily 
believes that the Plan would significantly improve the timeliness of 
data acquisition and use, which could improve the timeliness of 
regulatory actions that use data. CAT Data would be reported by 8:00 
a.m. Eastern Time on day T+1 and made available to regulators in raw 
form after it is received and passes basic formatting validations,\479\ 
with an error correction and linkage process that would be completed by 
8:00 a.m. Eastern Time on day T+5.\480\ These requirements would ensure 
that data is available to regulators faster than in the current system 
and should also reduce the amount of time regulators would need to 
process data prior to usage.
---------------------------------------------------------------------------

    \479\ While the Plan does not specify exactly when these 
validations would be complete, the requirement to link records by 
12:00 p.m. Eastern Time on day T+1 gives a practical upper bound on 
this timeline.
    \480\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.2(a).
---------------------------------------------------------------------------

    Regulatory activities expected to benefit from improved data 
quality would include surveillance, investigations, examinations, 
analysis and reconstruction of market events, and analysis in support 
of rulemaking initiatives. Data is essential to all of these regulatory 
activities and therefore substantial improvements in the quality of the 
regulatory data should result in substantial improvements in the 
efficiency and effectiveness of these regulatory activities, which 
should translate into benefits to investors and markets. For example, 
improved data could lead to more effective and efficient surveillance 
that better protects investors and markets from violative behavior and 
facilitates more efficient and effective risk-based investigations and 
examinations that more effectively protect investors. Together, these 
improved activities could better deter violative behavior of market 
participants, which could improve market efficiency. Furthermore, this 
increase in directly accessible data should improve regulators' 
understanding of the markets, leading to more informed public policy 
decisions that better address market deficiencies to the benefit of 
investors and markets.
    The Commission notes that the Plan lacks information regarding the 
details of certain elements of the Plan, primarily because many details 
likely to affect the benefits of the Plan have not yet been determined, 
which creates some uncertainty about the expected economic effects. As 
discussed further below, lack of specificity surrounding the processes 
for converting data formats and linking related order events

[[Page 30676]]

creates uncertainty in the anticipated improvements in accuracy because 
such processes have the potential to create new data inaccuracies. Lack 
of specificity surrounding the process for regulators to access the CAT 
Data also creates uncertainty around the expected improvements in 
accessibility. For example, while the Plan indicates that regulators 
would have an on-line targeted query tool and a tool for user-defined 
direct queries or bulk extraction,\481\ the Plan itself does not 
provide an indication for how user-friendly the tools would be or the 
particular skill set needed to use the tools for user-defined direct 
queries.

[[Page 30677]]

[GRAPHIC] [TIFF OMITTED] TN17MY16.328

    \481\ See CAT NMS Plan, supra note 3, at Appendix D, Sections 
8.1, 8.2.

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[[Page 30678]]

1. Improvements in Data Qualities
    As explained above, in the Adopting Release the Commission 
identified four qualities of trade and order data that impact the 
effectiveness of core SRO and Commission regulatory efforts: Accuracy, 
completeness, accessibility, and timeliness.\486\ In assessing the 
potential benefits of the CAT NMS Plan, the Commission's economic 
analysis compares the data that would be available under the Plan to 
the trading and order data currently available to regulators.\487\ As 
explained in detail below, the Commission preliminarily believes that 
the Plan would improve data in terms of all four qualities noted above, 
although uncertainty remains as to the expected degree of improvement 
in some areas.
---------------------------------------------------------------------------

    \486\ See Adopting Release, supra note 9, at 45727.
    \487\ Changes in all four data qualities affect certain data-
driven regulatory activities. The benefits of the Plan derive from 
the changes to these regulatory activities.
---------------------------------------------------------------------------

a. Completeness
    The CAT NMS Plan, if approved, would result in regulators having 
direct access to a single data source that would be more complete than 
any current data source.\488\ The CAT Data would be more complete than 
other data sources because it would contain data from a greater number 
of broker-dealers on more event types, products, and data fields, when 
compared to existing SRO audit trails and other data sources. As 
discussed in more detail below, while some current data sources contain 
many of the elements that would be included in CAT Data, the CAT Data 
would consolidate that data into one source to produce a data source 
much more complete than any existing source. CAT Data would also 
include some elements that are not available from any current data 
source. Having this data consolidated in a single source would provide 
numerous benefits that are described below.
---------------------------------------------------------------------------

    \488\ See Sections IV.C.1.a(1) and IV.D.2.b(1), supra for a 
definition of completeness.
---------------------------------------------------------------------------

(1) Events and Products
    CAT Data would be more complete than any current data source 
because it combines currently fragmented information into one data 
source. In particular, the Plan states that the Central Repository, 
under the Plan Processor's oversight, shall receive, consolidate, and 
retain all CAT Data.\489\ ``CAT Data'' is defined as ``data derived 
from Participant Data, Industry Member Data, SIP Data, and such other 
data as the Operating Committee may designate as CAT Data from time to 
time.'' \490\ Section 6.3 of the Plan describes the data to be received 
from Participants that are national securities exchanges, which would 
include data for ``each NMS Security \491\ registered or listed for 
trading on such exchange or admitted to unlisted trading privileges on 
such exchange.'' Participants that are a national securities 
association (i.e., FINRA) must report data for each ``Eligible Security 
for which transaction reports are required to be submitted to that 
association.'' \492\ ``Eligible Security'' is defined in the Plan as 
all NMS Securities and all OTC Equity Securities,\493\ and ``OTC Equity 
Security'' is defined as ``any equity security, other than an NMS 
Security, subject to prompt last sale reporting rules of a registered 
national securities association and reported to one of such 
association's equity trade reporting facilities.'' \494\ ``Industry 
Member Data'' refers to audit trail data reported by members of the 
exchanges and national associations, which includes Options Market 
Makers.\495\ SIP Data is defined in the Plan as information, including 
size and quote condition, on quotes including the National Best Bid and 
National Best Offer (``NBBO'') for each NMS Security; Last Sale Reports 
and transaction reports reported pursuant to an effective transaction 
reporting plan filed with the Commission pursuant to, and meeting the 
requirements of Rule 601 and 608; trading halts, limit-up limit-down 
(``LULD'') price bands,\496\ and LULD indicators; and summary data or 
reports described in the specifications for each of the SIPs and 
disseminated by the respective SIP.\497\
---------------------------------------------------------------------------

    \489\ See CAT NMS Plan, supra note 3, at Section 6.5(a)(i).
    \490\ See id. at Section 1.1.
    \491\ An ``NMS Security'' is defined as ``any security or class 
of securities for which transaction reports are collected, 
processed, and made available pursuant to an effective transaction 
reporting plan, or an effective national market system plan for 
reporting transactions in listed options.'' See 17 CFR 
242.600(b)(46).
    \492\ See CAT NMS Plan, supra note 3, at Section 6.3(c)(ii).
    \493\ See id. at Section 1.1. Audit trail data regarding OTC 
Equity Securities was not required under Rule 613, but the 
Participants, in consultation with the DAG, included OTC Equity 
Securities in the CAT NMS Plan so as to permit the retirement of 
OATS and thereby reduce costs to the industry. See CAT NMS Plan, 
supra note 3, at Appendix C, Section C.9, Section A.1(a) n.16. The 
determination to include OTC Equity Securities would also have a 
positive effect on further reducing fragmentation of data sooner.
    \494\ See CAT NMS Plan, supra note 3, at Section 1.1.
    \495\ See id. at Section 6.4(d).
    \496\ See Plan to Address Extraordinary Volatility for 
information on LULD, available at http://www.finra.org/sites/default/files/regulation-NMS-plan-to-address-extraordinary-market-volatility.pdf; see also Securities Industry Automation Corporation, 
Consolidated Tape System, CTS, Output Multicast Interface 
Specifications, available at https://www.nyse.com/publicdocs/ctaplan/notifications/trader-update/cts_output_spec.pdf Securities 
Industry Automation Corporation, Consolidated Tape System, CQS, 
Output Multicast Interface Specifications, available at https://www.nyse.com/publicdocs/ctaplan/notifications/trader-update/cqs_output_spec.pdf. The UTP Plan Trade Data Feed \SM\ (UTDF\SM\), 
Direct Subcriber Interface Specification, Version 14.4 available at 
http://www.utpplan.com/DOC/utdfspecification.pdf.
    \497\ See id. at Section 1.1 and Section 6.5(a)(ii).
---------------------------------------------------------------------------

    CAT Data would include data from all SRO audit trails, combined 
into a single data source. In addition, it would include some off-
exchange activity not captured on current SRO audit trails. Section 
6.4(d) of the Plan requires the Participants to require their Industry 
Members to record and report order events to the Central Repository. 
The Commission notes that SRO audit trails currently do not include the 
activity of firms that are not members of that SRO.\498\ And, currently 
only FINRA requires its members to report their off-exchange activity. 
While broker-dealers that trade off-exchange must be members of FINRA 
unless their activity fits the terms of the exemption in Rule 15b9-
1,\499\ firms that qualify for the exemption in that rule and that are 
not FINRA members do not report their off-exchange activity to 
OATS.\500\ This exemption amounts to a large percentage of off-exchange 
activity. Broker-dealers that are not FINRA Members accounted for 48% 
of orders sent directly to ATSs in 2014, 40% of orders sent directly to 
ATSs in 2013, and 32% in 2012.\501\ Because all SROs

[[Page 30679]]

are Participants in the Plan, under the Plan all broker-dealers with 
Reportable Events, including off-exchange, would be required to report 
the required CAT Data to the Central Repository. And, the inclusion of 
these additional Reportable Events would make CAT Data more complete 
than the combination of current SRO audit trails.
---------------------------------------------------------------------------

    \498\ This information can sometimes be inferred through data 
reported by member firms. See Securities Exchange Act Release No. 
74581 (March 25, 2015), 80 FR 18036 (April 2, 2015) (``Proposed 
Amendments to Rule 15b9-1''), Section V.B.2; see also CAT NMS Plan, 
supra note 3, at Appendix C Section B.7(a)(ii)(A).
    \499\ See id. for details on the exemption to Rule 15b9-1 and 
the proposed modifications to the Exemption for Certain Exchange 
Members that would require a dealer to be a member of a registered 
national securities association to conduct most off-exchange 
activity. If these modifications are adopted, Section IV.F.1.c(2)B.i 
discusses counts of broker-dealers currently not represented in 
OATS; the 15b9-1 exclusion applies to approximately 125 firms, most 
of which are not expected to incur OATS reporting obligations if 
15b9-1 modifications are approved.
    \500\ Furthermore, not all FINRA members are obligated to report 
to OATS. FINRA's rules exempt from reporting certain members that 
engage in a non-discretionary order routing process; additionally, 
FINRA has the authority to exempt other members who meet specific 
criteria from the OATS recording and reporting requirements, and has 
granted many such exemptions. See supra notes 396 and 397, and 
accompanying text. Approximately 799 firms that are excluded or 
exempt from OATS would incur CAT reporting obligations if the Plan 
were approved; see also Section IV.F.1.c(2)B.i, infra.
    \501\ See Proposed Amendments to Rule 15b9-1, supra note 498, at 
n.21. If the Commission adopts the proposed amendments to Rule 15b9-
1 set out in the proposed modifications to the Exemption for Certain 
Exchange Members, the percentage of off-exchange activity captured 
by CAT Data that is not currently captured by another audit trail 
would be smaller, and fewer broker-dealers would be excluded from 
OATS, reducing the number of broker-dealers that would be added to 
regulatory data if the Plan were approved. Section IV.F.1.c(2)B.ii 
discusses counts of broker-dealers currently not represented in 
OATS; the 15b9-1 exclusion applies to approximately 125 firms, most 
of which are not expected to incur OATS reporting obligations if 
15b9-1 modifications are approved. Specifically, the exemption from 
FINRA membership would be limited to dealers that effect 
transactions off the exchanges of which they are members solely for 
the purpose of hedging the risks of their floor-based activity, and 
brokers and dealers that effect transactions off the exchange 
resulting from orders that are routed by a national securities 
exchange of which they are members. Id. at Section II.
---------------------------------------------------------------------------

    CAT Data would also include many Reportable Events such as order 
origination, order routing, receipt of a routed order, order 
modifications, cancellations, and executions, and trade cancellations. 
Currently, OATS data contains most of these Reportable Events but does 
not cover all participants and does not include options.\502\ For 
example, CAT Data would contain more events than EBS data, trade 
blotters, and public data. As previously noted, OATS data also do not 
include proprietary orders originated by a trading desk in the ordinary 
course of a member's market making activities (or ``principal 
activity'').\503\ But, pursuant to Rule 613(j)(8),\504\ principal 
trading would be included in CAT reporting requirements, an improvement 
over OATS. This requirement significantly improves completeness because 
such events are not included in current SRO audit trails, and account 
for a significant portion of market activity (40.5% of all transactions 
and 67% of all exchange message traffic according to a Commission 
analysis).\505\ This would improve regulatory activities in which 
observation of pricing information, as it relates to market activity, 
is important for determining the legality and consequences of market 
activity of interest as well as regulatory analysis of market behavior 
in general.
---------------------------------------------------------------------------

    \502\ See Section IV.D.2.b(1)A, supra.
    \503\ Id.
    \504\ See 17 CFR 242.613(j)(8).
    \505\ See Section IV.D.2.b(1)A, supra for a description of this 
analysis.
---------------------------------------------------------------------------

    CAT Data also would include the information described above for 
listed equities and options and OTC Equity Securities.\506\ Therefore, 
the inclusion in CAT Data of all these products adds an additional 
level of completeness relative to current data sources.
---------------------------------------------------------------------------

    \506\ See supra note 494.
---------------------------------------------------------------------------

(2) Data Fields
    The CAT NMS Plan also would improve completeness by consolidating 
in a single source fields that currently may only be available from 
some data sources, and by including some fields that are difficult for 
regulators to compile. Not every data field that would be in CAT Data 
is currently included in SRO audit trails, and very few fields are 
included in all data sources.
    The inclusion of consistent unique customer information, in 
particular, in the CAT Data represents a significant improvement over 
current SRO audit trails in terms of completeness. Rule 613(c)(7)(i) 
requires that a CAT Reporter report information to the Central 
Repository that uniquely identifies a customer across all broker-
dealers.\507\ As noted in the Baseline, very few current data sources 
contain customer information, and those that do are largely limited in 
the completeness and accuracy of this information, all of which 
significantly limits regulatory efficiency.\508\ The identification of 
customers underlies numerous enforcement activities and many 
examination and surveillance activities of regulators. This would also 
allow regulators to obtain information efficiently regarding customers, 
such as issuers repurchasing their stock and short sellers.\509\
---------------------------------------------------------------------------

    \507\ 17 CFR 242.613(c)(7)(i). Specifically, Sections 9.1 and 
9.2 of Appendix D of the Plan require the CAT Data to include the 
following Customer information, at minimum: social security number 
or individual taxpayer identification number, date of birth, current 
name, current address, previous name and previous address. For legal 
entities, the Plan requires the reporting of the LEI (if available), 
tax identifier, full legal name and address. The Plan also requires 
that the following information about a Customer be reported to the 
Central Repository, at a minimum: Account owner name, account owner 
mailing address, account tax identifier, market identifiers, type of 
account, firm identifier number, prime broker ID, bank repository 
ID, and clearing broker. See CAT NMS Plan supra note 3, at Sections 
9.1 and 9.2. The CAT Data must also support account structures that 
have multiple account holders. See id. Relatedly, the unique 
Customer-ID also improves accuracy because Rule 613 requires that it 
be consistent and associated with all Reportable Events involving 
that Customer. Current data sources do not provide consistent 
customer identifiers. See Sections IV.D.2.b(2)D supra, and 
IV.E.1.b(4), infra.
    \508\ See Sections IV.D.2.a(1) and IV.D.2.b(1)B, supra. As 
discussed above, the Commission notes that SRO audit trails 
typically do not provide customer information but a recent FINRA 
rule change would require its members to report to OATS non-FINRA 
member customers who are broker-dealers. See supra note 407.
    \509\ See Short Sale Reporting Study, supra note 413, for a 
discussion of the benefits of being able to identify short sellers. 
Because CAT Data would include a short sale mark and identify 
customers, regulators could use CAT Data to identify short sellers.
---------------------------------------------------------------------------

    In addition to data fields providing customer information, the Plan 
would improve completeness by including other data fields not found on 
current SRO audit trails. For example, CAT Data would include 
allocation information, open/close information, Quote Sent Time, and 
information on whether a Customer gave a modification or cancellation 
instruction.
    The information in the Allocation Report required by the CAT NMS 
Plan represents a significant improvement in completeness over current 
sources for subaccount allocation data, such as trade blotter and EBS 
data. Under the Plan, an Allocation Report would include the Firm 
Designated ID for any account(s), including subaccount(s), to which 
executed shares are allocated, the security that has been allocated, 
the identifier of the firm reporting the allocation, the price per 
share of shares allocated, the side of shares allocated, the number of 
shares allocated to each account, and the time of the allocation.\510\ 
While most of the fields required on the Allocation Report are included 
on trade blotter or EBS data, their inclusion in CAT Data would 
significantly reduce the time and effort expended for regulators to 
acquire such information.\511\ Because it is not required on EBS or in 
broker-dealer recordkeeping rules, the allocation time field on the 
Allocation Report provides information that is currently even more 
difficult for regulators to acquire than the other information on the 
Allocation Report. These data improvements should facilitate the use of 
allocation data in regulatory investigations and should result in more 
effective and efficient investigative processes. Allocation data also 
serves an important role in many other regulatory activities that aim 
to protect investors.\512\ Indeed, allocation time is an extremely 
important data field because it is critical in investigations of 
violations like market manipulation and cherry-picking.\513\
---------------------------------------------------------------------------

    \510\ See CAT NMS Plan, supra note 3, at Section 1.1; see also 
Exemption Order, supra note 18, at 11867.
    \511\ See Section IV.D.2.b(1)B, supra, for further information 
on Allocation Reports.
    \512\ Id.
    \513\ Id.
---------------------------------------------------------------------------

    In addition, while many of the elements contained in the definition 
of ``Material Terms of the Order'' are

[[Page 30680]]

collected in current SRO audit trails, the CAT NMS Plan's definition of 
Material Terms of the Order expands the CAT Data beyond the coverage of 
current SRO audit trails and other sources. The CAT NMS Plan requires 
that the Material Terms of the Order be reported for order origination, 
routing, and the receipt of a routed order. And Material Terms of the 
Order is defined to include the security symbol, security type, price 
(if applicable), size (displayed and non-displayed), side (buy/sell), 
order type, if a sell order, whether the order is long, short, or short 
exempt, open/close indicator, time in force (if applicable), and any 
special handling instructions.\514\ In addition, if the order is for a 
Listed Option, the Material Terms of the Order would be defined to 
include option type (put/call), option symbol or root symbol, 
underlying symbol, strike price, expiration date, and open/close.\515\
---------------------------------------------------------------------------

    \514\ See CAT NMS Plan, supra note 3, Section 1.1; see also 17 
CFR 242.613(j)(7).
    \515\ Id.
---------------------------------------------------------------------------

    Because data on open/close indicators are not currently included in 
SRO audit trails, obtaining data on whether a trade opens or closes a 
position in equities is currently very difficult. Ready access to this 
information would facilitate regulators' ability to determine whether a 
purchase or sale increases or decreases equity exposure, such as when a 
buy covers a short position.\516\ This would help regulators 
reconstruct customer positions without requiring specific position data 
and would assist in analysis of rules such as Rule 105 of Regulation 
M,\517\ governing when short sellers can participate in a follow-on 
offering.\518\ This information is also useful in investigating short 
selling abuses and short squeezes.\519\ Among other things, a build-up 
of a large short position by one investor along with the spreading of 
rumors may be indicative of using short selling as a tool to 
potentially manipulate prices. Information on when the position 
decreases is also useful for indicating potential manipulation, insider 
trading, or other rule violations.\520\ The ability to determine 
whether an order adds to a position, along with the timing of the 
order, is particularly important in detecting and investigating 
portfolio pumping or marking the close.\521\
---------------------------------------------------------------------------

    \516\ The open/close indicator would help to identify buy to 
cover orders because a buy order that closes a position would 
presumably be a buy-to-cover order. See Proposing Release supra note 
9, at 32575. The Commission notes that the accuracy of this data 
field may depend on how the Plan Processor interprets when CAT 
Reporters should populate the field with particular permitted 
values. See infra note 537 and accompanying text.
    \517\ 17 CFR 242.105.
    \518\ For a discussion of additional benefits of position 
information and buy to cover information, see Short Sale Reporting 
Study, supra note 413; see also Press Release: SEC Charges Six Firms 
for Short Selling Violations in Advance of Stock Offerings (October 
14, 2015), available at http://www.sec.gov/news/pressrelease/2015-239.html.
    \519\ See Proposing Release, supra note 9 at 32575.
    \520\ Id.
    \521\ Id.
---------------------------------------------------------------------------

    The CAT Data would also include information regarding the sent time 
for Options Market Maker quotes and information about whether a 
modification or cancellation instruction for an order was given by a 
Customer associated with an order, or was initiated by a broker-dealer 
or exchange associated with the order. Neither of these data fields is 
currently readily available from existing SRO audit trails.\522\ Quote 
sent time is particularly informative for certain narrow market 
reconstructions for enforcement investigations, and knowing whether the 
member or Customer made a modification or cancellation helps regulators 
understand the decisions that broker-dealers and others make in the 
interest of best execution.
---------------------------------------------------------------------------

    \522\ See Exemption Order, supra note 18 at 11857 and 11861.
---------------------------------------------------------------------------

    The remaining data fields included in CAT Data are also included in 
some or all current SRO audit trails, although no single source 
contains all of them. For instance, Rule 613(c)(7)(vi)(C) requires the 
collection of audit trail data that links executions to contra-side 
orders and a CAT-Order-ID for the contra-side order.\523\ An order 
identifier for the contra-side order(s) would help regulators better 
reconstruct executions. Although some current exchange audit trails 
identify counterparties to trades, this identification is sometimes 
more difficult for off-exchange equity trading.\524\ Further, while all 
SRO audit trails contain time stamps, as CAT Data would, some sources 
of regulatory data do not currently include all the types of time 
stamps that would be in CAT Data.
---------------------------------------------------------------------------

    \523\ 17 CFR 613.242(c)(7)(vi)(C).
    \524\ For off-exchange trading, OATS records sometimes do not 
directly identify counterparties. In the case of ATS trades, 
sometimes counterparty broker-dealers can only be identified through 
TRF records; sometimes ATS OATS records alone suffice. For 
internalized trades, the reporting broker-dealer is the 
counterparty. By combining OATS with TRF data, regulators can 
identify the broker-dealers representing the counterparties for over 
99% of TRF reported trades, but identifying customer account 
information generally requires a data request to those broker-
dealers. See Section IV.D.2.b(2)A, supra.
---------------------------------------------------------------------------

    Additionally, the inclusion of order display information (i.e., 
whether the size of the order is displayed or non-displayed), and 
special handling instructions in CAT Data improve completeness because 
they are not always mandatory in SRO audit trail data, and therefore 
may not be consistently available without data requests to broker-
dealers.\525\ Order display information is useful for examining how 
hidden liquidity affects markets or how regulatory changes affect 
hidden liquidity, and special order handling instructions could assist 
in examinations of best execution and could allow regulators to better 
understand the role and trends of these instructions in the market.
---------------------------------------------------------------------------

    \525\ See supra note 412.
---------------------------------------------------------------------------

    Other information required by the CAT NMS Plan includes the 
security symbol, date and time of the Reportable Event, the identity of 
each Industry Member or Participant accepting, routing, receiving, 
modifying, canceling, or executing each order, the identity and nature 
of the department or desk to which an order is routed, if an order is 
routed internally within the system of an Industry Member, a CAT-Order-
ID, changes in any Material Term of the Order (if the order is 
modified), execution capacity, the CAT-Order-ID of any contra-side 
order(s), and the SRO-Assigned Market Participant Identifier of the 
clearing broker or prime broker.\526\ Of these fields, the security 
symbol and date are the only data found on all current data sources.
---------------------------------------------------------------------------

    \526\ See CAT NMS Plan, supra note 3, Sections 6.3(d); 6.4(d).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the CAT Data would 
include all data elements that would be useful and efficient to include 
in a consolidated audit trail. The Commission previously considered 
which fields should be reported to CAT when proposing and adopting Rule 
613. The set of data fields required by Rule 613 reflected the 
Commission's assessment, as informed by public comment, of the benefits 
and costs of including various data elements in CAT.\527\ While the 
costs and benefits of including particular fields can change due to 
technological advances and/or changes in the nature of markets, the 
Plan contains provisions regarding periodic reviews and upgrades to CAT 
that could lead to proposing additional data fields that are deemed 
important.\528\ In addition the Commission reviewed gap analyses that 
examine whether the CAT Data would contain all important data elements 
in current data sources.\529\ As a result of

[[Page 30681]]

this review, the Commission is aware that one data gap involves OATS 
data fields that allow off-exchange transactions to be matched to their 
corresponding trade reports at trade reporting facilities, and 
recognizes that these fields are important to assure trade reporting 
requirements are being met for off-exchange trading.\530\ Similarly, 
the Commission notes that EBS includes 13 data elements that are not 
required by CAT or derivable through other CAT fields and would thus 
reflect some limitations of the Plan if EBS were retired before those 
missing data elements were incorporated into CAT.\531\ However, as 
discussed in Section 3 of Appendix D of the Plan, prior to the 
retirement of existing systems, the CAT Data must contain data elements 
sufficient to ensure the same regulatory coverage provided by existing 
systems that are anticipated to be retired.\532\ The Commission 
therefore expects that any missing elements that are material to 
regulators would be incorporated into CAT Data prior to the retirement 
of the systems that currently provide those data elements to 
regulators. And the Commission preliminarily believes that CAT Data 
would include the audit trail data elements that currently exist in 
audit trail data sources and that could be retired upon implementation 
of the CAT.
---------------------------------------------------------------------------

    \527\ See Adopting Release, supra note 9, at 45751.
    \528\ See Section IV.E.3a, infra for a discussion of adding new 
data fields and other requirements for upgrading the CAT Data after 
approval.
    \529\ The Commission acknowledges that the Participants are 
continuing to study gaps between current regulatory data sources and 
the Plan as filed. CAT NMS Plan, supra note 3, at Appendix C, 
Section C.9; see also SEC Rule 613--Consolidated Audit Trail (CAT) 
OATS--CAT Gap Analysis and SEC Rule 613--Consolidated Audit Trail 
(CAT) Revised EBS--CAT GAP Analysis, available at http://www.catnmsplan.com/gapanalyses/index.html.
    \530\ The Commission notes that Rule 613 does not require the 
inclusion of this information. This information did not exist at the 
time the Commission adopted Rule 613 and such information on 
exchange trades does not exist today. The Commission expects that 
the requirements discussed in Section 3 of Appendix D of the Plan 
would result in the inclusion of this information in the CAT Data.
    \531\ See SEC Rule 613--Consolidated Audit Trail (CAT) Revised 
EBS--CAT GAP Analysis, available at http://www.catnmsplan.com/gapanalyses/p450537.pdf.
    \532\ See CAT NMS Plan, supra note 3, at Appendix D, Section 3.
---------------------------------------------------------------------------

b. Accuracy
    This Section analyzes the expected effect of the CAT NMS Plan, if 
approved, on the accuracy of the data available to regulators.\533\ In 
general, the Commission preliminarily believes that the requirements in 
the CAT NMS Plan for collecting, consolidating, and storing the CAT 
Data in a uniform linked format, the use of consistent identifiers for 
Customers, and the focus on sequencing would promote data accuracy.
---------------------------------------------------------------------------

    \533\ As discussed above and in the Adopting Release, accuracy 
refers to whether the data about a particular order or trade is 
correct. See Adopting Release, supra note 9, at 45727.
---------------------------------------------------------------------------

    The Commission notes that the full extent of improvement that would 
result from the Plan is currently unknown, because the Plan defers many 
decisions relevant to accuracy until the Plan Processor publishes the 
Technical Specifications and interpretations.\534\ In particular, the 
CAT NMS Plan specifies that the ``[t]echnical Specifications shall 
include a detailed description of . . . each data element, including 
permitted values, in any type of report submitted to the Central 
Repository'' \535\ and ``the Plan Processor shall have sole discretion 
to amend and publish interpretations regarding the Technical Specifica- 
tions.'' \536\ This leaves open precise definitions and parameters for 
the data fields to be included in CAT Data.\537\
---------------------------------------------------------------------------

    \534\ See CAT NMS Plan, supra note 3, at Section 6.9.
    \535\ Id. at Section 6.9(b)(v).
    \536\ The CAT NMS Plan provides details regarding how the 
responsibility for these decisions would be shared between the 
Operating Committee and the Plan Processor, with the Plan Processor 
having responsibility for data definitions and interpretations. See 
CAT NMS Plan, supra note 3, at Section 6.9(c)(i).
    \537\ For example, the completeness Section notes that the open/
close indicator for equities does not exist in current data sources 
(see Section IV.E.1.a(2)). The accuracy of the open/close indicator 
would be subject to Plan Processor discretion, because the Plan 
Processor would have responsibility for defining the permitted 
values and interpreting when CAT Reporters would use such permitted 
values and the Plan Processor would not have guidance from previous 
data sources on how to define or interpret such a field. While the 
Commission would ultimately be able to correct such 
misinterpretations, regulators may not detect such a 
misinterpretation until the misinterpretation harms an 
investigation, exam, or other analysis. Based on its experience with 
short sale indicators, the Commission believes that defining and 
interpreting the open/close indicator would be particularly complex. 
See SEC, Division of Market Regulation: Responses to Frequently 
Asked Questions Concerning Regulation SHO, Question 2.5, available 
at http://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm 
(``Regulation SHO FAQs'').
---------------------------------------------------------------------------

    Nonetheless, the Commission preliminarily believes that the Plan 
provides some procedural protections to mitigate this uncertainty and 
help promote accuracy. For example, the Plan requires that, at a 
minimum, the Technical Specifications be ``consistent with 
[considerations and minimum standards discussed in] Appendices C and 
D,'' and that the initial Technical Specifications and any Material 
Amendments thereto must be provided to the Operating Committee for 
approval by Supermajority Vote.\538\ Further, all non-Material 
Amendments and all published interpretations must be provided to the 
Operating Committee in writing at least ten days before publication, 
and shall be deemed approved unless two or more unaffiliated 
Participants call the matter for a vote of the full Operating 
Committee.\539\
---------------------------------------------------------------------------

    \538\ Id. at Section 6.9(a). The Commission notes that the 
standards in Appendices C and D do not cover all decisions that 
would affect the accuracy of the data.
    \539\ See CAT NMS Plan, supra note 3, at Section 6.9(c)(i).
---------------------------------------------------------------------------

(1) Data Errors
    The CAT NMS Plan specifies a high-level process for handling errors 
that includes target Error Rates for data initially submitted by CAT 
Reporters and a correction process and timeline. In particular, the 
Plan specifies an initial maximum Error Rate, which measures errors by 
CAT Reporters and linkage validation errors,\540\ of 5% for reports 
received by the Central Repository before the error correction process 
and contemplates the reduction of this Error Rate over time. It is 
difficult to conclude whether the Error Rates and processes in the CAT 
NMS Plan would constitute an accuracy improvement as compared to 
current data sources.
---------------------------------------------------------------------------

    \540\ The Commission notes that there is some uncertainty on 
whether the Error Rate definition includes any additional errors 
attributable to the Plan Processor because the Plan does not 
explicitly state whether Plan Processor errors are included in the 
Error Rate or not; it is also not clear whether Plan Processor 
errors are included in linking errors. See id. at Article VI, 
6.1(n)(v) n.1; Appendix C, Section A.3(b), n.102. Additional 
uncertainty exists because the Operating Committee would determine 
the details regarding error definitions in the Technical 
Specifications after the Plan is approved.
---------------------------------------------------------------------------

    The Plan states that 5% is an appropriate initial Error Rate, to 
allow CAT Reporters the opportunity to get used to a new reporting 
regime, and that the Error Rate should be reduced over time, with goal 
of a 1% Error Rate to be achieved one year after each new category of 
Reporters is required to begin reporting.\541\ This was determined 
based on Participants' experience with OATS. The initial rejection 
rates for OATS when it was initially implemented was 23%,\542\ although 
more recent experience with OATS reporting indicates error rates below 
3% following the implementation of additional OATS upgrades over the 
past 10 years and a current error rate of less than 1%.\543\
---------------------------------------------------------------------------

    \541\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.3(b).
    \542\ See id. at Appendix C, Section A.3(b), n.106.
    \543\ See Memorandum to File No. S7-11-10 regarding Telephone 
Conferences with FINRA (April 17, 2012) available at http://www.sec.gov/comments/s7-11-10/s71110-116.pdf.
---------------------------------------------------------------------------

    But, because the current OATS error rate is below 1%, the 
Commission preliminarily believes that the initial

[[Page 30682]]

percentage of errors in CAT would be higher than current percentage of 
errors in OATS, though the OATS error rate may not be directly 
comparable to the Error Rate in the Plan.\544\ Given the magnitude of 
CAT, the fact that many CAT Reporters would be new to audit trail 
reporting, and that options would be covered for the first time, the 
Participants believe that 5% is an appropriate initial Error Rate.\545\ 
And the Plan injects some uncertainty by asserting that this initial 5% 
rate is subject to the quality assurance testing period to be performed 
prior to launch, and then again before each new batch of CAT Reporters 
are brought online.\546\ In time, the rate could be lowered, but it 
also could be raised.
---------------------------------------------------------------------------

    \544\ See Section IV.D.2.b(2)A, supra, for discussion of current 
regulatory data error rates. It is important to note that both the 
1% OATS error rate and the 5% proposed CAT Error Rate represent 
error rates measured at initial data submission. Furthermore, some 
situations that do not qualify as an error in OATS (i.e., a route 
that cannot be linked because the routing destination is not 
required to report OATS) would qualify as an error under CAT. 
Furthermore, error rates after data correction are not known for 
OATS, and are anticipated to be ``de minimis'' under CAT, as 
discussed in note 547, infra. Finally, definitions of ``error'' for 
both OATS and CAT Data are dependent on proscribed data validation 
checks; if data is reported and passes validation checks, it is 
assumed to be correct. When validation checks are exhaustive and 
stringent, error rates are expected to be higher than when 
validation checks are minimal. Consequently, the Commission is 
cautious in directly comparing OATS reported and proposed CAT Error 
Rates.
    \545\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.3(b). See also Section IV.H.2.b, infra for a discussion and 
solicitation of comment on alternative Error Rates.
    \546\ See id. at Appendix C, Section A.3(b).
---------------------------------------------------------------------------

    The Plan specifies an error correction process after initial 
reports are received and indicates that practically all errors 
identifiable by the validations used in the error correction process 
would be corrected by 8:00 a.m. Eastern Time on day T+5, stating that 
errors are expected to be ``de minimis'' after the error correction 
period.\547\ Specifically, the Plan Processor must run initial 
validation checks on the data by noon eastern time on day T+1 (four 
hours after the submission deadline for the data). Those validation 
checks must be published in the Technical Specifications (as discussed 
further below) and have the objective to ensure that data is accurate, 
timely, and complete as near as possible to the time of submission. 
Once errors are identified, the Plan Processor must accept corrections 
via manual web-based entry and via batch uploads. Although there is a 
specific timeframe for performing these corrections, the Plan Processor 
must accept error corrections at any time.\548\
---------------------------------------------------------------------------

    \547\ See id. at Appendix C, Section A.3(b) n.102. ``De 
minimis'' is not defined and no numerical Error Rate is given. The 
Plan also includes a compliance program intended to help achieve 
this goal.
    \548\ See Section IV.E.1.d, infra. The RFP requested that 
Bidders provide information on how data format and context 
validations for order and quote events would be performed and how 
errors would be communicated to CAT Reporters; a system flow diagram 
showing how and when different types of validations would be 
completed; and how Customer information would be validated. Bidders 
noted that the validations would be performed via rules engines 
(using standard data validation techniques like format checks, data 
type checks, consistency checks, limit and logic checks, or data 
validity checks), and processing would be done in real time during 
data ingestion. The Plan Processor would be required to perform 
validations within three specified categories, which must be set out 
in the Technical Specifications document: File Validations 
(confirmation that the file is received in the correct format); 
Validation of CAT Data (checks of format, data type, consistency, 
range/logic, data validity, completeness, and timeliness); and 
Linkage Validation (checking the ``daisy chain''). See CAT NMS Plan, 
supra note 3, at Appendix D, Section 7.2. If errors are found, the 
data would be stored in an error database and notification sent to 
the CAT Reporter.
---------------------------------------------------------------------------

    Rather than providing details on the validations that would occur, 
however, the Plan provides high-level requirements for the validations 
and delegates the detailed design of the specific validations to the 
Plan Processor (with the involvement of the Operating Committee and the 
Advisory Committee).\549\ Additionally, the Plan does not provide the 
level of detail necessary to verify whether the CAT validation process 
would run the same validations as OATS, whether current validations 
would be relevant, and what validations, if any, would be added.
---------------------------------------------------------------------------

    \549\ See CAT NMS Plan, supra note 3, at Appendix D, Section 7.2 
(discussing validation requirements); see also id. Appendix C at 
Section A.3(b) (delegating responsibility regarding measurement of 
Error Rates to the Plan Processor).
---------------------------------------------------------------------------

    As noted above, it is therefore difficult to conclude whether the 
Error Rates and processes in the CAT NMS Plan would constitute an 
accuracy improvement as compared to current data sources. With respect 
to OATS, FINRA currently performs over 152 validation checks on each 
order event reported.\550\ After corrections, approximately 1-2% of 
each day's recorded events remain unmatched (i.e., multi-firm events, 
such as order routing that cannot be reconciled).\551\ However, the 
Commission is not certain that those error rates are directly 
comparable to the Error Rates permitted for CAT Data in the Plan given 
the increased scope and level of linkages specified in the Plan, and 
the new, large, and untested system. The Commission is not aware of 
other systems that track and record similar error rates, although the 
Commission does experience issues with errors contained in other 
sources of data when the Commission attempts to use that data. 
Accordingly, the Commission is unable to conclude whether the Error 
Rates and processes in the Plan would constitute an accuracy 
improvement compared to current data.
---------------------------------------------------------------------------

    \550\ See Adopting Release, supra note 9, at 45729.
    \551\ Id. at 45778.
---------------------------------------------------------------------------

(2) Event Sequencing
A. Clock Synchronization
    Rule 613(d)(1) and (2) requires that the CAT NMS Plan require that 
the business clocks of Participants and their members be synchronized 
to a specified standard of precision and for protocols to be in place 
for that standard to be maintained over time. Complying with this clock 
synchronization standard will require that, for the purpose of 
recording the date and time of Reportable Events, the business systems 
of Participants and their members be synchronized consistently with 
``industry standards.'' The Commission did not define the term 
``industry standard'' in Rule 613, though it noted that it expected the 
Plan to ``specify the time increment within which clock synchronization 
must be maintained, and the reasons the plan sponsors believe this 
represents the industry standard.'' \552\
---------------------------------------------------------------------------

    \552\ See Adopting Release, supra note 9, at 45774.
---------------------------------------------------------------------------

    The CAT NMS Plan describes the ``industry standard'' in this 
context in terms of the technology adopted by the majority of the 
industry.\553\ The Plan therefore bases its clock synchronization 
standard on current practices of the broker-dealer industry generally 
and provides that one standard would apply to all CAT Reporters. 
Specifically, Section 6.8(a) of the CAT NMS Plan requires CAT Reporters 
to synchronize their time clocks to the time maintained by the NIST 
with an allowable clock offset of 50 milliseconds, which the Plan 
determines is consistent with the current industry standards, as 
defined in the Plan. The Plan further requires annual review of the 
clock synchronization standard to evaluate its achievement of the 
Plan's goals related to clock synchronization. Section 6.8(c) of the 
Plan requires the Chief Compliance Officer to annually evaluate the 
clock offset tolerance and to make recommendations to the Operating 
Committee regarding whether industry standards have evolved such that 
the standard in Section 6.8(a) should be shortened.\554\
---------------------------------------------------------------------------

    \553\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
12(p).
    \554\ See id. at Section 6.8.(c) and Appendix C, Section A.3.(c)

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

[[Page 30683]]

    The Commission preliminarily believes that the clock 
synchronization standards in the CAT NMS Plan are reasonably designed 
to improve the accuracy of market activity sequencing by increasing the 
percentage of order events that could be chronologically sequenced 
relative to other order events,\555\ but notes that the improvements to 
the percentage of sequenceable order events by Plan standards are 
modest and the requirements of the Plan may not be sufficient to 
completely sequence the majority of market events relative to all other 
events.
---------------------------------------------------------------------------

    \555\ Independent of the potential time clock synchronization 
benefits, the order linking data that would be captured in CAT 
should increase the proportion of events that could be sequenced 
accurately. This reflects the fact that some records pertaining to 
the same order could be sequenced by their placement in an order 
lifecycle (e.g., an order submission must have occurred before its 
execution) without relying on time stamps. This information may also 
be used to partially sequence surrounding events.
---------------------------------------------------------------------------

    As discussed in the Baseline Section, 39% of the broker-dealers 
responding to the FIF Clock Offset Survey currently synchronize their 
clocks to a clock offset tolerance of greater than 50 
milliseconds.\556\ Accordingly, the 50 millisecond requirement for all 
CAT Reporters (except on manual order handling systems) would result in 
the availability of more precise time stamps from many broker-dealers 
\557\ and would increase the number of order events that could be 
accurately sequenced relative to each other.
---------------------------------------------------------------------------

    \556\ See Section IV.D.2.b(2)B.i, supra (reporting results of 
this survey); see also FIF Clock Offset Study, supra note 127.
    \557\ As noted above, FINRA has indicated that it is considering 
proposing a rule change that would require a 50 millisecond clock 
offset tolerance. If this rule change is proposed and approved, more 
entities would record time stamps with data at a 50 millisecond 
clock offset tolerance regardless of whether the CAT NMS Plan is 
approved.
---------------------------------------------------------------------------

    To evaluate the proportion of order events that could be sequenced 
with the clock offset tolerance specified in the CAT NMS Plan, the 
Commission has conducted an analysis of the frequency of market events 
occurring within 100 milliseconds of an event in a different trading 
venue in the same security.\558\ Table 5 (CAT and Current Clock Offset 
Tolerance) shows the percentage of events for listed equities and 
options that could be accurately sequenced with one-second and 50-
millisecond clock offset tolerances.
---------------------------------------------------------------------------

    \558\ The methodology to calculate these frequencies starts with 
the steps described in supra note 438 and then subtracts the result 
from one to get the percentage of unrelated orders that could be 
sequenced. This assumes that consecutive unrelated events within 
twice the clock offset tolerance cannot be sequenced. An unrelated 
event is an order event at a different venue.

                                 Table 5--CAT and Current Clock Offset Tolerance
----------------------------------------------------------------------------------------------------------------
                                                                                    % of Unrelated order events
----------------------------------------------------------------------------------------------------------------
     Minimum time between adjacent events            Clock offset tolerance        Equities (%)     Options (%)
----------------------------------------------------------------------------------------------------------------
2 seconds.....................................  1 second........................            1.31            6.97
100 milliseconds..............................  50 milliseconds.................            7.84           18.83
----------------------------------------------------------------------------------------------------------------

    The analysis finds that the current FINRA one-second clock offset 
tolerance allows only 1.31% of unrelated order events for listed 
equities and 6.97% of unrelated order events for listed options to be 
sequenced. The proposed 50-millisecond clock offset tolerance could 
accurately sequence 7.84% for listed equities and 18.83% for listed 
options of such events included in the MIDAS data. This analysis 
overestimates the portion of unrelated events that the proposed clock 
synchronization standard could sequence because the analysis includes 
only trade and quote events observable in the MIDAS data. The data 
currently available to the Commission provides only a rough and 
upwardly-biased estimate of how many of these events could be sequenced 
by the order data that would be captured by the CAT. In sum, the 
results of the Commission's analysis suggest that the standards 
required by the Plan do represent an improvement over current standard 
but that the majority of market events would remain impossible to 
sequence based on the Plan's required clock synchronization standards.
    This analysis does not consider events in OTC Equity Securities. 
The Commission believes that the proposed clock synchronization 
standard could accurately sequence a higher proportion of unrelated 
events in OTC Equity Securities because OTC Equity Securities trade 
less frequently than NMS equities and unrelated order events may be 
less frequent in OTC Equity Securities than in listed equities. The 
Commission therefore preliminarily believes that the proposed 50 
millisecond clock offset tolerance in the CAT NMS Plan could improve 
accuracy by modestly increasing the number of events that could be 
sequenced in OTC Equity Securities.
    The Plan acknowledges that the required clock offset tolerance, 
which is based on its determination of the current industry standard, 
would not be sufficient to accurately sequence all order events by 
their time stamps alone.\559\ In particular, the Plan states that 
``[f]or unrelated events, e.g., multiple unrelated orders from 
different broker-dealers, there would be no way to definitively 
sequence order events within the allowable clock drift as defined in 
Article 6.8.'' \560\ This in turn limits the benefits of CAT in 
regulatory activities that require event sequencing, such as the 
analysis and reconstruction of market events, as well as market 
analysis and research in support of policy decisions, in addition to 
examinations, enforcement investigations, cross-market surveillance, 
and other enforcement functions.
---------------------------------------------------------------------------

    \559\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.3(c). Order events occurring within a single system using the same 
time clock could be accurately sequenced by their time stamps, 
assuming that their time stamps are not identical. The CAT NMS Plan 
does not specify the approach that would be used to sequence events 
when time stamps are identical or indicate how this decision would 
be made.
    \560\ Id. at n.110. Events involving the same order routed 
across systems could be logically sequenced using routing-related 
data, because a routed order must be sent before it can be received, 
and received before it can be executed. However, the Plan would not 
facilitate the accurate sequencing of events that occur in different 
systems within 100 milliseconds of each other (twice the clock 
offset tolerance) that are not linked using a parent-child order 
relationship. The CAT NMS Plan does not provide a solution that will 
sequence these events, but recognizes the issue and states that 
``the Participants plan to require that the Plan Processor develop a 
way to accurately track the sequence of order events without relying 
entirely on time stamps.'' See CAT NMS Plan, supra note 3, at 
Appendix C, Section A.3(c).
---------------------------------------------------------------------------

    The Plan discusses its determination of the current industry 
standard and specifies implementation requirements for the clock 
synchronization standards in Appendix C.\561\ As noted above, the

[[Page 30684]]

Plan bases industry standards on current practices of the broker-dealer 
industry, which are derived from a survey of broker-dealers, and on the 
assumption that a change in industry standards would be premised on 
``the extent existing technology that synchronizes . . . clocks with a 
lower tolerance . . . becomes widespread enough throughout the industry 
to constitute a new standard.'' \562\
---------------------------------------------------------------------------

    \561\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.3(c).
    \562\ Id.
---------------------------------------------------------------------------

    The Commission notes however, that the current practices for 
exchanges and Execution Venues may differ from the industry standard 
for broker-dealers as defined in the Plan, and current practices for 
certain systems within broker-dealers may vary by the system within the 
broker-dealers. As noted in the Baseline Section, the Commission does 
not have precise information on the clock synchronization standards on 
exchange and ATS matching engines and quoting systems, but exchanges 
may currently synchronize their clocks to a 100 microsecond or less 
clock offset tolerance, and have an average clock offset of 36 
microseconds.\563\ By defining industry standards based on practices of 
the broker-dealer industry generally, the Plan does not account for 
these differences. Further, defining industry standards by majority 
practices may have the unintended effect of setting a standard that 
delays adopting advances in technology.
---------------------------------------------------------------------------

    \563\ See supra notes 435 and436.
---------------------------------------------------------------------------

    Despite these limitations, it is worth noting that the Plan 
requires the CCO of the Plan Processor to develop and conduct an annual 
assessment of Business Clock synchronization.\564\ Moreover, Plan 
Participants must require Industry Members to certify periodically that 
their Business Clocks comply with the clock synchronization standard 
and that any violations thereof are reported to the Plan Processor and 
the Plan Participant.\565\ Thus, the Commission believes that these 
provisions would help ensure that the benefits of clock synchronization 
are maintained.
---------------------------------------------------------------------------

    \564\ See CAT NMS Plan, supra note 3, Section 6.2(a)(v)(M).
    \565\ See id. at Section 6.8(a)(ii) and (iii).
---------------------------------------------------------------------------

B. Time Stamp Granularity
    The Commission preliminarily believes that the minimum time stamp 
granularity required by the Plan would result in some improvement in 
data accuracy, but that the level of improvement could be limited. 
Despite the modest level of direct improvements expected from the 
Plan's minimum time stamp granularity standards, the Commission 
preliminarily believes that the Plan should continue to have a time 
stamp granularity standard because the Plan provides a mechanism for 
making future improvements and monitoring whether more granular time 
stamps would provide better quality CAT Data and be feasible given 
technology improvements.
    The level of precision or granularity with which time stamps are 
recorded has significant implications for the usability of audit trail 
data in terms of sequencing events, matching records, and linking the 
data to other data sources. In some current regulatory data, the 
relative lack of time stamp granularity standards for data reporters 
could lead to difficulties in accurately sequencing events or linking 
data with other data sources. Rule 613(d)(3) requires that CAT 
Reporters record time stamps to reflect current industry standards and 
be at least to the millisecond.\566\ Furthermore, the Plan requires 
Participants to adopt rules requiring that CAT Reporters that use time 
stamps in increments finer than milliseconds use those finer increments 
when reporting to the Central Repository.\567\ Consistent with Rule 
613, Section 6.8(b) of the CAT NMS Plan requires millisecond or less 
time stamps. However, the Commission granted exemptive relief for 
manual orders to be recorded at the granularity of one second or 
better.\568\ Further, pursuant to Rule 613, if a CAT Reporter's system 
already utilizes time stamps in increments less than the minimum 
required by the Plan, the CAT Reporter must record time stamps in such 
finer increments.\569\
---------------------------------------------------------------------------

    \566\ 17 CFR 242.613(d)(3). This requirement does not apply to 
certain Manual Order Events, which are exempted from the requirement 
and are captured at one-second increments. Time stamp granularity on 
manual order events is discussed separately in the Alternatives 
Section.
    \567\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.3(c).
    \568\ See CAT NMS Plan, supra note 3, at Section 6.8(b) and 
Appendix C, Section A.3(c) (explaining that recording Manual Order 
Events at the millisecond level would be costly and ultimately 
arbitrary or imprecise due to the human interaction); see also 
Exemption Order, supra note 18, at 11868-9.
    \569\ Id.
---------------------------------------------------------------------------

    The Plan asserts that the millisecond increment required for CAT 
Data reflects the industry standard level of granularity.\570\ As noted 
in the discussion of clock synchronization, the Commission did not 
define the term ``industry standard'' in Rule 613. The Plan therefore 
bases its standard for time stamp granularity on current practices of 
the broker-dealer industry generally, and provides that one standard 
would apply to all CAT Reporters. There appears to be a wide divergence 
of industry standards in practice, ranging from full seconds to 
microseconds for latency-sensitive applications, and the Plan describes 
the slower systems as mostly older ones that cannot support a finer 
time stamp granularity.\571\ Many of the systems from which regulators 
currently obtain data already capture time stamps in increments of 
milliseconds or less. For example, OPRA allows for time stamps in 
nanoseconds, and the other SIPs require time stamps in microseconds for 
equity trades and quotes.\572\ However, OATS and EBS do not. Current 
OATS rules require time stamps to be expressed to the nearest second, 
unless the member's system expresses time in finer increments; and as 
of September 2014, approximately 12% of OATS records contain time 
stamps greater than one millisecond. EBS records either do not contain 
times or express time stamps in seconds.\573\
---------------------------------------------------------------------------

    \570\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.3(c).
    \571\ Id. Because older technology cannot support finer time 
stamp increments, members with older systems would incur significant 
effort and cost to upgrade those systems to support reporting data 
in milliseconds. The newest systems support finer increments, but 
include mostly the subset of systems dealing with low latency 
trading. Electronic Order Handling and Trading systems are commonly 
set at the millisecond level; see, e.g., FIF Letter.
    \572\ See Section IV.D.2.b(2), supra.
    \573\ Id.
---------------------------------------------------------------------------

    Thus, to the extent that some current data sources report time 
stamps in increments coarser than a millisecond, which is the case for 
12% of OATS records and all EBS records, the Commission expects the CAT 
millisecond time stamp requirement to improve data, and thereby allow 
regulators to more accurately determine the sequence of market events 
relative to surrounding events.
    The Commission preliminarily believes, however, that benefits from 
the more granular time stamps could be limited by the level of clock 
synchronization required by the Plan. In particular, the Commission 
believes that time stamp granularity would not be the limiting factor 
in sequencing accuracy, because recording events with time stamps with 
resolutions of less than one millisecond cannot help to sequence events 
occurring on different venues with clocks that may be 100 milliseconds 
out of sync due to clock synchronization offsets.\574\ Therefore,

[[Page 30685]]

the benefits of time stamping order events at increments finer than a 
millisecond would be limited without also improving the clock 
synchronization standards of the Plan.
---------------------------------------------------------------------------

    \574\ For example, under the requirements in the Plan, an order 
event at Broker-Dealer A could have a time stamp that is 1 
millisecond sooner than an order event at Broker-Dealer B even if 
the event at Broker-Dealer B actually occurred 99 milliseconds 
sooner. This could occur if Broker-Dealer A's systems are recording 
times 50 milliseconds ahead of NIST while Broker-Dealer B's systems 
are recording times 50 milliseconds behind NIST. Both broker-
dealers' systems would be within the Plan's allowable clock 
synchronization tolerance.
---------------------------------------------------------------------------

(3) Linking and Combining Data
    The Commission believes the requirements of Rule 613 and the Plan 
related to data linking would result in improvements to the accuracy of 
the data available to regulators, but the extent of the improvement 
would depend on the accuracy of the linking algorithm and the 
reformatting process that the Plan Processor would eventually develop.
    As discussed in the Baseline, data is currently stored in multiple 
formats, is difficult to merge, and results in errors during the 
merging process. Moreover, in some cases, the data sources do not 
capture the information necessary to link records, while in other cases 
linking must be done with algorithms that accomplish the linking with 
some degree of error.
    Rule 613(e)(1) generally requires the creation and maintenance of a 
Central Repository that would receive, consolidate, and retain 
information reported to the CAT.\575\ Further, the rule requires that 
the Central Repository store and make available to regulators data in a 
uniform electronic format and in a form in which all events pertaining 
to the same originating order are linked together in a manner that 
ensures timely and accurate retrieval of information reported to the 
CAT.\576\
---------------------------------------------------------------------------

    \575\ 17 CFR 242.613(e)(1); see also CAT NMS Plan, supra note 3, 
at Section 6.5(a) and (b).
    \576\ 17 CFR 242.613(e)(1).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the requirement that 
data be stored in a uniform format would eliminate the need for 
regulators who are accessing the data to reformat the data. As noted in 
the Baseline Section above, regulators face delays and inaccuracies 
when attempting to reformat and link data from multiple sources, such 
as linking trade blotters from several broker dealers with SRO audit 
trails. Given that the reformatting of CAT Data would be accomplished 
by individuals that likely specialize in this activity and that 
repetitively do so in a prescriptive and formalized way, this 
requirement could reduce the errors that could be introduced in the 
current regime where reformatting data is often done on an ad hoc basis 
by regulatory Staff who need to work with the data.\577\ In other 
words, the Plan Processor would develop a reformatting process by 
working with CAT Reporters to build an expertise in harmonizing the 
various formats that it receives from Reporters. The Plan Processor 
could then build, test, and refine the reformatting process with the 
ability to go back to the CAT Reporters for further clarification. Even 
if only one Staff member at each SRO or Affiliated Participant 
developed the expertise necessary to reformat each of the various 
formats and ran a reformatting process on order data, this would result 
in a duplication of efforts compared to one centralized entity (the 
Plan Processor) developing the expertise and running the reformatting 
process. Storing data in a linked format removes the need for 
regulators to link information from multiple lifecycle events of an 
order or orders themselves, which could further reduce errors and 
increase the usability of the data. The Commission recognizes, however, 
that despite the potential improvements, the CAT Data could still 
contain errors introduced in the reformatting and linking processes.
---------------------------------------------------------------------------

    \577\ Whether errors would decrease depends on the actual 
formatting process used.
---------------------------------------------------------------------------

    The process for linking orders designated in the CAT NMS Plan is 
similar to the process FINRA currently uses to link OATS records across 
market participants. However, the Plan would significantly improve the 
ability of regulators to link order events compared to OATS, and would 
link this activity to specific customers unlike current audit trail 
data.\578\ CAT Reporters must report a series of unique identifiers 
that are designed to allow records of events that occur over the 
order's lifecycle to be linked together to determine how the order was 
handled and how the order interacted with other orders.\579\ The Plan 
Processor must then create the initial linkages in the submitted data; 
unlike in OATS, the Plan Processor would verify these linkages as part 
of its data validity checks.\580\ In general, the CAT NMS Plan would 
link orders using the ``daisy chain approach,'' where CAT Reporters 
assign their own identifiers to each order event that the Plan 
Processor later replaces with a single identifier (the CAT Order-ID) 
for all order events pertaining to the same order.\581\ The Central 
Repository at a minimum must be able to create linkages between all 
order events that are internalized, between the Customer execution and 
a proprietary order in the case of a riskless principal transaction, 
between two broker-dealers, between a broker-dealer and an exchange, 
and vice versa, between executed orders and trade reports, between 
various legs of option/equity complex orders, and between order events 
for all equity option order handling scenarios that currently are or 
could potentially be used by CAT Reporters.\582\
---------------------------------------------------------------------------

    \578\ As discussed above, the Commission notes that SRO audit 
trails typically do not provide customer information but a recent 
FINRA rule change requires its members to report to OATS non-FINRA 
member customers who are broker-dealers. See supra note 407.
    \579\ See id. at Section 6.3(d)(i) through (vi).
    \580\ These data validations are to be established in a 
Technical Specifications document by the Plan Processor. 
Consequently, it is as yet unclear precisely how that process would 
occur. See id. at Appendix D, Section 7.2; Appendix C, Section 
A.3(a) (validations ensure that data is submitted in required 
formats and that lifecycle events can be accurately linked).
    \581\ See id. at Appendix D, Section 3.
    \582\ See id.
---------------------------------------------------------------------------

    Unlike OATS data, CAT Data would be less prone to breaking the 
order lifecycle chain when an order is sent across market participants 
because the order lifecycle linking procedure across reporters would be 
uniform and all industry participants would be reporters.\583\ 
Currently, linking procedures across SROs are not uniform, which 
complicates reconstructing order lifecycles. Furthermore, because some 
broker-dealers are not required to report to OATS, these broker-
dealers' activity cannot be completely reconstructed from audit trail 
data, and therefore, orders that they handle cannot be traced through 
their lifecycle, effectively severing the links between the order being 
received and the order's final disposition. Furthermore, as covered 
elsewhere, unlike other data sources, CAT Data would link orders to 
Customers because the Plan requires the order lifecycle to be linked 
back to the original Customer, and the Plan Processor must be able to 
fix linkages when error correction files are submitted.\584\ While the 
success of such a matching process is dependent on the accurate 
reporting of order linkages by CAT Reporters,\585\ Appendix D directs 
the Plan Processor to ensure that breaks in certain lifecycle linkages 
must not cause the entire lifecycle to break or

[[Page 30686]]

cause a CAT Reporter that correctly reports information to have its 
submission rejected.\586\
---------------------------------------------------------------------------

    \583\ See Section IV.D.2, supra.
    \584\ See id.
    \585\ For example, assume two broker-dealers handle an order 
that is ultimately executed on an exchange. Broker-Dealer A receives 
the order, and transmits it to Broker-Dealer B, that routes it to 
Exchange C where it is executed. In order for the Plan Processor to 
link these three order events, Broker-Dealer A would need to report 
the order and its routing to Broker-Dealer B; B would need to 
correctly echo A's order ID in its CAT reporting and its route to 
Exchange C, and C would need to correctly echo Broker-dealer B's 
order ID in its CAT reporting.
    \586\ See CAT NMS Plan, supra note 3, at Appendix D, Section 
7.3. The Commission also notes that, even if all CAT Reporters 
provide the required linking information, the success of the linking 
process would depend in part on the approach taken by the Plan 
Processor and whether or not that approach results in errors.
---------------------------------------------------------------------------

    The CAT NMS Plan does not provide sufficiently detailed information 
for the Commission to estimate the likely Error Rates associated with 
the linking process required by the CAT NMS Plan. Indeed, the 5% Error 
Rate covers data from CAT Reporters, but the Plan Processor could 
create errors as well, for example, through the linking process. 
Further, the Plan does not include details on how the Plan Processor 
would perform the linking process, identify broken linkages, and seek 
corrected reports from CAT Reporters to correct broken linkages. 
Instead, the Plan defers key decisions regarding the validation process 
until the selection of a Plan Processor and the development of 
Technical Specifications.\587\ Accordingly, while the centralized 
linking should generally promote efficiencies and accuracies in 
linking, these uncertainties make it difficult for the Commission to 
gauge the degree to which the process for linking orders across market 
participants and SROs would improve accuracy compared to existing data, 
including OATS.\588\
---------------------------------------------------------------------------

    \587\ The CAT NMS Plan describes the Plan Processor's 
responsibility for creating the Technical Specifications. See CAT 
NMS Plan, supra note 3, at Section 6.9.
    \588\ The Commission notes that the Plan Processor is required 
to create a quality assurance testing environment in which, during 
industry-wide testing, the Plan Processor provides linkage 
processing of data submitted, the results of which are reported back 
to Participants and to the Operating Committee for review. See CAT 
NMS Plan, supra note 3, at Appendix D, Section 1.2. This may help 
identify challenges in the linking process and allow for their early 
resolution.
---------------------------------------------------------------------------

    Uncertainties also prevent the Commission from determining whether 
the process for converting data into a uniform format at the Central 
Repository would improve the accuracy of the data over existing audit 
trail accuracy rates. The Plan includes two alternative approaches to 
data conversion. In the first, called Approach 1, CAT Reporters would 
submit data to the Central Repository in an existing industry standard 
protocol of their choice such as the Financial Information eXchange 
(``FIX'') protocol. In Approach 2, CAT Reporters would submit data to 
the Central Repository in single mandatory specified format, such as an 
augmented version of the OATS protocol. Under Approach 1, the data must 
be converted into a uniform format at the Central Repository in a 
second step. Under Approach 2, the data is already in a uniform format 
at the time of submission. The Plan defers the decision regarding which 
approach to take until the selection of a Plan Processor and the 
development of Technical Specifications.
    The Commission preliminarily believes that Approach 1 would likely 
result in a lower Error Rate than Approach 2. Under Approach 1, the CAT 
Reporters would presumably be submitting the actual data captured in 
real time without having to translate it into another format. In 
addition, under Approach 1, the conversion would be performed at the 
Central Repository by the Plan Processor, rather than the conversion 
being performed by each of the approximately 1,800 individual CAT 
Reporters or their vendors, which should reduce potential points where 
errors in formatting could be introduced, and provide for economies of 
scale.\589\ This would likely result in increased efficiency and 
accuracy due to specialization by the Plan Processor. However, while 
the Commission preliminarily believes that Approach 1 is likely to 
result in greater data accuracy than Approach 2, because of 
uncertainties regarding expected Error Rates and error rates in current 
data, the Commission is unable to evaluate the degree to which that 
approach would improve data accuracy relative to currently available 
data.\590\
---------------------------------------------------------------------------

    \589\ The Commission understands that a large proportion of 
reports that fail OATS validation checks do so because of errors in 
the translation of the data by the OATS reporter.
    \590\ The Plan Processor is required to have policies and 
procedures, including standards, to ensure the accuracy of the 
consolidation by the Plan Processor of the data, per Rule 
613(e)(4)(iii), which could mitigate errors as well. 17 CFR 
242.613(e)(4)(iii).
---------------------------------------------------------------------------

    Uniquely complex situations also pose a difficulty for assessing 
the ability of the Plan Processor to build a complete and accurate 
database of linked data that regulators could query for regulatory 
purposes. First, the Plan requires the Plan Processor, in consultation 
with industry, to develop a linking mechanism that would allow the 
option and equity legs of multi-leg trades to be linked within the 
Central Repository.\591\ Because the mechanism for this linkage is not 
yet determined, the Commission cannot assess the degree of the expected 
linkage error rate but, given that equities are not linked to options 
in current data sources, the Commission expects this feature to 
significantly improve the accuracy of linking equities to options.
---------------------------------------------------------------------------

    \591\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.1(b).
---------------------------------------------------------------------------

    Second, the Commission in the Proposing Release noted concern about 
the ability of the daisy chain approach to link a Customer order and a 
member's order from which the Customer is provided with an 
allocation.\592\ The Plan addresses this concern in the definition of 
an Allocation Report, which is a report that identifies accounts and 
subaccounts to which executed shares are allocated, but that is not 
required to be tied to a particular order or execution.\593\ The Report 
is required to be submitted to the Central Repository,\594\ but the 
lack of linkages in this case could make the resulting data less 
useful. Specifically, the content of the Allocation Report and the 
order lifecycles must contain content that permits regulators to draw 
certain conclusions about subaccount allocations even without a clean 
linkage.
---------------------------------------------------------------------------

    \592\ See Proposing Release, supra note 9, at 32576.
    \593\ See CAT NMS Plan, supra note 3, at Section 1.1.
    \594\ See id. at Section 6.4(d)(ii).
---------------------------------------------------------------------------

    While uncertainty about this issue remains, the Commission notes 
that the Plan's requirement for standardized Allocation Reports that 
consistently and uniquely identify Customers and reporters should 
improve the linkability of allocation information compared to current 
data, despite the limitation of direct linkage to order lifecycles, 
particularly in scenarios where potentially violative conduct is 
carried out by market participants operating through multiple broker 
dealers. This moderate improvement in the linkability of allocation 
data should improve regulators' ability to identify market participants 
who commit violations related to improper subaccount allocations.
(4) Customer and Reporter Identifiers
    The Commission preliminarily believes that the inclusion of unique 
Customer and Reporter Identifiers described in the CAT NMS Plan would 
increase the accuracy of customer and broker-dealer information in data 
regulators use and provide benefits to a broad range of regulatory 
activities that involve audit trail data.
    Currently, only a few data sources, which typically cover only a 
small portion of order lifecycles, include information regarding 
customers.\595\ Further, the customer information in these data sources 
is often incomplete

[[Page 30687]]

and inconsistent and the data is currently only obtainable by 
regulators making requests to broker-dealers directly. Additionally, 
although broker-dealer identifiers, in the form of MPID numbers, CRD 
numbers, and clearing broker numbers, appear within the current sources 
of audit trail data, because of the lack of a centralized database and 
because these identifiers may vary across exchanges, the Commission 
faces challenges in relying on these identifiers to accurately identify 
broker-dealer activity across the market.\596\
---------------------------------------------------------------------------

    \595\ See Section IV.D.2.b(1)A, supra. As discussed above, the 
Commission notes that SRO audit trails typically do not provide 
customer information but a recent FINRA rule change would require 
its members to report to OATS non-FINRA member customers who are 
broker-dealers. See supra note 407.
    \596\ See Section IV.D.2.b(1)D, supra.
---------------------------------------------------------------------------

    Rule 613 requires the use of a unique Customer-ID that identifies 
the Customer involved in CAT Reportable Events.\597\ Based on a concern 
that requiring CAT Reporters to report a Customer-ID to the Central 
Repository with each order would disrupt existing business practices 
and that reporting on that basis could risk the leakage of order and 
Customer information into the market,\598\ the Plan requires the Plan 
Processor to translate a unique Customer identifier assigned by the 
firm to its Customer (the Firm Designated ID) into the Customer-ID to 
be used in CAT.\599\ Specifically, the Plan requires CAT Reporters to 
provide a Firm Designated ID for each Customer, which is defined as the 
unique identifier designated by the broker-dealer for each trading 
account for purposes of providing data to the Central Repository.\600\ 
Upon receipt of the Firm Designated ID, the Plan Processor would be 
required to generate and associate one or more Customer-IDs for orders 
received by the Customer of the CAT Reporter, which would also be 
linked to the relevant Reportable Events for that Customer's order. 
Pursuant to the Plan, therefore, the Customer-ID would be generated 
from the Firm Designated ID,\601\ and the Plan Processor would create a 
unique Customer-ID that would be consistent across that Customer's 
activity regardless of the originating broker-dealer.
---------------------------------------------------------------------------

    \597\ Rule 613(c)(7) specifies the event records that would 
contain the Customer-ID. 17 CFR 242.613(c)(7). Event records that do 
not explicitly capture the Customer-ID could be linked to a record 
that does contain this information, typically using the Order-ID.
    \598\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.1.(a)(iii).
    \599\ Id. The Firm Designated ID could be anything, provided 
that it is unique across the firm for a given business date.
    \600\ See id. at Section 6.3(d)(i)(A), n.2; see also id. at 
Section 1.1.
    \601\ See CAT NMS Plan, supra note 3, at Appendix D, Section 3.
---------------------------------------------------------------------------

    To facilitate the creation of Customer-IDs, certain information 
would be submitted to the Central Repository. Specifically, broker-
dealers would be required to submit an initial set of information 
identifying a Customer to the Central Repository, including the Firm 
Designated ID and the other biographical information associated 
therewith including, for an individual, name, address, date of birth, 
ITIN/SSN, and individual's role in the account (e.g., primary holder, 
joint holder, guardian, trustee, person with power of attorney). With 
respect to legal entities, identifying information would include: name, 
address, EIN/LEI or other comparable common entity identifier.\602\ 
Broker-dealers must also submit to the Central Repository daily updates 
for reactivated accounts, newly-established or revised Firm Designated 
IDs, or other associated reportable Customer information.\603\ The Plan 
also calls for periodic refreshes of all Customer information from CAT 
Reporters.\604\ And the Plan Processor must have a way to periodically 
receive full account lists (i.e., not just the daily changes) to ensure 
the completeness and accuracy of the database.\605\
---------------------------------------------------------------------------

    \602\ See id. at Appendix C, Section A.1.(a)(iii); see also id. 
at Appendix D, Section 9.1. The CAT NMS Plan further provides, in 
the definition of Customer Identifying Information, that where the 
LEI or other comparable common identifier is provided, information 
covered by such common entity identifier (e.g., name, address) would 
not need to be separately submitted to the Central Repository. Id. 
at Section 1.1.
    \603\ See id. at Appendix C, Section A.1.(a)(iii).
    \604\ See id. at Appendix C, n.33 and Appendix D, Section 9.1.
    \605\ See id. at Appendix D, Section 9.1.
---------------------------------------------------------------------------

    Based on this information, the Plan Processor has to ``maintain 
information of sufficient detail to uniquely and consistently identify 
each Customer across all CAT Reporters, and associated accounts from 
each CAT Reporter.'' \606\ It is the Plan Processor's responsibility to 
document and publish, with the approval of the Operating Committee, the 
minimum list of data elements needed to maintain this association. 
Appendix D sets forth a list of minimum data elements needed to 
identify each Customer across all CAT Reporters, and associated 
accounts within a CAT Reporter, including SSN or ITIN, date of birth, 
current name, current address, previous name and address; and for legal 
entities, the LEI (if available), tax identifier, full legal name, and 
address.\607\ The Plan Processor must also support account structures 
that have multiple account owners and associated Customer information 
(e.g., joint accounts, managed accounts), and must be able to link 
accounts that move from one CAT Reporter to another,\608\ so it is 
possible that additional data fields would be necessary. Once a 
database is established, it must be maintained over time, and provide 
ready access to regulators to historical changes to that 
information.\609\
---------------------------------------------------------------------------

    \606\ See id. at Appendix C, Section A.1.(a)(iii).
    \607\ See id. at Appendix D, Section 9.1.
    \608\ See id.
    \609\ See id. at Article VI, Section 6.5(b) and (c).
---------------------------------------------------------------------------

    The Commission preliminarily believes that approval of the Plan 
would likely further remedy some of the inconsistencies and other 
limitations mentioned above. The Plan also contains provisions related 
to the accuracy of submitted Customer information. For example, a 
robust data validation process must be established for submitted 
Customer and Customer Account Information.\610\ There must also be a 
robust error resolution process for Customer information. The Central 
Repository must be able to accommodate minor data discrepancies (e.g., 
Road versus Rd in an address) on its own, while more substantial 
discrepancies (e.g., two different persons with the same SSN) would 
need to be transmitted to the CAT Reporter for resolution within the 
established error correction timeframe.\611\ While these elements 
should help increase the accuracy of Customer identification within 
CAT, there are some uncertainties, as the precise methods for 
submitting Customer data to the Central Repository, along with 
validations, are to be set out in Technical Specifications in the 
future.\612\
---------------------------------------------------------------------------

    \610\ See id. at Appendix C, Section A.1.(a)(iii); see also id. 
at Appendix D, Section 9.1.
    \611\ See id. at Appendix D, Section 3.
    \612\ See id. at Appendix C, Section A.1.(a)(iii).
---------------------------------------------------------------------------

    In addition to Customer-IDs, the CAT NMS Plan calls for the use of 
CAT-Reporter-IDs. The data to be reported to the Central Repository 
includes the SRO-assigned Market Participant Identifier (MPID) of the 
Industry Member or Participant receiving, routing, or executing the 
order.\613\ Upon receipt of the data, the Plan Processor must map the 
SRO-assigned MPID to a CAT-Reporter-ID, which would be assigned by the 
Plan Processor in the CAT data.\614\ Specifically, the Plan Processor 
must be able to assign a CAT-Reporter-ID to all reports submitted to 
the Central Repository based on SRO-assigned MPIDs. To the extent that 
the different Participants assign the same MPID to different CAT 
Reporters, the Plan Processor must be able to properly associate the 
correct SRO-assigned

[[Page 30688]]

MPIDs with the CAT Reporters.\615\ To do this, the Plan Processor must 
develop and maintain a mechanism for assigning CAT-Reporter-IDs based 
on the relevant SRO-assigned identifier (MPID, ETPID, or trading 
mnemonic) currently used by CAT Reporters in their order handling and 
trading processes, and also to change those identifiers should that be 
necessary (e.g., in the event of a merger), although changes are 
expected to be infrequent.\616\ Moreover, the SROs would have an 
obligation to provide all their SRO-assigned MPIDs to the Central 
Repository on a daily basis to ensure the accuracy of the information 
used to assign the CAT-Reporter-ID. The Plan Processor must capture, 
store, and maintain this information in a master/reference database, 
similar to how the Plan Processor would handle symbology changes.\617\ 
Finally, the validity of the SRO-assigned MPID is part of the initial 
file validation process upon receipt of a submission from a CAT 
Reporter, which should facilitate the accuracy of the Plan Processor's 
subsequent assignment of the CAT-Reporter-ID.\618\
---------------------------------------------------------------------------

    \613\ See Exemption Order, supra note 18, at 11863-11865; CAT 
NMS Plan, supra note 3, at Sections 6.3(d), 6.4(d).
    \614\ See CAT NMS Plan, supra note 3, at Appendix D, Section 3.
    \615\ See id.
    \616\ See id. at Appendix D, Section 10.1.
    \617\ See id. at Appendix D, Section 2 and Section IV.E.3.b, 
infra.
    \618\ See id. at Appendix D, Section 7.2.
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    The Commission preliminarily believes that the Customer-ID approach 
in the CAT NMS Plan would significantly improve the accuracy of 
customer information available to regulators. As noted above, existing 
data does not consistently capture information about the customers 
involved in a trade or other market event, which negatively affects the 
ability of regulators to accurately track customers' activities across 
broker-dealers. Additionally, customer identities in many existing data 
sources use inconsistent definitions and mappings across market 
centers. Accordingly, it is difficult for regulators to identify the 
trading of a single customer across multiple market participants.\619\ 
The Customer-ID approach specified in the CAT NMS Plan constitutes a 
significant improvement because it would consistently identify the 
Customer responsible for market activity, obviating the need for 
regulators to collect and reconcile Customer identification information 
from multiple broker-dealers. This should reduce the risk of the 
introduction of errors into the data by regulators and save a 
significant amount of time.
---------------------------------------------------------------------------

    \619\ See Adopting Release, supra note 9, at 45730; see also 
Section III.D.2.b(2)D, supra.
---------------------------------------------------------------------------

    Furthermore, the Commission preliminarily believes that the 
Reporter ID approach specified in the CAT NMS Plan would improve the 
accuracy of tracking information regarding entities with reporting 
obligations, namely broker-dealers and SROs. Because the Commission 
currently face challenges in using MPIDs and CRD numbers, for example, 
to identify broker-dealers across the market, the Plan's requirement 
for consistent unique Reporter IDs would eliminate the need for the 
Commission to reconcile broker-dealer information from multiple data 
sources, which can be a costly task for regulatory Staff that is often 
limited in terms of accuracy by the inconsistencies and non-uniqueness 
of current identifiers, and facilitate more efficient and effective 
regulatory activities that protect investors from harm. Moreover, 
because CAT Data would include more Industry Members in the Reporter ID 
category than are currently in any current set of broker-dealer 
identifiers, the Commission preliminarily believes that approval of the 
Plan would likely further remedy some of the inconsistencies and other 
limitations mentioned above.
(5) Aggregation
    Most CAT Data would be disaggregated data, meaning that CAT Data 
would not suffer from the limitations that characterize some of the 
aggregated data sources that regulators must currently use. As 
mentioned in the Baseline Section, subaccount allocation data and 
issuer repurchase data exist in forms that are aggregated and thus 
these data sources are limited for use in certain regulatory activities 
and interests.\620\ In particular, neither data type may necessarily 
indicate the individual executions. This data feature should promote 
more effective and efficient investigation by regulators of subaccount 
allocation issues and repurchase activity.
---------------------------------------------------------------------------

    \620\ See Section IV.D.2.b.(2)E, supra. Item 703 of Regulation 
S-K requires issuers to report aggregated issuer repurchase data to 
the Commission on an annual and quarterly basis in Forms 10-K and 
10-Q; see also 17 CFR 229.703 and supra note 451.
---------------------------------------------------------------------------

    To meet the requirements of Rule 613, the CAT NMS Plan includes a 
required allocation reporting tool that would provide information on 
executions that are allocated to multiple subaccounts.\621\ The 
Allocation Reports required by the Plan would provide the Firm 
Designated ID for any account(s), including subaccount(s) to which 
executed shares are allocated, the security that has been allocated, 
the identifier of the firm reporting the allocation, the price per 
share of shares allocated, the side of shares allocated, the number of 
shares allocated to each account, and the time of the allocation.\622\ 
The Firm Designated IDs could facilitate linking back to the Customer-
ID, so it may not be possible to perfectly link a Customer's aggregated 
orders, executions, and allocations for a day.\623\
---------------------------------------------------------------------------

    \621\ See CAT NMS Plan, supra note 3, at Section 
6.4(d)(ii)(A)(1).
    \622\ See Exemption Order, supra note 18, at 11867.
    \623\ The Commission notes, however, that there may be 
allocations made by non-broker-dealers that are difficult to track 
if they involve multiple broker-dealers, or are not tracked if they 
involve non-CAT-reporters. See Exemptive Request Letter, supra note 
16, at 26 n.61.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the CAT NMS Plan would 
improve the accuracy of allocation data compared to existing data 
available to regulators. It would provide disaggregated information on 
the identity of the security, the number of shares and price allocated 
to each subaccount, when the allocation took place, and how each 
Customer subaccount is associated with the master account. This would 
more accurately reflect which Customer ultimately received the shares 
that were purchased in a particular trade.
    The Commission anticipates that regulators may use CAT Data for 
some purposes that they use cleared data for now because CAT is 
significantly less aggregated. As discussed above, regulators often 
used equity and option cleared reports to identify market participants 
involved in trading activity relevant to an investigation.\624\ Because 
these are aggregated, regulators can use them to identify clearing 
firms that may have higher volume in a particular stock on a particular 
day, but the data does not identify actual trades, and, therefore, 
regulators make data requests to access the underlying disaggregated 
data necessary to identify broker-dealers or customers that may be 
involved in the activity under investigation. If the CAT NMS Plan is 
approved, CAT Data could be used to identify individual trades and 
customers or other market participants who were involved in such 
activity with less delay and without requiring ad hoc data requests to 
clearing firms identified using equity or option cleared reports.
---------------------------------------------------------------------------

    \624\ See Section IV.D.2.a(2), supra.
---------------------------------------------------------------------------

    Likewise, the disaggregated issuer repurchase information that 
would be in the CAT data would be an improvement in the accuracy of 
information available to regulators about those issuer repurchases. In 
particular, the Plan would require that the Plan Processor link 
Customer information to the order lifecycle and the report would 
identify as Customers those issuers that are

[[Page 30689]]

repurchasing their stock in the open market.\625\ This would provide 
much more granular data than what is available currently for open 
market issuer repurchases, which consists of monthly aggregations of 
those issuer repurchases.\626\
---------------------------------------------------------------------------

    \625\ See CAT NMS Plan, supra note 3, at Section 6.4(d)(iv).
    \626\ See Section IV.D.2.b(2)E, supra for baseline information 
on current issuer repurchase data.
---------------------------------------------------------------------------

c. Accessibility
    In general, the Commission believes that the Plan, if approved, 
would substantially improve the accessibility of regulatory data by 
providing regulators with direct access to the consolidated CAT Data, 
including some data elements that currently take weeks or months to 
obtain. However, there is some uncertainty regarding the process for 
regulatory access under the Plan, which creates uncertainty as to the 
degree of the expected improvement.\627\
---------------------------------------------------------------------------

    \627\ Accessibility refers to how the data is stored, how 
practical it is to assemble, aggregate, and process the data, and 
whether all appropriate regulators could acquire the data they need.
---------------------------------------------------------------------------

(1) Direct Access to Data
    As discussed in the Baseline Section,\628\ one of the significant 
limitations of current regulatory data sources is lack of direct 
access. Rule 613(e)(1) requires the Central Repository to store and 
make available to regulators data in a uniform electronic format and in 
a form in which all events pertaining to the same originating order are 
linked together in a manner that ensures timely and accurate retrieval 
of the information for all Reportable Events for that order.\629\ 
Additionally, Rule 613(a)(1)(ii) requires that the CAT NMS Plan discuss 
the time and method of access by which the data would be made available 
to regulators.\630\ The CAT NMS Plan implements this requirement in 
Section 6.5(c) \631\ and further describes the direct access methods 
and functionality in the discussion of Consideration 2 and in Appendix 
D.\632\ Section 6.5(c) requires that the Participants and the 
Commission have access to the Central Repository, and access to and use 
of the CAT Data stored at the Central Repository, and further requires 
a method of access to the data that provides for the ability to run 
searches and generate reports, including complex queries. Specifically, 
the Central Repository must store 6 years of CAT data in a ``convenient 
and usable standard electronic format'' that is ``directly available 
and searchable electronically without any manual intervention by the 
Plan Processor.'' \633\ This access to the Central Repository is solely 
for the purpose of performing regulatory functions and must include the 
ability to run searches and generate reports; further, the Plan 
requires that the Central Repository shall allow the ability to return 
results of queries that are complex in nature, including market 
reconstructions and the status of order books at varying time 
intervals.\634\ The Central Repository must also maintain valid 
Customer and Customer Account Information and permit regulators access 
to ``easily obtain historical changes to that information (e.g., name 
changes, address changes).'' \635\
---------------------------------------------------------------------------

    \628\ See Section IV.D.2.b(3), supra.
    \629\ 17 CFR 242.613(e)(1).
    \630\ 17 CFR 242.613(a)(1)(ii).
    \631\ See CAT NMS Plan, supra note 3, at Section 6.5(c).
    \632\ See id. at Appendix C, Section A.2(b) and (c), Appendix D, 
Section 8.
    \633\ See id. at Section 6.5(b)(i).
    \634\ See id. at Section 6.5(c)(ii), Appendix D, Section 8.1.
    \635\ See id. at Appendix C, Section A.1(a)(iii).
---------------------------------------------------------------------------

    The Commission recognizes that improving accessibility relative to 
the Baseline requires ensuring that enough SRO and Commission Staff 
members are able to use the direct access system supplied by the 
Central Repository when they need it. The ability to use the direct 
access system depends, among other things, on how user-friendly the 
system is, whether it has enough capacity for the expected use of the 
system, and whether it contains the functionality that the SROs and 
Commission Staff require. The Commission preliminarily believes that 
the minimum requirements for the direct access system would ensure that 
the Plan would improve on the Baseline of access to current data, 
including the process of requesting data.
    Appendix D provides minimum functional and technical requirements 
that must be met by the Technical Specifications to facilitate these 
methods of access, including the methods of selecting data that must be 
supported, query and bulk extract performance standards, and formats in 
which data could be retrieved.\636\ Specifically, CAT must be able to 
support a minimum of 3,000 regulatory users within the system, 600 of 
which might be accessing the system concurrently (which must be 
possible without an unacceptable decline in system performance) \637\: 
20% of the 3,000 users would be daily or weekly users, and 10% would 
require advanced regulatory-user access.\638\ Advanced user access 
includes the ability to run complex queries (versus basic users who may 
only run basic queries).\639\
---------------------------------------------------------------------------

    \636\ See id. at Appendix D, Section 8; see also Appendix C, 
Section A.2.
    \637\ See id. at Appendix D, Section 8.1.
    \638\ Id.
    \639\ See id. at Appendix D, Section 8.1.1. Both Basic and 
Advanced Users may be established by an employee at the regulator 
designated to set up access to the system, if the Plan Processor 
chooses to do so versus processing it themselves. See id. at 
Appendix C, Section D.12(k). However, providing access to PII must 
always be done directly by the Plan Processor. Id.
---------------------------------------------------------------------------

    Two types of query interfacing must be supported. The first, an 
online targeted query tool, must include a date or time range, or both, 
and allow users to choose from a broad menu of 26 pre-defined selection 
criteria (e.g., data type, listing market, size, price, CAT-Reporter-
ID, Customer-ID, or CAT-Order-ID), with more to be defined at a later 
date.\640\ Results must be viewable in the tool or downloadable in a 
variety of formats and support at least a result size of 5,000 or 
10,000 records, respectively, with a maximum result size to be 
determined by the Plan Processor.\641\ The other method for regulator 
access to the data is a user-defined direct query or bulk 
extraction.\642\ CAT must be able to support at least 3,000 daily 
queries, including 1,800 concurrently, and up to 300 simultaneous query 
requests with no performance degradation.\643\ Datasets generated by 
these direct queries could run from less than 1 GB to at least 10 TB or 
more of uncompressed data.\644\
---------------------------------------------------------------------------

    \640\ See id. at Appendix D, Section 8.1.1. This is a broad 
range of criteria from which to choose, although deferring 
additional selection fields to be defined at a later date makes the 
precise scope of this tool less certain.
    \641\ See id.
    \642\ See id. at Appendix D, Section 8.2.
    \643\ See id. at Appendix D, Section 8.2.1.
    \644\ See id.
---------------------------------------------------------------------------

    The actual method of query support is to be determined by the Plan 
Processor, but must provide an open API that allows use of regulator-
supplied common analytic tools (e.g., Python, Tableau) and ODBC/JDBC 
drivers.\645\ The Plan Processor is permitted to define a ``limited set 
of basic required fields (e.g., date and at least one other field such 
as symbol, CAT-Reporter-ID, or CAT-Customer-ID)'' that must be used by 
regulators in direct queries.\646\ Direct queries must be able to be 
created, saved, and run by regulators (either directly or at a 
prescheduled time), with automated delivery of scheduled query 
results.\647\ Finally, the Plan Processor must provide data models and 
data dictionaries for all processed and unlinked CAT Data, and

[[Page 30690]]

the Plan Processor must provide procedures and training to regulators 
that would use the direct query feature (although it is up to the Plan 
Processor whether to require these training sessions).\648\ 
Consideration was given to requiring the Plan Processor to create an 
online Report Center that would provide pre-canned reports (i.e., 
recurring reports of interest to regulators), but due to the added 
complexity and lack of quantifiable use cases, the decision was made 
not to proceed. The Plan, however, provides that this decision would be 
reassessed when broker-dealers begin submitting data to the CAT.\649\
---------------------------------------------------------------------------

    \645\ See id. at Appendix D, Section 8.2. A discussion of the 
types of data tools that bidders proposed to support can be found in 
Appendix C, Section A.2(b).
    \646\ See id. at Appendix D, Section 8.2.
    \647\ See id. at Appendix D, Section 8.2.1.
    \648\ See id. at Appendix D, Section 8.2.
    \649\ See id. at Appendix D, Section 8.2.2.
---------------------------------------------------------------------------

    All queries must be able to be run against raw (i.e., unlinked) or 
processed data, or both. A variety of minimum performance metrics apply 
to these queries.\650\ The Plan Processor must also provide certain 
support to regulatory users. Specifically, it must ``develop a program 
to provide technical, operational and business support'' to regulators, 
including creating and maintaining the CAT Help Desk to provide 
technical expertise to assist regulators with questions and/or 
functionality about the content and structure of the CAT query 
capability.\651\ The Help Desk must be available 24x7, support email 
and phone communication, and be staffed to handle 2,500 calls per month 
(although this resource would not be exclusive to regulators; CAT 
Reporters could use it as well).\652\ The Plan Processor must also 
develop tools, including an interface, to let users monitor the status 
of their queries and/or reports, including all in-progress queries/
reports and estimated time to completion.\653\ In addition, the Plan 
Processor must develop communication protocols regarding system status, 
outages, and other issues affecting access, including access by 
regulators to a secure Web site to monitor CAT System status.\654\ 
Furthermore, the Plan Processor must develop and maintain documentation 
and other materials to train regulators, including training on building 
and running queries.\655\
---------------------------------------------------------------------------

    \650\ See Section IV.E.1.IV.E.1.d(3), infra, for additional for 
additional information.
    \651\ See CAT NMS Plan, supra note 3, at Appendix D, Section 
10.2.
    \652\ See id. at Appendix D, Section 10.3.
    \653\ See id. at Appendix D, Section 10.2.
    \654\ See id.
    \655\ See id.
---------------------------------------------------------------------------

    The Commission preliminary believes that the direct access 
facilitated by provisions of the CAT NMS Plan described above is 
reasonably designed to substantially reduce the number of ad hoc data 
requests and provide access to substantial data without the delays and 
costly time and knowledge investments associated with the need to 
create and respond to data requests. For example, regulators do not 
have direct access to EBS or trade blotter data and therefore they must 
request such data when needed for regulatory tasks. As a result, in 
2014 the Commission made 3,722 EBS requests that generated 194,696 
letters to broker-dealers for EBS data.\656\ Likewise, the Commission 
understands that FINRA requests generate about half this number of 
letters. In addition, for examinations of investment advisers and 
investment companies, the Commission makes approximately 1,200 data 
requests per year. If the Plan is approved, the Commission 
preliminarily believes that the number of data requests would decline 
sharply. In addition to decreasing the amount of time currently 
required for regulators to access data sources, direct access to the 
CAT Data should decrease the costs that many regulators and market 
participants incur in either requesting data or fulfilling requests for 
data, such as the time and resources that regulators and data liaisons 
or back office IT staff at broker-dealers expend to understand and 
access broker-dealer data collected and provided in a particular way.
---------------------------------------------------------------------------

    \656\ See Section IV.D.2.b(2), supra, for discussion of ad hoc 
data requests.
---------------------------------------------------------------------------

    The Plan would also permit regulators to directly access customer 
information, which could improve the ability of SROs to conduct 
surveillance. Rule 613(e)(3) requires that the CAT provide the 
capability to run searches and generate reports.\657\ The CAT NMS Plan 
indicates that regulators would be able to run searches on many 
variables, including Customer-IDs.\658\ Appendix D further clarifies 
that both the online targeted query tool and the user-defined query/
bulk extract process would produce records that provide Customer-IDs, 
but that do not themselves provide Customer PII data.\659\ Data 
containing PII, however, could be obtained by regulatory personnel 
specifically authorized to obtain PII access, through a process to be 
documented by the Plan Processor.\660\ Currently, most regulatory data 
sources do not directly link to specific customers.\661\ Instead, 
regulators can use an ad-hoc data request to identify the customer and 
follow up with an EBS request to identify the customer's other activity 
across market participants. In this regard, CAT would provide SROs with 
direct access to the data that is necessary to conduct surveillance of 
the trading behavior of individual market participants in a more timely 
fashion.\662\
---------------------------------------------------------------------------

    \657\ 17 CFR 242.613(e)(3).
    \658\ See CAT NMS Plan, supra note 3, at Appendix D, Section 
8.2; See also supra note 632.
    \659\ See id. at Appendix D, Section 4.1.6, Appendix D, Section 
8.1.1-8.1.3.
    \660\ See id. at Appendix D, Section 4.1.6.
    \661\ The EBS system, trade blotters, order tickets, and trade 
confirmations are the existing data sources that contain customer 
information. See Section IV.D.2.b(1)A, supra; Adopting Release, 
supra note 9, at 45727. Also a recent FINRA rule change would 
require FINRA members to report to OATS non-FINRA member customers 
who are broker-dealers. See supra note 407.
    \662\ Currently, FINRA receives exchange data from SROs at the 
end of the trading day. It takes approximately three days for FINRA 
to process and translate this data to a common format before 
surveillance programs can run. As noted in Section IV.D.1.c, this 
economic analysis considers surveillance to be SROs running 
automated processes on routinely collected or in-house data to 
identify potential violations of rules or regulations.
---------------------------------------------------------------------------

(2) Consolidation of Data
    The Commission also preliminarily believes that, if approved, the 
Plan would improve accessibility by consolidating various data elements 
into one combined source, reducing data fragmentation. First, Rule 613 
requires that the Central Repository collect data that includes the 
trading and routing of a given security from all CAT Reporters.\663\ 
Currently, audit trail data for securities that are traded on multiple 
venues (multiple exchanges or off-exchange venues) is fragmented across 
multiple data sources, with each regulator generally having direct 
access only to data generated on the trading venues it regulates.\664\ 
If approved, the Plan would bring audit trail data related to trading 
on all venues into the Central Repository where it could be accessed by 
all regulators. Second, Rule 613 requires that the Plan include both 
equity and options data.\665\ Currently no existing regulatory audit 
trail data source includes both options and equities data, so 
collecting this data and providing access would allow regulators to 
monitor and run surveillance on the activity of market participants in 
related instruments, such as when a market participant has activity in 
both options and the options' underlying assets.
---------------------------------------------------------------------------

    \663\ See 17 CFR 242.613(c).
    \664\ The Commission recognizes that FINRA collects data from 
exchanges for which it provides regulatory services. However, this 
data is sent to FINRA by the exchanges with a delay, and the data 
formats are not standardized prior to receipt at FINRA.
    \665\ See 17 CFR 242.613(c)(5), (c)(6).
---------------------------------------------------------------------------

    The Plan would also marginally increase the accessibility of 
historical exchange data. In particular, Section 6.5(b)(i) of the Plan 
requires that the Central Repository make historical data available for 
not less than six years, in

[[Page 30691]]

a manner that is directly accessible and searchable electronically 
without manual intervention by the Plan Processor.\666\
---------------------------------------------------------------------------

    \666\ See CAT NMS Plan, supra note 3, at Section 6.5(b)(i). 
Currently, broker-dealers retain data for six years, but exchanges 
are only required to retain data for five years. In practice, the 
Commission understands that most exchanges generally retain data for 
at least six years, but at least one exchange does not retain data 
for six or more years. Therefore, the CAT NMS Plan would improve the 
historical data available from at least one exchange.
---------------------------------------------------------------------------

    In some dimensions of accessibility, the Commission notes that 
uncertainties exist that could affect the degree of expected 
improvement to accessibility. In particular, while the Plan provides 
detail on the method of access and the types of queries that regulators 
could run, many of the decisions regarding access have been deferred 
until after the Plan Processor is selected and finalizes the Technical 
Specifications; the Plan does not specify how regulators would access 
the data beyond providing for both an online query tool and user-
defined direct queries that could do bulk extractions.\667\ For 
example, while the Plan indicates that regulators would have an on-line 
targeted query tool and a tool for user-defined direct queries or bulk 
extraction,\668\ the Plan itself does not provide an indication for how 
user-friendly the tools would be or the particular skill set needed to 
use the tools for user-defined direct queries.
---------------------------------------------------------------------------

    \667\ See, e.g., CAT NMS Plan, supra note 3, at Appendix D, 
Section 8.2.
    \668\ See CAT NMS Plan, supra note 3 at Appendix D, Sections 
8.1.1, 8.1.2.
---------------------------------------------------------------------------

    In addition, it is not known whether the Plan Processor would host 
a server workspace that regulators could use for more complex analyses, 
what software tools would be available to regulators within such a 
workspace, and whether complex analyses would be able to be performed 
without extracting significant data from the Central Repository's 
database.
    While all Bidders included certain baseline functionality, such as 
some means for regulators to perform dynamic searches, data extraction, 
and ``off-line analysis,'' \669\ Bidders proposed using a variety of 
tools to provide regulators with access to and reports from the Central 
Repository, including direct access portals, web-based applications, 
and a number of different options for formatting the data provided to 
regulators in response to their queries.\670\ While all of these 
proposed solutions would presumably be compatible with achieving the 
accessibility benefits sought to be achieved through the Plan--i.e., 
they would all involve the aggregation of data from various sources and 
the provision of ready access to that data for regulators--the precise 
degree of functionality of the final system is still to be determined. 
Similarly, the details of system performance would depend on Service 
Level Agreements to be established between the Plan Participants and 
the eventual Plan Processor, which means that the details would not be 
known until after the Plan Processor is selected.\671\ These 
functionality and performance uncertainties create some uncertainty 
regarding the degree of improvement in regulatory access that would 
result from the Plan.
---------------------------------------------------------------------------

    \669\ See id. at Appendix C, Section A.2(b). ``Offline-
analysis'' refers to a regulator's analysis of data extracted from 
the Central Repository using the regulator's own analytical tools, 
software, and hardware to perform the analysis. See id. at Appendix 
C, Section A.2(b) n.77.
    \670\ See id. at Appendix C, Section A.2(b).
    \671\ See id. at Appendix D, Section 8.5.
---------------------------------------------------------------------------

    Nonetheless, the requirements included in the Plan describe a 
system that, once implemented, would result in the ability to query 
consolidated data sources that represents a significant improvement 
over the currently available systems. This substantial reduction in 
data delays and costly data investments would permit regulators to 
complete market reconstructions, analyses, and research projects, as 
well as investigations and examinations, more effectively and 
efficiently and would lead to improved productivity in the array of 
regulatory matters that rely on data, which should lead to improved 
investor protection.
d. Timeliness
    The Commission believes that, if approved, the CAT NMS Plan would 
significantly improve the timeliness of the reporting, compiling, and 
access of regulatory data, which would benefit a wide array of 
regulatory activities that use or could use audit trail data.\672\ The 
Commission preliminarily believes that the timeline for compiling and 
reporting data pursuant to the Plan constitutes an improvement over the 
processes currently in place for many existing data sources, and 
relative to some data sources the improvement is dramatic. 
Specifically, under the Plan, CAT Data would be compiled and made ready 
for access faster than is the case today for some data, both in raw and 
in corrected form; regulators would be able to query and manipulate the 
CAT Data without going through a lengthy data request process; and the 
data would be in a format to make it more immediately useful for 
regulatory purposes.
---------------------------------------------------------------------------

    \672\ Timeliness refers to when the data is available to 
regulators and how long it would take to process before it could be 
used for regulatory analysis.
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(1) Timing of Initial Access to Data
    The Plan would require CAT Reporters to report data to the Central 
Repository at times that are on par with current audit trails that 
require reporting, but the Central Repository would compile the data 
for initial access sooner than some other such data.\673\ Sections 
6.3(b)(ii) and 6.4(b)(ii) of the Plan require that the data required to 
be collected by CAT Reporters must be reported to the Central 
Repository by 8:00 a.m. Eastern Time on day T+1.\674\ These provisions 
also make clear that CAT Reporters could voluntarily report the 
required data prior to the deadline.\675\ As described in Table 4, the 
time at which data is reported often differs significantly from the 
time at which data is made available to various regulators.\676\ The 
CAT Data would be made available to regulators in raw form after it is 
received from reporters and passes basic formatting validations; the 
Plan does not specify exactly when these validations would be complete, 
but the requirement to link records by 12:00 p.m. (noon) Eastern Time 
on day T+1 gives a practical upper bound on this timeline for initial 
access to the data.\677\ Thus, to the extent that access to the raw 
(i.e., uncorrected and unlinked) data would be useful for regulatory 
purposes, the CAT NMS Plan provides a way for SROs and the Commission 
to access the uncorrected and unlinked data on day T+1 by 12:00 p.m. at 
the latest.
---------------------------------------------------------------------------

    \673\ Compiling data refers to a process that aggregates 
individual data records into a data set. This could occur when 
regulators request data and when the regulators receive data from 
multiple providers. This is different from the act of reporting 
data.
    \674\ See Rules 613(c)(3), (c)(4), 17 CFR 242.613(c)(3), (c)(4).
    \675\ See CAT NMS Plan, supra note 3, at Appendix D, Section 
3.1.
    \676\ See Table 4, supra.
    \677\ See CAT NMS Plan supra note 3, at Appendix C, Section 
A.2(a); Appendix C, Section A.3(e); Appendix D, Section 6.1.
---------------------------------------------------------------------------

    As noted in the Baseline, some current data sources compile and 
report the data with delays. For example, equity and option clearing 
data are not compiled and reported to the NSCC and OCC until day T+3, 
and thus access to this data by the Commission cannot occur until day 
T+3 at the very soonest. Under the Plan, raw data would be available 
two days sooner to all regulators. In other cases such as EBS reports, 
the data are not compiled and reported to a centralized database until

[[Page 30692]]

a request is received.\678\ OATS data is initially reported to FINRA by 
8 a.m. on the calendar day following the reportable event, and it takes 
approximately 24 hours for FINRA to run validation checks on the 
file.\679\ However, SROs do not currently access OATS information for 
regulatory purposes until after the error correction process is 
complete, which imposes a further delay of several business days for 
non-FINRA SRO regulators' use.\680\ Uncorrected OATS data is, however, 
available at 8 a.m. on the calendar day following the reportable event 
to FINRA (several hours more timely than CAT Data would be)--and is 
available to other regulators upon request several weeks later.\681\ 
Uncorrected CAT Data would be available to all regulators at 12:00 p.m. 
on day T+1, which is at least several days sooner than OATS is 
available to non-FINRA regulators; however, the Commission notes that 
because OATS is reportable on the calendar day following the OATS-
reportable event while CAT would be reported on T+1 following a 
Reportable Event, regulators' access to CAT Data from a day preceding a 
non-trading day (Fridays or days before market holidays) is likely to 
be less timely than it is currently, if that data would be covered by 
OATS. However, to the extent that the CAT would generally make CAT 
Data, which would include substantially more information than OATS 
data, available to all regulators, as opposed to just FINRA, in raw 
form by at least 12:00 p.m. Eastern Time on day T+1, the CAT would 
generally represent a significant improvement in timeliness for SROs 
other than FINRA compared to OATS.
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    \678\ The Commission notes, however, that broker-dealers could 
compile some data sources discussed in the baseline on the day of an 
event. For example, broker-dealers can compile trade blotters on the 
same day as the trade. Further, regulators can compile data received 
in real-time on the event day. For example, regulators can compile 
direct data feeds same day. The Commission does not believe the CAT 
NMS Plan would affect the timing of the compilation of such data, 
nor would it reduce the number of requests for data on the day of an 
event.
    \679\ See Adopting Release, supra note 9, at 45729.
    \680\ Id.
    \681\ See OATS Reporting Technical Specifications Section 8.1, 
available at https://www.finra.org/sites/default/files/OATSTechSpec_01112016.pdf.
---------------------------------------------------------------------------

    It is true that the Plan would not necessarily improve the 
timeliness of audit trail data in every case or for every regulator, as 
some kinds of audit trail data are currently timely for some 
regulators. For example, exchange SROs already have real-time access to 
their own audit trail data.\682\ However, regulators at other SROs or 
the Commission do not have real-time access to that exchange's audit 
trail, and therefore CAT Data could be more timely for these other 
regulators to access and use than obtaining that exchange's audit trail 
data through any means.\683\
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    \682\ Under the Plan, SROs that are exchanges would still have 
the same real-time access to their own audit trail data as they 
currently do. The Commission does not expect that all SRO audit 
trails will be retired on implementation of the Plan because 
exchanges may use such audit trails to implement their CAT reporting 
responsibilities. CAT reporting requirements would require that 
exchanges collect and report audit trail information from their 
systems even if they elect to replace their current audit trails. 
However, CAT requirements may improve the completeness of real-time 
exchange audit trail data if the information that exchanges collect 
under the Plan is more complete than what they currently collect.
    \683\ As noted, the SROs are generally currently able to access 
their own audit trail data on the same day of an event and the 
Commission is currently able to access some public data, like SIP 
and MIDAS, on the same day as an event. Further, OATS is available 
to FINRA at 8am on the day following an event. The Commission 
preliminarily does not expect the CAT NMS Plan would affect these 
regulators' access to most of these respective data sources.
---------------------------------------------------------------------------

(2) Timeliness of Access to Error-Corrected Data
    Further, the Commission preliminarily believes that the error 
correction process required by the CAT NMS Plan is reasonably designed 
to provide additional improvements in timeliness for corrected data. 
The CAT NMS Plan specifies that the initial data validation and 
communication of errors to CAT Reporters must occur by noon on day T+1, 
corrections of these errors must be submitted by the CAT Reporters to 
the Central Repository by 8:00 a.m. Eastern Time on day T+3, and the 
corrected data made available to regulators by 8:00 a.m. Eastern Time 
on day T+5.\684\ During this interim time period between initial 
processing and corrected data availability, ``all iterations'' of 
processed data must be available for regulatory use.\685\ The Central 
Repository must be able to receive error corrections at any time, even 
if late; \686\ if corrections are received after day T+5, the Plan 
Processor must notify the SEC and SROs of this fact and how re-
processing of the data (to be determined in conjunction with the 
Operating Committee) would be completed.\687\ Customer information 
(i.e., information containing PII) is processed along a slightly 
different timeline, but the outcome--corrected data available by 8:00 
a.m. Eastern Time on day T+5--is the same.\688\ One exception to this 
timeline is if the Plan Processor has not received a significant 
portion of the data, as determined according to the Plan Processor's 
monitoring, in which case the Plan Processor could determine to halt 
processing pending submission of that data.\689\
---------------------------------------------------------------------------

    \684\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.2(a), Appendix D, Section 6.1.
    \685\ Id. at Appendix D, Section 6.2.
    \686\ See id. at Appendix C, Section A.3.(b), Appendix D, 
Section 7.4.
    \687\ See id. at Appendix D, Section 6.2.
    \688\ Id.
    \689\ See id. at Appendix D, Section 6.1.
---------------------------------------------------------------------------

    As discussed in the Baseline Section, the error resolution process 
for OATS is limited to five business days from the date a rejection 
becomes available.\690\ The CAT NMS Plan requires a three-day repair 
window for the Central Repository.\691\ Accordingly, if the Plan is 
approved, regulators would generally be able to access partially and 
fully corrected data earlier than they would for OATS.\692\
---------------------------------------------------------------------------

    \690\ See Section IV.D.2.b(4) and supra note 465.
    \691\ Id. at Appendix C, Section A.2(a).
    \692\ CAT Data being available on day T+5 may be later than for 
other current SRO audit trails.
---------------------------------------------------------------------------

(3) Timeliness of direct access
    Improvements to timeliness would also result from the ability of 
regulators to directly access CAT Data.\693\ As noted in the Baseline 
Section and throughout this Section, most current data sources do not 
provide direct access to most regulators, and data requests can take as 
long as weeks or even months to process. Other data sources provide 
direct access with queries that can sometimes generate results in 
minutes--for example, running a search on all MIDAS message traffic in 
one day can take up to 30 minutes \694\--but only for a limited subset 
of the data to be available in CAT, and generally only for a limited 
number of regulators. Accordingly, the Commission preliminarily 
believes that the ability of regulators to directly access and analyze 
the scope of audit trail data that would be stored in the Central 
Repository should reduce the delays that are currently associated with 
requesting and receiving data. For many purposes, therefore, CAT Data 
could be up to many weeks more timely than current data sources. 
Furthermore, direct access to CAT Data should reduce the costs of 
making ad hoc data requests, including extensive interactions with data 
liaisons and IT staff at broker-dealers, SROs, and vendors, developing 
specialized knowledge of varied formats, data structures, and systems, 
and reconciling data.
---------------------------------------------------------------------------

    \693\ See CAT NMS Plan, supra note 3, Section 6.5(c).
    \694\ See Section IV.D.2.b(4) and supra note 468.
---------------------------------------------------------------------------

    As discussed above, Rule 613 generally requires that the Central

[[Page 30693]]

Repository would receive, consolidate, and retain CAT Data in a linked 
uniform electronic format and the regulators would be able to directly 
access the data stored in the Central Repository.\695\ Queries take 
time to return data because they need to look up information across a 
range of data records, process that data, and compile it into an output 
dataset. Therefore, the improvements to timeliness depend on how long 
the queries take to return data. The CAT NMS Plan specifies that 
regulators would be able to query the Central Repository using an 
online targeted query tool with response times ``measured in time 
increments of less than a minute'' for targeted queries and within 24 
hours for large or complex queries that either scan large amounts of 
data or return large result sets (i.e., sets of over 1 million 
records).\696\ That said, if the data request is limited to one 
business date, and that business date is within the last 12-month 
period, the query must not take more than 3 hours to run, regardless of 
complexity.\697\ Specifically, searches including only equities and 
options trade data must be returned within either 1 minute (events for 
a specific Customer or CAT Reporter with filterable other fields); 30 
minutes (events for a specific Customer or CAT Reporter in a specified 
date range of less than 1 month); or 6 hours (events for a single 
Customer or CAT Reporter in a specified date range of up to 12 months 
within the last 24 months).\698\ Searches including equities and 
options trade data, along with NBBO data, must return within 5 minutes 
for all orders for a specific security from a specific Participant; and 
for all orders, cancellations, and NBBO (or the protected best bid and 
offer) for a specific security, and with several similar types of 
searches, within a specified window not to exceed 10 minutes for a 
single date.\699\
---------------------------------------------------------------------------

    \695\ See Section IV.E.1.c, supra.
    \696\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.2(c); Appendix D, Section 8.1.2.
    \697\ Id. at Appendix D, Section 8.1.2.
    \698\ Id.
    \699\ Id.
---------------------------------------------------------------------------

    Furthermore, the search tool must include a resource management 
component, which could manage query requests to balance the workload, 
and categorize and prioritize query requests based on the input 
parameters, complexity of the query, and the volume of data to be 
parsed in the query, with the details on the prioritization plan to be 
provided at a later date.\700\ The database must support the estimated 
600 concurrent users to ensure that there is not an unacceptable 
decline in system performance.\701\ The direct query and bulk extract 
features are also designed to ensure timely regulatory access to 
critical data. For example, the bulk extract of an entire day's worth 
of data should be able to be transferred in less than four hours 
(assuming the regulator's network could support the required data 
transfer speeds).\702\ The Plan Processor must have an automated 
mechanism to monitor user-defined direct queries and bulk data 
extracts, including automated alerts of issues with bottlenecks and 
excessively long queues for queries or data extractions.\703\ Monthly 
reporting on the delivery and timeliness of these tools to the 
Operating Committee and regulators is required.\704\
---------------------------------------------------------------------------

    \700\ See id. at Appendix D, Section 8.1.2.
    \701\ See id. at Appendix D, Section 8.1.
    \702\ See id. at Appendix D, Section 8.2.2.
    \703\ Id.
    \704\ Id.
---------------------------------------------------------------------------

(4) Timeliness of use of Data
    The Commission also preliminarily expects the CAT NMS Plan to 
reduce the time required to process data before analysis. Currently 
regulators can spend days and up to months processing data they receive 
into a useful format.\705\ Part of this delay is due to the need to 
combine data across sources that could have non-uniform formats and to 
link data about the same event both within and across data sources. As 
discussed above, these kinds of linking processes can require 
sophisticated data techniques and substantial assumptions, and can 
result in imperfectly linked data. The Plan addresses this issue by 
stating that the Plan Processor must store the data in a linked uniform 
format.\706\ Specifically, the Central Repository will use a ``daisy 
chain'' approach to link and reconstruct the complete lifecycle of each 
Reportable Event, including all related order events from all CAT 
Reporters involved in that lifecycle.\707\ Therefore, regulators 
accessing the data in a linked uniform format would no longer need to 
take additional time to process the data into a uniform format or to 
link the data.\708\ Accordingly, the Commission preliminarily believes 
that the Plan would reduce or eliminate the delays associated with 
merging and linking order events within the same lifecycle. Further, 
the Plan would improve the timeliness of FINRA's access to the data it 
uses for much of its surveillance by several days because the corrected 
and linked CAT Data would be accessible on T+5 compared to FINRA's T+8 
access to its corrected and linked data combining OATS with exchange 
audit trails.
---------------------------------------------------------------------------

    \705\ See Section IV.D.2.b(4), supra.
    \706\ See CAT NMS Plan, supra note 3, at Section 6.5(b)(i). The 
CAT NMS Plan does not link allocations to order events; see also 17 
CFR 242.613(e)(1).
    \707\ See CAT NMS Plan, supra note 3, at Appendix D, Section 3.
    \708\ This does not apply if regulators choose to access raw 
data before the Central Repository processed them.
---------------------------------------------------------------------------

    The expected improvements to data accuracy discussed above could 
also result in an increase in the timeliness of data that is ready for 
analysis, although uncertainty exists regarding the extent of this 
benefit.\709\ As noted in the Baseline, regulators currently take 
significant time to ensure data is accurate beyond the time that it 
takes data sources to validate data. In some cases, data users may 
engage in a lengthy iterative process involving a back and forth with 
the staff of a data provider in order to obtain accurate data necessary 
for a regulatory inquiry. Accordingly, to the extent that the Central 
Repository's validation process is sufficiently reliable and complete, 
the duration of the error resolution process regulators would perform 
with CAT Data may be shorter than for current data. Further, to the 
extent that the Central Repository's linking and reformatting processes 
are sufficiently successful, the SROs and Commission may not need a 
lengthy process to ensure the receipt of accurate data. However, as 
discussed above, the Commission lacks sufficient information on the 
validations, linking, and reformatting processes needed to draw a 
strong conclusion as to whether users would take less time to validate 
CAT Data than they take on current data.\710\ Nonetheless, the 
Commission preliminarily believes that the linking and reformatting 
processes at the Central Repository would be more accurate than the 
current decentralized processes such that it would reduce the time that 
regulators spend linking and reformatting data prior to use.
---------------------------------------------------------------------------

    \709\ See Section IV.E.1.b, supra.
    \710\ As discussed above, Rule 613 requires a validation process 
but leaves significant flexibility on the specific validations to be 
performed and the timeline for validation. The details regarding 
required validations do not appear in the CAT NMS Plan and instead 
would appear in the Technical Specifications, which would not be 
finalized until after approval of the CAT NMS Plan. See Section 
IV.E.1.b, supra.
---------------------------------------------------------------------------

2. Improvements to Regulatory Activities
    The Commission preliminarily believes that improvements in the 
quality of available data have the potential to result in improvements 
in the analysis and reconstruction of market events; market analysis 
and research in support of regulatory

[[Page 30694]]

decisions; and market surveillance, examinations, investigations, and 
other enforcement functions.
    Regulators' abilities to perform analyses and reconstructions of 
market events would likely improve, allowing regulators to more quickly 
and thoroughly investigate these events. This would allow regulators to 
provide investors and other market participants with more timely and 
accurate explanations of market events, and to develop more effective 
responses to such events. The availability of the CAT Data would 
benefit market analysis and research in support of regulatory 
decisions, facilitating an improved understanding of markets and 
informing potential policy decisions. Regulatory initiatives that are 
based on an accurate understanding of underlying events and are 
narrowly tailored to address any market deficiency should improve 
market quality and benefit investors.
    In the Commission's preliminary view, CAT Data would substantially 
improve both the efficiency and effectiveness of SRO broad market 
surveillance programs, which could benefit investors and market 
participants by allowing regulators to more quickly and precisely 
identify and address a higher proportion of market violations that 
occur, as well as prevent violative behavior through deterrence.
    The Commission also preliminarily believes that CAT Data would 
enhance the SROs' and the Commission's abilities to effectively target 
risk-based examinations of market participants who are at elevated risk 
of violating market rules, as well as their abilities to conduct those 
examinations efficiently and effectively, which could also contribute 
to the identification and resolution of a higher proportion of 
violative behavior in the markets. The reduction of violative behaviors 
in the markets should benefit investors by providing investors with a 
safer environment for allocating their capital and making financial 
decisions. A reduction in violative behaviors could also benefit market 
participants whose business activities are harmed by the violative 
behavior of other market participants. The Commission further believes 
that more targeted examinations could also benefit market participants 
by resulting in proportionately fewer burdensome examinations of 
compliant market participants. A significant percentage of Commission 
enforcement actions involve trade and order data,\711\ and the 
Commission also preliminarily believes that CAT Data would 
significantly improve the efficiency and efficacy of enforcement 
investigations, including insider trading and manipulation 
investigations.
---------------------------------------------------------------------------

    \711\ In 2015, the Commission filed 807 enforcement actions, 
including 39 related to insider trading, 43 related to market 
manipulation, 124 related to broker-dealers, 126 related to 
investment advisers/investment companies, and one related to 
exchange or SRO duties. In 2014, the Commission filed 755 
enforcement actions, including 52 related to insider trading, 63 
related to market manipulation, 166 related to broker-dealers, and 
130 related to investment advisers/investment companies, many of 
which involved trade and order data. See Year-by-Year SEC 
Enforcement Statistics, available at https://www.sec.gov/news/newsroom/images/enfstats.pdf. The total number of actions filed is 
not necessarily the same as the number of investigations. An 
investigation may result in no filings, one filing, or multiple 
filings. Additionally, trade and order data may be utilized in 
enforcement investigations that do not lead to any filings. Based on 
these numbers, the Commission estimates that 30-50% of its 
enforcement actions incorporate trading or order data. A portion of 
FINRA's 1,397 disciplinary actions in 2014 and 1,512 in 2015 also 
involved trading or order data. See http://www.finra.org/newsroom/statistics.
---------------------------------------------------------------------------

    The Commission further anticipates additional benefits associated 
with enhanced abilities to handle tips, complaints and referrals, and 
improvements in the speed with which they could be addressed, 
particularly in connection with the significant number of tips, 
complaints, and referrals that relate to manipulation, insider trading, 
or other trading and pricing issues.\712\ The benefits to investor 
protection of an improved tips, complaints, and referrals system would 
largely mirror the benefits to investor protection that would accrue 
through improved surveillance and examinations efficiency.
---------------------------------------------------------------------------

    \712\ In fiscal years 2014 and 2015, the Commission received 
around 15,000 entries in its TCR system, approximately one third of 
which related to manipulation, insider trading, market events, or 
other trading and pricing issues.
---------------------------------------------------------------------------

a. Analysis and Reconstruction of Market Events
    The Commission preliminarily believes that, if approved, the Plan 
would improve regulators' ability to perform analysis and 
reconstruction of market events. As noted in the Adopting Release, the 
sooner regulators can complete a market reconstruction, the sooner 
regulators can begin reviewing an event to determine what happened, who 
was affected and how, if any regulatory responses might be required to 
address the event, and what shape such responses should take.\713\ 
Furthermore, the improved ability for regulators to generate prompt and 
complete market reconstructions could provide improved market 
knowledge, which could assist regulators in conducting retrospective 
analysis of their rules and pilots.
---------------------------------------------------------------------------

    \713\ See Adopting Release, supra note 9, at 45732.
---------------------------------------------------------------------------

    The fragmented nature of current audit trail data and the lack of 
direct access to such data renders market reconstructions cumbersome 
and time-consuming. Currently, the information needed to perform these 
analyses is spread across multiple audit trails, with some residing in 
broker-dealer order systems and trade blotters. Requesting the data 
necessary for a reconstruction of a market event often takes weeks or 
months and, once received, regulators then need weeks to reconcile 
disparate data formats used in different data sources. For example, on 
the afternoon of May 6, 2010, the U.S. equity and equity futures 
markets experienced a sudden breakdown of orderly trading when indices, 
such as the Dow Jones Industrial Average Index and the S&P 500 Index, 
fell about 5% in five minutes, only to rebound soon after (the ``Flash 
Crash'').\714\
---------------------------------------------------------------------------

    \714\ See CFTC and SEC, Findings Regarding the Market Events of 
May 6, 2010: Report of the Staffs of the CFTC and SEC to the Joint 
Advisory Committee on Emerging Regulatory Issues (September 30, 
2010), available at http://www.sec.gov/news/studies/2010/marketevents-report.pdf.
---------------------------------------------------------------------------

    The lack of readily available trade and order data resulted in 
delays and gaps in the Commission's analysis of the events of the Flash 
Crash. Ultimately, it took Commission Staff nearly five months to 
complete an accurate representation of the order books of the equity 
markets for May 6, 2010.\715\ Even then, the reconstruction only 
contained an estimated 90% of trade and order activity for that day.
---------------------------------------------------------------------------

    \715\ For a further explanation of the limitations data 
deficiencies imposed on the Commission's investigation into the 
Flash Crash, see Adopting Release, supra note 9, at 45732-33.
---------------------------------------------------------------------------

    Regulators, such as the Commission and SROs on whose exchanges 
events took place, faced similar challenges when reconstructing events 
around the May 2012 Facebook IPO, the August 2012 Knight Securities 
``glitch,'' and the August 2013 NASDAQ SIP outage.\716\ In addition, 
during the financial crisis in 2008, the lack of direct access to audit 
trail data resulted in the Commission being unable to quickly and 
efficiently conduct analysis and reconstruction of

[[Page 30695]]

market events. The state of OATS data in 2008 also limited FINRA's 
ability to analyze and reconstruct the market during the financial 
crisis because FINRA could not yet augment its OATS data with exchange 
data and OATS did not include market maker quotations. As a result, 
regulators had little information about the role of short sellers in 
market events and the identity of short sellers during the financial 
crisis, for example.\717\ Some of these shortcomings in regulatory data 
still apply today.\718\
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    \716\ For background information on these events, see SEC Press 
Release, SEC Charges NASDAQ for Failures During Facebook IPO (May 
29, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171575032; In the Matter of Knight Capital Americas 
LLC, Securities Exchange Release Nos. 70694 (October 16, 2013); 
73639 (November 19, 2014), 79 FR 72252, 72255, n.32 (December 5, 
2014) (discussing NASDAQ SIP outage); see also Adopting Release, 
supra note 9, at 45732-33 (discussing difficulty of analyzing and 
reconstructing market events in absence of a consolidated audit 
trail).
    \717\ See Short Sale Reporting Study, supra note 413. To resolve 
this lack of information, the Commission issued an emergency order 
creating a new filing requirement for 13f filers to report their 
short positions and short sales to the Commission weekly on Form SH. 
See former Rule 10a-3T; available at http://www.sec.gov/rules/other/2008/34-58591.pdf; http://www.sec.gov/rules/other/2008/34-58591a.pdf; http://www.sec.gov/rules/other/2008/34-58724.pdf; http://www.sec.gov/rules/final/2008/34-58785.pdf; http://www.sec.gov/news/press/2008/2008-209.htm; http://www.sec.gov/divisions/marketreg/shortsaledisclosurefaq.htm. This data was kept confidential. After 
evaluating whether the benefits from the data justified the costs, 
the Commission let this requirement expire, replacing it with 
additional public data. See SEC Press Release, SEC Takes Steps to 
Curtail Abusive Short Sales and Increase Market Transparency (July 
27, 2009), available at http://www.sec.gov/news/press/2009/2009-172.htm. This public data did not identify the short sellers as the 
Form SH data did. In addition, using data requested from SROs, the 
Commission conducted two studies on short selling during September 
2008. These studies required data requests to select exchanges, took 
two months to complete and did not have information identifying 
short sellers. See ``Analysis of a Short Sale Price Test Using 
Intraday Quote and Trade Data'' available at http://www.sec.gov/comments/s7-08-09/s70809-368.pdf and ``Analysis of Short Selling 
Activity during the First Weeks of September 2008'' available at 
http://www.sec.gov/comments/s7-08-09/s70809-369.pdf.
    \718\ For example, OATS still does not include all principal 
orders or option data. See Section IV.D.2.b(1)A, supra. Because 
FINRA collects some exchange data, FINRA is able to merge exchange 
quotes with OATS.
    And although there is a proposed FINRA rule that will require 
FINRA members to report to OATS identification for their non-FINRA 
member customers who are broker-dealers, even after approval of this 
rule OATS will lack identification for customers who are not broker-
dealers. See Section IV.D.2.b(1)B, supra.
---------------------------------------------------------------------------

    More generally, regulators face significant difficulties in using 
some current data sources for a thorough market reconstruction. Some of 
the most detailed data sources, including sources like EBS and trade 
blotters that identify customers, are impractical for broad-based 
reconstructions of market events. In particular, including EBS data for 
a reconstruction of trading in the market for even one security on one 
day could involve many, perhaps hundreds, of requests, and would 
require linking that to SRO audit trail data or public data.\719\ 
Further, because EBS data lacks time stamps for certain trades,\720\ 
use of EBS data in market reconstructions requires supplementation with 
data from other sources, such as trade blotters.
---------------------------------------------------------------------------

    \719\ See Section IV.D.2.b(3), supra (noting that in 2014, the 
SEC made 3,722 EBS requests which generated 194,696 letters to 
broker-dealers requesting EBS data). The Commission understands that 
FINRA makes about half this number of requests.
    \720\ Large traders who file Form 13H with the Commission are 
assigned a ``large trader identification number'' by the Commission 
and must provide that number to their brokers for inclusion in the 
EBS records that are maintained by the clearing brokers. Rule 13h-1, 
subject to relief granted by the Commission, requires that execution 
time be captured (to the second) for certain categories of large 
traders. See Sections IV.D.2.a.(3) and IV.D.2.b, supra (discussing 
the EBS system and large trader reports and the limitations of these 
data sources in performing market reconstructions).
---------------------------------------------------------------------------

    The Commission therefore expects that improvements in data 
completeness and accuracy from the Plan would enhance regulators' 
ability to perform analyses and to reach conclusions faster in the wake 
of a market event by reducing the time needed to collect, consolidate 
and link the data. The inclusion of Customer-IDs and consistent CAT-
Reporter-IDs in CAT would allow regulators to more effectively and 
efficiently identify market participants that submit orders through 
several broker-dealers and execute on multiple exchanges and whose 
activity may warrant further analysis. This would be useful if 
regulators were interested in determining if a particular trader or 
category of traders had some role in causing the market event, or how 
they might have adjusted their behavior in response to the event, which 
could amplify the effects of the root cause or causes. Furthermore, the 
clock synchronization requirements of the Plan would improve the 
ability of regulators to sequence some events that happened in 
different market centers to better identify the causes of market 
events. Overall, the Commission preliminarily believes that, if the 
Plan is approved, regulators would have dramatically improved ability 
to identify the market participants involved in market events.
    The Commission further believes that better data accessibility 
would significantly improve the ability of regulators to analyze and 
reconstruct market events. As noted above, CAT Data would improve data 
accessibility relative to every other data source because all SROs and 
the Commission would have direct access to CAT Data. If the Plan is 
approved, much of this information would be housed in the Central 
Repository with query capabilities that would allow regulators to 
access raw data beginning the day after an event.\721\ Further, as 
mentioned below in the SRO Surveillance Section, the CAT Data would 
link Reportable Events, which could allow regulators to respond to 
market events more rapidly because they would not need to process 
corrected and linked data before starting their analyses.\722\
---------------------------------------------------------------------------

    \721\ While the Commission recognizes that some data sources are 
currently available earlier, those data sources are so fragmented as 
to make collecting them for a broad-based market reconstruction 
infeasible.
    \722\ Such benefits could be limited for market events that 
require linked data within five days of an event or if the linking 
algorithm in the Central Repository introduces data errors.
---------------------------------------------------------------------------

b. Market Analysis and Research
    The Commission preliminarily believes that the CAT NMS Plan would 
benefit the quality of market analysis and research that is produced to 
increase regulatory knowledge and support policy decisions and would 
lead to a more thorough understanding of current markets and emerging 
issues. These expected benefits would stem from improvements in 
accessibility, accuracy, and completeness of regulatory data. 
Improvements in regulatory market analysis and research aimed at 
informing regulatory decisions would benefit investors and market 
participants by improving regulators' understanding of the intricacies 
of dynamic modern markets and how different market participants behave 
in response to policies and information. These more nuanced and more 
thorough insights would help regulators to identify the need for 
regulation that specifically tailors policies and interventions to the 
diverse landscape of market participants and conditions that 
characterize current financial markets, as well as assist them in 
conducting retrospective analysis of their rules and pilots.
    A lack of direct access to necessary data, along with inaccuracies 
in the data that are available, currently limits the types of analyses 
that regulators can conduct. These data limitations constrain the 
information available to regulators when they are considering the 
potential effects of regulatory decisions. For example, in January 2010 
the Commission published a concept release on equity market structure 
that discusses how the markets have rapidly evolved from trading by 
floor-based specialists to trading by high-speed computers.\723\ The 
concept release poses a number of questions about the role and impact 
of high-frequency trading

[[Page 30696]]

strategies and the movement of trading volume from the public national 
securities exchanges to over-the-counter trading venues such as dark 
pools. Over the past five years there has been considerable discussion 
about these topics by regulators, market participants, the media, and 
the general public. Nevertheless, limitations in the completeness and 
accessibility of the available data have limited the research that 
followed the concept release.
---------------------------------------------------------------------------

    \723\ See Concept Release on Equity Market Structure, supra note 
733; see also Adopting Release, supra note 9, at 45733 (discussing 
the Concept Release on Equity Market Structure).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the CAT NMS Plan 
improves this situation, benefiting market analysis and research in 
support of SRO and Commission rulemaking. It would provide direct 
access to data that currently requires an often lengthy and labor-
intensive effort to request, compile, and process. Additionally, the 
expected improvements in accuracy and completeness could benefit 
efforts to analyze the activities of particular categories of market 
participants, understand order routing behavior, identify short selling 
and short covering trades, issuer repurchases, and related topics. The 
requirement to store the data in a uniform format in the Central 
Repository is particularly important, as linking and normalizing data 
from disparate sources in different formats is a major component of 
completing many types of analyses and currently requires a significant 
amount of time. The Plan would provide direct access to data that 
regulators could use to more directly study issues such as high 
frequency trading, maker-taker pricing structures, short selling, 
issuer repurchases, and ETF trading.
    The CAT NMS Plan could improve market analysis and research 
concerning HFT by providing regulators with direct access to more 
uniform and comprehensive data that identifies HFT activity more 
precisely compared to existing academic research that regulators 
currently utilize. Existing academic research on high frequency trading 
cannot precisely identify high frequency traders or their trading 
activity and more comprehensive regulatory analysis on high frequency 
trading currently relies on fragmented data that is cumbersome to 
collect and process.\724\ For both academics and regulators, studying 
high frequency traders is currently difficult because these traders 
typically trade across many exchanges, and often off-exchange as well. 
NASDAQ distributes a trade and quote dataset to researchers for the 
purposes of performing academic studies on high frequency trading. This 
dataset identifies the trading and quoting activity of a group of high 
frequency traders identified by NASDAQ, but only includes activity from 
the NASDAQ exchange. Other exchanges and market centers currently do 
not provide such data to academics or the public.\725\ As a result, 
studies of high frequency trading have been limited in their ability to 
examine thoroughly such strategies and their impact on the market. 
Because data on high-frequency trading tends to be fragmented across 
many data sources, it is difficult even for regulators to thoroughly 
analyze their aggregate activity level, study how their activity on one 
exchange affects their activity on another, and study the effect of 
particular high frequency strategies on market quality.\726\
---------------------------------------------------------------------------

    \724\ See High Frequency Trading, literature review, available 
at https://www.sec.gov/marketstructure/research/hft_lit_review_march_2014.pdf.
    \725\ Even if other exchanges did provide such data, the NASDAQ 
data fields do not include the identities of the high frequency 
traders. As a result researchers would not be able to study the 
activity of the same high frequency trader across exchanges.
    \726\ See infra note 724.
---------------------------------------------------------------------------

    The Plan also would provide information on how various broker-
dealers route their customer orders and would allow regulators to study 
whether access fees and rebates drive routing decisions as much as 
execution quality considerations. This could inform debates about 
effects of conflicts of interest created by such maker-taker pricing. 
Studies of maker-taker pricing require information on routing decisions 
and how routing affects execution quality. Current academic studies of 
maker-taker pricing rely on data that provide imprecise information 
that cannot directly link routing and execution quality, and current 
similar research carried out by some regulators is often hindered by 
the significant amount of time it takes to obtain the relevant data 
from all market centers. However, the Plan would provide regulators 
with direct access to a data source that would link order lifecycle 
events together in a way that would allow regulators to more thoroughly 
analyze how and where broker-dealers route various order types. This 
could assist regulators in analyzing the importance of fees to the 
routing decisions and the ultimate impact on investors of any conflicts 
of interest in broker-dealer routing decisions. Such analysis could 
inform debates regarding whether maker/taker pricing structures are 
harmful to market structure.
    Similarly, the Plan would provide regulators with data to better 
understand the nature of short selling. Existing studies of the effects 
of short selling lack the ability to associate short selling activity 
with customer-level data, and also lack the ability to distinguish 
buying activity that covers short positions from buying activity that 
establishes new long positions. The Plan would allow regulators to 
examine, for example, how long particular types of traders hold a short 
position and what types of traders short around corporate events.
    The Plan, in requiring information about a Customer, would also 
facilitate studies of how certain entities other than natural persons 
trade and the market impact of their trading. For example, existing 
information on repurchases is aggregated at the monthly and quarterly 
level while the CAT Data on issuer repurchases would be much more 
granular. CAT Data would provide information that could determine the 
size and timing of issuer repurchases, for example. In addition, CAT 
Data would provide information that could help identify open market 
repurchases whereas existing data does not distinguish the type of 
repurchase. As such, the Plan would facilitate research that addresses 
the timing of issuer repurchases around corporate events or stock 
option grants and exercises, the extent to which issuers use the safe 
harbor in Rule 10b-18, and how aggressively issuers trade in the 
market. In addition, CAT Data on the trading of leveraged ETFs, 
particularly the end of day rebalancing, could shed light on how the 
leveraged ETFs relate to market volatility. In addition, Customer 
information should facilitate analyses of the secondary market trading 
of ETF Authorized Participants in their ETFs.\727\ This could help 
regulators better understand the arbitrage process between an ETF and 
its underlying securities and the limitations of that arbitrage.
---------------------------------------------------------------------------

    \727\ The CAT NMS Plan does not include requirements to record 
or report information on the creation or redemption of ETF shares.
---------------------------------------------------------------------------

    The Commission preliminarily believes that CAT Data would also 
better inform SROs and the Commission in rulemakings and assist them in 
conducting retrospective analysis of their rules and pilots. In 
particular, SROs would be able to use order data that is currently not 
available to examine whether rule changes are in the interest of 
investors. For example, direct access to consolidated audit trail data 
that identifies trader types could help an SRO examine whether a new 
rule improved market quality across the entire market and whether it 
benefitted retail and institutional investors specifically. Further, 
CAT Data would allow SROs to examine whether a rule

[[Page 30697]]

change on another exchange was in the interest of investors and whether 
to propose a similar rule on their own exchange.
c. Surveillance and Investigations
    The Commission preliminarily believes that the enhanced 
surveillance and investigations made possible by the implementation of 
the CAT NMS Plan could allow regulators to more efficiently identify 
and investigate violative behavior in the markets and could also lead 
to market participants that currently engage in violative behavior 
reducing or ceasing such behavior, to the extent that such behavior is 
not already deterred by current systems. The current markets are 
characterized by surveillance systems that identify violators so that 
regulators may address these violations. Given that violative behavior 
is identifiable in current markets, and potential violators know that 
there is a positive probability that they would be caught by 
surveillance should they commit a violation, fewer potential violators 
commit violations than would do so in markets that had no surveillance. 
Potential violators' expected probability of being caught influences 
their likelihood of committing a violation.\728\ It then follows that 
any system change that increases the likelihood of violative behavior 
detection would increase potential violators' expected probability of 
being caught and thus reduce the likelihood that potential violators 
would commit a violation.
---------------------------------------------------------------------------

    \728\ It is well established in the economics and political 
science literature that common knowledge among market actors can 
lead to the deterrence of behaviors; see, e.g., Schelling, Thomas, 
``The Strategy of Conflict: Prospectus for a Reorientation of Game 
Theory,'' Journal of Conflict Resolution, Vol. 2 No. 3 (1958) and 
Ellsberg, Daniel, ``The Crude Analysis of Strategic Choices,'' 
American Economic Review, Vol. 51, No. 2 (1961). Therefore, market 
participants with knowledge of improvements in the efficiency of 
market surveillance, investigations, and enforcements, and 
consequently the increased probability of incurring a costly 
penalty, could be deterred from participating in violative behavior.
---------------------------------------------------------------------------

    Specifically, if market participants believe that the existence of 
CAT, and the improved regulatory activities that result from 
improvements in data and data processes, increase the likelihood of 
regulators detecting violative behavior, they could reduce or eliminate 
the violative activity in which they engage to avoid incurring the 
costs associated with detection, such as fines, legal expenses, and 
loss of reputation. Such a reduction in violative behavior would 
benefit investor protection and the market as investors would no longer 
bear the costs of the violative behavior that would otherwise exist in 
the current system. Many of the improvements that would result from CAT 
could also allow regulators to identify violative activity, such as 
market manipulation, more quickly and reliably, which could improve 
market efficiency by deterring market manipulation and identifying and 
addressing it more quickly and more often when it occurs.\729\
---------------------------------------------------------------------------

    \729\ For example, as discussed in Section IV.E.2.c(1), the Plan 
would allow regulators to more efficiently conduct cross-market and 
cross-product surveillance relative to surveillance using current 
data sources, and the requirement that data be consolidated in a 
single database would assist regulators in detecting violative (but 
not obvious) activity. To the extent that market participants are 
aware of the current challenges to regulators in performing cross-
market surveillance and aggregating data across venues, and to the 
extent that they believe that their violative behavior is more 
likely to be detected if regulators' ability to perform those 
activities improves, they may reduce or eliminate violative behavior 
if the CAT Plan is approved.
---------------------------------------------------------------------------

(1) SRO Surveillance
    The Commission preliminarily believes that the CAT NMS Plan would 
result in improvements in SROs' surveillance capabilities and that many 
of the benefits to SRO surveillance stem from improvements to data 
completeness. These benefits encompass a number of improvements to 
surveillance, including: detection of insider trading; surveillance of 
principal orders; cross-market and cross-product surveillance, and 
other market surveillance activities.
    Rule 613(f) requires SROs to implement surveillances reasonably 
designed to make use of the CAT Data.\730\ Further, data improvements 
resulting from the Plan would improve regulators' ability to perform 
comprehensive and efficient surveillance. As a result, the market 
surveillances required by Rule 613(f) could identify a broader and more 
nuanced set of market participant behaviors. As such, the CAT would 
also provide the opportunity for development of more effective and 
efficient surveillance system. It is also possible that the CAT Data 
and tools would enable further innovations in market surveillance 
beyond those currently contemplated. These innovations could be in 
response to new developments in the market over the next few years or 
to the new capabilities for regulators.
---------------------------------------------------------------------------

    \730\ 17 CFR 242.613(f).
---------------------------------------------------------------------------

    CAT Data would include additional fields not currently available in 
data used for surveillance.\731\ The inclusion of Customer-IDs in the 
CAT would significantly improve surveillance capabilities, including 
surveillance designed to detect market manipulation and insider 
trading. Because currently available data do not include customer 
identifiers, SROs performing insider trading and manipulation 
surveillance could be unable to identify some suspicious trading \732\ 
and must undertake multiple steps to request additional information 
after identifying suspect trades. The ability to link uniquely 
identified customers with suspicious trading behavior would provide 
regulators with better opportunity to identify the distribution of 
suspicious trading instances by a customer as well as improving 
regulators' ability to utilize customer-based risk assessment. This 
enhanced ability to link customers with behaviors would enable 
detection of market abuses that are perpetrated by customers trading or 
quoting through multiple accounts or on multiple trading venues.
---------------------------------------------------------------------------

    \731\ As noted in Section IV.D.1.c, this economic analysis 
considers surveillance to be SROs running processing on routinely 
collected or in-house data to identify potential violations of rules 
or regulations.
    \732\ The Commission understands that SRO surveillances on 
topics such as insider trading and market manipulation do not 
incorporate data that identifies customers. Based on alerts from 
their surveillances, SROs may open a review that runs through 
several stages of data requests before identifying a customer. As 
discussed above, the Commission notes that SRO audit trails 
typically do not provide customer information but a recent FINRA 
rule change would require its members to report to OATS non-FINRA 
member customers who are broker-dealers. See supra note 407.
---------------------------------------------------------------------------

    Furthermore, having direct access to data could assist an SRO in 
its surveillance activities by potentially facilitating quicker 
responses to suspicious trading activity. Additionally, the inclusion 
of the principal orders of members would enable regulators to better 
identify rule violations by broker-dealers that have not previously had 
to provide audit trail data on their unexecuted principal orders. The 
evolution of the market has increased the importance of surveillance on 
principal orders. Many of these principal orders originate from 
algorithmic or high frequency trading firms who have been the recent 
subject of regulatory interest.\733\ Further, some rules and 
regulations provide for differential treatment of the principal orders 
of broker-dealer market makers. Yet, some current data sources used for 
SRO surveillance exclude unexecuted principal orders,\734\ limiting the

[[Page 30698]]

surveillance for issues such as wash sales. As a result, many 
surveillance patterns are unable to detect certain rule violations 
involving principal orders.
---------------------------------------------------------------------------

    \733\ See Securities Exchange Act Release No. 61358 (January 14, 
2010), 75 FR 3594 (January 21, 2010) (``Concept Release on Equity 
Market Structure''); Exemption for Certain Exchange Members, supra 
note 394.
    \734\ See Section IV.D.2.b(1), supra.
---------------------------------------------------------------------------

    The Plan would also improve regulators' efficiency in conducting 
cross-market and cross-product surveillance. The Plan would 
particularly enhance regulators' ability to perform cross-market 
surveillance, across equity and options markets, by enabling any 
regulator to surveil the trading activity of market participants in 
both equity and options markets and across multiple trading venues 
without data requests. Regulators would also have access to 
substantially more information about market participants' 
activity,\735\ and the requirement that the data be consolidated in a 
single database would assist regulators in detecting activity that may 
appear permissible without evaluating data from multiple venues.\736\ 
Likewise, it would assist regulators in detecting activity that may not 
appear violative without evaluating data from multiple venues.
---------------------------------------------------------------------------

    \735\ For example CAT Data would include Customer information, 
subaccount allocation information, exchange quotes, trade and order 
activity that occurs on exchanges, trade and order activity that 
occurs at broker-dealers that are not FINRA members, and trade and 
order activity that occurs at FINRA members who are not currently 
required to report to OATS. In addition CAT Data would require 
reporters to report data in milliseconds and would be directly 
available to non-FINRA regulators much faster than OATS is currently 
available to them. See Section IV.E.1.a, supra.
    \736\ See Section IV.E.1.c(2), infra. The Commission notes that 
while this is a benefit allowed by consolidation of data in the 
Central Repository, linked data would not be available in the 
Central Repository until T+5, which may delay the completion of 
surveillance activities.
---------------------------------------------------------------------------

    Increasing market complexity and fragmentation has increased the 
importance of cross-market surveillance. The Commission noted in its 
Regulation of NMS Stock Alternative Trading Systems proposing release 
that, ``[i]n the seventeen years since the Commission adopted 
Regulation ATS, the equity markets have evolved significantly, 
resulting in an increased number of trading centers and a reduced 
concentration of trading activity in NMS stocks.'' \737\ However, 
because market data are fragmented across many data sources and because 
audit trail data lacks consistent customer identifiers, regulators 
cannot run cross-market surveillance tracking particular 
customers.\738\ Furthermore, routine cross-product surveillance is 
generally not possible with current data. The potential enhancements in 
market surveillance enabled by the CAT NMS Plan are likely to result in 
more capable and efficient surveillance which could reduce violative 
behavior and protect investors from harm.
---------------------------------------------------------------------------

    \737\ See Securities Exchange Act Release No. 76474 (November 
18, 2015), 80 FR 80998 (December 28, 2015), at 81000.
    \738\ As noted in the above, SROs currently do not conduct 
routine surveillance that tracks particular customers because data 
currently used for surveillance does not include customer 
information.
---------------------------------------------------------------------------

(2) Examinations
    The Commission preliminarily believes that availability of the CAT 
would also improve examinations and that these improvements would 
benefit investor protection, and the market in general, by resulting in 
more effective supervision of market participants. The Commission 
conducted 493 broker-dealer examinations in 2014 and 484 in 2015, 70 
exams of the national securities exchanges and FINRA in 2014 and 21 in 
2015. In addition, the Commission conducted 1,237 investment adviser 
and investment company examinations in 2014 and 1,358 in 2015. 
Virtually all investment adviser examinations and a significant 
proportion of the Commission's other examinations involve analysis of 
trading and order data. Currently some data that would be useful to 
conduct risk-based selection for examinations, such as trade blotters, 
are not available in data sources available for pre-exam analysis.\739\ 
Further, data available during exams often require regulatory Staff to 
link multiple data sources to analyze customer trading. For example, 
some customer identities are present in EBS data, but time stamps are 
not. To evaluate the execution price a customer received, it is 
necessary to know the time of the trade to compare the price of the 
customer's execution with the prevailing market prices at that time. 
This requires linking the EBS data with another data source that 
contains trades with time stamps (such as the trade blotter). These 
linking processes can be labor-intensive and require the use of 
algorithms that may not link with 100% accuracy. Finally, for 
investment adviser examinations, examiners sometimes use non-trading 
data such as Form PF, Form 13-F, Form ADV, and clearing broker reports 
as a proxy for trading data when selecting investment advisers for 
examinations. The CAT would improve examinations in the following 
specific ways.
---------------------------------------------------------------------------

    \739\ Regulators can obtain detailed equity transaction data by 
requesting a trade blotter from a particular firm; however, the data 
would only show the activity of that firm.
---------------------------------------------------------------------------

    First, the Commission preliminarily believes that the expected 
improvements in the data qualities discussed above would enhance the 
ability of regulators to select market participants for focused 
examinations on the basis of risk. The direct access to consolidated 
data in a single location would dramatically improve regulators' 
ability to efficiently conduct analyses in an attempt to select broker-
dealers and investment advisers for more intensive examinations based 
on identified risk. Having CAT Data stored in the Central Repository in 
a linked format would allow examiners to access much more data directly 
through a query and without performing the linking process on an ad-hoc 
basis than is currently available before an exam. The ability to use 
Customer Account Information in the process for selecting investment 
advisers for exams, for example, could allow those selection models to 
incorporate trading data directly instead of imperfect proxies for 
trading data. This could lead to improved outcomes for risk-based 
examinations, such as more regulatory resources invested in examining 
market participants who are at an elevated risk of violating federal 
securities laws, rules, and regulations, and SRO rules, and a reduction 
in the proportion of examinations that might not have been necessary if 
a more complete view of the market participant's activity had been 
available. Compliant market participants could benefit from a reduction 
in the relative frequency of burdensome examinations. Improvements in 
the breadth and effectiveness of risk-based examination would help 
protect investors by increasing the likelihood of identifying market 
participants who are violating laws, rules and regulations.
    Second, the Commission preliminarily believes that with the CAT, 
regulators would be able to examine market participants more 
effectively. In particular, regulators would be able to conduct certain 
types of exams more efficiently because of the inclusion of Customer-
IDs in CAT. In addition, direct access to CAT Data would provide 
examination Staff with the ability to conduct more analysis prior to 
opening an examination because data would be available without the need 
to make a formal data request. In addition, the clock synchronization 
provisions of the Plan could aid regulators in sequencing some events 
more accurately, thereby facilitating more informed exams.\740\ In sum, 
the Plan would allow the data collection portion of examinations to be 
completed more quickly with fewer formal data requests. More efficient 
examinations would help regulators better protect

[[Page 30699]]

investors from the violative behavior of some market participants and 
could reduce examination costs for market participants who would have 
otherwise faced examinations that are less focused and more lengthy.
---------------------------------------------------------------------------

    \740\ See Sections IV.D.2.b(2), supra and IV.H.2.a(1), infra.
---------------------------------------------------------------------------

(3) Enforcement Investigations
    Many Commission enforcement actions involve trade and order 
data.\741\ The Commission preliminarily believes that the improvements 
in data qualities that would result from the CAT NMS Plan \742\ would 
significantly improve the efficiency and efficacy of enforcement 
investigations, including insider trading and manipulation 
investigations. The Commission believes that more efficient and 
effective enforcement activity is beneficial to both investors and 
market participants because it deters violative behavior that degrades 
market quality and that imposes costs on investors and market 
participants.
---------------------------------------------------------------------------

    \741\ See supra note 711 and accompanying text.
    \742\ See Section IV.E.1, supra.
---------------------------------------------------------------------------

    Dramatic expected benefits come from improvements to the accuracy, 
accessibility, timeliness, and completeness of the data. As noted 
above,\743\ compiling the data to support an investigation often 
requires a tremendous amount of time and resources and requires 
multiple requests to multiple data sources and significant data 
processing efforts, for both SROs and the Commission. While individual 
SROs have direct access to the data from their own markets, their 
investigations often require access to the data of other SROs because 
firms trade across multiple venues. Some enforcement investigations, 
including those on insider trading and manipulation, require narrow 
market reconstructions that allow investigators to view actions and 
reactions across the market. Currently, the data fragmentation and the 
time it takes to receive requested data, makes these market 
reconstructions cumbersome and time-consuming. Further, new data fields 
related to Customer information and the Allocation Reports should 
improve the completeness of the data available to investigators.
---------------------------------------------------------------------------

    \743\ See Sections IV.D.2.b(3) and IV.D.2.b(4), supra.
---------------------------------------------------------------------------

    Under the CAT NMS Plan, the data for an enforcement investigation 
initiated at least five days after an event would be processed, linked, 
and available for analysis within 24 hours of a query, instead of the 
current timeline of weeks or longer. Further, some of the data 
processing steps that are now performed on an ad-hoc basis during an 
investigation would be systematically performed by the Plan Processor 
in advance.\744\ The availability of uncorrected data by noon on T+1 
could improve the Commission's chances of preventing asset transfers 
from manipulation schemes because regulators could use the uncorrected 
data to detect the manipulation and identify the suspected 
manipulators.\745\ These improvements could shorten the times required 
to collect the data for investigations.
---------------------------------------------------------------------------

    \744\ See Section IV.E.1.d(4), supra.
    \745\ See Section IV.D.2.b(4), supra.
---------------------------------------------------------------------------

    Other expected benefits stem from improvements in the accuracy and 
completeness of the data. The inclusion and expected improvement in the 
accuracy of customer identifying data could allow regulators to review 
the activity of specific market participants more efficiently; 
currently, identifying the activity of a single market participant 
across the market is cumbersome and prone to error.\746\ This 
information would be particularly helpful in identifying insider 
trading, manipulation and other potentially violative activity that 
depends on the identity of market participants. Customer information 
could also be helpful to regulators in more efficiently identifying 
investors who qualify for disgorgement proceeds and in estimating such 
disgorgement proceeds.
---------------------------------------------------------------------------

    \746\ See Section IV.D.2.b(2)D, supra.
---------------------------------------------------------------------------

    The Commission also believes that increasing the proportion of 
market events that could be sequenced under the CAT NMS Plan could 
yield some benefits in enforcement investigations, improving 
investigations of insider trading, manipulation, and compliance with 
Rule 201 of Regulation SHO and Rule 611 of Regulation NMS.\747\ The 
expected improvements in completeness could also benefit investigations 
by allowing regulators to observe in a consolidated data source 
relevant data that are not available in some or all current data 
sources, including time stamps, principal orders, non-member activity, 
allocations, and the identification of whether a trade increases or 
decreases an existing position. This data could be important, for 
example, when investigating allegations of market manipulation or 
cherry-picking in subaccount allocations. Having disaggregated 
information about allocations and issuer repurchases also could 
facilitate new ways to investigate allegations of unfair allocations 
and new ways to investigate and monitor manipulation through issuer 
repurchases.
---------------------------------------------------------------------------

    \747\ Again, benefits associated with the ability to sequence 
events may be limited in some cases because many order events would 
not be able to be sequenced completely with the standards 
established in the CAT NMS Plan. See Section IV.D.2.b(2)B.i, supra.
---------------------------------------------------------------------------

(4) Tips and Complaints
    The Commission preliminarily believes that the CAT NMS Plan would 
improve the process for evaluating tips and complaints by allowing 
regulators to more effectively triage tips and complaints, which could 
focus resources on behavior that is most likely to be violative.\748\ 
The SROs and Commission evaluate thousands of tips and complaints 
regarding trading behavior each year. In fiscal years 2014 and 2015, 
the Commission received around 15,000 entries in its TCR system, 
approximately one third of which related to manipulation, insider 
trading, market events, or other trading and pricing issues. As stated 
in the Baseline Section, the analysis of tips and complaints follows 
three general stages. The Commission expects that the Plan would 
improve the second and third stages, the third in ways described in the 
Examinations and Enforcement Investigations Sections.\749\ The second 
stage in the evaluations of tips, which help regulators determine the 
credibility of a tip or complaint, is limited by a lack of direct 
access to the most useful data; specifically, customer information and 
cross-market data.\750\ The availability of the CAT Data would 
drastically increase the detail of data available to regulators for the 
purposes of tip assessment. This access would assist the SROs and 
Commission in identifying which tips and complaints are credible, would 
help ensure that regulators open investigations or examinations on 
credible tips and complaints, and would limit regulatory resources 
spent on unreliable tips and complaints. Likewise, regulated market 
participants would likely benefit from a reduction in unnecessary 
burdens placed upon them by inquiries that are related to tips that the 
CAT Data could show are not credible.
---------------------------------------------------------------------------

    \748\ See SEC Office of the Whistleblower, What Happens to Tips, 
https://www.sec.gov/about/offices/owb/owb-what-happens-to-tips.shtml.
    \749\ See Sections IV.D.2.a(4), supra.
    \750\ Cross-market data is especially key to market manipulation 
complaints, because regulators may need to examine a broad range 
data to see if a complaint is valid.
---------------------------------------------------------------------------

3. Other Provisions of the CAT NMS Plan
    The Commission notes that there are a number of provisions of the 
CAT NMS Plan that provide for features that are uniquely applicable to 
a consolidated audit trail or otherwise lack a direct analog in 
existing data systems.

[[Page 30700]]

Therefore, rather than analyze the benefits of these provisions as 
compared to existing NMS Plans or data systems, the Commission has 
analyzed these provisions in comparison to a CAT NMS Plan without these 
features. The Commission preliminarily believes that these provisions 
of the CAT NMS Plan increase the likelihood that the potential benefits 
of the CAT NMS Plan described above would be realized.
a. Future Upgrades
    Several provisions in the Plan seek to ensure that the CAT Data 
would continually be updated to keep pace with technological and 
regulatory developments. For example, the Plan would require that the 
Chief Compliance Officer review the completeness of CAT Data 
periodically,\751\ that the Central Repository be scalable to 
efficiently adjust for new requirements and changes in 
regulations,\752\ and that Participants provide the SEC with a document 
outlining how the Participants could incorporate information on select 
additional products and related Reportable Events.\753\ The Commission 
preliminarily believes that these provisions would allow the CAT to be 
updated if and when the applicable technologies and regulations change.
---------------------------------------------------------------------------

    \751\ See CAT NMS Plan supra note 3, at Sections 4.12(b)(ii), 
6.2(a)(v)(E). The Chief Compliance Officer would be required to 
perform reviews on matters including the completeness of information 
submitted to the Plan Processor or Central Repository and report 
findings periodically to the Operating Committee.
    \752\ See id. at Appendix D, Section 1.1.
    \753\ See id. at Section 6.11. This document is due within six 
months of the Effective Date of the CAT NMS Plan.
---------------------------------------------------------------------------

    Specifically, Rule 613(b)(6)(ii) and (iii) require that the Plan 
include a provision requiring a report at least every two years that 
details potential improvements in the CAT, such as incorporating new 
technology to improve system performance. Such a report would also 
include the costs of any such improvements. The CAT NMS Plan delegates 
responsibility for the report to the Chief Compliance Officer.
    Section 6.1(d)(iv) of the Plan, with respect to new functionality, 
requires the Plan Processor to ``design and implement appropriate 
policies and procedures governing the determination to develop new 
functionality for the CAT including, among other requirements, a 
mechanism by which changes can be suggested by Advisory Committee 
members, Participants, or the SEC,'' as well as providing for the 
escalation of reviews of proposed technological changes and upgrades to 
the Operating Committee, and for addressing the handling of 
surveillance.
    With respect to upgrades to maintain existing functionality, the 
Plan Processor could evaluate and implement potential system changes 
and upgrades to maintain and improve the normal day-to-day operating 
function of the CAT System; material system changes and upgrades are to 
be performed by the Plan Processor in consultation with the Operating 
Committee.\754\ The Plan Processor may on its own discretion initiate 
changes or upgrades to ensure compliance with applicable legal 
requirements.\755\ Regular reports on the operations and maintenance of 
the CAT System are to be provided by the Plan Processor to the 
Operating Committee, including reports on system improvements 
contemplated in Appendix D, Upgrade Process and Development of New 
Functionality.\756\
---------------------------------------------------------------------------

    \754\ See id. at Section 6.1(j).
    \755\ See id. at Section 6.1(k).
    \756\ See id. at Section 6.1(o).
---------------------------------------------------------------------------

    Section 11 of Appendix D sets out the obligations of the Plan 
Processor with respect to the requirements discussed above (e.g., to 
develop a process to add functionality to CAT, including reviewing 
suggestions submitted by the SEC). The Plan Processor must create a 
defined process for developing impact assessments, including 
implementation timelines for proposed changes, and a mechanism by which 
functional changes that the Plan Processor wishes to undertake could be 
reviewed and approved by the Operating Committee. The Plan Processor 
``shall not unreasonably withhold, condition, or delay implementation 
of any changes or modifications reasonably requested by the Operating 
Committee.'' \757\ There must be a similar process to govern the 
changes to the Central Repository discussed above--i.e., business-as-
usual changes that could be performed by the Plan Processor with only a 
summary report to the Operating Committee, versus infrastructure 
changes that would require approval by the Operating Committee.\758\ 
Finally, a process for user testing of new changes must be developed by 
the Plan Processor.\759\
---------------------------------------------------------------------------

    \757\ See id. at Appendix D, Section 11.1.
    \758\ See id at Appendix D, Section 11.2.
    \759\ See id. at Appendix D, Section 11.3.
---------------------------------------------------------------------------

    Appendix C notes that the Plan Processor must ensure that the 
Central Repository's technical infrastructure is scalable (to increase 
capacity to handle increased reporting volumes); adaptable (to support 
future technology developments so that new requirements could be 
incorporated); and current (to ensure, through maintenance and 
upgrades, that technology is kept current, supported, and 
operational).\760\
---------------------------------------------------------------------------

    \760\ See id. at Appendix C, Section A.5(a).
---------------------------------------------------------------------------

    These provisions are designed to ensure that the Participants 
consider enhancing and expanding CAT Data shortly after initial 
implementation of the CAT NMS Plan and that the Participants consider 
improvements regularly continuing forward. The Commission preliminarily 
expects that, in addition to these provisions, the CCO review would 
further facilitate proactive expansion of CAT to account for a 
regulatory change or change in how the market operates, or should there 
be a need for regulators to have access to new order events or new 
information about particular order events. To the extent that the 
Participants determine that an expansion is necessary and it is 
approved by the Commission, the Plan's scalability provision promotes 
the efficiency of the implementation of that expansion such that it 
could be completed at lower cost and/or in a timely manner.
    Taken together, these provisions could also provide a means for the 
Commission to ensure that improvements to CAT functionality are 
considered so as to preserve its existing benefits, or that expansion 
of CAT functionality is undertaken in order to create new benefits. 
These methods are not certain, but the Commission does retain the 
ability to modify the Plan, if such a step becomes necessary to ensure 
that future upgrades are undertaken as necessary.\761\ Moreover, the 
focus on scalability, adaptability, and timely maintenance and upgrades 
promotes a system that could be readily adapted over time, versus one 
that is difficult or costly to expand or modify. The Commission 
preliminarily believes that the provisions outlined above would allow 
the CAT Data to be continually updated to keep pace with technological 
and regulatory developments.
---------------------------------------------------------------------------

    \761\ See 17 CFR 242.608.
---------------------------------------------------------------------------

b. Promotion of Accuracy
    The Commission notes that the Plan contains specific provisions 
designed to generally promote the accuracy of information contained in 
the Central Repository. The CCO is required, among other 
responsibilities, to perform reviews related to the accuracy of 
information submitted to the Central Repository and report to the 
Operating Committee with regard thereto,\762\ and there is a special 
Compliance Subcommittee of the Operating

[[Page 30701]]

Committee, which is established to aid the CCO with regard to, among 
other things, issues involving the accuracy of information.\763\ The 
Plan also contains certain other provisions intended to monitor and 
address Error Rates.\764\
---------------------------------------------------------------------------

    \762\ See CAT NMS Plan, supra note 3, at Section 6.2(a)(v)(E).
    \763\ See id. at Section 4.12(b).
    \764\ See id. at Appendix C, Section A.3(b).
---------------------------------------------------------------------------

    The Operating Committee is responsible for adopting policies and 
procedures regarding the accuracy of CAT Data, which the Plan Processor 
shall be responsible to implement.\765\ The Plan Processor in turn must 
provide regular reports regarding accuracy issues to the Operating 
Committee, specifically Error Rates relating to the Central Repository, 
including (to the extent the Operating Committee deems necessary or 
advisable) Error Rates by day, changes in the Error Rates over time, 
and Compliance Thresholds by CAT Reporter, by Reportable Event, by age 
before resolution, by symbol, by symbol type, and by event time. The 
Plan documents an initial Error Rate tolerance of 5%, but requires 
that, at least annually, the Plan Processor review the Error Rates and 
make recommendations to the Operating Committee for proposed changes to 
the maximum Error Rate; and requires that the Operating Committee set 
and periodically review the maximum Error Rate.\766\
---------------------------------------------------------------------------

    \765\ See id. at Section 6.5(d).
    \766\ See id. at Section 6.5(d)(i).
---------------------------------------------------------------------------

    Under the Plan, the Plan Processor would also provide details to 
each CAT Reporter on the number of rejected records and the reasons for 
their rejection on a daily basis. And on a monthly basis, the Plan 
Processor would publish report cards that would allow CAT Reporters to 
compare their Error Rates with those of industry peers; this is similar 
to the process used by FINRA for OATS reporting. The Plan Processor 
would notify each CAT Reporter that exceeds the maximum Error Rate, and 
provide the specific reporting requirements that they did not fully 
meet. Participants and the SEC could request reports on Error Rates 
from the Plan Processor. The Plan Processor would also provide 
statistics on each CAT Reporter's Compliance Thresholds--the CAT 
Reporter's specific Error Rate, which could serve as the basis for a 
review or investigation into the CAT Reporter's performance by the 
Participants or the SEC for failure to comply with CAT reporting 
obligations--to the Participants or the SEC.
    In addition to providing CAT Reporters data on their Error Rates, 
the Plan states that the Participants believe that in order to meet 
Error Rate targets, industry would require certain resources, including 
a stand-alone testing environment, and time to test their reporting 
systems and infrastructure. The Technical Specifications must also be 
well-written and effectively communicated to CAT Reporters with 
sufficient time to allow proper systems updates.\767\ Finally, the Plan 
notes that reporters may be subject to penalties or fines for excessive 
Error Rates, to be defined by the Operating Committee.\768\
---------------------------------------------------------------------------

    \767\ See id. at Appendix C, Section A.3(b).
    \768\ See id. at Appendix C, Section A.3(b), n.101.
---------------------------------------------------------------------------

    The Commission preliminarily believes that these provisions to 
document Error Rates and promote data accuracy are reasonably designed 
to improve the overall accuracy of CAT Data relative to the exclusion 
of such provisions; however, the Commission also preliminarily believes 
that certain procedures outlined in the Plan may not incentivize all 
firms to further improve the quality of the data they report. The 
Commission recognizes that providing feedback to individual CAT 
Reporters on their individual Error Rates and information that compares 
Error Rates to industry peers could motivate firms with high Error 
Rates to reduce those rates, to avoid accruing penalties and fines 
associated with being a high Error Rate CAT Reporter.\769\ However, it 
is not clear what incentive, if any, would be provided to firms with 
median Error Rates to improve their regulatory data reporting 
processes; this could collectively limit industry's incentives to 
reduce Error Rates. Furthermore, the Commission notes that, under the 
Plan, proposals to adjust the maximum allowable Error Rate are to 
originate from the Plan Processor. The Commission preliminarily 
believes that the Participants (as data users) have incentives to 
pursue lower Error Rates as data errors could complicate their efforts 
to perform their regulatory responsibilities. However, the Commission 
preliminarily believes that the Plan Processor would also have to 
allocate resources to error resolution, so could be incentivized to 
pursue Error Rate reduction.
---------------------------------------------------------------------------

    \769\ The Commission understands that OATS has an analogous 
feedback system, but not all current data sources have such a 
system.
---------------------------------------------------------------------------

    The Commission notes that the Plan includes provisions requiring 
the establishment of a symbology database that will also foster 
accuracy. The Plan requires the Central Repository to create and 
maintain a symbol history and mapping table, as well as provide a tool 
to regulators and CAT Reporters showing the security's complete symbol 
history, along with a start of day and end of day list of reportable 
securities for use by CAT Reporters, in .csv format, by 6:00 a.m. on 
each trading day.\770\ This resource will assist regulators in 
accurately identifying all trading activity of securities across 
venues, many of which do not natively follow listing exchange 
symbology.
---------------------------------------------------------------------------

    \770\ See CAT NMS Plan, supra note 3, at Appendix D, Section 2.
---------------------------------------------------------------------------

    Regarding the Plan's business clock synchronization requirements, 
the Plan also discusses the expectation that Participants and their 
Industry Members will each be required to maintain a five-year running 
log, or comparable procedure, documenting the time of each clock 
synchronization performed and the result of such synchronization. These 
practices would reveal the parameters of any discrepancies, between 
Business Clocks and NIST, that exceed 50 milliseconds.\771\ As 
mentioned above, there is currently uncertainty regarding clock 
offsets, clock drift, and synchronization practices of Participants and 
Industry Members and the required practice of systematically 
maintaining five-year logs regarding these details should improve 
regulatory and industry understanding of these dynamics, which should 
provide a clearer foundation for evaluating the standards set in the 
Plan upon which future improvements could be considered.
---------------------------------------------------------------------------

    \771\ Id. at Appendix C, Section A.3(c).
---------------------------------------------------------------------------

c. Promotion of Timeliness
    In addition to the specific timeliness benefits discussed in the 
foregoing Sections, the Plan contains some provisions that promote 
performance of the Central Repository, and that therefore could 
indirectly improve the timeliness of regulator access to or use of the 
CAT Data. These are found in capacity requirements for the Plan 
Processor, disaster recovery requirements to ensure the availability of 
the system, and in supervision and reporting of timeliness issues.
    Specifically, first, the Plan Processor must measure and monitor 
Latency within the Central Repository's systems, must establish 
acceptable levels of Latency with the approval of the Operating 
Committee, and must establish policies and procedures to ensure that 
data feed delays are communicated to CAT Reporters, the Commission, and 
Participants' regulatory Staff.\772\ The Plan further provides that 
``[a]ny delays will be

[[Page 30702]]

posted for public consumption, so that CAT Reporters may choose to 
adjust the submission of their data appropriately. . . .'' \773\ The 
Plan Processor must also provide relevant parties, as well as to the 
public, with approximate timelines provided for system 
restoration.\774\ Moreover, the Central Repository is required to be 
designed to meet certain capacity standards, including handling above-
peak submission volumes, storing data for a sliding 6 year window (more 
than 29 petabytes of raw, uncompressed data), and the ability to add 
capacity quickly and seamlessly if needed.\775\
---------------------------------------------------------------------------

    \772\ See CAT NMS Plan, supra note 3, at Appendix D, Section 
8.3.
    \773\ Id.
    \774\ Id.
    \775\ See id. at Appendix D, Section 1.3.
---------------------------------------------------------------------------

    Second, the Plan Processor must develop disaster recovery and 
business continuity plans to support the continuation of CAT business 
operations.\776\ Business continuity planning must include a secondary 
site for critical staff, capable of recovery and restoration of 
services within 48 hours, with the goal of next day recovery.\777\ The 
secondary site must have the same level of availability, capacity, 
throughput and security (physical and logical) as the primary site--
i.e., it must be fully redundant.\778\ Thus, in the event of a 
widespread disruption, delays to CAT processing and regulator access to 
CAT of greater than a day or two could likely be prevented.
---------------------------------------------------------------------------

    \776\ See id. at Appendix D, Sections 5.3-5.4.
    \777\ Id.
    \778\ Id.
---------------------------------------------------------------------------

    Third, the Chief Compliance Officer of the Plan Processor must 
conduct regular monitoring of the CAT System for compliance, including 
with respect to the reporting and linkage requirements in Appendix 
D.\779\ Moreover, the Plan Processor must provide the Operating 
Committee with regular reports on the CAT System's operations and 
maintenance, including its capacity and performance, as set out in 
Appendix D.\780\
---------------------------------------------------------------------------

    \779\ See id. at Section 6.2(a)(v)(J).
    \780\ See id. at Section 6.1(o)(i).
---------------------------------------------------------------------------

    Finally, one caveat on the foregoing discussion is that system 
performance would in part be dependent on a series of SLAs to be 
negotiated between the Plan Participants and the eventual Plan 
Processor, including with respect to linkage and order event processing 
performance, query performance and response times, and system 
availability.\781\ As these have not yet actually been negotiated, some 
of the key timeliness benefits anticipated to accrue from 
implementation of the Plan could be subject to the successful 
negotiation on an acceptable basis of the terms of the SLAs.
---------------------------------------------------------------------------

    \781\ See id. at Appendix D, Section 8.5.
---------------------------------------------------------------------------

d. Operation and Administration of the CAT NMS Plan
    There are certain elements of the CAT NMS Plan's governance that, 
like the other factors discussed in this subsection, are uniquely 
applicable to a consolidated audit trail, and that the Commission 
therefore analyzed in comparison to a CAT NMS Plan without these 
features (or that implements those features in a different way). The 
Commission preliminarily believes that these provisions of the CAT NMS 
Plan increase the likelihood that the potential benefits of the CAT NMS 
Plan described above would be realized.
(1) Introduction
    In adopting Rule 613, the Commission established certain 
requirements for the governance of the CAT NMS Plan, stating that those 
``requirements are important to the efficient operation and practical 
evolution of the [CAT], and are responsive to many commenters' concerns 
about governance structure, cost allocations, and the inclusion of SRO 
members as part of the planning process.'' \782\ The Commission did 
not, in Rule 613, establish detailed parameters for the governance of 
the CAT NMS Plan, but rather allowed the SROs to develop specific 
governance provisions, subject to a small number of requirements. 
Recognizing that Rule 613 left Plan Participants with wide latitude to 
determine how to structure the Plan's governance, the Commission in the 
Adopting Release also stated that ``[a]fter the SROs submit the NMS 
plan, the Commission and the public will have more detailed information 
in evaluating the NMS plan.'' \783\
---------------------------------------------------------------------------

    \782\ See Adopting Release, supra note 9, at 45787.
    \783\ Id. at 45787-45788.
---------------------------------------------------------------------------

    The Plan's governance is described in greater detail in Section 
III.A.3. above, but generally consists of a Delaware LLC, which is to 
``create, implement, and maintain the CAT and the Central Repository,'' 
and which is to be managed by the Operating Committee, consisting of 
one voting representative of each SRO Participant. The Operating 
Committee acts by majority or Supermajority Vote, depending on the 
issue. An Advisory Committee that includes a mix of broker-dealers, as 
required by Rule 613, is to ``advise the [Operating Committee] on the 
implementation, operation and administration of the central 
repository.'' \784\ These features are analyzed in greater detail 
below.
---------------------------------------------------------------------------

    \784\ See Rule 613(b)(7). Whereas Section 4.13(b) requires that 
the Operating Committee select representatives of different types of 
broker-dealers, it specifies that Advisory Committee representatives 
would ``serve on the Advisory Committee on behalf of himself or 
herself individually and not on behalf of the entity for which the 
individual is then currently employed.'' See CAT NMS Plan, supra 
note 3, at Section 4.13(b).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the governance 
provisions identified in the Adopting Release continue to be important 
to the efficient operation and practical evolution of the Plan, 
particularly given that there are a range of possible outcomes with 
respect to both the costs and benefits of the Plan that depend on 
future decisions. The way in which the identified governance provisions 
have been incorporated into the Plan, as discussed in greater detail 
below, could help facilitate better decision-making by the relevant 
parties. This, in turn, means that the Commission could have greater 
confidence that the benefits resulting from implementation of the Plan 
would be achieved in an efficient manner and that costs resulting from 
inefficiencies would be avoided.
    The Commission notes that it can monitor whether the benefits of 
CAT are being achieved. For example, certain Operating Committee 
actions are subject to Commission approval.\785\ The Commission also 
retains the ability to modify the Plan as it may deem necessary or 
appropriate.\786\ To enable the Commission to exercise its oversight 
authority in an informed manner and to make its views known, 
representatives of the Commission are permitted to attend meetings of 
the Operating Committee, although the Commission representatives may be 
excluded from Operating Committee Executive Sessions.\787\ Moreover, 
the Commission is entitled to receive information regarding the 
performance of the Central Repository, including a Regular Written 
Assessment of the operation of the Central Repository at least every 
two years, or more frequently in connection with any review of the Plan 
Processor's performance. The assessment would cover the performance 
metrics specified in Rule 613(b)(6)(i).\788\ The Commission

[[Page 30703]]

is also entitled to receive any reports prepared in connection with the 
Operating Committee's annual performance review of the Plan 
Processor.\789\
---------------------------------------------------------------------------

    \785\ See CAT NMS Plan, supra note 3, at Section 4.3 (stating 
that actions authorized by Majority and Supermajority Vote of the 
Operating Committee are subject to approval by the Commission 
whenever such approval is required under the Exchange Act and the 
rules thereunder).
    \786\ See 17 CFR 242.608(b)(2).
    \787\ See CAT NMS Plan, supra note 3, at Section 4.4(a).
    \788\ See 17 CFR 242.613(b)(6)(i). Rule 613(b)(6) requires the 
Participants to provide the Commission with a written assessment of 
operation of the CAT at least every two years, along with a detailed 
plan, based on the assessment, that indicates any potential 
improvements to the performance of the CAT and includes an estimate 
of the costs and potential impacts of such improvements on 
competition, efficiency and capital formation, as well as an 
estimated implementation timeline for such potential improvements.
    \789\ See CAT NMS Plan, supra note 3, at Section 6.1(n). The 
review may be more frequent than annually if at the request of two 
non-affiliated Participants. The Commission also has other means of 
accessing information (e.g., through books & records requirements).
---------------------------------------------------------------------------

(2) Key Factors Relating to Governance
    Two factors identified by the Commission in the Adopting Release as 
``important to the efficient operation and practical evolution of the 
[CAT]'' are voting within the Operating Committee and the role and 
composition of the Advisory Committee. Voting thresholds that result in 
Operating Committee decision-making that balances the ability of 
minority members to have alternative views considered with the need to 
move forward when appropriate to implement needed policies can promote 
achievement of the Plan's benefits in an efficient manner. Similarly, 
an Advisory Committee that is balanced in terms of membership size and 
composition, as well as in its ability to present views to the 
Operating Committee, can result in better performance of its 
informational role, and thus more efficient achievement of the benefits 
of the Plan.
A. Voting
    In adopting Rule 613, the Commission found that one Commenter's 
concerns about unanimous voting in the context of the CAT NMS Plan 
``have merit.'' Specifically, the Commission stated that ``an alternate 
approach'' to voting involving ``the possibility of a governance 
requirement other than unanimity, or even super-majority approval, for 
all but the most important decisions'' should be considered, as it 
``may be appropriate to avoid a situation where a significant majority 
of plan sponsors--or even all but one plan sponsor--supports an 
initiative but, due to a unanimous voting requirement, action cannot be 
undertaken.'' \790\ The Commission ``urge[d] the SROs to take into 
account the need for efficient and fair operation of the NMS Plan 
governing the consolidated audit trail'' in setting voting 
thresholds.\791\
---------------------------------------------------------------------------

    \790\ See Adopting Release, supra note 9, at 45787.
    \791\ Id.
---------------------------------------------------------------------------

    The Plan sets forth two voting thresholds for most matters to be 
decided by the Operating Committee.\792\ Majority approval of the 
Operating Committee is sufficient to approve routine matters, arising 
in the ordinary course of business, while non-routine matters, outside 
the ordinary course of business, would require a supermajority (two-
thirds) vote of the Operating Committee to be approved.\793\
---------------------------------------------------------------------------

    \792\ As noted in Section IV.G.4, infra, the Plan requires 
unanimous voting in only three circumstances: A decision to obligate 
Participants to make a loan or capital contribution, a decision to 
dissolve the Company, and a decision to take an action by written 
consent instead of a meeting.
    \793\ See CAT NMS Plan, supra note 3, at Section 4.3; Appendix 
C, Section B.8(d). (specifying actions of the Operating Committee 
that require a Supermajority Vote); see also id. at Appendix C, 
Section D.11(b).
---------------------------------------------------------------------------

    The Plan generally eschews a unanimous voting threshold, except for 
the three clearly-defined circumstances noted above. Unanimity as a 
voting threshold may confer greater influence on holders of minority 
views, but it may also give a small faction the ability to extract 
private benefits inconsistent with Plan objectives by acting as 
holdouts.\794\ In a hold-out dynamic, one member may be able to block 
action that all the other members agree should move forward. While this 
dynamic may occasionally be used productively, to produce better 
decision-making through fostering discussion and compromise, it also 
may give one member the power to stand in the way of needed change.
---------------------------------------------------------------------------

    \794\ There are other governance-related trade-offs for majority 
voting versus supermajority voting; these are discussed in greater 
detail in the Plan. See CAT NMS Plan, supra note 3, at Appendix C, 
Sections B.8(d) and D.11(b).
---------------------------------------------------------------------------

    The ability of a single member to prevent action with regard to the 
Plan could be particularly troublesome if that member were motivated by 
a conflict of interest.\795\ The Plan requires recusal of the member 
representing such a Participant from voting in the Operating Committee 
on matters that raise a conflict of interest, defined as any matter 
subject to a vote that interferes, or is reasonably likely to 
interfere, with the member's objective consideration of the matter, or 
that is, or would reasonably likely be, inconsistent with the 
regulatory purpose and objectives of CAT.\796\ Recusal of a member 
could also be compelled by a supermajority of the Operating 
Committee.\797\ If conflicts of interest were the cause of all 
unproductive holding-out (i.e., holding out that does not contribute to 
better decision-making), then a robust conflict of interest provision 
could mitigate some of the negative features of unanimous voting.
---------------------------------------------------------------------------

    \795\ That there are potential conflicts of interest between 
Participants acting in their self-regulatory capacities and 
Participants acting in the other capacities in which they serve is 
well-documented; see, e.g., Peter M. DeMarzo, Michael J. Fishman, 
and Kathleen M. Hagerty, ``Self-Regulation and Government 
Oversight,'' 72 Review of Economic Studies 687 (2005); see also 
David Reiffen and Michel Robe, ``Demutualization and Customer 
Protection at Self-Regulatory Financial Exchanges,'' Journal of 
Futures Markets (2011) and Securities Exchange Act Release No. 50700 
(November 18, 2004), 69 FR 71256 (December 8, 2004) (Concept Release 
Concerning Self-Regulation); John W. Carson, Conflicts of Interest 
in Self-Regulation: Can Demutualized Exchanges Successfully Manage 
Them? (World Bank Policy Research Working Paper 3183, December 
2003). These conflicts could be further complicated if the 
individual employee of the Participant SRO who represents the 
Participant SRO on the Operating Committee sought to advance a 
private gain for the individual employee that is inconsistent with 
the Plan's regulatory objective or the objective of the Participant 
SRO. Indeed, the idea that an agency conflict between a natural 
person and the entity that the person represents has been discussed 
extensively in the academic literature on the governance of 
corporations; see, e.g., Jonathan Berk and Peter DeMarzo, 2011, 
Corporate Finance, Second Edition, Prentice Hall (Section 2.1: 
Corporate Governance and Agency Costs).
    \796\ See CAT NMS Plan, supra note 3, at Section 4.3(d) (recusal 
requirement) and Section 1.1 (definition of Conflict of Interest). 
Section 4.3(d) also automatically recuses a member from voting with 
respect to matters relating to the selection or removal of the Plan 
Processor if they or their affiliates are, or are bidding to be, the 
Plan Processor. Id.
    \797\ See CAT NMS Plan, supra note 3, at Section 4.3(d).
---------------------------------------------------------------------------

    Majority voting as a voting threshold strikes a different balance 
between the rights of members than does unanimous voting. Majority 
voting avoids the hold-out problem of unanimity, but can result in 
decisions that bear less concern for the interests of the minority 
members. Whether it does so or not may depend at least in part on 
voting dynamics on the Operating Committee. Under the Plan, each member 
has only one vote within the Operating Committee, and so an individual 
member--and represented Participant--could not unilaterally advance a 
position that benefits only the Participant under the Plan. That said, 
however, some individual members could exercise more influence than 
others over the outcome of the voting process. Participant SROs that 
are affiliated with one another could vote as a bloc by designating a 
single individual to represent them on the Committee.\798\ Individuals 
who represent more than one SRO would then in principle

[[Page 30704]]

exercise more influence than other individuals on the Operating 
Committee.\799\ The Chair of the Operating Committee also could 
exercise more influence than other members on the Committee, even 
though the Chair only has one vote, through influence over Committee 
processes.\800\ Ultimately, however, no individual would have 
unilateral control over vote outcomes, even at a majority voting 
threshold. Whether the threshold results in adequate attention to the 
rights of minority members could therefore depend on the ease with 
which a majority coalition can be formed, whether those coalitions are 
fluid or static, and whether in practice decision-making is collegial 
or contentious. While majority voting could pose a risk of disregard 
for minority positions, that risk here is mitigated in that majority 
voting only applies to the less important matters that could arise in 
the operations of the Plan.
---------------------------------------------------------------------------

    \798\ See CAT NMS Plan supra note 3, at Section 4.2(a) (``One 
individual may serve as the voting member of the Operating Committee 
for multiple Affiliated Participants, and such individual shall have 
the right to vote on behalf of each such Affiliated Participant.'') 
Even if separate representatives were appointed for each voting 
member, such individuals could agree to vote in a bloc; see also 
Section IV.G.1, infra, (discussing how many affiliated groups would 
need to vote together to reach a majority or supermajority).
    \799\ By enabling a single individual (i.e., natural person) to 
vote on behalf of groups of Affiliated Participant SROs, the Plan 
reduces the share and number of individuals needed to approve a 
committee action below the share and number of votes required for 
approval. For example, as few as two individuals (who would possess 
more than one-third of member votes) may be sufficient to block an 
action that requires a two-thirds (a supermajority) vote for 
approval of an action of the Operating Committee under the Plan. 
This casting of multiple votes by a single group is limited for some 
decisions under the Plan, however. See CAT NMS Plan, supra note 3, 
at Section 4.4(a) (Meetings of the Operating Committee: special and 
emergency meetings); see also Section IV.G.1, infra (discussing, in 
n.1077, the various affiliated exchanges among the 20 members of the 
Operating Committee, which could appoint a single individual to 
represent them).
    \800\ Specifically, see CAT NMS Plan, supra note 3, Section 
4.2(b) which establishes that there shall be elected a Chair from 
among the members of the Operating Committee, and states that the 
Chair's powers are those that the Operating Committee may from time 
to time prescribe. For example, the Chair may be granted the power 
to set the agenda of Operating Committee meetings, and thereby 
advance agenda items favorable to the Chair. Id. Section 4.2(b) also 
specifies that the Chair is not entitled to a tie-breaking vote and 
that the Chair may be removed by Supermajority Vote of the Operating 
Committee.
---------------------------------------------------------------------------

    The Plan's supermajority voting requirement for more important 
matters represents an intermediate ground between majority and 
unanimous voting, requiring more than a bare majority of members to 
agree to support a position, which therefore enhances the ability of 
members of the minority to seek to have their views reflected in the 
ultimate decision, while limiting the ability of minority members to 
act as holdouts. That said, the supermajority voting requirement may 
also have some disadvantages: To the extent that rules and practices 
already in place require correction, a supermajority voting requirement 
may make it more difficult to assemble the votes necessary to make 
needed changes. For example, supermajority voting could have the 
indirect effect of locking in the preferred business practices of the 
inaugural members of the Operating Committee. For decisions later in 
the Plan implementation, this lock-in effect of supermajority voting 
could make it more difficult for the Operating Committee to take non-
routine actions, such as replacing the Plan Processor after the initial 
selection decision.\801\
---------------------------------------------------------------------------

    \801\ See id. at Section 4.3(i). Supermajority voting as a 
governance mechanism in the CAT NMS plan is distinct from an 
analysis of supermajority voting rules in other settings.
---------------------------------------------------------------------------

B. Advisory Committee
    Rule 613(b)(7) requires that the Plan designate an Advisory 
Committee.\802\ Specifically, Rule 613(b)(7) calls for the formation of 
an Advisory Committee to advise the plan sponsors on the 
implementation, operation, and administration of the Central 
Repository, as detailed above in Section III.A.3 of this Notice.\803\ 
Under Rule 613(b)(7)(i), the Advisory Committee must include 
representatives of member firms of the plan sponsors (broker-dealers), 
acting in their own capacities as individuals on the Committee. Under 
Rule 613(b)(7)(ii), plan sponsors must give members of the Committee 
access to information and permit them to express their views and attend 
meetings of the Operating Committee. Also under Rule 613(b)(7)(ii), the 
Operating Committee has the right to exclude members of the Advisory 
Committee from its deliberations by meeting in Executive Session by a 
Majority Vote of its members.
---------------------------------------------------------------------------

    \802\ 17 CFR 242.613(b)(7).
    \803\ See Section III.A.3 (Requirements Pursuant to Rule 
608(a)), supra; see also Section IV.G.4.a, infra, for a discussion 
of the effects of the Advisory Committee on the efficiency of the 
Plan.
---------------------------------------------------------------------------

    The Adopting Release states that the ``provision requiring the 
creation of an Advisory Committee, composed at least in part by 
representatives of the plan sponsors,'' was ``[i]n response to the 
comment requesting that the broker-dealer industry receive a `seat at 
the table' regarding governance of the NMS plan.'' \804\ In addition, 
the Commission ``encourage[d] the plan sponsors to, in the NMS plan, 
provide for an Advisory Committee whose composition includes SRO 
members from a cross-section of the industry, including representatives 
of small-, medium-and large-sized broker-dealers.'' Rule 613 does not 
give broker-dealers a vote on the Operating Committee itself. In the 
Adopting Release, the Commission stated that the structure of Rule 613 
as adopted ``appropriately balances the need to provide a mechanism for 
industry input into the operation of the central repository, against 
the regulatory imperative that the operations and decisions regarding 
the [CAT] be made by SROs who have a statutory obligation to regulate 
the securities markets, rather than by members of the SROs, who have no 
corresponding statutory obligation to oversee the securities markets.''
---------------------------------------------------------------------------

    \804\ See Adopting Release, supra note 9, at 45786.
---------------------------------------------------------------------------

    In implementing these provisions of Rule 613, the Plan requires the 
Advisory Committee to have diverse membership.\805\ Section 4.13 of the 
Plan requires an Advisory Committee with a minimum of six broker-
dealers of diverse types and six representatives of entities that are 
not broker-dealers.\806\ That is, five of twelve seats on the initial 
Advisory Committee would be filled by representatives, respectively, of 
the client of a registered broker or dealer, two types of institutional 
investors, and two others with academic and regulatory expertise. Terms 
of Advisory Committee members would not exceed three years, and 
memberships would be staggered so that a third of the Committee would 
be replaced each year.\807\
---------------------------------------------------------------------------

    \805\ See CAT NMS Plan, supra note 3, Section 4.13(b).
    \806\ See id. at Section 4.13(b)(i) through (xii).
    \807\ See id. at Section 4.13(c).
---------------------------------------------------------------------------

    The Commission believes that the Plan's provisions regarding the 
Advisory Committee advance the goals of the Advisory Committee 
articulated in the Adopting Release: To allow the Operating Committee 
to receive the benefit of members' expertise with respect to ``expected 
or unexpected operational or technical issues'' and ``help assure the 
Commission and market participants that any requirements imposed on SRO 
members will be accomplished in a manner that takes into account the 
burdens on SRO members.''
    Given the primary purpose of the Advisory Committee as a forum to 
communicate important information to the Operating Committee, which the 
Operating Committee could then use to ensure its decisions are fully-
informed, the Plan's choices in implementing Rule 613 do reflect some 
trade-offs. One factor in the ability of the Advisory Committee to 
collect relevant information for the Operating Committee is the quality 
and depth of the expertise, and the diversity of viewpoints, of the 
Advisory

[[Page 30705]]

Committee's membership.\808\ A larger and more diverse Advisory 
Committee may have better access to expertise and diversity of 
viewpoints from among members for use in advising the Operating 
Committee.\809\ But, members of a larger and more diverse Advisory 
Committee would face potentially greater difficulties in working among 
themselves to identify and convey the information that is available to 
them. The Plan balances these considerations by providing the Advisory 
Committee with sufficient membership to be able to generate useful 
information and advice for the Operating Committee, while being at a 
sufficiently low size and diversity level to permit the members to be 
able to work together without undue obstacles that could otherwise 
limit the Advisory Committee's effectiveness in conveying their 
views.\810\
---------------------------------------------------------------------------

    \808\ In a role similar to that of the Advisory Committee, 
outsiders on corporate boards of directors can bring expertise and 
independence to board actions, thereby enhancing board 
effectiveness. Trade-offs in determining the optimum size and 
composition of boards is the subject of extensive academic research. 
For example, Lehn, Kenneth, Sukesh Patro, and Mengxin Zhao, 2009, 
``Determinants of the size and structure of corporate boards: 1935-
2000,'' Financial Management, 747-780, consider the size and 
composition of the board to be determined by trade-offs associated 
with the information the directors bring to boards, which facilitate 
their monitoring and advisory role, and the coordination costs and 
free-rider problems associated with their presence. Harris, Milton 
and Raviv, Artur, 2008, ``A Theory of Corporate Control and Size,'' 
21 Review of Financial Studies, 1797-1832, model the trade-off 
between benefits of greater expertise that outside directors bring 
versus the costs of an aggravated free-rider problem to arrive at 
the optimum number of outside directors on the board. Collective-
action and communication problems can limit the effectiveness of a 
board as it gains members as explored by Harris and Raviv (2008) and 
Lehn, Patro, and Zhao (2009), in addition to Raheja, Charu, 2005. 
``Determinants of Board Size and Composition: A Theory of Corporate 
Boards,'' 40 Journal of Financial and Quantitative Analysis, 283-
306, and Yermack, David, ``Higher Market Valuation for Firms with a 
Small Board of Directors,'' Journal of Financial Economics, XL 
(1996), 185-211; see also Jerayr Haleblian and Sydney Finkelstein, 
``Top Management Team Size, CEO Dominance, and Firm Performance: The 
Moderating Roles of Environmental Turbulence and Discretion,'' The 
Academy of Management Journal, Vol. 36, No. 4 (August, 1993), 844-
863.
    \809\ For related literature that expressly examines trade-offs 
and consequences of ``diverse'' boards, see Baranchuk, Nina, and 
Phil Dybvig, 2009, ``Consensus in diverse corporate boards,'' Review 
of Financial Studies 22(2), 715-747; and Malenko, Nadya, 2014, 
``Communication and Decision-Making in Corporate Boards,'' Review of 
Financial Studies 27(5), 1486-1532.
    \810\ Another factor that may bear on the Advisory Committee's 
ability to assemble a diverse range of views is the Plan's 
provisions that Advisory Committee members sit in their individual 
capacity, rather than as a representative of their employer. This 
may give Advisory Committee members greater freedom to speak to 
issues common to similarly-situated entities (e.g., large broker-
dealers), rather than potentially-idiosyncratic views of the 
individuals' employers, which broader views in turn could better 
inform the Operating Committee about issues or impacts associated 
with the operation of the CAT.
---------------------------------------------------------------------------

    Another factor in the ability of the Advisory Committee to advise 
the Operating Committee is whether the Advisory Committee, having 
assembled a diverse set of views, could effectively communicate those 
views to the Operating Committee. Two Plan provisions, relating to the 
staggering of member terms and the limits on participation of the 
Advisory Committee under Rule 613(b)(7)(ii), bear on this 
communication.\811\
---------------------------------------------------------------------------

    \811\ See CAT NMS Plan, supra note 3, at Section 4.13(b) and 
(c).
---------------------------------------------------------------------------

    First, the Plan provides for Advisory Committee members to serve 
for staggered three-year terms in order to provide ``improved 
continuity given the complexity of CAT processing.'' \812\ Staggering 
of terms would prevent the entire Advisory Committee or large numbers 
of its members from turning over in any given year, which could enhance 
the cohesion of the Advisory Committee, and thereby its effectiveness 
in communicating member viewpoints to the Operating Committee. Second, 
the Plan gives the Advisory Committee varying roles with respect to the 
different actions to be taken by the Operating Committee. While the 
Advisory Committee members may attend meetings and submit views to the 
Operating Committee on matters prior to a decision by the Operating 
Committee, the Operating Committee may exclude Advisory Committee 
members from Executive Sessions.\813\
---------------------------------------------------------------------------

    \812\ See id. at Section 4.13(c); Appendix C, Section D.11(b) 
(``Governance of the CAT . . . Industry Members also recommended a 
three-year term with one-third turnover per year . . . to provide 
improved continuity given the complexity of CAT processing.'').
    \813\ See CAT NMS Plan, supra note 3, at Section 4.13(d).
---------------------------------------------------------------------------

    An additional factor that bears on the ability of the Advisory 
Committee to advise the Operating Committee is a feedback loop: Whether 
the Advisory Committee could receive sufficiently detailed information 
on the operations of the Plan so that the Advisory Committee members 
can, in turn, provide decision-useful information to the Operating 
Committee. Here, the Plan specifies that the Advisory Committee has the 
right to receive from the Operating Committee information necessary and 
appropriate to the fulfillment of its functions, but that the scope and 
content of the information is to be determined by the Operating 
Committee.\814\ Thus, the Commission notes that the Operating Committee 
could act to limit the effectiveness of the Advisory Committee--for 
example, if the Operating Committee were to fail to provide Advisory 
Committee members with notice of the items to be deliberated and voted 
upon by the Operating Committee with sufficient time and particularity 
for the Advisory Committee to be able to adequately fulfill its 
function, or fail to provide other pathways for Advisory Committee 
members to become aware of topics of interest or concern to the 
Operating Committee.
---------------------------------------------------------------------------

    \814\ Id. at Section 4.13(e).
---------------------------------------------------------------------------

    One other determinant bears on the effectiveness of the Advisory 
Committee in ensuring that the Operating Committee makes decisions in 
light of diverse information--whether the Operating Committee actually 
takes into account the facts and views of the Advisory Committee before 
making a decision. Although the Plan expressly provides for Advisory 
Committee input, it does not contain a mechanism--such as requiring the 
Operating Committee to respond to the Advisory Committee's views, 
formally or informally, in advance of or following a decision by the 
Operating Committee--to ensure that the Operating Committee considers 
the views of the Advisory Committee as a part of the Operating 
Committee's decision-making process.
(3) Conclusion
    The Commission preliminarily believes that the governance 
provisions discussed above, which the Commission identified as being 
``important to the efficient operation and practical evolution of the 
[CAT], and . . . responsive to many commenters' concerns about 
governance structure, cost allocations, and the inclusion of SRO 
members as part of the planning process,'' could help promote better 
decision-making by the relevant parties. These provisions thus could 
mitigate concerns about potential uncertainty in the economic effects 
of the Plan by giving the Commission greater confidence that its 
expected benefits would be achieved in an efficient manner and that 
costs resulting from inefficiencies would be avoided.
4. Request for Comment on the Benefits
    The Commission requests comment on all aspects of the discussion of 
the potential benefits of the CAT NMS Plan. In particular, the 
Commission seeks responses to the following questions:
    257. Do Commenters agree with the Commission's assessment of the 
potential benefits of the CAT NMS Plan? Why or why not?
    258. To what extent do the uncertainties related to future 
decisions about Plan implementation impact the

[[Page 30706]]

assessment of potential benefits of the Plan? Please explain.
    259. Do Commenters agree that the inclusion of the data fields in 
one centralized data source in the CAT NMS Plan described above would 
result in more complete data than what is currently available to 
regulators? Which elements of the Plan would deliver improvements to 
completeness? Are there any elements of the Plan that would degrade the 
completeness of regulatory data? Please explain.
    260. The Commission reviewed gap analyses that examine whether the 
CAT Data would contain all important data elements in current data 
sources \815\ and concluded that certain information is not included 
(e.g., OATS data fields that allow off-exchange transactions to be 
matched to their corresponding trade reports at trade reporting 
facilities and certain EBS elements). Please identify any such data 
elements that are missing under the Plan.
---------------------------------------------------------------------------

    \815\ See SEC Rule 613--Consolidated Audit Trail (CAT) OATS--CAT 
Gap Analysis and SEC Rule 613--Consolidated Audit Trail (CAT) 
Revised EBS--CAT GAP Analysis, available at http://www.catnmsplan.com/gapanalyses/index.html. The Commission 
acknowledges that the Participants are continuing to study gaps 
between current regulatory data sources and the Plan as filed. CAT 
NMS Plan, supra note 3, at Appendix C, Section C.9
---------------------------------------------------------------------------

    261. The Commission also seeks comment on the significance of the 
gaps identified in the analyses. If there are particular fields that 
are identified in the gap analyses that should not be incorporated into 
CAT, please identify them and explain.
    262. The Commission expects that, pursuant to the requirements of 
the Plan,\816\ any missing elements that are material to regulators 
would be incorporated into CAT Data prior to the retirement of the 
systems that currently provide those data elements to regulators. Do 
you agree? Why or why not? Do you agree that CAT Data would include the 
audit trail data elements that currently exist in audit trail data 
sources? Why or why not?
---------------------------------------------------------------------------

    \816\ The Plan requires that, prior to the retirement of 
existing systems, the CAT Data must contain data elements sufficient 
to ensure the same regulatory coverage provided by existing systems 
that are anticipated to be retired. See CAT NMS Plan, supra note 3, 
at Appendix D, Section 3.
---------------------------------------------------------------------------

    263. Do Commenters agree that the CAT NMS Plan would improve the 
accuracy of the data available to regulators? Which elements of the 
Plan would deliver these improvements? Are there any elements of the 
Plan that would degrade the accuracy of regulatory data relative to 
today? Are there any elements of the Plan that would prevent or limit 
improvements in the accuracy of regulatory data? Are the provisions of 
the Plan related to accuracy appropriate and reasonable in light of the 
goal of improving data quality? Please explain.
    264. Do Commenters believe that procedural protections in the Plan, 
such as the requirement that the Technical Specifications be 
``consistent with [considerations and minimum standards discussed in] 
Appendices C and D,'' the requirement to provide the initial Technical 
Specifications and any Material Amendments thereto to the Operating 
Committee for approval by Supermajority Vote,\817\ and the requirement 
that all non-Material Amendments and all published interpretations be 
provided to the Operating Committee in writing at least ten days before 
publication,\818\ can mitigate uncertainty regarding future decisions 
and help promote accuracy? Please explain.
---------------------------------------------------------------------------

    \817\ Id. at Section 6.9(a). The Commission notes that the 
standards in Appendices C and D do not cover all decisions that 
would affect the accuracy of the data.
    \818\ See CAT NMS Plan, supra note 3, at Section 6.9(c)(i).
---------------------------------------------------------------------------

    265. Do Commenters believe that the Error Rate, validations, and 
error resolution processes described in the CAT NMS Plan would provide 
improvements in accuracy? Are these processes appropriate and 
reasonable in light of the goal of improving data quality? Please 
explain.
    266. The Plan specifies an error correction process after initial 
reports are received and indicates that practically all errors 
identifiable by the validations used in the error correction process 
would be corrected by 8:00 a.m. Eastern Time on day T+5, stating that 
errors are expected to be ``de minimis'' after the error correction 
period.\819\ Do Commenters believe that this is a reasonable 
conclusion? Please explain.
---------------------------------------------------------------------------

    \819\ See id. at Appendix C, Section A.3(b) n.102. ``De 
minimis'' is not defined and no numerical Error Rate is given. The 
Plan also includes a compliance program intended to help achieve 
this goal.
---------------------------------------------------------------------------

    267. Do Commenters believe that the provisions in the CAT NMS Plan 
related to event sequencing would provide improvements in accuracy? To 
what degree does the 50 millisecond clock synchronization requirement 
enable or prevent regulators' ability to sequence events that occur in 
different Execution Venues? Are the provisions of the Plan related to 
event sequencing appropriate and reasonable in light of the goal of 
improving data quality? Please explain.
    268. The Plan does not specify the approach that would be used to 
sequence events when time stamps are identical. Do Commenters believe 
that there is a way for the Plan Processor to sequence events with 
identical time stamps? How would this process, or the lack of a 
process, affect the quality of the CAT Data?
    269. The Plan states that ``the Participants plan to require that 
the Plan Processor develop a way to accurately track the sequence of 
order events [of a particular order] without relying entirely on time 
stamps.'' \820\ Do Commenters believe it is feasible to properly 
sequence the events of a simple or complex order without relying 
entirely on time stamps? Please explain. If such a procedure could be 
developed, how accurate would it be?
---------------------------------------------------------------------------

    \820\ See CAT NMS Plan supra note 3 at Appendix C, Section 
A.3(c).
---------------------------------------------------------------------------

    270. The Plan further states, ``For unrelated events, e.g., 
multiple unrelated orders from different broker-dealers, there would be 
no way to definitively sequence order events within the allowable clock 
drift as defined in Article 6.8.'' \821\ Do Commenters believe it would 
be feasible for the Plan Processor to develop a way to accurately 
sequence such unrelated orders given the time stamp and clock 
synchronization requirements of the Plan? Please explain. If such a 
procedure could be developed, how accurate would it be?
---------------------------------------------------------------------------

    \821\ See id. at Appendix C, Section A.3(c) n.110.
---------------------------------------------------------------------------

    271. Do Commenters agree with the Commission's data analysis of the 
clock synchronization improvements from the Plan? If not, how could the 
Commission improve the data analysis? Do Commenters have their own data 
analysis that informs on the expected improvements from the Plan? If 
so, please provide. Do Commenters agree that the improvements to the 
percentage of sequenceable order events by Plan standards are modest 
and the requirements of the Plan may not be sufficient to completely 
sequence the majority of market events relative to all other events?
    272. Do Commenters agree with the Plan's assessment of the industry 
standard for clock synchronization? Does this reflect the standards for 
all CAT Reporters, including exchanges, ATSs, and other broker-dealers? 
If not, what would be a more appropriate way to define the industry 
standard for clock synchronization?
    273. Do Commenters believe that the provisions in the CAT NMS Plan 
related to linking data would result in improvements to the accuracy of 
the data available to regulators? Would the process for linking orders 
across market participants and SROs improve accuracy compared to 
existing data? Would the Plan Processor be able to

[[Page 30707]]

develop expertise in linking data more efficiently than the regulatory 
staff members from each entity could on their own? Please explain.
    274. Would the Error Rates associated with the linking process 
represent improvements to data accuracy? Would Approach 1 to data 
conversion result in a lower Error Rate than Approach 2? Would the 
Approach affect the Plan Processor's ability to build a complete and 
accurate database of linked data? Are the Error Rates associated with 
the linking process appropriate and reasonable in light of the goal of 
improving data quality? Please explain.
    275. Do Commenters believe that the inclusion of unique Customer 
and Reporter Identifiers would increase the accuracy of information in 
data regulators use and provide benefits to a broad range of regulatory 
activities that involve audit trail data? Please explain.
    276. Do Commenters agree that the CAT Data would provide less 
aggregated allocation information and less aggregated issuer repurchase 
information? Why or why not? Would these changes significantly affect 
regulatory activities?
    277. Do Commenters agree that the CAT NMS Plan would improve the 
accessibility of the data available to regulators? Which elements of 
the Plan would deliver these improvements? Are there any elements of 
the Plan that would degrade the accessibility of regulatory data 
relative to today? Are there any elements of the Plan that would 
prevent or limit improvements in the accessibility of regulatory data?
    278. Do Commenters believe that the minimum requirements for direct 
access ensure that the Plan would improve access to current data, 
including the process of requesting data? Would the direct access 
facilitated by the Plan provide sufficient capacity and functionality? 
Would direct access reduce the number of ad hoc data requests?
    279. Do Commenters agree that the CAT NMS Plan would improve the 
timeliness of the data available to regulators? Which elements of the 
Plan would deliver these improvements? Are there any elements of the 
Plan that would degrade the timeliness of regulatory data relative to 
today? Are there any elements of the Plan that would prevent or limit 
improvements in the timeliness of regulatory data?
    280. Do Commenters believe that the CAT NMS Plan will facilitate 
the ability of each national securities exchange and national 
securities association to comply with the requirement in Rule 613(f) 
that they develop and implement a surveillance system, or enhance 
existing surveillance systems, reasonably designed to make use of the 
consolidated information contained in the consolidated audit trail? If 
not, why not?
    281. Do Commenters agree that the CAT NMS Plan will facilitate the 
ability of regulators to conduct risk-based examinations? Why or why 
not? How significantly would the Plan improve risk-based examinations? 
Please explain.
    282. Do Commenters agree that the CAT NMS Plan will improve the 
efficiency of regulators' enforcement activities? Why or why not? Which 
specific regulatory activities would be most improved by the CAT NMS 
Plan? Please explain.
    283. Do Commenters agree that the CAT NMS Plan will improve the 
ability for regulators to determine the credibility of tips and 
complaints? Please explain.
    284. Overall, do Commenters agree that the surveillance, 
examination, and enforcement activities of regulators would improve 
with the CAT NMS Plan? Please explain. Would these improvements be 
significant enough to deter violative behavior? Please explain. What 
would be the economic effect of this deterrence?
    285. Would such improvements reduce the percentage of activities 
that generate false positives (i.e., detection of behaviors that are 
not violative) and/or reduce the percentage of activities that are 
false negatives (i.e., not detecting behaviors that are violative)? 
Please explain. What would be the economic effect of any changes in 
false positives or false negatives?
    286. Do Commenters agree with the Commission's assessment of the 
economic effects of the improvements to surveillance, examinations, and 
enforcement from the CAT NMS Plan? Please explain.
    287. Do Commenters agree that the CAT NMS Plan would improve the 
efficiency and effectiveness of regulators conducting analysis and 
reconstruction of market events? Please explain. Do Commenters agree 
with the Commission's assessment of the benefits to investors and the 
market of more efficient and effective analysis and reconstruction of 
market events? Please explain.
    288. Do Commenters agree that the CAT NMS Plan would facilitate 
market analysis and research that would improve regulators' 
understanding of securities markets? Please explain. Do Commenters 
agree with the Commission's assessment of the benefits to investors and 
the markets from regulators having a better understanding of the 
markets? Please explain.
    289. Do Commenters believe that there are other features of the CAT 
NMS Plan uniquely applicable to a consolidated audit trail that 
increase the likelihood that the potential benefits of the CAT NMS Plan 
would be realized? Please identify these features and explain.
    290. Do Commenters agree that provisions of the Plan related to 
future upgrades, promoting accuracy, and promoting timeliness increase 
the likelihood that the potential benefits of the CAT NMS Plan would be 
realized? Do current regulatory data sources have provisions similar to 
ones the Commission analyzed? If so, please describe such provisions.
    291. Do Commenters believe that provisions of the Plan provide 
incentives to reduce reporting errors for a CAT Reporter that has an 
Error Rate that does not exceed the thresholds that would trigger fines 
under the Plan or possible enforcement actions by regulators? If so, 
what are the incentives? Could the Plan provide different incentives to 
reduce reporting errors? Please explain.
    292. Under the Plan, proposals to adjust the maximum allowable 
Error Rate are to originate from the Plan Processor. Do Commenters 
agree with this approach? Please explain. Should others, such as the 
Operating Committee, or Advisory Committee be able to originate changes 
to the Error Rate? Please explain.
    293. Do Commenters agree that communication of data feed delays for 
public consumption is beneficial to the operation and effectiveness of 
the CAT? If so, in what ways? What are the benefits and costs of such 
public disclosure?
    294. Do Commenters agree that the governance provisions identified 
in the Rule 613 Adopting Release continue to be important to the 
efficient operation and practical evolution of the Plan, and therefore 
to the achievement of the Plan's benefits? Are there other aspects of 
the Plan's governance that might enhance (or detract from) the Plan's 
ability to achieve its intended benefits? Are there other governance 
aspects that the Plan does not address that might enhance, if included 
(or detract from, if not remedied) the Plan's ability to achieve its 
intended benefits? Please identify these other features and explain how 
they enhance (or detract from) the Plan's ability to achieve its 
intended benefits.
    295. The Commission's analysis of the provisions of the Plan 
relating to voting assumes that these provisions will

[[Page 30708]]

promote the benefits sought to be achieved by the Plan because, by 
assigning different voting thresholds to different actions, the Plan 
seeks to address potential conflict of interest and holdout problems, 
balancing dissenters' rights with the need to move forward with needed 
changes. Is this a complete and accurate list of the factors that could 
bear on whether the voting provisions of the Plan will promote the 
benefits sought to be achieved by the Plan, and did the Commission 
correctly weigh these factors in preliminarily concluding that the 
Plan's voting provisions could help promote better Plan decision-making 
and, thus, improve achievement of the Plan's goals? If the Commission 
should have considered other factors or weighed the identified factors 
differently, please explain how, and what the costs and benefits of an 
alternative approach would be.
    296. The Plan provides that ``[a]ll votes by the Selection 
Committee shall be confidential and non-public.'' \822\ What are the 
effects of confidential voting as a means of limiting conflicts of 
interest and promoting accountability? Would expanding confidentiality 
in voting to other situations help or hinder the effectiveness of the 
Operating Committee and its Subcommittees in achieving the regulatory 
objectives of the Plan? Please explain and provide supporting examples 
and evidence, if available.
---------------------------------------------------------------------------

    \822\ See CAT NMS Plan, supra note 3, at Section 5.1(b)(v).
---------------------------------------------------------------------------

    297. Do Commenters believe that the size, membership, and tenure of 
Advisory Committee members is appropriately tailored to encourage the 
effective accumulation and communication of Advisory Committee member 
views to the Operating Committee, thereby improving Plan decision-
making? If not, why not? Are there other factors that could bear on 
whether the provisions of the Plan relating to the Advisory Committee 
will promote better decision-making? If so, what other factors?
    298. Are there any alternatives for Advisory Committee involvement 
that could increase the effectiveness of its involvement? What benefits 
would these achieve in terms of improving the Operating Committee's 
efficiency? Would these alternatives increase or decrease costs?
    299. What obstacles to information-sharing between individual 
members of the Operating Committee and the Commission, if any, are 
likely to limit the Plan's effectiveness in meeting its regulatory 
objectives? Is there any information, such as regarding individual SRO 
clock synchronization standards, that members would need to share 
within the Operating Committee to achieve plan regulatory objectives 
but may be uncomfortable sharing with one another (or more comfortable 
sharing with the Commission than with one another)? Please be specific 
and explain what, if any, changes to the plan could mitigate obstacles 
from inadequate information-sharing.
    300. Are there any other factors relating to the operation and 
administration of the Plan that the Commission should consider as part 
of determining whether to approve the Plan? If so, what are those 
factors and how could they influence the costs and benefits of the 
Plan? Does the Plan currently address these factors? If not, how could 
the Plan address these factors and what would be the relative costs and 
benefits of any changes to the Plan?

F. Costs

    As noted above, at the time of the Adopting Release the Commission 
deferred its economic analysis of the creation, implementation, and 
maintenance of CAT until after submission of the CAT NMS Plan.\823\ 
Accordingly, the Commission deferred its detailed analysis of costs 
associated with CAT. In light of the SROs having submitted the CAT NMS 
Plan, this Section sets forth the Commission's preliminary analysis of 
the expected costs for creating, implementing, and maintaining the CAT, 
as well as the associated reporting of data.
---------------------------------------------------------------------------

    \823\ See Adopting Release, supra note 9, at 45789.
---------------------------------------------------------------------------

    As discussed in detail below, the Commission has preliminarily 
estimated current costs related to regulatory data reporting, 
anticipated costs associated with building and maintaining the Central 
Repository, and the anticipated costs to report CAT Data to the Central 
Repository. These preliminary estimates are calculated from information 
provided in the CAT NMS Plan as well as supplemental information. 
Currently, the 20 Participants spend $154.1 million annually on 
reporting regulatory data and performing surveillance.\824\ The 
approximately 1,800 broker-dealers anticipated to have CAT reporting 
responsibilities currently spend $1.6 billion annually on regulatory 
data reporting.\825\ If the Plan is approved, the Commission 
preliminarily estimates that the cost of the Plan would be 
approximately $2.4 billion in initial aggregate implementation costs 
and $1.7 billion in ongoing annual costs.\826\ Furthermore, the Plan 
anticipates that market participants would have duplicative audit trail 
data reporting responsibilities for a period of up to a maximum of 2.5 
years, preceding the retirement of potentially duplicative regulatory 
data reporting schemes.\827\ Duplicative audit trail data reporting 
could cost broker-dealers $1.6 billion per year or more and could cost 
the Participants up to $6.9 million per year. The Commission 
preliminarily believes that the primary component of costs for CAT's 
estimated annual costs would be the estimated aggregate broker-dealer 
data reporting costs of $1.5 billion per year, whereas the Central 
Repository build costs are preliminarily estimated by the Participants 
to be no more than $92 million, with annual operating costs of no more 
than $135 million.
---------------------------------------------------------------------------

    \824\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(ii)(B)(1).
    \825\ See Section IV.F.1.c(2), infra.
    \826\ See Section IV.F.2, infra.
    \827\ See id.
---------------------------------------------------------------------------

    As explained in detail below, the Commission believes, however, 
that there is significant uncertainty surrounding the actual 
implementation costs of CAT and the actual ongoing broker-dealer data 
reporting costs if the Plan were approved. Methodology and data 
limitations used to develop these preliminary cost estimates could 
result in imprecise estimates that may significantly differ from actual 
costs. The Commission has used its best judgment, however, in obtaining 
and assessing available information and data to provide the analysis 
and estimates included in this Notice. The Commission is also 
requesting comment on the methodology and any additional data 
Commenters believe should be considered.
    Furthermore, the Commission notes that because some CAT design 
decisions (such as setting forth detailed Technical Specifications) 
have been deferred until the selection of the Plan Processor, the 
associated cost uncertainties could cause the actual costs to vary 
significantly from the estimates set forth in this analysis.
    The Commission notes that the cost estimates set forth in this 
analysis are updated from the cost estimates provided in the Proposing 
Release. In the Proposing Release, the Commission estimated $4.3 
billion in initial implementation costs and $2.3 billion in ongoing 
annual costs.\828\ The

[[Page 30709]]

Commission has now updated its analysis and estimates $2.4 billion in 
initial implementation costs and $1.7 billion in ongoing annual costs. 
The Commission believes that several factors drive differences in cost 
estimates from the Proposing Release to the current cost estimates in 
this analysis. First, the scope of CAT as contemplated in the Proposing 
Release is different than the scope of CAT Data as would be implemented 
by the CAT NMS Plan.\829\ For example, the Commission notes that, 
unlike CAT Data envisioned in the Proposing Release, the proposed Plan 
includes OTC Equity Securities, which if included in CAT would 
facilitate the possible retirement of OATS as an audit trail data 
reporting system at a relatively earlier date. While the Commission's 
cost estimates do not explicitly incorporate cost savings from systems 
retirement, cost estimates provided in the Plan and based on surveys of 
broker-dealers, participants and service providers may reflect some of 
these savings. For example, because respondents anticipate 
incorporating resources that would be devoted to OTC equity data 
reporting to CAT reporting, cost estimates may be lower than they would 
be if OTC equity data were excluded from CAT but were still reported to 
OATS on an ongoing basis. Thus, after all CAT Reporters start reporting 
to the Central Repository and the resolution of any data gaps between 
OATS and CAT, FINRA would not need to maintain OATS solely to fulfill 
its regulatory responsibilities relating to OTC Equity Securities.\830\ 
Additionally, the Commission's updated cost estimates are based on data 
submitted with the Plan, which was unavailable when the Commission 
first estimated the costs of CAT in the Proposing Release,\831\ as well 
as certain additional information obtained by Commission Staff.\832\ 
Furthermore, the Plan also integrates exemptive relief extended to the 
Participants regarding (1) Options Market Maker quotes; (2) Customer-
IDs; (3) CAT-Reporter-IDs; (4) linking of executions to specific 
subaccount allocations on Allocation Reports; and (5) time stamp 
granularity for Manual Order Events. The Commission preliminarily 
believes that this exemptive relief contributes to reductions in cost 
of the Plan relative to those estimated in the Proposing Release. The 
Commission has incorporated this additional information into its 
current cost analysis.\833\
---------------------------------------------------------------------------

    \828\ See Proposing Release supra note 9, at 32596-602. The $4.3 
billion and $2.3 billion cost estimates can be calculated using 
individual cost estimates from the Proposing Release. The Proposing 
Release expressed some cost estimates on a per-Participant basis. 
The Plan, however, breaks out costs to Participants by (i) single-
exchange-operating Participants and (ii) Affiliated Participants 
that operate multiple exchanges. To validly compare the Commission's 
preliminary cost estimates to the cost estimates set forth in the 
Plan, the Commission's analysis aggregates costs to all Participants 
for these cost estimates. The Proposing Release anticipated 1,114 
SRO members would report data to the Central Repository directly, 
and 3,006 broker-dealers would report data through a service 
provider. The Plan anticipates that approximately 1,800 broker-
dealers would have CAT reporting obligations; the Commission 
preliminarily believes that the majority of these broker-dealers 
would rely on service bureaus to perform their regulatory data 
reporting. Again, to validly compare the different cost estimates, 
the Commission aggregates the cost estimates across all broker-
dealer CAT Reporters.
    \829\ Similarly, in the Adopting Release, the Commission 
explained that ``the methodology that the Commission used in the 
Proposing Release to estimate the costs of creating, implementing, 
and maintaining a consolidated audit trail may no longer be 
suitable'' and that certain ``assumptions may no longer be valid 
since several of the specific technical requirements underlying the 
Proposing Release's approach have been substantially modified.'' See 
Adopting Release, supra note 9, at 45781.
    \830\ If FINRA were unable to retire OATS, the costs of 
duplicative reporting (discussed in Section IV.F.2, infra), would 
continue indefinitely. The Commission preliminarily believes this 
outcome is unlikely because the Plan discusses the Participants' 
plans to retire OATS if the Plan is approved. See CAT NMS Plan, 
supra note 3, at Appendix C, Section C.9.
    \831\ See Proposing Release, supra note 9, at 32601-02.
    \832\ As discussed further below, the Commission's analysis also 
incorporates data obtained from FINRA and information from 
discussions with broker-dealers and service bureaus arranged by FIF 
and staff. See infra notes 880 and 899.
    \833\ The Commission's revised cost estimates are generally 
substantially lower than those presented in the Proposing Release. 
See Proposing Release, supra note 9, at 32601-02. The Proposing 
Release's estimate of total industry implementation costs is 40.45% 
higher than the current estimate, and the Proposing Release's 
estimate of ongoing total industry costs is 57.99% higher than the 
current estimate. Reductions in cost estimates are primarily driven 
by lower broker-dealer implementation and ongoing reporting costs 
that are largely attributable to a reduction in the number of 
broker-dealers anticipated to incur CAT reporting responsibilities, 
as the Proposing Release assumed that all 4,120 broker-dealers would 
be CAT Reporters but the Plan estimates that only 1,800 broker-
dealers would incur CAT reporting responsibilities. The Proposing 
Release also presented higher estimates of the number of broker-
dealers that are likely to be insourcers; these broker-dealers have 
significantly higher implementation and ongoing costs that 
outsourcing broker-dealers. The Proposing Release estimated Central 
Repository implementation costs that are 23.33% higher than current 
estimates; ongoing Central Repository costs were lower by 33.56%; 
SRO implementation costs were 82.21% higher in the proposing 
release; SRO ongoing costs were estimated to be 31.79% lower than 
current estimates. The Proposing Release did not recognize costs to 
Service Bureaus related to CAT.
---------------------------------------------------------------------------

1. Analysis of Expected Costs
    The Plan provides estimates of the expected costs associated with 
the Plan, including costs to build and operate the Central Repository 
and costs to Participants and CAT Reporters to implement and maintain 
CAT reporting.\834\ As explained below, the Commission has thoroughly 
reviewed the cost estimates contained in the Plan and other relevant 
information to develop the Commission's preliminary estimate of 
expected costs of the Plan. The Commission preliminarily believes that 
in some cases the estimates provided in the Plan are reliable estimates 
of the potential costs of certain aspects of the Plan. The Commission 
preliminarily believes, however, that in other cases the data and 
methodology underlying certain Plan estimates are unreliable and, in 
such cases, the Commission has preliminarily evaluated and provided 
separate estimates based on alternative data or a different 
methodology.\835\
---------------------------------------------------------------------------

    \834\ Because the Plan does not provide data that permit 
partitioning costs associated with the Central Repository between 
Participants and broker-dealer CAT Reporters, this analysis 
discusses the Central Repository costs separately.
    \835\ For example, the Commission preliminarily believes that 
cost estimates in the Plan relating to the costs that would be borne 
by broker-dealers are unreliable due to limitations of certain 
survey response data. These limitations and the Commission's 
alternative cost estimate are discussed in detail below. See Section 
IV.F.1.c, infra.
---------------------------------------------------------------------------

    In this Section, the Commission provides preliminary estimates of 
the individual elements that constitute the estimated expected total 
cost associated with implementing and maintaining the CAT, including 
the costs of operating and building the Central Repository, the costs 
to Participants, the costs to broker-dealers, and other costs 
considered in the CAT NMS Plan.
a. Costs of Building and Operating the Central Repository
    The Plan's estimates of the costs to build the Central Repository 
are based on Bids that vary in a range as high as $92 million. The 
Plan's estimates of annual operating costs are based on Bids that vary 
in a range up to $135 million. The eventual magnitude of Central 
Repository costs is dependent on the Participants' selection of the 
Plan Processor, and may ultimately differ from estimates discussed in 
the Plan if Bids are revised as the bidding process progresses. The 
Plan discusses these costs both as (i) one-time and ongoing costs as 
well as (ii) a five-year total cost, to help evaluate economic trade-
offs between initial build costs and operating costs. The Plan 
anticipates that Participants and their members would bear the costs of 
building and operating the Central Repository. The Commission 
preliminarily believes that these estimates are reliable because they 
are the result of a competitive bidding process, although the 
Commission recognizes that the Bids are not legally binding on bidders. 
In particular, the Commission preliminarily believes that a Bidder 
would not likely decline a

[[Page 30710]]

contract to be Plan Processor that was based on the Bid it submitted 
because that Bidder might lose future business due to reputational 
consequences of its actions. Furthermore, Bidders have invested 
considerable time and effort in evaluating the RFP and preparing their 
Bids and thus if a Bidder were unwilling to serve as Plan Processor 
according to the terms outlined in its Bid, the time and effort 
expended to prepare the Bid would be wasted resources. As explained 
further below, however, the Commission believes that these cost 
estimates associated with building and operating the Central Repository 
are subject to a number of uncertainties.
    To estimate the one-time total cost to build the Central 
Repository, the Plan uses the Bids of the final six Shortlisted 
Bidders.\836\ The Bidders' implementation cost estimates range from $30 
million to $91.6 million, with a mean of $53 million and a median of 
$46.1 million.\837\ The Plan also estimates the ongoing costs of the 
Central Repository. The Bids of the final six Shortlisted Bidders 
estimate annual costs to operate and maintain the Central Repository 
range from $27 million to $135 million, with a mean of $51.1 million 
and a median of $42.2 million.\838\ The Plan's summary statistics show 
that annual costs are not expected to be constant year-over-year for 
all Bidders, but the Plan does not provide further details on how the 
costs are expected to evolve over time or how many of the Bids have 
time-varying annual costs.\839\ Although the Commission preliminarily 
believes that costs provided by Bidders are reliable, the Commission 
recognizes that these ongoing costs could increase over time due to 
inflation or changes in market structure such as a significant increase 
in message traffic. It is also possible these costs could decrease due 
to improvements in technology, reductions in message traffic, and 
innovation by the Plan Processor.
---------------------------------------------------------------------------

    \836\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(i)(B). The Plan does not reflect any more specific cost 
ranges that result from narrowing the range of Bidders from six to 
three. See supra note 35.
    \837\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(i)(B).
    \838\ Id.
    \839\ Id.
---------------------------------------------------------------------------

    The Plan also provides information based on the Bids on the total 
five-year operating costs for the Central Repository because the annual 
costs to operate and maintain the Central Repository are not 
independent of the build cost. In particular, it is plausible that the 
Bidders with the lowest build costs trade off lower build costs for 
higher recurring annual costs. To account for this possibility, the 
Plan presents the range of total five-year costs across Bidders using 
the Bids of the final six Shortlisted Bidders.\840\ The methodology 
takes the sum of the annual recurring costs over the first five years 
(discounted to the present with a discount rate of 2%) and adds the 
upfront investment. Across the six Shortlisted Bidders, the total five-
year costs to build and maintain CAT range from $159.8 million to 
$538.7 million.\841\ This information is less granular than other 
Bidder cost information provided in the Plan, and no mean or median is 
provided or can be calculated with the information provided.
---------------------------------------------------------------------------

    \840\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(i)(B). The five-year presentation of Central Repository costs 
is converted into implementation and annual costs by using the 
maximum build cost and maximum annual operating cost over the five 
year period in the Bids. The Commission preliminarily believes that 
this presentation is conservative in the sense that it avoids 
underestimating the Central Repository costs that must be borne by 
industry. However, the Commission preliminarily believes that it is 
likely that this presentation overestimates the actual Central 
Repository costs because most individual Bids forecast variation in 
operating expenses year by year, with costs in some years lower than 
the maximum used in this presentation. Because the Central 
Repository costs are, in aggregate, significantly lower than the 
aggregate costs broker-dealers would incur in reporting CAT Data, 
the Commission preliminarily believes that this overestimation would 
not materially affect the magnitude of aggregate costs for the Plan 
to industry.
    \841\ See supra note 836, and CAT NMS Plan, supra note 3, at 
Appendix C, Section B.7(b)(i)(B).
---------------------------------------------------------------------------

    The Plan provides that costs associated with building and operating 
the Central Repository would be borne by both Participants and their 
members.\842\ In particular, the Plan provides for fixed-tiered fees 
based on ranges of activity levels to be levied on Execution Venues 
(i.e., the Participants (including a national securities association 
with trade reporting facilities, and ATSs)) based upon the Execution 
Venue's market share of share volumes, with options and equity venue 
fees determined by separate schedules set by CAT's Operating 
Committee.\843\ Furthermore, the Plan provides for fixed-tiered fees 
for Industry Members (broker-dealers) based on the message traffic 
generated by the member, including message traffic associated with an 
ATS operated by the member.\844\ The Plan also provides for the 
establishment of other fees for activities such as late, inaccurate, or 
corrected data submission by CAT Reporters.\845\ The Plan does not 
present information on the potential magnitude of these fees, but the 
Commission preliminarily believes they are likely to be a minor expense 
for CAT reporters, who should be able to avoid these fees by fulfilling 
their normal reporting responsibilities under the Plan. The Plan does 
not provide information on the relative allocation of these fees 
between transaction-based fees, message traffic-based fees, and other 
fees.\846\
---------------------------------------------------------------------------

    \842\ See CAT NMS Plan, supra note 3, at Section 11.
    \843\ See id. at Section 11.3.
    \844\ See id. at Section 11.3(b).
    \845\ See id. at Section 11.3(c).
    \846\ The economic analysis treats estimates of costs associated 
with building and operating the Central Repository separately from 
estimates of costs to Participants and other CAT Reporters to report 
CAT Data. While the costs of building and operating the Central 
Repository would be borne by the Participants and Industry Members, 
the allocation of the costs between and among those entities would 
be determined by the CAT Funding Model, which has not yet been 
finalized. See Section IV.C.2, supra. However, these costs are 
included in the Commission's estimate of the total costs to industry 
if the Plan is approved.
---------------------------------------------------------------------------

    The Commission believes that a range of factors would drive the 
ultimate costs associated with building and operating the Central 
Repository and who would bear those costs. The Plan explains that the 
major cost drivers identified by Bidders are (1) transactional volume, 
(2) technical environments, (3) likely future growth in transactional 
volumes, (4) data archival requirements, and (5) user support/help desk 
resource requirements.\847\ The Plan does not present information on 
how sensitive the cost estimates are to each of these factors. Further, 
how Bidders propose to satisfy the RFP requirements could materially 
affect the ultimate cost to the industry to operate the Central 
Repository and who would bear those costs. For instance, some Bids may 
provide more extensive user support from the Plan Processor than 
others, effectively shifting user support costs from CAT Reporters to 
the Plan Processor, where such support might be more efficiently 
provided. However, the Plan does not provide information about how the 
Bidders propose to address each of the RFP requirements; thus, 
uncertainties exist around who would bear certain costs and how such 
costs could change if each Bidder's proposal related to these factors 
change.
---------------------------------------------------------------------------

    \847\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(i)(B).
---------------------------------------------------------------------------

    The Commission is mindful that the cost estimates associated with 
building and operating the Central Repository are subject to a number 
of additional uncertainties. First, the Participants have not yet 
selected a Plan Processor, and the Shortlisted Bidders have submitted a 
wide range of cost estimates for building and operating the Central

[[Page 30711]]

Repository. Second, the Bids submitted by the Shortlisted Bidders are 
not yet final. Participants could allow Bidders to revise their Bids 
before the final selection of the Plan Processor. Third, neither the 
Bidders nor the Commission can anticipate the evolution of technology 
and market activity with complete prescience. Available technologies 
could improve such that the Central Repository would be built and 
operated at a lower cost than is currently anticipated. On the other 
hand, if anticipated market activity levels are materially 
underestimated, the Central Repository's capacity could need to 
increase sooner, increasing the actual costs to operate the Central 
Repository than currently anticipated in the Bids. The Commission notes 
that costs to build and operate the Central Repository are relatively 
small compared to total industry costs if the CAT NMS Plan were 
approved; consequently, the Commission preliminarily believes that 
these uncertainties are unlikely to materially affect the final cost of 
the Plan to industry, if it is approved.
b. Costs to Participants
    The Commission preliminarily believes that the Plan's estimates for 
Participants to report CAT Data are reliable because all of the SROs 
provided cost estimates, and most SROs have experience collecting audit 
trail data as well as expertise in the both the requirements of CAT as 
well as their current business practices. The Plan provides estimated 
costs for the Participants to report CAT Data.\848\ These estimates are 
based on Participant responses to the Costs to Participants Study 
(``Participants Study'') \849\ that the Participants collected to 
estimate SRO CAT-related costs for hardware and software, full-time 
employee staffing (``FTE costs''), and third-party providers.\850\ 
Respondents to the Participants Study also estimated the costs 
associated with retiring current regulatory data reporting systems that 
would be rendered redundant by CAT.\851\
---------------------------------------------------------------------------

    \848\ See id. at Appendix C, Section B.7(b)(iii)(B)(2). In 
addition to the costs the Participants would incur implementing and 
maintaining CAT, the Participants would also incur and would 
continue to incur costs associated with developing the CAT NMS Plan. 
The Participants estimate such costs to be $8,800,000. The 
Commission does not include these costs in its estimates of the 
costs associated with CAT if the CAT NMS Plan is approved because 
these costs have already been incurred and would not change 
regardless of whether the Commission approves or disapproves the CAT 
NMS Plan. Further, the Commission assumes that the CAT NMS Plan's 
implementation cost estimates include any additional CAT NMS Plan 
development costs that would be incurred by Participants if the CAT 
NMS Plan were approved.
    \849\ The Participants Study delineates Participant responses 
into two groups. The first group consists of affiliated 
Participants, which includes single entities that hold self-
regulatory licenses for multiple exchanges. The second group 
consists of Participants that hold a single self-regulatory license, 
including FINRA, the sole national securities association. Id. at 
Appendix C, Section B.7(b)(i)(A)(1).
    \850\ Third-party provider costs are generally legal and 
consulting costs but may include other outsourcing. The template 
used by respondents is available at http://catnmsplan.com/PastEvents/ under the Section titled ``6/23/14'' at the ``Cost Study 
Working Template'' link.
    \851\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(iii)(B)(2).
---------------------------------------------------------------------------

    The Plan estimates costs for the Participants as an aggregate 
across all Participants (the six single-license Participants and the 
five Affiliated Participant Groups).\852\ The implementation cost 
estimate for Participants is $17.9 million, including $770,000 in legal 
and consulting costs and $10.3 million in full-time employee costs for 
operational, technical/development, and compliance-type functions.\853\ 
Annual ongoing costs are estimated to be $14.7 million, including 
$720,000 in legal and consulting costs and $7.3 million in full-time 
employee costs.\854\ Other than legal and consulting costs and full-
time employee costs, the Plan does not specify the other categories of 
implementation and ongoing costs, but based on discussion with the 
Participants, the Commission preliminarily believes that much of the 
remaining costs would be attributed to IT infrastructure, including 
hardware and software costs.
---------------------------------------------------------------------------

    \852\ Id. at Appendix C, Section B.7(b)(iii)(B)(2).
    \853\ Id.
    \854\ Id.
---------------------------------------------------------------------------

    The Plan also provides estimates of the costs Participants 
currently face in reporting regulatory data.\855\ The Plan anticipates 
that some, but not all, of these reporting systems would be retired 
after implementation of the Plan.\856\ The Plan reports that aggregate 
annual costs for current regulatory data reporting systems are $6.9 
million across all Participants.\857\
---------------------------------------------------------------------------

    \855\ Id.
    \856\ Id. As required by Rule 613(a)(1)(ix), 17 CFR 
242.613(a)(1)(ix), the CAT NMS Plan includes a plan to eliminate 
existing rules and systems that would be rendered duplicative under 
CAT. Id. at Appendix C, Section C.9. Among other things, this plan 
requires that within 18 months after Industry Members are required 
to begin reporting data to the Central Repository, each Participant 
will complete an analysis of whether its rules and systems related 
to monitoring quotes, orders, and executions collect information 
that is not rendered duplicative by CAT. Id. Each Participant must 
also analyze whether any such non-duplicative information should 
continue to be separately collected, incorporated into CAT, or 
terminated. Id. Therefore, depending on the results of these 
analyses, some existing regulatory reporting systems may continue to 
be in place after the implementation of CAT.
    \857\ Id. at Appendix C, Section B.7(b)(ii)(B)(1).
---------------------------------------------------------------------------

    In addition to data reporting costs, Participants face costs 
associated with developing and implementing a surveillance system 
reasonably designed to make use of the information contained in CAT 
Data as required by Rule 613(f).\858\ The Plan provides estimates of 
the costs to Participants to implement surveillance programs using data 
stored in the Central Repository. Participants would incur expenses, 
including full-time employee (``FTE''), legal, consulting and other 
costs to adapt their surveillance systems to utilize data in the 
Central Repository. The Plan provides an estimate of $23.2 million to 
implement surveillance systems for CAT, and ongoing annual costs of 
$87.7 million.\859\ The Plan does not provide information on why 
Participants' data reporting costs would substantially increase if the 
Plan were approved, nor does it provide information on why surveillance 
costs would decrease.
---------------------------------------------------------------------------

    \858\ See 17 CFR 242.613(f).
    \859\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(iii)(B)(2). Rule 613 requires the SROs to file updated 
surveillance plans within 14 months of CAT implementation. 17 CFR 
242.613(f). The Commission assumes that the CAT NMS Plan's estimate 
is limited to adapting current surveillance programs to the Central 
Repository. The Commission believes this is a conservative 
assumption because if other expenses were included in the estimate, 
the Commission would be overestimating the costs Participants would 
incur to implement and operate CAT if the CAT NMS Plan is approved.
---------------------------------------------------------------------------

    The Commission preliminarily believes the data reporting cost 
estimates are reasonable because the Commission expects that 
Participants would be required to implement new technology 
infrastructure to report data to the Central Repository and support 
specialized personnel to maintain this infrastructure and respond to 
inquiries from the Plan Processor and users of CAT Data. The Commission 
likewise preliminarily believes that the surveillance cost estimates 
are reasonable, even though the annual estimate of $87.7 million is 
lower than the $147.2 million Participants, in aggregate, currently 
spend on surveillance programs annually \860\ because Participants 
could realize efficiencies from having data standardized and centrally 
hosted that could allow them to handle fewer ad hoc data requests. In 
addition, the Plan could allow Participants to automate some 
surveillance processes that may currently be labor intensive or 
processed on legacy systems, which

[[Page 30712]]

could reduce costs because the primary driver of these costs is FTE 
costs.
---------------------------------------------------------------------------

    \860\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(ii)(B)(1).
---------------------------------------------------------------------------

    Table 6 summarizes the Participants' estimated costs, both current 
and CAT-related, that are set forth in the Plan. Currently, 
Participants spend approximately $154 million per year on data 
reporting and surveillance activities. The Participants estimate that 
they would incur $41 million in CAT implementation costs, and $102 
million annually in ongoing costs to report CAT Data and perform 
surveillance as mandated under Rule 613.

                                      Table 6--Participants' Cost Estimates
----------------------------------------------------------------------------------------------------------------
                                                       Current         CAT implementation        CAT ongoing
----------------------------------------------------------------------------------------------------------------
Data Reporting................................            $6,900,000           $17,900,000           $14,700,000
Surveillance..................................           147,200,000            23,200,000            87,700,000
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
    Total.....................................           154,100,000            41,100,000           102,400,000
----------------------------------------------------------------------------------------------------------------

c. Costs to Broker-Dealers
(1) Estimates in the Plan
    The Plan estimates total costs for those broker-dealers expected to 
report to CAT. In particular, the Plan relies on the Costs to CAT 
Reporters Study (``Reporters Study''), which gathered from broker-
dealers the same categories of cost estimates used in the Participants 
Study--i.e., the hardware and software costs, full-time employee 
staffing costs, and third-party provider costs that CAT Reporters would 
incur if the Commission approves the Plan.\861\ The Reporters Study 
surveyed broker-dealers to respond to two distinct approaches for 
reporting CAT Data to the Central Repository.\862\ Approach 1 assumes 
CAT Reporters would submit CAT Data using their choice of industry 
protocols. Approach 2 assumes CAT Reporters would submit data using a 
pre-specified format. The Participants distributed the Reporters Study 
to 4,406 broker-dealers and received 422 responses, of which the 
Participants excluded 180 deemed materially incomplete and 75 
determined to be erroneous.\863\ The Plan's cost estimate calculations 
are based on the remaining 167 responses. In aggregating the cost 
estimates across all broker-dealers expected to report CAT Data to the 
Central Repository, the Plan assumed that the characteristics of survey 
respondents (firm size and OATS reporting status) were representative 
of the approximately 1,800 broker-dealers expected to have CAT 
reporting obligations.\864\
---------------------------------------------------------------------------

    \861\ See id. at Appendix C, Section B.7(b)(i)(A)(2).
    \862\ See id.
    \863\ See id.
    \864\ Not all broker-dealers are expected to have CAT reporting 
obligations; the Participants report that approximately 1,800 
broker-dealers currently quote or execute transactions in NMS 
Securities, Listed Options or OTC Equity Securities and would likely 
have CAT reporting obligations. The Commission understands that the 
remaining 2,338 registered broker-dealers either trade in asset 
classes not currently included in the definition of Eligible 
Security or do not trade at all (e.g., broker-dealers for the 
purposes of underwriting, advising, private placements). The Plan 
describes the process of determining that 1,800 broker-dealers would 
report to the Central Repository in Appendix C. See CAT NMS Plan, 
supra note 3, at Appendix C, Section B.7(b)(ii)(B)(2).
---------------------------------------------------------------------------

    Based on the Reporters Study survey data, the Plan estimates 
implementation costs of less than $740 million for small firms \865\ 
and approximately $2.6 billion for large firms, for a total of $3.34 
billion in implementation costs for broker-dealers.\866\ For annual 
ongoing costs, the Plan estimates costs of $739 million for small firms 
and $2.3 billion for large firms, for a total of $3.04 billion in 
annual ongoing costs for broker-dealers.\867\ For both large and small 
broker-dealers, the Plan suggests that the primary cost driver for 
projected CAT reporting costs for broker-dealers is costs associated 
with full-time employees.\868\ For the reasons discussed below, the 
Commission preliminarily believes that the broker-dealer cost estimates 
in the Plan are in part unreliable, based on limitations with the 
Plan's underlying data in estimating costs. As discussed below, the 
Commission preliminarily believes that cost estimates in the Plan for 
large broker-dealers may be reliable, and the Commission has 
incorporated large firm data from the Plan into the Commission's 
estimates outlined below.\869\
---------------------------------------------------------------------------

    \865\ Survey respondents were instructed to classify themselves 
as ``small'' if their Total Capital (defined as net worth plus 
subordinated liabilities) was less than $500,000. See CAT NMS Plan, 
supra note 3, at Appendix C, Section B.7(b)(ii)(C) n.188. This is 
consistent with the definition of ``small business'' or ``small 
organization'' used with reference to a broker or dealer for 
purposes of Commission rulemaking in accordance with provisions of 
Chapter Six of the Administrative Procedure Act (5 U.S.C. 601 et 
seq.). See 17 CFR 240.0-10(c).
    \866\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(iv)(A)(3).
    \867\ Id.
    \868\ See id. at Appendix C, Section B.7(b)(iii)(C)(2).
    \869\ While the estimates presented in the Plan assume that the 
proportion of large versus small broker-dealers that responded to 
the Reporters Study is representative of the relative number of 
large versus small broker-dealers that are expected to incur CAT 
reporting obligations, the Commission's cost estimates do not embed 
this assumption. Instead, the Commission relies on data from FINRA 
to determine which firms are likely to outsource, and models those 
firms' costs based on information gleaned from FIF-organized 
discussions with industry. This is discussed further below, but this 
estimation results in relatively fewer firms' costs being estimated 
using ``large'' firm cost estimates presented in the Plan.
---------------------------------------------------------------------------

    The Commission preliminarily believes, however, that the cost 
estimates for small broker-dealers provided in the Plan, which are 
based upon responses set forth in the Reporters Study, do not prove 
reliable estimates of smaller CAT Reporter costs for a number of 
reasons. First, some respondents classified as small in the Reporters 
Study appear to have responded numerically with incorrect units, with 
such responses resulting in annual estimated cost figures that would be 
1,000 times too large. Second, maximum responses in certain categories 
of costs suggest that some large broker-dealers may have misclassified 
themselves as small broker-dealers.\870\ Third, methods used to remove 
outliers are likely to have introduced significant biases. Finally, the 
response rate to the Reporters Study survey was low and is likely to 
have oversampled small broker-dealers who currently have no OATS 
reporting obligations.\871\
---------------------------------------------------------------------------

    \870\ The Plan presents summary statistics such as average, 
median and maximum for each survey response. See CAT NMS Plan supra 
note 3, at Appendix C, Section B(7)(b)(ii)(C), Table 5. In the left 
most column, $14 million is the maximum response for ``Hardware/
Software Current Cost.''
    \871\ In reaching these preliminary conclusions, the Commission 
reviewed the detailed discussions of the Reporters Study survey 
methodology in the Plan and the survey form and instructions 
provided to respondents. See 6/23/14 entry on CAT NMS Plan Web site, 
available at http://www.catnmsplan.com/pastevents/index.html. The 
Commission staff also discussed with the Participants potential 
methodology adjustments in aggregating the CAT Reporters Study data. 
After Commission staff discussions with the Participants, the 
Commission concluded that no methodology could address these 
fundamental issues with the survey data.
---------------------------------------------------------------------------

    First, the Commission preliminarily believes that the respondents 
to the Reporters Study survey are likely to have used different units 
in their responses and that the survey precision is materially affected 
because

[[Page 30713]]

inconsistent use of reporting units across respondents introduces an 
upward bias to the Reporters Study's findings. The survey collected 
cost estimates in $1,000 increments; however, there is evidence that 
some respondents did not provide estimates in $1,000 increments as 
requested. Rather, survey results in the Plan reveal, for example, that 
one small firm reported current annual hardware/software costs for 
current regulatory data reporting to be $14,000,000 per year.\872\ 
Because small firms responding to the survey by definition have no more 
than $500,000 in total capital, an annual $14,000,000 estimate for 
hardware/software costs for current data reporting seems 
unreasonable.\873\ Furthermore, a small survey respondent cited 
$3,500,000 in hardware/software retirement of systems costs, which 
seems unreasonable for a broker-dealer with less than $500,000 in total 
capital. These are only a few examples, but they raise the question of 
how many other respondents recorded incorrect units in their responses, 
particularly if screening methodologies have difficulty detecting such 
incorrect units. In light of these unreasonable results, the Commission 
preliminarily believes that the Plan's cost estimates for small broker-
dealers reporting data to CAT has an upward bias because some firms did 
not correctly respond to the survey in $1,000 increments.
---------------------------------------------------------------------------

    \872\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.(7)(b)(ii)(C), Table 5.
    \873\ The Plan notes that it is possible that the firm intended 
to report that it had $14,000 in annual expenses for hardware/
software. See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(ii)(C), n.193.
---------------------------------------------------------------------------

    Because of errant responses of this type, the Plan recommends using 
medians instead of averages; \874\ however, for nearly all estimated 
cost categories in the Reporters Study, the median response was zero, 
which the Commission believes underestimates the costs that CAT 
Reporters are likely to face in most categories of costs. Consequently, 
the Commission is unable to adjust for these biases.
---------------------------------------------------------------------------

    \874\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7.(b)(ii)(C), n.194.
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes that the small 
firm cost survey information in the Reporters Study is unlikely to be 
representative of the small broker-dealers that would have CAT 
reporting responsibilities in part because the Commission also believes 
preliminarily that some survey respondents misclassified their firm's 
size, which renders the Plan's separate presentation of results for 
large and small broker-dealers imprecise. In particular, the Commission 
believes that at least one large firm misclassified itself as a small 
firm. The CAT NMS Plan Table 6 reveals that one firm designated as a 
small firm responded to the Reporters Study survey with it having 68 
full-time employees dedicated to performing regulatory data reporting 
activities for a yearly cost of $27,300,000.\875\ The Commission 
believes, however, that a firm with 68 full-time employees reporting 
regulatory data could not be small (again, as defined by the survey to 
include firms with less than $500,000 in total capital) because such a 
firm would lack the working capital to support that level of employee 
expense.\876\ The presence of large-firms with significantly higher 
costs in the small-firm sample significantly biases the small-firm cost 
estimates upward.
---------------------------------------------------------------------------

    \875\ See id. at Appendix C, Section B.(7)(b)(ii)(C), Table 6.
    \876\ See id. at Appendix C, Section B.7.(b)(i)(C), n.188.
---------------------------------------------------------------------------

    Moreover, the Commission preliminarily believes that the 
methodologies implemented to remove outliers in the Reporters Study 
introduce cost estimate biases.\877\ Based on discussions with the 
Participants, the Commission understands that to identify and remove 
outliers, the Participants first determined if each survey item's 
maximum response was a potential outlier because it was more than twice 
the value of the next highest response; the Participants then 
individually reviewed potential outliers and omitted those deemed 
errant. While the Commission recognizes that this methodology may 
mitigate the precision bias discussed above by removing a single 
response that is 1,000 times too high, it may not remove such outliers 
when two or more firms errantly report values 1,000 times too high, in 
which case an upward bias to the cost estimates would remain. 
Furthermore, if one firm genuinely incurs expenses that are more than 
twice those of the next highest respondent, such survey response might 
be removed under this methodology, even though such a response may 
accurately identify expenses expected by the respondent, which in turn 
introduces a downward bias to the cost estimates. For example, only 21 
large OATS reporting firms are represented in the Reporters Study 
survey responses. If most of these 21 firms perform the majority of 
their regulatory data reporting functions in house, but one firm 
outsources all of its regulatory data reporting, that single firm could 
have outsourcing costs far higher than its peers. Under the Plan's cost 
estimate methodology, this outsourcing response in the Reporters Study 
might be removed as an outlier, unless another large, OATS reporting 
firm responded to the Reporters Study with at least half of the 
outsourcing costs. The Commission considered whether to request that 
the Participants provide updated cost estimates under a methodology 
that did not remove Reporters Study outlier responses, but the 
Commission preliminarily believes that this approach would exacerbate 
the precision problem discussed above and possibly increase the number 
of errant responses that are 1,000 times too high to the cost estimate 
data set.
---------------------------------------------------------------------------

    \877\ See id. at Appendix C, Section B.7.(b)(i)(B)(ii)(C).
---------------------------------------------------------------------------

    Finally, the Commission believes that the Reporters Study response 
rate is not adequate to be representative of the population of broker-
dealers that would report to CAT. The survey was delivered to 4,025 
broker-dealers. After removing erroneous and materially incomplete 
responses, only 167 responses remained of the 4,025 broker-dealers who 
were sent the survey. To be representative of the broker-dealers that 
would report to CAT, a final response rate of 4.15% seems low 
considering the diversity of these broker-dealers. The majority of 
broker-dealers are small and smaller broker-dealers are diverse along 
many dimensions relevant to the likely magnitude of their expected CAT 
costs, including business practices; tendency to centralize technology; 
specialization in market segments, such as options versus equities; and 
the range of products and markets in which individual broker-dealers 
participate. Because broker-dealer diversity is great, a survey of 
expected broker-dealer costs would ideally have a higher response rate 
to ensure a representative sample. Furthermore, of the 167 responses 
incorporated into the Plan's cost estimates, 118 respondent firms were 
classified as small in the Reporters Study, and 88 of these 118 small 
firms were identified as having no current OATS reporting 
responsibilities.\878\ The Commission preliminarily believes that small 
firms that anticipate limited CAT reporting responsibilities may have 
been oversampled by the Reporters Study survey because for nearly all 
categories of cost estimates, the median small firm response was zero, 
suggesting that they do not expect to have CAT reporting 
responsibilities. Consequently, the

[[Page 30714]]

Commission preliminarily believes that the small firms that responded 
to the study cannot be statistically representative of the small firms 
that would incur CAT reporting obligations, because the Commission 
believes that most small broker-dealers would incur significant costs 
in reporting to CAT.\879\ These costs are estimated below.
---------------------------------------------------------------------------

    \878\ Small firms may have no OATS reporting responsibilities 
because they do not engage in activities that would incur OATS 
reporting obligations, or they may be excluded or exempted under 
FINRA's OATS reporting rules. See Section IV.D.2.b(1)A, supra.
    \879\ The Commission notes that small firms currently excluded 
from OATS reporting due to their size would have CAT reporting 
responsibilities under the Plan because the Plan makes no provision 
to exempt or exclude them, as FINRA does with OATS reporting. The 
Commission preliminarily believes that these firms are likely to 
experience higher implementation costs than other small firms 
because CAT reporting would likely necessitate establishing business 
relationships with service providers if they do not already have 
such relationships. The Commission preliminarily believes that most 
small firms that would have CAT reporting obligations but do not 
currently have OATS reporting obligations would not have the IT and 
regulatory personnel infrastructure to accomplish this reporting in-
house. The Commission's estimation of these firms' costs to 
implement CAT includes higher estimates of employee costs to 
implement CAT to account for this increased burden.
---------------------------------------------------------------------------

    Although the Commission has preliminarily concluded that the small 
broker-dealer cost estimates presented in the Plan are unreliable, the 
Commission also preliminarily believes that the cost estimates in the 
Plan for large broker-dealers may be reliable. The Commission 
preliminarily believes that problems with the Reporters Study data are 
less likely to affect the Plan's large broker-dealer cost estimates for 
several reasons. First, if a large broker-dealer were to respond to the 
Reporter Study survey with the incorrect level of units (resulting in 
estimates that were 1,000 times too large as was the case for some 
small broker-dealer responses), then these errant cost survey responses 
would result in estimates that likely would be denominated in billions 
of dollars. The maximums presented in the Plan's tables describing the 
Reporters Study data do not include responses denominated in billions; 
notably, under the Plan's cost estimate methodology, if such responses 
were generated, these responses likely would have been removed as 
outliers. Second, although it is possible that small broker-dealers 
misclassified themselves as large broker-dealers in the Reporters Study 
data, such misclassification does not seem to have biased the cost 
estimate results for large broker-dealers to the degree that the 
Commission preliminarily believes has occurred for the small broker-
dealer Reporters Study data. Cost estimates for large broker-dealers, 
particularly those that do not have current OATS reporting obligations, 
are not inconsistent with information gathered by the Commission in 
discussions with broker dealers and service providers,\880\ although 
the Commission preliminarily believes that averages presented in the 
Plan generally fall between the expenses that a very large and complex 
broker-dealer would experience and those of a more typical broker-
dealer in the same category. For example, the Plan estimates that the 
average large OATS-reporting broker-dealer currently spends $8.7 
million annually to comply with current data reporting 
requirements.\881\ The Commission preliminarily believes that this 
estimate is likely to be substantially lower than the actual data 
reporting costs incurred by the largest and most complex broker-dealers 
that currently report to OATS; these very large and complex firms are 
assumed to spend far more than this estimate. There are, however, only 
a limited number of exceptionally large OATS-reporting broker-dealers. 
Similarly, the Plan's estimate is likely to significantly overestimate 
the costs incurred by the majority of firms classified as large by the 
Plan because most large firms are not as large or as complex as these 
limited number of exceptionally large broker-dealers. Summary 
statistics on activity levels of OATS reporting firms are discussed in 
detail below.
---------------------------------------------------------------------------

    \880\ FIF arranged a group discussion with a small number of 
broker-dealers whose identities were not provided to Commission 
staff and individual discussions with five service bureaus whose 
identities were not provided to Commission staff. Also, staff 
arranged individual discussions with five additional broker-dealers. 
When market participant identities were unknown, FIF provided 
demographic information that allowed Commission staff to gauge a 
firm's size, complexity, and general market activities. Broker-
dealers outside of the group discussion and service bureaus were 
asked for specific cost information that related to their regulatory 
data reporting costs; most broker-dealers and some service bureaus 
shared general estimates, particularly of staffing levels, and 
provided information on cost drivers and obstacles that firms face 
in accomplishing their regulatory data reporting, particularly 
challenges that they face in implementing changes to these 
requirements. Most, but not all, firms participating in discussions 
with Commission staff discussed OATS as their most challenging data 
reporting requirement. Some firms named LOPR and EBS as additional 
sources of regular challenges and significant costs. It is our 
understanding from these discussions, that some data reporting 
requirements, such as Rule 605 and Rule 606 reporting, are nearly 
always outsourced.
    \881\ See infra note 882.
---------------------------------------------------------------------------

    The Plan presents cost estimates for large broker-dealers' current 
regulatory data reporting costs and costs they would incur to implement 
and maintain CAT Data reporting. The Plan estimates that an OATS-
reporting large broker-dealer has current data reporting costs of $8.7 
million per year.\882\ A non-OATS reporting large broker-dealer is 
estimated to spend approximately $1.4 million annually.\883\ The Plan 
estimates that OATS-reporting large broker-dealers would spend 
approximately $7.2 million to implement CAT Data reporting, and $4.8 
million annually for ongoing costs.\884\ For non-OATS reporting large 
broker-dealers, the Plan estimates $3.9 million in implementation costs 
and $3.2 million in annual ongoing costs.\885\ According to the Plan, 
the magnitude of each of these cost estimates is primarily driven by 
FTE costs.
---------------------------------------------------------------------------

    \882\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.(7)(b)(ii)(C), Table 3. The $8.7 million figure was calculated by 
summing the average hardware/software cost, third party/outsourcing 
cost, and full-time employee costs using the Commission's estimated 
cost per employee of $424,350.
    \883\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.(7)(b)(ii)(C), Table 4. The $1.4 million figure was calculated by 
summing the average hardware/software cost, third party/outsourcing 
cost, and full-time employee costs using the Commission's estimated 
cost per employee of $424,350.
    \884\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.(7)(b)(iii)(C)(2)a., Table 9; and at Appendix C, Section 
B.(7)(b)(iii)(C)(2)b., Table 15.
    \885\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.(7)(b)(iii)(C)(2)a., Table 10; and at Appendix C, Section 
B.(7)(b)(iii)(C)(2)b., Table 16.
---------------------------------------------------------------------------

(2) Commission Cost Estimates
    The Commission's broker-dealer cost estimates incorporate some 
broker-dealer data from the Plan, but to address issues in the Plan's 
Reporters Study data, the Commission's cost estimates also include 
other data sources.\886\ As previously discussed, the Commission 
preliminarily believes that the small firm cost estimates presented in 
the Reporters Study are unreliable. As a result, the Commission has re-
estimated the costs that broker-dealers likely would incur for CAT 
implementation and ongoing reporting. As with the Plan's cost 
estimates, the Commission's re-estimation relies on classifying broker-
dealers based on whether they currently report OATS data. However, the 
re-estimation further classifies broker-dealers, as in the Commission's 
cost estimates presented in the Proposing Release, based on whether the 
firm is likely to use a service bureau to report its regulatory data, 
or, alternatively, whether the firm might choose to self-report its 
regulatory data. In this updated analysis, the Commission preliminarily 
estimates that the 1,800 broker-dealers expected to incur CAT reporting 
obligations currently spend approximately $1.6 billion annually to 
report regulatory data.\887\ If the CAT NMS Plan is

[[Page 30715]]

approved, the Commission preliminarily believes that these broker-
dealers would incur approximately $2.2 billion in implementation costs 
and $1.5 billion in ongoing data reporting costs.\888\
---------------------------------------------------------------------------

    \886\ Discussions below present information on data obtained 
from FINRA and gleaned from discussions with broker-dealers and 
service bureaus arranged by FIF and staff. See supra notes 880 and 
899.
    \887\ To the extent that the CAT NMS Plan underestimates the 
number of broker-dealers that would incur CAT reporting obligations, 
the Commission's updated estimates understate the actual costs 
Reporters would face if the CAT NMS Plan is approved.
    \888\ These figures cover only broker-dealer costs. Industry-
wide costs are summarized below in Section IV.F.2.
---------------------------------------------------------------------------

    The Commission preliminarily believes classifying broker-dealers 
based on their manner of reporting provides a more accurate estimate of 
the costs firms will incur because, as noted below, costs differ based 
on whether the firm insources or outsources reporting responsibilities 
and insourcing/outsourcing does not necessarily correlate with firm 
size. Accordingly, the Commission begins its estimation of costs using 
the number of OATS Reportable Order Events (``ROEs'') reported by firms 
that report to OATS. The Commission preliminarily believes that because 
OATS reportable events, such as order originations, routes, and 
executions are also CAT Reportable Events, these two measures are 
likely to be highly correlated, making the number of OATS records a 
proxy for the anticipated level of CAT reporting.\889\ Based on 
discussions with broker dealers and service providers, however, the 
Commission preliminarily believes that firms that report high numbers 
of OATS ROEs decide to either self-report their regulatory data or 
outsource their regulatory data reporting based on a number of 
criteria, including potential costs.\890\ Thus, simply using the number 
of OATS ROEs as a proxy for firm size may not provide an accurate 
picture of the reporting costs for such firms. As a result, the 
Commission goes a step further in its estimation of costs by segmenting 
firms into two groups--those that insource and those that outsource 
their regulatory data reporting--and estimates costs separately for 
each group. Empirical evidence supporting this approach is detailed 
further below.\891\
---------------------------------------------------------------------------

    \889\ In other words, the Commission preliminarily believes that 
the higher the number of OATS ROEs reported, the higher the 
anticipated number of CAT records to report. As noted below, 
however, the Commission anticipates that the number of CAT records 
would exceed the number of OATS ROEs.
    \890\ As explained further below, the Commission believes that 
firms reporting relatively few OATS ROEs would be unlikely to have 
the infrastructure and specialized employees necessary to insource 
regulatory data reporting and would almost certainly outsource their 
regulatory data reporting functions.
    \891\ The Commission in its cost calculation uses the number of 
OATS ROEs as a measure of firm size, rather than traditional 
measures of firm size based on a single metric, such as capital 
level, or OTC dollar volume. The Commission preliminarily believes 
that the use of OATS ROEs provides a more accurate predictor of firm 
reporting behavior. Data provided by FINRA, for example, reveals 
that some firms with extremely high levels of OATS reporting 
activity have relatively low capital levels; furthermore, many firms 
that report exceptionally high numbers of OATS ROEs have no OTC 
dollar-volume. See infra note 893.
---------------------------------------------------------------------------

    The Plan also separates industry costs of current OATS reporting 
firms from those that currently have no OATS reporting obligations, 
recognizing that the group of non-OATS reporting firms are diverse in 
size and scope of activities. The Commission maintains this approach in 
its re-estimation, as firms that do not currently report to OATS would 
face a different range of costs to implement and maintain CAT reporting 
because firms that currently do not report to OATS may have little to 
no regulatory data infrastructure in place. Broker-dealers that do not 
currently report to OATS may have higher or lower costs than firms that 
do report to OATS, depending on whether they do not report because of 
SRO membership status or lack of equity market activity or because of 
size and scope of activity within equity markets. For example, an 
electronic liquidity provider (``ELP'') may trade extensively both on 
and off-exchange, yet not report to OATS because it is not a FINRA 
member; such a firm could incur high data reporting costs under CAT 
because it has a high volume of records to report. Conversely, a small 
equity trading firm might be excluded or exempted from OATS reporting 
due to its size and scope of activities; such a firm could have 
relatively low CAT reporting costs, although still higher than its 
existing regulatory reporting costs, because it has few Reportable 
Events and is assumed to outsource its reporting responsibilities. 
Recognizing this diversity in non-OATS firms, the Commission's re-
estimation anticipates a large range of firm activity levels in non-
OATS CAT reporters and treats them differently when estimating their 
costs.\892\ This is discussed further below.
---------------------------------------------------------------------------

    \892\ The Commission's re-estimation of costs assumes that firms 
that are currently excluded or exempted from OATS reporting are 
Outsourcers. By definition, OATS-reporting Outsourcers report fewer 
than 350,000 OATS ROEs per month. However, firms that are not FINRA 
members are not assumed to be Outsourcers; many of these firms are 
in the business of proprietary trading as ELPs or are Options Market 
Makers, which are assumed to be typical of large non-OATS reporters 
discussed in the Plan. The identification of these firms and their 
estimated costs of CAT reporting are discussed further in Section 
IV.F.1.c(2)B.i, infra.
---------------------------------------------------------------------------

    In sum, the framework for the Commission's re-estimation is as 
follows. First, the Commission identifies those OATS-reporting firms 
that insource (``Insourcers'') and those that outsource based on an 
analysis of the number of OATS reporting ROEs combined with specific 
data provided by FINRA on how firms report. Furthermore, the Commission 
identifies firms that do not currently report to OATS but are likely to 
insource based on their expected activity level by identifying Options 
Market Makers and ELPs. Based on that analysis, the Commission 
preliminarily estimates that there are 126 OATS-reporting Insourcers 
and 45 non-OATS reporting Insourcers; these estimates are discussed 
further below. The Commission's re-estimation classifies the remaining 
1,629 broker-dealers that the Plan anticipates would have CAT Data 
reporting obligations as ``Outsourcers,'' based on outsourcing 
practices observed in data obtained from FINRA and discussed further 
below. The Commission preliminarily believes that most of these firms 
would accomplish their CAT Data reporting through a service bureau. 
Next, to determine costs for Insourcers, the Commission relies upon 
cost estimates for firms classified as ``large'' in the Reporters 
Study. For Outsourcers, the Commission uses a model of ongoing 
outsourcing costs (``Outsourcing Cost Model'') to estimate both current 
regulatory data reporting costs and CAT-related data reporting costs 
Outsourcers would incur if the CAT NMS Plan were approved.
A. Broker-Dealer Reporting Practices
    Although the Commission's analysis segregates broker-dealers into 
two groups (Insourcers and Outsourcers), within those groups, broker-
dealer data reporting methods currently vary widely across firms, and 
these varied methods affect the data reporting costs that broker-
dealers incur. As discussed previously, depending on the business in 
which broker-dealers participate, broker-dealers can have a wide range 
of reporting responsibilities.
    There are two primary methods by which broker-dealers accomplish 
data reporting: Insourcing, where the firm reports data to regulators 
directly; and outsourcing, where a third-party service provider 
performs the data reporting, usually as part of a service agreement 
that includes other services. Firms that outsource retain 
responsibility for complying with rules related to outsourced activity. 
Based on data from FINRA and conversations with market participants, 
the Commission preliminarily believes that the vast majority of broker-
dealers outsource most of their regulatory data reporting

[[Page 30716]]

functions to third-party firms. Data provided by FINRA shows that 932 
broker-dealers reported at least one OATS ROE between June 15 and July 
10, 2015.\893\ Of these 932 firms, 799 reported at least 90% of their 
OATS ROEs through a service bureau. Broker-dealers generally used a 
single service bureau (497 firms) to report OATS, but some broker-
dealers used multiple service bureaus (up to 9 service bureaus).
---------------------------------------------------------------------------

    \893\ The Commission analyzed data on broker-dealer OATS 
reporting received from FINRA. This data source included the number 
of OATS ROEs reported by each individual broker-dealer, as well as 
counts of how many ROEs were reported by the firm directly and how 
many ROEs were reported through service bureaus, and the number of 
service bureaus that reported data for the firm. The dataset 
includes the firms' minimum net capital required and actual net 
capital as well as the number of registered persons associated with 
the firm. Factors that affect broker-dealers' insourcing/outsourcing 
decision are discussed below. Because market activity is highly 
correlated with volatility, this four-week period was chosen to have 
a typical level of volatility (as measured by VIX level) for the 
period September 16, 2010 through September 15, 2015.
---------------------------------------------------------------------------

    Often, service bureaus bundle regulatory data reporting services 
with an order-handling system service that provides broker-dealers with 
market access and order routing capabilities. Sometimes regulatory data 
reporting services are bundled with trade clearing services. A broker-
dealer's decision to insource/outsource these functions and services 
can be complex, and different broker-dealers reach different solutions 
based on their business characteristics. To illustrate, some broker-
dealers self-clear trades but outsource regulatory data reporting 
functions; some broker-dealers have proprietary order handling systems, 
self-clear trades, and outsource regulatory data reporting functions. 
Other broker-dealers outsource order-handling, outsource clearing 
trades, and self-report regulatory data. The most common insource/
outsource service configuration, however, for all but the most active-
in-the-market broker-dealers is to use one or more service bureaus to 
handle all of these functions.
    In most, but not all, cases, service bureaus host their client 
broker-dealer's order-handling system on the service bureau's servers 
while the broker-dealer has software serving as a ``front end'' for 
this system running on the broker-dealers' local IT infrastructure. For 
broker-dealers whose order-handling systems are thus hosted on their 
service bureau's servers, their service bureaus would handle many 
elements of CAT implementation, including clock synchronization. These 
broker-dealers would still incur some CAT implementation costs because 
some CAT Data, such as Customer information (including PII), is likely 
to reside outside of the broker-dealer's order handling system; 
consequently, such broker-dealers would need to develop technical and 
regulatory infrastructure to provide such CAT Data to its service 
bureaus. Further, broker-dealers that outsource could still need to 
adapt their in-house software systems to address order-management 
system changes. In addition to the resources needed to reprogram the 
system, any order-handling system change is likely to require 
significant staff training. Furthermore, broker-dealers that outsource 
would need to update their internal monitoring of their service 
bureau's reporting to ensure it meets the requirements of the Plan.
    In discussions arranged by FIF, broker-dealers cited a number of 
factors that influence a broker-dealer's decision on whether to handle 
regulatory data reporting in-house. Generally, smaller broker-dealers 
(with relatively few registered persons and limited capital) do not 
have the business volume required to support the IT infrastructure and 
specialized staff that is necessary to perform in-house regulatory data 
reporting; these broker-dealers may have no business choice but to rely 
upon third-party service providers to provide order handling and market 
connectivity, as well as clearing services.\894\ For larger broker-
dealers, outsourcing is more likely to be a discretionary business 
decision. In discussions with staff, larger broker-dealers cited a 
number of reasons to outsource. First, it may be a strategic choice; 
some broker-dealers view regulatory data reporting as a function that 
offers no competitive advantages and a costly distraction from other 
business activities, as long as an alternative solution satisfies 
reporting requirements. For these firms, compliance might be achieved 
at a lower-cost in-house, but the firms prefer to outsource the data 
reporting function to focus key resources on business functions. 
Second, some broker-dealers outsource these functions to reduce costs 
associated with demonstrating regulatory compliance. Multiple broker-
dealers stated that using a regulatory reporting service that was 
familiar to regulators allowed more efficient regulatory examinations, 
because an in-house regulatory reporting system might require more 
staff time invested in facilitating examinations and demonstrating 
compliance. Third, some broker-dealers cited that keeping current with 
regulatory requirements drove their decision to outsource. These 
broker-dealers may have insourced initially, but they relayed that over 
time they experienced accelerating regulatory rule changes, which led 
to an escalation in their compliance costs. For these firms, the pace 
of regulatory rule changes drove the decision to outsource where they 
had at one time insourced, because the firm could fulfill its 
regulatory responsibilities at a lower cost by outsourcing and 
monitoring the service bureau's compliance.\895\
---------------------------------------------------------------------------

    \894\ In conversations with market participants, several broker-
dealers suggested that for very small firms, establishing these 
service bureau relationships could be difficult. These firms might 
``piggy back'' on another broker-dealer's infrastructure, 
essentially relying on them to act as an introducing broker. This 
would generally add another cost layer for these very small firms 
but could be more cost effective than establishing stand-alone 
service bureau relationships.
    \895\ The Commission notes that an Industry Member CAT Reporter 
remains responsible for compliance with the requirements of the CAT 
NMS Plan and Rule 613, as reflected in the Compliance Rule of the 
SRO(s) of which it is a member, regardless of whether it has 
outsourced some or all of its regulatory data reporting functions to 
a third party.
---------------------------------------------------------------------------

    On the other hand, some broker-dealers choose to insource their 
regulatory data reporting functions. In discussions arranged by FIF, 
broker-dealers cited a number of reasons supporting their decision to 
self-report. First, some broker-dealers cited ancillary benefits to 
constructing the IT infrastructure necessary to accomplish their 
regulatory data reporting. Data collected in a central location for 
regulatory data reporting and the software necessary to manipulate the 
regulatory data facilitates self-monitoring and business reporting, 
providing other benefits to the firm. Second, some broker-dealers cited 
protecting their proprietary strategies as a motivator to self-report 
regulatory data. These broker-dealers felt that sharing their trading 
data with a service bureau was potentially too revealing of their 
proprietary trading strategies. Third, some broker-dealers cited 
operational complexity as a driver of their insourcing decision. For 
these very large broker-dealers that traded in a wide range of assets, 
outsourcing would involve multiple service provider contracts. At least 
one broker-dealer stated that it did not believe service bureaus could 
meet all of its requirements due to its complexity. Finally, while some 
broker-dealers preferred to outsource to reduce the costs of 
demonstrating compliance, others stated that outsourcing would increase 
compliance costs because they could not conduct their own compliance 
checks to ensure the reports comply with relevant regulations.

[[Page 30717]]

    Current costs of outsourcing regulatory data reporting vary widely 
across broker-dealers. Whether data reporting is provided on behalf of 
a broker-dealer by the provider of an order-management system or 
another third-party firm, a broker-dealer generally enters into long-
term agreements with its service provider to obtain a bundle of 
services that includes regulatory data reporting, and costs to change 
service bureaus are high. Furthermore, based on discussions with 
service providers, the Commission understands that switching service 
bureaus can be costly and involve complex onboarding processes and 
requirements, and that systems between service bureaus may be 
disparate; furthermore, changing service bureaus may require different 
or updated client documentation.\896\ The Commission preliminarily 
believes that annual costs for provision of an order-handling system 
(including market connectivity, routing and regulatory data reporting) 
range from $50,000 to $180,000 annually for very small broker-dealers. 
Costs for very large broker-dealers that outsource these functions 
begin at $1 million to 2.4 million annually.\897\
---------------------------------------------------------------------------

    \896\ See Section IV.G.1.d, infra, for a discussion of the 
potential effects of the Plan on the market to report regulatory 
data.
    \897\ These estimates are based on Staff discussions with 
service bureaus that were arranged by FIF. See supra note 895 and 
accompanying text. The $1 million per year figure contemplated a 
very large broker-dealer that provided its own order management 
system and market connectivity, so it likely represents a rough 
estimate of the regulatory data reporting costs of a very large 
firm. Because service bureaus did not provide an OATS activity level 
corresponding to ``very large,'' the Commission relies on an 
analysis of FINRA data on OATS reporting to calibrate its definition 
of ``very large'' in terms of OATS activity level and seeks comment 
on what activity level should correspond to cost estimates for 
``very large'' broker-dealers. The Commission notes that because 
there are relatively few broker-dealers that report at medium 
activity levels, the Commission's estimation of outsourcing costs is 
not particularly sensitive to this definition because most broker-
dealers whose costs are estimated using the Outsourcing Cost Model 
have very low OATS reporting levels. Finally, estimates of total 
reporting costs include provision of an order-management system and 
market connectivity.
---------------------------------------------------------------------------

    For broker-dealers that perform regulatory data reporting in-house, 
implementation costs are likely to vary widely. Some very large broker-
dealers that self-report regulatory data have a centralized IT 
infrastructure and trade in relatively few asset classes. Some of these 
broker-dealers carry no customer accounts, simplifying their regulatory 
data reporting obligations. The Commission preliminarily believes that 
such broker-dealers could incur relatively low CAT implementation costs 
because they have a centralized IT infrastructure that captures all 
broker-dealer activity and specialized personnel who are dedicated to 
broker-dealer-wide data reporting. At the other end of the spectrum, 
large broker-dealers may be very complex, facilitating complex multi-
leg transactions and operating within a non-centralized structure. 
These broker-dealers would be likely to experience CAT implementation 
costs far higher than broker-dealers with less complex structures for 
several reasons. First, some of these broker-dealers do not have a 
centralized IT infrastructure; instead, orders could originate from 
many locations in the broker-dealer and may be handled by diverse 
legacy systems, each of which the broker-dealer would need to adapt for 
CAT Data reporting.\898\ Second, broker-dealers that accommodate more 
complex transactions that involve multiple asset classes would likely 
need to invest more time in understanding new regulatory requirements. 
In discussions with market participants, several broker-dealers noted, 
among other concerns, that determining the correct regulatory treatment 
for unusual trades can be a significant cost-driver in implementing 
regulatory rule changes and can delay implementation of system changes 
or precipitate a second round of changes once regulatory treatment of 
these trades is clarified. Third, broker-dealers that lack a 
centralized IT infrastructure would likely incur higher costs to comply 
with clock synchronization requirements because more servers may be 
handling orders than in firms with a more centralized IT 
infrastructure.
---------------------------------------------------------------------------

    \898\ In discussions with market participants, some broker-
dealers indicated that they operate more than a dozen instances of a 
third-party's order handling system, suggesting they originate 
orders at more than a dozen places within the broker-dealer, yet 
they handle data reporting in-house. Firms such as these are likely 
to incur far higher costs to implement CAT compared to broker-
dealers with a centralized IT infrastructure and fewer legacy 
systems because there are more systems that require changes to 
comply with new data reporting requirements.
---------------------------------------------------------------------------

B. Re-Estimation
i. Count of Firms Likely To Rely Upon Service Bureaus for Data 
Reporting
    To separately examine the costs to broker-dealers that outsource 
and to aggregate those costs across all broker-dealers, Commission 
Staff first established a count of CAT Reporters likely to outsource 
their regulatory data reporting functions. For this, the Commission 
analyzed data provided by FINRA.\899\
---------------------------------------------------------------------------

    \899\ See supra note 893 and accompanying text.
---------------------------------------------------------------------------

    The FINRA data allows the Commission to examine how broker-dealers' 
current outsourcing activities vary with the number of ROEs reported to 
OATS. Figure 1 shows the percentage of OATS ROEs that are self-reported 
for five size categories of broker-dealers with the following OATS 
reporting activity levels for a four-week period from June 15-July 10, 
2015: More than 1 billion records; 1 million to 1 billion records; 
350,000 to 1 million records; 100,000 to 350,000 records; and 100,000 
records or fewer.\900\ The bars for each category represent the 
percentage of total OATS ROEs reported by broker-dealers in the 
category that were reported directly by the broker-dealers.
---------------------------------------------------------------------------

    \900\ The group that reports one billion records or more 
comprises 77.90% of OATS records; the group that reports one million 
records to one billion comprises an additional 22.05% of OATS 
records. The remaining three groups comprise just 0.05% of all OATS 
records. Overall, firms self-report 65.44% of OATS ROEs.

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[[Page 30718]]

[GRAPHIC] [TIFF OMITTED] TN17MY16.329

    Based on this analysis of FINRA data, the Commission preliminarily 
believes that the 126 broker-dealers that reported more than 350,000 
OATS ROEs between June 15 and July 10, 2015 make the insourcing-
outsourcing decision strategically based on the broker-dealer's 
characteristics and preferences, while the remaining OATS reporters are 
likely to utilize a service bureau to accomplish their regulatory data 
reporting.\901\ The categories of broker-dealers assumed to outsource 
their data reporting are marked with an asterisk (*) in Figure 1.
---------------------------------------------------------------------------

    \901\ The Commission preliminarily believes this decision is 
strategic and discretionary because FINRA data reveals that while 
many broker-dealers at these activity levels self-report most or all 
of their regulatory data, other broker-dealers outsource most or all 
of their regulatory reporting at these activity levels. At lower 
activity levels, most, but not all, broker-dealers outsource most if 
not all of their regulatory data reporting. The Commission is 
cognizant that some broker-dealers reporting fewer than 350,000 OATS 
ROEs per month can and do opt to self-report their regulatory data. 
However, based on conversations with broker-dealers, the Commission 
preliminarily believes that most broker-dealers at these activity 
levels do not have the infrastructure and specialized staff that 
would be required to report directly to the Central Repository, and 
electing to self-report would be cost-prohibitive in most but not 
all cases. See Section IV.F.1.c(2)A, supra.
---------------------------------------------------------------------------

    As seen in Figure 1, broker-dealers in the highest OATS-reporting 
category insourced reporting for more than 60% of the OATS ROEs 
reported. More specifically, the FINRA data shows that 16 broker-
dealers reported more than a billion OATS ROEs each between June 15 and 
July 10, 2015; most of these broker-dealers (11) self-reported nearly 
all of their regulatory data, but 3 used service bureaus for 100% of 
their OATS reporting.
    Figure 1 also shows that broker-dealers that report between 1 
million and 1 billion OATS ROEs during the four-week period insourced 
reporting for more than 70% of the OATS ROEs they reported in 
aggregate. Thirty-six of these 89 broker-dealers used service bureaus 
to report at least 90% of their OATS data while 42 of these 89 broker-
dealers self-reported over 99% of their regulatory data.
    For the 21 broker-dealers that reported more than 350,000 but fewer 
than 1 million OATS ROEs during the sample period, Figure 1 shows that 
they insource approximately 27% of their aggregate OATS ROEs reporting. 
Thirteen of these broker-dealers use service bureaus for more than 99% 
of their OATS reporting while 7 of these 21 broker-dealers self-
reported more than 98% of their OATS data.
    For the 806 broker-dealers that reported fewer than 350,000 OATS 
ROEs during the sample period, approximately 88.9% of those OATS ROEs 
were reported through service bureaus, with 730 broker-dealers 
reporting more than 99% of their OATS ROEs through one or more service 
bureaus.\902\ These broker-dealers are represented in the two right-
most bars in Figure 1 that are identified with asterisks (*) in their 
labels. Because of the extensive use of service bureaus in these 
categories of broker-dealers, the Commission assumes that these broker-
dealers are likely to use service bureaus to accomplish their CAT Data 
reporting.
---------------------------------------------------------------------------

    \902\ Although most of these broker-dealers report nearly all of 
their ROEs through a service bureau, there are broker-dealers, both 
large and small, that self-report nearly all of their OATS data at 
all activity levels, including a broker-dealer that self-reported 
two OATS ROEs during the sample. Despite this variation, the 
Commission believes that its assumptions regarding which firms are 
likely to outsource and which firms have discretion are appropriate 
because (1) small firms that insource likely do so because it is 
less costly so the assumption simplifies the analysis and 
overestimates costs and (2) the cost information for the other firms 
already accounts for both insourcing and outsourcing.
---------------------------------------------------------------------------

ii. Estimation of Outsourcing Costs
    The Commission has estimated ongoing costs for outsourcing firms 
using a model based on data gleaned from discussions with service 
bureaus and broker-dealers and implementation costs using information 
learned in conversations with industry.\903\ Service bureaus that 
provide order-handling systems, market connectivity and regulatory data 
reporting services estimated that a very small broker-dealer was likely 
to currently spend $50,000-$180,000 per year for these services; they 
suggested that current annual costs for very large broker-dealers would 
likely be $1,000,000-$2,400,000 but could be greater in some 
cases.\904\ The Commission assumes that a very small broker-dealer 
would report a single OATS ROE per month and a very large broker-dealer 
would report 100 million OATS ROEs per month.\905\
---------------------------------------------------------------------------

    \903\ See supra note 880.
    \904\ Estimates are based on FIF-arranged conversations with 
service bureaus. See supra note 880.
    \905\ The Commission preliminarily believes that firms that 
report more than 350,000 OATS ROEs per month outsource on a 
discretionary basis. If the estimate of activity level for very 
large firms is too large (100 million ROEs is used in the model 
estimation), the Commission's model would underestimate the costs of 
all firms that report fewer than 350,000 OATS ROEs per month 
currently. The Commission preliminarily believes the 100 million 
ROEs per year size estimate to be reliable because although most 
firms at activity levels between 40 million and 300 million OATS 
ROEs (15 firms) self-report, several use service bureaus.

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[[Page 30719]]

[GRAPHIC] [TIFF OMITTED] TN17MY16.330

    Based on discussions with market participants, the Commission 
assumes that the cost function for outsourcing is concave.\906\ This 
type of function is appropriate when costs increase as activity level 
increases, but the cost per unit of activity (e.g., cost per report) 
declines as activity increases. Volume discounts can create such cost 
functions. Alternatively, if the Commission estimates outsourcing costs 
as a linear function using the two point-estimates (very small firms 
and very large firms) obtained from service bureaus, that outsourcing 
cost model would underestimate the costs of broker-dealers that are 
neither very large nor very small due to the concavity of the function. 
As shown in Figure 2, a concave function is greater than the linear 
function that connects its endpoints. To illustrate the underestimation 
concern, if the estimated pricing function was a straight line but the 
actual pricing function was concave, the estimates would be too low. 
Lacking data on outsourcing costs faced by broker-dealers with activity 
levels that are neither very small nor very large, which would assist 
the Commission in estimating the degree of concavity of the pricing 
function, the Commission's estimation assumes that service bureau 
pricing functions are similar in concavity to equity exchange pricing 
functions.\907\
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    \906\ The Commission preliminarily believes that service bureau 
pricing functions are concave based on discussions with service 
bureaus arranged by FIF. See supra note 897.
    \907\ The Commission relies on exchange pricing functions 
because the data is publicly available and because a broker-dealer's 
activity level on exchanges is correlated with the quantity of 
regulatory data it generates. If the pricing function for service 
bureau services is more concave than exchange pricing functions, the 
Commission's preliminary model would underestimate costs for broker-
dealers that are neither very small nor very large because an 
increase in concavity would increase the distance between the 
concave and linear functions in Figure 2.
---------------------------------------------------------------------------

    The Commission relies on a schedule of average charges to access 
liquidity and rebates to provide liquidity from four non-inverted 
exchanges to estimate the concavity of the exchange pricing function, 
which the Commission uses to approximate the concavity of the 
outsourcing cost model.\908\ On such exchanges, the party receiving 
liquidity in the transaction generally pays a fixed fee to do so; the 
party providing liquidity receives a rebate from the exchange. This 
rebate often marginally increases with the market participant's 
aggregate volume on the exchange.\909\ For liquidity providing firms, 
this pricing scheme would imply a concave function of the cost 
differential between taking and providing liquidity, which informs the 
Commission's estimation of the degree of concavity of the outsourcing 
cost model. The Commission preliminarily believes that estimating the 
shape of the function \910\ using exchange pricing functions is a 
reasonable approach because the same

[[Page 30720]]

activities that determine a broker-dealer's access fees on exchanges--
such as executing orders and the activities such as order submission 
that are requisite to those executions--would affect the broker-
dealer's impact on a service bureau's infrastructure and thus the fee 
that a service bureau is likely to charge to provide services to the 
broker-dealer.
---------------------------------------------------------------------------

    \908\ On many exchanges, the party posting a resting order earns 
a rebate when his order is executed. His counterparty, whose order 
immediately executes, pays a fee to the exchange, which exceeds the 
rebate the liquidity-providing party earned. The difference between 
the rebate and the fee represents the cost a market participant 
would incur to fill a resting order on the exchange, then 
immediately trade out of the position--a so-called ``round-trip'' 
cost. The magnitude of this round-trip cost is often a function of 
the market participant's trading activity on the exchange, with more 
active traders paying lower round-trip costs. On ``inverted'' 
exchanges, the party with the resting order pays a fee while her 
counterparty that receives immediate execution earns a rebate. The 
Commission's estimate of concavity relies on data from exchanges 
that do not feature inverted pricing.
    The Commission obtained public fee schedule data from Web sites 
for NASDAQ, PSX, NYSE, and ARCA during October, 2015. For NASDAQ, 
the differential between access fees and liquidity rebates was 
calculated using the universal ``take fee,'' and rebates were for 
shares trading at greater than $1.00 per share (http://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2. For PSX, 
calculations used the Tape C remove charge less rebate to add 
displayed liquidity (http://www.nasdaqtrader.com/Trader.aspx?id=PSX_Pricing). For NYSE, calculations used the 
``Providing Tier 3/2/1'' rebates versus the universal ``take fee'' 
(NYSE Trading Fees). For ARCA, calculations used charges and rebates 
for midpoint passive liquidity orders available at https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/NYSE_Arca_Marketplace_Fees.pdf.
    \909\ See supra note 908 for examples of exchange pricing 
schedules.
    \910\ This estimation affects the shape of the function, and 
thus the relative prices that are estimated for each broker-dealer; 
the absolute level of prices is determined through the function's 
calibration, which is described below.
---------------------------------------------------------------------------

    The Commission's estimation of the outsourcing cost model begins 
with construction of a tiered function based on the exchange pricing 
function; the incorporation of the exchange pricing function is the 
source of the concavity in the model.\911\ The Commission's estimation 
of exchange pricing assumes four activity level categories.\912\ The 
Commission preliminarily mapped OATS reporting activity levels to 
exchange fee break points, with the assumptions that only a very small 
minority of firms would qualify for the lowest-fee tier of services and 
all of the firms that reported so few OATS ROEs to be assumed to be 
Outsourcers would be at the highest-cost tier of service.\913\ 
Consequently, the Commission assumed the first fee break-point to be 
350,000 OATS messages per month. A firm with 1 million messages per 
month is assumed to qualify for the third pricing tier. To qualify for 
the most favorable pricing tier, a firm would need to report more than 
100 million OATS messages per month. The model is fitted by adding a 
constant to the implied cost of message traffic to bring firms with a 
single OATS ROE to the minimum $50,000 annual fee discussed by service 
bureaus. The fee for very large firms (for purposes of this model, 100 
million plus records per month) is calibrated by multiplying the 
estimated exchange fee tiered function by a constant scale factor of 
30. With these adjustments, the tiered function implies a firm with 
20,000 OATS ROEs per month would incur a service bureau fee of $50,705 
annually; a firm with 100 million OATS ROEs per month would incur a 
service bureau fee of $1.175 million annually; and a firm with 1 
billion OATS ROEs per month firm would incur a service bureau fee of 
$11.3 million annually.\914\
---------------------------------------------------------------------------

    \911\ A tiered function often looks like a set of steps with 
points of discontinuity where the function appears to suddenly move 
up or down. Often, a tiered function's behavior is determined by the 
range of its independent variable (input value). For example, a firm 
that charges $1 per unit for orders of 100 units or less, or $.80 
per unit for orders of more than 100 units prices according to a 
step function, with the number of units ordered being the 
independent variable. On exchanges, the round trip cost (access fee 
less rebate) is often a step function based on the firm's activity 
level during a given calendar period.
    \912\ The Commission chose four tiers to strike a balance 
between incorporating as much information from exchange pricing 
models and having to extrapolate information from them. NASDAQ and 
PSX have five activity level tiers, while NYSE and ARCA have three 
activity level tiers. Building a model with only three tiers would 
ignore potentially significant information from NASDAQ and PSX while 
building a model with five tiers would require extrapolating 
information on nonexistent tiers on NYSE and ARCA, which adds 
imprecision to the function. For NASDAQ and PSX, the Commission used 
prices for the four most active tiers in the analysis; for NYSE and 
ARCA, the Commission used all three, with the middle activity level 
assumed constant over the two middle activity tiers in the 
outsourcing cost model. The aggregate exchange price function 
averages prices on those four exchanges.
    \913\ The Commission preliminarily believes that this is a 
conservative assumption because all of the firms assumed to be 
outsourcing are assumed to be at the highest priced service level on 
a per record reported basis. This causes the Commission's estimate 
of their costs to be higher than other possible assumptions.
    \914\ Estimates are outputs of the calibrated step function 
based on exchange pricing. Calculations are as follows: Outsourcing 
Cost = Fixed Fee ($50,000) + Monthly OATS ROEs x Fee per ROE. 
$50,705 = $50,000 + 20,000 x $0.03525; $1.175 million = $50,000 + 
100MM x $0.01125; $11.3MM = $50,000 + 1B x $0.01125.
---------------------------------------------------------------------------

    The final step in estimating the Outsourcing Cost Model is to 
smooth the tiered function by fitting it to a polynomial. As discussed 
previously, tiered functions are not continuous; the behavior of the 
function can change dramatically at a discontinuity, such as happens 
when moving from one activity level category to another. In the earlier 
illustrative example, a vendor offered pricing that would be 
characterized by a tiered function, in which the firm charges $1 per 
unit for orders of 100 units or less, or $.80 per unit for orders up to 
400 units. In this example, a purchase of 100 units is more expensive 
than a purchase of 120 units.\915\ On exchanges, the pricing 
discontinuities may be acceptable to broker-dealers because the broker-
dealers can more easily estimate a range of volume rather than actual 
volume, and thus pricing discontinuities may allow the broker-dealers 
to better forecast their expected exchange fees based on those volume 
ranges. For the Outsourcing Cost Model, however, such discontinuities 
are undesirable because service bureaus negotiate the contract with 
each customer individually and contracts generally cover a period of 
several years. Consequently, service providers provide custom 
quotations in consideration of the firm's business activities and 
likely capacity impact upon the provider's infrastructure. The 
Commission preliminarily believes that there are unlikely to be 
instances in which a service bureau's costs to service a customer would 
decrease if the customer were to become more active, and because the 
contract has a fixed cost, there is unlikely to be incentives to price 
with a tiered function to ease billing. To smooth the Outsourcing Cost 
Model, the Commission estimates a second degree polynomial to points 
imputed across the tiered function.\916\ This step essentially involves 
finding a smooth curve that closely tracks the tiered function, but 
smoothes its discontinuities.
---------------------------------------------------------------------------

    \915\ In this illustrative example, 100 units would cost $100 
(100 units x $1 per unit), while 120 units would cost $96 (120 units 
x $.80).
    \916\ A first degree polynomial is linear; a second-degree 
polynomial includes a term raised to the power of two and defines a 
quadratic function. The Commission did not consider higher degree 
polynomials because they include inflection points, which would be 
undesirable in this model because there is unlikely to be a range in 
which costs per unit would be expected to increase with volume. 
Quadratic functions are characterized by curves with a single 
minimum or maximum and include concave curves that would be typical 
of cost curves with volume discounts. The estimated functional form 
of the outsourcing cost model used in cost estimates is based on 
OATS ROE activity levels expressed in millions of ROEs per month. 
The estimated function is: Cost estimate = -1.3939 ROEs \2\ + 12,473 
ROEs + 124,005. Model fit statistics, used to measure how well a 
model fits its underlying data, are not meaningful for this model 
because points used for the estimation are imputed rather than 
observed. This function is not monotonic (always increasing or 
always decreasing); it has a maximum at 4.47 billion ROEs. The 
Commission believes this is not a serious concern because the model 
is not used to provide cost estimates for firms that report more 
than 350,000 OATS ROEs per month.

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[[Page 30721]]

[GRAPHIC] [TIFF OMITTED] TN17MY16.331

    The model's output in Figure 3 is an estimate of a broker-dealer's 
current cost to outsource data reporting services as part of a bundle 
of services from a service bureau; for smaller broker-dealers, it is 
assumed to include provision of an order management system and market 
connectivity.\917\
---------------------------------------------------------------------------

    \917\ In conversations with Commission staff, service bureaus 
related that some very large clients provide their own order-
handling system and market connectivity. See supra note 880.
---------------------------------------------------------------------------

    To estimate costs of CAT Data reporting by the service bureaus, the 
Commission preliminarily assumes that the current pricing function 
would apply for CAT Data reporting, but the costs in relation to the 
number of ROEs would increase because some events that are excluded 
from OATS (like proprietary orders originated by a trading desk in the 
ordinary course of a member's market making activities), would be 
included in CAT.\918\ The Commission estimates the expected increase in 
broker-dealer data by estimating the ratio of all SRO audit trail data 
(OATS and exchange data) to OATS data; with this methodology, the 
Commission estimates CAT Data ROEs reported by broker-dealers would 
increase from those reported to OATS by a factor of 1.9431.\919\ The 
Commission preliminarily believes that the assumption of the same cost 
function is reasonable for several reasons. First, the service bureaus 
that provide market access for broker-dealers already process the 
exchange traffic for most of these broker-dealers. Although the number 
of ROEs reported would increase, service bureaus already host most of 
the data that broker-dealers would report to the Central Repository. 
Second, although some broker-dealers would have to establish a process 
of hosting or processing their customer information at their service 
bureau, many broker-dealers already do so to allow their service bureau 
to prepare information for clearing.\920\

[[Page 30722]]

Consequently, most service bureaus have already established the 
infrastructure to host or process customer information. Third, the Plan 
requires broker-dealers to update customer information files, one of 
the additional data sources that broker-dealers would need to report to 
the Central Repository. While the costs of ensuring the appropriate 
security could be significant, these updates occur at a much lower 
frequency than the rate of a service bureau customer's market activity, 
and thus such updating activity would be unlikely to provide a 
technological stress on a service bureau's infrastructure.
---------------------------------------------------------------------------

    \918\ Although the pricing function is assumed constant, broker-
dealer costs would increase because the number of ROEs they report 
through their service bureaus would increase under the Plan. It is 
possible that, if the Plan is approved, data under CAT might be 
reported in a form other than ROEs; however, if a ROE is equivalent 
to a Reportable Event, the number of Reportable Events--regardless 
of the form of the event report--would increase by approximately the 
same adjustment factor.
    \919\ To approximate the increase in reporting activity that 
broker-dealers would likely experience if the Plan were approved, 
the Commission relied on equity data from the week of September 15-
19, 2014, previously provided by FINRA. This FINRA data includes all 
OATS data reported to FINRA, as well as SRO audit trail data from 
all equity exchanges effecting trades that week except the Chicago 
Stock Exchange. The adjustment factor was estimated by dividing the 
number of ROEs in SRO audit trail data hosted by FINRA for all 
exchanges and OATS, by the number of ROEs in OATS; this methodology 
is equivalent to assuming that all exchange message traffic would 
become reportable by broker-dealers. Because some exchange message 
traffic is already reported through OATS, this is a conservative 
assumption in the sense that it increases the adjustment factor and 
consequently increases estimates of broker-dealer reporting costs. 
To adjust for the missing exchange, data for the NASDAQ OMX BX (the 
lowest volume exchange with trading volume exceeding that of the 
Chicago Stock Exchange, based on trades reported through NYSE TAQ) 
was double-counted in the exchange activity total. Although this 
adjustment factor does not capture options data, the Commission 
preliminarily believes that the underestimation is not material in 
this application because the Plan assumes that Options Market Maker 
quotes (the most frequent option event) would not be reported by 
broker-dealers. Furthermore, the Commission notes that the largest 
group of events excluded by OATS but reportable under CAT's 
reporting rules (proprietary orders originated by a trading desk in 
the ordinary course of a member's market making activities) 
predominantly originate from insourcing firms for which the service-
bureau model does not provide estimates of reporting costs. 
Consequently, the adjustment factor is likely to overestimate the 
increased regulatory data volume of outsourcing firms under CAT to a 
degree that should encompass the limited option activity reported by 
outsourcing broker-dealers.
    \920\ Broker-dealers that self-clear but rely on a service 
bureau to perform their regulatory data reporting may not have 
infrastructure in place to share customer information with their 
service providers. However, service bureaus that provide regulatory 
data reporting services would need customer information to perform 
CAT reporting. The Commission preliminarily believes that service 
bureaus that do not currently collect customer information but 
provide regulatory data reporting services would need to change 
their business processes to continue to offer regulatory data 
reporting services; the Commission further assumes that the cost 
estimates presented in the Vendors Study encompass the expenses 
these service bureaus would incur to continue providing their 
current service offerings. In discussions with service bureaus 
arranged by FIF, some service bureaus that do not offer clearing 
services discussed additional costs, some related to security, that 
accompany hosting customer information. If these service bureaus 
were to stop offering regulatory data reporting services due to 
unwillingness to host customer information, their customers would be 
forced to establish new service bureau relationships or undertake 
self-reporting. The Commission cannot rule out that one or more 
service bureaus may choose to exit the market to provide data 
reporting services rather than change their business practices to 
satisfy their clients' responsibilities under the Plan. Any such 
event would potentially be very costly to the broker-dealer clients 
of the exiting service bureaus due to the switching costs that 
broker-dealers incur to change service bureaus. Such an event could 
also contribute to crowded entrances problems. See infra note 934. 
The Commission preliminarily believes that such service bureau exit 
events are unlikely because service bureaus should be able to pass 
costs associated with handling customer information on to their 
clients as part of a more comprehensive bundle of services. 
Furthermore, based on information from broker-dealer discussions 
arranged by FIF, the Commission preliminarily believes that the 
market for regulatory data reporting services is generally expanding 
and the trend is for more, not less, outsourcing. Consequently, the 
Commission believes that market share in this market is valuable and 
existing competitors are unlikely to voluntarily exit the market 
abruptly. The Commission preliminarily believes that most firms that 
report fewer than 350,000 OATS ROEs per month do not self-clear; 
smaller firms that do not self-clear are likely to already have 
relationships with service bureaus that host their customer 
information. It is possible that some of these firms have clearing 
arrangements that do not include regulatory data reporting; these 
firms may be forced to seek new service bureau relationships to 
satisfy their CAT reporting obligations, but it is also possible 
these clearing firms may either add CAT reporting as a service or 
establish a relationship with a service bureau to perform the 
function of providing customer information for CAT on behalf of its 
clients.
---------------------------------------------------------------------------

    The Commission preliminarily believes this activity is unlikely to 
result in a service bureau pricing structure that significantly differs 
from the Commission's current outsourcing cost model. The Commission 
recognizes, however, that these new data sources create implementation 
costs for both broker-dealers and service bureaus, and preliminarily 
believes that these costs are reflected in cost estimates provided by 
service bureaus because service providers that responded to the Service 
Providers Study were presumably familiar with the requirements of CAT 
when they estimated the costs they could likely incur if the CAT NMS 
Plan is approved. The number of ROEs broker-dealers would report would 
likely increase because, for example, proprietary orders originated by 
a trading desk in the ordinary course of a member's market-making 
activities, currently excluded from OATS, would be included in a 
broker-dealer's audit trail data under the Plan.\921\ The increase in 
ROEs would drive an increase in service bureau costs that the 
Commission's model anticipates for broker-dealers that would outsource 
CAT Data reporting obligations.\922\ For illustration, consider two 
firms: Firm A reports the median number of OATS ROEs per month in the 
Outsourcers sample (1,251) and Firm B reports the maximum number of 
OATS ROEs per month (348,636). After CAT implementation, the estimation 
would assume that Firm A would report 2,431 ROEs of audit trail data 
per month and Firm B would report 677,435 ROEs of audit trail data per 
month.\923\ Using the outsourcing cost model discussed above, Firm A's 
annual cost would increase from $124,021 to $124,035. Firm B's average 
annual cost would increase from $128,353 to $132,454.\924\
---------------------------------------------------------------------------

    \921\ The Commission recognizes that OATS does not include 
options market activity. Because option quotes are not reportable by 
broker-dealers under the Plan, the Commission preliminarily believes 
that option related events would not significantly increase the 
number of events that would be included in regulatory data reporting 
for broker-dealers whose costs are estimated by the Outsourcing Cost 
Model. The Outsourcing Cost Model predicts costs only for broker-
dealers that the Commission expects to outsource CAT reporting 
responsibilities. Because exchanges would report Options Market 
Maker quotes, the Outsourcing Cost Model would not predict the costs 
of reporting Options Market Maker quotes. See Exemption Order, supra 
note 18, at 11857-58.
    In addition, the Commission recognizes that larger and more 
complex broker-dealers are likely to have significant regulatory 
reporting responsibilities related to their options activities, but 
the Commission preliminarily believes that these broker-dealers are 
likely to be included in the broker-dealers reporting more than 
350,000 OATS ROEs per month. The Commission estimates these broker-
dealers' costs using information from the Reporters Study in the 
Plan as opposed to the Outsourcing Cost Model, and those cost 
estimates presumably include costs related to options activity.
    \922\ The Outsourcing Cost Model assumes that other CAT 
reporting tasks like providing customer information to the Central 
Repository are handled by the firms' service bureaus. In practice, 
some Outsourcers may have a service bureau that provides an order 
handling system and market connectivity, but does not currently host 
broker-dealers' customer information, while another service provider 
provides clearing services and hosts customer information. For 
broker-dealers with multiple service provider relationships, the 
clearing broker-dealer is assumed to provide services that include 
providing the Central Repository with the customer information for 
its broker-dealer clients. The Commission recognizes that not all 
clearing firms may plan to provide this service to their customers, 
and this may result in additional costs for broker-dealers that do 
not have relationships with service providers that will provide all 
services they need to comply with CAT, if it is approved. This is 
discussed further below in Section IV.G.1.d, infra.
    \923\ Firm A: 2,431 = 1,251 x 1.9431. Firm B: 677,435 = 348,636 
x 1.9431.
    \924\ Firm A: $124,021 = -1.3939 x (0.001251) \2\ + 12,473 x 
0.001251 + 124005; $124,035 = -1.3939 x (0.002431) \2\ + 12,473 x 
0.002431 + 124,005. Firm B: $128,353 = -1.3939 x (0.348636) \2\ + 
12,473 x 0.348636 + 124,005; $132,454 = -1.3939 x (0.677435) \2\ + 
12,473 x 0.677435 + 124,005. The Commission notes that, as set 
forth, the outsourcing cost model's output is dominated by the fixed 
cost of maintaining service at low reporting levels. But if the 
service bureau cost model estimated a very large firm's outsourcing 
cost, a very large firm's cost increase due to CAT would be far more 
significant. For example, a firm that reported 1.05 billion OATS 
ROEs per month would have estimated current costs of $11.7 million 
annually; after CAT implementation, its costs would be estimated to 
be $19.8 million. However, the Commission does not assume that firms 
that report more than 350,000 OATS ROEs per month are Outsourcers 
nor does the Commission assume that they are necessarily Insourcers; 
instead, their costs are estimated using data from the Reporters 
Study.
---------------------------------------------------------------------------

    Application of the model to data provided by FINRA allows the 
Commission to estimate current outsourcing costs for broker-dealers, as 
well as projected costs under the CAT NMS Plan.\925\ The Commission 
estimates that the 806 broker-dealers that monthly each currently 
report fewer than 350,000 OATS ROEs currently spend an aggregate $100.1 
million on annual outsourcing costs.\926\ Under the CAT NMS Plan, the 
Commission estimates these 806 broker-dealers would spend $100.2 
million on annual outsourcing costs. The Commission recognizes that the 
magnitude of this increase is quite small, but this is driven by the 
fact that the vast majority of firms that are assumed to outsource have 
very low regulatory data reporting levels currently. As mentioned 
previously, the median firm in this group reports 1,251 OATS ROEs per 
month; only 39 of these 806 firms currently reports more than 100,000 
OATS ROEs per month. The Outsourcing Cost Model also does not include 
additional staffing costs that the broker-dealer is likely to incur for 
implementation and maintenance of CAT reporting; these are discussed 
further below, and are the primary cost driver of costs that 
Outsourcers are expected to incur if the Plan is approved. Furthermore, 
the Commission is cognizant that data reporting is

[[Page 30723]]

normally part of a bundle of services provided by a service bureau; 
many of those services, including the provision of market access and an 
order handling system, are likely to contribute substantially to the 
costs service bureaus bear to service their clients. The Commission is 
cognizant that while the volume of transactions reported by broker-
dealers assumed to be Outsourcers are unlikely to dramatically increase 
under CAT, the service bureaus would incur significant costs to 
implement changes required by CAT reporting. Those costs are discussed 
below.\927\ Assuming service bureaus pass those implementation costs on 
to their broker-dealer clients eventually, the Outsourcing Cost Model 
would change.\928\
---------------------------------------------------------------------------

    \925\ This data is described above. See supra note 893.
    \926\ The average broker-dealer in this category reported 15,185 
OATS ROEs from June 15-July 10, 2015; the median broker-dealer 
reported 1,251 OATS ROEs. Of these broker-dealers, 39 reported more 
than 100,000 OATS ROEs during the sample period.
    \927\ See Section IV.F.1.d, infra.
    \928\ This would constitute a transfer of costs between market 
participants, but would not affect the Commission's estimate of the 
total costs to industry. In particular, the Commission preliminarily 
believes that if service bureaus pass their implementation costs on 
to their broker-dealer clients, it would appear as higher ongoing 
costs for those clients, but the overall costs would not change.
---------------------------------------------------------------------------

    Firms that outsource their regulatory data reporting still incur 
internal staffing costs associated with this activity. These employees 
perform activities directly related to regulatory data reporting such 
as answering inquiries from their service bureaus, investigating 
reporting exceptions, maintaining any systems that transmit data to 
their service providers, and overseeing their service bureaus' data 
reporting to ensure compliance.\929\ Based on conversations with market 
participants, the Commission estimates that these firms currently have 
0.5 full-time employees devoted to regulatory data reporting 
activities. The Commission further estimates these firms would need one 
full-time employee for one year to implement CAT reporting 
requirements, and 0.75 full-time employees on an ongoing basis to 
maintain CAT reporting.\930\
---------------------------------------------------------------------------

    \929\ Other employees perform other compliance duties such as 
supervising associated persons, and creating and enforcing internal 
regulatory policies (e.g., personal trading, churning reviews, sales 
practice reviews, SEC filings and net capital compliance). Because 
these regulatory activities are not part of regulatory data 
reporting directly affected by the Plan, they are not included in 
activities that contribute to current regulatory data reporting 
costs in the Commission's analysis.
    \930\ As previously discussed, the Commission preliminarily 
believes that small broker-dealer cost data in the Reporters Study 
is unreliable. Based on discussions with broker-dealers, the 
Commission preliminarily believes that very small broker-dealers are 
unlikely to have employees entirely dedicated to regulatory data 
reporting. Instead, other employees have duties that include dealing 
with service bureau matters and answering regulatory inquiries. The 
Commission assumes a full-time employee costs $424,350 per year. See 
Section V.D.2(2)A.i, infra.
---------------------------------------------------------------------------

    In addition to broker-dealers that currently report to OATS, the 
Commission estimates there are 799 broker-dealers that are currently 
excluded from OATS reporting rules due to firm size, or exempt because 
all of their order flow is routed to a single OATS reporter, such as a 
clearing broker, that would have CAT reporting responsibilities.\931\ 
The Commission assumes these broker-dealers would have low levels of 
CAT reporting, similar to those of the typical Outsourcers that 
currently report to OATS.\932\ For these firms, the Commission assumes 
that under CAT they would incur the average estimated outsourcing cost 
of firms that currently report fewer than 350,000 OATS ROEs per month, 
which is $124,373 annually. Furthermore, because these firms have more 
limited data reporting requirements than other firms, the Commission 
assumes these firms currently have only 0.1 full-time employees 
currently dedicated to regulatory data reporting activities. The 
Commission assumes that these firms would require 2 full-time employees 
for one year to implement the CAT NMS Plan and 0.75 full-time employees 
annually to maintain CAT Data reporting.\933\
---------------------------------------------------------------------------

    \931\ In discussions with Commission Staff, FINRA has stated 
that there are currently 54 OATS-exempt broker-dealers and 691 OATS-
excluded firms. The Commission's estimate of 799 new CAT-reporting 
broker-dealers is based on the counts of other broker-dealer types 
(current OATS reporters, ELPs, Options Market Makers, and floor 
brokers) and the 1,800 broker-dealer estimate provided in the Plan. 
Based on the FINRA information on OATS-excluded or OATS-exempt 
broker-dealers, there are 54 remaining broker-dealers in the 1,800 
with an unknown type. The Commission preliminarily assumes that 
these broker-dealers are small and new reporters, although it is 
possible that they are floor brokers on exchanges other than the 
CBOE (CBOE floor brokers are accounted for directly as discussed 
below.) Floor brokers are assumed to have the same costs as new 
reporting small firms, so there would be no impact on the 
Commission's cost estimate if these firms were reclassified as 
options floor brokers.
    \932\ Exemption or exclusion from OATS may be based on firm size 
or type of activity. Broker-dealers with exemptions or exclusions 
that relate to firm size are presumably relatively inactive. 
However, some firms may be exempted or excluded because they route 
only to a single OATS-reporting broker-dealer; this could encompass 
large firms that would be more similar to Insourcers.
    \933\ The Commission assumes that these very small firms already 
have established service bureau relationships to provide an order 
handling system, market access, and clearing services. If any of 
these firms would have to establish these relationships to comply 
with CAT, they would likely face greater costs associated with 
implementing these relationships. Furthermore, the Commission notes 
that conversations with market participants revealed that 
establishing these relationships can be difficult for very small 
firms because their relatively low activity levels results in 
service bureau fees that may not make the relationship economically 
feasible for service providers. Faced with this constraint, some 
very small firms currently resort to establishing ``piggy back'' 
relationships with larger broker-dealers, essentially using another 
firm as its introducing broker. Such a relationship may add an 
additional layer of costs to those discussed here, but such an 
agreement may actually prove less costly for these small firms than 
establishing the service bureau relationships assumed in the cost 
estimation because the process of onboarding with a service bureau 
is costly.
---------------------------------------------------------------------------

    The Commission recognizes that some broker-dealers that are 
categorized in its estimation as Outsourcers in fact currently self-
report their regulatory data; there are 36 firms that the Commission 
categorized as Outsourcers that self-report more than 95% of their OATS 
ROEs. Some of these broker-dealers could find that the costs associated 
with adapting their systems to the CAT NMS Plan reporting would render 
self-reporting (insourcing) CAT Data reporting infeasible or 
undesirable; others could continue to self-report regulatory data. The 
Commission preliminarily believes that the estimated cost of 
outsourcing for these broker-dealers is reliable, but recognizes that 
some of these broker-dealers could choose to self-report for other 
reasons at costs that could exceed these estimates. If some of these 
broker-dealers choose to outsource under CAT, these broker-dealers 
would likely incur additional costs associated with establishing or re-
negotiating service bureau relationships.\934\ The Commission does

[[Page 30724]]

not have information on existing service bureau relationships for firms 
that currently self-report OATS data, so cannot estimate the costs 
these firms might face in aggregate. It would be, however, unlikely 
that many firms of this size do not have relationships with service 
bureaus that would provide this service because firms with limited OATS 
reporting are unlikely to be large enough to self-clear and support the 
IT infrastructure necessary to provide a proprietary order handling 
system and market access.
---------------------------------------------------------------------------

    \934\ In addition to the 36 broker-dealers discussed above, it 
is possible that many of the 799 broker-dealers that are currently 
exempt or excluded from OATS reporting may seek to establish service 
bureau relationships to accomplish their regulatory reporting 
required under the Plan if it were approved. It is possible that 
this could precipitate a ``crowded entrances'' problem in the market 
for regulatory data reporting services, in which more broker-dealers 
wished to establish relationships than the market could accommodate. 
As discussed previously, the onboarding process for service bureaus 
is onerous and time-consuming, both for the broker-dealer and the 
service bureau. If a large number of broker-dealers seek 
relationships simultaneously, service bureaus might not accommodate 
them in time to meet CAT reporting requirements. In such a 
situation, smaller broker-dealers are more likely to fail to 
establish service bureau relationships because they are presumably 
less profitable for service bureaus to serve and so are likely to be 
seen as lower-priority when onboarding resources are constrained. 
Some small broker-dealers could be forced to establish relationships 
with larger broker-dealers and rely on their infrastructure, 
essentially using the larger partner as an introducing broker. This 
could add an additional layer of costs for the smaller broker-
dealer. The Commission preliminarily believes that significant 
crowded entrances problems with service bureaus are unlikely for two 
reasons. First, in discussions with service bureaus arranged by FIF, 
several service bureaus stated that onboarding resources were not 
difficult to scale up. Consequently, it seems likely that service 
bureaus could deploy additional onboarding resources to accommodate 
new demand for their services. Second, the Commission preliminarily 
believes that most of the OATS exempt or excluded broker-dealers 
already have service bureau relationships which provide them with 
order handling systems and market access; it is likely that these 
service bureaus could add regulatory data reporting packages to 
their current bundle of services. Finally, the implementation 
timelines may help alleviate strained capacity because it would 
allow some time for expanding onboarding capacity and new entrants 
and would spread out onboarding somewhat. See Section IV.G.1.d, 
infra.
---------------------------------------------------------------------------

C. Aggregate Broker-Dealer Cost Estimate
    The Commission's methodology to estimate costs to broker-dealers of 
implementing and maintaining CAT reporting varies by the type of 
broker-dealer. As discussed previously,\935\ the Commission 
preliminarily believes that the survey of small broker-dealers used in 
the Reporters Study is unreliable. The Commission does, however, rely 
on the Reporters Study's large broker-dealer cost estimates in 
estimating costs for Insourcers. Consequently, for broker-dealers that 
are FINRA members, the Commission relies on the Reporters Study data to 
estimate costs for broker-dealers that report more than 350,000 OATS 
ROEs per month (using estimates from the Reporters Study for large, 
OATS-reporting broker-dealers).\936\ For lower activity FINRA-member 
broker-dealers (including those that do not currently report to OATS 
due to exclusions and exemptions to OATS reporting requirements), the 
Commission relies on the Outsourcing Cost Model to estimate costs for 
CAT Data reporting.
---------------------------------------------------------------------------

    \935\ See Section IV.F.1.c(1), supra.
    \936\ The Commission's cost estimates assume that broker-dealers 
that currently reporter fewer than 350,000 OATS ROEs per month are 
likely to use one or more service bureaus to report their regulatory 
data. This is discussed further in Section IV.F.1.c(2)B.i, supra.
---------------------------------------------------------------------------

    The Commission, however, preliminarily believes that there are 
three other categories of broker-dealers not reflected in the above 
detailed cost estimates that do not currently report OATS data but 
could be CAT Reporters. First, there are at least 14 ELPs that do not 
carry customer accounts; these firms are not FINRA members and thus 
have no regular OATS reporting obligations.\937\ The Commission 
preliminarily believes that it is likely that these broker-dealers 
already have self-reporting capabilities in place because each is a 
member of an SRO that requires the ability to report OATS on request. 
The second group of broker-dealers that are not encompassed by the cost 
estimates of FINRA member broker-dealers discussed above are those that 
make markets in options and not equities. Although not required by the 
CAT NMS Plan to report their option quoting activity to the Central 
Repository,\938\ these broker-dealers may have customer orders and 
other activity that would cause them to incur a CAT Data reporting 
obligation. Based on CBOE membership data, the Commission believes 
there are 31 options market-making firms that are members of multiple 
SROs but not FINRA.\939\ The third group comprises 24 broker-dealers 
that have SRO memberships only with CBOE; the Commission believes this 
group is comprised primarily of CBOE floor brokers and, further, 
preliminarily believes these firms would incur CAT implementation and 
ongoing reporting costs similar in magnitude to small equity broker-
dealers that currently have no OATS reporting responsibilities because 
they would face similar tasks to implement and maintain CAT reporting. 
The Commission assumes the 31 options market-making firms and 14 ELPs 
would be typical of the Reporters Study's large, non-OATS reporting 
firms because this group encompasses large broker-dealers that are not 
FINRA members, a category that would exclude any broker-dealer that 
carries customer accounts and trades in equities. For these 45 firms, 
the Commission relies on cost estimates from the Reporters Study.\940\
---------------------------------------------------------------------------

    \937\ The category of Insourcers that do not currently report 
OATS data includes firms that have multiple SRO memberships that 
exclude FINRA. This category includes Options Market Makers and at 
least 14 ELPs; these are firms that carry no customer accounts and 
directly route proprietary orders to Alternative Trading Systems; 
further information on these firms including the methodology by 
which they are identified can be found in the 15b9-1 Proposing 
Release. See Proposed Amendments to Rule 15b9-1, supra note 498, at 
18052. Because the Commission has identified at least 14 ELPs, it 
can consider these firms separately from Options Market Makers for 
analysis. However, the Commission recognizes that some firms that 
are classified as Options Market Makers may actually be ELPs, if 
they were not identified as ELPs previously and are members of CBOE; 
because the same cost estimates are used for these groups, this 
misclassification does not affect the Commission's aggregate cost 
estimates for broker-dealers. The Commission recognizes that some 
FINRA member firms also make markets in options; if these firms 
report more than 350,000 OATS ROEs per month, the Commission's 
estimate of these firms' costs would be based on the estimates for 
OATS-reporting large firms based on data in the Reporters Study, 
which are higher than estimates for non-OATS reporting large firms 
(which include Options Market Makers that do not currently report 
OATS). If FINRA member Options Market Makers report fewer than 
350,000 OATS ROEs per month or are exempt or excluded from 
reporting, they would be incorrectly classified as Outsourcers. 
Furthermore, ELPs that were not included in the analysis for the 
15b9-1 Proposing Release and are not CBOE members would be 
incorrectly classified as new Outsourcers.
     Most if not all ELPs have SRO memberships that require them to 
report OATS data upon request. Consequently, these firms are likely 
to have infrastructure in place that would reduce their 
implementation costs for CAT. The Commission preliminarily believes 
that this is reflected in the lower CAT implementation costs that 
the Plan estimates for large firms that do not currently report 
OATS; these estimates form the basis of the Commission's estimates 
of costs that ELPs would face if CAT were approved.
    \938\ See Section III.B.9, supra; see also Exemption Order, 
supra note 18, at 11857-58.
    \939\ The Commission identified 39 CBOE-member broker-dealers 
that are not FINRA members, but are members of multiple SROs; 8 of 
these broker-dealers were previously identified as ELPs, leaving 31 
firms with multiple SRO memberships that are unlikely to be CBOE 
floor brokers. These 31 firms are likely to include some ELPs. This 
methodology implicitly assumes that there are no Options Market 
Makers that are not members of the CBOE. Because the Commission uses 
the same cost estimates for ELPs and options market making firms, 
uncertainty in the classification of the 31 Non-FINRA member CBOE 
member firms does not impact the Commission's cost estimates. The 
Commission recognizes that Options Market Makers may be FINRA 
members, but preliminarily believes these broker-dealers would be 
identified as Insourcers using FINRA data discussed in Section 
IV.F.1.c(2)B.i and thus would not fall under cost estimates produced 
by the Outsourcing Cost Model.
    \940\ The Commission recognizes that additional broker-dealers 
may be members of neither FINRA nor CBOE, yet may incur CAT 
reporting obligations if the Plan is approved. Indeed, the Plan 
estimates that 100 CAT Reporters are not currently FINRA members 
(B.7.(b)(ii)(B)(2)), while the Commission estimates 69 (24 floor 
brokers, 31 Options Market Makers, and 14 ELPs). The Commission has 
determined that categorizing additional broker-dealers that are 
currently classified as exempt or excluded FINRA members as non-
FINRA members would not change the cost estimates because these 
groups have identical estimated per-firm costs.
---------------------------------------------------------------------------

    The estimated costs in the Reporters Study for non-OATS reporting 
firms are lower than the Reporters Study's estimated costs for large 
OATS-reporting firms; in reviewing the Reporters Study data, the 
Commission considered the possibility that firms that do not currently 
report OATS may systematically underestimate the costs they would incur 
to initiate and maintain the type of comprehensive regulatory data 
reporting that OATS entails or the CAT NMS Plan would entail. After 
discussions with multiple broker-dealers, the Commission, however, 
preliminarily believes that large non-OATS reporting firms would likely 
have lower CAT Data reporting costs than current OATS reporting large

[[Page 30725]]

firms because large non-OATS reporting firms tend to be cutting-edge 
technology firms that already have a centralized IT infrastructure; 
they are unlikely to have a fragmented structure with multiple legacy 
systems. A centralized IT infrastructure with cutting-edge technology 
would likely simplify their implementation of the CAT NMS Plan, as 
fewer of their systems would need altering and fewer servers would be 
subject to clock synchronization requirements.
    The Commission presents cost estimates for individual broker-
dealers in Table 7 that include estimates of current costs, CAT 
implementation costs, and ongoing CAT reporting costs. In addition, 
Table 7 presents cost estimates for three categories of costs: 
Hardware/software; staffing; and outsourcing.\941\ Table 7 also 
presents a total across these three categories.\942\ Current data 
reporting cost estimates range from $167,000 annually for floor broker 
and firms that are currently exempt from OATS reporting requirements to 
$8.7 million annually for firms that currently report more than 350,000 
OATS ROEs per month (``Insourcers''). One-time implementation costs 
range from $424,000 for current OATS reporters that are assumed to 
outsource (``OATS Outsourcers'') to $7.2 million for Insourcers. 
Ongoing annual costs range from $443,000 annually for firms that are 
assumed to outsource (OATS Outsourcers, New Outsourcers and Floor 
Brokers) to $4.8 million for Insourcers.
---------------------------------------------------------------------------

    \941\ The Commission preliminarily believes that ``Hardware/
Software'' costs include technology such as servers and 
telecommunications infrastructure necessary to report data to the 
Central Repository, as well as software that must be acquired or 
costs to alter existing software. ``Staffing'' includes the costs of 
employees assigned to regulatory data reporting, and includes 
existing staff as well as staff that would need to be hired if the 
CAT NMS Plan is approved. ``Outsourcing'' includes costs of service 
bureau relationships, legal and technical consulting, as well as 
other services that firms would need to acquire from service vendors 
to accomplish CAT reporting.
    \942\ Rounding may cause totals to vary from the sum of 
individual elements in Table 7.

                          Table 7--Cost Estimates for Individual Broker-Dealers by Type
----------------------------------------------------------------------------------------------------------------
                                                                               Costs
                                                 ---------------------------------------------------------------
               Broker-dealer type                    Hardware/
                                                     software        Staffing       Outsourcing        Total
----------------------------------------------------------------------------------------------------------------
Current Costs:
    Insourcers..................................        $720,000      $7,587,000        $400,000      $8,707,000
    ELPs........................................           3,000       1,409,000          22,000       1,433,000
    Options Market Makers.......................           3,000       1,409,000          22,000       1,433,000
    OATS Outsourcers \1\........................               0         212,000         124,000         336,000
    New Outsourcers \1\.........................               0          42,000         124,000         167,000
    Floor Brokers \1\...........................               0          42,000         124,000         167,000
CAT Implementation:
    Insourcers..................................         750,000       6,331,000         150,000       7,231,000
    ELPs........................................         450,000       3,416,000          10,000       3,876,000
    Options Market Makers.......................         450,000       3,416,000          10,000       3,876,000
    OATS Outsourcers \1\........................               0         424,000               0         424,000
    New Outsourcers \1\.........................               0         849,000               0         849,000
    Floor Brokers \1\...........................               0         849,000               0         849,000
CAT Ongoing:
    Insourcers..................................         380,000       4,256,000         120,000       4,756,000
    ELPs........................................          80,000       3,144,000           1,000       3,226,000
    Options Market Makers.......................          80,000       3,144,000           1,000       3,226,000
    OATS Outsourcers \1\........................               0         318,000         124,000         443,000
    New Outsourcers \1\.........................               0         318,000         124,000         443,000
    Floor Brokers \1\...........................               0         318,000         124,000         443,000
----------------------------------------------------------------------------------------------------------------
\1\ Outsourcing costs are modelled on an individual broker-dealer basis. Category averages are presented here.

    Table 8 presents aggregate total costs to broker-dealers by broker-
dealer type. The Commission estimates that broker-dealers spend 
approximately $1.6 billion annually on current regulatory data 
reporting activities. The Commission estimates approximate one-time 
implementation costs of $2.1 billion, and annual ongoing costs of CAT 
reporting of $1.5 billion. The Commission notes that estimates of 
ongoing CAT reporting costs of $1.5 billion are slightly lower than 
current data reporting costs of $1.6 billion. This differential is 
driven by reductions in data reporting costs reported by large OATS-
reporting broker-dealers in the Reporters Study survey.\943\ The 
Commission estimates that all other categories of broker-dealers would 
face significant increases in annual data reporting costs.
---------------------------------------------------------------------------

    \943\ In the Reporters Study, Large OATS Reporters cite average 
current data reporting costs of $8.32 million and Approach 1 
maintenance costs of $4.5 million annually.

                                                     Table 8--Aggregate Broker-Dealer Cost Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Costs
                                                               ---------------------------------------               Individual
                      Broker-dealer type                         Hardware/                                Count        total         Aggregate total
                                                                  software     Staffing   Outsourcing
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current Data Reporting Costs:
    Insourcers................................................     $720,000   $7,587,000     $400,000          126   $8,707,000           $1,097,130,000
    ELPs......................................................        3,000    1,409,000       22,000           14    1,433,000               20,068,000
    Options Market Makers.....................................        3,000    1,409,000       22,000           31    1,433,000               44,437,000
    OATS Outsourcers \1\......................................            0      212,000      124,000          806      336,000              271,113,000
    New Outsourcers \1\.......................................            0       42,000      124,000          799      167,000              133,137,000

[[Page 30726]]

 
    Floor Brokers \1\.........................................            0       42,000      124,000           24      167,000                3,999,000
                                                                                                                                ------------------------
        Total.................................................  ...........  ...........  ...........        1,800  ...........            1,569,884,000
CAT Implementation Costs:
    Insourcers................................................      750,000    6,331,000      150,000          126    7,231,000              911,144,000
    ELPs......................................................      450,000    3,416,000       10,000           14    3,876,000               54,257,000
    Options Market Makers.....................................      450,000    3,416,000       10,000           31    3,876,000              120,141,000
    OATS Outsourcers \1\......................................            0      424,000            0          806      424,000              342,026,000
    New Outsourcers \1\.......................................            0      849,000            0          799      849,000              678,111,000
    Floor Brokers \1\.........................................            0      849,000            0           24      849,000               20,369,000
                                                                                                                                ------------------------
        Total.................................................  ...........  ...........  ...........  ...........  ...........            2,126,048,000
CAT Ongoing Costs:
    Insourcers................................................      380,000    4,256,000      120,000          126    4,756,000              599,285,000
    ELPs......................................................       80,000    3,144,000        1,000           14    3,226,000               45,160,000
    Options Market Makers.....................................       80,000    3,144,000        1,000           31    3,226,000               99,998,000
    OATS Outsourcers \1\......................................            0      318,000      124,000          806      443,000              356,764,000
    New Outsourcers \1\.......................................            0      318,000      124,000          799      443,000              353,666,000
    Floor Brokers \1\.........................................            0      318,000      124,000           24      443,000               10,623,000
                                                                                                                                ------------------------
        Total.................................................  ...........  ...........  ...........  ...........  ...........            1,465,496,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Outsourcing costs are modeled on an individual broker-dealer basis. Category averages are presented here.

d. Costs to Service Bureaus
    The Plan discusses costs that service bureaus would face to 
implement the CAT NMS Plan and maintain ongoing CAT reporting.\944\ The 
CAT NMS Plan's cost estimates for service bureaus are based on the 
Participant's Costs to Vendors Study (``Vendors Study''), which 
gathered data from third-party vendors.\945\ The Vendors Study 
requested information from thirteen (13) service providers about their 
potential costs for reporting CAT Data--five (5) service providers 
responded. The CAT NMS Plan cites aggregate implementation costs of 
$51.6 million to $118.2 million for service bureaus, depending on 
whether Approach 1 or Approach 2 is selected, where Approach 1 would be 
more costly to vendors.\946\ Aggregate ongoing annual cost estimates 
ranged from $38.6 million to $48.7 million.
---------------------------------------------------------------------------

    \944\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(iii)(D), Appendix C, Section B.7(b)(iv)(A)(4).
    \945\ See id. at Appendix C, Section B.7(b)(i)(A)(3); Appendix 
C, Section B.7(b)(iii)(D). The Commission preliminarily believes 
that most if not all market participants that responded to the 
Vendors Survey are service bureaus, but it is possible that some 
respondents are firms providing technology rather than service 
bureau services.
    \946\ Approach 1 allows broker-dealers to submit data to the 
Central Repository using their choice of existing industry messaging 
protocols while Approach 2 would specify a pre-defined format. See 
Section IV.E.1.b(3), supra.
---------------------------------------------------------------------------

    The Commission preliminarily believes that costs that service 
bureaus would face to implement CAT should be included as part of the 
aggregate costs of CAT. While the CAT NMS Plan does not require the use 
of service bureaus to report CAT Data, the Commission recognizes that 
the most cost effective manner to implement the CAT NMS Plan likely 
would be for most market participants to continue their current 
practice of outsourcing their regulatory data reporting to one or more 
service bureaus. By doing so, the roughly 1,600 broker-dealers 
predicted to outsource would avoid incurring a significant fraction of 
CAT implementation costs; instead, service bureaus would incur 
implementation costs on their behalf. Based on conversations with 
market participants, the Commission preliminarily believes that these 
implementation costs are likely to pass-through to broker-dealers that 
outsource data reporting, because service contracts between broker-
dealers and service bureaus are renegotiated periodically, and approval 
of the CAT NMS Plan might trigger renegotiation as the bundle of 
services provided would materially change. Consequently, service 
bureaus likely would renegotiate their client agreements during the 
period of implementation of the CAT NMS Plan. The Commission 
preliminarily recognizes that service bureaus may, when re-negotiating 
these service contracts factor in the CAT implementation costs the 
service bureaus incurred; consequently, broker-dealers could see 
increases in costs that reflect a service bureau's efforts to recoup 
those costs. In its analysis of costs, the Commission includes these 
service bureau costs and separately identifies them as service bureau 
implementation costs, but the Commission recognizes that they are 
likely to ultimately be borne by broker-dealers.\947\
---------------------------------------------------------------------------

    \947\ Although the Commission preliminarily believes that 
service bureau implementation costs would ultimately be passed on to 
broker-dealers, the Commission believes these costs are not double-
counted in this analysis because re-negotiation of service bureau's 
contracts with their clients is not explicitly factored in to the 
Outsourcing Cost Model. Instead, the Commission recognizes these 
costs as being borne by the service bureaus initially, and does not 
identify a specific mechanism by which they will ultimately be 
passed onto broker-dealers.
---------------------------------------------------------------------------

    The Commission, however, preliminarily believes that the ongoing 
costs of CAT Data reporting by service bureaus would be duplicative of 
costs incurred by broker-dealers. The aggregate fees paid by 
outsourcing broker-dealers to service bureaus cover the service 
bureaus' costs of ongoing data reporting. To include ongoing service 
bureau costs as a cost of CAT would double-count the costs that broker-
dealers incur for CAT Data reporting; thus, in aggregating the cost 
estimates for CAT, the Commission includes only the maximum 
implementation cost that vendors would likely face of $118.2 million.
2. Aggregate Costs to Industry
    The Sections above provide four sets of cost estimates that 
together encompass the costs of the Plan. This Section discusses 
aggregation of these costs into the total costs of the Plan. The Plan 
provides estimates of the total costs to industry if the Commission 
approves the Plan. The Plan estimates initial aggregate costs to 
industry of $3.2 billion to $3.6 billion and annual ongoing costs of 
$2.8 billion to $3.4

[[Page 30727]]

billion, with system retirement costs of $2.6 billion.\948\ The 
Commission estimates that industry would spend $2.4 billion to 
implement CAT, and $1.7 billion per year in ongoing annual costs.
---------------------------------------------------------------------------

    \948\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(iv)(A)(5).
---------------------------------------------------------------------------

    Using estimates discussed above, the Commission recalculated total 
implementation and ongoing annual costs, partitioned across market 
participant types as possible. Because the Plan does not discuss how 
Central Repository costs would be partitioned across Participants and 
CAT Reporters, the analysis here presents Central Repository costs 
separately from costs to Participants and costs to CAT Reporters. The 
Plan presents some costs related to constructing and operating the 
Central Repository as ranges; in these cases, the Commission uses range 
maximums in the total cost calculation. Where costs differ for Approach 
1 and Approach 2, the Commission uses estimates for the approach that 
is more costly in aggregate.\949\
---------------------------------------------------------------------------

    \949\ Approach 1 aggregate costs are higher than those for 
Approach 2 for all market participants except in one case where 
service bureaus have lower ongoing costs for Approach 1. In its 
discussion of industry (broker-dealer) costs, the Plan states that 
the cost differences between these two approaches are not 
statistically significant and that there would likely be no 
incremental costs associated with either approach. See CAT NMS Plan, 
supra note 3, at Appendix C, Section B.7(b)(iii)(C)(2)e.
---------------------------------------------------------------------------

    Table 9 presents estimates of aggregate current, implementation, 
and ongoing costs to the industry. The Commission notes that costs to 
broker-dealers are much greater than the costs of building and 
maintaining the Central Repository. In terms of magnitudes of aggregate 
costs, costs to the 126 largest broker-dealers that currently report 
OATS data is the largest driver of implementation costs, accounting for 
38.3% of CAT implementation costs. Although these firms would face 
significant costs in implementing CAT, the Reporters Study survey 
results suggest that they anticipate lower ongoing reporting costs than 
they currently incur ($599 million annually in expected aggregate costs 
versus $1.1 billion annually in current aggregate regulatory data 
reporting costs).\950\ For all other categories of broker-dealers, the 
Commission estimates ongoing annual costs to be higher than currently 
reporting costs.
---------------------------------------------------------------------------

    \950\ As discussed in Section IV.F.1.c(1), supra, the Commission 
preliminarily believes that cost estimates for Large Broker-Dealers 
presented in the Plan are reliable.

                               Table 9--Aggregate Data Reporting Costs to Industry
----------------------------------------------------------------------------------------------------------------
                                                                                               CAT
                                                    Number       Current costs ---------------------------------
                                                                                 Implementation      Ongoing
----------------------------------------------------------------------------------------------------------------
Central Repository............................               1              $0      $92,000,000     $134,900,000
Participants (all)............................               1     154,100,000       41,100,000      102,400,000
Service Bureaus (all, 13).....................               1         Unknown      118,200,000         Excluded
Broker Dealers:...............................
Insourcers (126)..............................             126   1,097,130,000      911,144,052      599,285,000
Outsourcers (806).............................             806     271,113,000      342,026,100      356,764,000
New Small Firms (799).........................             799     133,137,000      678,111,300      353,666,000
ELPs (14).....................................              14      20,068,000       54,257,245       45,160,000
Options Market Makers (31)....................              31      44,437,000      120,141,043       99,998,000
Options Floor Brokers (24)....................              24       3,999,000       20,368,800       10,623,000
                                                               -------------------------------------------------
    Total BD..................................            1800   1,569,884,000    2,126,048,540    1,465,496,000
                                                               -------------------------------------------------
    Total Industry............................  ..............   1,723,984,000    2,377,348,540    1,702,796,000
----------------------------------------------------------------------------------------------------------------

    Although the Commission relied on an alternative to the Reporters 
Study data to estimate costs for most broker-dealers, the Commission's 
aggregate cost estimate is consistent with information presented in the 
Plan that suggests that ongoing costs under CAT would likely be lower 
than ongoing costs for current reporting systems.\951\ The Plan, 
however, also discusses significant costs ($2.6 billion) for retirement 
of current regulatory reporting systems.\952\
---------------------------------------------------------------------------

    \951\ See CAT NMS Plan, supra note 3, at Appendix C.
    \952\ Id. at Appendix C, Section B.7(b)(iv)(A)(5).
---------------------------------------------------------------------------

    The Commission has not included those costs in its estimate of the 
aggregate costs of the Plan for several reasons. First, for reasons 
discussed below, the Commission preliminarily believes that cost 
estimates provided in the Plan are unlikely to accurately represent the 
actual costs industry will face in retiring duplicative reporting 
systems. Second, the retirement of current regulatory reporting systems 
is not a requirement of the Plan and the timeline and process for their 
retirement is uncertain.\953\ While the Commission's cost estimates do 
not recognize explicit system retirement expenses, it also does not 
explicitly recognize savings from elimination of these systems, though 
they are recognized qualitatively as additional benefits of the Plan. 
The Commission preliminarily believes that this approach is 
conservative in the sense that (for reasons that are discussed below) 
system retirement costs are likely to be mitigated by incorporation of 
current reporting infrastructure into CAT reporting infrastructure, 
while cost savings associated with industry's need to maintain fewer 
regulatory data reporting systems are not explicitly recognized. 
Finally, while the Commission does not include explicit system 
retirement costs, the Commission does recognize that industry will 
experience a costly period of duplicative reporting if the CAT NMS Plan 
is approved, and the Commission believes it is possible that these 
costs may be conflated with actual retirement costs estimated in the 
Plan. These reasons are discussed further below. As discussed above, 
the Commission preliminarily believes that retirement costs are 
unlikely to reflect actual costs to industry in eliminating duplicative 
reporting systems for several reasons. First, for the majority of 
broker-dealers that outsource, system retirement would affect few in-
house systems; these broker-dealers are likely to adapt the systems 
that interface with service bureaus for current regulatory data 
reporting to interface for CAT Data reporting. Consequently, the 
Commission believes that, for these broker-dealers, costs to implement 
CAT reporting are likely to implicitly

[[Page 30728]]

accomplish the retirement of older regulatory data reporting systems 
because these older systems will be transformed--in whole or in part--
into systems that accomplish CAT reporting. Second, for broker-dealers 
that self-report regulatory data, the Commission cannot determine the 
source of the costs of system retirement that are estimated in the 
Plan. At its simplest level, ceasing reporting activities would include 
scrapping IT hardware dedicated to the endeavor and terminating the 
employees responsible for such regulatory data reporting.\954\ The 
Commission recognizes that there are costs associated with those 
activities, but does not preliminarily believe their magnitude 
(estimated in the Plan as $2.6 billion) should approach or exceed the 
magnitude of costs of CAT implementation (estimated in this analysis as 
$2.4 billion). Although the Commission is uncertain what estimates were 
included in system retirement costs and the Commission recognizes that 
different survey respondents may have interpreted the question 
differently, the Commission preliminarily believes that the system 
retirement costs cited in the Plan might include industry estimates of 
an extended period of duplicative reporting costs, during which 
industry would report data to both CAT and to the systems that CAT 
would likely replace.
---------------------------------------------------------------------------

    \953\ Id. at Appendix C, Section C.9.
    \954\ Based on discussions with industry, the Commission 
believes that industry is likely to implement the CAT NMS Plan by 
repurposing systems and employees currently assigned to other 
regulatory data reporting. The cost of eliminating these resources, 
however, should provide an upper bound to what actual system 
retirement costs would be, because eliminating these resources is an 
available and effective means of retiring these systems; market 
participants could choose other methods if they are preferable in 
terms of reducing costs of system retirement or CAT implementation. 
See supra note 880.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the period of 
duplicative reporting would likely constitute a major cost to industry 
for several reasons. These reasons include the length of the 
duplicative reporting period; constraints on the capacity of industry 
to implement changes to regulatory reporting infrastructure that might 
cause market participants to implement changes using less cost-
effective resources; and the inability of some market participants to 
implement duplicative reporting in house, necessitating that they seek 
service bureau relationships to accomplish their CAT reporting 
requirements.
    Based on data provided in the Plan, the Commission believes that 
the period of duplicative reporting anticipated by the Participants is 
likely to last for 2 to 2.5 years. The Commission preliminarily 
believes that these estimates are reliable because they reflect the 
Participants' experience with their historical rulemaking activity, 
although the Commission preliminarily believes that some steps outlined 
by the Participants might happen concurrently with Commission 
rulemaking required to facilitate ending some duplicative reporting. 
The Plan outlines a timeline for eliminating duplicative 
reporting.\955\ The timeline begins when Industry Members (other than 
Small Industry Members) are required to begin reporting to the Central 
Repository. The elimination of duplicative reporting would require 
several steps: (1) The SROs would identify their respective duplicative 
SRO rules and systems; (2) the SROs would file with the Commission the 
relevant rule modifications or eliminations; (3) the Commission would 
review and consider such rule modification or elimination filings; and 
(4) subject to the requisite Commission approval, the SROs would then 
implement such SRO rule changes.
---------------------------------------------------------------------------

    \955\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
C.9. The elimination of duplicative reporting may or may not involve 
actually retiring IT systems. If current regulatory data reporting 
systems are adapted to report CAT Data, some of these systems may 
continue to also report duplicative data during the period of 
duplicative reporting. In such a case, system retirement would 
involve no longer using these systems to report the duplicative data 
and any savings may be associated with no longer requiring staff to 
maintain the software and systems that support the duplicative 
reporting.
---------------------------------------------------------------------------

    According to the Plan, step (1)--SRO identification of duplicative 
SRO rules and systems--of the process could take 12 to 18 months from 
implementation. SROs have 12 months (in the case of duplicative rules 
and systems) or 18 months (in the case of partially duplicative rules 
and systems) to complete their analysis of existing rules and systems 
to identify which systems should continue collecting data, or whether 
data in the Central Repository could substitute for the information 
collected through rules and systems in place.\956\
---------------------------------------------------------------------------

    \956\ The Plan notes that if a Participant determines that 
sufficient data is not available to complete the analysis, a 
subsequent date could be identified for such a determination to be 
made.
---------------------------------------------------------------------------

    Certain SRO rules or systems identified by the SROs in step (1) 
might first necessitate an SEC rule change before the SROs can properly 
modify or eliminate such SRO rule or system. If so, Commission 
rulemaking may be required.\957\ This step (1)--even for those SRO rule 
and system changes requiring Commission rulemaking--could still 
feasibly take less than 18 months total because the SRO's analysis of 
their rules and their corresponding SRO rule filings could be 
undertaken in parallel with any such related Commission rulemaking 
during this period.
---------------------------------------------------------------------------

    \957\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
C.9. For example, Commission rules that require broker-dealers to be 
able to report Large Trader or EBS data would prevent SROs from 
changing their rules to eliminate this capability. See id. 
Consequently, the timeframe for retirement of these systems may also 
be dependent on Commission rulemaking. The Commission recognizes 
that during the comment period of any SEC rulemaking, SROs might 
begin their analysis of their own rules and preparation of potential 
filings, possibly compressing this timeline further.
---------------------------------------------------------------------------

    According to the Plan, step (2) of the process could take 6 months. 
After identifying the rules to eliminate or modify, the Plan provides 
the Participants with six months to file the proposed rule change with 
the Commission. It is possible for the Participants to file these 
sooner if their rule changes are not complex, but the Plan places an 
upper bound on this. Under this timeline, it could take 18 months to 
two years after the first broker-dealers start reporting to the Central 
Repository for Participants to file rules to eliminate duplicative 
reporting.\958\
---------------------------------------------------------------------------

    \958\ It could also take longer if the Participant determines 
that sufficient data is not available to complete such analysis by 
12 or 18 months after Industry Member reporting to the Central 
Repository commences.
---------------------------------------------------------------------------

    According to the Plan, step (3) of the process could take another 3 
months to a year. The Commission recognizes that the approval process 
for Participant rule changes can take time. In particular, for the 
Commission to approve such rules could take another 3 to 12 months 
depending on how complex the rule change. However, the Commission 
preliminarily expects that as long as such rule changes would be fairly 
straight forward, approval would likely take 3 months or less. As such, 
the first three steps add up to 21 months to 27 months.
    Step (4) involves implementing the Participant rule changes, which 
would eliminate duplicative reporting. The Plan states that 
Participants would, upon Commission approval of rule changes, implement 
the ``. . . most appropriate and expeditious timeline . . . for 
eliminating such rules and systems.'' \959\ The Commission 
preliminarily believes that the elimination of duplicative reporting 
will require significant planning and implementation, but believes that 
much of the required planning is likely to happen concurrently with the 
Commission approval process of the

[[Page 30729]]

underlying SRO rules. Consequently, the Commission preliminarily 
believes that actual implementation could occur as soon as 90 days 
after approval, and is not likely to occur more than six months after 
approval. The Plan also states that Participants should consider in 
setting an implementation timeline, when the quality of CAT Data would 
be sufficient to meet surveillance needs. In addition, reducing some 
duplicative reporting could require changing Participant rules in 
response to the elimination or modification of Commission Rules.
---------------------------------------------------------------------------

    \959\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
C.9.
---------------------------------------------------------------------------

    Based on the timelines for all four steps and the Commission's 
analysis of how this timeline would be affected by the need in some 
cases for Commission rulemaking, the Commission preliminarily believes 
that the period of duplicative reporting could last at least 2 years, 
and the period of system retirement could extend for up to 2.5 years 
after Industry Members begin reporting data, assuming SROs are not 
limited in their initial analysis by problems such as delays in 
Commission rulemaking or excessive Error Rates, and Commission approval 
of SRO rules is completed within 90 days of submission.
    Second, industry-wide resources to update order-handling systems 
are limited. Based on conversations with market participants, the 
Commission preliminarily believes that while most Insourcers and 
service bureaus have permanent staff that specialize in these 
activities, some would rely on hiring additional staff or utilizing 
contractors to increase their capacity to implement changes to order 
handling and data reporting systems and support of duplicative 
reporting systems. Furthermore, multiple broker-dealers and service 
providers cited access to specialized staff as a constraint that limits 
their ability to implement regulatory rule changes, stating that while 
current and newly hired staff might be able to implement the CAT NMS 
Plan and continue supporting OATS, they would be unlikely to be able to 
continue to implement changes to both systems. Consequently, Insourcers 
and service bureaus would likely incur significant costs associated 
with hiring additional employees to implement the CAT NMS Plan and 
accomplish regulatory data reporting during any duplicative reporting 
period.
    Third, the Commission preliminarily believes that some firms that 
are currently challenged to maintain their self-reporting of data may 
not have the resources to implement the CAT NMS Plan at the same time 
as current reporting absent a service bureau relationship. It is 
possible that a number of relatively large firms would seek to 
establish service bureau relationships to accomplish both CAT reporting 
and current reporting even as a number of very small firms that 
currently do not report OATS could seek to establish such 
relationships. This could precipitate a ``crowded entrances'' situation 
in the market to provide data reporting services. The establishment of 
these relationships would pose a significant cost to industry.\960\
---------------------------------------------------------------------------

    \960\ See supra note 934 and Section IV.G.1.d, infra.
---------------------------------------------------------------------------

    The Commission expects that there would be some cost efficiencies 
with respect to current data reporting costs and CAT reporting costs 
during any period of duplicative reporting. For example, servers 
hosting software to produce records for CAT could possibly also host 
software to produce records for OATS during the duplicative reporting 
period because these regulatory reporting systems rely upon much of the 
same underlying data. However, the Commission does not currently have 
the necessary data to determine the extent of these efficiencies, which 
would vary across market participants. Therefore, the Commission cannot 
estimate duplicative reporting costs. The Commission preliminarily 
believes, however, that the current data reporting costs of $1.7 
billion per year constitutes an estimate of the cost per year to 
industry of duplicative reporting requirements, as it represents the 
cost of duplicative reporting to industry if there are no efficiencies. 
The Commission notes, however, that staff required to implement changes 
to order handling systems are a limited resource. If market 
participants do not have adequate staffing to implement the changes 
required by CAT and maintain duplicative reporting, costs for 
duplicative reporting could exceed current reporting costs because 
market participants could have to rely on external staff (such as 
consultants) or contract through service bureaus to accomplish this 
reporting; this is likely to be more expensive than staff used for 
current reporting.
    Further, the Commission does not believe that duplicative reporting 
costs should be added to the estimated aggregate costs of the CAT NMS 
Plan. The Commission believes that the aggregate costs above represent 
the total costs of the Plan and do not account for the differential 
between these costs and the costs the industry currently incurs for 
regulatory data reporting and maintenance. During the period of 
duplicative reporting, industry would incur the aggregate costs of 
accomplishing CAT reporting described above, plus the costs of current 
data reporting, which the Commission uses as an estimate of duplicative 
reporting costs. The Commission notes that market participants will 
incur costs equal to current data reporting costs if the Plan were not 
approved (because current regulatory data reporting would continue), or 
as duplicative reporting costs if the Plan were approved. Consequently, 
the Commission preliminarily believes these costs should not be 
considered as costs attributable to approval of the Plan, because 
market participants would bear these costs whether the Plan is approved 
or disapproved.
    While broker-dealers are anticipated to bear the burden of the 
costs associated with CAT, including implementation costs, ongoing 
costs and duplicative reporting costs, the Commission does not know 
whether these costs would be passed on to investors, or whether these 
costs would be absorbed by the broker-dealers themselves. On one hand, 
it could be assumed that broker-dealers could pass on the costs 
associated with CAT to investors because broker-dealers currently 
already pass on certain regulatory fees to their customers. For 
instance, the SROs have adopted rules that require broker-dealer to pay 
Section 31 transaction fees,\961\ and some of these broker-dealers have 
in turn imposed fees on their customers in order to provide funds to 
pay for the fees owed to the SROs. However on the other hand, if the 
passing on of these costs is associated with higher fees, a given 
broker-dealer could decide to absorb these costs and not increase their 
fees, and by doing so, they may attract more customer order flow. The 
incremental order flow that the broker-dealer attracts from having 
lower fees relative to their competitors may indeed offset the costs 
associated with CAT that they incur by not passing these on to their 
customers. Other broker-dealers, cognizant that they could lose order 
flow to other broker-dealers that do not pass on the costs to their 
customers could strategically respond and thus, could also absorb these 
costs. Ultimately, the Commission does not know which situation is more 
likely to eventuate,

[[Page 30730]]

primarily because the Commission generally does not know the cost 
structure of broker-dealers.
---------------------------------------------------------------------------

    \961\ Under Section 31 of the Securities Exchange Act of 1934, 
SROs and all the national securities exchanges must pay transaction 
fees to the Commission based on the volume of securities that are 
sold on their markets. These fees are designed to recover the costs 
incurred by the government, including the Commission, for 
supervising and regulating the securities market and securities 
professionals. See ``SEC Fee--Section 31 Transaction Fees,'' 
available at https://www.sec.gov/answers/sec31.htm.
---------------------------------------------------------------------------

3. Further Analysis of Costs
a. Costs Included in the Estimates
    In general, the CAT NMS Plan does not break down its cost estimates 
as a function of particular CAT NMS Plan requirements, although it does 
provide some cost information for certain requirements in the Plan. 
However, the Commission has considered which elements of the CAT NMS 
Plan are likely to be among the most significant contributors to CAT 
costs. The Commission preliminarily believes that significant sources 
of costs would include the requirement to report customer information, 
the requirement to report certain information as part of the material 
terms of the order, the requirement to use listing exchange symbology, 
and possibly, the inclusion of Allocation Reports. The Commission 
preliminarily believes that the clock synchronization requirements, the 
requirement that Options Market Makers send quote times to the 
exchanges, the requirement that the Central Repository maintain six 
years of CAT Data, and the inclusion of OTC Equity Securities in the 
initial phase of the implementation of the CAT NMS Plan are unlikely to 
be significant contributors to the overall costs of the Plan. Notably, 
the Commission believes that its estimates of the implementation costs 
and ongoing costs to industry above include each of the costs discussed 
in this Section because these provisions encapsulate major parts of the 
Plan.
    The Commission preliminarily believes that the requirement in the 
CAT NMS Plan to report customer information for each transaction 
represents a significant source of costs.\962\ In particular, the 
adapting of systems to report customer information that is not included 
in current regulatory data on a routine basis could require significant 
and potentially difficult reprogramming because current audit trail 
data does not routinely provide this information. Consequently, this 
reprogramming could require gathering information from separate systems 
within a broker-dealer's infrastructure and consolidating it in one 
location, and redesigning an IT infrastructure to satisfy this 
requirement could interrupt other workflows within the broker-dealer, 
expanding the scope of systems that must be altered to accomplish CAT 
reporting. While the Commission preliminarily believes that the 
requirement to report customer information would be a significant 
source of costs, the Commission lacks the necessary information to 
estimate what proportion of the costs of the Plan are attributable to 
this requirement. The Plan does not provide information on the costs 
attributable to the reporting of customer information, and the 
Commission has no other data from which it can independently estimate 
these costs, because the Commission is not aware of any data currently 
available to it regarding the number of broker-dealers that would need 
to engage in significant reprogramming in order to report customer 
information as required in the Plan, or the costs of doing so. The 
Commission therefore seeks comment on the costs that would be 
attributable to the requirement to report customer information as set 
out in the CAT NMS Plan. The Commission also notes that the Plan 
reflects exemptive relief granted by the Commission in connection with 
this requirement. Specifically, as discussed further in the 
Alternatives Section, the Commission granted exemptive relief from 
certain requirements of Rule 613 to allow the alternative approach to 
customer information that leverages existing identifiers to be included 
in the Plan and subject to notice and comment.\963\ Based on cost 
survey data provided by the Participants, this approach would reduce 
quantifiable costs to the top three tiers of CAT Reporters by at least 
$195 million as compared to an approach that followed requirements of 
Rule 613 as adopted.\964\
---------------------------------------------------------------------------

    \962\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.1.a.iii.
    \963\ See Exemption Order, supra note 18.
    \964\ Id. at 17-18.
---------------------------------------------------------------------------

    Similarly, the Commission preliminarily believes that the 
requirement to report material terms of the order that include an open/
close indicator, order display information, and special handling 
instructions represents a significant source of costs.\965\ Not all 
broker-dealers are currently required to report these elements on every 
order and no market participants report an open/close indicator on 
orders to buy or sell equities. Thus, the adapting of some market 
participants' systems to report this information for each transaction 
could require significant and potentially difficult reprogramming that 
requires centralizing or copying information from multiple IT systems 
within the broker-dealer. As discussed above, redesigning a broker-
dealer's IT infrastructure could disrupt multiple workflows and 
dramatically increase the costs associated with implementing the 
changes required by CAT. While the Commission preliminarily believes 
that this reprogramming would be a significant source of implementation 
costs, the Commission lacks the necessary information to estimate what 
proportion of the costs of the Plan are attributable to this 
requirement. The Plan does not provide information on the costs 
attributable to these elements of the Plan, and the Commission has no 
other data from which it can independently estimate the costs, because 
the Commission is not aware of any data currently available to it 
regarding the number of broker-dealers that would need to engage in 
significant reprogramming in order to report this information as 
required in the Plan, or the costs of doing so. The Commission 
therefore seeks comment on the costs that would be attributable to 
reporting the material terms of the order as set out in the CAT NMS 
Plan, including an open/close indicator, order display information, and 
special handling instructions.
---------------------------------------------------------------------------

    \965\ See CAT NMS Plan, supra note 3, at Article I.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that the requirement to 
use listing exchange symbology in the CAT NMS Plan could represent a 
significant source of costs. The Plan requires CAT Reporters to report 
CAT Data using the listing exchange symbology format,\966\ which would 
also be used in the display of linked data; because broker-dealers do 
not necessarily use listing exchange symbology when placing orders on 
other exchanges or off-exchange, this requirement could require broker-
dealers to perform a translation process on their data before they 
submit CAT Data to the Central Repository.\967\ The translation process 
could be costly to design and perform and result in errors that would 
be costly for the broker-dealers to correct. If other elements of the 
Plan were to necessitate a translation, then the listing exchange 
symbology could be fairly low cost because it would be just another 
step in the translation. However, if the Plan has no other requirement 
that would necessitate a translation, the costs of including listing 
exchange symbology on all CAT reports would include the costs of 
designing and performing the

[[Page 30731]]

translation as well as the costs of correcting any errors caused by the 
translation. While the Commission preliminarily believes that the 
requirement to use listing exchange symbology could be a significant 
source of costs, the Commission lacks the necessary information to 
estimate what proportion of the costs of the Plan are attributable to 
this requirement. The Plan does not provide information on the costs 
attributable to this particular element of the Plan, and the Commission 
has no other data from which it can independently estimate these costs, 
because the Commission is not aware of any data currently available to 
it regarding the number of broker-dealers that would need to undertake 
the translation process, either as a result of this or other elements 
of Plan, or the costs of doing so. The Commission seeks comment on the 
costs that would be attributable to the requirement to report CAT Data 
using listing exchange symbology format as set out in the CAT NMS Plan.
---------------------------------------------------------------------------

    \966\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.1.a.
    \967\ For example, class A shares of ABC Company might be traded 
using ticker symbol ``ABC A'' on one exchange, ``ABC_A'' on another 
exchange, and ``ABC.A'' on a third. As written, the Plan would 
require all broker-dealers to use the listing exchange's symbol for 
its Central Repository reporting, regardless of the symbol in the 
order messages received or acted upon at the broker-dealer or 
exchange.
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    The Commission recognizes that industry would bear certain costs 
associated with Allocation Reports, particularly the requirement that 
the reports include allocation times. The Commission understands that 
some broker-dealers already record allocation times; broker-dealers 
that do not currently record these times will face implementation costs 
associated with changing their business processes to record these 
times. Implementation costs for allocation reporting may include 
significant costs associated with incorporating additional systems into 
their regulatory data reporting infrastructure to facilitate this 
reporting, if such systems would not already be involved in recording 
or reporting order events. Furthermore, Outsourcers could face 
significant implementation and ongoing costs associated with reporting 
Allocation Reports if their service bureaus do not extend their 
services to manage the servers that handle allocations. Because 
implementation costs for Allocation Reports would vary widely across 
broker-dealers and because the Plan does not break out costs associated 
with reporting allocation information, the Commission cannot separately 
estimate costs attributable to this reporting.
    The Commission preliminarily believes that the clock 
synchronization requirements in the Plan represent a less significant 
source of costs. The CAT NMS Plan estimates industry costs associated 
with the 50 millisecond clock synchronization requirement, based on the 
FIF Clock Offset Survey.\968\ The FIF Clock Offset Survey states that 
broker-dealers currently spend $203,846 per year on clock 
synchronization activities, including documenting clock synchronization 
events.\969\ The FIF Clock Offset Survey states that firms expect the 
50 millisecond requirement to increase those costs by $109,197 per 
firm.\970\
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    \968\ See CAT NMS Plan, supra notes 3, at Section D.12, and note 
127. The Commission notes that the survey has two limitations 
pertinent to specific cost estimates provided in the summary of 
survey results. First, cost estimates are likely to be significantly 
downward biased. Individual responses to cost data were gathered 
within a range; for example, a firm would quantify its expected 
costs as ``Between $500K and less than $1M'' or ``$2.5M and over''. 
When aggregating these responses, FIF generally used the range 
midpoint as a point estimate; however, for the highest response, the 
range minimum was used (i.e., ``$2.5M and over'' was summarized as 
$2.5M.) This is likely to have produced a significant downward bias 
in aggregate survey responses. Second, the survey includes only 
broker-dealers and service bureaus, thus the data excludes 
exchanges. The Commission preliminarily believes this limitation 
would not significantly impact industry costs because all exchanges 
currently maintain clock synchronization standards finer than those 
discussed as alternatives.
    \969\ See FIF Clock Offset Survey, supra note 127. This is based 
on the current practice of the broker-dealers who responded to the 
survey.
    \970\ See id. at 16. The $109,197 figure is obtained by 
subtracting the cost of maintaining current clock offsets of 
$203,846 annually from the estimated per-firm annual cost of 
maintaining a 50 millisecond clock offset of $313,043; see also id. 
at 7 (``Even where firms were at the target clock offset, many firms 
cited additional costs associated with compliance including logging 
and achieving greater degrees of reliability'').
---------------------------------------------------------------------------

    Based on discussions with industry, the Commission preliminarily 
believes that the majority of broker-dealers (Outsourcers) would not 
face significant direct costs for clock synchronization because time 
stamps for CAT Data reporting would be applied by service bureaus.\971\ 
However, the Commission preliminarily estimates there are 171 firms 
that make the insourcing-outsourcing decision on a discretionary basis; 
\972\ if these firms decide to insource their data reporting under CAT, 
each of these firms is likely to face costs associated with complying 
with new clock synchronization requirements. The Commission 
preliminarily estimates that industry-wide implementation costs for the 
50 millisecond clock synchronization requirement would be $268 million, 
with $25 million annually in ongoing costs.\973\ The Commission 
preliminarily believes that approximately $19.7 million in broker-
dealer implementation costs would be attributable to clock 
synchronization requirements.\974\ The Commission also preliminarily 
believes that service bureaus would face similar clock synchronization 
costs if the CAT NMS Plan is approved. Using 13 as an estimate of the 
number of service bureaus, approximately $1.4 million in service bureau 
implementation costs would be attributable to clock synchronization 
requirements in the Plan.\975\
---------------------------------------------------------------------------

    \971\ See Section IV.F.1.d for discussion of service bureau 
costs and the degree to which those costs might be passed on to 
broker-dealers.
    \972\ These are the 126 current OATS reporters that report more 
than 350,000 OATS ROEs per month; the 31 options market-making 
firms; and the 14 ELPs.
    \973\ See Section IV.H.2.a(1), infra, for a discussion of how 
these implementation costs might vary for different clock 
synchronization standards.
    \974\ See id., for discussion of costs attributable to the 50 
millisecond clock synchronization tolerance proposed in the Plan, 
including the $109,197 estimate of per-firm implementation costs of 
the 50 millisecond clock synchronization requirement; see also CAT 
NMS Plan, supra note 3, at Appendix C, Section B.7(b)(i)(A)(3). 171 
broker-dealers x $109,197 = $18,672,687.
    \975\ The CAT NMS Plan states that the Vendor Study was 
distributed to 13 service bureaus or technology-providing firms 
identified by the DAG. See CAT NMS Plan, supra note 3, at Appendix 
C, Section B.7(b)(i)(A)(3). 13 service bureaus x $109,197 = 
$1,419,561. The Commission believes clock synchronization costs are 
already included in cost estimates provided in the Vendor Study. As 
discussed above (see Section IV.F.1.d), the Commission believes it 
is likely that these costs would ultimately be passed on to service 
bureaus' broker-dealer clients.
---------------------------------------------------------------------------

    Other Plan requirements that the Commission preliminarily believes 
are unlikely to represent major contributions to the overall costs of 
the Plan include the requirement that Options Market Makers report the 
quote times sent to the exchanges,\976\ which the Plan estimates would 
cost between $36.9 million and $76.8 million over five years; the 
requirement to maintain six years of data at the Central Repository, 
which the Plan estimates would cost $5.59 million,\977\ and the 
inclusion of OTC Equity Securities in the initial phase of the 
implementation of the CAT NMS Plan.\978\
---------------------------------------------------------------------------

    \976\ See FIF, SIFMA, and Security Traders Association, Cost 
Survey Report on CAT Reporting of Options Quotes by Market Makers 
(November 5, 2013), available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p601771.pdf; see also CAT 
NMS Plan, supra note 3, at Appendix C, Section B.7(b)(iv)(B).
    \977\ See CAT NMS Plan, supra note 3, Section 12(m).
    \978\ See id. at Section 12(q). The Commission does not have the 
information necessary to precisely estimate the costs that are 
incurred by including OTC Equity Securities in the initial phase of 
the implementation of the CAT NMS Plan, because the Plan does not 
separately present the costs associated with OTC Equity Securities. 
Because of low trading activity in the OTC equity markets, any 
significant costs associated with including OTC Equity Securities 
would be in implementation costs. Further, broker-dealers that 
implement CAT Data reporting for NMS securities may not incur 
significant additional costs to implement CAT Data reporting for OTC 
Equity Securities.

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[[Page 30732]]

    There are many other categories of costs that contribute to the 
aggregated estimates of the costs of the Plan in addition to the items 
discussed above. For example, in addition to providing CAT Reporters 
data on their Error Rates, the Plan states that the Participants 
believe that in order to meet Error Rate targets, industry would 
require certain resources, including a stand-alone testing environment, 
and time to test their reporting systems and infrastructure. There are 
also likely to be costs related to the Plan Processor's management of 
PII.\979\ As noted above, the Commission does not have sufficient 
information to analyze each individual category of costs, because the 
available cost estimates do not reflect a detailed breakdown of the 
expected cost of each element of the CAT NMS Plan. However, the 
Commission preliminarily believes that its estimates of implementation 
costs and the ongoing costs of the CAT NMS Plan reflect all relevant 
costs to industry.
---------------------------------------------------------------------------

    \979\ The Commission also acknowledges that the costs associated 
with handling PII could create an incentive for service bureaus not 
to offer CAT Reporting services. The Commission does not believe 
that this incentive would significantly alter the services available 
to broker-dealers. For further discussion, see supra note 920 and 
Section IV.G.1.e, infra. The Commission also notes that, pursuant to 
the exemptive relief granted by the Commission, the approach to the 
reporting of Customer information in the CAT NMS Plan could allow 
for the bifurcation of PII reporting from the reporting of order 
data. See Exemption Order, supra note 18, at 11858-63.
---------------------------------------------------------------------------

b. Fees
    The Plan states that the Operating Committee would have the 
authority to levy ancillary fees on both broker-dealers reporting to, 
and regulators accessing, the Central Repository.\980\ The Commission 
believes that ancillary fees levied on broker-dealers are unlikely to 
be levied broadly, because discussion in the Plan associates these fees 
with late and/or inaccurate reporting. The Plan also discusses 
ancillary fees possibly levied on regulators associated with the use of 
Central Repository data. The Commission recognizes that costs estimated 
in Bids for constructing and operating the Central Repository already 
anticipate use of the CAT Data by regulators, and that additional fees 
to access the data might give regulators incentives to make less use of 
the data than anticipated in the Benefits Section. However, any fee 
schedule proposed by the Participants would be filed with the 
Commission. Consequently, the Commission does not believe that the 
provisions for ancillary fees would likely significantly impact the 
costs or benefits of CAT.
---------------------------------------------------------------------------

    \980\ See CAT NMS Plan, supra note 3, at Section 11.3(c).
---------------------------------------------------------------------------

4. Second-Order Effects and Other Security-Related Costs
a. Security
    As noted in the Adopting Release, Commenters have expressed 
concerns regarding the risk of failing to maintain appropriate controls 
over the privacy and security of CAT Data.\981\ The Commission 
recognizes that investors and market participants could face 
significant costs if CAT Data security were breached.
---------------------------------------------------------------------------

    \981\ See Adopting Release, supra note 9, at 45725, 45756-58.
---------------------------------------------------------------------------

    The Commission believes that it is difficult to form reliable 
economic expectations for the costs of security breaches, because there 
are few examples of security breaches analogous to the type that could 
occur under the CAT NMS Plan. However, the Commission can break down 
the expected costs of security breaches into two components: The risk 
of a security breach and the cost resulting from a security breach. 
Therefore, the Commission separates its discussion of the expected 
costs of security breaches into these two components. The Commission 
recognizes that security risks could give rise to second order costs as 
well where the costs come not directly from the security breach but 
rather from the actions of market participants attempting to avoid 
security risks.
(1) Costs of a Security Breach
    The form of the direct costs resulting from a security breach would 
vary across market participants and could be significant. For broker-
dealers, investment advisers, and other similar institutions, a 
security breach could leak highly-confidential information about 
trading strategies or positions,\982\ which could be deleterious for 
market participants' trading profits and client relationships. A data 
breach could also expose the proprietary information about the 
existence of a significant business relationship with either a 
counterparty or client, which could reduce business profits.
---------------------------------------------------------------------------

    \982\ Although the Plan does not require reporting positions, 
observation of a broker-dealer's recent executions can offer 
information about their change in position, or, potentially, 
information about their actual position if the audit trail 
information breached contains all trading activity since the 
creation of the position.
---------------------------------------------------------------------------

    A data breach could also potentially reveal PII of Customers. 
Because some of the CAT Data that would be stored in the Central 
Repository would contain PII such as names, addresses and social 
security numbers, a security breach could raise the possibility of 
identity theft, which currently costs Americans billions of dollars per 
year.\983\ Because PII would be stored in a single, centralized 
location rather than stored across multiple locations, a breach in the 
Central Repository could leak all PII, rather than a subset of PII that 
could be leaked if the information was stored in multiple locations. As 
such, these costs associated with the risk of a security breach could 
be substantial in aggregate.\984\
---------------------------------------------------------------------------

    \983\ According to survey data, the Bureau of Justice Statistics 
reported $24.7 billion in identity theft costs in 2012, available at 
http://www.bjs.gov/content/pub/press/vit12pr.cfm.
    \984\ At a June 23, 2015 congressional hearing titled, 
``Government Personnel Data Security Review'', Office of Personnel 
Management (OPM) Director Katherine Archuleta estimated the direct 
costs of the OPM data breach at $19 to $21 million. Available at 
http://www.c-span.org/video/?326710-1/opm-director-katherine-archuleta-testimony-spending-data-security&start=3304. This breach 
of PII of current and former federal employees exposed PII for 
approximately 4 million individuals. Available at http://www.federaltimes.com/section/OPM-Cyber-Report/. The Commission 
recognizes that the number of individuals whose PII would be stored 
in the Central Repository far exceeds the number of federal 
employees whose data was exposed in the OPM breach, and that these 
costs include only the direct costs (such as the provision of credit 
monitoring services to affected individuals) incurred by OPM and do 
not reflect the total costs that these individuals may face as a 
result of the data breach, which could be far larger than the direct 
costs faced by OPM. These indirect costs may include the 
consequences of the breach as well as costs of credit fraud and 
legal services to address consequences of the data breach. There may 
also be second-order effects to such a breach, if investors reduce 
their engagement with the securities industry to avoid these costs. 
See Section IV.F.4.a(3), infra.
---------------------------------------------------------------------------

    A breach that reveals the activities of regulators within the 
Central Repository, such as data on the queries and processes run on 
query results, could compromise regulatory efforts or lead to 
speculation that could falsely harm the reputation of market 
participants and investors. For example, a breach could result in an 
article that reports on regulators querying trading information of 
certain individuals or broker-dealers, which could harm those 
individuals or broker-dealers even if no regulators open 
investigations. Further, perpetrators of a breach could attempt to 
trade on information on regulatory queries to try to profit ahead of 
public information of an action, to the disadvantage of other 
investors.
(2) Risk of a Security Breach
    The Commission preliminarily believes that the risks of a security 
breach may not be significant because certain provisions of Rule 613 
and the

[[Page 30733]]

CAT NMS Plan appear reasonably designed to mitigate these risks. 
However, the Commission notes that the considerable diversity in the 
potential security approaches of the bidders creates some uncertainty 
about the effectiveness of the eventual security procedures and hence, 
the risk of a security breach.\985\
---------------------------------------------------------------------------

    \985\ The Commission notes that, at a minimum, the security of 
the CAT Data must be consistent with Regulation Systems Compliance 
and Integrity under the Exchange Act (``Reg SCI'') (17 CFR 242.1000 
to 1007).
---------------------------------------------------------------------------

    Provisions of Rule 613 provide safeguards designed to prevent 
security breaches. Rule 613(e)(4) requires policies and procedures that 
are designed to ensure the rigorous protection of confidential 
information collected by the Central Repository, and Rule 613(iv) 
requires that the Plan contain a discussion of the security and 
confidentiality of the information reported to the Central Repository. 
Rule 613 also restricts access to use only for regulatory purposes, and 
requires certain provisions that are designed to mitigate these 
security risks such as the appointment of a Chief Compliance Officer 
and annual audits of Plan Processor operating procedures.
    The Plan also includes provisions designed to prevent security 
breaches. First, governance provisions of the CAT NMS Plan could 
mitigate the risk of a security breach. Section 4.12 of the CAT NMS 
Plan provides for a Compliance Subcommittee whose activities could 
reduce the risk that information is released to unauthorized 
entities.\986\ Among the Subcommittee's responsibilities is ``the 
maintenance of the confidentiality of information submitted to the Plan 
Processor or Central Repository.'' Furthermore, the Plan Processor is 
required to submit a comprehensive security plan to the Operating 
Committee and update this security plan annually.\987\ The security 
plan must cover all components of CAT, including physical assets and 
personnel; the plan ``must document how the Plan Processor would 
protect, monitor and patch the environment; assess it for 
vulnerabilities as part of a managed process, as well as the process 
for response to security incidents and reporting of such 
incidents.''\988\ In addition, Section 6.2(b) of the Plan establishes a 
Chief Information Security Officer who is responsible for monitoring 
and addressing data security issues for the Plan Processor. Second, the 
Plan includes specific provisions designed to ensure the security of 
data in flight. For instance, the Plan requires that bulk extract data 
be encrypted, password protected and sent via secure methods of 
transmission.\989\ Third, Section 6.7(g) of the Plan requires that the 
Participants establish, maintain, and enforce written policies and 
procedures reasonably designed to (1) ensure the confidentiality of the 
CAT Data obtained from the Central Repository; and (2) limit the use of 
CAT Data obtained from the Central Repository solely for surveillance 
and regulatory purposes. Finally, the Plan makes further provisions 
designed to provide security for PII. For example, regulators 
authorized to access PII would be required to complete additional 
authentications, and PII would be masked unless users have permissions 
to view PII.\990\
---------------------------------------------------------------------------

    \986\ See CAT NMS Plan, supra note 3, at Section 4.12.
    \987\ Id. at Section 6.12.
    \988\ See id. at Appendix D, Section 4.
    \989\ See id. at Appendix D, Section 8.2.2.
    \990\ See id. at Appendix C, Section A.2(c).
---------------------------------------------------------------------------

    As discussed in the Plan,\991\ the Participants collected 
information from the Bidders regarding security and confidentiality 
during the RFP process, however, there was considerable diversity in 
the approaches proposed by the Bidders and the Participants chose to 
give the Plan Processor flexibility on many implementation details and 
state the requirements as a set of minimum standards. These 
requirements include both general security and PII treatment 
requirements. General security requirements are designed to address 
physical security, data security during transmissions, transactions, 
and while at-rest, confidentiality, and a cyber-incident response plan. 
PII requirements include a separate PII-specific workflow, PII-specific 
authentication and access control, separate storage of PII data, and a 
full audit trail of PII access.\992\ Because many of the decisions that 
define security measures for the Central Repository are coincident with 
the selection of the Plan Processor, there is a degree of uncertainty 
with regards to security measures that would be implemented by the Plan 
Processor. Consequently, there is uncertainty about the significance of 
the risks, the expected costs of a breach when considering the 
likelihood of a data breach,\993\ and the second-order effects.
---------------------------------------------------------------------------

    \991\ See id. at Appendix C, Section A.4; Appendix D, Section 4.
    \992\ See CAT NMS Plan, supra note 3, at Appendix D, Section 
4.1.2-4.1.6.
    \993\ One study of 62 U.S. companies experiencing data breaches 
in 2015 puts the average cost per stolen record containing personal 
or sensitive information at $217; the average number of breached 
records per incident was 28,070. See Ponemon Institute, 2015 Cost of 
Data Breach Study: United States (May 2015) (noting, however, that 
the study specifically excluded breaches of over 100,000 records as 
not representative of ``typical'' data breaches). As one example of 
a large data breach, Target Corporation's 2013 data breach affecting 
40 million credit card numbers and 70 million other records 
containing PII had, as of January 2015, resulted in $252 million of 
related expenses for Target. See Target Corporation, Form 10-K for 
the Fiscal Year ended January 31, 2015 (March 13, 2015). Because it 
is not clear what the risk of a breach would be for CAT, in terms of 
either likelihood or magnitude, these types of numbers are simply 
indicative; it is impossible to estimate with any precision what the 
cost of a breach might be. For example, a complete breach of the CAT 
System, including the PII storage, might expose records an order of 
magnitude larger than the Target breach; however the types of 
records stored in CAT could be more difficult to exploit than credit 
card information, but their exploitation might prove far more 
damaging to individuals and entities whose trading information, for 
example, were compromised.
---------------------------------------------------------------------------

    The Commission preliminarily believes the Plan marginally increases 
the threat of breach of broker-dealer trading and business strategies 
because although SROs currently receive this data from their own 
members, SROs are expected to have access to other SROs data more 
readily within the Central Repository. There is some risk that SROs 
could use this data improperly to gain information on how broker-
dealers interact with other SROs' trading platforms. The Plan includes 
certain measures that mitigate this risk, however, by restricting the 
use of CAT Data reported by other entities for business purposes.\994\
---------------------------------------------------------------------------

    \994\ Rule 613(e)(4)(1)(A) states that Participants and the Plan 
Processor ``agree not to use such data for any purpose other than 
surveillance and regulatory purposes, provided that nothing in this 
paragraph (e)(4)(i)(A) shall be construed to prevent a plan sponsor 
from using the data that it reports to the central repository for 
regulatory, surveillance, commercial, or other purposes as otherwise 
permitted by applicable law, rule, or regulation.'' Similar language 
appears in the CAT NMS Plan. The Commission preliminarily believes 
this provision does not increase security risks because the data 
reported to the Central Repository by a Participant is already 
available to that Participant. See CAT NMS Plan, note 3, supra, at 
Section 6.5(f)(i)(A).
---------------------------------------------------------------------------

(3) Second Order Effects
    The desire to avoid direct costs of a security breach could 
motivate actions that would result in second order effects of security 
breaches. For example, if service bureaus perceive the costs and risks 
of a security breach to be great enough because of the addition of PII 
in the data, which is not included in current data, some could decide 
not to provide CAT Data reporting services. This could increase the 
potential for a short term strain on capacity and exacerbate the costs 
of this strain described above and below.\995\ Further, investors or 
other market participants could move their activity off-shore or cease 
market participation altogether to

[[Page 30734]]

avoid having sensitive information stored in the Central Repository. 
Consequences of changes in investor behavior in response to the threat 
of a breach include: Investors holding suboptimal portfolios; lost 
profits to the securities industry; and higher costs of raising capital 
for U.S.-based securities issuers, if the public's willingness to 
participate in capital markets is sufficiently reduced.\996\
---------------------------------------------------------------------------

    \995\ See supra note 934 and Section IV.G.1.d, infra.
    \996\ See Section IV.G.3, infra.
---------------------------------------------------------------------------

    Nonetheless, the Commission preliminarily does not believe that the 
effect of the Plan on the risk or costs of a data breach would be great 
enough to result in significant second order effects. As discussed 
above, the Commission preliminarily believes the Plan marginally 
increases the threat of breach of broker-dealer trading and business 
strategies. However, the Plan includes certain measures that mitigate 
this risk. In light of these provisions, the Commission preliminarily 
believes that the Plan is unlikely to significantly deter broker-
dealers from participating in markets. In addition, in deciding whether 
to trade in the U.S. markets or abroad, investors and other market 
participants would continue to assess a multitude of potential trade-
offs. While the expected costs of a security breach may factor in, so 
would the level of investor protections, which the Commission 
preliminarily believes would increase if it approved the Plan.\997\
---------------------------------------------------------------------------

    \997\ See Section IV.E.2, supra.
---------------------------------------------------------------------------

    Another possible second order effect of avoiding the risk and cost 
of a security breach event could be the risk that one or more service 
bureaus could choose to exit the market in providing data reporting 
services rather than change their business practices to report PII to 
the Central Repository, in order to assist their client(s) in meeting 
their reporting responsibilities under the Plan. Specifically, while 
some service bureaus currently handle PII for their broker-dealer 
clients, others do not or do so only on an occasional and limited 
basis. To the extent service bureaus that do not already handle such 
PII were to stop offering regulatory data reporting services due to an 
unwillingness to host such customer information, their customers would 
be forced to establish new service bureau relationships, or undertake 
self-reporting. This potentially would be very costly to the broker-
dealer clients of the exiting service bureaus due to the switching 
costs that broker-dealers incur to change service bureaus. Such an 
event could also contribute to crowded entrances problems.\998\ As 
noted above, however, the approach in the Plan to the reporting of 
customer information could allow for the bifurcation of PII reporting 
from the reporting of order data, which could affect a service bureau's 
decision whether to exit the market for reporting services to a broker-
dealer client.\999\ While the Commission cannot rule out that one or 
more service bureaus could choose to exit the data reporting services 
market to avoid the costs of a potential security breach, the 
Commission preliminarily believes that such exits are unlikely. In 
addition, the Commission preliminarily believes that security breach 
risks are unlikely to result in service bureau exit because the market 
for regulatory data reporting services is generally expanding and the 
trend is for more, not less, outsourcing.\1000\ Consequently, the 
Commission preliminarily believes that market share in this market is 
valuable and existing competitors are unlikely to voluntarily exit the 
market abruptly.
---------------------------------------------------------------------------

    \998\ See supra note 934.
    \999\ See supra note 979.
    \1000\ See Section IV.G.1.d, infra.
---------------------------------------------------------------------------

b. Changes to CAT Reporter Behavior
    The Commission acknowledges that increased surveillance could 
potentially impose some costs by altering the behavior of market 
participants. Benefits could accrue to the extent that improved 
surveillance, investigation, and enforcement capabilities allow for 
regulators to better identify and address violative behavior when it 
occurs; and to the extent that common knowledge of improved 
capabilities deters violative behavior.\1001\ Costs could accrue to the 
extent that some forms of market activity, which are permissible and 
economically beneficial to the market and investors, could come under 
higher scrutiny, which could create a disincentive to engage in that 
activity.
---------------------------------------------------------------------------

    \1001\ See Section IV.E.2.c, supra.
---------------------------------------------------------------------------

    In particular, the Commission acknowledges that some market 
participants could reduce economically beneficial behavior if those 
market participants believe that, because of enhanced surveillance, 
their activities would increase the level of regulatory scrutiny that 
they bear. In other words, if market participants engaging in non-
violative activity believe that such activity could increase the 
likelihood of examinations, inspections, and other interactions with 
regulators, those market participants could reduce or cease such 
activity to reduce the frequency and costs of interactions with 
regulators, including staff time to accommodate inspections, facilitate 
examinations and answer regulatory inquiries. Because facilitating 
regulatory inquiries is costly to firms, such a firm might conclude 
that certain permissible activities generate insufficient profits to 
offset costs associated with the regulatory scrutiny generated by these 
activities, even if the firm's behavior is permissible and no fines or 
other penalties result from these inquiries. To the extent that market 
participants could reduce activity that benefits the market, this could 
impose costs on investors and the market in the form of a reduction in 
the economic value of such activity.
    Additionally, in an environment of improved surveillance, 
regulators could increase the number of inspections, examinations and 
enforcement proceedings that they initiate.\1002\ To the extent that 
these activities result in a reduction in violative behavior, the 
market benefits in not bearing the costs of this behavior. To the 
extent, however, the additional regulatory activity increases the 
number of inspections, examinations and enforcement on permissible 
activities,\1003\ market participants would incur the increased costs 
of facilitating these regulatory inquiries. The Commission 
preliminarily believes, however, that these costs would be offset by 
other effects of CAT such as fewer ad hoc data requests, improvement in 
regulators' precision in selecting firms for risk-based exams, and 
other efficiency improvements, and that the related savings would 
likely be greater than such costs in aggregate.
---------------------------------------------------------------------------

    \1002\ See Section IV.E.2.c, supra.
    \1003\ For example, the Commission preliminarily believes that 
the Plan would improve the efficiency and effectiveness of risk-
based exams. However, because the efficiency could increase the 
total number of risk-based exams, the total number of exams on 
permissible activity could go up even if the percentage of exams on 
permissible activity goes down.
---------------------------------------------------------------------------

c. Tiered Funding Model
    The Commission preliminarily believes that establishing a small 
number of discrete fee tiers, as occurs under the Plan, could create 
incentives for CAT Reporters to alter their behavior to switch from one 
tier to another, thereby qualifying for lower fees. Specifically, in 
the discussion of Consideration 7, the Plan states that CAT Reporters 
would be classified into a number of groups based on reporter type and 
market share of share volume or message traffic and assessed a fixed 
fee that is determined by this classification.\1004\ The higher-
activity groups would be assessed higher fees.

[[Page 30735]]

Equity Execution Venues would be classified into 2-5 fee tiers based on 
market share of share volume, option Execution Venues would be 
classified into a separate set of 2-5 fee tiers based on market share 
of share volume, and Industry Members would be classified into another 
set of 5-9 fee tiers based on message traffic.\1005\ That is, the Plan 
describes a funding policy with a tiered funding model that places 
market participants who fall into the lower tiers at a fee advantage 
over the market participants that fall into the higher tiers.\1006\ The 
Plan states that this funding model is designed to reward the 
characteristics--small market share of share volume in the case of 
Execution Venues, low message traffic in the case of broker-dealers--
that would enable CAT Reporters to qualify for the lower tiers. The 
potential effect of rewarding these characteristics is to incent market 
participants at the margins to reconfigure their operations so as to 
qualify for smaller tiers than would otherwise apply. The potential for 
such an effect would be greater among those CAT Reporters that fall at 
the low end of a tier and could most easily alter their operations to 
qualify for a smaller tier. Similarly, the funding model could create 
incentives for a firm that has an activity level near the top of a tier 
to avoid additional market activity that might move it to a higher fee 
tier. For example, to control its tier level, a market participant 
could reduce its quoting activity or cease providing services in a set 
of securities. Such activity could affect liquidity and the 
availability of trading services to investors. The Commission notes, 
however, that because this incentive is contingent on being near a fee-
tier cutoff point, it preliminarily believes relatively few market 
participants would likely be affected and thus market quality effects 
would likely not be significant.\1007\ Furthermore, for those market 
participants near a cutoff point, managing activity to avoid a higher 
fee tier would necessarily incur costs of lost business and potential 
loss of market share, and would possibly be difficult to implement, 
which should mitigate any effects on market quality.
---------------------------------------------------------------------------

    \1004\ See CAT NMS Plan, supra note 3, at Section 11.3 and 
Appendix C, Section B.7(b)(4)(C).
    \1005\ The CAT NMS Plan defines ``Execution Venue'' as ``. . . a 
Participant or an alternative trading system (``ATS'') (as defined 
in Rule 300 or Regulation ATS) that operates pursuant to Rule 301 of 
Regulation ATS (excluding any such ATS that does not execute 
orders).'' The Plan also defines Industry Member as ``. . . a member 
of a national securities exchange or a member of a national 
securities association''. See CAT NMS Plan, supra note 3, at Article 
I, Section 1.1 for definitions. Classification of Execution Venues 
into tiers is based on transacted volume market share of share 
volume (in the case of NMS stocks and OTC Equity Securities) or 
contract volume (in the case of listed options). For Industry 
Members, classification into tiers is based on message traffic. 
Based on conversations with Participants, the Commission 
preliminarily believes message traffic would be based on CAT 
Reportable Events reported to the Central Repository. See id. at 
Article XI, Section 11.3 for discussion of assignment to funding 
tiers.
    \1006\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(v).
    \1007\ This argument assumes that activity levels used to 
determine funding tiers do not naturally cluster near cutoffs, and 
that if such natural cutoff points exist, the Operating Committee 
would avoid setting such funding tier cutoff levels near those 
activity levels.
---------------------------------------------------------------------------

    The Commission recognizes that the tiering of fees also could 
create calendar effects within markets. Although the Plan does not 
detail the horizon at which CAT would measure activity levels, the 
structure ultimately approved by the Operating Committee could affect 
market participant behavior near the end of a measuring period. For 
example, high levels of market activity during a measuring period might 
cause CAT Reporters to limit their activity near the end of a 
measurement period to avoid entering a higher fee tier. If this 
translates into a reduction in quoting activity, market liquidity 
conditions could deteriorate at the end of activity measurement 
periods, and improve when a new measurement period begins, for example.
    The Commission notes that the Operating Committee has discretion 
under the Plan governance structure to make the tier adjustments 
discussed in Section 11.1.d for individual CAT Reporters. This 
provision might mitigate incentives for individual market participants 
to alter market activities to reduce their expected CAT fees.
d. Differential CAT Costs Across Execution Venues
    The funding model proposed in the Plan is a bifurcated funding 
model, in which costs are first allocated between the group of all 
broker-dealers and the group of all Execution Venues, then within these 
groups by market activity level.\1008\ The proposed funding model 
treats Execution Venues differently from broker-dealers; this 
differential treatment could introduce inefficiencies to the market for 
execution services. As discussed in a recent academic paper,\1009\ 
differential funding models in execution venues could influence how 
broker-dealers route customer order flow, possibly to the detriment of 
execution quality realized by investors. The Commission preliminarily 
believes that the bifurcated funding model proposed in the Plan almost 
certainly results in differential CAT costs between Execution Venues 
because it would assess fees differently on exchanges and ATSs for two 
reasons. First, message traffic to and from an ATS would generate fee 
obligations on the broker-dealer that sponsors the ATS, while exchanges 
incur almost no message traffic fees.\1010\ Second, broker-dealers that 
internalize off-exchange order flow, generating off-exchange 
transactions outside of ATSs, would face a differential funding model 
compared to ATSs and exchanges.\1011\ The cost differentials that 
result might create incentives for broker-dealers to route order flow 
to minimize costs,\1012\ creating a potential conflict of interest with 
broker-dealers' investor customers, who are likely to consider many 
facets of execution quality (such as price impact of a trade and 
probability of execution in a venue in which the order is exposed) in 
addition to any of these costs that are passed on to them.
---------------------------------------------------------------------------

    \1008\ See CAT NMS Plan, supra note 3, at Article XI.
    \1009\ See Robert H. Battalio, Shane A. Corwin and Robert H. 
Jennings, Can Brokers Have It All? On the Relation between Make-Take 
Fees and Limit Order Execution Quality (2015 working paper), 
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2367462. (``Battalio, Corwin, and 
Jennings'').
    \1010\ See CAT NMS Plan, supra note 3, at Section 11.3.(b): 
``For the avoidance of doubt, the fixed fees payable by Industry 
Members pursuant to this paragraph shall, in addition to any other 
applicable message traffic, include message traffic generated by: 
(i) an ATS that does not execute orders that is sponsored by such 
Industry Member; and (ii) routing orders to and from any ATS 
sponsored by such Industry Member.'' The Commission notes that 
exchange broker-dealers would be subject to message traffic fees as 
Industry Members under the Plan. However, the Commission notes that 
based on its analysis of OATS data from September 15-19, 2014, these 
broker-dealers are minor contributors to overall message traffic, 
accounting for less than 0.03% of OATS ROEs.
    \1011\ See CAT NMS Plan, supra note 3, at Article XI.
    \1012\ This assumes that CAT fees would ultimately be borne by 
the broker-dealers that make routing decisions. Currently, exchange 
access fees are often borne by broker-dealers that make routing 
decisions, as discussed in Battalio, Corwin, and Jennings. Id. If 
Execution Venues were to absorb these fees rather than pass them on 
to customers, broker-dealer routing decisions might not be affected. 
It is also possible that some Execution Venues could incorporate 
some sort of rebate for broker-dealer message fees into their fee 
schedules, effectively making some venues less expensive for broker-
dealers to access.
---------------------------------------------------------------------------

    In addition to friction created by the bifurcated structure of the 
funding model, the Commission preliminarily believes that the CAT NMS 
Plan funding model shifts broker-dealer costs associated with the 
Central Repository to all broker-dealers and away from Options Market 
Makers. The CAT NMS Plan provides that broker-dealers would not report 
their options quotations to the Central Repository, while equity market 
makers would report their equity

[[Page 30736]]

quotations to the Central Repository.\1013\ This differential treatment 
of market making quotes affects costs of funding the Central Repository 
in two ways. First, the elimination of Options Market Maker quotes from 
the message traffic of broker-dealers decreases the number of messages 
that must be reported and stored, which presumably reduces the overall 
cost of building and operating the Central Repository. This reduction 
in the overall cost of the Central Repository reduces costs to both 
broker-dealers and Execution Venues. Second, because Options Market 
Maker quotes would not be in the message traffic which determines the 
allocation of broker-dealer costs of the Central Repository, broker-
dealers that do not quote listed options would pay a higher share of 
broker-dealer-assessed CAT fees than they would if Options Market 
Makers' quotes were included in the allocation of fees. Also, Options 
Market Makers would pay relatively lower fees than they would if their 
quotations were included in CAT message traffic from broker-dealers.
---------------------------------------------------------------------------

    \1013\ See Section IV.H.1.a, supra for a discussion of an 
alternative that would require Options Market Makers to report their 
quotes.
---------------------------------------------------------------------------

    Although this differential treatment would marginally increase the 
cost of providing other broker-dealers services relative to options 
market making, the Commission preliminarily does not believe that this 
would materially affect a market participant's willingness to provide 
broker-dealer services other than options market making for several 
reasons. First, many market participants participate in both equities 
and options markets because activity in one market (equities or 
options) could be used to hedge positions acquired in the other market. 
Consequently, many firms already find it cost effective to participate 
in both markets. Second, broker-dealers participating in equity markets 
have significant infrastructure in place for serving that market and 
switching costs to participate in options market making are high due to 
the need to establish quantitative infrastructure to quote options, 
market connectivity, IT infrastructure, and clearing/settlement 
arrangements required to transact in options; consequently, reducing 
the cost to make markets in options is unlikely to attract broker-
dealers to change their business models. Finally, the Commission 
believes that the market to provide liquidity in the options market is 
already a competitive one because many broker-dealers participate in 
that market and market share that is sufficient to cover substantial 
fixed costs of making markets in options is valuable; consequently, 
options market participants have incentives to compete to win market 
share. Without a market change that significantly affects profits to be 
made in options market making, it seems broker-dealers would need a 
competitive advantage relative to existing competitors to successfully 
win market share from the existing competitors. The Commission 
preliminarily believes that that broker-dealers that currently focus on 
equity market making and other broker-dealer services unrelated to 
options market making are likely to continue to focus on the markets in 
which they participate because their competitive advantages relate to 
these activities.
5. Request for Comment on the Costs
    The Commission requests comment on all aspects of the discussion of 
the potential costs of the CAT NMS Plan. In particular, the Commission 
seeks responses to the following questions:
    301. Do Commenters agree with the Commission's assessment of the 
potential costs of the CAT NMS Plan? Why or why not?
    302. To what extent do the uncertainties related to future 
decisions about Plan implementation impact the assessment of potential 
costs of the Plan? Please explain.
    303. Do Commenters agree that the Plan's level of detail regarding 
the drivers of the costs to build, operate, and maintain the Central 
Repository is sufficient to assess the economic effects of the Plan? If 
more detail is needed, how can this information be obtained?
    304. Do Commenters agree that using the cost estimates provided in 
Bids from the Shortlisted Bidders provides reasonable estimates of 
costs to build and operate the Central Repository? Why or why not?
    305. Estimates in the Plan suggest that the Participants' data 
reporting costs will significantly increase while surveillance costs 
will significantly decrease if the Plan is approved. Do Commenters 
agree that these changes are likely to occur? Please explain.
    306. Do Commenters agree with the Commission's characterization of 
the limitations in the cost studies? Do Commenters agree with the 
Commission's assessment that the Vendors Study and Participants Study 
have reliable cost estimates? Do Commenters agree that cost estimates 
for large OATS Reporters and large non-OATS Reporters are reliable? Do 
Commenters agree that cost estimates for small reporters are 
unreliable? Why or why not? Do Commenters have more precise estimates 
of the costs than provided in the cost surveys?
    307. The Commission re-estimated aggregated costs under a different 
set of assumptions than the Plan. Do Commenters agree that the re-
estimated costs better represent the expected costs of the CAT NMS 
Plan? Why or why not? Do Commenters agree that most broker-dealers that 
report fewer than 350,000 OATS ROEs per month are likely to report this 
data through a service bureau?
    308. Do Commenters agree with the estimates of annual service 
bureau costs for a very small OATS-reporting firm of $50,000 to 
$180,000 per year, which assumes that the service bureau provides order 
routing and an order-handling system? If not, please provide alternate 
estimates.
    309. Do Commenters agree that the pricing function for service 
bureaus is concave (increasing at a decreasing rate)? Why or why not? 
The Commission assumes in its re-estimation that service bureau cost 
functions are approximately as concave as exchange pricing functions. 
Do Commenters agree? Why or why not?
    310. Will the requirement to provide customer information to the 
Central Repository be a significant cost-driver for Outsourcers? Why or 
why not? Is the need for encryption of this data a significant cost-
driver?
    311. Will the anticipated retirement of duplicative reporting 
systems such as EBS affect Outsourcer costs? Why or why not? Will the 
reduction in ad hoc data requests significantly affect the costs 
incurred by service bureaus in assisting their clients in responding to 
these requests? Why or why not?
    312. Are there ways in which the Commission could better estimate 
the aggregate costs of the CAT NMS Plan? If so, please explain.
    313. Do Commenters agree with the Commission's assumption that most 
firms that report fewer than 350,000 OATS ROEs per month are self-
clearing? If not, please explain. Do Commenters believe that these 
firms would have significantly higher implementation costs due to their 
need to provide this information to any service bureaus they use for 
regulatory data reporting?
    314. Do Commenters agree that broker-dealers that are exempt or 
excluded from OATS reporting are likely to be small and should have 
their costs estimated as Outsourcers? If no, how many of these broker-
dealers currently participate in more than 350,000 events that would be 
OATS-reportable, were they not exempt or excluded, per month?

[[Page 30737]]

    315. Are Commenters aware of options market making firms that are 
FINRA members and report fewer than 350,000 OATS ROEs per month, or 
that are exempt or excluded from OATS reporting rules? If so, are there 
ways that the Commission can identify these firms to better estimate 
their costs under the Plan?
    316. Are Commenters aware of ELPs that are not CBOE members that 
did not trade on ATSs in 2014? If so, are there ways that the 
Commission can identify these firms to better estimate their costs 
under the Plan?
    317. Do Commenters agree that FINRA member broker-dealers that are 
Options Market Makers are unlikely to be exempt or excluded from OATS-
reporting requirements, and are likely to report more than 350,000 OATS 
ROEs per month? If not, how many FINRA member Options Market Makers 
exist that are exempt or excluded from OATS reporting requirements, or 
that report fewer than 350,000 OATS ROEs per month? Are there methods 
by which the Commission could improve its estimates of costs these 
broker-dealers are likely to face if the Plan is approved?
    318. According to survey results, Approach 1 aggregate 
implementation and ongoing costs are higher than those for Approach 2 
for CAT Reporters, though not statistically so.\1014\ The Commission 
notes that this cost estimate does not seem intuitive because Approach 
2 could result in extra data processing by CAT Reporters to translate 
data into a fixed format whereas Approach 1 would require no 
translation. Why is the cost of Approach 1 anticipated to be higher 
than Approach 2? Can this be explained by the use of service bureaus 
whom CAT Reporters expect to charge the same for either approach? Can 
this be explained by the need to process data under either approach to 
replace ticker symbols with listing exchange symbology?
---------------------------------------------------------------------------

    \1014\ Approach 1 assumes CAT Reporters would submit CAT Data 
using their choice of industry protocols. Approach 2 assumes CAT 
Reporters would submit data using a pre-specified format.
---------------------------------------------------------------------------

    319. Do Commenters believe that duplicative reporting systems will 
be retired and, if so, when? What systems do Commenters expect to be 
retired? \1015\ Are there any systems that cannot be retired? What are 
the costs associated with retiring duplicative reporting systems? What 
are the benefits of retiring duplicative reporting systems? Would there 
be cost savings as a result of retiring any duplicative reporting 
systems? How does the timeline for retiring duplicative reporting 
systems affect the costs and benefits? Please explain.
---------------------------------------------------------------------------

    \1015\ See supra note 856.
---------------------------------------------------------------------------

    320. Do service bureaus handle EBS reporting for their clients? To 
what extent would EBS reporting contribute to duplicative reporting 
costs or system retirement costs and savings?
    321. The Commission's analysis discusses the Plan's timetable for 
retirement of duplicative reporting systems (i.e., a maximum of 2.5 
years). Is the timetable for retirement of these systems in the Plan 
realistic and/or reasonable? Are there ways that the timetable for 
duplicative reporting system retirement could be accelerated? If so, 
how?
    322. Do Commenters believe that the period of duplicative reporting 
that would precede the retirement of certain current, anticipated to be 
retired, regulatory reporting systems would impose significant cost 
burdens on industry? Are the Commission's estimates of those costs 
accurate? Are there dimensions of these costs that the Commission has 
not recognized? If so, what are they and what are their magnitudes?
    323. What milestones should CAT be required to reach before 
duplicative reporting systems can be retired?
    324. What costs would service bureaus face in accomplishing a 
period of duplicative reporting during which both CAT and the 
regulatory data reporting systems that the Plan anticipates would be 
retired are operational? How many FTEs would be involved?
    325. What costs would broker-dealers face in accomplishing a period 
of duplicative reporting during which both CAT and the regulatory data 
reporting systems that the Plan anticipates would be retired are 
operational? How many FTEs would be involved?
    326. The CAT NMS Plan estimates that market participants would face 
significant costs of approximately $2.6 billion in connection with 
retiring duplicative reporting systems. What expenses does this 
estimate cover, and which systems account for which costs? For some 
broker-dealers, would implementation of CAT reporting accomplish the 
retirement of other regulatory data reporting systems? How do system 
retirement costs differ between broker-dealers that outsource their 
data reporting versus those who perform this function in-house?
    327. Do Commenters believe that the CAT NMS Plan would deliver 
additional cost savings from sources other than the retirement of 
duplicative reporting systems and a reduction in the amount of ad-hoc 
data requests to regulated entities? Are there any changes to the CAT 
NMS Plan that would increase the potential cost savings?
    328. Are SROs adequately incentivized to retire current regulatory 
reporting and surveillance systems that might be replaced by CAT? Do 
they have incentives to resist the retirement of these systems that 
this analysis fails to identify?
    329. Do Commenters agree that costs associated with the Plan 
incurred by broker-dealers could be passed down to their customers? Why 
or why not? If so, do Commenters have estimates regarding what fraction 
of broker-dealer costs would be passed down?
    330. The Commission preliminarily believes that the Vendors Study 
measures ongoing costs that would also be captured by the third-party 
outsourcing costs in the other surveys. As a result, the Commission 
does not add these to the aggregated cost estimates. Do Commenters 
agree with this approach? Is there any double counting of costs across 
the surveys, or can the individual survey estimates be aggregated into 
an industry-wide estimate? Please explain.
    331. According to survey results, Approach 1 aggregate 
implementation costs are higher than those for Approach 2 for vendors 
and ongoing costs are lower.\1016\ The Commission notes that this 
implementation cost result does not seem intuitive because Approach 2 
could result in creating a whole new data translation process to 
implement the Plan whereas Approach 1 would require no translation. Why 
is Approach 1 costlier for vendors to implement than Approach 2? Can 
this be explained by the need to process data under either approach to 
replace ticker symbols with listing exchange symbology?
---------------------------------------------------------------------------

    \1016\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(iv)(A).
---------------------------------------------------------------------------

    332. The Commission assumes that cost estimates from Participants 
include all costs the Participants would incur if the Plan is approved, 
and that other costs related to development of the Plan are not 
avoidable if the Plan is not approved. Is it reasonable for the 
Commission to treat all costs related to development of the Plan that 
are not included in implementation and ongoing costs as sunk costs? Why 
or why not?
    333. To what degree would industry's costs to implement and 
maintain CAT reporting be passed on to investors? Would competition 
between broker-dealers affect the passing on of costs to investors? Why 
or why not?
    334. How significant to the total industry costs of the CAT NMS 
Plan are

[[Page 30738]]

clock synchronization requirements, the requirement that Options Market 
Makers send quote times to the exchanges, the requirement that the 
Central Repository maintain six years of CAT Data, and the inclusion of 
OTC Equity Securities in the initial phase of the implementation of the 
CAT NMS Plan? Why?
    335. How significant to the total industry costs of the CAT NMS 
Plan is the requirement to report customer information to the Central 
Repository? What elements of this requirement contribute to its 
significance of the potential costs of the Plan? Are there ways in 
which this data can be made available to regulators that would prove 
less costly to industry and investors? If so, what are they?
    336. How significant to the total industry costs of the CAT NMS 
Plan is the requirement to report certain information as part of the 
material terms of the order? What elements of this requirement 
contribute to its significance of the potential costs of the Plan? Are 
there ways in which this data can be made available to regulators that 
would prove less costly to industry and investors? If so, what are 
they?
    337. How significant to the total industry costs of the CAT NMS 
Plan is the requirement to report information to the Central Repository 
using listing exchange symbology? What elements of this requirement 
contribute to its significance of the potential costs of the Plan? Are 
there ways in which this data can be made available to regulators that 
would prove less costly to industry and investors? If so, what are 
they?
    338. How significant to the total industry costs of the CAT NMS 
Plan is the requirement to report allocation information to the Central 
Repository? What elements of this requirement contribute to its 
significance of the potential costs of the Plan? Are there ways in 
which this data can be made available to regulators that would prove 
less costly to industry and investors? If so, what are they?
    339. Are there other requirements of the CAT NMS Plan that would be 
significant sources of costs? If so, what are they? Are there ways in 
which those requirements could be made less costly? If so, what are 
they?
    340. Do Commenters agree that ancillary fees levied by the Plan 
Processor on broker-dealers in response to late or inaccurate reporting 
are unlikely to broadly levied on broker-dealers? Do Commenters believe 
they would comprise a significant source of CAT costs to industry? Why 
or why not?
    341. Do Commenters agree with the Commission's analysis of 
potential cost savings from a reduction in the number (and ultimately 
the cost) of data requests as a result of regulators having direct 
access to CAT Data?
    342. Do Commenters agree with the Commission's analysis of the risk 
of a security breach? Do Commenters agree with the Commission's 
analysis of the potential costs of a security breach? Are there factors 
not covered in the analysis? What are they? Are the security measures 
outlined in the Plan appropriate and reasonable? Why or why not?
    343. Do Commenters agree with the Commission's analysis of 
potential changes to CAT reporter behavior? Why or why not? Are there 
additional factors that should be considered?
    344. Do Commenters agree with the Commission's analysis of the 
Plan's funding model? Why or why not? Are there additional factors that 
should be considered?
    345. Do Commenters agree with the Commission's analysis of 
potential costs resulting from differential CAT costs across Execution 
Venues? Why or why not? Are there additional factors that should be 
considered?
    346. Should the Plan require the inclusion of a web-based manual 
data entry option for initial CAT reporting in addition to updates and 
corrections? Please explain. How would a web-based manual data entry 
option affect the costs incurred by CAT Reporters? Do any current 
regulatory data reporting systems have a web-based manual data entry 
option? If so, which ones and how often do broker-dealers utilize that 
option for data submission?

G. Efficiency, Competition, and Capital Formation

    In determining whether to approve the CAT NMS Plan, and whether the 
Plan is in the public interest, Rule 613 requires the Commission to 
consider the impact of the Plan on efficiency, competition and capital 
formation.\1017\
---------------------------------------------------------------------------

    \1017\ See 17 CFR 242.613(a)(5); see also 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the Plan generally 
promotes competition. However, as explained below, the Commission 
recognizes that the Plan could increase barriers to entry because of 
the costs to comply with the Plan. Further, the Commission's analysis 
identifies several limitations to competition, but the Plan contains 
provisions to address some limitations and Commission oversight can 
also address the limitations.
    The Commission preliminarily believes that the Plan would improve 
the efficiency of regulatory activities and enhance market efficiency 
by deterring violative activity that harms market efficiency. The 
Commission preliminarily believes that the Plan would have modest 
positive effects on capital formation and that the threat of a security 
breach at the Central Repository is unlikely to significantly harm 
capital formation.
    The Commission notes that the significant uncertainties discussed 
earlier in this economic analysis also affect the Commission's analysis 
of efficiency, competition, and capital formation. For example, the 
Commission recognizes that the uncertainties around the improvements to 
data qualities can affect the strength of the Commission's conclusions 
on efficiency, and the uncertainty regarding how the Operating 
Committee allocates the fees used to fund the Central Repository could 
affect the Commission's conclusions on competition. Additionally, the 
Commission recognizes that the Plan's likely effects on competition, 
efficiency and capital formation are dependent to some extent on the 
performance and decisions of the Plan Processor and the Operating 
Committee in implementing the Plan, and thus there is necessarily some 
further uncertainty in the Commission's analysis. Nonetheless, the 
Commission believes that the Plan contains certain governance 
provisions, as well as provisions relating to the selection and removal 
of the Plan Processor, that mitigate this uncertainty by promoting 
decision-making that could, on balance, have positive effects on 
competition, efficiency, and capital formation.
1. Competition
    As required by Rule 613, the Plan contains an analysis of its 
expected impact on competition.\1018\ The Plan's analysis considers 
potential impacts of the CAT NMS Plan on competition related to 
technology, cost allocation across CAT Reporters, and changes in 
regulatory reporting requirements.\1019\ The Plan splits its analysis 
between ``Participants and broker-dealers communities'' and concludes 
that the Plan generally would avoid placing an inappropriate burden on 
competition in U.S. markets.\1020\ The Plan's analysis states the 
criteria for evaluating impacts on competition by outlining the channel 
of potential impacts as policy changes

[[Page 30739]]

caused by the Plan that ``burden a group or class of CAT Reporters in a 
way that would harm the public's ability to access their services'' and 
states that such impacts ``should be measured relative to the economic 
baseline.'' \1021\
---------------------------------------------------------------------------

    \1018\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.8 (noting that Rule 613(a)(1)(viii) requires the Plan to include a 
discussion of an analysis of the impact of the Plan on competition, 
efficiency and capital formation).
    \1019\ See id.
    \1020\ See id.
    \1021\ See id.
---------------------------------------------------------------------------

    The Commission's evaluation of competition reorients the Plan's 
approach to analyzing competition, expands upon it, and notes some 
limitations in the scope and conclusions of the Plan's analysis. In 
particular, the Commission's analysis of competition is organized and 
segmented by the particular markets in which competition among service 
providers of types of services exists. The Commission's analysis 
focuses on four distinct markets: The market for trading services, the 
markets for broker-dealer services, the market for regulatory services, 
and the market for data reporting services. In the context of the Plan, 
this allows the competition analysis to consider a more complex 
interaction between all market participants in a defined market than 
would be feasible by focusing solely on market participant types. This 
approach allows the Commission to determine whether a differential 
impact across competitors affects overall competition in the market. 
Much like the Plan's criteria for evaluation, the Commission recognizes 
that any effects on competition, with respect to each market, should be 
compared to a Baseline that characterizes the competitive environment 
without the CAT NMS Plan. In addition, the Commission considered 
uncertainty in the effect of the Plan on competition in any of these 
markets.
    After analyzing the discussion of competition and the other 
relevant provisions of the Plan in the context of four affected 
markets, the Commission preliminarily believes that, while there could 
be effects on individual competitors, these effects would not lead to 
changes to competition as a whole in affected markets in a way that 
would generate significant adverse effects. In sum, and as discussed in 
detail below, the Commission preliminarily believes that the Plan poses 
a risk for competition for trading services, but provisions in the Plan 
and Commission oversight could mitigate this risk. Additionally, the 
Plan could have a differential impact on the ability of smaller broker-
dealers and broker-dealers subject to CAT reporting to compete in the 
various markets for broker-dealer services, but these differential 
impacts may not be significant enough to affect overall competition in 
the markets for broker-dealer services. Moreover, the Plan generally 
promotes competition to be the Plan Processor and competition for 
regulatory services, but friction in those markets could limit the 
competition. Finally, the Plan could have a harmful effect on 
competition in the market for data reporting services, at least in the 
short term, because of capacity constraints, but the prolonged 
implementation for small broker-dealers could limit these harmful 
effects.
a. Market for Trading Services
    The Commission analyzed the CAT NMS Plan's economic effects on 
competition in the market for trading services, compared to the 
Baseline of the competitive environment without the Plan, and 
preliminarily believes that the Plan would not place a significant 
burden on competition for trading services. The Commission recognizes 
the risk for the Plan to have negative effects on competition and to 
increase the barriers to entry in this market, but preliminarily 
believes that Plan provisions and Commission oversight could mitigate 
these risks.
    The market for trading services, which is served by exchanges, 
ATSs, and liquidity providers (internalizers and others), relies on 
competition to supply investors with execution services at efficient 
prices. These trading venues, which compete to match traders with 
counterparties, provide a framework for price negotiation and 
disseminate trading information. The market for trading services in 
options and equities consists of 19 national securities exchanges, 
which are all Plan Participants,\1022\ and off-exchange trading venues 
including broker-dealer internalizers, which execute substantial 
volumes of transactions, and 44 ATSs, which are not Plan 
Participants.\1023\ Since the adoption of Regulation NMS in 2005, the 
market for trading services has become more fragmented and competitive, 
and there has been a shift in the market share of trading volume among 
trading venues. For instance, from 2005 to 2013, there was a decline in 
the market share of trading volume for exchange-listed stocks on NYSE. 
At the same time, there was an increase in the market share of newer 
national securities exchanges such as NYSE Arca, BATS-Z, BATS-Y, EDGA 
and EDGX.\1024\ During the same time period, the proportion of NMS 
Stocks trading off-exchange (which includes both internalization and 
ATS trading) increased; for example, during the second quarter of 2015, 
NMS Stock ATSs alone comprised approximately 15 percent of consolidated 
volume, and other off-exchange volume totaled 18 percent of 
consolidated volume over the same period.\1025\ Aside from trading 
venues, exchange market makers provide trading services in the 
securities market. These firms stand ready to buy and sell a security 
``on a regular and continuous basis at publicly quoted prices.'' \1026\ 
Exchange market makers quote both buy and sell prices in a security 
held in inventory, for their own account, for the business purpose of 
generating a profit from trading with a spread between the sell and buy 
prices. Off-exchange market makers also stand ready to buy and sell out 
of their own inventory, but they do not quote buy and sell 
prices.\1027\
---------------------------------------------------------------------------

    \1022\ The Commission understands that ISE Mercury, LLC will 
become a Participant in the CAT NMS Plan and thus is accounted for 
as a Participant for purposes of this Notice. See supra note 3.
    \1023\ See Concept Release on Equity Market Structure, at 3598-
3560, supra note 733 (for a discussion of the types of trading 
centers); see also Alternative Trading Systems with Form ATS on File 
with the SEC as of April 1, 2016, available at https://www.sec.gov/foia/ats/atslist0416.pdf.
    \1024\ See Securities Exchange Act Release No. 76474 at 81112, 
``Regulation of NMS Stock Alternative Trading Systems'', available 
at http://www.sec.gov/rules/proposed/2015/34-76474.pdf.
    \1025\ See id. at 81124.
    \1026\ See ``Market Maker'', available at http://www.sec.gov/answers/mktmaker.htm (last visited April 18, 2016).
    \1027\ Laura Tuttle, OTC Trading: Description of Non-ATS OTC 
Trading in National Market System Stocks (March 2014), available at 
http://www.sec.gov/dera/staff-papers/white-papers/otc-trading-white-paper-03-2014.pdf.
---------------------------------------------------------------------------

    The Plan examined the effect of the CAT NMS Plan on the market for 
trading services primarily from the perspective of the exchanges. The 
Plan asserts that distribution of regulatory costs incurred by the Plan 
would be distributed according to ``the Plan's funding principles,'' 
calibrated to avoid placing ``undue burden on exchanges relative to 
their core characteristics,'' and would thus not cause any exchange to 
be at a relative ``competitive disadvantage in a way that would 
materially impact the respective Execution Venue marketplaces.'' \1028\ 
Likewise, the Plan asserts that its method of cost allocation would 
avoid discouraging entry into the Participant community because a 
potential entrant, like an ATS, would ``be assessed exactly the same 
amount [of allocated CAT-related fees] for a given level of activity'' 
both before and after becoming an exchange.\1029\
---------------------------------------------------------------------------

    \1028\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.8(a)(i); see also id. at Section 11.2 (for a discussion of the 
Plan's funding principles); Section, III.A.3.d, supra.
    \1029\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.8(a)(i).

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

[[Page 30740]]

    The Commission also examined the effect of the funding model on 
competition in the market for trading services, including off-exchange 
liquidity suppliers and ATSs. In addition, the Commission considered 
the effect of implementation and ongoing costs of the Plan, whether 
particular elements of the Plan could hinder competition, and the 
effect of enhanced surveillance on competition in the market for 
trading services.
(1) The Funding Model
    As noted above, the Operating Committee would fund the Central 
Repository by allocating its costs across exchanges, FINRA, ATSs and 
broker-dealers.\1030\ The Operating Committee would decide which 
proportion of costs would be funded by exchanges, FINRA, and ATSs and 
which portion would be funded by broker-dealers. The Plan does not 
specify how the Operating Committee would select this allocation. 
However, the portion allocated to the exchanges, FINRA, and ATSs would 
be divided among them according to market share of share volume and the 
portion allocated to broker-dealers would be divided among them 
according to message traffic, including message traffic sent to and 
from an ATS.\1031\ The Operating Committee would allocate fees for the 
equities market and options market separately based on market share in 
each market. The Operating Committee would file the fees resulting from 
its funding model with the Commission under the Exchange Act.
---------------------------------------------------------------------------

    \1030\ See id. at Article XI.
    \1031\ Id.
---------------------------------------------------------------------------

    Any entity that becomes a new exchange would be required to join 
the CAT NMS Plan as a Participant. In addition, any new Participant to 
the Plan must pay a ``Participation Fee,'' to the Company ``in an 
amount determined by a Majority Vote of the Operating Committee as 
fairly and reasonably compensating the Company and the Participants for 
costs incurred in creating, implementing, and maintaining the CAT.'' 
\1032\ This Participation Fee would be based on, among other potential 
factors, capital expenditures paid by the Company amortized over five 
years, costs incurred by the Company to accommodate the new 
Participant, and Participant Fees paid by other new Participants.\1033\
---------------------------------------------------------------------------

    \1032\ See id. at Section 3.3. The Commission notes that the 
Plan does not specify the Participation Fee. The Commission expects 
this fee to be filed as an amendment to the CAT NMS Plan under Rule 
608 of Regulation NMS. See 17 CFR 242.608.
    \1033\ The Commission notes that Section 3.3(b)(v) of the CAT 
NMS Plan states, ``In the event the Company (following the vote of 
the Operating Committee contemplated by Section 3.3(a)) and a 
prospective Participant do not agree on the amount of the 
Participation Fee, such amount shall be subject to review by the 
Commission pursuant to Sec.  11A(b)(5) of the Exchange Act.'' See 
CAT NMS Plan, supra note 3, at Section 3.3(b)(v); see also text 
accompanying notes 1038-1039, infra.
---------------------------------------------------------------------------

    The Commission preliminarily believes that any impacts of such fees 
on competition in the market for trading services would manifest either 
through the model for the fees itself or through the later allocation 
of the fees across market participant types, across equity or options 
exchanges or, within market participant types and markets, through the 
levels of fees paid by each tier. Each of the different channels 
through which the Plan could have an adverse effect on competition is 
discussed separately below.
A. Funding Model
    As discussed in Section IV.F.4.d, the Commission preliminarily 
believes that the structure of the funding model could provide a 
competitive advantage to exchanges over ATSs. The Plan states that an 
entity would be assessed exactly the same amount for a given level of 
activity whether it acted as an ATS or an exchange.\1034\ However, 
FINRA would be charged fees based on the market share of off-exchange 
trading. ATSs, which are FINRA members, would presumably pay a portion 
of the FINRA fee through their broker-dealer membership fees. In 
addition, ATSs would pay a fee for their market share, which is a 
portion of the total off-exchange market share. Therefore, ATS volume 
would effectively be charged once to the broker-dealer operating the 
ATS and a second time to FINRA.\1035\ This would result in ATSs paying 
more than exchanges for the same level of activity. Ultimately, if the 
funding model disadvantages ATSs relative to registered exchanges, 
trading volume could migrate to exchanges in response, and ATSs could 
have incentives to register as exchanges as well.\1036\
---------------------------------------------------------------------------

    \1034\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(iii)(C).
    \1035\ Id. at Section 11.3(b).
    \1036\ The Commission notes that ATSs currently incur a 
different set of regulatory fees than are incurred by exchanges, 
because ATSs are required to be members of a national securities 
association. FINRA charges its members fees to cover its regulatory 
costs. See FINRA Manual: Corporate Organization: By-Laws of the 
Corporation: Schedule A: Section 1--Member Regulatory Fees, 
available at http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4694 (``FINRA shall, in 
accordance with this Section, collect member regulatory fees that 
are designed to recover the costs to FINRA of the supervision and 
regulation of members, including performing examinations, financial 
monitoring, and policy, rulemaking, interpretive, and enforcement 
activities.'').
---------------------------------------------------------------------------

    Additionally, the Commission preliminarily believes that the 
Participation Fee could discourage new entrants or the registration of 
an ATS as an exchange, increasing the barriers to entry to becoming an 
exchange. In particular, the factors listed in the Plan for determining 
the Participation Fee consider the previous costs incurred by the 
existing Participants but not the costs already incurred by the new 
Participant when it acted as an ATS.\1037\ However, the Plan does not 
prescribe a set formula for determining the Participation Fee and the 
Plan does not preclude considering previous costs incurred by the ATS 
in the Participation Fee. In addition, although amendments designated 
by sponsors to an NMS plan as establishing or changing a fee may be 
effective upon filing with the Commission,\1038\ the Commission may 
summarily abrogate the amendment that establishes (or in the future, 
changes) the Participation Fee within 60 days of its filing and require 
that the fee amendment be refiled in accordance with Rule 608(a)(1) and 
reviewed in accordance with Rule 608(b)(2) of Regulation NMS, if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or the 
maintenance of fair and orderly markets, to remove impediments to, and 
perfect the mechanisms of, a national market system or otherwise in 
furtherance of the purposes of the Act.\1039\
---------------------------------------------------------------------------

    \1037\ See CAT NMS Plan, supra note 3, at Section 3.3(b).
    \1038\ See 17 CFR 242.608(b)(3)(i).
    \1039\ See 17 CFR 242.608(a)(1); 608(b)(2); 608(b)(3)(i); and 
608(b)(3)(iii). Pursuant to Rule 608(b)(2) of Regulation NMS, the 
Commission shall approve such amendment, with such changes or 
subject to such conditions as the Commission may deem necessary or 
appropriate, if it finds that such 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 Act. 
Approval of the amendment shall be by Commission order.
---------------------------------------------------------------------------

    Further, because the funding model seems to charge ATSs more for 
their market share than exchanges, ATSs could pay relatively less for 
their market share as an exchange than as an ATS, countering this 
barrier to entry depending on the magnitudes of the two fee types.
B. Allocation of Fees
    The Plan discusses the allocation of fees among market participants 
of different sizes within the same market participant type (Execution 
Venues versus broker-dealers), but does not

[[Page 30741]]

discuss the allocation of fees across the different market participant 
types or markets. The Operating Committee would determine this 
allocation and would submit a filing to the Commission, which would be 
subject to Commission review and public comment.\1040\ The Commission 
recognizes the potential for the Operating Committee to influence the 
market for trading services either by coordinating to favor one segment 
over another, or through an imbalance in the voting rights on the 
Operating Committee. The Commission also preliminarily believes that 
the Plan contains governance provisions that could mitigate such 
potential burdens on competition.
---------------------------------------------------------------------------

    \1040\ See supra notes 78 and 79 (describing how fee schedules 
for CAT could be filed and noting that they could take effect upon 
filing with the Commission).
---------------------------------------------------------------------------

    The Commission recognizes that the potential for a burden on 
competition and effects on competitors in the market for trading 
services could arise from provisions relating to the allocation and 
exercise of voting rights. In particular, a concentration of influence 
over Committee decisions could directly and indirectly affect 
competition. The potential for concentration of influence over vote 
outcomes arises from proposed provisions to give one vote to each Plan 
Participant \1041\ in an environment where some Participants are 
Affiliated SROs.\1042\ Indeed, supermajority approval could be achieved 
through five of the 10 groups of Affiliated SROs and majority approval 
could be achieved with just four such groups.\1043\ In light of this 
potential for concentration, voters could weigh some particular 
interests more than others. For example, the Participant groups with 
options exchanges could have the incentive to allocate a 
disproportionately low level of fees for options market share than for 
equity market share. Such an allocation could disadvantage competing 
Participants with only equities exchanges.
---------------------------------------------------------------------------

    \1041\ See CAT NMS Plan, supra note 3, at Section 4.3.
    \1042\ The CAT NMS Plan states that the Operating Committee 
shall consist of one voting member representing each Participant and 
that one individual may serve as the voting member of the Operating 
Committee for multiple Affiliated Participants and shall have the 
right to vote on behalf of each such Affiliated Participant. See id. 
at Section 4.2(a).
    \1043\ The twenty SROs that are Participants in the CAT NMS Plan 
include five sets of affiliated SROs (New York Stock Exchange LLC, 
NYSE Arca, Inc., and NYSE MKT LLC (the ``NYSE Group''); The NASDAQ 
Stock Market LLC, NASDAQ OMX BX, Inc., and NASDAQ OMX PHLX LLC (the 
``NASDAQ Group''); BATS Exchange, Inc., BATS Y-Exchange, Inc., EDGX 
Exchange, Inc., and EDGA Exchange, Inc. (the ``BATS Group''); 
Chicago Board Options Exchange, Incorporated and C2 Options 
Exchange, Incorporated (the ``Chicago Options Group''); 
International Securities Exchange, LLC, ISE Gemini, LLC, and ISE 
Mercury, LLC (the ``ISE Group''); and five independent SROs 
(National Stock Exchange, Inc.; Chicago Stock Exchange, Inc.; BOX 
Options Exchange LLC; Miami International Securities Exchange LLC; 
and Financial Industry Regulatory Authority, Inc.). The BATS Group 
has four votes, the NYSE Group, the NASDAQ Group and the ISE Group 
each have three votes, and the Chicago Options Group has two votes. 
See CAT NMS Plan, supra note 3, at Appendix C, Section D.11(b) 
(Affiliated Participant Groups and Participants without 
Affiliations). A majority approval requires eleven votes. This could 
include as few as four of the SROs and sets of affiliated SROs: the 
affiliated SROs that have four votes, two sets of affiliated SROs 
that have three votes, and one other SRO or set of affiliated SROs. 
Supermajority approval requires fourteen votes. This could include 
as few as five SROs and sets of affiliated SROs: the affiliated SROs 
that have four votes, three sets of affiliated SROs with three 
votes, and any additional SRO. Note also that as few as two sets of 
affiliated SROs could block a Supermajority approval by casting 
seven ``no'' votes: the affiliated SROs with four votes and any one 
of the affiliated SROs with three votes.
---------------------------------------------------------------------------

    The inclusion of all exchanges on the Operating Committee could 
give the Plan Participants opportunities and incentives to share 
information and coordinate strategies in ways that could reduce the 
competition among exchanges or could create a competitive advantage of 
exchange trading over off-exchange trading.\1044\ However, the 
Commission preliminarily believes that the Plan would limit these 
potential burdens on competition. In particular, the Plan includes 
provisions designed to limit the flow of information between the 
employees of the Plan Participants who serve as members of the 
Operating Committee and other employees of the Plan Participants.\1045\ 
Additionally, the Plan includes provisions that guide the Operating 
Committee to set fees between exchanges and ATSs in a tiered fashion, 
based upon market share.\1046\ Finally, Commission oversight could also 
mitigate any concerns that burdens on competition might arise as a 
result of this approach.
---------------------------------------------------------------------------

    \1044\ See infra note 1272. The Commission notes that FINRA 
could represent the perspectives of the off-exchange portion of the 
market, but FINRA would have only one vote and exchanges would have 
nineteen.
    \1045\ See CAT NMS Plan, supra note 3, at Section 9.6(a) 
(Participants may share Plan information with their employees and 
other Representatives on a need-to-know basis; their use of Plan 
information is restricted to what is needed to achieve plan 
regulatory objectives). Details on the implementation of these 
confidentiality provisions are not stated. However, see also id. at 
Section 9.6(c) (Participants may share information among themselves 
without Operating Committee approval in some instances).
    \1046\ See id. at Section 11.3; Appendix C, Section 
B.7(b)(iv)(C).
---------------------------------------------------------------------------

    Additionally, the Commission agrees with the Plan's assessment that 
some governance features of the Plan would limit adverse effects on 
competition in the market for trading services. The governance 
structure of the Plan contains provisions to limit the incentive and 
ability of Operating Committee members to serve the private interests 
of their employers, such as rules regulating conflicts of 
interest.\1047\ Such governance provisions could mitigate the potential 
for members of the Operating Committee to use their influence over the 
fee schedule to benefit their own enterprise in a way that unfairly 
harms the customers of competing exchanges and ATSs and places a burden 
on competition. Moreover, as discussed above, the Commission may 
summarily abrogate and require the filing of Plan amendments that 
establish or change a fee in accordance with Rule 608(a)(1) and review 
such amendments in accordance with Rule 608(b)(2) of Regulation NMS, if 
it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
the maintenance of fair and orderly markets, to remove impediments to, 
and perfect the mechanisms of, a national market system or otherwise in 
furtherance of the purposes of the Act.\1048\ In such a case, if the 
Commission chooses to approve such amendment, it would be by order and, 
with such changes or subject to such conditions as the Commission may 
deem necessary or appropriate.
---------------------------------------------------------------------------

    \1047\ See supra note 796.
    \1048\ See supra note 1039.
---------------------------------------------------------------------------

(2) Costs of Compliance
    Because all Participants but one compete in the market for trading 
services, the ability of affiliates to vote as a group could in 
principle allow a few large Participant groups to influence the outcome 
of competition in the market for trading services by making various 
decisions that can alter the costs of one set of competitors more than 
another set. Further, the Plan would allocate profits and losses from 
operating the Central Repository equally across Participants, which 
could advantage small exchanges in the event of a profit and 
disadvantage small exchanges in the event of a loss. This could 
negatively impact competition if the cost differentials are unnecessary 
in light of the cost-benefit trade-offs of alternatives and if the cost 
differentials are significant enough to alter the set of services that 
some Participants offer.
    Generally, smaller competitors could have implementation and 
ongoing costs of compliance that are disproportionate

[[Page 30742]]

relative to their size. Any choices that could exacerbate these 
differences could potentially result in the exit of smaller 
competitors. To lessen the impact of funding the Central Repository on 
smaller exchanges and ATSs, the Plan would apply a tiered funding model 
that charges the smallest exchanges and ATSs the lowest fees. Likewise, 
the Plan would apply a tiered funding model that would charge the 
smallest broker-dealers, including liquidity suppliers, the lowest 
fees. However, the Commission notes that the Plan does not indicate 
whether off-exchange liquidity providers would pay fees similar to 
similarly-sized ATSs and exchanges.
    In addition, as noted above, the Plan provides that the Technical 
Specifications would not be finalized until after the selection of a 
Plan Processor, which would not occur until after any decision by the 
Commission to approve the Plan.\1049\ The Commission recognizes that 
the costs of compliance associated with future technical choices or the 
selection of the Plan Processor could exacerbate the relative cost 
differential across competitors. For example, the Affiliated 
Participants on the Selection Committee could favor a Plan Processor 
that employs technology that would make implementation costs relatively 
higher for the exchanges that do not have affiliates. In addition, the 
Affiliated Participants, who have more votes on the Operating 
Committee, could be amenable to adding particular CAT Data items in the 
future that could expose violations on other exchanges, but not be 
amenable to CAT Data items that could expose violations on their own 
exchanges. While those groups could still use such data to surveil 
their own exchanges, if not in CAT Data, the data items would not be 
available for cross-market surveillance or efficient Commission 
examinations and enforcement. As such, the independent exchanges, which 
have only one vote on the Operating Committee, could face higher 
regulatory costs than exchanges of the Affiliated Participants. 
However, for the same reasons as stated above, the Commission 
preliminarily believes that the governance provisions of the Plan and 
Commission oversight could help to mitigate such effects on these 
competitors in the market for trading services.
---------------------------------------------------------------------------

    \1049\ See Section IV.C.2, supra.
---------------------------------------------------------------------------

(3) Enhanced Surveillance and Deterrence
    The Commission also preliminarily believes that the CAT NMS Plan 
could promote competition in the market for trading services through 
enhanced surveillance and the deterrence of violative behavior that 
could inhibit competition.\1050\ Should the Plan deter violative 
behavior, passive liquidity suppliers, such as on or off-exchange 
market makers could increase profits as a result of reduced losses from 
others' violative behavior. This increase in profits could encourage 
new entrants or could spark greater competition, which reduces 
transaction costs for investors. For example, spoofing, which involves 
building up the apparent depth of the market to trigger particular 
trading patterns and then trading against those patterns, could cause 
confusion about bona-fide supply and demand for a particular security. 
Liquidity providers could compete less than is optimal to provide 
liquidity in that security out of fear that they could suffer a decline 
in profitability if they trade at inopportune times as a result of 
others' spoofing behavior. If the Plan facilitates surveillance 
improvements that deter spoofing, it could increase incentives to 
provide liquidity and promote lower transaction costs for investors, 
particularly in stocks that may lack a critical mass of competing 
liquidity providers or that could be targets for violative trading 
behavior.
---------------------------------------------------------------------------

    \1050\ See Section IV.E.2.c, supra, for a discussion of how the 
CAT NMS Plan would enhance surveillance and deter violative 
behavior.
---------------------------------------------------------------------------

b. Market for Broker-Dealer Services
    The Commission analyzed the effect of the CAT NMS Plan on the 
market for broker-dealer services. For simplification, the Commission 
presents its analysis as if the market for broker-dealer services 
encompasses one broad market with multiple segments even though, in 
terms of competition, it actually may be more realistic to think of it 
as numerous inter-related markets. The market for broker-dealer 
services covers many different markets for a variety of services, 
including, but not limited to, managing orders for customers and 
routing them to various trading venues, holding customer funds and 
securities, handling clearance and settlement of trades, intermediating 
between customers and carrying/clearing brokers, dealing in government 
bonds, private placements of securities, and effecting transactions in 
mutual funds that involve transferring funds directly to the issuer. 
Some broker-dealers may specialize in just one narrowly defined 
service, while others may provide a wide variety of services.
    The market for broker-dealer services relies on competition among 
broker-dealers to provide the services listed above to their customers 
at efficient levels of quality and quantity. The broker-dealer industry 
is highly competitive, with most business concentrated among a small 
set of large broker-dealers and thousands of small broker-dealers 
competing for niche or regional segments of the market. To limit costs 
and make business more viable, small broker-dealers often contract with 
larger broker-dealers or service bureaus to handle certain functions, 
such as clearing and execution, or to update their technology.\1051\ 
Large broker-dealers typically enjoy economies of scale over small 
broker-dealers and compete with each other to service the smaller 
broker-dealers, who are both their competitors and their customers.
---------------------------------------------------------------------------

    \1051\ See Securities Exchange Act Release No. 63241 (November 
3, 2010), 75 FR 69791, 69822 (November 15, 2010) (Risk Management 
Controls for Brokers or Dealers with Market Access).
---------------------------------------------------------------------------

    There are approximately 1,800 broker-dealers likely to be CAT 
Reporters, while approximately 2,338 broker-dealers would not be CAT 
Reporters because their businesses do not involve reportable events in 
securities covered by the Plan.\1052\ Further, broker-dealers that are 
anticipated to have CAT reporting obligations could compete with the 
broker-dealers that would not have CAT reporting responsibilities in 
various broker-dealer market segments that are unrelated to CAT 
reporting. Some broker-dealers may offer specialized services in one 
line of business mentioned above, while other broker-dealers may offer 
diversified services across many different lines of businesses. As 
such, the competitive dynamics within each of these specific lines of 
business for broker-dealers is different, depending on the number of 
broker-dealers that operate in the given segment and the market share 
that the broker-dealers occupy.
---------------------------------------------------------------------------

    \1052\ Examples of these business activities include 
underwriting and advising. See supra note 864.
---------------------------------------------------------------------------

    The Commission preliminarily believes costs of compliance incurred 
by broker-dealers to comply with the Plan, particularly to report order 
events to the Central Repository, will differ substantially between 
broker-dealers and may affect competition between smaller and larger 
broker-dealers. As discussed previously in the Commission's analysis of 
Costs, broker-dealers that outsource regulatory data reporting 
activities are expected to see their costs of regulatory data reporting 
increase, while broker-dealers that Insource may see a decrease in 
their regulatory data reporting costs.\1053\ The Commission 
preliminarily believes this

[[Page 30743]]

dynamic may affect competition between Outsourcers (that tend to be 
smaller) and Insourcers (that tend to be larger), and may increase 
barriers to entry in some segments of this market.
---------------------------------------------------------------------------

    \1053\ See Section IV.F.1.c(2)C, supra.
---------------------------------------------------------------------------

    The Plan discusses certain aspects of competition pertaining to 
broker-dealers that relate to costs and the allocation of fees. The 
Plan states, ``[b]roker-dealer competition could be impacted if the 
direct and indirect costs associated with meeting the CAT NMS Plan's 
requirements materially impact the provision of their services to the 
public. Further, competition may be harmed if a particular class or 
group of broker-dealers bears the costs disproportionately . . . .'' 
The Plan asserts that it would have little to no adverse effect on 
competition between large broker-dealers, and would not materially 
disadvantage small broker-dealers relative to large broker-dealers. 
Regarding small broker-dealers, the Plan states, ``. . . . [the 
allocation of costs on broker-dealers based on their contribution to 
market activity] may be significant for some small firms, and may even 
impact their business models materially . . . .'' and that the 
Participants were sensitive to the burdens the Plan could impose on 
small broker-dealers, noting that such broker-dealers could incur 
minimal costs under their existing regulatory reporting requirements 
``because they are OATS-exempt or excluded broker-dealers or limited 
purpose broker-dealers.'' The CAT NMS Plan attempts to mitigate its 
impact on these broker-dealers by proposing to follow a cost allocation 
formula that (in expectation) charges lower fees to smaller broker-
dealers; furthermore, Rule 613 provides them additional time to 
commence their reporting requirements.
    The Commission preliminarily agrees with the Plan's general 
assessment of competition among broker-dealers, and also with the 
Plan's assessment of differential effects on small versus large broker-
dealers. The Commission agrees that the Plan's funding model is an 
explicit source of financial obligation for broker-dealers and 
therefore an important feature to evaluate when considering potential 
differential effects of the Plan on competition in the market for 
broker-dealers. The Commission understands that the tiered funding 
model should result in the smallest broker-dealers paying the smallest 
fees, but the Plan does not outline how the magnitudes of fees would 
differ across the tiers. The Commission also recognizes that the 
potentially greater level of service specialization that may 
characterize small broker dealers and the potentially non-linear 
economies of scale may result in the compliance costs associated with 
the Plan competitively disadvantaging small broker-dealers, on average, 
relative to large broker-dealers.
    However, the Commission preliminarily believes that the segments of 
the market most likely to experience higher barriers to entry are those 
that currently have no data reporting requirements of the type the Plan 
requires and those that would involve more CAT Reporting obligations, 
such as the part of the broker-dealer market that involves connecting 
to exchanges, because of the technology infrastructure requirements and 
the potential to have to report several types of order events.\1054\ 
The opportunity to rely on service bureaus or other solutions to reduce 
the costs of complying with the Plan could limit any increases in the 
barriers to entry in this market. Nonetheless, the Commission 
preliminarily believes that any increases in the barriers to entry are 
justified because they are necessary in order for the CAT Data to 
include data from small broker-dealers. In the Adopting Release, the 
Commission explained that excluding small broker-dealers from reporting 
requirements would ``eliminate the collection of audit trail 
information from a segment of the broker-dealer community and would 
thus result in an audit trail that does not capture all orders by all 
participants in the securities markets.'' \1055\ The Commission further 
noted that ``illegal activity, such as insider trading and market 
manipulation, can be conducted through accounts at small broker-dealers 
just as readily as it can be conducted through accounts at large 
broker-dealers'' and that ``granting an exemption to certain broker-
dealers might create incentives for prospective wrongdoers to utilize 
such firms to evade effective regulatory oversight through the 
consolidated audit trail.'' \1056\
---------------------------------------------------------------------------

    \1054\ The majority of broker-dealers do not directly engage in 
exchange trading, and most broker-dealers are not expected to have 
CAT reporting obligations. See supra note 864.
    \1055\ See Adopting Release supra note 9, at 45749.
    \1056\ See id.
---------------------------------------------------------------------------

    The Commission also recognizes that the Plan could affect the 
current relative competitive positions of broker-dealers in the market 
for broker-dealer services. To varying degrees, the economic impacts 
resulting from the Plan could benefit some broker-dealers and adversely 
affect others. The magnitude of these effects on broker-dealers could 
vary across and within categories of broker-dealers and classes of 
securities. However, there is no clear reason to expect these impacts, 
should they occur, to decrease the current state of overall competition 
in the market for broker-dealer services so as to materially burden the 
price or quality of services received by investors on average.
    Regardless of the differential effects of the CAT NMS Plan on small 
versus large broker-dealers, it is the Commission's preliminary view 
that the CAT NMS Plan, in aggregate, would likely not reduce 
competition and efficiency in the overall market for broker-dealer 
services. Even if small broker-dealers potentially face a burden, this 
may not necessarily have an adverse effect on competition as a whole in 
the overall market for broker-dealer services. Under the CAT NMS Plan, 
broker-dealers would have greater reporting responsibilities than they 
would otherwise have. Broker-dealers could face high upfront 
infrastructure costs to set up a processing environment to meet 
reporting responsibilities. Because these infrastructure costs are 
upfront, fixed costs, the burden to bear these costs could be 
potentially greater for small broker-dealers. Instead of bearing these 
costs in-house, small broker-dealers could contract with outside 
technology vendors for reporting services. This outcome could lead to 
lower costs relative to not using a vendor for reporting services. For 
these reasons, even firms that currently do not report to OATS, but 
will be CAT Reporters under the Plan, could face manageable upfront 
costs that permit them to continue in their line of business without a 
severe setback in their profitability.
    The Commission notes that a difficulty in assessing the likely 
impacts of the CAT NMS Plan on competition among broker-dealers is that 
competition in the markets for different broker-dealer services could 
be affected in different ways. As mentioned above, there is great 
diversity in the business activities of broker-dealers. Broker-dealer 
services that are likely to incur CAT reporting responsibilities 
include: executing orders, whether it be as an ATS or acting as a 
carrying broker-dealer; intermediating between customers and carrying/
clearing brokers; effecting transactions in mutual funds that involve 
transferring funds directly to the issuer; writing options; and acting 
as an exchange floor broker. As noted above, these broker-dealers may 
also compete with the approximately 2,338 other broker-dealers in 
market segments that are not related to CAT reporting, such as dealing 
in municipal bonds or arranging

[[Page 30744]]

private placements of securities.\1057\ If CAT costs represent a 
significant increase in overall costs, the Plan could disadvantage 
broker-dealers who are CAT Reporters in the market segments that do not 
require CAT reporting. For example, broker-dealers that, in addition to 
providing services related to market transactions that are reportable 
to CAT, also compete to provide fixed-income order entry as a line of 
business may be at a relative disadvantage to competitors in the fixed-
income market who do not provide broker-dealer services that are 
related to market activity that is reportable to CAT. Whether this 
disadvantage amounts to a substantial reduction in competition in 
various markets depends on the magnitude of the disadvantage and 
whether it affects the price and level of services available to 
investors.
---------------------------------------------------------------------------

    \1057\ See Section IV.F.1.c, supra.
---------------------------------------------------------------------------

    The Commission recognizes that the CAT NMS Plan could result in 
fewer broker-dealers providing specialized services that trigger CAT 
reporting obligations. The Commission preliminarily believes that this 
potential effect on broker-dealer specialization depends on whether 
three key conditions are met. First, the effect requires that, compared 
to large broker-dealers, small broker-dealers disproportionately 
specialize in providing regional or niche services to a particular 
market segment of clients. Second, the effect requires that this 
specialization is correlated with business risk associated with changes 
in marginal cost. Finally, the effect requires that the compliance 
costs of the CAT NMS Plan could affect the ability for some small 
broker-dealers to provide these specialized services. This effect, in 
which fewer broker-dealers compete in specialized market segments, 
could thereby negatively affect the competitive dynamics in these 
market segments, especially if these segments currently contain 
relatively few broker-dealers. The Commission preliminarily believes 
that these conditions could hold, particularly for smaller broker-
dealers, and result in fewer broker-dealers operating in specialized or 
niche markets if the Plan is approved.
    The Commission recognizes, however, that fewer broker-dealers in a 
specialized segment of the market may not necessarily harm competition 
in that segment. In particular, the costs of compliance with the Plan 
may be less of a relative burden for large broker-dealers who may, 
compared to small broker-dealers, provide a larger portfolio of 
specialized services to clients. This portfolio may buffer large 
broker-dealers from business risk associated with specialization. 
Because of the lower relative burden, large broker-dealers are more 
likely to maintain their presence in specialized market segments. If a 
sufficient number of large broker-dealers, or all broker-dealers more 
generally, maintain their presence in specialized market segments, a 
net decrease in broker-dealers may not affect the competition in such 
market segments to a level in which the market segment offers fewer or 
lower quality services or higher prices. However, the Commission 
recognizes that negative effects on competition in specialized market 
segments could result if broker-dealers achieve a level of market 
concentration necessary to adversely affect prices for investors.
c. Market for Regulatory Services
    SROs compete in the market for regulatory services.\1058\ 
Regulatory functions include market surveillance, cross-market 
surveillance, oversight, compliance, investigation, and enforcement, as 
well as the registration, testing, and examination of broker-dealers. 
Although the Commission oversees exchange SROs' supervision of trading 
on their respective venues, the responsibility for direct supervision 
of trading on an exchange resides in the SRO that operates the 
exchange. Currently, SROs compete to provide regulatory services in at 
least two ways. First, because SROs are responsible for regulating 
trading within venues they operate, their regulatory services are 
bundled with their operation of the venue. Consequently, for a broker-
dealer, selecting a trading venue also entails the selection of a 
provider of regulatory services surrounding the trading activity. 
Second, SROs could provide this supervision not only for their own 
venues, but for other SROs' venues as well through the use of 
Regulatory Service Agreements or a plan approved pursuant to Rule 17d-2 
under the Exchange Act.\1059\ Consequently, SROs compete to provide 
regulatory services to venues they do not operate. Because providing 
trading supervision is characterized by high fixed costs (such as 
significant IT infrastructure and specialized personnel), some SROs 
could find that another SRO could provide some regulatory services at a 
lower cost than it would incur to provide this service in-house. Until 
recently, nearly all the SROs that operate equity and option exchanges 
contracted with FINRA for some or much of their trading surveillance 
and routine inspections of members' activity.\1060\
---------------------------------------------------------------------------

    \1058\ FINRA is the SRO responsible for supervision of trading 
off-exchange, which includes trading occurring on ATSs.
    \1059\ 17 CFR 240.17d-2.
    \1060\ Every equity exchange except CHX and NSX has an RSA with 
FINRA which allows FINRA to provide cross-market surveillance for 
nearly 100% of the equity markets. These RSAs differ in scope, but 
in every case these contracts represent a partnership between FINRA 
and the other SROs to provide a full set of effective regulatory 
services. Recently NYSE Group and NASDAQ OMX decided to 
significantly scale back their RSA with FINRA and directly resume 
most of their market surveillance and investigation regulatory 
obligations.
---------------------------------------------------------------------------

    As a result, the market for regulatory services in the equity and 
options markets currently has one dominant competitor, FINRA. This may 
provide relatively uniform levels of surveillance across trading 
venues. One SRO having a competitive advantage in providing such 
services could also limit the incentives to innovate in surveillance. 
Hypothetically, increases in the competition to provide regulatory 
services could promote regulatory oversight of exchanges and investor 
protection for investors. To the extent that a regulator could improve 
on current regulatory oversight, this could result in a better 
functioning, more liquid, financial market. However, it is possible 
that increased competition between SROs to provide regulatory services 
could have negative effects on the market if SROs compete on the basis 
of providing light-touch regulation, which might be less likely to 
detect violative activity.
    The Commission preliminarily believes that the Plan could provide 
opportunities for increased competition in the market to provide 
regulatory services. In particular, designated regulatory Staff from 
all of the SROs would have access to CAT Data, which would reduce the 
differences in data access across SROs.\1061\ This could reduce 
barriers to entry in providing regulatory services because data would 
be centralized and standardized, possibly reducing economies of scale 
in performing surveillance activities.\1062\ Furthermore, because some 
types of

[[Page 30745]]

previously infeasible surveillance would become possible with the 
availability of additional data,\1063\ SROs would have greater 
opportunities to innovate in the type of surveillance that is 
performed, and the efficiency with which it is performed. In addition, 
when as Rule 613(a)(3)(iv) requires, SROs implement new or updated 
surveillance within 14 months after effectiveness of the CAT NMS 
Plan,\1064\ any SRO could reconsider its approach to outsourcing its 
own regulation and whether it wants to compete for regulatory service 
agreements.
---------------------------------------------------------------------------

    \1061\ Without a Central Repository, an SRO wishing to compete 
as a regulatory services provider would need to invest in the IT 
infrastructure and enter into the data access agreements necessary 
to surveil broadly beyond its exchanges' data resources. By 
providing access to consolidated trade and order data to all SROs, 
CAT may reduce barriers to entry for this market. See Exemption for 
Certain Exchange Members, supra note 394, at 18057-58 (describing 
the barriers to entry of potential new national securities 
associations).
    \1062\ The Commission recognizes that efficient access to data 
is not the only prerequisite for entering the market to provide 
regulatory services and that high barriers to entry may still 
characterize this market.
    \1063\ See Section IV.G.2.a, infra, for a discussion of the 
efficiency improvements for surveillance.
    \1064\ 17 CFR 242.613(a)(3)(iv).
---------------------------------------------------------------------------

d. Market for Regulatory Data Reporting Services
    The Commission analyzed the effect of the CAT NMS Plan on 
competition in the market for data reporting services with a focus on 
its impact on the costs incurred by broker-dealers to comply with the 
Plan. As discussed in the Costs Section above, the Commission 
preliminarily believes that many broker-dealers, particularly smaller 
broker-dealers, would fulfill their CAT Reporting obligations by 
outsourcing to service bureaus and that the fees charged by the service 
bureaus would be a major cost driver for these broker-dealers. Further, 
these fees would factor into the increase in barriers to entry in the 
market for broker-dealer services.\1065\ Therefore, the Commission 
preliminarily believes that any effects on competition in the market 
for regulatory data reporting services could have a significant effect 
on the costs incurred by broker-dealers in complying with the CAT NMS 
Plan.
---------------------------------------------------------------------------

    \1065\ See Section IV.G.1.b, supra.
---------------------------------------------------------------------------

    The Plan provides information on broker-dealers' use of third-party 
service providers to accomplish current regulatory data reporting. The 
Plan notes that while some broker-dealers perform their regulatory data 
reporting in-house, others outsource this activity. The Plan does not 
state what proportion of broker-dealers currently outsources their 
regulatory data reporting work. However, the Commission interviewed a 
variety of broker-dealers and service bureaus in order to gain insight 
into the scope of broker-dealers' use of data reporting services. As 
noted in the Costs Section,\1066\ the Commission understands that most 
firms outsource the bulk of their regulatory data reporting to third-
party firms. The Commission preliminarily believes that the competition 
in the market to provide data reporting services is a product of firms 
choosing to perform this activity in-house or to outsource it based on 
a number of considerations including cost, with some firms choosing to 
outsource this activity across multiple service providers.
---------------------------------------------------------------------------

    \1066\ See Section IV.F.1.c(2)A, supra.
---------------------------------------------------------------------------

    The market for regulatory data reporting services is characterized 
by bundling, high switching costs, and barriers to entry. The high IT 
infrastructure costs of regulatory data reporting creates economies of 
scale that give rise to the data reporting services provided by service 
bureaus. Broker-dealers, instead of investing in the IT infrastructure 
necessary for regulatory data reporting, could share the costs of the 
IT infrastructure with other broker-dealers by paying for a service 
bureau to report for them. Often, service bureaus bundle regulatory 
data reporting services with an order-handling system service that 
provides broker-dealers with market access and order routing 
capabilities.\1067\ Sometimes service bureaus bundle regulatory data 
reporting services with trade clearing services.
---------------------------------------------------------------------------

    \1067\ See Section IV.F.1.c(2)A, supra, for more information on 
broker-dealer use of service bureaus.
---------------------------------------------------------------------------

    In discussions with Staff, service bureaus stated that switching 
service bureaus can be costly and involve complex onboarding processes 
and requirements, that systems between service bureaus may be 
disparate, and switching service providers may require different or 
updated client documentation. However, service bureaus stated that on-
boarding operations were infrequent and that it was rare for broker-
dealers to switch between service providers. Difficulty switching 
between service providers could limit the competition among service 
bureaus to provide data reporting services, and impact the costs that 
Outsourcers incur to secure regulatory data reporting services. 
Furthermore, the high IT infrastructure costs also give rise to 
barriers to entry, which could slow the entry of new market 
participants into the market. Despite this, the trend in the market is 
toward expansion.\1068\
---------------------------------------------------------------------------

    \1068\ See supra note 920.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the Plan could alter the 
competitive landscape in the market for data reporting services in 
several ways. It is not clear whether demand for regulatory data 
reporting services would increase or decrease; although more broker-
dealers would be required to report regulatory data, it is possible 
that flexible reporting options allowed by the Plan could make 
preparing data for reporting less onerous, leading to fewer firms 
choosing to outsource this activity.
    It is possible that the Plan would increase the demand for data 
reporting services by requiring regulatory data reporting by broker-
dealers that may have previously been exempt due to size under 
individual SRO rules.\1069\ Because more broker-dealers would be 
required to report regulatory data under the Plan, the Commission 
preliminarily believes there could be an opportunity for increased 
competition in this market which might benefit all broker-dealers that 
outsource their regulatory data reporting activity. However, it is also 
possible that the increase in demand for data reporting services could 
serve to entrench existing providers if they capture a large share of 
newly created demand; this could lead to relatively higher costs for 
broker-dealers than they would face in a more competitive market. The 
potential increase in demand for data reporting services could impact 
the capacity of already existing data reporting services to meet this 
increase in demand, and this in turn could have implications for 
competition and pricing in the market for data reporting services. 
Considering the barriers to entry that characterize the market for data 
reporting services and this potential increase in demand, service 
bureaus could have less incentive to compete for broker-dealer clients 
because these clients are no longer scarce, and as such, the CAT NMS 
Plan could result in a decline in the competition for data reporting 
services. It is possible that broker-dealers seeking to establish 
relationships with service bureaus could have trouble securing them 
because of the limited on-boarding capacity and need to on-board many 
broker-dealers at once. In the short-run these capacity constraints and 
the high demand could increase the costs of reporting through a service 
bureau. However, the two year implementation period for large broker-
dealers and three year period for small broker-dealers could alleviate 
the reduction in competition due to the onboarding capacity strain 
because current service bureaus have time to increase their on-boarding 
capacity and new entrants have time to build the necessary IT 
infrastructure and a client base.
---------------------------------------------------------------------------

    \1069\ See, e.g., FINRA Rule 7470.
---------------------------------------------------------------------------

    The CAT NMS Plan could also dramatically change the pool of firms 
demanding data reporting services, which would be skewed toward firms 
that are smaller and on average costlier to service, which could result 
in higher

[[Page 30746]]

prices, which could eventually be passed onto investors. In addition to 
small and medium sized broker-dealers that previously self-reported, 
the CAT NMS plan would result in more broker-dealers having data 
reporting responsibilities and the Commission preliminarily believes 
that these broker-dealers would predominantly be small. For example, 
very small broker-dealers that are currently exempt from OATS reporting 
requirements could seek to establish service bureau relationships. In 
addition, because the Plan would require additional elements in 
regulatory data, particularly customer data, some broker-dealers that 
currently self-report could no longer find it economically feasible to 
continue to do so.
    In addition to possibly increasing demand for data reporting 
services, the CAT NMS Plan may have a mixed effect on the number of 
firms offering data reporting services. This can impact the 
competitiveness of this market, and affect the costs broker-dealers 
bear in securing these services. On one hand, the number of firms 
offering data reporting services could decrease, because the need to 
secure PII might increase the likelihood of liability and litigation 
risks in the event of a security breach.\1070\ On the other hand, it is 
possible that the number of service bureaus offering data reporting 
services would increase. New reporting requirements for numerous 
broker-dealers could create opportunities for new entrants to meet this 
demand. This could increase capacity and result in innovation in 
providing these services, which could benefit broker-dealers needing 
data reporting services by potentially reducing reporting costs, or at 
least reducing the potential for cost increases. Lower reporting costs 
for broker-dealers could in turn benefit the investors who are serviced 
by these broker-dealers, through reduced costs.
---------------------------------------------------------------------------

    \1070\ See Section IV.F.4.a(3), supra for a discussion of the 
potential exit of service bureau resulting from the risk of a 
security breach.
---------------------------------------------------------------------------

    It is also possible that the Plan would decrease the demand for 
data reporting services. Many broker-dealers currently pay another firm 
(such as a service bureau) to fulfill their regulatory data reporting; 
this may be because these broker-dealers find it would be more 
expensive to handle the translation of their order management system 
data into fixed formats, such as is required for OATS. If the Plan 
Processor allows broker-dealers to send data to the Central Repository 
in the formats that they use for normal operations, in drop copies for 
example, these broker-dealers may no longer see a cost advantage in 
engaging the services of a regulatory data reporting service provider 
because one of the costs associated with regulatory data reporting--
having to translate data into a fixed format--will have been 
eliminated.\1071\ Without the cost of having to translate data, some 
broker-dealers that currently outsource OATS reporting could choose, at 
the margin, to insource their regulatory data reporting.
---------------------------------------------------------------------------

    \1071\ The Plan does not mandate the data ingestion format. See 
CAT NMS Plan, supra note 3, at Appendix C, at Section A.1(b). The 
Commission recognizes that the CAT Reporters Study found no 
difference in expected costs for a fixed format, but requests 
comment on why the costs may be similar when it would seem logical 
that allowing flexible data reporting formats would reduce costs for 
broker-dealers. See Request for Comment Nos. 318 and 331 in Section 
IV.F.5, supra.
---------------------------------------------------------------------------

    The Commission preliminarily believes that this reduction in demand 
would not likely be realized and, if realized, would be unlikely to 
offset the increase in demand that would come from CAT reporters not 
subject to OATS reporting. As noted in the Costs Section, of the 1,800 
expected CAT Reporters, 868 do not currently report to OATS.\1072\ This 
means that the Commission expects a large proportion of CAT Reporters 
may be broker-dealers that currently do not have a service bureau for 
regulatory data reporting but would choose to engage one to manage 
their CAT reporting responsibilities. This is more than the 
Commission's estimate of 806 current outsourcing broker-dealers.\1073\ 
Therefore, it is unlikely that the number of current Outsourcers that 
choose to become Insourcers would be larger than the number of non-OATS 
reporters that would elect to outsource. As a result, demand is more 
likely to increase. Further, the requirement for CAT reports to use 
listing exchange symbology could require pre-report data processing 
even if the Plan Processor allows for the receipt of reports in the 
formats that broker-dealers use for normal operations.\1074\ As a 
result, the CAT NMS Plan is unlikely to eliminate the costs of 
processing data prior to reporting that data to the Central Repository.
---------------------------------------------------------------------------

    \1072\ The Plan estimates that 1,800 broker-dealers are expected 
to have CAT reporting obligations. Based on data from FINRA, 932 
broker-dealers currently report OATS data. 1,800-932=868. See 
Section IV.F.1.c(2)A, supra.
    \1073\ Id.
    \1074\ See supra note 949.
---------------------------------------------------------------------------

2. Efficiency
    The Commission has analyzed the potential impact of the Plan on 
efficiency. The Plan includes a discussion of certain efficiency 
effects anticipated if the Plan is approved; as part of its economic 
analysis, the Commission discusses these effects, as well as additional 
effects on efficiency anticipated by the Commission. The Commission 
preliminarily believes that the Plan as proposed is likely to result in 
significant improvements in efficiency related to how regulatory data 
is collected and used. The Plan also has the potential to result in 
improvements in market efficiency by deterring violative activity that 
could reduce market efficiency.\1075\ The Commission notes, however, 
that efficiency gains from the retirement of duplicative and outdated 
reporting systems would be delayed for up to two and a half years and 
the interim period of increased duplicative reporting would impose 
significant financial burden on Industry Members.\1076\
---------------------------------------------------------------------------

    \1075\ The Commission has also analyzed the likely effect of the 
Plan on allocative efficiency of existing capital within the 
industry. These potential effects are discussed in Section IV.G.3, 
infra.
    \1076\ See Section IV.F.2, supra.
---------------------------------------------------------------------------

a. Effect of the Plan on Efficiency
    The Commission has analyzed the possible effects of the CAT NMS 
Plan on efficiency. Specifically, building off the discussion in the 
Plan, the Commission analyzed the effect of the Plan on the efficiency 
of detecting violative behavior through examinations and enforcement, 
on the efficiency of surveillance, on market efficiency through 
deterrence of violative behavior, on operational efficiency of CAT 
Reporters, and on efficiencies through reduced ad hoc data requests and 
quicker access to data.
    The current state of regulatory data collection and use provides 
ample opportunity for efficiency improvements. First, regulators' 
ability to efficiently perform cross-market surveillance is hindered by 
data fragmentation.\1077\ Second, regulators' ability to efficiently 
supervise and surveil market participants and carry out their 
enforcement responsibilities is hindered by limitations in current 
regulatory data.\1078\ Finally, there are a number of other 
inefficiencies associated with the current system of regulatory data 
collection. These include: Delays in data availability to regulators; 
lack of direct access to data collected by other regulators results in 
numerous ad-hoc data requests; and the need for regulatory Staff to 
invest

[[Page 30747]]

significant time and resources to reconciling disparate data 
sources.\1079\
---------------------------------------------------------------------------

    \1077\ See Section IV.E.2.c, supra.
    \1078\ See Section IV.E.2.c, supra.
    \1079\ See Section IV.D.2.b, supra. These other inefficiencies 
are discussed above in the Baseline and Benefits Sections.
---------------------------------------------------------------------------

    The Plan discusses a number of expected efficiency effects 
associated with the Plan, including both positive and negative 
effects.\1080\ The Commission preliminarily agrees with the Plan's 
assessment and has identified additional efficiency effects as well. 
The Plan outlines several positive effects relating to efficiency in: 
Monitoring for rule violations; performing surveillance; and supporting 
fewer reporting systems. Some of these efficiencies are also discussed 
in the Benefits Section of this analysis.\1081\
---------------------------------------------------------------------------

    \1080\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.8(b).
    \1081\ See Section IV.E, supra.
---------------------------------------------------------------------------

    The Plan concludes SROs would experience improved efficiency in the 
detection of rule violations, particularly for violations that involve 
trading in multiple markets.\1082\ The Plan states an expectation that 
SROs would need to expend fewer resources to detect violative cross-
market activity, and such activity would be detected more 
quickly.\1083\ The Commission agrees that the Plan would result in 
improvements in efficiency in the performance of examinations of market 
participants by SROs and the Commission. Improvements to data 
availability and access through the Central Repository could allow SROs 
and the Commission to more efficiently identify market participants for 
examination.\1084\ The Commission also agrees that the Plan would 
improve the efficiency of enforcement investigations. If regulatory 
data access improves, the quality and quantity of enforcement 
investigations could increase through improvements to the 
comprehensiveness and timeliness of data used to support 
investigations. As mentioned previously, it can take months for 
regulators to assemble the data necessary to comprehensively 
investigate a regulatory inquiry.\1085\ To the extent that the Plan 
allows regulators to access more comprehensive data directly from the 
Central Repository, regulators would be able to collect data faster and 
start processing it sooner, resulting in a more efficient data analysis 
portion of an investigation. As a result, follow-up enforcement 
inquiries could be avoided entirely in situations where data from the 
Central Repository allows regulators to conclude an initial inquiry 
without initiating an enforcement investigation.\1086\ This benefit 
would be observable to both regulators and subjects of investigations, 
for whom ongoing enforcement investigations can be costly and the 
source of uncertainty.
---------------------------------------------------------------------------

    \1082\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.8(b); see also Section IV.E.2, supra.
    \1083\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.8(b).
    \1084\ See Section IV.E.2.c, supra.
    \1085\ See Section IV.E.2.c, supra.
    \1086\ The Commission notes that this does not preclude an 
increase in total enforcement investigations, but rather that some 
enforcement investigations may determine earlier in the 
investigation that no violation occurred.
---------------------------------------------------------------------------

    The Plan states that the Participants believe that the CAT NMS Plan 
could improve the efficiency of surveillance.\1087\ According to the 
Plan, this improvement is due to a number of factors including: 
Increased surveillance capacity; improved system speed, which would 
result in more efficient data analysis; and a reduction in surveillance 
system downtime.\1088\ The Plan also cites reduced monitoring 
costs,\1089\ but the Commission notes that estimates in the Costs 
Section of the Plan predict increased surveillance costs if the Plan is 
approved. The increased surveillance costs predicted in the Plan could 
reflect more effective surveillance under the Plan. Although the Plan 
does not discuss the cost-benefit trade-off of increased surveillance 
directly, the Commission notes that achieving the level of surveillance 
that would be possible if the Plan is approved would likely be more 
expensive using currently available data sources, if it is achievable 
at all, due to the inefficiencies that currently exist in delivering 
regulatory supervision, discussed previously.\1090\
---------------------------------------------------------------------------

    \1087\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.8(b) (stating that the CAT NMS Plan could reduce monitoring costs, 
enable regulators to detect cross-market violative activity more 
quickly, provide regulators more fulsome access to unprocessed data 
and timely and accurate information on market activity, and provide 
CAT Reporters with long term efficiencies resulting from the 
increase in surveillance capabilities); see also IV.E.2.c, supra.
    \1088\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.8(b). The Participants surveyed the 10 exchange-operating SRO 
groups on surveillance downtime. In conversations with Staff, the 
Participants informed Staff that average surveillance downtime was 
0.03% from August 1, 2014 to August 31, 2015, and ranges from 0 to 
0.21% across SROs.
    \1089\ See id.
    \1090\ See Section IV.E.2, supra.
---------------------------------------------------------------------------

    The Commission preliminarily believes that CAT may reduce violative 
behavior.\1091\ The Plan states that CAT may serve a deterrent effect, 
thereby reducing investor losses attributable to such behavior.\1092\ 
Improvements in the efficiency of market surveillance, investigations, 
and enforcement could directly reduce the amount of violative behavior 
by identifying and penalizing market participants who violate rules and 
who would more easily go undetected in the current regime. Furthermore, 
market participants' awareness regarding improvements in the efficiency 
of market surveillance, investigations, and enforcement (or perceptions 
thereof), and the resultant increase in the probability of incurring a 
costly penalty for violative behavior, could deter violative 
behavior.\1093\ Reductions in violative behavior through both of these 
economic channels could improve market efficiency, assuming violative 
behavior receives diminishing marginal gains and generates increasing 
marginal harm.\1094\
---------------------------------------------------------------------------

    \1091\ See Section IV.E.2.c, supra.
    \1092\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.8(b).
    \1093\ See, e.g., Schelling, Thomas, ``The Strategy of Conflict: 
Prospectus for a Reorientation of Game Theory,'' Journal of Conflict 
Resolution, Vol. 2 No.3 (1958); Ellsberg, Daniel, ``The Crude 
Analysis of Strategic Choices,'' American Economic Review, Vol. 51, 
No. 2 (1961).
    \1094\ See, e.g., Becker, Gary and William Landes, ``Essays in 
the Economics of Crime and Punishment,'' Columbia University Press, 
(1974).
---------------------------------------------------------------------------

    The Plan discusses increased efficiency due to reductions in 
redundant reporting systems.\1095\ The Plan also discusses increases in 
system standardization, which would allow consolidation of resources, 
including the sunsetting of legacy reporting systems and processes, as 
well as consolidated data processing envisioned from the Plan.\1096\ 
However, the Commission is aware that the Plan, as proposed, calls for 
a period of years during which Industry Members would face duplicative 
reporting systems before older regulatory data reporting systems are 
retired.\1097\ This period of duplicative reporting would impose a 
considerable financial burden on Industry Members.\1098\
---------------------------------------------------------------------------

    \1095\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(iii)(C) (discussing benefits of CAT to broker-dealers).
    \1096\ See id. at Appendix C, Section B.8(b).
    \1097\ See id. at Appendix C, Section B.9.
    \1098\ See Section IV.F.2, supra for a discussion of duplicative 
reporting and whether broker-dealers would pass costs on to 
investors.
---------------------------------------------------------------------------

    The Plan discusses two other efficiency improvements: a reduction 
in ad-hoc data requests and more fulsome access to raw data. The Plan 
predicts a reduction in ad-hoc data requests, which would free up 
resources previously used to service such requests.\1099\ However, 
while the Plan anticipates a decrease in ad-hoc data requests as a 
result of Plan-related data improvements, the Commission notes that it 
is possible that some types of ad-hoc data requests might increase. For 
instance, even if enforcement

[[Page 30748]]

investigations initially use CAT Data, later-stage investigations may 
involve requests for data not included in CAT Data, such as commissions 
paid or a locate identifier for a short sale. An increase in the 
efficiency of enforcement investigations could increase the total 
number of later-stage investigations.\1100.\ Such investigations could 
produce additional ad-hoc data requests and require other interactions 
with market participants.\1101\ The Commission recognizes that these 
data request increases would partially offset the efficiency 
improvements from the reduction in data requests noted above, but the 
Commission preliminarily believes that the Plan would improve 
efficiency by reducing the total number of data requests. The 
Commission, however, acknowledges that this decrease in data requests 
may be partially offset in an increase in the number of investigations 
in general, because enhanced surveillance is likely to detect more 
potentially violative activity that would need to be investigated.
---------------------------------------------------------------------------

    \1099\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.8(b).
    \1100\ This does not preclude regulators determining sooner if 
the actions they are investigating are not violative. Rather, an 
increase in the total number of enforcement investigations due to 
efficiency improvements can result in more later-stage 
investigations even if regulators are better able to conclude some 
investigations earlier.
    \1101\ See Section IV.D.1.c, supra.
---------------------------------------------------------------------------

    Furthermore, the Plan anticipates more robust access to unprocessed 
regulatory data, which could improve the efficiency with which SROs 
could respond to market events where they previously had to submit data 
requests and wait for data validation procedures to be completed before 
accessing data collected by other regulators.\1102\ The Commission 
recognizes that unprocessed data may contain errors that would later be 
fixed.\1103\ The Commission preliminarily believes the benefits of the 
greater timeliness of the unprocessed data may justify the lack of 
validations and corrections in such unprocessed data.\1104\
---------------------------------------------------------------------------

    \1102\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.8(b).
    \1103\ See Section III.B.10, supra.
    \1104\ See Section IV.E.2.c, supra, for an example of benefits 
from regulators accessing uncorrected data on T+1.
---------------------------------------------------------------------------

b. Effects of Certain Costs of the Plan on Efficiency
    The Plan discusses several sources of inefficiency due to costs of 
the Plan that are difficult to quantify, and are transient in nature. 
First, the Plan anticipates that implementation would introduce new 
costs related to data mapping and data dictionary creation.\1105\ 
Second, the Plan discusses needs for expenditures, such as staff time 
for compliance with encryption requirements associated with the 
transmission of PII.\1106\ While the Commission recognizes that these 
are additional activities and costs that the Plan would require, it 
views these as additional costs rather than inefficiencies and, though 
the Commission cannot quantify the magnitude, these costs are likely to 
have relatively minor contributions to overall costs of the Plan 
because they impose technical requirements on systems that industry 
will need to significantly alter to comply with other provisions in the 
Plan.\1107\ Furthermore, the Commission notes that the costs of data 
mapping and encryption requirements are likely to be included in costs 
covered by surveys conducted by the Participants while preparing the 
Plan because these requirements were known publicly at the time the 
surveys were conducted, and are anticipated to be small relative to 
other costs entailed in potentially complying with the Plan if it is 
approved.\1108\
---------------------------------------------------------------------------

    \1105\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.8(b).
    \1106\ See id.
    \1107\ See Section IV.G.2.a, supra.
    \1108\ See Section IV.F.1, supra.
---------------------------------------------------------------------------

    The Plan notes that there could be a market inefficiency effect 
related to the funding proposal for the Plan. For example, the cost 
allocation methodology for the Plan could create disincentives for the 
provision of liquidity, which could impair market quality and increase 
the costs to investors to transact.\1109\ The Plan notes that the 
funding principles set forth in the Plan \1110\ seek to mitigate the 
risk of reduction in market quality resulting from allocation of costs 
from building and operating the Central Repository.\1111\ The 
Commission preliminarily recognizes that negative effects on efficiency 
could result from the CAT Funding Model.\1112\ First, data reporters 
could respond to the Funding Model by taking actions to limit their fee 
payments, such as exiting the market or reducing their activity levels. 
Second, the funding policy of the CAT NMS Plan of aligning fees closely 
with the amounts that are required to cover costs could create 
incentives for the Plan Processor or Operating Committee to propose a 
cost schedule for the CAT that matches a given fee schedule, but is not 
the most efficient cost schedule for meeting the CAT regulatory 
objectives.\1113\
---------------------------------------------------------------------------

    \1109\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.8(b).
    \1110\ See id. at Section 11.2, Appendix C, Section 
B.7(b)(iv)(C).
    \1111\ See id. at Appendix C, Section B.7.(b)(iv)(C).
    \1112\ See id. at Appendix C, Section B.7(b)(v)(B).
    \1113\ Economics research that dates back to Averch, Harvey, and 
Johnson, Leland L. (1962) (``Behavior of the Firm Under Regulatory 
Constraint,'' American Economic Review 52 (5): 1052-1069) 
characterizes an incentive of regulated utilities to inflate their 
costs in order to establish larger rate bases and justify higher 
rates. An opposite effect would arise if the regulated utility were 
unable to justify sufficient fee revenue to pay the fixed cost of 
expanding the base.
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3. Capital Formation
a. Enhanced Investor Protection
    The Commission has examined the potential effects on capital 
formation discussed in the Plan in addition to other potential effects 
on capital formation that the Commission believes could result if the 
Plan is approved. The Commission preliminarily believes that the Plan 
would have a modest positive effect on capital formation.
    The Plan's analysis regarding capital formation concludes that the 
Plan would generally not have a deleterious effect on capital formation 
and could bolster capital formation that could lead to increased 
investor participation in capital markets.\1114\ The Plan's analysis 
provides several reasons why the Plan would not adversely affect 
capital formation. Specifically, it asserts that the Plan would not 
place any undue burden on primary issuances; would not pass along CAT 
related costs to ``investors in a way that would limit their access to 
or participation in capital markets''; and would not discourage market 
participation as a result of data security concerns given the data 
security safeguards outlined in the Plan.\1115\ The Commission 
preliminarily agrees with the rationale of the Plan's analysis, but 
addresses some additional considerations regarding the scope of the 
Plan's effects on capital formation, as well as the channels through 
which these effects could accrue.
---------------------------------------------------------------------------

    \1114\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
C.8(c).
    \1115\ See id.
---------------------------------------------------------------------------

    The Plan's analysis states that the Plan may improve capital 
formation by improving investor confidence in the market due to 
improvements in surveillance. As discussed previously,\1116\ the 
Commission believes that the Plan would provide substantial 
enhancements to investor protection through improvements to 
surveillance, particularly for cross-market trading.\1117\

[[Page 30749]]

As discussed throughout, improved surveillance, as well as other 
regulatory activities, could decrease the rate of violative activity in 
the market, reducing investor losses due to violative activity, to the 
extent that such behavior is not already deterred by current 
systems.\1118\ If improved surveillance leads to expectations of fewer 
losses due to violative activity, this may increase capital formation 
by facilitating a market where investors could be more likely to 
mobilize capital into securities markets.\1119\
---------------------------------------------------------------------------

    \1116\ See Section IV.E.2.c, supra and CAT NMS Plan, supra note 
3, at Appendix C, Section B.7(b)(ii)(B)(1) and (2), B.7(b)(iii)(C).
    \1117\ FINRA currently provides cross-market surveillance, but 
limitations in the data (e.g. reliable cross-market linkages, 
customer identification, parent order identification) limit the 
scope and reliability of this surveillance.
    \1118\ For example, as discussed in Section IV.E.2.c, the Plan 
would allow regulators to more efficiently conduct cross-market and 
cross-product surveillance relative to surveillance using current 
data sources, and the requirement that data be consolidated in a 
single database would assist regulators in detecting activity that 
does not appear clearly violative until data is linked and evaluated 
from multiple venues. To the extent that market participants are 
aware of the current challenges to regulators in performing cross-
market surveillance and aggregating data across venues, and to the 
extent that they believe that their violative behavior is more 
likely to be detected if regulators' ability to perform those 
activities improves, they may reduce or eliminate violative behavior 
if the CAT Plan is approved.
    \1119\ There is evidence in the academic finance literature that 
countries with weaker investor protections, considering both the 
character of rules as well as the quality of enforcement, have 
smaller and narrower capital markets in terms of investor 
participation. See La Porta, R. et al, ``Legal Determinants of 
External Finance,'' Journal of Finance, Vol. 52 No. 3 (1997).
---------------------------------------------------------------------------

    The Commission preliminarily believes there could be additional 
increases in capital formation in the form of improvements in 
allocative efficiency of existing capital within the industry. If 
investors perceive an environment of improved surveillance, they could 
be willing to allocate additional capital to liquidity provision or 
other activities that increase market efficiency. Furthermore, an 
environment of improved surveillance efficiency could result in the 
reduction of capital allocated to violative activities that impose 
costs on other market participants, because these market participants 
may no longer find it possible to engage in such behavior that exposes 
them to regulatory action. In this scenario, this reallocation of 
capital could improve market quality and efficiency even if net capital 
formation changes little. In addition to the potential reallocation of 
capital currently mobilized toward violative activities, investor 
capital that may currently be diverted because of the risk of loss to 
violative activities could also be reallocated should the violative 
activities decrease. If the CAT NMS Plan reduces manipulative quoting 
activities, either through improved detection/enforcement or through 
deterrence of such activities, then investors are less likely to make 
capital allocation decisions in response to manipulative quoting 
activities. In this scenario, because manipulative quoting activities 
have been reduced, the contribution of manipulation to prices has been 
reduced and prices should therefore better reflect fundamentals. It 
would follow that, to the extent that displayed prices better reflect 
fundamentals rather than manipulation, investors could allocate capital 
more efficiently for their purposes. The Commission notes, however, 
that market participants engaging in allowable activity that might risk 
additional regulatory scrutiny under the Plan regime could allocate 
capital to other activities to avoid this scrutiny, because even when 
activity is not violative, interacting with regulators can be costly 
for market participants.\1120\ This reallocation away from allowable 
activity to avoid regulatory interactions could result in capital 
allocations that are less efficient.\1121\
---------------------------------------------------------------------------

    \1120\ See Section IV.F.4.b, supra, for a discussion of the 
potential for the efficiencies in surveillance, examinations, and 
investigations to increase the number of regulatory activities, 
including the number of regulatory activities on conduct that turns 
out not to violate regulations.
    \1121\ The Commission is unable to estimate the magnitude of 
allowable economic activity that does not occur when market 
participants anticipate relatively high costs of demonstrating 
regulatory compliance in the course of normal regulatory 
interactions such as exams and inquiries because this activity is 
not observable. However, Section IV.F.1.c(2) discusses how some 
broker-dealers avoid self-reporting regulatory data because of 
expectations of higher costs to demonstrate compliance, providing an 
example of an allowable activity that is perceived as costly due to 
the risk of compliance costs. See Section IV.F.1.c(2), supra.
---------------------------------------------------------------------------

    The Plan states that the costs from CAT are unlikely to deter 
investor participation in the capital markets.\1122\ The Commission 
notes, however, that the final costs of the Plan and the funding 
mechanism for CAT are not wholly certain at this time; thus, it is the 
Commission's view that there is uncertainty concerning the extent to 
which investors would bear Plan costs and consequently to what extent 
Plan costs could affect investors' allocation of capital. As mentioned 
above in the Costs Section,\1123\ the Commission preliminarily does not 
know whether Plan costs incurred by the industry are likely to be 
passed on to investors. Competition in the market for broker-dealer 
services could mitigate some of these costs, but it may not minimize 
costs passed on to retail investors. Despite these potential costs to 
investors, investors could believe that the additional benefits they 
receive from the potential of a market that is more effectively 
regulated justify any additional costs they pay to access capital 
markets.
---------------------------------------------------------------------------

    \1122\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.8(c).
    \1123\ See Section IV.F.2, supra.
---------------------------------------------------------------------------

b. Data Security
    The Commission preliminarily agrees with the Plan's assessment that 
data security concerns are unlikely to materially affect capital 
formation. In its discussion of capital formation, the Plan recognizes 
that data security concerns could potentially impact capital formation 
through market participants' perception that sensitive proprietary data 
might be vulnerable in case of a data breach at the Central Repository. 
The Plan's analysis discusses the security measures that are required 
by Rule 613 and the manner in which they have been implemented in the 
Plan. It concludes that these security measures are sufficient and that 
it is unlikely market participants would reduce their participation in 
markets in a manner that would affect capital formation.
    As noted above, the Commission agrees that concerns regarding data 
security are unlikely to substantially affect capital formation, but 
that some uncertainty about the risks exist because of the variations 
in the potential security solutions and their resulting 
effectiveness.\1124\ The Commission notes that the consequences of a 
data breach, nonetheless, could be quite severe. It is inherently 
difficult to form reliable economic expectations given that security 
breaches of the form that could occur under the CAT NMS Plan occur 
infrequently. Therefore, as described in Section IV.F above, even if a 
CAT Data security breach is unlikely with the safeguards required by 
the Plan, the scope of the potential consequences of such a breach in 
the event that one should occur is important to evaluating the risk to 
capital formation.\1125\
---------------------------------------------------------------------------

    \1124\ See Section IV.F.4.a, supra.
    \1125\ See id. for a more thorough discussion of the costs and 
risks of security breaches of the Central Repository.
---------------------------------------------------------------------------

    A data breach could also substantially harm market participants by 
exposing proprietary information, such as a proprietary trading 
strategy or the existence of a significant business relationship with 
either a counterparty or client. The Commission notes, however, that 
broker-dealers already bear such risks in transmitting regulatory data 
to SROs. The Commission preliminarily believes that the marginal 
increase in the risks to broker-dealers associated with a data breach 
would be unlikely to deter

[[Page 30750]]

broker-dealers from participating in markets.
    A data breach could potentially reveal PII of investors. To address 
the potential for harm to the investing public and the health of 
capital markets through such a breach, the Plan has enhanced 
requirements for security around PII. Those requirements include a 
separate PII-specific workflow, PII-specific authentication and access 
control, separate storage of PII data, and a full audit trail of PII 
access.\1126\ The Commission preliminarily believes that these risks 
will not materially affect investors' willingness to participate in 
markets because they already face these risks with PII shared with 
broker-dealers, though not in one centralized location.\1127\ However, 
the risk and costs of a security breach would be only one factor that 
market participants would consider in deciding whether to participate 
in the market. Another consideration would be investor protection, 
which the Commission preliminarily believes would increase under the 
CAT NMS Plan.\1128\
---------------------------------------------------------------------------

    \1126\ See CAT NMS Plan, supra note 3, at Appendix D, Sections 
4.1.1-4.1.6. The Commission notes that there is considerable 
diversity in the approaches proposed by the Bidders. Further, the 
Participants chose to give the Plan Processor flexibility on many 
implementation details and the Plan states the requirements as a set 
of minimum standards. Consequently, the final PII security solution 
cannot be evaluated--only the minimum standards specified in the 
Plan.
    \1127\ See Section IV.F.2, supra.
    \1128\ See Section IV.E.2, supra.
---------------------------------------------------------------------------

4. Related Considerations Affecting Competition, Efficiency and Capital 
Formation
    The Commission recognizes that the Plan's likely effects on 
competition, efficiency and capital formation are dependent to some 
extent on the performance and decisions of the Plan Processor and the 
Operating Committee in implementing the Plan, and thus there is 
necessarily some uncertainty in the Commission's analysis. Nonetheless, 
the Commission believes that the Plan contains certain governance 
provisions, as well as provisions relating to the selection and removal 
of the Plan Processor, that mitigate this uncertainty by promoting 
decision-making that could, on balance, have positive effects on 
competition, efficiency, and capital formation.
a. The Efficiency of Plan Decision-Making
    As noted in several places above,\1129\ future decisions of the 
Operating Committee could significantly alter the economic effects of 
the Plan. As a result, this economic analysis also considered whether 
the process by which the Operating Committee would make such decisions 
promotes efficiency. According to the Plan, the inability of the 
Operating Committee to act in a timely manner could create consequences 
for efficiency, competition, and capital formation.\1130\ On the other 
hand, the Commission notes that consequences also could arise if the 
Operating Committee makes decisions so quickly that it does not 
consider all relevant information. This Section analyzes whether the 
decision-making processes in the Plan promote timely decisions that 
consider all relevant information of value. While the Plan considers 
the potential for inefficiencies in the decision-making process, the 
Commission preliminarily believes that certain governance provisions in 
the Plan could create some inefficiencies in the decision-making 
process, but that these inefficiencies are limited or exist to promote 
better decision-making. The Plan discusses two areas where the proposed 
governance structure impacts the efficiency of the decision-making 
process: (1) Voting protocols and (2) the role of industry 
advisers.\1131\ The Commission also considered the efficiency 
implications of the level of detail included in the Plan and the 
scalability of the Plan.
---------------------------------------------------------------------------

    \1129\ See, e.g., Section IV.C.2, supra.
    \1130\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.8(d).
    \1131\ See id.
---------------------------------------------------------------------------

    The Plan specified three types of voting protocols and determines 
when each protocol applies.\1132\ The Plan requires unanimous voting in 
only three circumstances: A decision to obligate Participants to make a 
loan or capital contribution, a decision to dissolve the Company, and a 
decision to take an action by written consent instead of a 
meeting.\1133\ Further, the Plan requires supermajority voting in 
instances considered by the Participants to have a direct and 
significant impact on the functioning, management, and financing of the 
CAT System,\1134\ such as selection and removal of the Plan Processor 
and key officers, approving the initial Technical Specifications, 
approving Material Amendments to the Technical Specifications proposed 
by the Plan Processor, and approving direct amendments to the Technical 
Specifications proposed by the Operating Committee.\1135\ The Plan 
considers other matters as routine matters that arise in the ordinary 
course of business and would be subject to majority voting. As a 
practical matter, Majority Vote is the default standard for decisions 
other than those requiring supermajority or unanimous voting.
---------------------------------------------------------------------------

    \1132\ See Section III.A.3.a(3), supra, for a discussion of the 
management of the Company, including the definitions of the voting 
protocols and details on their application.
    \1133\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
D.11(b), Voting Criteria of the Operating Committee.
    \1134\ See id. at Appendix C, Section D.11(b).
    \1135\ See id. at Appendix C, Section D.11(b). The Plan also 
requires supermajority voting on matters outside the ordinary course 
of business, such as modifications to a Material Contract, incurring 
debt, making distributions or tax elections, or changing the fee 
schedules.
---------------------------------------------------------------------------

    The Plan balanced the efficiency of the decision-making process 
against the value of considering minority and dissenting opinions in 
proposing these voting protocols.\1136\ In particular, the Plan 
recognizes that some voting protocols might impede the effective 
administration of the CAT System.\1137\ From a mechanical perspective, 
voting protocols determine a threshold for a passing vote. Unanimity 
requires a threshold of 100% yes votes while majority voting requires a 
threshold of more than 50% yes votes and Supermajority requires two-
thirds or more. The Plan explains that too-high a threshold for 
decision-making, such as may be the case in applying unanimity to all 
voting matters, could limit the ability of the Operating Committee to 
adopt broadly agreed upon provisions.\1138\ For example, in the 
extreme, requiring unanimity in voting could result in one dissenting 
opinion holding up the entire decision-making process. Conversely, the 
Plan explains that a threshold that is set too low might limit the 
opportunities for the consideration of dissenting or minority opinions 
and alternative approaches.\1139\ For example, if voting thresholds 
were too low, a set of Participants could potentially adopt provisions 
that might provide them a competitive advantage over other 
Participants.
---------------------------------------------------------------------------

    \1136\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.8(d).
    \1137\ See id.
    \1138\ See id.
    \1139\ See id.
---------------------------------------------------------------------------

    The Commission preliminarily agrees with the discussion on the need 
to balance efficiency in the voting protocols in the Plan. The 
Commission notes that the speed and ability to make a decision are key 
components of whether the Plan promotes efficiency in its operations. 
High-vote thresholds may result in an increase in the effort needed to 
obtain enough votes to make a decision. Further, in addition to the 
drawn out discussions necessary to obtain a unanimous vote, a unanimous

[[Page 30751]]

vote might also require compromises that reduce the efficiency of the 
decision-making process. This could be particularly costly in 
situations in which the Operating Committee must make a decision by a 
particular date. It could also result in inaction for decisions related 
to making discretionary changes that could improve data qualities, such 
as updates, if the Participants disagree among the various 
alternatives.
    Furthermore, while the decision-making processes with a very low 
voting threshold would be faster, the resulting decisions might not 
consider all relevant information.\1140\ As a result, the Commission 
preliminarily agrees that the inefficiencies in the voting protocols in 
the Plan are limited enough to strike a balance between the 
inefficiencies of the decision-making process and the quality of the 
decisions.
---------------------------------------------------------------------------

    \1140\ See Section IV.E.3.d, supra, for a discussion of how 
certain governance provisions could help promote better decision-
making by the relevant parties.
---------------------------------------------------------------------------

    The Plan also discusses the role of industry representation as part 
of the governance structure.\1141\ Section 4.13 of the Plan requires an 
Advisory Committee that contains twelve members, including 
representatives from 7 types of broker-dealers, 2 institutional 
investors, and 3 individuals.\1142\ In addition, the Plan says that the 
Advisory Committee is ``intended to support the Operating Committee and 
to promote continuing efficiency in meeting the objective of the CAT.'' 
\1143\ The Plan also indicates that it is important to include industry 
representation to assure that all affected parties have representation.
---------------------------------------------------------------------------

    \1141\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.8(d).
    \1142\ See id. at Section 4.13 (Advisory Committee).
    \1143\ See id. at Appendix C, Section B.8(d).
---------------------------------------------------------------------------

    The Commission preliminarily agrees with the discussion in the Plan 
that including industry representation might result in a more 
efficiently designed CAT, but adds that an Advisory Committee also adds 
operational inefficiencies. As discussed above, the Commission 
preliminarily believes that an Advisory Committee could add more 
diverse viewpoints to the debates surrounding Operating Committee 
decisions and thus reduce the risk that members of the Operating 
Committee could make decisions without first obtaining a full 
understanding of the underlying facts or the likely impact of its 
decisions.\1144\ The Commission also recognizes, however, that 
including an Advisory Committee in the decision-making process might 
add complexity to the process and decisions might require more time 
relative to allowing the Operating Committee to make decisions without 
the input of an Advisory Committee. The inclusion of an Advisory 
Committee could thereby potentially adversely affect the efficiency of 
the Plan's operation. In general, the Commission preliminarily believes 
that as long as the Advisory Committee adds sufficiently useful 
information, the benefits from the Advisory Committee would justify any 
operational inefficiencies from the inclusion of the Advisory 
Committee.
---------------------------------------------------------------------------

    \1144\ See Section IV.E.3.d(2)B, supra.
---------------------------------------------------------------------------

    The Commission considered an additional source of potential 
efficiencies in the decision-making process. The Plan specifies minimum 
standards for particular provisions or solutions in Appendix D of the 
Plan instead of specifying the solutions themselves in the Plan.\1145\ 
While this creates uncertainty in the costs and benefits of the Plan 
and reduces the transparency for the bidders, the Commission recognizes 
that decisions to not specify certain solutions in the Plan could 
promote efficiency in the decision-making process of the Operating 
Committee. The Operating Committee and/or Selection Committee would 
effectively decide upon the unspecified details when selecting the Plan 
Processor and when approving the Technical Specifications.\1146\ As 
such, certain technical details may not appear in the Plan and may not 
be subject to Commission approval or, potentially, to public comment. 
Instead, the Operating Committee could implement such decisions much 
more quickly and at a potentially lower cost. The Commission believes 
that the Commission and public review process could add value to the 
decision-making process, particularly in assuring that the decisions 
consider costs and benefits. However, a notice and comment process for 
certain technical changes could be cumbersome and time-consuming, and 
may not therefore be justified in the context of certain technical 
issues. The Plan therefore may be more agile and efficient in its 
ability to upgrade and improve systems quickly. On the other hand, the 
cost of this efficiency comes in the form of the significant 
uncertainties surrounding the economic effects of the Plan during the 
approval process.
---------------------------------------------------------------------------

    \1145\ For example, the Plan provides minimum standards for 
regulator access to CAT Data but does not propose any particular 
method for regulatory access. Nor does the Plan specify whether the 
regulators would have work space on servers at the Central 
Repository or whether regulators would have to download the results 
of every query before being able to process such results.
    \1146\ For example, the Selection Committee would decide on the 
details of regulator access in conjunction with selecting the Plan 
Processor or in subsequent negotiations with the selected Plan 
Processor.
---------------------------------------------------------------------------

    Provisions of the Plan should also promote efficiently implementing 
expansions to the CAT Data. Appendix C of the Plan notes that the Plan 
Processor must ensure that the Central Repository's technical 
infrastructure is scalable and adaptable.\1147\ These provisions should 
reduce the costs and time needed for expansions to the Central 
Repository.
---------------------------------------------------------------------------

    \1147\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.5(a).
---------------------------------------------------------------------------

b. Selection and Removal of the Plan Processor
    The CAT NMS Plan uses a request for proposal (``RFP'') to select 
the Plan Processor that would design, build, and operate the Central 
Repository. The winning bidder becomes the sole supplier of the 
operation of the Central Repository. The Commission preliminarily 
believes this is necessary to achieve the benefits of a single 
consolidated source of regulatory data.
    The competitiveness of the selection process influences the 
ultimate economic effect of the Plan because those effects depend in 
large part on the efficiency and effectiveness of the Plan Processor. 
In particular, many of the details of the Plan would be determined 
either by the winning bid or in negotiations with the Plan Processor 
after selection. The Plan Processor exercises control over the future 
costs of operating and maintaining the Central Repository in this 
context and the Plan Processor chooses its performance level, subject 
to the minimum standards in the Plan and with oversight from the 
Operating Committee.
    Given the effects associated with the selection process for the 
Plan Processor, the Commission considered whether the Plan promotes a 
competitive process and whether the Plan contains provisions that would 
create incentives for the chosen Plan Processor to set costs and 
performance competitively. As explained below, the Commission 
preliminarily believes that the selection process generally promotes 
competition but that there are also a few potential limitations on 
competition. Moreover, the Commission recognizes that a competitive 
bidding process does not necessarily mean that the selected bidder 
would behave competitively after being selected as the Plan 
Processor.\1148\

[[Page 30752]]

But the Commission preliminarily believes that the Plan could control 
the costs of the Central Repository and the performance of the Plan 
Processor if the Plan included sufficient competitive incentives for 
the selected Plan Processor. While the Commission preliminarily 
believes that threat of replacement of the Plan Processor could 
incentivize them to set costs and performance competitively, the high 
cost of replacement could limit these incentives.\1149\
---------------------------------------------------------------------------

    \1148\ See Goldfine and Vorrasi, ``The Fall of the Kodak 
Aftermarket Doctrine: Dying A Slow Death in the Lower Courts,'' 74 
Antitrust Law Journal No. 1 (2004), p. 209 (stating that 
``competition in the primary market, as a matter of law, does not 
necessarily preclude the possibility of market power (and 
anticompetitive conduct) in the aftermarkets for parts and 
services,'' and citing Eastman Kodak Co. v. Image Technical 
Services, Inc., 504 U.S. 451 (1992)). Economic theories of the 
relation between primary markets and aftermarket are the focus of 
other literature as well; see infra note 1149. (In the context of 
the Plan, the ``primary market'' would be the initial selection of 
the Plan Processor while in the ``aftermarket,'' the selected Plan 
Processor would supply a performance level for the given revenues 
received from the Company.)
    \1149\ Under the theory of contestable markets, it is possible 
for the sole supplier of a service to behave as if there multiple 
suppliers, and thus not exercise monopoly power. Necessary 
conditions include the absence of entry and exit costs. William J. 
Baumol, John C. Panzar, Robert D. Willig (1982), Contestable Markets 
and the Theory of Industry Structure. When the conditions needed to 
support contestable markets are not met, the presence of alternative 
suppliers may not be sufficient to prevent the costly exercise of 
monopoly power, post-selection. For example, if the supplier cannot 
make complete and binding commitments to the price and quality of 
its post-selection services, and the buyer becomes locked into the 
sole supplier (e.g., due to switching costs or other sources of 
friction), a competitive selection process may lead to monopoly 
outcomes, post-selection; see, e.g., Carl Shapiro, 1995, 
``Aftermarkets and Consumer Welfare: Making Sense of Kodak,'' 
Antitrust Law Journal, and Borenstein, Severin, Jeffrey K. Mackie-
Mason, and Janet S. Netz, 1995, Antitrust Policy in Aftermarkets, 
Antitrust Law Journal 63: 455-82. For a recent survey of alternative 
theories, see section 3.1, Dennis W. Carlton and Michael Waldman, 
2014. ``Robert Bork's Contributions to Antitrust Perspectives on 
Tying Behavior,'' Journal of Law & Economics.
---------------------------------------------------------------------------

(1) Competitiveness of the Plan Processor Selection Process
    The Commission believes that two elements determine the 
competitiveness of the bidding process. The first relates to the voting 
process and the second relates to the degree of transparency in the 
bidding process. The Commission preliminarily believes that the Plan 
provisions relevant to these two factors could promote competition in 
the bidding process and limit the risk that selection of the Plan 
Processor would be affected by a conflict of interest, thereby 
promoting better decision-making.
    The CAT NMS Plan outlines a bidding process whereby a Selection 
Committee votes on bidders during several rounds of voting that each 
narrow the potential bidders until one bidder is selected.\1150\ 
Pursuant to the Plan, the bidders compete to be selected by proposing 
solutions to comply with Rule 613 and documenting the anticipated costs 
of doing so. The Plan also contains provisions for revising Bids if the 
Commission approves the Plan.\1151\
---------------------------------------------------------------------------

    \1150\ See CAT NMS Plan, supra note 3, at Section 5.2 (Bid 
Evaluation and Initial Plan Processor Selection).
    \1151\ Id. at Section 5.2(e).
---------------------------------------------------------------------------

    The Participants received 31 Intent to Bid forms during the RFP 
process; 13 of the potential bidders withdrew before January 30, 2014; 
the Participants reported receiving 10 Bids by April 2, 2014.\1152\ Six 
of these Bidders were shortlisted through the selection process in July 
2014, including one SRO that is also a Bidder. In November 2015, the 
shortlist was further narrowed to three Bidders.\1153\
---------------------------------------------------------------------------

    \1152\ For details on the progression of the CAT RFP process, 
see RFP Process, SEC Rule 613: Consolidated Audit Trail (CAT), 
available at http://catnmsplan.com/process/ (last visited November 
19, 2015).
    \1153\ See supra note 35.
---------------------------------------------------------------------------

    In considering how competitive the voting process is, the 
Commission has considered whether conflicts of interest could limit 
competition in the bidding process through the proposed participation 
of a bidder representative on the Selection Committee. The Plan 
includes provisions that mitigate this conflict but that have not 
eliminated it completely. In particular, the Plan requires recusal of 
an SRO from any selection round if that SRO or its affiliate has 
submitted a bid--or is included as a material subcontractor as part of 
a bid--that is still under consideration in such round.\1154\ 
Similarly, the Plan creates information barriers between the Staff at 
the SRO selecting the bidder and the Staff undertaking the 
bidding.\1155\ These provisions promote a level playing field for all 
bidders because the SRO bidder does not know any more than a non-SRO 
bidder and so has no informational advantage in submitting a bid that 
the Selection Committee may find favorable. Further, the information 
barriers prevent those working on the bid from attempting to persuade 
members of the Selection Committee toward their bid in a way that other 
bidders cannot. The Commission recognizes, however, that there is a 
residual risk in having an SRO among the bidders; it is possible that 
voting Participants would be biased for or against that SRO either 
because they compete with that SRO in another market (and could gain a 
competitive advantage in that market by acting as Plan Processor) or 
because of repeated interactions with that SRO.
---------------------------------------------------------------------------

    \1154\ See CAT NMS Plan, supra note 3, at Section 4.3(d), at 
Section 5.1(b).
    \1155\ See id. at Section 5.1(d).
---------------------------------------------------------------------------

    The Commission also recognizes that, to the extent the Operating 
Committee has specific preferred solutions as to how the Plan should be 
implemented, the degree to which the Committee is transparent about 
those preferences in the bidding process would affect the 
competitiveness of that process. For example, if the Commission were to 
approve the Plan and bidders were thereafter given the opportunity to 
revise their bids, the Operating Committee could promote 
competitiveness in the bidding process by outlining its preferences. 
Transparency into the Operating Committee's views regarding potential 
optimal solutions could assist a bidder in revising its bid to inform 
how that bidder could supply those optimal solutions, and the Selection 
Committee could then compare all bidders on those particular solutions. 
To the extent that the Operating Committee has strong preferences 
toward particular solutions but did not specify those preferences 
directly in the Plan, the bidder may not know that it could improve its 
chances of winning the bid by proposing a different solution and the 
Selection Committee would not know whether the bidder is capable of 
delivering the preferred solution more efficiently than the other 
bidders. On the other hand, the Commission notes that specifying a 
preferred solution also has the potential to discourage bidders from 
competing on innovation by proposing novel approaches that may deliver 
superior outcomes.
    The Commission has no reason to believe that the Operating 
Committee has preferred solutions beyond what is in the Plan that would 
significantly impact the competitiveness of the Plan Processor 
selection process. Indeed, Appendix D of the Plan details numerous 
minimum standards not included in the RFP. In addition, the Plan also 
provides details on the range of solutions proposed by bidders and why 
the Operating Committee may not have a preference and therefore did not 
select a particular solution. This provides transparency to the bidders 
on the criteria the Selection Committee may use to compare bidders.
(2) Competitive Incentives of the Selected Plan Processor
    The Plan could create competitive incentives for the selected Plan 
Processor by detailing strong requirements for the Plan Processor and 
providing an efficient mechanism to

[[Page 30753]]

remove the selected Plan Processor and introducing an alternative Plan 
Processor in the event of underperformance. As described below, the 
Commission preliminarily believes that the Plan provides the selected 
Plan Processor with competitive incentives because the Plan contains 
defined procedures for monitoring and removing the Plan Processor for 
failure to perform functions adequately or otherwise. However, the ease 
with which the Operating Committee could remove the Plan Processor and 
the costs of switching to another Plan Processor could limit these 
competitive incentives.
    The Plan contains several provisions that would allow the Operating 
Committee to remove the Plan Processor.\1156\ By Supermajority Vote, 
the Operating Committee could remove the Plan Processor for any reason. 
The Operating Committee may, by Majority Vote, remove the Plan 
Processor if it determines that the Plan Processor has failed to 
perform its functions ``in a reasonably acceptable manner'' or if the 
Plan Processor's expenses ``have become excessive or are not 
justified.'' The consideration of such poor performance or excessive 
expenses would include (1) responsiveness to requests for technological 
changes or enhancements, (2) results of assessments performed pursuant 
to Section 6.6 of the Plan, (3) staying up-to-date on reliability and 
security of operations, (4) compliance with the requirements of 
Appendix D, and (5) other factors the Operating Committee may determine 
to be appropriate.
---------------------------------------------------------------------------

    \1156\ See CAT NMS Plan, supra note 3, at Section 6.1(q), (r), 
(s).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the ability of the 
Operating Committee to remove the Plan Processor for poor performance 
with only a Majority Vote incentivizes the Plan Processor to perform 
well enough to avoid being removed. The Commission further 
preliminarily believes that the performance of the Plan Processor would 
depend significantly on strong oversight by the Operating 
Committee.\1157\
---------------------------------------------------------------------------

    \1157\ See Section IV.E.3.d, supra, for a discussion of the 
incentives of the Operating Committee in overseeing the Plan 
Processor.
---------------------------------------------------------------------------

    The Commission recognizes that the effort required to remove a Plan 
Processor could be significant, which would limit the incentives of the 
Plan Processor to perform well. To subject a removal to a Majority 
Vote, the Operating Committee would presumably need to demonstrate the 
Plan Processor's performance and determine that it was not ``reasonably 
acceptable.'' If not, the removal would be subject to Supermajority 
Vote, which could also take significant effort and a removal would be 
less likely to pass.
    In addition, significant switching costs could influence whether 
removing a Plan Processor despite poor performance makes economic 
sense. In other words, the Operating Committee could wait for 
significant performance issues before initiating a vote to remove the 
Plan Processor. Additionally, before removing a Plan Processor, the 
Operating Committee would need to select a new Plan Processor. This 
would likely be a lengthy process taking significant time and effort by 
the Operating Committee. Moreover, switching Plan Processors could 
entail a complete rebuild of the Central Repository and significant 
implementation costs for CAT Reporters and Participants, potentially 
amounting to the initial implementation costs of the Plan. These costs 
would be higher if the Plan Processor's solutions include proprietary 
technologies that no other potential replacement (competitor) could 
supply. The costs would be lower if the new Plan Processor could 
implement the existing Technical Specifications. The benefits of 
switching could also depend on the benefits from technological 
advancements that these competitors could supply. In light of these 
costs, the competitive incentives of the Plan Processor to maintain top 
performance could be limited. Specifically, the Plan Processor may only 
need to perform well enough to keep the inefficiencies associated with 
their performance from exceeding the cost to switch to another Plan 
Processor. Despite the limitations on competitive incentives due to 
switching costs, however, the Commission preliminarily believes that 
the threat of replacement still provides an incentive to stay 
relatively current on technology advancements to avoid falling 
significantly behind potential competitors.
5. Request for Comment on Efficiency, Competition, and Capital 
Formation
    The Commission requests comment on all aspects of the discussion of 
the effects of the CAT NMS Plan on efficiency, competition, and capital 
formation. In particular, the Commission seeks responses to the 
following questions:
    347. The Participants state in the Plan that they believe the Plan 
would avoid disincentives such as placing an inappropriate burden on 
competition in the U.S. securities markets. In its analysis, the 
Commission concludes that competition is unlikely to be harmed to a 
degree that would affect investors. Do Commenters agree with the 
conclusions discussed in the Plan? Why or why not? Do Commenters agree 
with the Commission's conclusion regarding the Plan's impact on 
competition? Why or why not?
    348. Do Commenters agree with the Commission's characterization of 
the relevant markets that the CAT NMS Plan affect? Why or why not? Do 
Commenters agree with the identified level of competition in each of 
the relevant markets in the Commission's analysis? Why or why not?
    349. Do Commenters agree with the Commission's discussion of the 
Baseline for the market for trading services? Why or why not?
    350. Do Commenters agree with the Commission's analysis of 
competition in the market for trading services under the Plan? Why or 
why not?
    351. Do Commenters agree with the Commission's analysis of effects 
of the Plan's funding model on competition? Why or why not? Would the 
funding model as outlined in the Plan affect competition in the market 
for trading services between exchanges and ATSs? If so, how? Do 
Commenters agree with the Commission's analysis of the effects on 
competition of the Plan's allocation of CAT fees across market 
participants? Why or why not? Would the Participation Fee outlined in 
the Plan serve as a barrier to entry for ATSs that might otherwise 
register as exchanges? Why or why not?
    352. Do Commenters believe that the allocation of voting rights 
among the Participants may serve to affect competition between 
Participants that operate options exchanges and those that do not? Why? 
Do governance provisions outlined in the Plan provide controls that 
could prevent burdens on competition due to the allocation of voting 
rights among Participants? If not, are there controls that could 
achieve this?
    353. Do Commenters believe that the allocation of voting rights 
among the Participants may serve to affect competition between 
exchanges and ATSs in the market for trading services? Why or why not?
    354. Do Commenters agree with the Commission's analysis of the 
effects on competition of costs of compliance with the Plan? Why or why 
not?
    355. Do Commenters agree with the Commission's analysis of the 
effects on competition of the Plan's enhanced surveillance and 
deterrence? Why or why not?
    356. Do Commenters agree with the Commission's analysis of the 
Baseline

[[Page 30754]]

for competition in the market for broker-dealer services? Why or why 
not?
    357. Do Commenters agree with the Commission's analysis of the 
effects on competition in the market for broker-dealer services of the 
Plan? Why or why not? Are these effects different for smaller broker-
dealers? How? How significant are these impacts?
    358. Do Commenters agree with the Commission's analysis of the 
competition to be Plan Processor? Why or why not?
    359. Do Commenters believe that any elements of the CAT NMS Plan 
may affect competition among the bidders? Do Commenters believe that 
any decisions by the Operating Committee that are allowable or likely 
under the proposed Plan may affect competition among the bidders in the 
market to be Plan Processor? If so, how would these competitive 
dynamics affect CAT as outlined in the Plan?
    360. Do Commenters agree with the Commission's analysis of 
competition in the market to be Plan Processor post-selection? Why or 
why not?
    361. Do Commenters agree with the Commission's analysis of the 
Baseline for competition in the market for regulatory services? Why or 
why not?
    362. Do Commenters agree with the Commission's analysis of 
competition in the market for regulatory services of the Plan? Why or 
why not?
    363. Do Commenters agree with the Commission's analysis of the 
Baseline for competition in the market for data reporting services? Why 
or why not? Do Commenters believe that capacity constraints in this 
market may affect broker-dealers' ability to comply with data reporting 
requirements under the Plan?
    364. Do Commenters agree with the Commission's analysis of 
competition in the market for data reporting services under the Plan? 
Why or why not?
    365. If some or all of the Participants decide to share the Raw 
Data they collect pursuant to the CAT NMS Plan and use the combined 
data for commercial purposes, how do Commenters believe that might 
affect competition in the markets described above?
    366. In the Plan, the Participants state that they believe the Plan 
would have a net positive effect on efficiency. The Commission's 
analysis states that the Commission preliminarily believes the Plan 
would have a significant positive effect on efficiency. Do Commenters 
agree with the conclusions stated in the Plan? Why or why not? Do 
Commenters agree with the Commission's analysis? Why or why not?
    367. Do Commenters agree that costs related to the Plan's 
requirements for data mapping, data dictionary creation, and encryption 
associated with the transmission of PII would not significantly affect 
efficiency? Why or why not?
    368. Do Commenters agree with the Commission's analysis of the 
Plan's effects on the efficiency of market regulation and oversight? 
Why or why not?
    369. Do Commenters agree with the Commission's analysis of the 
Plan's effects on market efficiency due to reductions in violative 
behavior? Why or why not?
    370. Do Commenters agree with the Commission's analysis of the 
Plan's effect on efficiency related to reductions in ad hoc data 
requests from regulators? Why or why not?
    371. Do Commenters agree with the Commission's analysis of the 
Plan's effect on efficiency due to reductions in duplicative reporting 
systems? Why or why not?
    372. Do Commenters believe that the period of duplicative reporting 
that would precede the retirement of certain current, anticipated to be 
retired, regulatory reporting systems would significantly affect 
efficiency? Why or why not?
    373. Do Commenters agree with the Commission's analysis of 
inefficiencies related to the funding model? Why or why not?
    374. Do Commenters agree with the Commission's analysis of the 
likelihood of CAT fees being passed on to investors under the Plan? Why 
or why not?
    375. Do Commenters agree with the Commission's analysis of the 
efficiency of Plan operations? Why or why not?
    376. Do Commenters agree with the Commission's analysis of the 
effects of voting thresholds for Operating Committee decisions on 
efficiency? Why or why not?
    377. Do Commenters agree with the Commission's analysis of the 
Advisory Committee's effect on efficiency under the Plan? Why or why 
not?
    378. Do Commenters agree with the Commission's analysis of the 
effects on efficiency of the Participants' decision to specify or not 
specify certain aspects of CAT in the RFP? Why or why not?
    379. Do Commenters believe that the CAT NMS Plan would impact 
investor confidence? If so, how? Do investors currently lack confidence 
because of the current state of regulatory data? Would the expected 
improvements to investor protection result in increased investor 
confidence? Please explain. What would be the expected effects of 
changes in investor confidence on allocative efficiency and capital 
formation? What would be the magnitude of the economic effects from 
expected changes to investor confidence? Please provide analysis.
    380. The Plan states that the Participants believe that the Plan 
would have no deleterious effect on capital formation. Do Commenters 
agree with the Participants' conclusions stated in the Plan? Do 
Commenters agree with the Commission's preliminary belief that the Plan 
would not have a deleterious effect on capital formation? Why or why 
not?
    381. Do Commenters agree with the Commission's analysis of the 
Plan's effects on capital formation due to enhanced market surveillance 
and regulatory activities? Why or why not?
    382. Do Commenters agree with the Commission's analysis of effects 
on capital formation due to data security provisions of the Plan? Why 
or why not?

H. Alternatives

    As a part of its economic analysis, the Commission is considering 
and soliciting comment on alternatives to certain approaches or 
elements of the CAT NMS Plan. The Commission analyzes alternatives that 
could have a direct and significant impact on costs or benefits 
deriving from at least one of the four data qualities discussed above: 
accuracy, completeness, accessibility, and timeliness. While the 
discussed alternatives are not the only alternatives that could 
significantly impact costs, benefits, or data quality, they are an 
attempt to identify reasonable options. Each has the potential to alter 
the Commission's preliminary conclusions regarding the economic effects 
of the CAT NMS Plan.
    The analysis of alternatives is divided into three categories. 
First, the Commission analyzes alternatives to the approaches the 
Exemption Order permitted the Participants to include in the 
Plan.\1158\ As noted in the Exemption Order, the Commission was 
persuaded to grant exemptive relief to provide flexibility such that 
the proposed approaches described in the Exemption Request can be 
included in the CAT NMS Plan and subject to notice and comment.\1159\ 
Second, the Commission analyzes alternatives to certain specific 
approaches in the CAT NMS Plan, including alternative approaches to 
clock synchronization, time stamps, Error Rates, error correction 
timelines, the funding model, listing exchange symbology, data 
accessibility standards, and the intake capacity levels. Third,

[[Page 30755]]

the Commission analyzes alternatives to the scope of certain specific 
elements of the Plan. Specifically, the Commission analyzes the impact 
of changing the scope of the CAT to exclude certain data fields. The 
Commission also analyzes alternatives to exclude OTC Equity Securities 
and the requirement to periodically refresh all customer information. 
Finally, the Commission solicits comment on the broad alternative of 
modifying OATS and/or another existing system to meet the requirements 
of Rule 613 instead of approving the Plan.
---------------------------------------------------------------------------

    \1158\ See Exemption Order, supra note 18.
    \1159\ Id.
---------------------------------------------------------------------------

1. Alternatives to the Approaches the Exemption Order Permitted To Be 
Included in the Plan
    The Commission is soliciting additional comment on alternatives to 
the approaches the Exemption Order permitted the SROs to include in the 
CAT NMS Plan.\1160\ Specifically, the Commission is soliciting comment 
on how the following alternatives (the ``Rule 613 approach''), 
described in further detail below, would affect the costs and benefits 
of the CAT: (a) Requiring both Options Market Makers and Options 
Exchanges to report Options Market Maker quotations to the Central 
Repository, (b) requiring CAT Reporters to report a Customer-ID for 
each Customer upon the original receipt or origination of an order, (c) 
requiring CAT Reporters to report a universal CAT-Reporter-ID to the 
Central Repository for orders and certain Reportable Events, (d) 
requiring the reporting of the account number for any subaccount to 
which an execution is allocated, and (e) requiring that Manual Order 
Events be reported with a time stamp granularity of one millisecond.
---------------------------------------------------------------------------

    \1160\ Id.
---------------------------------------------------------------------------

a. Options Market Maker Quotes
    The Commission is soliciting comment on how an alternative 
approach--the Rule 613 approach--to the reporting of Options Market 
Maker quotations might impact the costs and benefits of the Plan. Rule 
613(c)(7) provides that the CAT NMS Plan must require each national 
securities exchange, national securities association, and any member of 
such exchange or association to record and electronically report to the 
Central Repository details for each order and each Reportable Event, 
including the routing and modification or cancellation of an 
order.\1161\ Rule 613(j)(8) defines ``order'' to include ``any bid or 
offer'' so that the details for each Options Market Maker quotation 
must be reported to the Central Repository by both the Options Market 
Maker and the exchange to which it routes its quote.\1162\ The SROs 
requested an exemption from Rules 613(c)(7)(ii) and (iv) and proposed 
an approach whereby only Options Exchanges--but not Options Market 
Makers--would be required to report information to the Central 
Repository regarding Options Market Maker quotations.\1163\ The 
Commission granted exemptive relief to the SROs to allow the approach 
to collecting Options Market Maker quotations described in the 
Exemption Request to be included in the CAT NMS Plan and subject to 
notice and comment.\1164\
---------------------------------------------------------------------------

    \1161\ See 17 CFR 242.613(c)(7).
    \1162\ See 17 CFR 242.613(j)(8).
    \1163\ See Exemptive Request Letter, supra note 16, at 2-5.
    \1164\ See Exemption Order, supra note 18.
---------------------------------------------------------------------------

    Pursuant to the exemptive relief granted by the Commission, the CAT 
NMS Plan provides that only Options Exchanges--but not Options Market 
Makers--would be required to report information to the Central 
Repository regarding Options Market Maker quotations.\1165\ On the 
other hand, the Rule 613 approach would require that each Options 
Market Maker quotation be reported to the Central Repository by both 
the Options Market Maker and the exchange to which it routes its quote. 
The Commission preliminarily believes that the Rule 613 approach would 
increase certain costs associated with the implementation and operation 
of CAT as compared to the Plan as filed without providing any 
additional material information.
---------------------------------------------------------------------------

    \1165\ See CAT NMS Plan, supra note 3, at Appendix C, Background 
Section.
---------------------------------------------------------------------------

    Under the Rule 613 approach, the reports from the Options Exchanges 
would be virtually identical to the reports coming from the Options 
Market Makers, with the exception that reports from the Options Market 
Makers would indicate the time that the Options Market Maker routes its 
quote, or any modification or cancellation thereof, to the exchange 
(``Quote Sent Time''). However, to ensure that regulators would receive 
all of the information contemplated by Rule 613(c)(7), the CAT NMS Plan 
requires that (1) Options Market Makers report to the relevant Options 
Exchange the Quote Sent Time along with any quotation, or any 
modification or cancellation thereof; and (2) Options Exchanges submit 
the quotation data received from Options Market Makers, including the 
Quote Sent Time, to the Central Repository without change.\1166\ Under 
the CAT NMS Plan, therefore, regulators would have access to all the 
material information in CAT that would be provided under the Rule 613 
approach. As such, the Commission preliminarily does not believe that 
there would be any additional benefits to using the Rule 613 approach.
---------------------------------------------------------------------------

    \1166\ Id. at Section 6.4(d)(iii).
---------------------------------------------------------------------------

    Furthermore, the CAT NMS Plan estimates that the Rule 613 approach 
would increase the amount of records that must be handled by the 
Central Repository by 18 billion records per day, at an additional cost 
of between $2 million and $16 million for data storage and technical 
infrastructure over a five year period.\1167\ A cost survey estimates 
the Rule 613 approach would cost all Options Market Makers between 
$307.6 million and $382 million over five years.\1168\ Under the 
approach taken in the CAT NMS Plan, these costs would be avoided but 
the Options Market Makers surveyed would spend approximately $8.5 
million to send Quote Sent Times to the exchanges and all Options 
Market Makers would spend $36.9M to $76.8M.\1169\ In aggregate, the 
estimates provided suggest that the Rule 613 approach would add between 
$230.80 million and $345.10 million to industry costs over five 
years.\1170\ The Exemption Request also notes that the additional costs 
would be disproportionately borne by smaller broker-dealers relative to 
their market share.\1171\
---------------------------------------------------------------------------

    \1167\ Id. at Appendix C, Section B.7(b)(iv)(B).
    \1168\ See FIF, SIFMA, and Security Traders Association, Cost 
Survey Report on CAT Reporting of Options Quotes by Market Makers 
(November 5, 2013), available at http://www.catnmsplan.com/industryfeedback/p601771.pdf; see also CAT NMS Plan, supra note 3, 
at Appendix C, Section B.7(b)(iv)(B).
    \1169\ See FIF, SIFMA, and Security Traders Association, Cost 
Survey Report on CAT Reporting of Options Quotes by Market Makers 3-
4 (November 5, 2013), available at http://www.catnmsplan.com/industryfeedback/p601771.pdf.
    \1170\ To be conservative, the Commission estimates the lower 
end of the range to be the lower cost to comply with a CAT NMS Plan 
without the exemption minus the higher cost to comply with a CAT NMS 
Plan with the exemption ($230.8M = $307.6 - $76.8M). Likewise, the 
higher end of the range is the higher cost to comply with a CAT NMS 
Plan without the exemption minus the lower cost to comply with a CAT 
NMS Plan with the exemption ($345.1M = $382M - $36.9M).
    \1171\ See Exemptive Request Letter, supra note 16, at 7.
---------------------------------------------------------------------------

    The Commission notes that there are limitations to the cost 
estimation methodology presented in the Exemption Request. These 
limitations include the lack of quantified cost estimates for 
additional indirect cost savings associated with the exemption. 
However, the Commission preliminarily believes that the Rule 613 
approach would increase certain costs associated with the 
implementation and operation of CAT as compared to the Plan as filed

[[Page 30756]]

without providing any additional material information.
b. Customer-ID
    The Commission is soliciting comment on how an alternative 
approach--the Rule 613 approach--to the reporting of customer 
information might impact the costs and benefits of the Plan. Rule 
613(c)(7)(i)(A) requires that for the original receipt or origination 
of an order, a CAT Reporter report the ``Customer-ID(s) for each 
Customer.'' \1172\ ``Customer-ID'' is defined in Rule 613(j)(5) to mean 
``with respect to a customer, a code that uniquely and consistently 
identifies such customer for purposes of providing data to the central 
repository.'' \1173\ Rule 613(c)(8) further requires that ``[a]ll plan 
sponsors and their members shall use the same Customer-ID and CAT-
Reporter-ID for each customer and broker-dealer.'' \1174\ The SROs 
requested an exemption from the requirements in Rule 613(c)(7)(i)(A) 
and Rule 613(c)(8), and proposed an approach whereby each broker-dealer 
would assign a unique Firm Designated ID to each trading account, which 
would be linked to a set of identifying information (the ``Customer 
Information Approach'').\1175\ Using the Firm Designated ID and the 
other information identifying the Customer that would be reported to 
the Central Repository, the Plan Processor would then assign a unique 
Customer-ID to each Customer. Upon original receipt or origination of 
an order, broker-dealers would only be required to report the Firm 
Designated ID on each new order, rather than using the Customer-ID. The 
Commission granted exemptive relief to the SROs to allow the 
alternative approach to Customer-IDs described in the Exemption Request 
to be included in the CAT NMS Plan and subject to notice and 
comment.\1176\
---------------------------------------------------------------------------

    \1172\ See 17 CFR 242.613(c)(7)(i)(A).
    \1173\ See 17 CFR 242.613(j)(5).
    \1174\ See 17 CFR 242.613(c)(8).
    \1175\ See Exemptive Request Letter, supra note 16, at 9. 
Because the Plan Processor would still assign a Customer-ID to each 
Customer under the Customer Information Approach, the SROs did not 
request an exemption from Rule 613(j)(5).
    \1176\ See Exemption Order, supra note 18, at 11863.
---------------------------------------------------------------------------

    Pursuant to the exemptive relief granted by the Commission, the CAT 
NMS Plan provides for the use of the Customer Information 
Approach.\1177\ The Commission is soliciting comment on the Rule 613 
approach, which would require that broker-dealers report Customer 
information using a consistent, unique Customer-ID, as set out in in 
Rule 613(c)(7)(i)(A) and Rule 613(c)(8). The Commission preliminarily 
believes that the Rule 613 approach would increase certain costs 
associated with the implementation and operation of CAT as compared to 
the Customer Information Approach while providing substantially 
identical data.
---------------------------------------------------------------------------

    \1177\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.1(a)(iii).
---------------------------------------------------------------------------

    The Commission also preliminarily believes that the Rule 613 
approach would have no significant impact on the benefits of the CAT 
NMS Plan. The Participants maintain that, under the Rule 613 approach, 
there would be no gains in terms of accuracy or reliability, no effect 
on the ability to link records, and no effect on the time the data 
would be made available to regulators, as compared to the Customer 
Information Approach.\1178\ The Participants also believe that there 
may be accuracy gains under the Customer Information Approach if it 
reduces errors that may otherwise occur if broker-dealers must adapt 
their systems and business processes to manage Customer-IDs.\1179\
---------------------------------------------------------------------------

    \1178\ See Exemptive Request Letter, supra note 16, at 15-18.
    \1179\ Id.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that the Rule 613 
approach would increase the costs of the CAT NMS Plan. In their 
Exemption Request, the Participants discussed a number of reasons why 
the Customer Information Approach is less burdensome than the Rule 613 
approach. First, it reduces the CAT implementation burden on market 
participants by eliminating the need for changes to their current 
customer identification systems.\1180\ Currently, market participants 
have individual formats for their customer identifiers; under the 
Customer Information Approach, no standardization of form would be 
required. Second, the Customer Information Approach eliminates the need 
for centrally-assigned Customer-IDs to be assigned at the Central 
Repository and communicated back to market participants.\1181\ Third, 
it allows the Plan Processor to implement modifications and technical 
upgrades to the Customer-ID generation process and infrastructure 
without the involvement of CAT Reporters.\1182\ Fourth, the Customer 
Information Approach eliminates the need to train CAT Reporters on the 
Customer-ID management process and provide related technical support. 
Fifth, it potentially reduces delays faced by investors opening new 
accounts, who might not be able to transact until the Central 
Repository has assigned a Customer-ID and communicated it to the 
broker-dealer representing the Customer.\1183\
---------------------------------------------------------------------------

    \1180\ See id. at 17.
    \1181\ See id.
    \1182\ See id.
    \1183\ See id. at 16-17.
---------------------------------------------------------------------------

    Based on cost survey data provided by the Participants, the Rule 
613 approach would increase quantifiable costs to the top three tiers 
of CAT Reporters by at least $195 million.\1184\ The Commission notes 
that this likely underestimates the increased costs to all CAT 
Reporters because the Rule 613 approach would likely increase costs to 
CAT Reporters outside the top three tiers also. Furthermore, the 
Bidders have indicated that the costs of building and operating the 
Central Repository under the Rule 613 approach would not be lower than 
the costs of the Customer Information Approach.\1185\ The Commission 
therefore preliminarily believes that the Rule 613 approach would 
increase the costs of the CAT NMS Plan relative to the Plan's Customer 
Information Approach, while providing substantially identical data.
---------------------------------------------------------------------------

    \1184\ Id. at 17-18.
    \1185\ Id. at 17.
---------------------------------------------------------------------------

c. CAT-Reporter-ID
    The Commission is soliciting comment on how an alternative 
approach--the Rule 613 approach--to the reporting of CAT Reporter 
information might impact the costs and benefits of the Plan. A CAT-
Reporter-ID is ``a code that uniquely and consistently identifies [a 
CAT Reporter] for purposes of providing data to the central 
repository.'' \1186\ Subparagraphs (c)(7)(i)(C), (ii)(D), (ii)(E), 
(iii)(D), (iii)(E), (iv)(F), (v)(F), (vi)(B), and (c)(8) of Rule 613 
provide that the CAT NMS Plan must require CAT Reporters to report CAT-
Reporter-IDs to the Central Repository for orders and certain 
Reportable Events.\1187\ Additionally, Rule 613(c)(8) requires that CAT 
Reporters use the same CAT-Reporter-ID for each broker-dealer.\1188\ To 
leverage existing infrastructure and business processes, the 
Participants requested an exemption from Rule 613(c)(7) and (c)(8) to 
allow a different approach to be included in the Plan; CAT Reporters 
would report existing SRO-assigned market participant identifiers when 
submitting data to the Central Repository (``SRO-Assigned Market 
Participant Identifiers'').\1189\ The Central Repository would then 
generate a corresponding CAT-Reporter-ID for internal use to identify 
CAT Reporters.

[[Page 30757]]

This approach--called the ``Existing Identifier Approach''--allows the 
CAT-Reporter-IDs to be managed at the Central Repository by the Plan 
Processor without the involvement of the Reporters.\1190\ The 
Commission granted exemptive relief to the SROs to allow the Existing 
Identifier Approach to be included in the CAT NMS Plan and subject to 
notice and comment.\1191\
---------------------------------------------------------------------------

    \1186\ 17 CFR 242.613(j)(2).
    \1187\ 17 CFR 242.613(c)(7)(i)(C), (ii)(D), (ii)(E), (iii)(D), 
(iii)(E), (iv)(F), (v)(F), (vi)(B), and (c)(8).
    \1188\ 17 CFR 242.613(c)(8).
    \1189\ See Exemptive Request Letter, supra note 16, at 19.
    \1190\ Id.
    \1191\ See Exemption Order, supra note 18, at 11866.
---------------------------------------------------------------------------

    Pursuant to the exemptive relief granted by the Commission, the CAT 
NMS Plan provides for the use of the Existing Identifier 
Approach.\1192\ The Commission is soliciting additional comment on the 
Rule 613 approach, which would require that CAT Reporters use a 
consistent, unique CAT-Reporter-ID, as set out in in Rule 613(c)(7) and 
Rule 613(c)(8). The Commission preliminarily believes that the Rule 613 
approach would increase certain costs associated with the 
implementation and operation of CAT as compared to the Existing 
Identifier Approach while providing substantially identical data.
---------------------------------------------------------------------------

    \1192\ See, e.g., CAT NMS Plan, supra note 3, at Sections 6.3(d) 
and (e), 6.4(d).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the Rule 613 approach 
would not result in more reliable or accurate data as compared to the 
Existing Identifier Approach. The Exemption Request states that ``the 
proposed approach would not compromise the goal of Rule 613 to record 
and link Reportable Events to the CAT Reporter associated with the 
event.'' \1193\ The processed CAT Data would contain the CAT-Reporter-
ID fields, and the Participants maintain that there would be no loss of 
accuracy or reliability, no effect on the ability to link records, and 
no effect on the time the data would be made available to 
regulators.\1194\
---------------------------------------------------------------------------

    \1193\ See Exemptive Request Letter, supra note 16, at 21.
    \1194\ Id. at 22-23.
---------------------------------------------------------------------------

    In fact, the Commission preliminarily believes that the Rule 613 
approach would reduce the quality of data obtained as compared to the 
Existing Identifier Approach. Specifically, the Rule 613 approach would 
reduce the granularity of information on departments, trading desks, 
and other business units within CAT Reporters, which would be captured 
under the Existing Identifier Approach. This additional granularity 
would be possible under the Existing Identifier Approach because 
identifiers currently in use are often assigned to entities that are 
defined more granularly than the CAT-Reporter-ID level. The Commission 
also preliminarily believes that the ability to leverage existing 
infrastructure and business processes may reduce the potential for 
delays and errors that could be associated with requiring CAT Reporters 
to modify their systems and workflows to handle the CAT-Reporter-IDs.
    The Commission preliminarily believes that the Rule 613 approach 
would increase the costs of the CAT NMS Plan relative to the Existing 
Identifier Approach. The Participants estimate implementation costs for 
the top three tiers of CAT Reporters for the Rule 613 approach of $78 
to $244 million, depending on how report types have to use the CAT-
Reporter-IDs.\1195\ The Exemption Request does not compare these costs 
to the Existing Identifier Approach allowed by the exemption and 
included in the Plan.\1196\ The Participants note that these estimates 
are conservative because they are based on only 11% of broker-
dealers.\1197\ The Participants indicated that they have consulted with 
the bidders and the industry in compiling this analysis.\1198\
---------------------------------------------------------------------------

    \1195\ Id. at 24.
    \1196\ Id. at 24.
    \1197\ Id. at 25.
    \1198\ Id. at 22.
---------------------------------------------------------------------------

    While the Commission preliminarily believes that the Rule 613 
approach would increase certain costs associated with the 
implementation and operation of CAT as compared to the Existing 
Identifier Approach, the Commission notes that there are limitations 
associated with the cost estimation methodology presented in the 
Exemption Request. These limitations include the exclusion of SROs and 
smaller CAT Reporters from the survey, no apparent differentiation 
between initial, deferred, and recurring costs, and lack of support for 
the method used to extrapolate the estimates for large broker-dealers 
to the industry. Nor do the cost estimates address the broker-dealers 
who would be CAT Reporters but are currently not OATS reporters, 
including those that are currently not registered with FINRA, which may 
have a very different cost structure. However, it is likely that the 
dominant effect would be the exclusion of many CAT Reporters from the 
cost estimates, which would tend to underestimate the cost increases. 
The Commission currently has no data from which it can independently 
estimate the cost differential because it depends on information 
internal to each of a heterogeneous group of CAT Reporters, which is 
not compiled or stored anywhere and to which the Commission therefore 
does not have ready access. The Commission believes that these effects 
are not likely to alter its preliminary conclusion that the Rule 613 
approach would significantly increase the costs of the CAT NMS Plan as 
compared to the Plan's Existing Identifier Approach. The Commission is 
requesting comment on this preliminary conclusion and any additional 
data Commenters believe should be considered.
d. Linking Order Executions to Allocations
    The Commission is soliciting comment on how an alternative approach 
to the reporting of allocation information--the Rule 613 approach--
might impact the costs and benefits of the Plan. Rule 613(c)(7)(vi)(A) 
requires each CAT Reporter to record and report to the Central 
Repository ``the account number for any subaccounts to which the 
execution is allocated (in whole or part).'' \1199\ This information 
would allow regulators to link the subaccount to which an allocation 
was made to the original order placed and its execution. In the 
Exemptive Request Letter and April 2015 Supplement, the SROs requested 
an exemption from Rule 613(c)(7)(vi)(A) to include in the Plan an 
approach whereby CAT Reporters would instead submit information to the 
Central Repository that would allow regulators to link subaccount 
information to the Customer that submitted the original order.\1200\ 
The Commission granted exemptive relief to the SROs to allow this 
approach to be included in the CAT NMS Plan and subject to notice and 
comment.\1201\
---------------------------------------------------------------------------

    \1199\ See 17 CFR 242.613(c)(7)(vi)(A).
    \1200\ See Exemptive Request Letter, supra note 16, at 28-29; 
April 2015 Supplement, supra note 16, at 2.
    \1201\ See Exemption Order, supra note 18, at 11868.
---------------------------------------------------------------------------

    Pursuant to the exemptive relief granted by the Commission, the CAT 
NMS Plan provides that, rather than providing the account number for 
any subaccounts to which the execution is allocated, CAT Reporters 
would submit information to the Central Repository in the form of an 
Allocation Report, in order to allow regulators to link subaccount 
information to the Customer that submitted the original order.\1202\ 
The Allocation Report would include the Firm Designated ID for any 
account(s), including subaccount(s), to which executed shares are 
allocated, and provide the security that has been allocated, the 
identifier of the firm

[[Page 30758]]

reporting the allocation, the price per share of shares allocated, the 
side of shares allocated, the number of shares allocated to each 
account, and the time of the allocation, which is information that is 
not currently required to be reported and/or retained by broker-
dealers.\1203\ There would not be a direct link in the Central 
Repository between the subaccounts to which an execution is allocated 
and the execution itself. However, CAT Reporters would be required to 
report each allocation to the Central Repository on an Allocation 
Report, and the Firm Designated ID of the relevant subaccount provided 
to the Central Repository as part of the Allocation Report could be 
used by the Central Repository to link the subaccount holder to those 
with authority to trade on behalf of the account.\1204\ Further, the 
Allocation Reports used in conjunction with order lifecycle information 
in CAT would assist regulators in identifying, through additional 
investigation, the probable group of orders that led to 
allocations.\1205\
---------------------------------------------------------------------------

    \1202\ See CAT NMS Plan, supra note 3, at Section 
6.4(d)(ii)(A)(1).
    \1203\ See id. at Section 1.1; see also Exemption Order, supra 
note 18, at 44-45.
    \1204\ See Exemption Order, supra note 18, at 45.
    \1205\ Id.
---------------------------------------------------------------------------

    The Commission is soliciting comment on the Rule 613 approach, 
which would require CAT Reporters to record and report the account 
number for any subaccounts to which the execution is allocated, as 
described above. The Commission preliminarily believes that that the 
Rule 613 approach could provide the Central Repository with a way to 
link allocations to order lifecycles.\1206\ This linkage would not be 
available under the current approach. However, based on estimates 
provided by the Participants, the Commission preliminarily believes 
that the Rule 613 approach would increase certain costs associated with 
the implementation and operation of CAT as compared to the Plan as 
filed by roughly $525 million.\1207\
---------------------------------------------------------------------------

    \1206\ In the Exemption Request, the SROs explained that under 
the Rule 613 approach allocations made from an average price account 
would not reflect a true one-to-one relationship between an 
execution and an allocation, and therefore the information provided 
would not directly link a single order execution and the subaccount 
to which an allocation was made. See Exemptive Request Letter, supra 
note 16, at 28. However, the Commission believes that under the Rule 
613 approach, regulators would receive information that would 
identify each execution resulting from the original order placed, as 
well as the identity of all the subaccounts to which those 
executions were allocated. This information would provide regulators 
a finite list of executions from which the subaccount allocations 
could have been made.
    \1207\ The Participants estimate that the Plan's approach to 
allocation information would result in a reduction in implementation 
cost for the top three tiers of CAT Reporters of $525 million as 
compared to the Rule 613 approach. See Exemptive Request Letter, 
supra note 16, at 31.
---------------------------------------------------------------------------

    The Commission preliminarily believes that either approach would 
allow regulators to link specific allocations, and the prices received 
on those allocations, with the aggregated executions that resulted in 
the allocations and their execution prices. Industry feedback received 
by the Participants indicates that existing business practices 
typically involve aggregating executions in an average price account 
before making allocations, and forcing a precise matching between 
orders and executions ex-post would be misleading.\1208\ The Exemption 
Request maintains that, under the approach in the Plan, there would be 
no loss of accuracy or reliability, no effect on the ability to link 
order records, and no effect on the time the data would be made 
available to regulators as compared to the Rule 613 approach.\1209\ The 
Exemption Request also states that there may be accuracy and 
reliability gains if the exemption reduces errors that may otherwise 
occur if broker-dealers were required to re-engineer their allocation 
handling systems and business processes to meet the requirements of 
Rule 613.\1210\
---------------------------------------------------------------------------

    \1208\ See Exemptive Request Letter, supra note 16, at 28 
(``[T]his approach . . . introduces an artificial relationship 
between any one execution and one allocation. . . . Although, . . . 
the ultimate allocation of the shares executed that result from [an] 
aggregated order may be useful for regulatory surveillance purposes, 
tying these allocations to multiple different executions is of 
little regulatory benefit.'').
    \1209\ Id. at 30.
    \1210\ Id.
---------------------------------------------------------------------------

    However, the Rule 613 approach would provide regulators access to 
allocations linked to specific disaggregated orders, which is not 
possible under the approach in the Plan. The Exemption Request notes 
that linking particular allocations to particular order lifecycles 
would be inaccurate in some circumstances, such as when many orders are 
allocated to many customers.\1211\ The Commission is soliciting comment 
on whether such information would necessarily be inaccurate, and 
whether requiring the linking of allocations to order lifecycles would 
reduce accuracy for several reasons. First, in cases in which one order 
is allocated to one customer, the Rule 613 approach would provide an 
improvement in accuracy over the approach proposed in the CAT NMS Plan 
because the Rule 613 approach would allow the Central Repository to 
accurately link such allocations to order lifecycles whereas the 
approach proposed in the CAT NMS Plan might not. Under the CAT NMS 
Plan, for regulators to link the allocations to the order lifecycles, 
they would need to construct an algorithm that would rely on less 
information than the Central Repository would have under the Rule 613 
approach. As a result, these regulator linkages would likely be less 
accurate than a Central Repository linkage. The Commission 
preliminarily believes that this is true for cases in which one order 
is allocated to many customers and when many orders are linked to one 
customer. For the many-to-many allocations, in which many customer 
orders are grouped and worked by the market participant using many 
orders to acquire the aggregate position ultimately used to fill the 
customer orders, the Commission notes that broker-dealers likely 
already maintain records that allow them to ensure that the allocations 
receive fair prices based on market executions. The Commission is 
soliciting comment on whether such information might be sufficient to 
link the many allocations to the many orders executed in an accurate 
manner. Such information would greatly aid investigations of fair 
allocations because it would allow regulators to reconstruct the manner 
in which allocations occur.
---------------------------------------------------------------------------

    \1211\ See id. at 28-30.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the Rule 613 approach 
would increase the costs of compliance with the CAT NMS Plan. According 
to industry feedback collected by the Participants, the Rule 613 
approach would require broker-dealers to undertake a major re-
engineering of their middle and back office systems and 
processes.\1212\ The Participants estimate a reduction in 
implementation cost over the Rule 613(c)(7)(vi) Baseline for the top 
three tiers of CAT Reporters of $525 million; consequently, the 
Commission preliminarily believes that this alternative would cost at 
least $525 million more than the estimated costs of the CAT NMS Plan to 
implement.\1213\ The Participants indicated that they have consulted 
with the bidders and the industry in compiling this analysis.\1214\
---------------------------------------------------------------------------

    \1212\ Id. at 27.
    \1213\ Id. at 31.
    \1214\ See id. at 30-31.
---------------------------------------------------------------------------

e. Time Stamp Granularity
    The Commission is soliciting comment on how an alternative 
approach--the Rule 613 approach--to time stamps on ``Manual Order 
Events'' might impact the costs and benefits of

[[Page 30759]]

the Plan.\1215\ Rule 613(c)(7) and Rule 613(d)(3) require time stamps 
with a minimum granularity of one millisecond on all order 
events.\1216\ The Participants requested an exemption from the 
requirement in Rule 613(d)(3) that for Manual Order Events each CAT 
Reporter record and report details for Reportable Events with time 
stamps that ``reflect current industry standards and [are] at least to 
the millisecond.'' \1217\ The Commission granted exemptive relief to 
the SROs to allow the approach to recording and reporting time stamps 
for Manual Order Events described in the Exemption Request to be 
included in the CAT NMS Plan and subject to notice and comment.\1218\
---------------------------------------------------------------------------

    \1215\ ``Manual Order Events'' are defined to mean ``non-
electronic communication[s] of order-related information for which 
CAT Reporters must record and report the time of the event.'' See 
CAT NMS Plan, supra note 3, at Section 1.1.
    \1216\ See 17 CFR 242.613(c)(7) (requiring use of time stamps 
pursuant to 17 CFR 242.613(d)(3)); 17 CFR 242.613(d)(3) (requiring 
time stamp granularity be ``at least to the millisecond'').
    \1217\ See 17 CFR 242.613(d)(3); Exemptive Request Letter, supra 
note 16, at 32.
    \1218\ See Exemption Order, supra note 18, at 11869.
---------------------------------------------------------------------------

    Pursuant to the exemptive relief granted by the Commission, the CAT 
NMS Plan provides that: (1) Each CAT Reporter would record and report 
Manual Order Event time stamps to the second; (2) Manual Order Events 
would be identified as such when reported to the CAT; and (3) CAT 
Reporters would report in millisecond time stamp increments when a 
Manual Order Event is captured electronically in the relevant order 
handling and execution system of the CAT Reporter (``Electronic Capture 
Time'').\1219\ On the other hand, the Rule 613 approach would require 
that CAT Reporters record and report details for Manual Order Events 
with time stamps that are at least to the millisecond, as required by 
Rule 613(c)(7) and Rule 613(d)(3). The Commission preliminarily 
believes that the Rule 613 approach would increase the costs of 
implementing the CAT NMS Plan while providing little regulatory benefit 
relative to the current approach.
---------------------------------------------------------------------------

    \1219\ See CAT NMS Plan, supra note 3, at Section 6.8.
---------------------------------------------------------------------------

    The Participants maintain in the Exemption Request that there would 
be little benefit, and possibly some adverse consequences, of capturing 
Manual Order Event time stamps in milliseconds.\1220\ They note that 
determining the time of a manual event is inherently imprecise, due to 
the limits of human reaction time in completing a transaction and the 
time required to manually record the event.\1221\ They claim human 
reaction time to visual stimulus is on the order of 400-500 
milliseconds, making millisecond time stamps imprecise.\1222\ The 
Commission preliminarily agrees that attempting to record the precise 
millisecond in which a manual event occurred would necessarily be 
imprecise. The Commission also preliminarily agrees that potential 
adverse consequences could arise from relying on time stamps with a 
misleading level of precision.\1223\
---------------------------------------------------------------------------

    \1220\ See Exemptive Request Letter, supra note 16, at 33.
    \1221\ Id. at 37.
    \1222\ Id.
    \1223\ The Commission notes that Manual Order Events are not 
clearly and exhaustively defined, and the definitions may not be 
available until the Technical Specifications are published. It may 
be possible for the Plan Processor to classify some types of order 
events as Manual Order Events that were not considered to be a 
Manual Order Event for the purposes of this analysis. This creates a 
degree of uncertainty as to whether the Rule 613 approach might 
yield some regulatory benefit.
---------------------------------------------------------------------------

    The Participants discussed the costs and benefits of the proposed 
exemption in their Exemption Request. They estimated a minimum total 
cost to the industry of $10.5 million based on the cost of advanced 
OATS-compliant clocks with granularity of one second, and noted that 
clocks with millisecond granularity would likely be more expensive if 
available.\1224\ The Participants also noted that the industry was 
consulted through the DAG and an unsuccessful attempt was made to find 
a commercially available time stamping device with millisecond 
granularity.\1225\ Based on this information, the Commission 
preliminarily believes the Rule 613 approach to Manual Order Events 
would increase certain costs associated with the implementation and 
operation of CAT as compared to the Plan as filed without providing any 
significant additional benefit.
---------------------------------------------------------------------------

    \1224\ See Exemptive Request Letter, supra note 16, at 36-37.
    \1225\ Id. at 35.
---------------------------------------------------------------------------

2. Alternatives to Certain Specific Approaches in the CAT NMS Plan
    The Commission has analyzed alternatives to specific approaches in 
the CAT NMS Plan with respect to clock synchronization, time stamps, 
error rates, the time within which errors must be corrected, the 
funding model, requirements regarding listing exchange symbology, data 
accessibility standards, and intake capacity levels.
a. Clock Synchronization
    The Commission is soliciting comments on alternate approaches to 
clock synchronization as compared to those proposed in the CAT NMS 
Plan. First, the Commission is soliciting comment on alternatives to 
the Plan's one-size-fits-all definition of ``industry standard.'' Under 
these alternatives, ``industry standard'' would be defined in terms of 
the standard practices of different segments of the CAT Reporters, or 
by looking at information other than current industry practices. These 
alternative approaches could result in clock offset tolerances shorter 
than the CAT NMS Plan's proposed 50 millisecond standard for some or 
all CAT Reporters. The Commission preliminarily believes that these 
alternatives could substantially increase the benefits of CAT in 
regulatory activities that require event sequencing, such as analysis 
and reconstruction of market events, as well as market analysis and 
research in support of policy decisions, and cross-market surveillance, 
examinations, investigations, and other enforcement functions.\1226\
---------------------------------------------------------------------------

    \1226\ See Section IV.E.1.b(2), supra.
---------------------------------------------------------------------------

    Second, the Commission is soliciting comment on two additional 
alternatives that could allow for more cost-effective clock 
synchronization standards. In particular, the Commission is soliciting 
comment on modifying the requirement to document clock synchronization 
activities such that only events that require clock adjustment would be 
required to be documented, and modifying the clock synchronization 
requirement such that clocks would not have to be synchronized at times 
when systems are not recording time-sensitive CAT Reportable Events, 
such as orders originated outside of market hours when they are not 
immediately actionable. The Commission preliminarily believes that 
reduced clock synchronization logging requirements might significantly 
reduce ongoing costs associated with clock synchronization compliance 
as compared to the Plan as filed, without losing any additional 
material information. In addition, the Commission preliminarily 
believes that more flexible clock synchronization standards outside of 
regular and extended trading hours may also reduce costs without a 
material loss to the ability of regulators to sequence order events as 
compared to the Plan as filed, without losing any additional material 
information. Each of these alternatives is outlined below.
(1) Alternative Clock Synchronization Standards
    Rule 613(d)(1) requires synchronization of business clocks for the 
purposes of recording the date and time of Reportable Events consistent

[[Page 30760]]

with industry standards.\1227\ The CAT NMS Plan describes the 
``industry standard'' in terms of the technology adopted by the 
majority in the industry.\1228\ The Plan therefore bases its clock 
synchronization standard on current practices of the broker-dealer 
industry generally, and provides that one standard would apply to all 
CAT Reporters. The Commission is soliciting comment on an alternative 
interpretation of ``industry standard'' that would consider the 
standard practices of different segments of the CAT Reporters for the 
purposes of setting the clock synchronization requirements. The 
Commission is also soliciting comment on an alternative that would 
define industry standard by looking at information other than current 
industry practice; for example, the most accurate technology currently 
available in the industry, or the standard recommended by a particular 
authority or industry group.
---------------------------------------------------------------------------

    \1227\ The Commission did not define the term ``industry 
standard'' in Rule 613. In the Adopting Release, the Commission 
noted that it expected the Plan to ``specify the time increment 
within which clock synchronization must be maintained, and the 
reasons the plan sponsors believe this represents the industry 
standard.'' See Adopting Release, supra note 9, at 45774.
     The benefits of alternative clock offset tolerances discussed 
in this Section may be dependent on time stamp granularity 
requirements. Related alternatives are discussed in Section 
IV.H.2.b, infra.
    \1228\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
12(p).
---------------------------------------------------------------------------

    First, the Commission is soliciting comment on an alternative 
definition of industry standard that would consider the standard 
practices of different segments of CAT Reporters. Under this 
alternative, all systems within market participants that process CAT-
Reportable Events would be required to comply with a clock 
synchronization requirement reflecting an industry standard particular 
to that market participant's segment of the industry. Currently, the 
Commission lacks the information necessary to reach a preliminary 
conclusion regarding the appropriate industry standards for all subsets 
of the industry. Specifically, neither the FIF Clock Offset Survey nor 
the Plan provides comprehensive data on the clock synchronization 
practices of firms within each of the relevant subsets of the industry, 
and the Commission has no data from which it can independently estimate 
the cost differential because the Commission is not aware of any such 
data available to it at this time. However, the Commission is 
soliciting comment on this approach, which it believes would result in 
a clock offset tolerance of less than 50 milliseconds for some market 
participants. The Commission seeks comment on the current practices for 
clock synchronization in various segments of the industry, including 
but not limited to broker-dealers that are introducing firms, 
institutional firms, retail firms that accept customer orders 
electronically, registered market makers and principal trading firms, 
as well as service bureaus hosting order management systems, exchanges 
and ATSs, and branches of broker-dealers that predominantly handle 
manual orders. The Commission also seeks comment on the costs and 
benefits of requiring varying clock offset tolerances within the 
industry.
    The Commission notes that the current practices for exchanges and 
Execution Venues may differ from the industry standard for broker-
dealers as defined by the Plan, and current practices for certain 
systems within broker-dealers may vary by the system within the broker-
dealers. For example, a small clock offset tolerance may be nearly 
universally adopted for systems like ATSs that operate a matching 
engine, while systems involved in manual entry of orders may typically 
have larger clock offset tolerances. By defining industry standard 
based on practices of the broker-dealer industry generally, the Plan 
does not account for these differences.
    Other information now available for the Commission and the public 
to study, particularly information from the FIF Clock Offset Survey, 
shows that several of the survey respondents that have a current clock 
offset tolerance of one second are clearing firms or service 
bureaus.\1229\ According to the same survey, current clock offset 
tolerances vary from one second to five microseconds among the broker-
dealers surveyed with 22% of respondents having multiple clock offset 
tolerances across their systems.\1230\ Further, the FIF Clock Offset 
Survey shows that the firms with multiple clock offset tolerances 
typically engage in multiple lines of business. The fact that some 
broker-dealers maintain clock offset tolerances at different levels 
within the firm suggests that these broker-dealers believe that clock 
precision is more important for some systems; furthermore, based on 
conversations with market participants,\1231\ the Commission 
preliminarily believes that market participants strategically upgrade 
certain systems and reallocate older technology within the firm to 
applications where up-to-date technology is less critical.\1232\
---------------------------------------------------------------------------

    \1229\ See FIF Clock Offset Survey, supra note 127.
    \1230\ See Section IV.D.2.b(2)B.i, supra for more information 
regarding the distribution of broker-dealer clock offset tolerances.
    \1231\ Based on FIF-organized conversations with broker-dealers 
and service bureaus. See supra note 880.
    \1232\ Systems that have greater clock offset tolerances may 
have technology that is too old to support smaller clock offset 
tolerances. The Commission preliminarily believes that if a shorter 
clock offset tolerance is important to these broker-dealers, they 
would update their systems to support newer technology capable of 
smaller clock offset tolerances.
---------------------------------------------------------------------------

    Finally, exchanges and ATSs, as well as the SIPs, may have current 
clock offset tolerances that are significantly different from the clock 
offset tolerances at broker-dealers and could therefore achieve finer 
clock offset tolerances at lower cost than broker-dealers.\1233\ 
According to FIF, all exchange matching engines meet a clock offset 
tolerance of 50 milliseconds or less while NASDAQ states that all 
exchanges that trade NASDAQ securities have clock offset tolerances of 
100 microseconds or less.\1234\ In conversations with Commission Staff, 
the Participants stated that absolute clock offset on exchanges 
averages 36 microseconds, further suggesting that certain business 
activities warrant smaller clock synchronization tolerances.\1235\
---------------------------------------------------------------------------

    \1233\ See supra notes 441 and 442. Specifically, the NASDAQ SIP 
Web site implies that exchanges reporting to the NASDAQ SIP 
synchronize their systems to 100 microseconds.
    \1234\ See Section IV.D.2.b(2)B.i, supra for more information on 
clock offset tolerances of exchanges and the SIPs.
    \1235\ See supra note 436.
---------------------------------------------------------------------------

    Given this information, the Commission recognizes the possibility 
that some business systems and some CAT Reporter types would rarely be 
responsible for recording the date and time of reportable events and 
also recognizes that the time stamp precision of such rare events might 
not be as critical as for other events. For example, a system that 
routes customer orders to market centers may be considered critical for 
sequencing market events, while a system that facilitates manual input 
of orders received by telephone may not. Conversely, the clock 
synchronization practices of some CAT Reporters may be more critical to 
the overall benefits of CAT or could be less costly to implement. For 
example, a service bureau that provides an order-handling system hosted 
on its own servers is likely to route orders for many market 
participants and its clock synchronization practices would, thus, be 
critical to event sequencing. On the other hand, the precision of time 
stamps from systems of an isolated broker-dealer that routes customer 
orders to its service bureau or another broker-dealer for market access 
and conducts no

[[Page 30761]]

proprietary trading may be less critical to event sequencing, 
especially if the receiving system at the service bureau would record a 
high-precision time stamp when the order is received. Furthermore, 
instituting higher clock precision at a single service bureau would be 
less costly than instituting that same level of clock precision at the 
service bureau and all of its broker-dealer customers as is required by 
the Plan as filed.
    Relative to the proposed clock synchronization standard, the 
Commission preliminarily believes that an alternative approach that 
would consider the standard practices of different segments of the 
industry for the purposes of setting the clock synchronization 
requirements, and would require a smaller clock offset tolerance than 
in the Plan for certain business systems that are more critical to 
being able to accurately sequence order events, could have significant 
benefits. In other words, the Commission preliminarily believes that 
some business systems may be responsible for time stamping more time-
sensitive order events than others, where more time-sensitive orders 
are those for which precise time stamps are more critical for event 
sequencing.
    The Commission does not currently have the information necessary to 
specify which particular types of business system handle more time-
sensitive orders because neither the FIF Clock Offset Survey nor the 
Plan provides this data. The Commission has no data from which it can 
independently estimate this because the Commission is not aware of any 
such data available to it. However, the Commission recognizes the 
potential for such an approach. For example, it is possible that almost 
all of the order origination events, routing events, modification 
events, and execution events, which are likely to be more time-
sensitive than other CAT Reportable Events, occur on systems at broker-
dealers that conduct certain types of businesses. The businesses that 
seem most likely to record these time-sensitive events include: 
Introducing broker-dealers; institutional broker-dealers; retail 
broker-dealers that accept customer orders electronically; registered 
market makers; principal trading firms; service bureaus that host order 
management systems; exchanges; and ATSs.
    Further, some systems collect order events that either do not 
require a granular time stamp; other systems would not be required to 
record order events in real time. An example would be regional branches 
of broker-dealers that only handle manual orders which require a time 
stamp to the second until the broker enters the order into an 
electronic system. If the order entry hits a centralized system 
quickly, then perhaps the clock precision of the centralized system may 
be sufficient for sequencing.
    The Commission is also soliciting comment on an alternative 
approach that would define industry standard by looking at information 
other than current industry practices; for example, by considering the 
most accurate technology currently available in the industry, or the 
standard recommended by a particular industry group or authority. 
Defining industry standards by majority practices may have the 
unintended effect of setting a standard that delays adopting advances 
in technology. The Commission preliminarily believes that this 
alternative approach could result in defining an industry standard for 
clock synchronization that would require a clock offset tolerance for 
all CAT Reporters that is lower than the 50 millisecond standard 
required by the Plan. The Commission seeks comment on any appropriate 
definitions of ``industry standard'' with respect to clock 
synchronization, including the costs and benefits of using any 
alternative definitions of ``industry standard'' for the purposes of 
setting clock synchronization requirements. The Commission also seeks 
comment on whether a definition of ``industry standard'' could set a 
maximum clock offset tolerance with an expectation that each CAT 
Reporter would be responsible for smaller clock offsets if the CAT 
Reporter is technically capable of such clock offsets.
    The Commission conducted an analysis to assess the benefits of 
alternative approaches to defining industry standard that would result 
in smaller clock offset tolerances for some or all segments of CAT 
Reporters. The Commission evaluated the percentage of unrelated events 
that can potentially be sequenced under various clock offset 
tolerances, including the 50 millisecond tolerance outlined in the CAT 
NMS Plan. The Commission estimates that approximately 7.84% of 
unrelated orders for listed equities and 18.83% of unrelated orders for 
listed options can be accurately sequenced using a clock offset 
tolerance of 50 milliseconds.\1236\ The Commission augmented this 
analysis by conducting a clock synchronization analysis to examine 
certain alternative clock offset tolerances from those examined in the 
FIF Clock Offset Survey.\1237\ Table 10 shows the results of the 
Commission's analysis as a percentage of unrelated order events for 
equities that could be sequenced under various alternative clock offset 
tolerance.
---------------------------------------------------------------------------

    \1236\ See Section IV.E.1.b(2)A, supra. In general, events occur 
with such frequency that a 50 millisecond clock synchronization 
standard would not be sufficient to sequence all orders; see also 
CAT NMS Plan, supra note 3, at Appendix C, Section A.3(c) n.110 
(``Events occurring within a single system that uses the same clock 
to time stamp those events should be able to be accurately sequenced 
based on the time stamp. For unrelated events, e.g., multiple 
unrelated orders from different broker-dealers, there would be no 
way to definitively sequence order events within the allowable clock 
drift as defined in Article 6.8 [of the CAT NMS Plan].'').
    \1237\ See Section IV.D.2.b(2)B, supra, for information on the 
Commission's clock offset tolerance analysis. Specifically, the 
analysis says that an order event can be sequenced if its time stamp 
is at least twice the clock offset tolerance from any other event on 
another venue.

    Table 10--Sequencing Accuracy of Unrelated Events by Clock Offset
                                Tolerance
------------------------------------------------------------------------
                                        Percentage of unrelated  events
                                             that can be sequenced
       Clock offset tolerance        -----------------------------------
                                        Equities (%)       Options (%)
------------------------------------------------------------------------
50 milliseconds.....................              7.84             18.83
5 milliseconds......................             16.51             35.54
1 millisecond.......................             22.08             50.70
100 microseconds....................             42.47             78.42
------------------------------------------------------------------------


[[Page 30762]]

    The Commission's analysis suggests that approximately 16.51% of 
unrelated order events for equities and 35.54% of unrelated order 
events for options could be sequenced under a clock offset tolerance of 
5 milliseconds, 22.08% of orders events for equities and 50.70% of 
order events for options could be sequenced under a clock offset 
tolerance of 1 millisecond, and 42.47% of order events for equities and 
78.42% of orders events for options could be sequenced under a clock 
offset tolerance of 100 microseconds. Given these results, the 
Commission believes that requiring a smaller clock offset tolerance 
than the Plan's proposed 50 milliseconds for some segments of the 
industry could improve the accuracy of event sequencing.
    Relative to the Plan's proposed universal 50 millisecond clock 
offset tolerance, the Commission preliminarily believes that requiring 
a smaller clock offset tolerance for some segments of the industry 
would likely increase the costs of the CAT NMS Plan. Table 11 is from 
page C-126 of the CAT NMS Plan, and it provides the costs of the Plan's 
proposed clock offset tolerance (50 milliseconds) and alternative 
tolerances (100 microseconds, 5 milliseconds, and 1 millisecond).\1238\ 
These costs assume that each clock offset tolerance is applied to all 
business systems. However, as noted above, the alternative the 
Commission is soliciting comment on is to require smaller clock offset 
tolerance for certain segments of the industry. So, the estimates below 
provide an upper bound on the potential cost if the Commission requires 
smaller clock offset tolerances in some cases.
---------------------------------------------------------------------------

    \1238\ Table 11 is from the CAT NMS Plan, supra note 3, at 
Appendix C, Section D.12(p) and it draws its numbers from the FIF 
Clock Offset Survey. See supra note 127.

 Table 11--Implementation and Annual Ongoing Cost Estimates per Firm by
                         Clock Offset Tolerance
------------------------------------------------------------------------
                                          Estimated     Estimated annual
       Clock offset tolerance          implementation      ongoing cost
                                       cost (per firm)     (per firm)
------------------------------------------------------------------------
50 milliseconds.....................          $554,348          $313,043
5 milliseconds......................           887,500           482,609
1 millisecond.......................         1,141,667           534,783
100 microseconds....................         1,550,000           783,333
------------------------------------------------------------------------

    The Commission understands that the cost figures in Table 11 do not 
net out the current ongoing costs of clock synchronization, which are 
$203,846.\1239\ Table 12 shows the preliminary estimated annual ongoing 
cost increase (ongoing costs minus current costs) to comply with 
various alternative clock offset tolerances as well as the clock offset 
tolerance specified in the Plan.
---------------------------------------------------------------------------

    \1239\ See FIF Clock Offset Survey, supra note 127, at 16. This 
is based on current practice of the broker-dealers who responded to 
the survey.

    Table 12--Annual Ongoing Cost Increases per Firm by Clock Offset
                                Tolerance
------------------------------------------------------------------------
                                                            Estimated
                                                         annual  ongoing
                Clock offset tolerance                   cost  increases
                                                           (per firm)
------------------------------------------------------------------------
50 milliseconds.......................................          $109,197
5 milliseconds........................................           278,763
1 millisecond.........................................           330,937
100 microseconds......................................           579,487
------------------------------------------------------------------------

    Based on these estimates, the Commission estimated aggregate clock 
synchronization costs for broker-dealers consistent with the estimation 
of their total CAT compliance costs as detailed in the Costs Section 
above.\1240\ The Commission assumed that 171 broker-dealers would incur 
the full ongoing costs and full implementation costs indicated in the 
FIF Clock Offset Survey.\1241\ Conversely, the remaining 1,629 broker-
dealers that are already assumed to use service bureaus would rely on 
the 13 service bureaus to facilitate their clock synchronization, and 
therefore would pay lower implementation and ongoing costs than those 
in the FIF Clock Offset Survey. The Commission understands that broker-
dealers that rely on service bureaus for order management systems and 
regulatory reporting usually use servers operated by their service 
bureaus and most would therefore not directly bear the costs to 
implement and comply with clock synchronization standards.\1242\ For 
the implementation costs for those relying on service bureaus for clock 
synchronization, the Commission assumes \1/4\ FTE for 50 milliseconds, 
\1/2\ FTE for 5 milliseconds, \3/4\ FTE for 1 millisecond, and 1 FTE 
for 100 microseconds. Under these assumptions, broker-dealers that 
outsource their order management and regulatory reporting obligations 
would incur costs (shown in Table 13) that are significant relative to 
the estimated implementation costs for broker-dealers that handle order 
management and reporting obligations in-house.\1243\
---------------------------------------------------------------------------

    \1240\ See Section IV.F.3.a, supra.
    \1241\ The 171 broker-dealers comes from the total of 
Insourcers, ELPs, and Options Market Makers.
    \1242\ See Section IV.F.1.d, supra for a discussion of service 
bureaus passing costs on to clients.
    \1243\ As in the Costs Section above (see Section IV.F.1.c(2)C), 
monetizing the FTE costs involves multiplying the number of FTEs by 
$424,350. See infra note 1487.

 Table 13--Implementation Cost Estimates per Firm for Outsourcing Firms
                        by Clock Offset Tolerance
------------------------------------------------------------------------
                                                            Estimated
                                                         implementation
                Clock offset tolerance                  costs (per firm)
                                                         for outsourcing
                                                              firms
------------------------------------------------------------------------
50 milliseconds.......................................          $106,000
5 milliseconds........................................           212,000
1 millisecond.........................................           318,000
100 microseconds......................................           424,000
------------------------------------------------------------------------

    With these implementation costs, the Commission aggregated 
implementation and ongoing costs as indicated in Table 14.

[[Page 30763]]



Table 14--Aggregated Implementation and Annual Ongoing Cost Estimates by
                         Clock Offset Tolerance
------------------------------------------------------------------------
                                          Estimated         Estimated
                                          aggregate     aggregate annual
       Clock offset tolerance          implementation      ongoing cost
                                         cost \1244\         \1245\
------------------------------------------------------------------------
50 milliseconds.....................      $268 million      $25 million.
5 milliseconds......................       497 million       63 million.
1 millisecond.......................       714 million       75 million.
100 microseconds....................       956 million      131 million.
------------------------------------------------------------------------

    Table 14 suggests that the Plan's clock synchronization costs for 
the approximately 1,800 expected CAT Reporters would be approximately 
$268 million in estimated implementation costs and about $25 million in 
ongoing costs. To estimate the relative costs of each alternative 
compared to the Plan, the Commission subtracted the costs of the Plan 
from the costs of each alternative.
---------------------------------------------------------------------------

    \1244\ $268 million [ap] 171*$554,348 + 1,629*0.25*$424,350. 
$497 million [ap] 171*$887,500 + 1,629*0.5*$424,350. $714 million 
[ap] 171*$1,141,667 + 1,629*0.75*$424,350. $956 million [ap] 
171*$1,550,000 + 1,629*$424,350.
    \1245\ $25 million [ap] 171*$109,197 + 13*4.2*$109,197. $63 
million [ap] 171*$278,763 + 13*4.2*$278,763. $75 million [ap] 
171*$330,937 + 13*4.2*$330,937. $131 million [ap] 171*$579,487 + 
13*4.2*$579,487. 13 is the number of service bureaus and 4.2 is the 
ratio between the total incremental ongoing charges to broker-
dealers and the total incremental ongoing costs to service bureaus 
derived from the cost estimates above. See Section IV.F.2, supra.
---------------------------------------------------------------------------

    Table 15 provides estimates for how the costs of alternative clock 
offset tolerances applied to all business systems would be greater than 
those of the CAT NMS Plan if a different clock offset tolerance applied 
to all CAT Reporters.

Table 15--Aggregated Implementation and Annual Ongoing Cost Increases by
                         Clock Offset Tolerance
------------------------------------------------------------------------
                                          Estimated         Estimated
                                         increase in       increase in
       Clock offset tolerance          implementation    annual  ongoing
                                            cost              cost
                                         (aggregate)       (aggregate)
------------------------------------------------------------------------
5 milliseconds......................      $229 million      $38 million.
1 millisecond.......................       446 million       50 million.
100 microseconds \1246\.............       688 million      106 million.
------------------------------------------------------------------------

    The Commission does not have information on the implementation and 
ongoing costs to exchanges or ATSs of various alternative clock offset 
tolerances because trading venues were not included in the FIF Clock 
Offset Survey. The Plan does not provide this data, and the Commission 
has no other data from which it can independently estimate this, 
because the Commission is not aware of any such data available to it. 
However, exchanges may currently synchronize their clocks to within 100 
microseconds.\1247\ Consequently, the Commission preliminarily believes 
that any of the alternative clock offset tolerances discussed above 
would not materially increase costs to Participants relative to the 
costs they would incur under the Plan because their current clock 
synchronization procedures seem to satisfy any of the proposed clock 
offset tolerances. In the case of ATSs, these systems tend to be 
operated by large and complex broker-dealers that are unlikely to rely 
upon service bureaus to perform their clock synchronization 
responsibilities. Consequently, the Commission preliminarily believes 
that cost estimates for the broker-dealers surveyed by FIF are likely 
to include broker-dealers that operate ATSs and already reflect any 
additional clock synchronization costs attributable to operating ATSs. 
However, if Execution Venues (including ATSs) were to have smaller 
clock offset tolerances than other broker-dealer systems, broker-
dealers operating ATSs would be expected to incur higher clock 
synchronization costs than other broker-dealers.
---------------------------------------------------------------------------

    \1246\ The Commission recognizes that the benefits of clock 
synchronization of less than one millisecond are limited unless the 
time stamps are also more granular. Requiring more granular time 
stamps than the 1 millisecond in the Plan would increase the costs 
relative to those in Table 15.
    \1247\ See Section IV.D.2.b(2)B.i, supra; see also supra notes 
435 and 436.
---------------------------------------------------------------------------

    As noted above, the Commission is soliciting comment on both an 
alternative that would consider the standard practices of different 
segments of the CAT Reporters for the purposes of setting the clock 
synchronization requirements, and an alternative that would define 
industry standard by looking at information other than current industry 
practice. The Commission preliminarily believes that if the CAT NMS 
Plan used an alternative interpretation of ``industry standard'' that 
considered the standard practices of different segments of the CAT 
Reporters for the purposes of setting the clock synchronization 
requirements, the cost increases associated with smaller clock offset 
tolerances might be lower than estimates presented in the tables above. 
In particular, if the clock synchronization requirements were only 
applied to the most time-sensitive systems, the costs increases would 
be lower than those presented.\1248\ In addition, if the only broker-
dealers required to comply with clock synchronization requirements were 
the ones accepting, routing, and executing orders, the costs could be 
lower than those presented above. The Commission does not have the 
information necessary to quantify how much lower the costs would be 
under an alternative that applied different clock offset tolerances to 
different segments of the CAT Reporters, because neither the Plan nor

[[Page 30764]]

the FIF Clock Offset Survey break the cost estimates for changes in 
clock synchronization requirements down by business system types, and 
the Commission has no data from which it can independently estimate 
this, because the Commission is not aware of any such data available to 
it.
---------------------------------------------------------------------------

    \1248\ This belief is also consistent with information in the 
FIF Clock Offset Survey. See supra note 127, at 20. Specifically, 
the survey found that respondents would save on costs if the 
alternative clock offset tolerance were applied only to ``server-
side trading systems.''
---------------------------------------------------------------------------

    The Commission recognizes that a clock offset tolerance smaller 
than 50 milliseconds would have differential cost across market 
participants. An alternate approach to defining ``industry standard'' 
that took into account the standard practices of different segments of 
CAT Reporters could mitigate those costs. All FIF Clock Offset Survey 
respondents that provided technology information use technology capable 
of 50 millisecond clock offset tolerances, but 36% of those respondents 
do not employ a technology capable of clock offset tolerances smaller 
than 50 milliseconds. Some survey respondents indicated that they 
employ software that is not capable of clock offset tolerances of less 
than 50 milliseconds or that desktop PCs would be a challenge with such 
clock offset tolerances. An alternative definition of ``industry 
standard'' that considered the practices of various segments of the 
industry could apply smaller clock offset tolerances to a subset of 
business systems; the Commission expects that applying smaller clock 
offset tolerances to a subset of systems would cost less than applying 
such clock offset tolerances to all systems. However, the benefits 
could also be limited in terms of the percentage of unrelated events 
that could potentially be sequenced, as compared to a definition of 
``industry standard'' that a set a lower clock offset tolerance for all 
CAT Reporters.
(2) Alternative Logging Procedures
    Rule 613(d)(1) requires synchronizing business clocks that are used 
for the purposes of recording the date and time of any Reportable 
Event. The CAT NMS Plan further requires that Participants and other 
CAT Reporters maintain a log recording the time of each clock 
synchronization that is performed and the result of such 
synchronization, specifically identifying any synchronization initiated 
in response to an observed discrepancy between the CAT Reporter's 
business clock and the time maintained by the NIST exceeding 50 
milliseconds.\1249\ According to the FIF Clock Offset Survey, costs in 
logging the synchronization events is a significant driver of overall 
clock synchronization costs.\1250\
---------------------------------------------------------------------------

    \1249\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.3(c).
    \1250\ Other cost drivers include hardware and software costs 
and costs in ensuring reliability.
---------------------------------------------------------------------------

    A few survey respondents indicated that the number of logged events 
would go up significantly with a shorter clock offset, which requires a 
costly logging system.\1251\ Therefore, the Commission is soliciting 
comment on an alternative that would require logging only exceptions to 
the clock offset (i.e., events in which a market participant checks the 
clock offset and applies changes to the clock).\1252\ While logging 
every event, including clock offset checks, may be cost effective with 
longer clock synchronization tolerances, the Commission questions 
whether logging each event is cost efficient with finer clock offset 
tolerances, given the large number of events expected for the proposed 
and alternative clock synchronization standards. For example, if an 
investigation is relying on properly sequenced events, the 
investigation only would need to examine exception files to ensure the 
precision of the time stamps. The FIF Clock Offset Survey suggests that 
relaxing the logging requirement could reduce the burdens associated 
with clock synchronization.
---------------------------------------------------------------------------

    \1251\ See FIF Clock Offset Survey, supra note 127, at 19. One 
survey respondent noted that a log file for a one second clock 
offset would require 1 gigabyte of compressed storage each day but 
clock offset log files for 50 millisecond clock offset would 
increase the daily data storage 10 fold. Another survey respondent 
noted that its current system logs 86,000 events per day and that 
the proposed clock offset would require logging 35 million events 
per day; see also CAT NMS Plan, supra note 3, at Appendix C, Section 
A.3(c).
    \1252\ This is one of the alternatives suggested in the FIF 
Clock Offset Survey. See supra note 127.
---------------------------------------------------------------------------

    The Commission cannot quantify the reduction in costs from this 
alternative because it lacks data on the proportion of clock 
synchronization costs that are associated with event logging and the 
proportion of those costs that could be avoided by alternative event 
logging requirements. The Commission preliminarily believes that any 
reduction in benefits from this alternative, as compared to the CAT NMS 
Plan's approach for clock synchronization, would be minor because the 
inclusion of clock synchronization checks that required no clock 
adjustment would not improve regulators' ability to sequence events. 
The Commission notes, however, that enforcement of clock 
synchronization requirements may be more difficult without 
comprehensive logging requirements that document firms' actions to 
comply with requirements; consequently, relaxing the logging 
requirement may also reduce incentives to comply with the clock 
synchronization requirements.
(3) Alternative Clock Synchronization Hours
    The Commission is soliciting comment on alternative requirements 
for the times during which clock synchronization is required that would 
provide more flexibility than the requirements of the Plan. The clock 
synchronization requirement presented in the CAT NMS Plan makes no 
provision for reduced clock synchronization requirements at times 
during which systems are not performing tasks that produce time-
sensitive CAT Reportable Events; in the FIF Clock Offset Survey, 
respondents identified that there were certain times during which 
maintaining clock synchronization is more costly. Survey respondents 
noted they would incur additional costs in maintaining clock offset 
``99.9% of the time'' or with ``100% reliability'' and costs associated 
with managing ``clock synch instability . . . after server reboot.'' 
The Commission notes that maintaining 99.9% or 100% reliability may be 
unnecessary during times when the system does not record Reportable 
Events. Further, the Commission understands that generally a system 
does not record Reportable Events during server reboots. Therefore, the 
Commission preliminarily believes that an alternative that does not 
require synchronizing clocks when servers are not recording Reportable 
Events or when precise time stamps are not as important to sequencing, 
such as outside of normal trading hours, would not materially reduce 
benefits. Given the responses to the FIF Clock Offset Survey, the 
Commission preliminarily believes that this alternative could reduce 
costs because synchronization activities and log entries related to 
those events would not be as beneficial outside of normal trading 
hours. The Commission does not have information necessary to quantify 
the cost reduction because cost information available to the Commission 
is not broken down by time of day or server status.
b. Time Stamp Granularity
    The Commission is soliciting comment on the benefits and costs of 
an alternative time stamp granularity requirement of less than one 
millisecond. Rule 613(d)(3) requires time stamp granularity consistent 
with industry standards and, as discussed above, the Plan requires time 
stamps that reflect industry standards and are at

[[Page 30765]]

least to the millisecond.\1253\ Furthermore, the Plan requires 
Participants to adopt rules requiring that CAT Reporters that use time 
stamps in increments finer than milliseconds use those finer increments 
when reporting to the Central Repository.\1254\ As discussed in the 
Commission's analysis of alternative clock offset tolerance 
requirements, millisecond time stamps may be inadequate to allow 
sequencing of the majority of unrelated Reportable Events across 
markets.\1255\ In addition, as discussed below, the Commission 
recognizes that the benefits of more granular time stamps would be 
limited unless the Plan were to require a clock offset tolerance far 
lower than is proposed in the Plan.
---------------------------------------------------------------------------

    \1253\ See Section IV.H.1.e, supra.
    \1254\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.3(c).
    \1255\ See Section IV.E.1.b(2)B, supra.
---------------------------------------------------------------------------

    The Commission recognizes that regulators' ability to sequence 
events is dependent on both clock offset tolerance and time stamp 
granularity. If the Plan requires any or all CAT Reporters to implement 
clock offset tolerances of less than a millisecond, time stamps 
reported at the millisecond level would not capture the additional 
precision of the smaller clock offset tolerance and much of the 
benefits of this smaller clock offset requirement would be lost if time 
stamps were rounded or truncated due to a millisecond time stamp 
granularity requirement. The Commission notes that provisions in the 
Plan require that any Participant that utilizes time stamps in 
increments finer than the minimum required to be reported under the 
Plan utilize such increments in reporting data to the Central 
Repository. Also, the Commission notes that a sub-millisecond clock 
offset tolerance would not in itself require the reporting of sub-
millisecond time stamps to the Central Repository.\1256\
---------------------------------------------------------------------------

    \1256\ See CAT NMS Plan, supra note 3, at Section 6.8(b).
---------------------------------------------------------------------------

    A requirement for time stamps at resolutions finer than 1 
millisecond would entail certain costs. Because some market 
participants already use time stamps at the sub-millisecond level and 
will be required to report this information under the Plan, such a 
requirement is unlikely to create significant additional costs for CAT 
Reporters. Furthermore, while some exchanges and broker-dealers are 
already required to report time stamps at the sub-millisecond level, 
implementation costs are likely to vary across CAT Reporters. The Plan 
does not provide data on the cost of requiring sub-millisecond time 
stamps, and the Commission has no other data from which it can 
independently estimate this, because the Commission is not aware of any 
such data currently available to it.
    Requiring sub-millisecond time stamp reporting would bring certain 
benefits. However, the Commission preliminarily believes these benefits 
may be limited without requiring clock offset tolerances of less than 
one millisecond as well. For example, with a 50 millisecond clock 
offset tolerance, a time stamp can only pinpoint the time of an event 
to a 100 millisecond range.\1257\ In this case, sub-millisecond time 
stamps provide little benefit to regulators attempting to determine the 
order of events occurring in venues with separate clocks. However, even 
with a 1 millisecond clock offset tolerance, a sub-millisecond time 
stamp granularity requirement could provide some benefit for regulators 
attempting to sequence events. For example, two events recorded at 
times 12:00:00.0001 and 12:00:00.0021 on different venues can be 
sequenced with a 1 millisecond clock offset, while if these time stamps 
were rounded or truncated to 12:00:00.000 and 12:00:00.002, they could 
not be sequenced with certainty, because it would be possible that both 
events occurred at 12:00:00.001. If the Plan were to require sub-
millisecond clock offset tolerances, the additional benefits of this 
sub-millisecond clock offset tolerance would be significantly limited 
without time stamps that were similarly granular.
---------------------------------------------------------------------------

    \1257\ See Section IV.H.2.a(1), supra.
---------------------------------------------------------------------------

c. Error Rate
    The Commission is soliciting comment on the benefits and costs of 
alternative maximum Error Rates. The Commission does not possess 
sufficient data to quantitatively assess the costs and benefits of an 
alternative to the maximum Error Rates specified in the CAT NMS Plan. 
However, the Commission is using information provided in the CAT NMS 
Plan to perform a qualitative assessment of the proposed maximum Error 
Rates.\1258\
---------------------------------------------------------------------------

    \1258\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.3(b).
---------------------------------------------------------------------------

    The potential benefits from a lower maximum Error Rate than 
proposed in the CAT NMS Plan could be improved accuracy in the data, 
and a quicker retirement of OATS and other regulatory data reporting 
systems.\1259\ However, the CAT NMS Plan states that errors would be de 
minimis by the morning of day T+5, therefore the improvement in 
accuracy does not seem to affect the data available to regulators 
starting on day T+5.\1260\ Accordingly, the benefit of improved 
accuracy as a result of a lower maximum Error Rate comes primarily from 
regulatory use of the data prior to day T+5. While the Commission 
believes that most regulatory uses would involve data after day T+5, 
regulators also have essential needs for uncorrected data prior to day 
T+5. For example, as discussed in the Benefits Section, the 
availability of unprocessed data within three days of an event could 
improve the Commission's chances of preventing asset transfers from 
manipulation schemes.\1261\ Therefore, a lower Error Rate in data 
available before day T+5 could, in certain regulatory contexts, be 
meaningful.
---------------------------------------------------------------------------

    \1259\ The Commission recognizes that a lower Error Rate could 
also lead to the same accuracy level as the proposed Error Rate, but 
more violations and consequences from those violations. This is 
likely to occur if the Error Rates in the Plan are lower than what 
every broker-dealer could reasonably obtain on the timeline; as a 
consequence, because broker-dealers are reporting the most accurate 
data they are currently able to report, a lower Error Rate cannot 
improve data quality, but it can produce additional costs in the 
form of penalties levied by the Plan Processor. However, as long as 
at least one broker dealer can reasonably obtain lower Error Rates 
than those in the Plan, a lower Error Rate would improve accuracy 
because the lower Error Rate would incentivize that broker-dealer to 
reduce its initial errors.
    \1260\ See id. at Appendix C, Section A.3(b), n.102.
    \1261\ See Section IV.E.3.d(3), supra.
---------------------------------------------------------------------------

    Second, because OATS currently has a lower observed error rate than 
the CAT NMS Plan, a reduction in CAT Error Rates may accelerate the 
retirement of OATS because the SROs may find it advantageous to retain 
OATS until CAT Data is at least as accurate as OATS data. However, the 
CAT NMS Plan does not require a particular target Error Rate before 
OATS can be retired and the Plan does not estimate any cost savings 
associated with the retirement of OATS or other systems, beyond those 
resulting from the end of a period of costly duplicative reporting. 
Therefore, any acceleration in the retirement of OATS would not provide 
a direct benefit resulting from a lower Error Rate. Further, the error 
rates in OATS may not be comparable to the Error Rates in CAT Data 
because the algorithm that identifies errors in CAT Data is unlikely to 
be identical to the algorithm that identifies errors in OATS. In 
particular, the Plan requires some types of validation checks on CAT 
Data that OATS data does not go through. These additional validation 
checks will help to ensure the accuracy of information types not 
currently collected by OATS such as Customer Account Information, Firm 
Designated

[[Page 30766]]

ID, and options information, or to ensure the accuracy of information 
necessary for the order lifecycle linking process.\1262\ Consequently, 
the Commission cannot be sure of the specific CAT Error Rate that would 
accelerate retirement of OATS. In addition, the Commission does not 
have cost estimates for different maximum Error Rates because such 
information was not provided in the CAT NMS Plan.
---------------------------------------------------------------------------

    \1262\ See CAT NMS Plan, supra note 3, at Appendix C, Sections 
A.1(a)(iii) and A.3(a) and Appendix D, Section 7.2 for a discussion 
of the types of required validations of CAT Data.
---------------------------------------------------------------------------

    While reducing error rates may have these potential benefits, the 
Commission recognizes that it would also come at a cost. In particular, 
reducing Error Rates could increase the implementation and ongoing 
costs incurred by CAT Reporters and the Central Repository as compared 
to costs estimated in the Plan, as filed. To achieve lower Error Rates, 
some CAT Reporters might have to run additional validation checks on 
their data before sending their data to the Central Repository. Such 
CAT Reporters would incur additional costs to code and test any 
additional validation checks prior to implementation. CAT Reporters 
might also have to monitor and adjust their validation checks to 
respond to Error Rate reports from the Central Repository, incurring 
additional ongoing costs. However, the CAT Reporters already achieving 
lower Error Rates might not require additional checks, adjustments, or 
monitoring. Additionally, the Commission preliminarily believes that 
costs incurred by CAT Reporters to reduce error rates prior to sending 
data to the Central Repository may ultimately result in lower costs 
associated with correcting errors after the data is sent. The 
Commission also notes that the costs incurred would depend in part on 
the format in which data is reported to the Central Repository, which 
has yet to be determined. If a solution is chosen that requires the 
reformatting of data, and this reformatting results in errors, then the 
costs could be higher. Conversely, a solution that does not require 
data reformatting could result in a lower Error Rate with lower costs 
to CAT Reporters.
    Additionally, the Plan contains provisions that require the Plan 
Processor to monitor and address Error Rates. For example, the Plan 
Processor is required to notify each CAT Reporter that exceeds the 
maximum Error Rate, and provide the specific reporting requirements 
that they did not fully meet. Requiring a lower Error Rate could 
increase the costs of these provisions, as compared to the costs 
estimated in the Plan as filed, because more CAT Reporters would exceed 
the Error Rate at which penalties are levied by the Plan Processor.
d. Error Correction Timeline
    The Commission is soliciting comment on an alternative error 
correction timeline to that proposed in the CAT NMS Plan. The CAT NMS 
Plan proposes a deadline of T+3 for submission of corrected data to the 
Central Repository.\1263\ The CAT NMS Plan also discusses 
recommendations from FIF and SIFMA to impose a day T+5 deadline, which 
is the current standard for OATS.\1264\ The Participants state in the 
CAT NMS Plan that they believe it is important to retain the day T+3 
deadline in order to make data available to regulators as soon as 
possible.\1265\
---------------------------------------------------------------------------

    \1263\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.1(a)(iv).
    \1264\ Id.
    \1265\ Id.
---------------------------------------------------------------------------

    The Commission is soliciting comment on whether the CAT NMS Plan 
should impose a day T+5 deadline rather than the day T+3 deadline. In 
comment letters submitted to the Participants, FIF and SIFMA maintain 
that the day T+3 deadline may not be feasible and would prove costly to 
market participants.\1266\ The alternative of a day T+5 deadline could 
reduce the costs relative to the CAT NMS Plan for CAT Reporters. The 
Commission preliminarily believes that the delays in regulatory access 
from a day T+5 deadline would significantly reduce regulators' ability 
to conduct surveillance and slow the response to market events relative 
to the CAT NMS Plan. However, the Commission also believes that day T+5 
error correction may reduce costs to industry relative to the CAT NMS 
Plan, although the Commission is unaware of any cost estimates that 
have been provided to date.
---------------------------------------------------------------------------

    \1266\ See Letter from Manisha Kimmel, Managing Director, FIF, 
to the Participants, dated November 19, 2014, available at http://www.catnmsplan.com/industryfeedback/p601972.pdf; Industry 
Recommendations for the Creation of a Consolidated Audit Trail 
(CAT), SIFMA, March 28, 2013, available at http://www.catnmsplan.com/industryfeedback/p242319.pdf.
---------------------------------------------------------------------------

e. Funding Model
    The mechanism by which CAT fees are allocated is important because 
it can potentially disadvantage particular business models. Although 
the Plan does not discuss the final details of the CAT funding model, 
it does provide some details, including a set of funding principles 
that the Participants have discussed with the Development Advisory 
Group. The Commission is soliciting comment on alternative mechanisms 
for allocating fees across Execution Venues and across Industry 
Members.
    The CAT NMS Plan presents details regarding an allocation of costs 
between the Execution Venues and the other Industry Members (i.e., 
broker-dealers), but does not detail the proportions of fees to be 
borne by each group. Under the CAT NMS Plan, fees would be tiered by 
activity levels, with market participants within a given tier incurring 
a fixed fee.\1267\ In the case of Execution Venues (exchanges and 
ATSs), market share of share volume would determine the tier of the 
Execution Venue. In the case of broker-dealers, fees would be allocated 
by message traffic. The Commission is cognizant that ATSs are operated 
by broker-dealers, complicating this division of fees between broker-
dealers and Execution Venues. This is discussed further below.
---------------------------------------------------------------------------

    \1267\ For a discussion of the economic effect of the tiered 
structure, see IV.F.4.c, supra.
---------------------------------------------------------------------------

(1) Unified Funding Models
    The Commission is soliciting comment on several unified funding 
models as alternatives to the Plan's bifurcated funding model. One of 
the alternative funding models the Commission is soliciting comment on 
is a unified funding model in which Central Repository costs are 
allocated across all market participants (including Execution Venues) 
by message traffic. The Commission expects that message traffic will be 
a primary cost driver for the Central Repository, because transactional 
volume (which is cited by the Plan as a primary cost driver for the 
Central repository) is highly correlated with message traffic. 
Consequently, assessing CAT costs on market participants by message 
traffic may have the benefit of aligning market participants' 
incentives with the Participants' stated goal of minimizing costs. 
However, the Commission is also aware that while a broker-dealer's 
choice of business model is likely to determine its level of message 
activity, the majority of an exchange's message traffic is passive 
receipt of quote updates.\1268\ Because quotes must be updated on all 
exchanges when prices change, exchanges with low market share are 
likely to have more message

[[Page 30767]]

traffic (incurring CAT fees) per executed transaction (generating 
revenue).\1269\ Consequently, a model that charges exchanges for the 
passive receipt of messages from broker-dealers is likely to 
disadvantage the smaller exchanges relative to a model that charges for 
market share of executions.
---------------------------------------------------------------------------

    \1268\ Using MIDAS data, Commission staff analyzed the number of 
equity exchange proprietary feed messages and trades during the week 
of October 12, 2015. The message per trade ratio varied across 
exchanges from 38.46 to 987.17, with a median of 57.21.
    \1269\ Commission staff data analysis confirms this for the 
smallest exchanges. Except for the smallest exchanges, the trade to 
message ratios range from about 0.016 trades for every quote update 
to about 0.026 trades for every quote update and appear constant 
across market share levels. However, the smallest exchanges by 
market share have only about 0.001 trades for every quote update to 
about 0.009 trades for every quote update.
---------------------------------------------------------------------------

    The Commission is also soliciting comment on an alternative 
approach to reporting market maker quotations on exchanges that could 
address this concern. In this approach, market makers (both equity and 
options) would not need to report their quotation updates. Exchanges 
(both equity and options) would report quotation sent times (as 
detailed in the Plan with regard to Options Market Makers and the 
Exemption Request \1270\). Exchanges would not be assessed message 
traffic fees for these quotation updates; the broker-dealers who sent 
the quotes would be assessed for this message traffic. All other 
message traffic, regardless of which market participant initiated it, 
would be assessed fees associated with CAT using a common rate formula.
---------------------------------------------------------------------------

    \1270\ See Exemption Order, supra note 18, at 7-8.
---------------------------------------------------------------------------

    The Commission is soliciting comment on this alternative for a 
number of reasons. First, it ties CAT costs to a primary driver of the 
magnitude of Central Repository costs: message traffic.\1271\ Second, 
it substantially reduces the number of messages stored in the Central 
Repository. Third, it avoids disadvantaging smaller exchanges whose 
message traffic may be relatively large compared to their execution 
volume. Finally, this alternative avoids bifurcated fee approaches that 
may cause one Execution Venue to be relatively cheaper than another due 
to the manner in which CAT fees are assessed and may cause conflicts of 
interest for broker-dealers routing customer orders.\1272\ However, 
this alternative assesses CAT fees based on messages rather than the 
revenue-generating activity of trades. This may provide market 
participants with incentives to change their business models to reduce 
CAT fees, which could lead to reduced quotation activity that could be 
detrimental to market liquidity levels. Furthermore, because the vast 
majority of message activity originates with broker-dealers, this 
approach necessarily shifts most of the ultimate CAT funding burden to 
broker-dealers.
---------------------------------------------------------------------------

    \1271\ See Section IV.F.1.a, supra, stating that transactional 
volume is a primary driver of the costs of the Central Repository. 
The Commission preliminarily believes that transactional volume is 
highly correlated with message traffic.
    \1272\ For example, if the CAT funding model were set to make 
ATS trades significantly more costly relative to exchange trades, 
the exchanges might benefit from increased market share because ATSs 
might be compelled to increase their access fees to offset the 
proportionately higher CAT charges that they would incur. In the 
extreme, some ATSs might cease operations or seek to register as 
exchanges. Most ATSs do not disseminate quotation information; 
exchanges are required to do so. Reorganizing an ATS as an exchange 
therefore involves significant changes to its business model. 
Consequently, the Commission believes it unlikely that many ATSs 
would register as exchanges to avoid proportionately higher CAT 
charges. If certain types of trades have lower costs when their 
trades execute on an ATS, their trading costs would increase if they 
are forced onto exchanges. If some trades would not happen in the 
absence of an ATS, this would drive down overall trading volumes (as 
opposed to a shift from ATS to exchange). Lower overall trading 
volumes would be considered welfare-reducing, as they indicate 
foregone gains from trade.
---------------------------------------------------------------------------

    The Commission also is soliciting comment on a second alternative 
approach to CAT funding, a unified funding approach where the tiers in 
the funding model are based on market share of share volume. Under this 
approach, all market participants (both exchanges and broker-dealers) 
would qualify for a tier based on reported share volumes. Share volume 
would count equally toward the tier regardless of the Execution Venue 
selected by the broker-dealer originating the order. However, this 
approach does not align the costs of operating and maintaining the 
Central Repository, which would largely depend on message traffic, with 
the fees charged to market participants. Furthermore, it is possible 
that some Execution Venues could compete for order flow by not passing 
this fee on to their customers, generating the same limitations as 
discussed above for the funding model in the Plan.\1273\
---------------------------------------------------------------------------

    \1273\ See Section IV.F.4.c, supra.
---------------------------------------------------------------------------

    A third alternative would be for the funding model to impose fees 
on every individual trade instead of imposing a fixed fee by tier. This 
approach has several benefits. First, the Commission preliminarily 
believes that implementation costs for this approach are likely to be 
lower than other alternatives because infrastructure already exists to 
levy fees on each trade (this is the mechanism by which Section 31 fees 
are levied).\1274\ Second, it ties fees to the revenue-generating 
activity of trading, rather than quoting activity, which results in 
those more likely to afford high fees paying the higher fees. Quoting 
activity provides liquidity to the market, but often does not 
necessarily result in an execution that can bring revenue to the market 
participant placing the quote; consequently, levying CAT fees on trades 
avoids making a generally desirable activity (posting liquidity) more 
costly.\1275\ Third, it avoids the problems that may accompany a 
bifurcated approach to CAT cost allocation. Because the fee is levied 
regardless of where the trade occurs, it limits incentives of market 
participants to route to exchanges to avoid message traffic fees within 
broker-dealers or to avoid exposing an order in multiple venues to try 
to find non-displayed liquidity. These liquidity-seeking activities 
might reduce a client's trading costs, but they also potentially incur 
message traffic fees, creating a conflict of interest for broker-
dealers.
---------------------------------------------------------------------------

    \1274\ Under Section 31 of the Act, 15 U.S.C. 78ee, and Rule 31 
thereunder, 17 CFR 240.31, SROs such as FINRA and the national 
securities exchanges must pay transaction fees to the SEC based on 
the volume of securities that are sold on their markets. These fees 
are designed to recover the costs incurred by the government, 
including the SEC, for supervising and regulating the securities 
markets and securities professionals. The SROs have adopted rules 
that require their broker-dealer members to pay a share of these 
fees. Broker-dealers, in turn, may impose fees on their customers 
that provide the funds to pay the fees owed to their SROs. See SEC, 
Section 31 Transaction Fees (September 25, 2013), available at 
http://www.sec.gov/answers/sec31.htm.
    \1275\ Some quoting behavior may be costly to the market, for 
example spoofing or layering. This analysis assumes that message 
traffic fees associated with this undesirable behavior would not be 
sufficient to reduce that behavior. If that assumption is false, 
funding models that assign fees to quotes have the additional 
benefit of reducing disruptive activity. The Commission 
preliminarily believes that the benefits of reducing disruptive 
quoting activity via levying fees on quotes would not justify the 
costs of reducing beneficial quoting activity through the same fees.
---------------------------------------------------------------------------

    Assessing fees directly on trades entails certain costs as well. 
First, it does not provide incentives for market participants to limit 
their message traffic, which is a primary cost-driver for the Central 
Repository. Second, it does not provide the benefits of a tiered 
approach, which the CAT NMS Plan lists as including transparency, 
predictability and ease of calculation.\1276\
---------------------------------------------------------------------------

    \1276\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(v)(B).
---------------------------------------------------------------------------

(2) Bifurcated Funding Models
    The Commission is also soliciting comment on alternatives to the 
funding model proposed in the CAT NMS Plan that would also be 
bifurcated. One alternative would be to allocate CAT costs to broker-
dealers by market share of share volume while retaining the Plan's 
funding model for Execution

[[Page 30768]]

Venues.\1277\ A benefit of this alternative would be to avoid 
disincentives to liquidity provision operations, particularly for 
infrequently traded securities and high volatility securities. A 
disadvantage of this approach would be that it does not align the fees 
charged to a CAT Reporter with the costs those CAT Reporters impose on 
the Central Repository in terms of message traffic, potentially 
resulting in disproportionate charges to CAT Reporters because high 
message traffic broker-dealers would pay no more than low message-
traffic broker-dealers with the same level of trading activity.
---------------------------------------------------------------------------

    \1277\ SROs currently fund their regulatory data collection 
through a number of mechanisms. The Commission notes that FINRA does 
not charge its members for OATS directly. Rather, it is funded from 
FINRA's regulatory budget, which is collected from its members 
through various membership fees. The options exchanges charge an 
Options Regulatory Fee (``ORF''), which is a pass-through exchange 
fee collected by OCC clearing members on behalf of the U.S. option 
exchanges. The stated purpose of the fee is to assist in offsetting 
exchange costs relating to the supervision and regulation of the 
options market (e.g., routine surveillance, investigations, and 
policy, rule-making, interpretive and enforcement activities). The 
fee was first adopted by CBOE in 2008. See Securities Exchange Act 
Release No. 58817 (October 20, 2008), 73 FR 63744 (October 27, 
2008). Subsequently, PHLX (Securities Exchange Act Release No. 61133 
(December 9, 2009), 74 FR 66715 (December 16, 2009), ISE (Securities 
Exchange Act Release No. 61154 (December 11, 2010, 74 FR 67278 
(December 18, 2009)), BOX (See Securities Exchange Act Release No. 
61388 (January 20, 2010), 75 FR 4431(January 27, 2010)), NYSEAmex 
(Securities Exchange Act Release No. 64400 (May 4, 2011), 76 FR 
27114 (May 10, 2011), NYSE Arca (Securities Exchange Act Release No. 
64399 (May 4, 2011), 76 FR 27114 (May 10, 2011), NASDAQ (Securities 
Exchange Act Release No. 66158 (January 13, 2012), 77 FR 3024 
(January 20, 2012, C2 (Securities Exchange Act Release No. 67596 
(August 6, 2012), 77 FR 47902 (August 10, 2012)), MIAX (Securities 
Exchange Act Release No. 68711 (January 23, 2013), 78 FR 6155 
(January 29, 2013)), ISE Gemini (Securities Exchange Act Release No. 
70200 (August 14, 2013), 78 FR 51242 (August 20, 2013)), and BATS 
(Securities Exchange Act Release No. 74214 (February 5, 2105), 80 FR 
7665 (February 11, 2015)) also adopted an ORF. The OFR is currently 
assessed to customer orders at a rate of $0.0417 per U.S. exchange 
listed option contract. The ORF is assessed on all trades, both buys 
and sells. Further, FINRA charges fees for reporting to TRACE. 
Certain fees are based on the number of users and type of connection 
a firm has to the system, and others are based on size of the 
transaction. See FINRA Rule 7730.
---------------------------------------------------------------------------

    The Commission is further soliciting comment on the alternative of 
requiring the CAT NMS Plan to treat ATSs only as broker-dealers for 
funding purposes, instead of treating ATSs as Execution Venues. Under 
this alternative, firms that operate ATSs would not be charged for both 
their ATS's market share of share volume (like an exchange) and its 
message traffic (as a broker-dealer).\1278\ Instead, the firm operating 
the ATS would pay fees based on the ATS's message traffic as part of 
its operations as a broker-dealer, rather than as an Execution Venue as 
well, for fee purposes. As described in Section IV.F.4.d, the 
Commission preliminarily believes that under the current funding model 
in the CAT NMS Plan, the cost differentials that result might create 
incentives for broker-dealers to route order flow to minimize costs, 
creating a potential conflict of interest with broker-dealers' investor 
customers, who are likely to consider many facets of execution quality 
(such as price impact of a trade and probability of execution in a 
venue in which the order is exposed) in addition to any of these costs 
that are passed on to them.\1279\ The Commission is aware that this 
alternative would, in effect, shift part of the Central Repository 
funding costs from broker-dealers to Execution Venues because volume 
transacted on ATSs would not be assessed a portion of the Execution 
Venue funding burden and this portion would instead be allocated to 
exchanges. Furthermore, the Commission is aware that it is possible 
that under this alternative approach, ATSs might pay less in fees than 
similarly situated exchanges, which could disadvantage exchanges 
relative to ATSs.
---------------------------------------------------------------------------

    \1278\ As explained in Section IV.F.4.c, supra, the Commission 
preliminarily believes that the bifurcated funding model proposed in 
the Plan results in differential CAT costs between Execution Venues 
because it would assess fees differently on exchanges and ATSs for 
two reasons. First, message traffic to and from an ATS would 
generate fee obligations on the broker-dealer that sponsors the ATS, 
while exchanges incur no message traffic fees. Second, broker-
dealers that internalize off-exchange order flow, generating off-
exchange transactions outside of ATSs, would face a differential 
funding model compared to ATSs and exchanges.
    \1279\ See CAT NMS Plan, supra note 3, at Article VIII.
---------------------------------------------------------------------------

    The Commission is also soliciting comment on the alternative 
approach of not charging broker-dealers for message traffic to and from 
their ATSs while still assessing fees to ATSs as Execution Venues or 
exchange broker-dealers for their message traffic. Under this 
alternative, broker-dealers that operate ATSs would pay trading volume 
based fees on their ATSs volume in the same manner as exchanges' fees 
are assessed. However, the message traffic to and from the ATS would 
not be included in the message traffic used to calculate fees assessed 
to the broker-dealer that sponsors the ATS. The Commission 
preliminarily believes this alternative would help mitigate the broker-
dealer routing incentives discussed above. The Commission is aware that 
because the volume executed on ATSs would be included in the portion of 
Central Repository funding assigned to Execution Venues, this funding 
approach would not shift part of the funding burden assigned to 
Execution Venues away from ATSs (and the broker-dealers that operate 
them) to exchanges as the previous alternative would.
    The Commission preliminarily believes that either of these ATS-
related funding alternative approaches would avoid disadvantaging ATSs 
relative to similarly situated exchanges, and would be less likely to 
result in the conflicts of interest in routing described above. 
Currently, the Commission lacks sufficient details on the fee structure 
to make this determination, because the fee structure has not yet been 
finalized.
    The Commission is also soliciting comment on the alternative of 
excluding ATS volume from TRF volume for purposes of allocating fees 
across Execution Venues. Under this alternative, SROs that operate TRFs 
(currently only FINRA) would not pay Execution Venue fees for volume 
that originated from an ATS execution. This alternative would avoid the 
problem of double-counting ATS volume as share volume, which originates 
because each ATS trade is counted for fee-levying purposes as share 
volume associated with an ATS, then counted again as share volume when 
the trade is printed to a TRF. However, the Commission notes that other 
over the counter volume, such as occurs when orders are executed off-
exchange against a broker-dealer's inventory, would be assessed share 
volume fees while the message traffic that resulted in this execution 
would also be subject to fees through the broker-dealers that had order 
events related to these transactions. This contrasts to executions that 
occur on exchanges, where the venue that facilitates the execution does 
not pay fees for message traffic that led to the execution.
    The Commission is also soliciting comment on the alternative of not 
treating the Trade Reporting Facilities (``TRFs'') as FINRA Execution 
Venues. TRFs capture ATS share volume, which is already subject to fees 
allocated to Execution Venues, and non-ATS off-exchange share volume, 
which is subject to CAT fees allocated to broker-dealer message 
traffic. Consequently, under the approach in the Plan, the activity 
that generates a TRF trade report is already assessed CAT fees through 
the broker-dealers that facilitate the trade, or the ATSs that served 
as the Execution Venue. Under this alternative approach, FINRA would 
not pay any fees directly into the Central Repository, and broker-
dealers would only incur fees directly levied on them by the Operating 
Committee, rather than also

[[Page 30769]]

indirectly paying the TRF fees passed on to them by FINRA. If FINRA 
does not pay fees directly to the Central Repository, this could alter 
its incentives with respect to matters of cost voted on by the 
Operating Committee. However, it is possible that, since FINRA 
represents the viewpoints of its broker-dealer members, its incentives 
would be similar under either approach.
    The CAT NMS Plan would allocate net profit or net loss from the 
operation of the CAT equally among the Participants, regardless of 
size, which could advantage small exchanges in the event of a profit 
and disadvantage small exchanges in the event of a loss. This could 
negatively impact competition if the cost differentials are significant 
enough to alter the set of services that some competitors offer. As an 
alternative, the Commission is soliciting comment on whether the profit 
or loss from operating CAT should be allocated across Participants by 
market share of share volume, consistent with how the CAT costs would 
be allocated under the Plan.\1280\ The Commission preliminarily 
believes that this alternative would limit the possibility of 
extraordinary profits or losses from CAT resulting in a 
disproportionate advantage or disadvantage to exchanges with low 
trading volume.
---------------------------------------------------------------------------

    \1280\ Id.
---------------------------------------------------------------------------

    Finally, the Commission is soliciting comment on requiring a 
strictly variable funding model, rather than the fixed-tiered model in 
the CAT NMS Plan. Under a variable funding model, each trade or message 
is subject to a fee, rather than a broker-dealer incurring a fixed fee 
that depends on that broker-dealer's volume tier.\1281\ The Commission 
preliminarily believes that this alternative might increase 
administrative costs of the CAT NMS Plan as compared to an approach 
that uses the fixed-tiered funding model. However, the Commission also 
preliminarily believes that the fixed-tiered funding model can create 
incentives for market participants to change their behavior to avoid 
fees when their activity is near the boundary between two tier 
levels.\1282\ The Commission preliminarily believes that a strictly 
variable funding model could reduce inefficiencies resulting from 
market participants changing their behavior to move into a lower fee 
tier.
---------------------------------------------------------------------------

    \1281\ For example, under a fixed-tiered funding approach, any 
broker-dealer with no more than 10,000 CAT Reportable Events in a 
given month might pay $100 in fees, even a broker-dealer reporting a 
single event. Under a strictly variable funding approach, every 
broker-dealer CAT message might be assessed one cent in fees. For a 
broker-dealer reporting 10,000 CAT Reportable Events in a given 
month, the same fee burden would be incurred, but a broker-dealer 
reporting a single CAT reportable event would pay only one cent.
    \1282\ See Section IV.F.3.b, supra.
---------------------------------------------------------------------------

f. Requiring Listing Exchange Symbology
    The Commission is soliciting comment on an alternative to the CAT 
NMS Plan that would allow CAT Reporters to report using their existing 
symbologies, rather than listing exchange symbology. The Plan requires 
the Plan Processor maintain a complete symbology database, including 
the historical symbology. The CAT NMS Plan also requires CAT Reporters 
to report data using the listing exchange symbology format, which would 
be used in the display of linked data. The CAT NMS Plan also requires 
Participants to provide the Plan Processor with the issue symbol 
information, and validation of symbology would be part of data 
validation performed by the Plan Processor.\1283\
---------------------------------------------------------------------------

    \1283\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.1(a).
---------------------------------------------------------------------------

    The Commission preliminarily believes that, in light of the 
proposed requirement for the Plan Processor to maintain a complete 
symbology database, the requirement that CAT Reporters report using 
listing exchange symbology may result in unnecessary costs to CAT 
Reporters. Therefore, the Commission preliminarily believes that the 
alternative of allowing CAT Reporters to use their existing symbologies 
for reporting purposes could significantly reduce the costs for 
exchanges and broker-dealers to report order events to the Central 
Repository, as compared to the approach in the CAT NMS as filed, 
without a significant impact on the expected benefits of the Plan or 
the costs to operate the Central Repository.
    Currently, Execution Venues handle complex symbology in different 
fashions. Some common stocks, for example, have multiple classes of 
shares. Exactly specifying the issue to be traded involves identifying 
the ticker symbol and sometimes a share class. On some venues, the 
convention is that these security types are reported without a 
delimiter in the symbol; other venues use a delimiter, and delimiters 
can vary across venues. For example, assume a firm has a listing symbol 
of ABC, and has two classes of shares, A and B. An issue might be ``ABC 
A'' on one venue, ``ABC_A'' on another, and ``ABCA'' on a third. This 
can cause numerous problems for analyses that extend beyond a single 
trading venue, particularly if ``ABCA'' is the complete listing symbol 
for an unrelated security. As mentioned in the Benefits Section, the 
inclusion of the complete symbol history of a security and the 
requirement for queries, reports, and searches to automatically collect 
the appropriate data despite symbol changes promotes accurate query 
responses by ensuring the inclusion of order events that might have 
been excluded because of symbology differences and by excluding order 
events in unrelated securities. The Commission preliminarily believes 
that the CAT NMS Plan can achieve these benefits without requiring CAT 
Reporters to report using listing exchange symbology.
    As discussed in the Costs Section, one potential cost driver to CAT 
Reporters is the need to process reports before submitting them to the 
Central Repository.\1284\ If reports can contain drop copies from an 
order management system, CAT Reporters can aggregate their drop copies 
and send them without further processing the reports. If, on the other 
hand, CAT Reporters need to transform or add any fields to the report, 
those CAT Reporters would need to develop, test, and maintain code to 
run the transformation, and they would need to actually transform the 
data at least once a day. If CAT Reporters do not need to run this 
transformation at all, they could save money. The Commission 
preliminarily believes that the requirement to report in listing 
exchange symbology could be the only requirement that necessitates that 
CAT Reporters transform data before reporting it to the Central 
Repository.\1285\ Therefore, the Commission preliminarily believes that 
eliminating this requirement could reduce costs relative to the CAT NMS 
Plan as filed.
---------------------------------------------------------------------------

    \1284\ See Section IV.F.3.a, supra.
    \1285\ See id.
---------------------------------------------------------------------------

    Some broker-dealers may already have adequate computational 
resources to run the transformation, whether at once, in batches, or in 
real-time; others could have to invest in such resources--an investment 
that would be saved by eliminating the requirement to use listing 
exchange symbology. The degree of cost savings would depend on any 
requirements to transform the data prior to reporting, which depends on 
the allowable formats for transmission. The CAT NMS Plan does not 
specify the allowable formats or whether the Central Repository would 
require a fixed format. If the Technical Specifications require a fixed 
format, broker-dealers would most likely have

[[Page 30770]]

to transform their data prior to reporting it to the Central Repository 
regardless of the requirement to use listing exchange symbology, and 
the listing exchange symbol requirement could add very little to the 
reporting costs. Therefore, the Commission recognizes significant 
uncertainty in the cost savings associated with this alternative.
    Further, the Commission cannot estimate the degree to which 
eliminating this requirement could reduce costs as compared to those in 
the CAT NMS Plan as filed, because it lacks the data to do so. The Plan 
assumes the need to transform the data to match exchange symbologies 
and therefore does not separately itemize the cost for transformation 
as a separate step in the reporting process. The Commission has no data 
from which it can independently estimate the cost differential because 
it depends on information internal to each of a heterogeneous group of 
CAT Reporters (e.g., the symbologies their current systems use and 
whether those are readily transformed to match listing exchange 
symbologies), which information is not compiled or stored anywhere and 
to which the Commission therefore does not have ready access.
g. Data Accessibility Standards
    The Commission is soliciting comment on alternative approaches to 
the manner in which the CAT NMS Plan provides data access to 
regulators. Section IV.E.1.c of the CAT NMS Plan summarizes the Central 
Repository's requirements to provide access to regulators. This access 
would include both an online targeted query tool and a user-defined 
direct query or bulk extract.\1286\ The CAT NMS Plan also specifies 
minimum standards the Central Repository must meet, such as capacity to 
support 3,000 minimum regulatory users and minimum acceptable response 
times for queries of varying complexity and size.\1287\ The CAT NMS 
Plan also requires that the Plan Processor provide an open API that 
allows use of regulator-supplied common analytic tools. As discussed 
above, the CAT NMS Plan could result in many improvements to regulatory 
activities such as surveillance, examinations, and enforcement, but 
these benefits may not be fully realized if access to data is 
cumbersome or inefficient.\1288\ The Commission does not have 
information on the incremental benefits and costs of each aspect of 
regulator access as would be necessary to analyze specific alternatives 
to the many data access standards in the CAT NMS Plan.
---------------------------------------------------------------------------

    \1286\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.2(c).
    \1287\ Id. at Appendix C, Section A.1(b).
    \1288\ See Section IV.E.2, supra.
---------------------------------------------------------------------------

    The Commission is generally soliciting comment on alternatives to 
each minimum data accessibility standard required in the CAT NMS Plan. 
With multiple standards that could each be adjusted in countless ways, 
the set of possibilities is infinite, which precludes their enumeration 
and discussion within this analysis. Instead, this Section discusses 
several examples and requests comment on alternative standards that 
might be adopted. Because query response time standards provide exact 
limits, the Commission uses those to illustrate how changing the 
standards could affect benefits and costs. The CAT NMS Plan requires 
query responses for various types of queries of 5 minutes, 10 minutes, 
3 hours, and 24 hours, where the simplest queries involving scanning 
narrow sets of data would be required to return in 5 minutes and 
complex queries scanning multiple days of data and returning large 
datasets would be required to return within 24 hours.
    The Commission notes that particularly large and complex data 
queries can take extensive computing resources. While the benefits of 
direct access to CAT Data depend on reasonably fast query responses, 
the Commission recognizes that faster query response times come at a 
cost. The Commission does not have detailed information on significant 
breakpoints in those costs to judge whether slightly longer response 
times than those in the Plan could significantly reduce the costs of 
developing, maintaining, and operating the Central Repository. For 
example, the Commission does not know whether a 48-hour response time 
on a query of 5 years of data is significantly less expensive than a 24 
hour response time, but either maximum response time would provide a 
significant improvement in timeliness over current data. Likewise, the 
Commission does not know whether the response times could be faster 
without a significant increase in costs. The Commission recognizes that 
the detailed information on numerous other minimum standards regarding 
access to regulators is similarly unclear. Therefore, the Commission 
requests comment regarding all standards for regulatory access and 
whether technology creates natural breakpoints in costs such that a 
particular alternative could reduce the costs of the Plan without 
significantly reducing benefits or could increase benefits without 
significantly increasing costs.
h. Intake Capacity Levels
    The Commission is soliciting comment on alternatives to the intake 
capacity level required in the CAT NMS Plan. The CAT NMS Plan requires 
that the Central Repository have an intake capacity of twice historical 
peak daily volume measured over the most recent six years and the 
ability to handle peaks beyond this Baseline level for short 
periods.\1289\ In setting this requirement, the Participants could have 
selected any number of alternative intake capacity standards.
---------------------------------------------------------------------------

    \1289\ See CAT NMS Plan, supra note 3, at Appendix D, Section 
1.1.
---------------------------------------------------------------------------

    The Commission performed an analysis using MIDAS data and 
determined that, for equities, the daily message traffic volume would 
exceed two times the maximum daily message volume from the previous six 
years (2010 through 2015) with a probability of 0.033%, which amounts 
to the intake exceeding capacity levels about once every 8\1/3\ years. 
Message volume measures all equity messages, including orders, order 
updates, executions and cancellations, from MIDAS exchange direct 
feeds, consolidated SIP feeds, and a small portion of the FINRA ATS 
feed.\1290\
---------------------------------------------------------------------------

    \1290\ The Commission collected daily message volume from MIDAS 
for six years (January 1, 2010 through November 19, 2015) and found 
that August 10, 2011 generated the highest message traffic with 8.6 
billion messages. A Box-Cox transformation was applied to the data 
to fit it into a normal distribution. Using a probability density 
function to fit the transformed data into a normal distribution, the 
Commission found the probability that the daily message volume would 
exceed 17.2 billion (twice the maximum) messages is 0.033%. The 
MIDAS data used are all equity messages between 4 a.m. and 7 p.m. on 
trading days--including orders, order updates, executions, and 
cancellations--from exchange direct feeds, consolidated SIP feeds, 
and a small portion of the FINRA ATS feed. MIDAS does not receive 
messages before 4 a.m. and after 7 p.m. from its feed sources. The 
data is missing AMEX feeds from January 1, 2010 through October 4, 
2010; however, on average AMEX messages represent only 0.26% of 
daily message volume from all feeds.
---------------------------------------------------------------------------

    The Commission preliminarily believes that intake capacity level is 
likely to be a primary cost driver for the Central Repository.\1291\ In 
selecting a standard, there is a trade-off between additional cost for 
constructing and operating the Central Repository and the risk that 
increased volume could exceed the Central Repository's capacity. If the 
capacity were exceeded, the Commission preliminarily believes that 
regulators' access to CAT Data could be

[[Page 30771]]

significantly delayed. The Commission is cognizant that periods of 
heavy market activity are more likely to be periods with market events 
that would require regulatory investigation, so the risk that the 
Central Repository might not be able to provide timely access to data 
when it is most needed is concerning.
---------------------------------------------------------------------------

    \1291\ Transactional volume and the growth in transactional 
volume is likely a primary driver of the costs of the Central 
Repository. See Section IV.F.1.a, supra. The Commission believes 
that higher transactional volumes require higher intake capacity 
levels, higher storage capacity, and higher processing capacity.
---------------------------------------------------------------------------

    The Commission is soliciting comment on requiring a different 
intake capacity level. Alternative intake capacity levels would result 
in costs and benefits that depend on the specific alternative capacity 
level and whether it is higher or lower than the proposed level. For an 
alternative with a lower intake capacity level, such as 1.5 times the 
historic peak capacity level, the cost of creating and operating the 
Central Repository might be lower, but the risk that the Central 
Repository would be unable to meet regulator's data needs would be 
higher than under the CAT NMS Plan, particularly following events 
similar to the Flash Crash and August 24th, which created both a high 
volume of trading records and a high demand for timely regulatory 
analysis.
    An alternative with a higher required intake capacity level, such 
as 3 times the historic peak capacity level, would likely entail higher 
costs than the CAT NMS Plan, but higher intake capacity levels would 
reduce the risk of the Central Repository being unable to meet 
regulators' data needs and thus increase the benefits of the Plan.
    The CAT NMS Plan does not provide sufficient information for the 
Commission to quantify the cost difference between alternative intake 
capacities and the intake capacity in the CAT NMS Plan and there are no 
analogous projects of this scope with publicly-available data from 
bidding or otherwise from which the Commission could extrapolate.
3. Alternatives to the Scope of Certain Specific Elements in the CAT 
NMS Plan
    The Commission notes that Rule 613 sets forth the minimum elements 
the Commission believes are necessary for an effective consolidated 
audit trail.\1292\ The Commission also notes that it adopted these 
elements after notice and comment, including analyzing comment letters 
submitted in response to the Rule 613 Proposing Release.\1293\ 
Moreover, the Participants, pursuant to Rule 613, analyzed and proposed 
for inclusion in the CAT NMS Plan certain elements after consultation 
with their members, the Bidders and the DAG.\1294\
---------------------------------------------------------------------------

    \1292\ See Adopting Release, supra note 9.
    \1293\ See id.
    \1294\ See CAT NMS Plan, supra note 3.
---------------------------------------------------------------------------

    While the Commission and the SROs have previously analyzed Rule 
613, including the elements to be included in the CAT NMS Plan, the 
Commission now has the Plan, together with the cost and alternatives 
analysis provided by the Participants. The Commission has reviewed the 
Plan, including the cost estimates, and has performed its own economic 
analysis of the Plan. With the benefit of having reviewed and analyzed 
the Plan, the Commission believes that it is reasonable to solicit 
comment on alternatives to the scope of certain elements of the CAT NMS 
Plan because these alternatives could impact the cost and benefits of 
CAT, and given the passage of time, there may be market developments 
that could affect those costs and benefits that should be evaluated. 
These alternatives include: (1) Not requiring certain data fields that 
are currently required by the Plan; (2) requiring the Operating 
Committee to consider including more primary market transactions than 
it would otherwise be required to consider under the Plan; (3) removing 
from the Plan the OTC Equity Securities recording and reporting 
requirements; and (4) excluding certain Customer information periodic 
update requirements.
a. Data Fields
    Rule 613 provides that the Plan must require the reporting of 
certain data fields.\1295\ It also gives discretion to the Participants 
to require the reporting of data fields beyond the minimum set of 
fields mandated by Rule 613.\1296\ The Commission is soliciting comment 
on whether there should be changes to the data fields that would be 
subject to CAT reporting. Specifically, the Commission is soliciting 
comment on whether any data fields that would be subject to CAT 
reporting under the Plan should be excluded.
---------------------------------------------------------------------------

    \1295\ See 17 CFR 242.613(c)(7).
    \1296\ Id.
---------------------------------------------------------------------------

    The Commission is soliciting comment on whether any data fields 
that would be subject to CAT reporting under the Plan should be 
excluded. For example, Rule 613 required the Plan to include a unique 
customer identifier. As discussed further in Section IV.H.1 above the 
Commission granted the Participants an exemption from certain 
requirements in Rule 613 so that the Plan could include an approach 
whereby each broker-dealer would assign a unique Firm Designated ID to 
each trading account, which would be linked to a set of identifying 
information.\1297\ The Commission preliminarily believes that this 
approach would reduce the costs of requiring the customer identifier as 
compared to the Rule 613 approach.\1298\
---------------------------------------------------------------------------

    \1297\ Using the Firm Designated ID and the other information 
identifying the Customer that would be reported to the Central 
Repository, the Plan Processor would then assign a unique Customer-
ID to each Customer. Upon original receipt or origination of an 
order, broker-dealers would only be required to report the Firm 
Designated ID on each new order, rather than using the Customer-ID. 
See Exemption Order, supra note 18, at 14-15. Because the Plan 
Processor would still assign a Customer-ID to each Customer under 
the Customer Information Approach, the SROs are not requesting an 
exemption from Rule 613(j)(5).
    \1298\ See Section IV.H.1.b, supra.
---------------------------------------------------------------------------

    As an alternative, the Commission could eliminate the requirement 
to report customer identifiers. In the Adopting Release, the Commission 
recognized that the implementation of the unique customer identifier 
requirement might be complex and costly, and that the reporting of a 
unique customer identifier would require SROs and their members to 
modify their systems to comply with the Rule's requirements.\1299\ 
While the Commission preliminarily believes that eliminating the 
customer identifier would reduce certain costs to industry associated 
with the implementation and operation of CAT as compared to the Plan as 
filed, without providing any additional material information, the 
Commission preliminarily believes that such a change would limit the 
benefits of the Plan significantly. As the Commission noted in the 
Adopting Release for Rule 613, unique customer identifiers are vital to 
the effectiveness of the consolidated audit trail, and the inclusion of 
unique customer identifiers would greatly facilitate the identification 
of the orders and actions attributable to particular customers and thus 
substantially enhance the efficiency and effectiveness of the 
regulatory oversight provided by the SROs and the Commission. Further, 
without the inclusion of unique customer identifiers, many of the 
potential benefits of a consolidated audit trail would not be 
achievable.\1300\
---------------------------------------------------------------------------

    \1299\ See Adopting Release, supra note 9, at 45756.
    \1300\ Id.
---------------------------------------------------------------------------

    The Commission could also consider the alternative of excluding the 
allocation time field from reporting requirements in the Allocation 
Reports. Although this field is not currently required for 
recordkeeping, some broker-dealers do already retain allocation time 
information at the subaccount level in their trade blotters, though the 
Commission does not have precise information on the prevalence of this 
practice. The Commission preliminarily believes that removing 
allocation time would significantly

[[Page 30772]]

reduce the benefits of the Plan because regulators currently undergo 
significant difficulties to obtain allocation times and the allocation 
times would be useful for enforcement investigations.\1301\ At the same 
time, given the uncertainty in the current practices and the lack of 
information on the costs of this field in the Plan, the Commission is 
not sure how significant the cost savings of excluding the allocation 
time field would be. The Commission preliminarily believes that the 
substantial benefits of having allocation time at the subaccount level 
available and relatively accessible for regulatory activities warrants 
the costs associated with requiring CAT Reporters to include this field 
in CAT Data and that these costs would be significantly mitigated to 
the extent that CAT Reporters already retain this information.
---------------------------------------------------------------------------

    \1301\ See Section IV.E.1.a, supra.
---------------------------------------------------------------------------

    The Plan requires both the CAT-Reporter-ID for the broker-dealer 
routing an order and the CAT-Reporter-ID for the broker-dealer 
receiving a routed order to be reported to the Central Repository, both 
when the order is routed and again when the routed order is received. 
The Commission could eliminate the requirement to report the CAT-
Reporter-IDs when the routed order is received. However, while the 
Commission preliminarily believes this might reduce the CAT Reporting 
burden on some broker-dealers as compared to the Plan as filed, without 
providing any additional material information, the Commission noted in 
the Adopting Release that it does not believe the information reported 
when the order is received would be duplicative. Instead, the 
Commission noted that information regarding when a broker-dealer 
received a routed order could prove useful in an investigation of 
allegations of best execution violations to see if, for example, there 
were delays in executing an order that could have been executed 
earlier.\1302\ In addition, the Commission notes that if a market 
participant is required to report when it receives an order, regulators 
could solely rely on information gathered directly from that market 
participant when examining or investigating the market 
participant.\1303\ The Commission also noted that it relies on such 
data to improve its understanding of how markets operate and evolve, 
including with respect to the development of new trading practices, the 
analysis and reconstruction of atypical or novel market events, and the 
implications of new market dynamics.\1304\
---------------------------------------------------------------------------

    \1302\ See Adopting Release, supra note 9, at 45763.
    \1303\ Id.
    \1304\ Id.
---------------------------------------------------------------------------

    The Commission preliminarily believes that, with respect to the 
reporting of data fields required by Rule 613, the analysis in the 
Adopting Release is still applicable and the elimination of these data 
fields from the Plan would result in a failure to achieve many of the 
significant potential benefits of the Plan. However, as noted above, 
the costs or benefits of including particular fields in the Plan as 
filed, may have changed due to technological advances and/or changes in 
the nature of markets since Rule 613 was adopted. The Commission is 
therefore soliciting comment on the benefits and drawbacks of 
eliminating these and any other required data fields from the Plan.
b. Primary Market Transactions
    The CAT NMS Plan does not require the reporting of any primary 
market information to the Central Repository. However, as required by 
Rule 613(i), the CAT NMS Plan commits to incorporating a discussion of 
how and when to implement the inclusion of some primary market 
information into a document outlining how additional Eligible 
Securities could be reported to the Central Repository (the 
``Discussion Document''), which would be jointly provided to the 
Commission within six months after effectiveness of the Plan.\1305\ 
Additionally, as required by Rule 613(a)(1)(vi), the Plan includes a 
discussion of the feasibility, benefits and costs of including primary 
market transactions in the CAT NMS Plan.\1306\
---------------------------------------------------------------------------

    \1305\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
C.9. Section 6.11 of the Plan satisfies a requirement in 17 CFR 
242.613(i) to plan for expansion.
    \1306\ 17 CFR 242.613(a)(1)(vi); CAT NMS Plan, supra note 3, at 
Appendix C, Section A.6.
---------------------------------------------------------------------------

    In its discussion of primary market transactions, the CAT NMS Plan 
states that including some primary market allocation information in the 
CAT NMS Plan would provide significant benefits without unreasonable 
costs, while other allocation information would provide marginal 
benefits at significantly higher cost.\1307\ Specifically, the 
discussion in the CAT NMS Plan divides the primary market allocation 
information into two categories: Top-account allocations and subaccount 
allocations. Top-account allocations refer to allocations during the 
book-building process to institutional clients and retail broker-
dealers. These allocations are conditional and can fluctuate until the 
offering syndicate terminates. Top-account institutions and broker-
dealers make the subsequent subaccount allocations to the actual 
accounts receiving the shares. The Plan concludes that, with respect to 
primary market information, only the subaccount allocations would 
provide significant benefits without unreasonable costs if they were to 
be incorporated into the CAT.
---------------------------------------------------------------------------

    \1307\ See id. at Appendix C, Section A.6(b)-(c).
---------------------------------------------------------------------------

    Based on that discussion, the Plan states that ``the Participants 
are supportive of considering the reporting of Primary Market 
Transactions, but only at the subaccount level, and would incorporate 
analysis of this requirement, including how and when to implement such 
a requirement, into their document outlining how additional Eligible 
Securities could be reported to the Central Repository, in accordance 
with SEC Rule 613(i) and Section 6.11 of the Plan.'' \1308\ The Plan 
therefore would limit the discussion of reporting primary market 
transactions in the Discussion Document to the subaccount level. As an 
alternative to the approach in the Plan, the Commission is soliciting 
comment on whether to broaden the required scope of the discussion of 
primary market allocation information in the Discussion Document to 
include an analysis of incorporating both top-account and subaccount 
information for primary market transactions into the CAT. The 
Commission preliminarily believes that the potential benefits of 
including top-account information in the CAT could be significant and 
that the costs of including top-account information could be lower than 
what is described in the CAT NMS Plan and appropriate in light of 
significant potential benefits. For these reasons, the Commission 
preliminarily believes that top-account information should not be 
excluded from the Discussion Document.
---------------------------------------------------------------------------

    \1308\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.6(c).
---------------------------------------------------------------------------

    Some primary market information is currently available to 
regulators. FINRA collects primary market allocation information on the 
initial and final list of distribution participants in their 
Distribution Manager. Based on discussions with Participants, the 
Commission understands that issuers of IPOs are required to report 
primary market allocations to broker-dealers within the Distribution 
Manager, but reported information does not contain broker-dealer 
customer information on those allocations. Primary market allocations 
to market participants other than broker-dealers can be voluntarily 
reported to the system. FINRA uses this system in the course of 
investigations in response to complaints and in normal

[[Page 30773]]

examinations of broker-dealers. The Commission can request data from 
the Distribution Manager. When the Commission or an SRO needs 
additional primary market information, they request it from 
underwriters and other broker-dealers in the offering process. These ad 
hoc data requests can take weeks for underwriters to process and, if 
requesting data from multiple underwriters or other broker-dealers, 
each could submit the data in a different format or with different data 
definitions, adding time to the process of combining the data across 
underwriters.
    Primary market information currently assists regulators in 
examining underwriting practices and surveilling for violations of 
regulations regarding allocations in primary offerings. The information 
also is useful for conducting market analysis and research on policy 
issues such as allocation decisions, flipping, and secondary market 
price support and the analysis and reconstruction of market events such 
as the Facebook IPO or the Vonage IPO.\1309\
---------------------------------------------------------------------------

    \1309\ See Reena Aggarwal, Allocation of Initial Public Offering 
and Flipping Activity, 68(1) Journal of Financial Economics 111-135 
(2003); Reena Aggarwal, Manju Puri and N. Prabhala, Institutional 
Allocation in Initial Public Offerings: Empirical Evidence 57 (3) 
Journal of Finance 1421-1442 (2002); Raymond P. Fishe, How Stock 
Flippers Affect IPO Pricing and Stabilization, Journal of Financial 
and Quantitative Analysis 319-339 (2002); and Raymond P. Fishe, 
Ekkehart Boehmer, Underwriter Short Covering in the IPO Aftermarket: 
A Clinical Study, Journal of Corporate Finance, 575-594 (2004). For 
background information on the Facebook IPO, see SEC Press Release, 
SEC Charges NASDAQ for Failures During Facebook IPO (May 29, 2013), 
available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171575032. For background information on the Vonage 
IPO, see FINRA, FINRA Fines Citigroup Global Markets, UBS and 
Deutsche Bank $425,000, Orders Customer Restitution for Supervisory 
Failures in Vonage IPO (September 22, 2009), available at http://www.finra.org/newsroom/2009/finra-fines-citigroup-global-markets-ubs-and-deutsche-bank-425000-orders-customer.
---------------------------------------------------------------------------

    The Commission preliminarily believes that including both top-
account and subaccount allocation information for primary market 
transactions in CAT would make primary market information that 
identifies customers directly accessible to regulators, which would be 
beneficial. In particular, top-account information in addition to 
subaccount information would be necessary to surveil, without 
requesting data from underwriters, for prohibited activities in the 
book-building process and would improve the efficiency of 
investigations into such prohibited activities. For example, including 
top-account information in CAT Data would provide regulators efficient 
access to data relevant for investigations into tie-in arrangements 
because regulators would be able to correlate treatment in the primary 
offering with other trading activity to see if, for example, those who 
trade more in the aftermarket receive more of the initial public 
offering shares they request than others. Including such information in 
CAT Data would also provide efficient access to data that could 
identify potential allocations that preference some customers over 
others in the IPO allocation process because the SROs and Commission 
could examine the relationship between IPO initial allocations, initial 
indications of interest, and fluctuations in allocations and 
indications of interest during the book-building process. In the 
Adopting Release, the Commission noted several additional benefits of 
collecting top-account information in addition to subaccount 
information for primary market transactions. For example, examinations 
of ``spinning,'' ``laddering,'' and other ``quid pro quo'' arrangements 
would benefit from efficient access to such CAT Data, which would 
facilitate a comparison of those customers allocated shares in an 
offering to those who are not allocated shares in an offering and how 
the conditional allocations change during the book-building process. 
Book-building information, which is currently very difficult for 
regulators to assemble, would provide very useful insights into IPO and 
follow-on allocations in market analysis. Such insights would better 
inform rulemaking and other policy decisions.
    The CAT NMS Plan estimates that for broker-dealers to implement a 
system to record and report top-account and subaccount allocation 
information for primary market transactions would take 36 months of 
staff time per firm at a cost of $234.8 million whereas just subaccount 
information would take 12 months of staff time per firm at a cost of 
$58.7 million.\1310\ The inclusion of top-account allocation 
information accounts for the difference of $176.1 million. The CAT NMS 
Plan explains that including top-account information in the CAT would 
result in higher implementation costs because the top-account 
information is maintained in book-building systems in investment 
banking divisions of broker-dealers that differ fundamentally from 
secondary market systems.\1311\
---------------------------------------------------------------------------

    \1310\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.6(c). The estimated costs reflect the implementation cost of 
systems development needed to support top-account and subaccount 
information for primary market transactions to CAT. The $234.8 
million figure assumes 36 months of staff time, with 21.741 days per 
month at a $1200 daily FTE rate for 250 firms. The $58.7 million 
figure assumes 9 months of staff time, with 21.741 days per month at 
a $1200 daily FTE rate for 250 firms. The estimates do not include 
any ongoing annual costs to maintain the reporting; the Commission 
assumes that these systems would be supported by staff already 
engaged to support CAT reporting.
    \1311\ Id. at Appendix C, Section A.6(a).
---------------------------------------------------------------------------

    However, the Commission preliminarily believes that the costs of 
adding top-account allocation information may be lower than those 
estimated in the CAT NMS Plan, for several reasons. First, in 
combination with an alternative that would require less granular time 
stamps or a larger allowable clock offset on less time-sensitive 
systems, the costs for top-account information would be lower than 
indicated in the Plan. The Commission recognizes that the benefits from 
time stamp granularity and clock synchronization in the systems for 
reporting top-account information may be lower than those for secondary 
market systems because activity occurs far less frequently than it does 
on exchanges and regulators may not need to sequence primary market 
transactions relative to secondary market transactions within a second. 
The Commission is unable to estimate cost savings from alternative 
clock synchronization requirements because estimates presented in the 
Plan do not cite these specific costs. Second, the Plan's estimate is 
sensitive to the number of underwriters. In particular, the estimates 
assume 250 underwriters would need to implement changes to provide for 
top-account allocation information for primary market 
transactions.\1312\ This is also the same number of underwriters 
assumed to need to implement subaccount allocation information. 
However, the Commission suspects that the number of underwriters that 
would need to implement changes for top-account information may be 
lower than the number that implement subaccount information for primary 
market transactions because the lead underwriters could have all of the 
information necessary to report the top-account information. If so, 
then only those underwriters that expect to lead an offering would need 
to implement systems changes to report top-account allocation 
information. Estimating costs only for lead underwriters could result 
in a much smaller estimate.
---------------------------------------------------------------------------

    \1312\ See Cost Estimate for Adding Primary Market Transactions 
into CAT (February 17, 2015), available at http://www.catnmsplan.com/industryfeedback/p602480.pdf.
---------------------------------------------------------------------------

    The Commission does not have an estimate of the ongoing costs of 
underwriters reporting top-account information. However, the Commission 
preliminarily estimates an average of

[[Page 30774]]

approximately 120 IPOs each year and 340 follow-on offerings each year 
from 2001 to 2014. Assuming each offering contains approximately 260 
initial allocations, including all indications of interest, with 10 
amendments from initial allocation to final allocation, each offering 
would generate 2,600 CAT Reportable Events for a total of 1.2 million 
per year.\1313\ This total is much smaller than the number of 
Reportable Events in the secondary market (trillions). Therefore, while 
the Commission cannot estimate the costs of ongoing primary market 
reporting, the Commission believes the ongoing costs of reporting 
primary market transactions would be a fraction of the ongoing costs of 
secondary market reporting and would likely be supported by staff 
already engaged to maintain CAT reporting.
---------------------------------------------------------------------------

    \1313\ The Commission estimated the number of allocations per 
offering by averaging the data for the 11 IPOs made public along 
with an academic paper. See Jay R. Ritter and Donghang Zhang, 
Affiliated Mutual Funds and the Allocation of Initial Public 
Offerings, 86(2) Journal of Financial Economics 337-368 (2007) and 
http://bear.warrington.ufl.edu/ritter/Allocation08282012.xls. If the 
Commission assumes that each offering would generate 10 amendments 
to allocations prior to the subaccount allocations, there would be 
2,600 reports per offering and 1.2 million reports per year using 
the number of offerings in 2014. If each offering instead generates 
5 or 20 amendments, the number of reports per year would be 0.6 
million or 2.4 million.
---------------------------------------------------------------------------

    The Commission also recognizes that including top-account 
information in the CAT NMS Plan could change the competitive landscape 
of the market for underwriting services. In particular, some 
underwriters may choose to exit the market instead of report top-
account information. The Commission preliminarily believes that the 
compliance costs themselves would be low compared to underwriting 
fees.\1314\ Nonetheless, the Commission recognizes that some 
underwriters may exit rather than comply with the CAT NMS Plan 
requirements. Likewise, the Commission recognizes that the costs to 
implement CAT reporting of top-account allocation information could 
increase barriers to entry.
---------------------------------------------------------------------------

    \1314\ The primary market issued about $450 billion in common 
stock in 2014 and underwriters earned $5.2 billion in underwriting 
fees in 2014. This is high relative to the $176 million cost 
estimate above. The value of issuances comes from the Securities 
Data Corporation and information regarding the aggregate 
underwriting fees comes from FOCUS reports.
---------------------------------------------------------------------------

    Finally, the Commission recognizes that requiring top-account 
information in the CAT NMS Plan could alter the way underwriters 
conduct their book-building activities. The Commission is not sure if 
these changes would be beneficial or harmful to issuers and investors. 
For example, issuers and investors could benefit if including top-
account information in CAT deters book-building activity that violates 
Regulation M or FINRA Rule 5110, 5130 or 5131, though some particular 
investors may lose any gains from preferential treatment. However, the 
Commission is uncertain whether investors and issuers would benefit if 
underwriters altered their book-building activity in an effort to 
reduce their reporting burden. For example, if reporting every change 
to a conditional allocation proved cumbersome, underwriters may choose 
to update preliminary allocations less often. This could change the way 
that underwriters and investors interact with each other in the book-
building process with implications for the potential success of the 
offering or investors' satisfaction with the outcome.
c. OTC Equity Securities
    The CAT NMS Plan requires the reporting of data regarding OTC 
Equity Securities upon implementation of the CAT NMS Plan. The 
Commission is soliciting comment on the alternative of eliminating the 
requirement to report activity in OTC Equity Securities from the CAT 
NMS Plan, and instead requiring only that the SROs include a discussion 
of how OTC Equity Securities could be incorporated into the CAT in the 
Discussion Document that they are required to provide within six months 
after the effective date of the Plan pursuant to Rule 613(i).\1315\ 
This was the approach taken with respect to OTC Equity Securities in 
Rule 613, because the Commission believed that limiting the scope of 
the CAT to NMS securities was a reasonable first step in implementing 
the CAT.\1316\ Under this approach, the CAT NMS Plan would require each 
national securities exchange and national securities association, 
within six months after effectiveness of the national market system 
plan, to jointly provide to the Commission a document outlining in 
detail how OTC Equity Securities (along with certain other categories 
of securities) could be incorporated into the CAT information, 
including an implementation timeline and a cost estimate. The 
Commission preliminarily believes that excluding OTC Equity Securities 
from the CAT upon implementation would reduce costs of the CAT NMS 
Plan. But, the Commission also preliminarily believes that removing the 
requirement to report activity in OTC Equity Securities from the CAT 
NMS Plan would limit the regulatory benefits of the CAT NMS Plan 
significantly.
---------------------------------------------------------------------------

    \1315\ 17 CFR 242.613(i).
    \1316\ Id.; see also Adopting Release, supra note 9 at 45744. 
The Plan states that ``[e]ven though SEC Rule 613 does not require 
reporting of OTC Equity Securities, the Participants have agreed to 
expand the reporting requirements to include OTC Equity Securities 
to facilitate the elimination of OATS.'' See CAT NMS Plan, supra 
note 3, at Appendix C, Section C.9.
---------------------------------------------------------------------------

    Under the alternative approach, OTC Equity Securities would be 
excluded from the Plan upon implementation. While they could still be 
incorporated into the Plan following the submission of the Discussion 
Document, the alternative approach would create uncertainty as to 
whether or not OTC Equity Securities would ultimately be incorporated 
into CAT NMS Plan and the timeline for that process.
    Excluding OTC Equity Securities from the CAT NMS Plan could limit 
oversight of the OTC equity market relative to the oversight obtainable 
under the Plan.\1317\ FINRA currently collects reports on OTC equity 
markets in its OATS data.\1318\ The primary difference between OATS and 
CAT Data for OTC Equity Securities would be in completeness, due to the 
additional data fields in CAT Data that are not in OATS, particularly 
Customer-ID; in any accuracy improvements relative to OATS; in direct 
access for the Commission; and in the timeliness relative to OATS, 
particularly in having linked data that requires less time to process. 
Relative to the Plan, therefore, excluding OTC Equity Securities could 
reduce the efficiency and effectiveness of regulators overseeing the 
OTC market, conducting investigations of manipulation, pump and dumps, 
and improper penny stock sales. It could also reduce the efficiency of 
estimating disgorgement payments to harmed investors relative to the 
Plan.
---------------------------------------------------------------------------

    \1317\ The Commission has discussed the potential for fraudulent 
activity in the OTC market. See SEC, Microcap Fraud, available at 
http://www.sec.gov/spotlight/microcap-fraud.shtml.
    \1318\ See supra note 351 and related text.
---------------------------------------------------------------------------

    The CAT NMS Plan states that including OTC Equity Securities could 
facilitate the retirement of OATS.\1319\ If OTC Equity Securities are 
not included in the CAT NMS Plan upon implementation, including OTC 
Equity Securities at a later time would require an amendment to the CAT 
NMS Plan, which could take significant time and potentially delay the 
retirement of OATS.\1320\ The Commission is cognizant

[[Page 30775]]

that the period of duplicative reporting, during which both CAT and 
OATS would be reported by market participants, is likely to impose a 
significant cost on industry.\1321\ The CAT NMS Plan states that the 
inclusion of OTC Equity Securities at CAT implementation is generally 
supported by industry to facilitate the retirement of OATS.\1322\
---------------------------------------------------------------------------

    \1319\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.1(a) n.16.
    \1320\ The Commission notes, however, that the incorporation of 
OTC Equity Securities is not the only hurdle needed to retire OATS, 
and other hurdles may remain open even after any approval of the CAT 
NMS Plan. For example, the Plan anticipates a period of 12-18 months 
during which the SROs would analyze rules and systems to determine 
which require duplicative information. The process and timeline for 
elimination of duplicative reporting systems is discussed in Section 
IV.F.2, supra.
    \1321\ See Section IV.F.2, supra.
    \1322\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
C.9.
---------------------------------------------------------------------------

    The Commission preliminarily believes that excluding OTC Equity 
Securities from the CAT upon implementation would reduce certain costs 
associated with implementation and operation of CAT as compared to the 
Plan as filed, without providing any additional material information, 
because less data would be reported,\1323\ therefore requiring fewer 
resources to implement and maintain the CAT. The Commission further 
preliminarily believes that CAT Reporters and the Central Repository 
would avoid certain compliance costs if OTC equities were excluded. To 
the extent that market participants rely on separate IT infrastructure 
to handle activity in OTC as opposed to listed securities, delaying the 
inclusion of OTC Equity Securities in CAT postpones costs associated 
with updating these systems. Postponing these system modifications may 
allow these modifications to be more efficiently integrated into other 
planned system upgrades, reducing costs to industry. The Commission 
notes that, even under this alternative approach, market participants 
still may incur these costs eventually, because the approach 
contemplates that the CAT NMS Plan could be expanded to require the 
reporting of order events in OTC Equities following the submission of 
the Discussion Document.
---------------------------------------------------------------------------

    \1323\ For example, in February, 2016, the average daily number 
of trades in OTC securities is approximately 98,300, on an average 
of approximately 18,500 issues over that same period. While that 
volume of trades is not large, the number of distinct issues is.
---------------------------------------------------------------------------

    Furthermore, the Commission preliminarily believes that the cost 
savings from delaying incorporating OTC Equity Securities in the CAT 
NMS Plan are likely to be lower than the increase in costs of 
duplicative reporting that result from a delay to OATS retirement. Any 
broker-dealers that trade both OTC Equity Securities and listed equity 
or option securities would have to comply with the Plan regardless of 
the inclusion of OTC equities, so the cost savings to these broker-
dealers from the exclusion of OTC Equity Securities may not be 
significant. The Commission preliminarily believes that the number of 
broker-dealers that trade only OTC Equity Securities is small. Finally, 
the Commission expects that the duplicative reporting costs would be 
fairly significant and that extending the time until the retirement of 
OATS would be a significant additional cost.
    The Commission cannot estimate the amount of the cost reduction 
from excluding OTC Equity Securities because it lacks the data to do 
so. The CAT NMS Plan presents data only on the aggregate costs of on-
exchange and OTC equity reporting; it does not present data on the 
costs specifically attributable to OTC equity reporting. The Commission 
has no data from which it can independently estimate the cost 
differential because it depends on information internal to each CAT 
Reporter (e.g., how their systems would change for the alternative 
compared to the Plan), which is not compiled or stored anywhere, and to 
which the Commission therefore does not have ready access, and it 
depends on when OTC Equity Securities would otherwise be included and 
the status of OATS and other systems in the interim.
d. Periodic Updates to Customer Information
    As noted above in Section IV.E.1.b(4), the Plan Processor is 
required to create a Customer-ID and map Firm Designated IDs to this 
Customer-ID so that records stored in the CAT Data link to the 
Customers. To facilitate this, the Plan requires CAT Reporters to 
submit an initial set of Customer information to the Central Repository 
and subsequent daily updates and changes to that Customer 
information.\1324\ In addition to daily updates to reflect changes in 
Customer information required in Rule 613, the CAT NMS Plan also 
requires members to submit periodic full refreshes of all Customer 
information to the CAT.\1325\ The Commission is soliciting comment on 
an alternative that would eliminate the requirement for periodic full 
refreshes.
---------------------------------------------------------------------------

    \1324\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.1(a)(iii); Appendix D, Section 9.1.
    \1325\ See id., at Appendix C, Section A.1(a)(iii) n.33.
---------------------------------------------------------------------------

    The CAT NMS Plan states that the purpose of these refreshes is to 
``ensure the completeness and accuracy of Customer information and 
associations.'' \1326\ Although the Commission believes that the 
Participants should ensure that customer information in the Central 
Repository is complete and accurate, the requirement for periodic full 
refreshes seems redundant if the initial list and daily updates are 
complete and accurate and would, therefore, provide no additional 
benefit. Further, not requiring these periodic refreshes could reduce 
the risk of a security breach of personally identifiable information. 
However, the Commission recognizes that periodic full refreshes of 
customer information could address any errors that are introduced in 
the daily update process, although the Commission preliminarily 
believes that such problems are likely to be quite rare. In addition, 
the Commission recognizes that not requiring the periodic full 
refreshes could reduce certain costs associated with implementation and 
operation of CAT as compared to the Plan as filed for CAT Reporters, 
although the Commission preliminarily believes that these cost 
reductions would be minor for two reasons. First, the quantity of data 
required to refresh the customer information table is very small 
compared to the size of market data files submitted regularly by most 
market participants. Second, because market participants would need to 
develop software and procedures to initially populate the customer 
information table, that software and procedure should be available to 
refresh the table periodically. Therefore, the Commission preliminarily 
believes that removing the requirements for periodic full refreshes of 
customer information could minimally reduce the cost of the Plan 
without materially reducing the benefits.
---------------------------------------------------------------------------

    \1326\ Id.
---------------------------------------------------------------------------

4. Alternatives to the CAT NMS Plan
    The Commission is soliciting comment on the broad set of 
alternatives of modifying existing systems to reduce the data 
limitations described above instead of approving the CAT NMS Plan.
    When it adopted Rule 613, the Commission noted that ``the costs and 
benefits of creating a consolidated audit trail, and the consideration 
of specific costs as related to specific benefits, are more 
appropriately analyzed once the SROs narrow the expanded array of 
choices they have under the adopted Rule and develop a detailed NMS 
plan.'' \1327\ The Commission also noted that a ``robust economic 
analysis of . . . the actual creation and implementation of a 
consolidated audit trail itself . . .

[[Page 30776]]

requires information on the plan's detailed features (and their 
associated cost estimates) that will not be known until the SROs submit 
their NMS plan to the Commission for its consideration.'' \1328\ 
Accordingly, the Commission deferred its economic analysis of the 
actual creation, implementation, and maintenance of the CAT until after 
submission of an NMS plan.
---------------------------------------------------------------------------

    \1327\ See Adopting Release, supra note 9, at 45725-26.
    \1328\ Id. at 45726.
---------------------------------------------------------------------------

    The Commission recognizes that approving the CAT NMS Plan is not 
the only available means of improving the completeness, accuracy, 
accessibility, and timeliness of the data used in regulatory 
activities. Alternatively, the Commission could mandate improvements to 
one or more existing data sources to address the data limitations noted 
in the Baseline Section. The Commission previously considered this set 
of alternatives when considering whether to adopt Rule 613.\1329\ The 
Commission has now reviewed the CAT NMS Plan, including the cost 
estimates, and has performed its own economic analysis of the Plan. 
With the benefit of having reviewed and analyzed the Plan, the 
Commission is now soliciting comment on this set of alternatives.
---------------------------------------------------------------------------

    \1329\ Id. at 45739-41.
---------------------------------------------------------------------------

    As an alternative to the CAT NMS Plan, the Commission could require 
modifications to OATS. In the Adopting Release, the Commission noted 
that it had received comments suggesting various ways that the OATS 
system could be modified to serve as the central repository for the 
consolidated audit trail.\1330\ However, the Commission also noted that 
OATS would require significant modifications in order to provide the 
attributes that the Commission deems crucial to an effective audit 
trail. In particular, OATS excludes some exchange-based and other types 
of non-member activity; it does not collect market-making quotes 
submitted by registered market makers (in those stocks for which they 
are registered); it is not a central repository and therefore does not 
presently provide other regulators with ready access to a central 
database containing processed, reconciled, and linked orders, routes, 
and executions ready for query, analysis, or download; it does not 
presently collect options data; it does not afford regulators an 
opportunity to perform cross-product surveillance and monitoring; and 
it does not collect information on the identities of the customers of 
broker-dealers from whom an order is received.\1331\
---------------------------------------------------------------------------

    \1330\ Id.
    \1331\ Id. at 45741.
---------------------------------------------------------------------------

    The Commission preliminarily believes that, as stated in the 
Adopting Release, the missing attributes identified above are crucial 
to improving the completeness, accuracy, accessibility, and timeliness 
of the data used in regulatory activities. Thus, any alternative to CAT 
based on OATS that does not address those deficiencies would limit the 
potential benefits of the alternative significantly. Given the 
modifications necessary, the Commission cannot estimate the potential 
cost savings, if any, from mandating an OATS-based approach as an 
alternative to the CAT NMS Plan, because the Commission does not have 
sufficient information to estimate the cost of modifying OATS to 
address some or all of these deficiencies, either separately or in 
combination. The Plan does not provide data on the cost of making each 
relevant modification to OATS, and the Commission has no other data 
from which it can independently estimate this, because the Commission 
is not aware of any such data currently available to it. The Commission 
notes, however, that Rule 613 provided flexibility to the SROs to 
propose an approach based on OATS and/or other existing data 
sources.\1332\ Given that Rule 613 provided this flexibility to the 
SROs, the Commission preliminarily believes that the SROs could have 
utilized an OATS-based approach if that approach would have represented 
significant cost savings relative to the Plan's approach, and the SROs 
that operate those reporting systems had presented such a solution as a 
Bid. Furthermore, the Commission notes that an approach that modifies 
and expands OATS to satisfy the requirements of the CAT NMS Plan 
remains feasible under the current bidding process. The Commission 
seeks comment on the costs and benefits of requiring modifications to 
OATS as an alternative to the CAT NMS Plan.
---------------------------------------------------------------------------

    \1332\ Id. The Commission also notes that the current Plan could 
allow the Plan Processor to leverage some elements of the existing 
OATS infrastructure and/or other existing data sources in the 
implementation of the CAT.
---------------------------------------------------------------------------

    Another alternative would be for the Commission to modify other 
data sources instead of, or in combination with, OATS. However, like 
OATS, all of the current data sources have limitations that would need 
to be addressed in order to provide the attributes that the Commission 
deems crucial to an effective audit trail.\1333\ Furthermore, the 
Commission preliminarily believes that modifying any other single data 
source would be more costly than modifying OATS, which is currently the 
most comprehensive audit trail. While the Commission could require the 
modification of multiple data sources in combination, the Commission 
preliminarily believes that an alternative to the CAT NMS Plan that 
relied on multiple data sources, such as a combination of OATS, COATS, 
other SRO audit trail data and/or publicly available data, would 
eliminate the benefits associated with having a single, complete 
consolidated source from which regulators can access trade and order 
data, which the Commission considers to be very significant.\1334\
---------------------------------------------------------------------------

    \1333\ The limitations of the various data sources are discussed 
in Section IV.D, supra.
    \1334\ These benefits are discussed in Section IV.E, supra.
---------------------------------------------------------------------------

    In summary, the Commission cannot estimate the potential cost 
savings, if any, from modifying one or more other data sources instead 
of, or in combination with, OATS, because the Commission does not have 
sufficient information to estimate the cost of modifying each of the 
currently available data sources to address their current limitations, 
separately or in combination. The Plan does not provide data on the 
cost of making each relevant modification to each current data source, 
and the Commission has no other data from which it can independently 
estimate this, because the Commission is not aware of any such data 
currently available to it.
    However, the Commission preliminarily believes that mandating 
improvements to the completeness, accuracy, accessibility, and 
timeliness of current data sources without an NMS Plan that requires 
the consolidation of data and increased coverage across markets and 
broker-dealers would likely significantly limit the potential benefits, 
possibly without providing significant cost savings. The Commission 
seeks comment on the costs and benefits of modifying one or more 
currently available data sources, separately or in combination, as an 
alternative to the CAT NMS Plan.
5. Request for Comment on the Alternatives
a. Generally
    383. Are there any other alternatives that the Plan should require? 
If so, please describe the alternative and the costs and benefits of 
the alternative relative to the Plan.

[[Page 30777]]

b. Alternatives to the Approaches Permitted by the Exemption Order 
\1335\
---------------------------------------------------------------------------

    \1335\ See also Sections III.B.5-III.B.9, supra, for additional 
requests for comment on the alternative Rule 613 approaches to the 
approaches the Exemption Order allowed to be included in the CAT NMS 
Plan.
---------------------------------------------------------------------------

    384. Should the CAT NMS Plan require Options Market Makers to 
report their quotes to the Central Repository? Please explain. Do 
Commenters believe that the costs of the Rule 613 approach would be 
disproportionately borne by smaller broker-dealers? Why or why not? 
Please provide data supporting your position.
    385. Should the Plan treat equity market makers the same as Options 
Market Makers for purposes of quotation reporting--i.e., equity market 
makers report only Quote Sent Time and exchanges to which the quote is 
routed report the other information? Why or why not? What are the 
relative costs and benefits of this alternative? Please provide cost 
estimates.
    386. Should the Plan require an alternative approach to reporting 
market maker quotes on exchanges where both equity and Options Market 
Makers would not need to report their quotation updates, and instead 
the exchanges would report Quote Sent Times in their reports of 
receiving these quotation updates? Why or why not? How would such an 
alternative affect the costs of building and operating the Central 
Repository? How would such an alternative affect market-maker costs of 
implementing and continuing CAT reporting?
    387. Should the CAT NMS Plan require that Allocation Reports 
provide sufficient information for the Central Repository to be able to 
link those allocations to order lifecycles? What are the costs and 
benefits of providing this information? Please explain and provide cost 
estimates.
    388. How do broker-dealers currently track which customers should 
receive allocations from which set of orders and how do broker-dealers 
ensure that those orders receive the correct average price? Can these 
same systems provide a key that could accurately link the allocations 
to lifecycles in many-to-many allocations? Please explain.
    389. Should the CAT NMS Plan require an alternative to the Customer 
Information Approach? If so, what alternative should the Commission 
require and what are the relative costs and benefits of the 
alternative? Please explain.
    390. Should the CAT NMS Plan require an alternative approach to 
assigning CAT-Reporter-IDs? If so, what alternative should the 
Commission require and what are the relative costs and benefits of the 
alternative? Please explain.
    391. Should the CAT NMS Plan provide for the use of the LEI or 
another unique identification code as an alternative to the CAT-
Reporter-ID? What are the advantages and disadvantages of this 
approach?
    392. Should the CAT NMS Plan require an alternative to the 
requirement to time stamp manual orders to the second? If so, what 
alternative should the Commission require? For example, should the Plan 
require millisecond time stamps or one-minute time stamps? Please 
explain and provide information on the relative costs and benefits of 
the alternatives.
c. Alternatives to Certain Specific Approaches in the CAT NMS Plan 
\1336\
---------------------------------------------------------------------------

    \1336\ See also Sections III.B.2, III.B.4, III.B.10, III.B.11, 
supra, for additional requests for comment related to alternatives 
to certain specific approaches in the CAT NMS Plan.
---------------------------------------------------------------------------

    393. Should the ``industry standard'' for the purposes of the clock 
synchronization and time stamping be ``one-size-fits-all''? Please 
explain. If not, how should the CAT NMS Plan structure variations in 
clock synchronization and time stamp requirements that are based on 
industry practices?
    394. Should the ``industry standard'' for the purposes of the clock 
synchronization and time stamping requirements be defined based on 
industry practice? Please explain. If not, how should ``industry 
standard'' be defined? Should the ``industry standard'' consider 
information other than current industry practice, such as the most 
accurate technology currently available in the industry, or the 
standard recommended by a particular industry group or authority? Could 
a definition of ``industry standard'' set a maximum clock offset 
threshold with an expectation that each CAT Reporter would be 
responsible for smaller clock offsets if the CAT Reporter is 
technically capable of such clock offsets? Please explain and include 
information on the relative costs and benefits of such alternative 
definitions.
    395. What benefits, if any, would derive from applying the same 
uniform clock synchronization standards to all market participants 
versus applying different standards to different participant types? 
Which approach is preferable? If applying different standards to 
different participant types, which participant types should have 
smaller clock offset tolerances and which should have larger clock 
offset tolerances and what are the industry standards for those 
participant types? Please explain and provide any supporting data.
    396. Do Commenters agree with the Commission's cost estimates for 
clock synchronization alternatives? Are there CAT Reporters other than 
broker-dealers that would incur significant costs from increasing clock 
synchronization standards to allowable clock drifts of less than 50 
milliseconds, such as 1 millisecond or 100 microseconds? At what level 
of clock synchronization would these costs become material? Please 
explain. Do Commenters have estimates of these costs?
    397. Does the FIF Clock Offset Survey reflect the operational 
capabilities of all potential CAT Reporters? Please explain.
    398. Do Commenters agree that an alternative that would relax the 
logging requirements such that CAT Reporters would only need to log 
exceptions and resulting synchronization events (and not every 
synchronization event) would reduce costs of the CAT NMS Plan without 
materially reducing its benefits? Why or why not? Do Commenters have an 
estimate of how much such an alternative would reduce costs, either in 
isolation or in combination with the alternative to not require 
synchronization outside of event recording times? Please provide 
supporting documentation for these estimates.
    399. Is there a need for clock synchronization standards outside of 
regular and extended trading hours? Is clock synchronization beneficial 
for retail orders that come in overnight? Are there examples of times 
or events outside of regular and extended trading hours when clock 
synchronization is more beneficial? Do Commenters agree that an 
alternative that would not require synchronizing clocks outside of 
times when servers record Reportable Events would reduce costs of the 
Plan without materially reducing its benefits? Do Commenters have an 
estimate of how much such an alternative would reduce costs? Please 
explain and provide supporting documentation if possible.
    400. Are some CAT Reportable Events more time-sensitive than other 
events? If so, what events are more time-sensitive and why? What 
systems are more likely to process these events, and where are those 
systems located (i.e., within broker-dealers, service bureaus, 
Execution Venues)? Please explain.
    401. What market participant systems, if any, should have smaller 
clock offset tolerances? Why? What clock

[[Page 30778]]

synchronization standard should these systems have? Why? What market 
participant systems, if any, should have smaller clock offset 
tolerances? Why? What clock offset tolerances should these systems 
have? Why?
    402. Should the Plan require time stamps to be reported more 
granularly than the one millisecond required in the Plan? If so, what 
standard should be required? Do Commenters agree with the Commission's 
analysis of the costs and benefits of requiring finer time stamp 
resolution than 1 millisecond? Please explain.
    403. Should the CAT NMS Plan require different Error Rates in CAT? 
For example, should the Plan require a lower initial Error Rate? If so, 
what initial Error Rate should the Plan require and why? What would be 
the costs and benefits of requiring a lower initial Error Rate? Should 
the Plan require a lower Error Rate at some time period after 
implementation? If so, what Error Rate should the Plan require and why 
and when? What would be the costs and benefits of requiring a lower 
Error Rate?
    404. Should the CAT NMS Plan require a day T+5 error correction 
deadline instead of a day T+3 error correction deadline? What are the 
relative costs and benefits of different error correction deadlines? 
Please explain and provide cost estimates.
    405. Should the CAT NMS Plan require an alternative to the funding 
model in which broker-dealers and Execution Venues pay fees on the same 
fee schedule? If so, how would that funding model be structured and 
what metric would determine the fee level? How would that funding model 
affect the costs and benefits of the Plan, including the effect on 
competition? Please explain.
    406. The Plan cites ``transactional volume'' as a cost driver for 
the Central Repository, but uses ``message traffic'' to allocate 
Central Repository costs across Industry Members. Do Commenters agree 
with the Commission's assumption that these two metrics are highly 
correlated? Is one of these metrics preferable for allocating costs 
across Industry Members? Please explain.
    407. Should the CAT NMS Plan require alternative metrics to the 
message traffic and market share metrics required by the Plan for 
determining the tiers of the funding model but still place Execution 
Venues on a different fee schedule than broker-dealers? If so, which 
metrics? How would these alternative metrics affect the costs and 
benefits of the Plan, including effects on competition? Could these 
alternative metrics create conflicts of interest? Please explain.
    408. Do Commenters agree with the Commission's analysis of unified 
versus bifurcated funding models? Why or why not?
    409. Should the Plan require a unified funding model wherein 
Central Repository costs are allocated across all market participants 
by message traffic? Why or why not?
    410. Should the Plan require a unified funding model wherein the 
tiers of the funding model for all CAT Reporters would be based on 
market share of share volume? Why or why not?
    411. Should the Plan require a unified funding model wherein a 
fixed fee is levied on every trade? Why or why not? Could such a 
funding model reduce implementation costs by utilizing infrastructure 
already in place to assess Section 31 fees?
    412. Should the Plan require a bifurcated funding model wherein 
Central Repository costs are allocated across broker-dealers by market 
share of share volume? Why or why not?
    413. Should the Plan require a bifurcated funding model wherein 
Central Repository costs treat ATSs as part of broker-dealers only, 
instead of including them as Execution Venues? Why or why not?
    414. Should the Plan require a bifurcated funding model wherein 
broker-dealer message traffic to and from an ATS are not included in 
message traffic measures used to assess fees on broker-dealers? Why or 
why not?
    415. Should the Plan require a bifurcated funding model wherein ATS 
volume is excluded from TRF volume for the purposes of assessing 
Execution Venue fees to operators of TRFs? Why or why not?
    416. Should the Plan require a bifurcated funding model wherein 
TRFs are not counted as Execution Venues for purposes of assessing fees 
on Execution Venues? Why or why not?
    417. Should the Plan require that profits or losses from operating 
the Central Repository be allocated across Participants by market share 
of share volume? Why or why not?
    418. Should the Plan require a strictly variable, rather than 
tiered, funding model? Why or why not?
    419. Should the CAT NMS Plan require any funding model alternatives 
that could result in ATSs and exchanges paying equivalent fees? If so, 
how should that funding model be structured and what metrics should 
determine the funding tiers? How would that funding model affect the 
costs and benefits of this alternative, including effects on 
competition? Could these alternatives create conflicts of interest and, 
if so, to what extent? Please explain.
    420. How should the CAT NMS Plan distribute the profits and losses 
of the Company among Participants? What are the relative costs and 
benefits of alternative ways to divide the profits and losses among the 
Participants? Please explain.
    421. Should the CAT NMS Plan require a strictly variable funding 
model in which the fees paid are a set percentage of message traffic or 
share volume instead of a tiered funding model in which fees are fixed 
for a tier that is determined by message traffic or market share of 
share volume? If so, how would that funding model be structured? What 
are the relative costs and benefits of that funding model, including 
the effect on competition? Please explain.
    422. Should the CAT NMS Plan exclude the requirement to report 
listing exchange symbology and instead allow CAT Reporters to use 
existing symbologies? Please explain. Would excluding this requirement 
allow broker-dealers to report data to CAT without processing the data 
ahead of the report? Please explain. What would be the relative costs 
and benefits of removing this requirement from the Plan? Please provide 
any cost estimates.
    423. Should the CAT NMS Plan require alternative minimum standards 
for access to the CAT Data to those proposed in the CAT NMS Plan? If 
so, what alternative minimum standards should the Commission require? 
For example, should the response time on the largest queries be longer 
or shorter than 24 hours? How would changes to the alternative minimum 
standards affect the costs and benefits of the Plan? Please be specific 
and provide cost estimates.
    424. Should the CAT NMS Plan require an intake capacity level 
different from twice historical peak daily volume measured over the 
most recent six years? If so, what intake capacity level should the 
Plan require? What are the relative costs and benefits of this 
alternative intake capacity level?
    425. The Plan proposes using a ``daisy chain'' approach for linking 
order events within the Central Repository.\1337\ This approach was 
chosen in favor of an approach that would require a unique order ID to 
be assigned by the first market participant that receives an order, and 
that order ID to be passed to and used by any market participant that 
handles the order afterward (the ``unique order ID''

[[Page 30779]]

approach). Do Commenters believe that a unique order ID approach or any 
other alternative approach would produce more accurate linkages than a 
daisy chain approach or any other benefits? Please explain. According 
to the Plan, the daisy chain approach would minimize impact on existing 
OATS reporters because OATS already uses this type of linkage.\1338\ Do 
Commenters believe that a unique order ID approach or any other 
alternative approach would increase the costs for CAT Reporters who 
currently report to OATS or have any other effect on the costs of the 
Plan? Please explain and provide estimates. Given that the Bids from 
potential Plan Processors all utilize the ``daisy chain'' approach, 
would adopting a unique order ID approach at this stage cause a 
significant disruption in the progress toward the implementation of a 
consolidated audit trail? Please explain. What would the costs of such 
a disruption be?
---------------------------------------------------------------------------

    \1337\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
A.1(b).
    \1338\ Id.
---------------------------------------------------------------------------

    426. The CAT NMS Plan requires that the Plan Processor make use of 
a commercially available file management tool. What are the benefits to 
CAT Reporters from this requirement? Does this requirement have any 
effects on the competition between bidders? For example, are any 
bidders, such as those that could more efficiently use a proprietary 
file management tool, disadvantaged by this requirement? Please 
explain. Does this requirement affect the ability of the Operating 
Committee to replace an under-performing Plan Processor? Are there 
other costs or benefits of this requirement? Please explain.
d. Alternatives to the Scope of Certain Specific Approaches in the CAT 
NMS Plan
    427. Should the CAT NMS Plan require excluding any data fields 
currently required to be included in the CAT Data (e.g., unique 
customer identification, allocation time, and CAT-Reporter-IDs at both 
order routing and receipt)? If so, which ones? Please explain and 
provide information on the relative costs and benefits of excluding 
those data fields, including any cost estimates.
    428. Should the CAT NMS Plan exclude primary market information? 
Why or why not?
    429. Do Commenters agree with the analysis in the Plan of the 
feasibility, benefits, and costs of the inclusion of primary market 
information (including primary market transactions) in the CAT NMS 
Plan? Please explain.
    430. Do Commenters have additional analysis relevant to the 
decision to include primary market information (including primary 
market transactions) in the CAT NMS Plan? If so, please describe that 
analysis, including any data.
    431. Do Commenters agree with the Plan's decision to include 
subaccount allocation information for primary market transactions in 
the Discussion Document, which commits the Operating Committee to 
consider the implementation of this subaccount allocation information 
in the CAT NMS Plan? Please explain.
    432. Do Commenters agree with the Commission's assessment of the 
costs and benefits of requiring top-account allocation information for 
primary market transactions? Please explain. Should the Operating 
Committee consider requiring top-account information? Please explain.
    433. What are the implications of the SROs decision not to include 
top-account information for primary market transactions in the 
Discussion Document? Please explain.
    434. Should the CAT NMS Plan exclude OTC Equity Securities? Please 
explain. Would the exclusion of OTC Equity Securities in the CAT NMS 
Plan delay the retirement of OATS? If so, by how long and what would be 
the added cost be? Please provide an estimate. What are the other costs 
and benefits of excluding OTC Equity Securities from the CAT NMS Plan?
    435. The CAT NMS Plan requires that CAT Reporters provide periodic 
refreshes of all customer information to the Central Repository to 
maintain an accurate database of customer information. What intervals 
for updates would be appropriate and reasonable, and what information 
should be required to be updated? Should the CAT NMS Plan remove the 
requirement for periodic full submission of customer information beyond 
the daily updates sent when customer information changes? Please 
explain. Would broker-dealers reduce their costs if they did not have 
to report all customer information periodically? Would the removal of 
this requirement significantly reduce the risk of a security breach of 
personally identifiable information? Please explain.
e. Alternatives to the CAT NMS Plan
    436. Do Commenters agree with the Commission's analysis of the 
broad alternatives to approving the CAT NMS Plan, such as modifying 
OATS and/or other data sources to meet the objectives of Rule 613? 
Please explain. Are there other alternative approaches that the 
Commission has not identified that it should consider? Please explain.
f. Alternatives Discussed in the CAT NMS Plan
    The Commission recognizes that the Plan discusses many alternatives 
that the Commission does not analyze above, including alternatives in 
Consideration 12 therein. This Consideration (Rule 613(a)(1)(xii)) 
requires the Participants to discuss in the Plan any reasonable 
alternative approaches that the plan sponsors considered in developing 
the Plan, including a description of any such alternative approach; the 
relative advantages and disadvantages of each such alternative, 
including an assessment of the alternative's costs and benefits; and 
the basis upon which the plan sponsors selected the approach reflected 
in the CAT NMS Plan. Such discussions appear in Section 12 of Appendix 
C. The Commission reviewed these alternatives and has not included 
above a discussion of all of the specific alternatives addressed in the 
Plan. In some cases, the Commission, at this time, has no analysis to 
add beyond the analysis in the Plan. In other cases, the Plan does not 
require any specific alternative, so the Commission cannot analyze the 
effect on the Plan of selecting a different alternative. The Commission 
is soliciting comment on the alternatives discussed by the Participants 
in the Plan but not discussed above. The Commission requests comment on 
each of these alternatives, both in isolation and in combination, as 
well as any data that would assist the Commission in evaluating the 
costs and trade-offs associated with these alternatives.
    437. Organizational Structure. According to the CAT NMS Plan, the 
Participants considered various organizational structures of the 
Bidders.\1339\ The CAT NMS Plan notes that the Bidders have three 
general organizational structures: (1) Consortiums or partnerships 
(i.e., the Plan Processor would consist of more than one unaffiliated 
entity that would operate the CAT), (2) single firms (i.e., one entity 
would be the Plan Processor and that entity would operate the CAT as 
part of its other ongoing business operations), and (3) dedicated legal 
entities (i.e., Plan operations would be conducted in a separate legal 
entity that would perform no other business activities). The CAT NMS 
Plan notes that each type of organizational structure has strengths and 
weaknesses but does not discuss those strengths and

[[Page 30780]]

weaknesses. The CAT NMS Plan concludes that the organizational 
structure should not be a material factor in selecting a bidder and 
does not mandate any specific organizational structure for the Plan 
Processor.\1340\ The Commission requests comment on whether the CAT NMS 
Plan should mandate a particular organizational structure. Why or why 
not? How can the organizational structure of the Plan Processor affect 
the costs and benefits of the CAT NMS Plan? What are the relative 
strengths and weaknesses of the different organizational structures?
---------------------------------------------------------------------------

    \1339\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
D.12(b).
    \1340\ Id.
---------------------------------------------------------------------------

    438. Primary Storage. The CAT NMS Plan states that bidders proposed 
two methods of primary data storage: traditionally-hosted storage 
architecture and infrastructure-as-a-service.\1341\ The CAT NMS Plan 
does not mandate a specific method for primary storage, but does 
indicate that the storage solution would meet the security, 
reliability, and accessibility requirements for the CAT, including 
storage of PII data, separately. The CAT NMS Plan also indicates 
several considerations in the selection of a storage solution including 
maturity, cost, complexity, and reliability of the storage method. The 
Commission requests comment on whether the CAT NMS Plan should mandate 
a particular data storage method. Why or why not? How can the storage 
method affect the costs and benefits of the Plan? What are the relative 
strengths and weaknesses of the different primary storage methods?
---------------------------------------------------------------------------

    \1341\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
D.12(c). Traditionally-hosted storage architecture is a model in 
which an organization would purchase and maintain proprietary 
servers and other hardware to store CAT Data. Infrastructure-as-a-
service is a provisioning model in which an organization outsources 
the equipment used to support operations, including storage, 
hardware, servers, and networking components, to a third party who 
charges for the service on a usage basis.
---------------------------------------------------------------------------

    439. Personally Identifiable Information. The CAT NMS Plan 
discusses several requirements to reduce the risk of misuse of PII, 
such as multi-factor authentication \1342\ and Role Based Access 
Control for access to PII; \1343\ separation of PII from other CAT 
Data; restricted access to PII; and an auditable record of all access 
to PII data contained in the Central Repository.\1344\ The CAT NMS Plan 
notes that all bidders proposed some of these requirements, but only 
some bidders proposed others. The Commission requests comment on 
whether the Plan should mandate any/all of these requirements. The 
Commission further requests comment on the alternatives to these 
requirements. What are the potential alternative ways to protect PII? 
What are the costs and benefits of those alternatives compared to the 
Plan? Please provide estimates or other data to support answers.
---------------------------------------------------------------------------

    \1342\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
D.12(e). Multifactor authentication is a mechanism that requires the 
user to provide more than one factor (e.g., biometrics/personal 
information in addition to a password) in order to be validated by 
the system. Id.
    \1343\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
D.12(e). Role Based Access Control (``RBAC'') is a mechanism for 
authentication in which users are assigned to one or many roles, and 
each role is assigned a defined set of permissions. Id.
    \1344\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
D.12(e). Appendix D provides additional discussion of these PII 
requirements. See id. at Appendix D, Section 4.1-4.2.
---------------------------------------------------------------------------

    440. Data Ingestion Format. The Plan discusses the trade-offs 
between requiring that the CAT Reporters report data to CAT in a 
uniform defined format or in existing messaging protocols.\1345\ The 
Plan does not require either method. A uniform defined format would 
include the current process for reporting data to OATS. This is 
Approach 2 in the CAT Reporters Study.\1346\ Several bidders proposed 
to leverage the OATS format and enhance it to meet the requirements of 
Rule 613. The Plan states that this could reduce the burden on certain 
CAT Reporters (i.e., current OATS Reporters) and simplify the process 
for those CAT Reporters to implement the CAT.\1347\ Accepting existing 
messaging protocols would allow CAT Reporters to submit copies of their 
order handling messages that are typically used across the order 
lifecycle and within order management processes, such as FIX. This is 
Approach 1 in the CAT Reporters' Survey.\1348\ The Plan states that 
using existing messaging protocols could result in quicker 
implementation times and simplify data aggregation.\1349\ The Plan 
further notes that the surveys revealed no cost difference between the 
two approaches,\1350\ but that FIF members prefer using the FIX 
protocol.\1351\ Should the Plan specify a particular approach? Please 
explain.
---------------------------------------------------------------------------

    \1345\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(i)(A)(2); Section D.12(f). These are also called ``Approach 
1'' and ``Approach 2'' in the Costs Section herein.
    \1346\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(i)(A)(2).
    \1347\ Id. at Appendix C, Section D.12(f).
    \1348\ Id. at Appendix C, Section B.7(b)(i)(A)(2).
    \1349\ Id. at Appendix C, Section D.12(f).
    \1350\ Id.
    \1351\ Id.
---------------------------------------------------------------------------

    441. The Commission requests further information on the relative 
costs and benefits and strengths and weaknesses of these two data 
ingestion format approaches. Would either of these approaches produce 
more accurate data? For example, would using existing messaging 
protocols such as FIX be more accurate because CAT Reporters would send 
their messages without the possibility of adding errors when 
translating them to a different format? Alternatively, would using 
existing messaging protocols such as FIX be less accurate because the 
Central Repository would have to translate too many different and 
possibly bespoke formats into a uniform format for the CAT data? Would 
a hybrid approach produce the most accurate data? \1352\ How else would 
the benefits of the CAT NMS Plan differ between these approaches?
---------------------------------------------------------------------------

    \1352\ A hybrid approach would allow data to be submitted in 
either a uniform defined format or using existing messaging 
protocols.
---------------------------------------------------------------------------

    442. The Commission requests comment on the implementation costs of 
these two data ingestion format approaches. The Commission expects that 
broker-dealers would need to modify existing messaging protocols to 
implement CAT regardless of which approach the Plan requires for 
reporting order events. What additional implementation costs would CAT 
Reporters incur to report using existing messaging protocols? What 
additional implementation costs would CAT Reporters, both OATS and non-
OATS reporters, incur to report using a uniform defined format such as 
a modification of OATS format? In what ways would the implementation 
costs incurred at the Central Repository differ for the two approaches? 
What is the estimated cost of implementing each approach for CAT 
Reporters, Participants, and the Central Repository?
    443. The Commission requests comment on the ongoing costs of these 
two data ingestion format approaches. How would ongoing costs be 
different for the two approaches? Would CAT Reporters need to process 
the order messages before reporting using existing messaging protocols 
to comply with requirements such as using the listing exchange 
symbology? If so, how costly is that processing? How costly is the 
processing required to translate order messages into a uniform defined 
format such as OATS format? What other ongoing costs associated with 
these approaches would CAT Reporters incur and how would they differ 
for the two approaches? How do the ongoing costs incurred by the 
Central Repository differ for the two approaches? Would the translation 
process from existing messaging protocols into a uniform format be more 
costly for the Central

[[Page 30781]]

Repository relative to putting reports submitted in a uniform defined 
format in a single dataset? Would the validation process associated 
with existing messaging protocols be more costly for the Central 
Repository than uniform defined format because of the complexity of 
validating data from many different and possibly bespoke messaging 
protocols? What are the estimated ongoing costs of each approach for 
CAT Reporters, Participants, and the Central Repository?
    444. Process to Develop the CAT. Bidders proposed, and the Plan 
describes, several processes for development of the CAT: The agile or 
iterative development model, the waterfall model, and hybrid 
models.\1353\ The CAT NMS Plan does not mandate a particular 
development process because any of the options could be utilized to 
manage the development of CAT.\1354\ The CAT NMS Plan notes that the 
agile model is more flexible and more susceptible to the early delivery 
of software for testing and feedback, but that the agile model makes it 
more difficult to accurately estimate the effort and time required for 
development. The waterfall model would also facilitate longer-term 
planning and coordination among multiple vendors or project 
streams.\1355\ The Commission requests comment on the strengths and 
weaknesses of each development process. The Commission further requests 
comment on whether the CAT NMS Plan should mandate a particular process 
and the impact on the relative costs and benefits of the mandating a 
particular process.
---------------------------------------------------------------------------

    \1353\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
D.12(g). An agile methodology is an iterative model in which 
development is staggered and provides for continuous evolution of 
requirements and solutions. A waterfall model is a sequential 
process of software development with dedicated phases for 
Conception, Initiation, Analysis, Design, Construction, Testing, 
Production/Implementation and Maintenance. Id.
    \1354\ Id.
    \1355\ Id.
---------------------------------------------------------------------------

    445. Industry Testing. The CAT NMS Plan requires a dedicated test 
environment that is functionally equivalent to the production 
environment and available 24 hours a day, six days a week.\1356\ The 
CAT NMS Plan discusses alternative approaches for industry 
testing.\1357\ Using the production environment for scheduled testing 
events on weekends or on specific dates would allow for realistic 
testing because multiple users are likely to test at the same time. 
However, CAT Reporters would not be able to test when it might be more 
convenient or less costly for them to test. The Commission requests 
comment on whether the Plan should mandate particular industry testing 
processes and the benefits and costs of these alternatives compared to 
the requirements of the CAT NMS Plan. How would either of these 
alternatives lead to more accurate data than the Plan? Would the 
alternatives otherwise affect the benefits of the CAT NMS Plan? How 
would either of these alternatives affect the costs of the CAT NMS Plan 
for CAT Reporters, Participants, and the Central Repository? Please 
provide estimates, if available.
---------------------------------------------------------------------------

    \1356\ See CAT NMS Plan, supra note 3, at Appendix D, Section 
1.2.
    \1357\ See id, at Appendix C, Section D.12(h).
---------------------------------------------------------------------------

    446. Quality Assurance (QA). The CAT NMS Plan mentions several 
alternative approaches to quality assurance, but does not select a 
particular approach.\1358\ In particular, the CAT NMS Plan states that 
the Participants considered many approaches, including continuous 
integration, test automation, and industry standards such as ISO 20000/
ITIL. Although the Plan does not mandate a particular approach, certain 
requirements were detailed in the RFP.\1359\ In addition, the CAT NMS 
Plan discusses the trade-offs associated with the QA staffing 
level.\1360\ The Commission requests comment on whether the CAT NMS 
Plan should mandate a particular QA approach. Why or why not? If so, 
which approach should the Plan mandate? How can the QA approach affect 
the costs and benefits of the CAT NMS Plan? For example, how does the 
QA approach affect the accuracy and accessibility of the CAT Data? What 
are the relative strengths and weaknesses of the different quality 
assurance approaches?
---------------------------------------------------------------------------

    \1358\ See id., at Appendix C, Section D.12(i).
    \1359\ See RFP, supra note 29, at 31. Specifically, the RFP 
requires that Bidders' responses include both the functional and 
non-functional testing that includes the following: System testing, 
integration testing, regression testing, software performance 
testing, system performance testing, application programming 
interface (API) testing, user acceptance testing, industry testing, 
interoperability, security, load and performance testing, and CAT 
Reporter testing.
    \1360\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
D.12(i). Bidder QA staffing levels range from 2 to 90. Id.
---------------------------------------------------------------------------

    447. User Support and Help Desk. The CAT NMS Plan discusses several 
alternatives related to how the Plan Processor provides a CAT Help Desk 
that would be available 24 hours a day, 7 days a week and be able to 
manage 2,500 calls per month.\1361\ Specifically, alternatives relate 
to the number of user support staff members, the degree to which the 
support team is dedicated to CAT, and whether the help desk is located 
in the US or offshore. The CAT NMS Plan discusses the benefit and cost 
trade-offs,\1362\ but does not mandate any of the particular 
alternatives. Instead, the CAT NMS Plan commits to considering each 
bidder's user support proposals in the context of the overall bid. The 
Commission requests comment on whether the CAT NMS Plan should specify 
the standards for user support. How would the various alternatives 
affect the benefits of CAT? How would the various alternatives affect 
the implementation costs of CAT? How would the various alternatives 
affect the ongoing costs of CAT for CAT Reporters, Participants, and 
the Central Repository? Please explain and provide estimates, if 
available.
---------------------------------------------------------------------------

    \1361\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
D.12(j). The RFP specified these standards. Id.
    \1362\ See id. The Plan states that a larger support staff could 
be more effective, but would be more costly. Further, a dedicated 
CAT support team would have a deeper knowledge of CAT but would be 
more costly. Finally, a U.S.-based help desk could facilitate 
greater security and higher quality service, but would be more 
costly. Id.
---------------------------------------------------------------------------

    448. CAT User Management. The CAT NMS Plan discusses several 
alternatives to manage users, but does not require a specific approach 
or standards.\1363\ Specifically, the CAT NMS Plan discusses help desk 
creation of accounts, user creation (by broker-dealers or regulators), 
and multi-role solutions. Generally, there are trade-offs in terms of 
convenience and security in the approaches.\1364\ The Commission 
requests comments on whether the CAT NMS Plan should specify an 
approach for user management. How would the various alternatives affect 
the benefits of CAT, such as accessibility? How would the various 
alternatives affect the implementation costs of CAT? How would the 
various alternatives affect the ongoing costs of CAT for CAT Reporters, 
Participants, and the Central Repository? How would the various 
alternatives affect the risk of a security breach or misuse of the CAT 
Data? Please explain and provide estimates, if available.
---------------------------------------------------------------------------

    \1363\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
D.12(k). User management is a business function that grants, 
controls, and maintains user access to a system. Id. at n.253.
    \1364\ See id. for more specific information on the relative 
strengths and weaknesses of each approach.
---------------------------------------------------------------------------

    449. Required Reportable Events. The CAT NMS Plan states that the 
Participants considered requiring the reporting of multiple additional 
order event types, such as the ``results order event'' and the ``CAT 
feedback order

[[Page 30782]]

event.'' \1365\ According to the CAT NMS Plan, a ``results order 
event'' type would not provide additional value over a ``daisy chain'' 
linkage method and a ``CAT feedback order event'' can be generated by 
the Plan Processor, making reporting by others unnecessary.\1366\ The 
Commission requests comments on these additional order event types and 
any other order event types that the Plan might require. Should the CAT 
NMS Plan require additional order event types? What are these order 
event types and what distinguishes them from the required order event 
types? What would be the purpose of these order event types? Would they 
make the CAT Data more complete or more accurate? How would regulators 
use these event types? How much would these additional order event 
types cost to report, to validate, and/or to store? Are there any other 
costs associated with these additional order event types? Please 
provide estimates, if available.
---------------------------------------------------------------------------

    \1365\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
D.12(l).
    \1366\ Id.
---------------------------------------------------------------------------

    450. Data Feed Connectivity. The Plan discusses requiring the 
collection of SIP data in real-time as opposed to through an end-of-day 
batch process.\1367\ According to the Plan, real-time data would 
provide for more rapid access to SIP Data, but may require additional 
processing support to deal with out-of- sequence or missing 
records.\1368\ Because CAT Reporters are only required to report order 
information on a next-day basis, the Plan does not require the Plan 
Processor to have real-time SIP connectivity. The Commission requests 
comments on whether the Plan should require a particular SIP 
connectivity. The Commission requests comment on the costs and benefits 
of requiring real-time SIP connectivity, or conversely, the costs and 
benefits of requiring end-of-day batch SIP connectivity (and not allow 
real-time). What would the Plan Processor do with real-time SIP data? 
Would the real-time SIP data be available to regulators, and if so, 
what would regulators do with that data? Do all regulators currently 
receive real-time SIP data? How much would the various SIP connectivity 
alternatives cost? How much processing would each alternative require 
to be of use to the Plan Processor or regulators?
---------------------------------------------------------------------------

    \1367\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
D.12(n).
    \1368\ See id.
---------------------------------------------------------------------------

I. Request for Comment on the Economic Analysis

    The Commission has identified above the economic effects associated 
with the proposed CAT NMS Plan and requests comment on all aspects of 
its preliminary economic analysis. The Commission encourages Commenters 
to identify, discuss, analyze, and supply relevant data, information, 
or statistics regarding any such economic effects. Commenters should, 
when possible, provide the Commission with data to support their views. 
Commenters suggesting alternative approaches should provide 
comprehensive proposals, including any conditions or limitations that 
they believe should apply, the reasons for the suggested approaches, 
their analysis of the cost-benefit trade-offs of suggested approaches 
compared to the Plan, and their analysis regarding why their suggested 
approaches would satisfy the objectives of Rule 613. In particular, the 
Commission seeks comment on the following:
    451. Do Commenters agree with the Commission's analysis of the 
potential economic effects of the Plan? Why or why not?
    452. Has the Commission considered all relevant economic effects? 
If not, what other economic effects should the Commission consider?
    453. Do Commenters have information that could help the Commission 
fill in gaps in the economic analysis related to a lack of information 
on details in the plan that could significantly affect the economic 
analysis? If so, please provide this information and explain how it 
could affect the economic analysis.
    454. Do Commenters have data that could help the Commission fill in 
gaps in the economic analysis related to a lack of available data? If 
so, please provide this information and explain how it could affect the 
economic analysis.
    455. Do Commenters believe that there are additional categories of 
benefits or costs that could be quantified or otherwise monetized? If 
so, please identify these categories and, if possible, provide specific 
estimates or data.
    456. Do Commenters believe that the CAT NMS Plan would change the 
behavior of any market participant in such a way as to create 
unintended effects? For example, would requirements to report certain 
data elements or events change the activities of market participants in 
ways other than deterrence but that create second-order economic 
effects? If so, please explain. Would such effects be economic benefits 
or economic costs? Please explain.

V. Paperwork Reduction Act

    Certain provisions of Rule 613 contain ``collection of information 
requirements'' within the meaning of the Paperwork Reduction Act of 
1995 (``PRA'') \1369\ and the Commission has submitted them to the 
Office of Management and Budget (``OMB'') for review in accordance with 
44 U.S.C. 3507 and 5 CFR 1320.11. An agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
unless it displays a currently valid OMB control number. The title of 
the collection of information is ``Creation of a Consolidated Audit 
Trail Pursuant to Section 11A of the Securities Exchange Act of 1934 
and Rules Thereunder.''
---------------------------------------------------------------------------

    \1369\ 44 U.S.C. 3501 et. seq.
---------------------------------------------------------------------------

    As noted above, Rule 613 of Regulation NMS (17 CFR part 242) 
requires the Participants to jointly submit to the Commission the CAT 
NMS Plan to govern the creation, implementation, and maintenance of the 
consolidated audit trail and Central Repository for the collection of 
information for NMS securities. The CAT NMS Plan must require each 
Participant and its respective members to provide certain data to the 
Central Repository in compliance with Rule 613. When it adopted Rule 
613, the Commission discussed the burden hours associated with the 
development and submission of the CAT NMS Plan.\1370\ In doing so, the 
Commission noted that the

[[Page 30783]]

development and submission of the CAT NMS Plan that would govern the 
creation, implementation and maintenance of a consolidated audit trail 
is a multi-step process and accordingly that the Commission was 
deferring its discussion of the burden hours associated with the other 
paperwork requirements required by Rule 613 and ongoing burdens since 
they would only be incurred if the Commission approves the CAT NMS 
Plan.\1371\
---------------------------------------------------------------------------

    \1370\ See Adopting Release, supra note 9, at 45804. On 
September 25, 2015, the Commission submitted to OMB a request for 
approval of an extension of the collection of information related to 
the development and submission of the CAT NMS Plan. The Commission 
stated that, although that collection of information pertained to 
the development and submission of an NMS plan, and that such NMS 
plan had already been developed and submitted, the Commission 
believed it was prudent to extend the collection of information 
during the pendency of the Commission's review of the NMS plan. The 
Commission provided estimates for 19 SROs, stating that they would 
spend a total of 2,760 burden hours of internal legal, compliance, 
information technology, and business operations time to comply with 
the existing collection of information, calculated as follows: (880 
programmer analyst hours) + (880 business analyst hours) + (700 
attorney hours) + (300 compliance manager hours) = 2,760 burden 
hours to prepare and file an NMS plan, or approximately 52,440 
burden hours in the aggregate, calculated as follows: (2,760 burden 
hours per SRO) x (19 SROs) = 52,440 burden hours. Amortized over 
three years, the annualized burden hours would be 920 hours per SRO, 
or a total of 17,480 for all 19 SROs. The Commission further 
estimated that the aggregate one-time reporting burden for preparing 
and filing an NMS plan would be approximately $20,000 in external 
legal costs per SRO, calculated as follows: 50 legal hours x $400 
per hour = $20,000, for an aggregate burden of $380,000, calculated 
as follows: ($20,000 in external legal costs per SRO) x (19 SROs) = 
$380,000. Amortized over three years, the annualized capital 
external cost would be $6,667 per SRO, or a total of $126,667 for 
the 19 SROs. See Submission for OMB Review; Comment Request for 
Extension of Rule 613; SEC File No. 270-616, OMB Control No. 3235-
0671 (September 25, 2015), 80 FR 59209 (October 1, 2015).
    \1371\ Id.
---------------------------------------------------------------------------

    The Commission is now publishing its preliminary estimates of the 
paperwork burdens of the CAT NMS Plan. These estimates are based on the 
requirements of Rule 613 and take into account the Exemption Order 
discussed above.\1372\ Information and estimates contained in the CAT 
NMS Plan that was submitted by the Participants also informed these 
estimates because they provide a useful, quantified point of reference 
regarding potential burdens and costs. The Commission acknowledges that 
the CAT NMS Plan as filed contains provisions in addition to those 
required by Rule 613 (e.g., requiring the inclusion of OTC Equity 
Securities; \1373\ the availability of historical data for not less 
than six years in a manner that is directly available and searchable 
without manual intervention from the Plan Processor; \1374\ a complete 
symbology database to be maintained by the Plan Processor, including 
the historical symbology; as well as issue symbol information and data 
using the listing exchange symbology format \1375\).
---------------------------------------------------------------------------

    \1372\ See Exemption Order, supra note 18.
    \1373\ See CAT NMS Plan, supra note 3, at Section 1.1 (defining 
``Eligible Security'' as all NMS securities and all OTC Equity 
Securities); Appendix C, Section A.1(a).
    \1374\ See id. at Section 6.5(b)(i).
    \1375\ See CAT NMS Plan, supra note 3 at Appendix C, Section 
A.1(a); Appendix D, Section 2.
---------------------------------------------------------------------------

A. Summary of Collection of Information Under Rule 613

    Rule 613 requires that the CAT NMS Plan must provide for an 
accurate, time-sequenced record of an order's life, from receipt or 
origination, through the process of routing, modification, cancellation 
and execution.\1376\ The Central Repository, created by the 
Participants, would be required to receive, consolidate and retain the 
data required under the Rule.\1377\ Such data must be accessible to 
each Participant, as well as the Commission, for purposes of performing 
regulatory and oversight responsibilities.\1378\
---------------------------------------------------------------------------

    \1376\ See 17 CFR 242.613(c)(1).
    \1377\ See 17 CFR 242.613(e)(1).
    \1378\ See 17 CFR 242.613(e)(1), (e)(2).
---------------------------------------------------------------------------

    Rule 613 provides that the CAT NMS Plan must require that all 
Participants that are exchanges, and their members, record and report 
to the Central Repository certain data for each NMS security registered 
or listed on a national securities exchange, or admitted to unlisted 
trading privileges on such exchange, and each Participant that is a 
national securities association, and its members, record and report for 
each NMS security for which transaction reports are required to be 
submitted to the national securities association in a uniform 
electronic format or in a manner that would allow the Central 
Repository to convert the data to a uniform electronic format for 
consolidation and storage. This data must be recorded contemporaneously 
with the Reportable Event and reported to the Central Repository in no 
event later than 8:00 a.m. Eastern Time on the trading day following 
the day such information has been recorded by the national securities 
exchange, national securities association, or member.\1379\
---------------------------------------------------------------------------

    \1379\ See 17 CFR 242.613(c)(3).
---------------------------------------------------------------------------

    Rule 613 also provides that the CAT NMS Plan must require each 
member of a Participant to record and report to the Central Repository 
other information which may not be available until later in the 
clearing process no later than 8:00 a.m. Eastern Time on the trading 
day following the day the member receives such information.\1380\ The 
CAT NMS Plan also requires the Participants to provide to the 
Commission, at least every two years after the effectiveness of the CAT 
NMS Plan, a written assessment of the operation of the consolidated 
audit trail.\1381\
---------------------------------------------------------------------------

    \1380\ See 17 CFR 242.613(c)(4).
    \1381\ See 17 CFR 242.613(b).
---------------------------------------------------------------------------

    Rule 613 requires all Participants to make use of the consolidated 
information, either by each developing and implementing new 
surveillance systems, or by enhancing existing surveillance 
systems.\1382\ The Rule also requires the CAT NMS Plan to require 
Participants to submit to the Commission a document outlining the 
manner in which non-NMS securities and primary market transactions in 
NMS and non-NMS securities can be incorporated into the consolidated 
audit trail.\1383\
---------------------------------------------------------------------------

    \1382\ See 17 CFR 242.613(a)(3)(iv).
    \1383\ See 17 CFR 242.613(i).
---------------------------------------------------------------------------

1. Central Repository
    Rule 613 provides that the CAT NMS Plan must require the creation 
and maintenance of a Central Repository that would be responsible for 
the receipt, consolidation, and retention of all data submitted by the 
Participants and their members.\1384\ The Rule also requires that the 
CAT NMS Plan require the Central Repository to retain the information 
reported pursuant to subparagraphs (c)(7) and (e)(7) of the Rule for a 
period of not less than five years in a convenient and usable standard 
electronic data format that is directly available and searchable 
electronically without any manual intervention.\1385\ The Plan 
Processor is responsible for operating the Central Repository in 
compliance with the Rule and the CAT NMS Plan. In addition, the Rule 
provides that the CAT NMS Plan must include: Policies and procedures to 
ensure the security and confidentiality of all information submitted to 
the Central Repository,\1386\ including safeguards to ensure the 
confidentiality of data; \1387\ information barriers between regulatory 
and non-regulatory staff with regard to access and use of data; \1388\ 
a mechanism to confirm the identity of all persons permitted to use the 
data; \1389\ a comprehensive information security program for the 
Central Repository that is subject to regular reviews by the CCO;\1390\ 
and penalties for non-compliance with policies and procedures of the 
Participants or the Central Repository with respect to information 
security.\1391\ Further, the Rule provides that the CAT NMS Plan must 
include policies and procedures to be used by the Plan Processor to 
ensure the timeliness, accuracy, integrity, and completeness of the 
data submitted to the Central Repository,\1392\ as well as policies and 
procedures to ensure the accuracy of the consolidation by the Plan 
Processor of the data.\1393\
---------------------------------------------------------------------------

    \1384\ See 17 CFR 242.613(e)(1).
    \1385\ See 17 CFR 242.613(e)(8). The Commission notes that the 
CAT NMS Plan proposes to require that the Central Repository retain 
data reported in a convenient and usable standard electronic data 
format that is directly available and searchable electronically 
without any manual intervention for six years. See CAT NMS Plan, 
supra note 3, at Section 6.5(b)(i).
    \1386\ See 17 CFR 242.613(e)(4)(i).
    \1387\ See 17 CFR 242.613(e)(4)(i)(A).
    \1388\ See 17 CFR 242.613(e)(4)(i)(B).
    \1389\ See 17 CFR 242.613(e)(4)(i)(C).
    \1390\ Id.
    \1391\ See 17 CFR 242.613(e)(4)(i)(D).
    \1392\ See 17 CFR 242.613(e)(4)(ii).
    \1393\ See 17 CFR 242.613(e)(4)(iii).
---------------------------------------------------------------------------

2. Data Collection and Reporting
    Rule 613 provides that the CAT NMS Plan must require each 
Participant, and any member of such Participant, to record and 
electronically report to the

[[Page 30784]]

Central Repository details for each order and Reportable Event 
documenting the life of an order through the process of original 
receipt or origination, routing, modification, cancellation, and 
execution (in whole or part) for each NMS security.\1394\ For national 
securities exchanges, Rule 613 requires the CAT NMS Plan to require 
each national securities exchange and its members to record and report 
to the Central Repository the information required by Rule 613(c)(7) 
for each NMS security registered or listed for trading on an exchange, 
or admitted to unlisted trading privileges on such exchange.\1395\ Rule 
613 provides that the CAT NMS Plan must require each Participant that 
is a national securities association, and its members, to record and 
report to the Central Repository the information required by Rule 
613(c)(7) for each NMS security for which transaction reports are 
required to be submitted to the Participant.\1396\ The Rule requires 
each Participant and any member of a Participant to record the 
information required by Rule 613(c)(7)(i) through (v) contemporaneously 
with the Reportable Event, and to report this information to the 
Central Repository by 8:00 a.m. Eastern Time on the trading day 
following the day such information has been recorded by the Participant 
or member of the Participant.\1397\ The Rule requires each Participant 
and any member of a Participant to record and report the information 
required by Rule 613(c)(7)(vi) through (viii) to the Central Repository 
by 8:00 a.m. Eastern Time on the trading day following the day the 
Participant or member receives such information.\1398\ The Rule 
requires each Participant and any member of such Participant to report 
information required by Rule 613(c)(7) in a uniform electronic format 
or in a manner that would allow the Central Repository to convert the 
data to a uniform electronic format for consolidation and 
storage.\1399\
---------------------------------------------------------------------------

    \1394\ See 17 CFR 242.613(c)(1), (c)(5), (c)(6), (c)(7).
    \1395\ See 17 CFR 242.613(c)(1), (c)(5).
    \1396\ See 17 CFR 242.613(c)(1), (c)(6).
    \1397\ See 17 CFR 242.613(c)(3).
    \1398\ See 17 CFR 242.613(c)(4).
    \1399\ See 17 CFR 242.613(c)(2).
---------------------------------------------------------------------------

    Such information must also be reported to the Central Repository 
with a time stamp of a granularity that is at least to the millisecond 
or less to the extent that the order handling and execution systems of 
a Participant or a member utilize time stamps in finer 
increments.\1400\ The Commission understands that any changes to 
broker-dealer recording and reporting systems to comply with Rule 613 
may also include changes to comply with the millisecond time stamp 
requirement.
---------------------------------------------------------------------------

    \1400\ See 17 CFR 242.613(d)(3).
---------------------------------------------------------------------------

3. Collection and Retention of NBBO, Last Sale Data and Transaction 
Reports
    Rule 613(e)(7) provides that the CAT NMS Plan must require the 
Central Repository to collect and retain on a current and continuing 
basis: (i) Information on the NBBO for each NMS Security; (ii) 
transaction reports reported pursuant to a transaction reporting plan 
filed with the Commission pursuant to, and meeting the requirements of, 
Rule 601 of Regulation NMS; and (iii) Last Sale Reports reported 
pursuant to the OPRA Plan.\1401\ The Central Repository must retain 
this information for no less than five years.\1402\
---------------------------------------------------------------------------

    \1401\ See 17 CFR 242.613(e)(7); 17 CFR 242.601.
    \1402\ See 17 CFR 242.613(e)(8).
---------------------------------------------------------------------------

4. Surveillance
    Rule 613(f) provides that the CAT NMS Plan must require that every 
Participant develop and implement a surveillance system, or enhance 
existing surveillance systems, reasonably designed to make use of the 
consolidated information contained in the consolidated audit trail. 
Rule 613(a)(3)(iv) provides that the CAT NMS Plan must require that the 
surveillance systems be implemented within fourteen months after 
effectiveness of the CAT NMS Plan.
5. Participant Rule Filings
    Rule 613(g)(1) requires each Participant to file with the 
Commission, pursuant to Section 19(b)(2) of the Exchange Act and Rule 
19b-4 thereunder,\1403\ a proposed rule change to require its members 
to comply with the requirements of Rule 613 and the CAT NMS Plan 
approved by the Commission.\1404\ The burden of filing such a proposed 
rule change is already included under the collection of information 
requirements contained in Rule 19b-4 under the Exchange Act.\1405\
---------------------------------------------------------------------------

    \1403\ 15 U.S.C. 78s(b)(2) and 17 CFR 240.19b-4.
    \1404\ See 17 CFR 242.613(g)(1).
    \1405\ See Securities Exchange Act Release No. 50486 (October 5, 
2004), 69 FR 60287, 60293 (October 8, 2004) (File No. S7-18-04) 
(describing the collection of information requirements contained in 
Rule 19b-4 under the Exchange Act). The Commission has submitted 
revisions to the current collection of information titled ``Rule 
19b-4 Filings with Respect to Proposed Rule Changes by Self-
Regulatory Organizations'' (OMB Control No. 3235-0045). According to 
the last submitted revision, for Fiscal Year 2012 SROs submitted 
1,688 Rule 19b-4 proposed rule changes.
---------------------------------------------------------------------------

6. Written Assessment of Operation of the Consolidated Audit Trail
    Rule 613(b)(6) provides that the CAT NMS Plan must require the 
Participants to provide the Commission a written assessment of the 
consolidated audit trail's operation at least every two years, once the 
CAT NMS Plan is effective.\1406\ Such written assessment shall include, 
at a minimum, with respect to the CAT: (i) An evaluation of its 
performance; (ii) a detailed plan for any potential improvements to its 
performance; (iii) an estimate of the costs associated with any such 
potential improvements; and (iv) an estimated implementation timeline 
for any such potential improvements, if applicable.\1407\
---------------------------------------------------------------------------

    \1406\ See 17 CFR 242.613(b)(6).
    \1407\ See id.
---------------------------------------------------------------------------

7. Document on Expansion to Other Securities
    Rule 613(i) provides that the CAT NMS Plan must require the 
Participants to jointly provide to the Commission, within six months 
after the CAT NMS Plan is effective, a document outlining how the 
Participants could incorporate into the CAT information regarding: (1) 
Equity securities that are not NMS securities; \1408\ (2) debt 
securities; and market transactions in equity securities that are not 
NMS securities and debt securities.\1409\
---------------------------------------------------------------------------

    \1408\ As noted above, the CAT NMS Plan would require the 
inclusion of OTC Equity Securities, while Rule 613 does not include 
such a requirement. See supra note 1373.
    \1409\ See 17 CFR 242.613(i).
---------------------------------------------------------------------------

B. Proposed Use of Information

1. Central Repository
    Rule 613 states that the Central Repository is required to receive, 
consolidate and retain the data required to be submitted by the 
Participants and their members.\1410\ Participant and Commission Staff 
would have access to the data for regulatory purposes.\1411\
---------------------------------------------------------------------------

    \1410\ See 17 CFR 242.613(e)(1).
    \1411\ See 17 CFR 242.613(e)(2).
---------------------------------------------------------------------------

2. Data Collection and Reporting
    The Commission believes that the data collected and reported 
pursuant to the requirements of Rule 613 would be used by regulators to 
monitor and surveil the securities markets and detect and investigate 
activity, whether on one market or across markets.\1412\ The data 
collected and reported pursuant to Rule 613 would also be used by 
regulators for the evaluation of tips and complaints and for complex 
enforcement inquiries or investigations, as well as inspections and 
examinations. Further, the Commission believes that regulators would 
use the data collected and reported to conduct timely and accurate 
analysis of market activity for reconstruction of broad-based market

[[Page 30785]]

events in support of regulatory decisions.
---------------------------------------------------------------------------

    \1412\ See Section IV.E.2, supra.
---------------------------------------------------------------------------

3. Collection and Retention of NBBO, Last Sale Data and Transaction 
Reports
    The CAT NMS Plan must require the Central Repository to collect and 
retain NBBO information, transaction reports, and Last Sale Reports in 
a format compatible with the order and event information collected 
pursuant to Rule 613(c)(7).\1413\ Participant and Commission Staff 
could use this data to easily search across order, NBBO, and 
transaction databases. The Commission believes that having the NBBO 
information in a uniform electronic format compatible with order and 
event information would assist Participants in enforcing compliance 
with federal securities laws, rules, and regulations, as well as their 
own rules.\1414\ The Commission also believes that a CAT NMS Plan 
requiring the Central Repository to collect and retain the transaction 
reports and Last Sale Reports in a format compatible with the order 
execution information would aid regulators in monitoring for certain 
market manipulations.\1415\
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    \1413\ See 17 CFR 242.613(e)(7).
    \1414\ The Commission and Participants use the NBBO to, among 
other things, evaluate members for compliance with numerous 
regulatory requirements, such as the duty of best execution or Rule 
611 of Regulation NMS. See 17 CFR 242.611; see also, e.g., ISE Rule 
1901 and Phlx Rule 1084.
    \1415\ Rules 613(e)(7)(ii) and (iii) require that transaction 
reports reported pursuant to an effective transaction reporting plan 
and Last Sale Reports reported pursuant to the OPRA Plan be reported 
to the Central Repository. This requirement should allow regulators 
to evaluate certain trading activity. For example, trading patterns 
of reported and unreported trades may cause Participant or 
Commission staff to make further inquiries into the nature of the 
trading to ensure that the public was receiving accurate and timely 
information regarding executions and that market participants were 
continuing to comply with trade reporting obligations under 
Participant rules. Similarly, patterns in the transactions that are 
reported and unreported to the consolidated tape could be indicia of 
market abuse, including failure to obtain best execution for 
customer orders or possible market manipulation. The Commission and 
the Participants would be able to review information on trades not 
reported to the tape to determine whether they should have been 
reported, whether Section 31 fees should have been paid, and/or 
whether the trades are part of a manipulative scheme.
---------------------------------------------------------------------------

4. Surveillance
    The requirement in Rule 613(f) that the Participants develop and 
implement a surveillance system, or enhance existing surveillance 
systems, reasonably designed to make use of the consolidated 
information in the consolidated audit trail,\1416\ is intended to 
position regulators to make full use of the consolidated audit trail 
data in order to carry out their regulatory obligations. In addition, 
because trading and potentially manipulative activities could take 
place across multiple markets, and the consolidated audit trail data 
would trace the entire lifecycle of an order from origination to 
execution or cancellation, new or enhanced surveillance systems may 
also enable regulators to investigate potentially illegal activity that 
spans multiple markets more efficiently.
---------------------------------------------------------------------------

    \1416\ 17 CFR 242.613(f).
---------------------------------------------------------------------------

5. Written Assessment of Operation of the Consolidated Audit Trail
    Rule 613(b)(6) requires the CAT NMS Plan to require the 
Participants to provide the Commission a written assessment of the 
CAT's operation at least every two years, once the CAT NMS Plan is 
effective.\1417\ These assessments would aid Participant and Commission 
Staff in understanding and evaluating any deficiencies in the operation 
of the consolidated audit trail and to propose potential improvements 
to the CAT NMS Plan. The Commission believes the written assessments 
would allow Participants and Commission Staff to periodically assess 
whether such potential improvements would enhance market oversight. 
Moreover, the Commission believes these assessments would help inform 
the Commission regarding the likely feasibility, costs, and impact of, 
and the Participants' approach to, the consolidated audit trail 
evolving over time.
---------------------------------------------------------------------------

    \1417\ 17 CFR 242.613(b)(6).
---------------------------------------------------------------------------

6. Document on Expansion to Other Securities
    Rule 613(i) requires the CAT NMS Plan to require the Participants 
to jointly provide to the Commission, within six months after the CAT 
NMS Plan is effective, a document outlining how the SROs could 
incorporate into the CAT information regarding certain products that 
are not NMS securities.\1418\ A document outlining a possible expansion 
of the consolidated audit trail could help inform the Commission about 
the SROs' strategy for potentially accomplishing such an expansion over 
a reasonable period of time. Moreover, such document would aid the 
Commission in assessing the feasibility and impact of possible future 
proposals by the SROs to include such additional securities and 
transactions in the consolidated audit trail.
---------------------------------------------------------------------------

    \1418\ See 17 CFR 242.613(i). See also supra note 1408.
---------------------------------------------------------------------------

C. Respondents

1. National Securities Exchanges and National Securities Associations
    Rule 613 applies to the 20 Participants (the 19 national securities 
exchanges and the one national securities association (FINRA)) 
currently registered with the Commission.\1419\
---------------------------------------------------------------------------

    \1419\ The Participants are: BATS Exchange, Inc., BATS-Y 
Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, 
Incorporated, Chicago Board Options Exchange, Incorporated, Chicago 
Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., 
Financial Industry Regulatory Authority, Inc., International 
Securities Exchange, LLC, ISE Gemini, LLC, ISE Mercury, LLC, Miami 
International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ 
OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, 
Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. 
The Commission understands that ISE Mercury, LLC will become a 
Participant in the CAT NMS Plan and thus is accounted for as a 
Participant for purposes of this Section. See supra note 3.
---------------------------------------------------------------------------

2. Members of National Securities Exchanges and National Securities 
Association
    Rule 613 also applies to the Participants' members, that is, 
broker-dealers. The Commission believes that Rule 613 applies to 1,800 
broker-dealers. The Commission understands that there are currently 
4,138 broker-dealers; however, not all broker-dealers are expected to 
have CAT reporting obligations. The Participants report that 
approximately 1,800 broker-dealers currently quote or execute 
transactions in NMS Securities, Listed Options or OTC Equity Securities 
and would likely have CAT reporting obligations.\1420\
---------------------------------------------------------------------------

    \1420\ The Commission understands that the remaining 2,338 
registered broker-dealers either trade in asset classes not 
currently included in the definition of Eligible Security or do not 
trade at all (e.g., broker-dealers for the purposes of underwriting, 
advising, private placements). See supra note 864.
---------------------------------------------------------------------------

D. Total Initial and Annual Reporting and Recordkeeping Burden

1. Burden on National Securities Exchanges and National Securities 
Associations
a. Central Repository
    Rule 613 requires the Participants to jointly establish a Central 
Repository tasked with the receipt, consolidation, and retention of the 
reported order and execution information. The Participants issued an 
RFP soliciting Bids from entities to act as the consolidated audit 
trail's Plan Processor.\1421\ Bidders were asked to provide total one-
year and annual recurring cost estimates to estimate the costs to the 
Participants for implementing and maintaining the

[[Page 30786]]

Central Repository.\1422\ There are currently three remaining Bidders, 
any of which could be selected to be the Plan Processor. The Plan 
Processor would be responsible for building, operating, administering 
and maintaining the Central Repository.
---------------------------------------------------------------------------

    \1421\ See Section III.A.1, supra.
    \1422\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(i)(B). The CAT NMS Plan listed the following as primary 
drivers of Bid costs: (1) Reportable volumes of data ingested into 
the Central Repository; (2) number of technical environments that 
would be have to be built to report to the Central Repository; (3) 
likely future rate of increase of reportable volumes; (4) data 
archival requirements; and (5) user support and/or help desk 
resource requirements. See id. at Section B.7(b)(i)(B).
---------------------------------------------------------------------------

    The Plan's Operating Committee, which consists of one voting 
representative of each Participant,\1423\ would be responsible for the 
management of the LLC, including the Central Repository, acting by 
Majority or Supermajority Vote, depending on the issue.\1424\ In 
managing the Central Repository, among other things, the Operating 
Committee would have the responsibility to authorize the following 
actions of the LLC: (1) Interpreting the Plan; \1425\ (2) determining 
appropriate funding-related policies, procedures and practices 
consistent with Article XI of the CAT NMS Plan; \1426\ (3) terminating 
the Plan Processor; (4) selecting a successor Plan Processor (including 
establishing a Plan Processor Selection Subcommittee to evaluate and 
review Bids and make a recommendation to the Operating Committee with 
respect to the selection of the successor Plan Processor); \1427\ (5) 
entering into, modifying or terminating any Material Contract; \1428\ 
(6) making any Material Systems Change; \1429\ (7) approving the 
initial Technical Specifications or any Material Amendment to the 
Technical Specifications proposed by the Plan Processor; \1430\ (8) 
amending the Technical Specifications on its own motion; \1431\ (9) 
approving the Plan Processor's appointment or removal of the CCO, CISO, 
or any Independent Auditor in accordance with Section 6.1(b) of the CAT 
NMS Plan; \1432\ (10) approving any recommendation by the CCO pursuant 
to Section 6.2(a)(v)(A); \1433\ (11) selecting the members of the 
Advisory Committee; \1434\ (12) selecting the Operating Committee 
chair; \1435\ and (13) determining to hold an Executive Session of the 
Operating Committee.\1436\
---------------------------------------------------------------------------

    \1423\ See id. at Section 4.2(a).
    \1424\ See Section IV.E.3.d(1), supra.
    \1425\ See CAT NMS Plan, supra note 3, at Section 4.3(a)(iii).
    \1426\ See id. at Section 4.3(a)(vi).
    \1427\ See id. at Section 4.3(b)(i).
    \1428\ See id. at Section 4.3(b)(iv).
    \1429\ See id. at Section 4.3(b)(v).
    \1430\ See id. at Section 4.3(b)(vi).
    \1431\ See id. at Section 4.3(b)(vii).
    \1432\ See id. at Section 4.3(b)(iii).
    \1433\ See id. at Section 4.3(a)(iv).
    \1434\ See id. at Section 4.3(a)(ii).
    \1435\ See id. at Section 4.3(a)(i).
    \1436\ See id. at Section 4.3(a)(v).
---------------------------------------------------------------------------

    Additionally, in managing the Central Repository, the Operating 
Committee would have the responsibility and authority, as appropriate, 
to: (1) Direct the LLC to enter into one or more agreements with the 
Plan Processor obligating the Plan Processor to perform the functions 
and duties contemplated by the Plan to be performed by the Plan 
Processor, as well as such other functions and duties the Operating 
Committee deems necessary or appropriate; \1437\ (2) appoint as an 
Officer of the Company the individual who has direct management 
responsibility for the Plan Processor's performance of its obligations 
with respect to the CAT; \1438\ (3) approve policies, procedures, and 
control structures related to the CAT System that are consistent with 
Rule 613(e)(4), Appendix C and Appendix D of the CAT NMS Plan that have 
been developed and will be implemented by the Plan Processor; \1439\ 
(4) approve any policy, procedure or standard (and any material 
modification or amendment thereto) applicable primarily to the 
performance of the Plan Processor's duties as the Plan Processor; 
\1440\ (5) for both the CCO and CISO, render their annual performance 
reviews and review and approve their compensation; \1441\ (6) review 
the Plan Processor's performance under the Plan at least once each 
year, or more often than once each year upon the request of two 
Participants that are not Affiliated Participants; \1442\ (7) in 
conjunction with the Plan Processor, approve and regularly review (and 
update as necessary) SLAs governing the performance of the Central 
Repository; \1443\ (8) maintain a Compliance Subcommittee for the 
purpose of aiding the CCO as necessary; \1444\ and (9) designate by 
resolution one or more Subcommittees it deems necessary or desirable in 
furtherance of the management of the business and affairs of the 
Company.\1445\
---------------------------------------------------------------------------

    \1437\ See id. at Section 6.1(a).
    \1438\ See id. at Section 4.6(b).
    \1439\ See id. at Section 6.1(c).
    \1440\ See id. at Section 6.1(e).
    \1441\ See id. at Section 6.2(a)(iv) and Section 6.2(b)(iv).
    \1442\ See id. at Section 6.1(n).
    \1443\ See id. at Section 6.1(h).
    \1444\ See id. at Section 4.12(b).
    \1445\ See id. at Section 4.12(a).
---------------------------------------------------------------------------

    The CAT NMS Plan also proposes to establish a Selection Committee 
comprised of one Voting Senior Officer from each Participant,\1446\ 
which is tasked with the review and evaluation of Bids and the 
selection of the initial Plan Processor.\1447\ The Selection Committee 
would determine, by Majority Vote, whether Shortlisted Bidders will 
have the opportunity to revise their Bids.\1448\ The Selection 
Committee would review and evaluate all Shortlisted Bids, including any 
permitted revisions submitted by Shortlisted Bidders, and in doing so, 
may consult with the Advisory Committee (or the DAG until the Advisory 
Committee is formed) and such other Persons as the Selection Committee 
deems appropriate.\1449\ After receipt of any permitted revisions, the 
Selection Committee would select the Initial Plan Processor from the 
Shortlisted Bids in two rounds of voting where each Participant has one 
vote via its Voting Senior Officer in each round.\1450\ Following the 
selection of the Initial Plan Processor, the Participants would file 
with the Commission a statement identifying the Initial Plan Processor 
and including the information required by Rule 608.\1451\
---------------------------------------------------------------------------

    \1446\ See id. at Section 5.1(a).
    \1447\ See id. at Section 5.1.
    \1448\ See id. at Section 5.1(d)(i).
    \1449\ See id. at Section 5.1(d)(ii).
    \1450\ See id. at Section 5.1(e).
    \1451\ See id. at Section 6.7(a)(i).
---------------------------------------------------------------------------

    For its initial and ongoing internal burden and cost estimates 
associated with the management of the Central Repository, the 
Commission is relying on estimates provided in the CAT NMS Plan for the 
development of the CAT NMS Plan, which the Participants ``have accrued, 
and will continue to accrue,'' \1452\ and have described in the CAT NMS 
Plan as ``reasonably associated with creating, implementing, and 
maintaining the CAT upon the Commission's adoption of the CAT NMS 
Plan.'' \1453\
---------------------------------------------------------------------------

    \1452\ See id. at Appendix C, Section B.7(b)(iii).
    \1453\ See id.
---------------------------------------------------------------------------

    The Commission believes that the activities of the Operating 
Committee and the Selection Committee overlap with those undertaken by 
the Participants to develop the CAT NMS Plan. The CAT NMS Plan 
describes the costs incurred by the Participants to develop the CAT NMS 
Plan as including ``staff time contributed by each Participant to, 
among other things, determine the technological requirements for the 
Central Repository, develop the RFP, evaluate Bids received, design and 
collect the data necessary to evaluate costs and other economic 
impacts, meet with Industry

[[Page 30787]]

Members to solicit feedback, and complete the CAT NMS Plan submitted to 
the Commission for consideration.'' \1454\ For the building and 
management of the Central Repository, the Selection Committee and the 
Operating Committee would have comparable responsibilities. The 
Selection Committee would be required to review and evaluate all 
Shortlisted Bids, including any permitted revisions submitted by 
Shortlisted Bidders, and then to select the initial Plan Processor from 
those Bids. As part of its overall management of the Central 
Repository, the Operating Committee would have responsibility for 
decisions associated with the technical requirements of the Central 
Repository.\1455\ Furthermore, the Operating Committee would be 
required to establish a Selection Subcommittee to evaluate Bids 
received to select a successor Plan Processor,\1456\ and would also be 
required to authorize the selection of the members of the Advisory 
Committee,\1457\ comprising members of the Industry, to advise the 
Participants on the implementation, operation, and administration of 
the Central Repository.\1458\ Because the responsibilities of the 
Operating Committee and the Selection Committee are similar to those 
described in the CAT NMS Plan for the development of the CAT NMS Plan 
itself, the Commission believes that it is reasonable to use the CAT 
NMS Plan estimates as the basis for its burden and cost estimates for 
the initial and ongoing management of the Central Repository.
---------------------------------------------------------------------------

    \1454\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(iii).
    \1455\ For example, the Operating Committee would be required to 
authorize the following actions of the LLC: Entering into, modifying 
or terminating any Material Contract (see id. at Section 
4.3(b)(iv)); making any Material Systems Change (see id. at Section 
4.3(b)(v)); amending the Technical Specifications on its own motion 
(see id. at Section 4.3(b)(vii)); and approving the initial 
Technical Specifications or any Material Amendment to the Technical 
Specifications proposed by the Plan Processor (see id. at Section 
4.3(b)(vi)). Further, the Operating Committee would be able to 
approve policies, procedures, and control structures related to the 
CAT System that are consistent with Rule 613(e)(4), Appendix C and 
Appendix D of the CAT NMS Plan that have been developed and will be 
implemented by the Plan Processor (see id. at Section 6.1(c)); and 
in conjunction with the Plan Processor, approve and regularly review 
(and update as necessary) SLAs governing the performance of the 
Central Repository (see id. at Section 6.1(h)).
    \1456\ See id. at Section 4.3(b)(i).
    \1457\ See id. at Section 4.3(a)(ii).
    \1458\ See id. at Section 4.13(d).
---------------------------------------------------------------------------

(1) Initial Burden and Costs To Build the Central Repository
    As proposed, each Participant would contribute an employee and a 
substitute for the employee to serve on the Operating Committee that 
would oversee the Central Repository.\1459\ Additionally, each 
Participant would select a Voting Senior Officer to represent the 
Participant as a member of the Selection Committee responsible for the 
selection of the Plan Processor of the Central Repository.\1460\
---------------------------------------------------------------------------

    \1459\ In the case of Affiliated Participants, one individual 
may be the primary representative for all or some of the Affiliated 
Participants, and another individual may be the substitute for all 
or some of the Affiliated Participants. See id. at Section 4.2(a).
    \1460\ In the case of Affiliated Participants, one individual 
may be (but is not required to be) the Voting Senior Officer for 
more than one or all of the Affiliated Participants. Where one 
individual serves as the Voting Senior Officer for more than one 
Affiliated Participant, such individual will have the right to vote 
on behalf of each such Affiliated Participant. See id. at Section 
5.1(a).
---------------------------------------------------------------------------

    The Commission preliminarily estimates that, over the 12-month 
period after the effectiveness of the CAT NMS Plan within which the 
Participants would be required to select an initial Plan Processor 
\1461\ and begin reporting to the Central Repository,\1462\ each 
Participant would incur an initial internal burden of 720 burden hours 
associated with the management of the creation of the Central 
Repository and the selection of the Plan Processor (including filing 
with the Commission the statement identifying the Initial Plan 
Processor and including the information required by Rule 608), for an 
aggregate initial estimate of 14,407 burden hours.\1463\
---------------------------------------------------------------------------

    \1461\ Rule 613(a)(3)(i) requires the selection of the Plan 
Processor within 2 months after effectiveness of the CAT NMS Plan. 
See 17 CFR 242.613(a)(3)(i).
    \1462\ Rule 613(a)(3)(iii) requires the Participants to provide 
to the Central Repository the data required by Rule 613(c) within 
one year after effectiveness of the CAT NMS Plan. See 17 CFR 
242.613(a)(3)(iii).
    \1463\ The Commission is basing this estimate on the internal 
burden estimate provided in the CAT NMS Plan related to the 
development of the CAT NMS Plan. See CAT NMS Plan, supra note 3, at 
Appendix C, Section B.7(b)(iii) (stating ``. . . the Participants 
have accrued, and will continue to accrue, direct costs associated 
with the development of the CAT NMS Plan. These costs include staff 
time contributed by each Participant to, among other things, 
determine the technological requirements for the Central Repository, 
develop the RFP, evaluate Bids received, design and collect the data 
necessary to evaluate costs and other economic impacts, meet with 
Industry Members to solicit feedback, and complete the CAT NMS Plan 
submitted to the Commission for consideration. The Participants 
estimate that they have collectively contributed 20 FTEs in the 
first 30 months of the CAT NMS Plan development process''). The 
Commission believes the staff time incurred for the development of 
the CAT NMS Plan would be comparable to the staff time incurred for 
the activities required of the Operating Committee and the Selection 
Committee for the creation and management of the Central Repository 
once the Plan is effective). (20 FTEs/30 months) = 0.667 FTEs per 
month for all of the Participants to develop the CAT NMS Plan. 
Converting this into burden hours, (0.667 FTEs) x (12 months) x 
(1,800 burden hours per year) =14,407 initial burden hours for all 
of the Participants to develop the CAT NMS Plan. (14,407 burden 
hours for all Participants/20 Participants) = 720 initial burden 
hours for each Participant to develop the CAT NMS Plan.
---------------------------------------------------------------------------

    Additionally, the Commission preliminarily estimates that the 
Participants will collectively spend $2,400,000 on external public 
relations, legal and consulting costs associated with the building of 
the Central Repository and the selection of the Plan Processor for the 
Central Repository, or $120,000 per Participant.\1464\ The Commission 
is basing this estimate on the estimate provided in the CAT NMS Plan 
for public relations, legal and consulting costs incurred in 
preparation of the CAT NMS Plan. Because the Participants described 
such costs as ``reasonably associated with creating, implementing and 
maintaining the CAT,'' \1465\ the Commission preliminarily believes 
these external cost estimates should also be applied to the creation 
and implementation of the Central Repository.
---------------------------------------------------------------------------

    \1464\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(iii) (stating ``the Participants have incurred public 
relations, legal and consulting costs in preparation of the CAT NMS 
Plan. The Participants estimate the costs of these services to be 
$8,800,000''). $2,400,000 for all Participants over 12 months = 
($8,800,000/44 months between the adoption of Rule 613 and the 
filing of the CAT NMS Plan) x (12 months). ($2,400,000/20 
Participants) = $120,000 per Participant over 12 months.
    \1465\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(iii).
---------------------------------------------------------------------------

    The CAT NMS Plan provides the estimates given by the Shortlisted 
Bidders \1466\ for the one-time total cost associated with the Plan 
Processor that would build the Central Repository.\1467\

[[Page 30788]]

The CAT NMS Plan states that this includes internal technological, 
operational, administrative and ``any other material costs.'' \1468\ 
Using the estimates in the CAT NMS Plan, which are based on the Bids of 
the six Shortlisted Bidders, the Commission preliminarily estimates 
that the initial one-time cost to develop the Central Repository would 
be an aggregate initial external cost to the Participants of $91.6 
million,\1469\ or $4.6 million per Participant.\1470\ Therefore, the 
Commission preliminarily estimates that each Participant would incur 
initial one-time external costs of $7 million \1471\ to build the 
Central Repository, or an aggregate initial one-time external cost 
across all Participants of $140 million.\1472\
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    \1466\ The Selection Committee narrowed the list of Shortlisted 
Bidders from six to three Shortlisted Bidders. See ``Participants, 
SROs Reduce Short List Bids from Six to Three for Consolidated Audit 
Trail'' (November 16, 2015), available at http://www.catnmsplan.com/pastevents/catnms_release_downselect_111615.pdf. However, the costs 
provided by the SROs in the CAT NMS Plan are based on the Bids of 
the six Shortlisted Bidders.
    \1467\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(i)(B). See also id. at Appendix C, Section B.7(b)(iv)(A)(1). 
The Commission notes that the cost associated with the build and 
maintenance of the Central Repository includes compliance with the 
requirement in Rule 613(e)(8) that the Central Repository retain 
information collected pursuant to Rule 613(c)(7) and (e)(7) in a 
convenient and usable standard electronic data format that is 
directly available and searchable electronically without any manual 
intervention for a period of not less than five years. See id. at 
Section 6.1(d)(i) (requiring the Plan Processor to comply with the 
recordkeeping requirements of Rule 613(e)(8)). See also id. at 
Appendix C, Section D.12(l) (stating that Rule 613(e)(8) requires 
data to be available and searchable for a period of not less than 
five years, that broker-dealers are currently required to retain 
data for six years under Rule 17a-4(a), and that the Participants 
are requiring CAT Data to be kept online in an easily accessible 
format for regulators for six years, though this may increase the 
cost to run the CAT). The Commission notes that a Shortlisted Bidder 
may be permitted to revise its Bid prior to approval of the CAT NMS 
Plan if the CAT Selection Committee determines by Majority Vote that 
such revisions are necessary or appropriate, so the estimates 
provided in the CAT NMS Plan may be subject to change. See id. at 
Section 5.2(c)(ii). In addition, changes in technology between the 
time the Bids were submitted and the time the Central Repository is 
built could result in changes to the costs to build and operate the 
Central Repository.
    \1468\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(i)(B).
    \1469\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(i)(B) (describing the minimum, median, mean and maximum 
Bidder estimates for the build and maintenance costs of the Central 
Repository).
    \1470\ Id. The Bidders provided a range of estimates. For 
purposes of this Paperwork Burden Act analysis, the Commission is 
using the build cost of the maximum Bidder estimate. $4,580,000 = 
$91,600,000/20 SROs.
    \1471\ $7 million for each Participant to build the Central 
Repository = ($4.6 million per Participant in initial one-time costs 
to compensate the Plan Processor to build the Central Repository) + 
($2.4 million per Participant in initial one-time public relations, 
legal and consulting costs associated with the building of the 
Central Repository and the selection of the initial Plan Processor).
    \1472\ $140 million for all of the Participants to build the 
Central Repository = $7 million per Participant to build the Central 
Repository) x (20 Participants). Id.
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(2) Ongoing, Annual Burden Hours and Costs for the Central Repository
    After the Central Repository has been developed and implemented, 
there would be ongoing costs for operating and maintaining the Central 
Repository, including the cost of systems and connectivity upgrades or 
changes necessary to receive, consolidate, and store the reported order 
and execution information from Participants and their members; the 
costs to store data, and make it available to regulators, in a uniform 
electronic format, and in a form in which all events pertaining to the 
same originating order are linked together in a manner that ensures 
timely and accurate retrieval of the information; \1473\ the cost, 
including storage costs, of collecting and maintaining the NBBO and 
transaction data in a format compatible with the order and event 
information collected pursuant to the Rule; the cost of monitoring the 
required validation parameters, which would allow the Central 
Repository to automatically check the accuracy and completeness of the 
data submitted and reject data not conforming to these parameters 
consistent with the requirements of the proposed Rule; and the cost of 
paying the CCO. The CAT NMS Plan provides that the Plan Processor would 
be responsible for the ongoing operations of the Central 
Repository.\1474\ The Operating Committee would continue to be 
responsible for the management of the Central Repository. In addition, 
the CAT NMS Plan states that the Participants would incur costs for 
public relations, legal, and consulting costs associated with 
maintaining the CAT upon approval of the CAT NMS Plan.\1475\
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    \1473\ See supra note 1469.
    \1474\ See CAT NMS Plan, supra note 3, at Section 6.1.
    \1475\ See id. at Appendix C, Section B.7(b)(iii).
---------------------------------------------------------------------------

    The Commission preliminarily estimates that the Participants would 
incur an ongoing annual internal burden of 720 burden hours associated 
with the continued management of the Central Repository, for an 
aggregate annual estimate of 14,407 burden hours across the 
Participants.\1476\
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    \1476\ The Commission is basing this estimate on the internal 
burden estimate provided in the CAT NMS Plan for the development of 
the CAT NMS Plan. The Commission notes that the CAT NMS Plan 
describes the internal burden estimate for the development of the 
CAT NMS Plan as a cost the Participants will continue to accrue; 
therefore, the Commission preliminarily believes that it is 
reasonable to use this burden estimate as the basis for its ongoing 
internal burden estimate for the maintenance of the Central 
Repository, particularly as the Commission believes the reasons for 
the staff time incurred for the development of the CAT NMS Plan 
would be comparable to those of the staff time to be incurred by the 
Operating Committee and the Selection Committee for the continued 
management of the Central Repository. See CAT NMS Plan, supra note 
3, at Appendix C, Section B.7(b)(iii) (stating `` . . . the 
Participants have accrued, and will continue to accrue, direct costs 
associated with the development of the CAT NMS Plan. These costs 
include staff time contributed by each Participant to, among other 
things, determine the technological requirements for the Central 
Repository, develop the RFP, evaluate Bids received, design and 
collect the data necessary to evaluate costs and other economic 
impacts, meet with Industry Members to solicit feedback, and 
complete the CAT NMS Plan submitted to the Commission for 
consideration. The Participants estimate that they have collectively 
contributed 20 FTEs in the first 30 months of the CAT NMS Plan 
development process''). (20 FTEs/30 Participants) = 0.667 FTEs per 
month for all of the Participants to continue management of the 
Central Repository. Converting this into burden hours, (0.667 FTEs) 
x (12 months) x (1,800 burden hours per year) = 14,407 ongoing 
annual burden hours for all of the Participants to continue 
management of the Central Repository. (14,407 ongoing annual burden 
hours for all Participants/20 Participants) = 720 ongoing annual 
burden hours for each Participant to continue management of the 
Central Repository.
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    Additionally, the Commission estimates that the Participants will 
collectively spend $800,000 annually on external public relations, 
legal and consulting costs associated with the continued management of 
the Central Repository, or $40,000 per Participant.\1477\
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    \1477\ The Commission is basing this external cost estimate on 
the public relations, legal and consulting external cost estimate 
provided in the CAT NMS Plan associated with the preparation of the 
CAT NMS Plan (which the Participants consider ``reasonably 
associated with creating, implementing, and maintaining the CAT upon 
the Commission's adoption of the CAT NMS Plan''). See CAT NMS Plan, 
supra note 3, at Appendix C, Section B.7(b)(iii) (stating ``the 
Participants have incurred public relations, legal and consulting 
costs in preparation of the CAT NMS Plan. The Participants estimate 
the costs of these services to be $8,800,000''). $2,400,000 for all 
Participants over 12 months = ($8,800,000/44 months between the 
adoption of Rule 613 and the filing of the CAT NMS Plan) x (12 
months). Because the Central Repository will have already been 
created, the Commission believes it is reasonable to assume that the 
Participants will have a lesser need for public relations, legal and 
consulting services. The Commission is estimating that the 
Participants will incur one-third of the external cost associated 
with development and implementation of the Central Repository to 
maintain the Central Repository. $800,000 = (0.333) x ($2,400,000). 
($800,000/20 Participants) = $40,000 per Participant over 12 months.
---------------------------------------------------------------------------

    The CAT NMS Plan includes the estimates the six Shortlisted Bidders 
provided for the annual ongoing costs to the Participants to operate 
the Central Repository.\1478\ The CAT NMS Plan did not categorize the 
costs included in the ongoing costs, but the Commission believes they 
would comprise external technological, operational and administrative 
costs, as the Participants described the costs included in the initial 
one-time external cost to build the Central Repository.\1479\ Using 
these estimates, the Commission preliminarily estimates that the annual 
ongoing cost to the Participants \1480\ to compensate the Plan 
Processor for building, operating and maintaining the Central 
Repository would be an aggregate ongoing external cost of $93 
million,\1481\ or approximately $4.7 million per

[[Page 30789]]

Participant.\1482\ Therefore, the Commission preliminarily estimates 
that each Participant would incur ongoing annual external costs of 
$4,740,000 \1483\ to maintain the Central Repository, or aggregate 
ongoing annual external costs across all Participants of 
$94,800,000.\1484\
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    \1478\ See Section IV.F.1.a, supra, for a discussion of the 
total five-year operating costs for the Central Repository presented 
in the CAT NMS Plan. See also CAT NMS Plan, supra note 3, at 
Appendix C, Section B.7(b)(i)(B); supra note 840; supra note 1467.
    \1479\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(i)(B).
    \1480\ See supra note 1469.
    \1481\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(i)(B).
    \1482\ The Bidders provided a range of estimates. For purposes 
of this Paperwork Burden Act analysis, the Commission is using the 
maximum operation and maintenance cost estimate. $4,650,000 = 
$93,000,000/20 Participants. See also Section IV.F.1.a, supra. The 
Commission noted several uncertainties that may affect the Central 
Repository cost estimates, including (1) that the Participants have 
not yet selected a Plan Processor and the Shortlisted Bidders have 
submitted a wide range of cost estimates for building and operating 
the Central Repository; (2) the Bids submitted by the Shortlisted 
Bidders may not be final because they may be revised before the 
final selection of the CAT Processor; and (3) neither the Bidders 
nor the Commission can anticipate the evolution of technology and 
market activity with precision, as improvements in available 
technology may allow the Central Repository to be built and operated 
at a lower cost than is currently anticipated, but if levels of 
anticipated market activity are materially underestimated, the 
capacity of the Central Repository may need to be increased, 
resulting in an increase in costs.
    \1483\ $4,740,000 for each Participant to build the Central 
Repository = ($4.7 million per Participant in ongoing annual costs 
to build the Central Repository) + ($40,000 per Participant in 
ongoing annual public relations, legal and consulting costs 
associated with the maintenance of the Central Repository).
    \1484\ $94,800,000 for all of the Participants to maintain the 
Central Repository = ($4,740,000 per Participant to compensate the 
Plan Processor and for external public relations, legal and 
consulting costs associated with the maintenance of the Central 
Repository) x (20 Participants). Id.
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b. Data Collection and Reporting
    Rule 613(c)(1) requires the CAT NMS Plan to provide for an 
accurate, time-sequenced record of orders beginning with the receipt or 
origination of an order by a Participant, and further to document the 
life of the order through the process of routing, modification, 
cancellation and execution (in whole or in part) of the order. Rule 
613(c) requires the CAT NMS Plan to impose requirements on Participants 
to record and report CAT information to the Central Repository in 
accordance with specified timelines.
    Rule 613(c) would require the collection and reporting of some 
information that Participants already collect to operate their business 
and are required to maintain in compliance with Section 17(a) of the 
Exchange Act and Rule 17a-1 thereunder.\1485\ For instance, the 
Commission believes that the national securities exchanges keep records 
pursuant to Section 17(a) of the Exchange Act and Rule 17a-1 thereunder 
in electronic form, of the receipt of all orders entered into their 
systems, as well as records of the routing, modification, cancellation, 
and execution of those orders. However, Rule 613 requires the 
Participants to collect and report additional and more detailed 
information, and to report the information to the Central Repository in 
a uniform electronic format, or in a manner that would allow the 
Central Repository to convert the data to a uniform electronic format 
for consolidation and storage.
---------------------------------------------------------------------------

    \1485\ 15 U.S.C. 78q(a); 17 CFR 240.17a-1.
---------------------------------------------------------------------------

    The CAT NMS Plan provides estimated costs for the Participants to 
report CAT Data. These estimates are based on Participant responses to 
the Participants Study that the Participants collected to estimate CAT-
related costs for hardware and software, FTE costs, and third-party 
providers, if the Commission approves the CAT NMS Plan.\1486\ For these 
estimates, the Commission is relying on the cost data provided by the 
Participants because it believes that the Plan's estimates for 
Participants to report CAT Data are reliable since all of the 
Participants provided cost estimates, and most Participants have 
experience collecting audit trail data, as well as knowledge of both 
the requirements of Rule 613 as well as their current business 
practices. The Commission is providing below its paperwork burden 
estimates for the initial burden hours and external costs, and ongoing, 
annual burden hours and external costs to be incurred by the 
Participants to comply with the data reporting requirements of Rule 
613.
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    \1486\ Third-party provider costs are generally legal and 
consulting costs, but may include other outsourcing. The template 
used by respondents is available at http://catnmsplan.com/PastEvents/ under the Section titled ``6/23/14'' at the ``Cost Study 
Working Template'' link.
---------------------------------------------------------------------------

    The Commission notes that throughout this Paperwork Reduction Act 
analysis, it is categorizing the FTE cost estimates for the 
Participants, as well as the broker-dealer respondents, that were 
provided in the CAT NMS Plan as an internal burden. To convert the FTE 
cost estimates into internal burden hours, the Commission: (1) Divided 
the FTE cost estimates by a divisor of $424,350, which is the 
Commission's estimated average salary for a full-time equivalent 
employee in the securities industry in a job category associated with 
regulatory data reporting; \1487\ and then (2) multiplied the quotient 
by 1,800 (the number of hours a full-time equivalent employee is 
estimated to work per year).
---------------------------------------------------------------------------

    \1487\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(ii)(C) at n.192. The Participants represented that the cost 
per FTE is $401,440. The $401,440 figure used in the CAT NMS plan 
was based on a Programmer Analyst's salary ($193 per hour) from 
SIFMA's Management & Professional Earnings in the Securities 
Industry 2008, multiplied by 40 hours per week, then multiplied by 
52 weeks per year. The Commission has updated this number to include 
recent salary data for other job categories associated with 
regulatory data reporting in the securities industry, using the hour 
and multiple methodology used by the Commission in its paperwork 
burden analyses. The Commission is using $424,350 as its annual cost 
per FTE for purposes of its cost estimates. The $424,350 FTE cost = 
25% Compliance Manager + 75% Programmer Analyst (0.25) x ($283 per 
hour x 1,800 working hours per year) + (0.75) x ($220 per hour x 
1,800 working hours per year). The $282 per hour figure for a 
Compliance Manager and the $220 per hour figure for a Programmer 
Analyst are from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013, modified by the Commission to account for 
an 1800-hour work-year and multiplied by 5.35 to account for 
bonuses, firm size, employee benefits and overhead.
---------------------------------------------------------------------------

(1) Initial Burden Hours and External Cost
    The CAT NMS Plan provides the following average costs that the 
Participants would expect to incur to adopt the systems changes needed 
to comply with the data reporting requirements of the consolidated 
audit trail: $10,300,000 in aggregate FTE costs for internal 
operational, technical/development, and compliance functions; $770,000 
in aggregate third party legal and consulting costs; and $17,900,000 in 
aggregate total costs.\1488\
---------------------------------------------------------------------------

    \1488\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(iii)(B)(2). Of the $17,900,000 in aggregate total costs, 
$11,070,000 is identified (subtotal of FTE costs and outsourcing), 
but the remaining $6,830,000 is not identified in the CAT NMS Plan. 
The Commission believes that the $6,830,000 may be attributed to 
hardware costs because the Participants have not provided any 
hardware costs associated with data reporting elsewhere and the 
Commission believes that the Participants will likely incur external 
costs to purchase upgraded hardware to report data to the Central 
Repository.
---------------------------------------------------------------------------

    Based on estimates provided in the CAT NMS Plan, the Commission 
preliminarily estimates that the initial internal burden hours to 
develop and implement the needed systems changes to capture the 
required information and transmit it to the Central Repository in 
compliance with the Rule for each Participant would be approximately 
2,185 burden hours.\1489\ The Commission also estimates that each 
Participant would, on average, incur approximately $38,500 in initial 
third party legal and consulting costs \1490\ for

[[Page 30790]]

a total of $380,000 in initial external costs.\1491\ Therefore, the 
Commission preliminarily estimates that, for all Participants, the 
estimated aggregate one-time burden would be 43,690 hours \1492\ and 
the estimated aggregate initial external cost would be 
$7,600,000.\1493\
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    \1489\ ($10,300,000 anticipated initial FTE costs)/(20 SROs) = 
$515,000 in anticipated initial FTE costs per Participant. ($515,000 
in anticipated initial FTE costs per Participant)/($424,350 FTE 
costs per Participant) = 1.214 anticipated FTEs per Participant for 
the implementation of data reporting. (1.214 FTEs) x (1,800 working 
hours per year) = 2,184.5 initial burden hours per Participant to 
implement CAT Data reporting.
    \1490\ ($770,000 anticipated initial third party costs)/(20 
Participants) = $38,500 in initial anticipated third party costs per 
Participant.
    \1491\ To determine the total initial external cost per 
Participant, the Commission subtracted the anticipated initial FTE 
cost estimates for the Participants as provided in the Plan from the 
total aggregate initial costs to the Participants and divided the 
remainder by 20 Participants. ($17,900,000 total aggregate initial 
cost to Participants) - ($10,300,000 initial FTE cost to 
Participants) = $7,600,000. ($7,600,000)/20 Participants = $380,000 
in initial external costs per Participant. See CAT NMS Plan, supra 
note 3, at Appendix C, Section B.7(b)(iii)(B)(1) for the 
Participants' anticipated costs associated with the implementation 
of regulatory reporting to the Central Repository.
    \1492\ 43,690 initial burden hours = (20 Participants) x 
(2,184.5 initial burden hours).
    \1493\ $7,600,000 = ($380,000 in initial external costs) x (20 
Participants).
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(2) Ongoing, Annual Burden Hours and External Cost
    Once a Participant has established the appropriate systems and 
processes required for collection and transmission of the required 
information to the Central Repository, the Commission preliminarily 
estimates that Rule 613 would impose on each Participant ongoing annual 
burdens associated with, among other things, personnel time to monitor 
each Participant's reporting of the required data and the maintenance 
of the systems to report the required data; and implementing changes to 
trading systems that might result in additional reports to the Central 
Repository. The CAT NMS Plan provides the following average aggregate 
costs that the Participants would expect to incur to maintain data 
reporting systems to be in compliance with Rule 613: $7,300,000 in 
anticipated annual FTE costs for operational, technical/development, 
and compliance functions related to data reporting; $720,000 in annual 
third party legal, consulting, and other costs; \1494\ and $14,700,000 
total annual costs.\1495\
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    \1494\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(iii)(B)(2). The CAT NMS Plan did not identify the other 
costs.
    \1495\ Of the $14,700,000 in aggregate total annual costs, 
$8,020,000 is identified (subtotal of FTE costs and outsourcing), 
but the remaining $6,680,000 is not identified in the CAT NMS Plan. 
The Commission believes that this amount may be attributed to 
hardware costs because the Participants have not provided any 
hardware costs associated with data reporting elsewhere and the 
Commission believes that the Participants will likely incur costs to 
upgrade their hardware to report data to the Central Repository.
---------------------------------------------------------------------------

    Based on estimates provided in the CAT NMS Plan, the Commission 
believes that it would take each Participant 1,548 ongoing burden hours 
per year \1496\ to continue compliance with Rule 613. The Commission 
preliminarily estimates that it would cost, on average, approximately 
$36,000 in ongoing third party legal and consulting and other costs 
\1497\ and $370,000 in total ongoing external costs per 
Participant.\1498\ Therefore, the Commission preliminarily estimates 
that the estimated aggregate ongoing burden for all Participants would 
be approximately 30,966 hours \1499\ and an estimated aggregate ongoing 
external cost of $7,400,000.\1500\
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    \1496\ ($7,300,000 in anticipated Participant annual FTE costs)/
(20 Participants) = $365,000 in anticipated per Participant annual 
FTE costs. ($365,000 in anticipated per Participant FTE costs)/
($424,350 FTE cost per Participant) = 0.86 anticipated FTEs per 
Participant. (0.86 FTEs) x (1,800 working hours per year) = 1,548.3 
burden hours per Participant to maintain CAT Data reporting.
    \1497\ ($720,000 in annual third party costs)/(20 Participants) 
= $36,000 per Participant in anticipated annual third party costs.
    \1498\ To determine the total external annual cost per 
Participant, the Commission subtracted the anticipated annual FTE 
cost estimates for the Participants as provided in the Plan from the 
total aggregate annual costs to the Participants and divided the 
remainder by 20 Participants. ($14,700,000 total aggregate annual 
cost to Participants) - ($7,300,000 annual FTE cost to Participants) 
= $7,400,000. ($7,400,000)/20 Participants = $370,000 in annual 
external costs per Participant. See CAT NMS Plan, supra note 3, at 
Appendix C, Section B.7(b)(iii)(B)(1) for the Participants' 
anticipated maintenance costs associated with regulatory reporting 
to the Central Repository.
    \1499\ 30,966 annual burden hours = (20 Participants) x (1,548.3 
annual burden hours).
    \1500\ $7,400,000 = ($370,000 in total annual external costs) x 
(20 Participants).
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c. Collection and Retention of NBBO, Last Sale Data and Transaction 
Reports
    Rule 613(e)(7) provides that the CAT NMS Plan must require the 
Central Repository to collect and retain on a current and continuous 
basis NBBO information for each NMS security, transaction reports 
reported pursuant to an effective transaction reporting plan, and Last 
Sale Reports reported pursuant to the OPRA Plan.\1501\ Additionally, 
the CAT NMS Plan must require the Central Repository to maintain this 
data in a format compatible with the order and event information 
consolidated and stored pursuant to Rule 613(c)(7).\1502\ Further, the 
CAT NMS Plan must require the Central Repository to retain the 
information collected pursuant to paragraphs (c)(7) and (e)(7) of Rule 
613 for a period of not less than five years in a convenient and usable 
uniform electronic format that is directly available and searchable 
electronically without any manual intervention.\1503\ The Commission 
notes that the CAT NMS Plan includes these data as ``SIP Data'' to be 
collected by the Central Repository.\1504\ The Commission believes the 
burden associated with SIP Data is included in the burden to the 
Participants associated with the implementation and maintenance of the 
Central Repository.
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    \1501\ See 17 CFR 242.613(e)(7).
    \1502\ Id.
    \1503\ See 17 CFR 242.613(e)(8).
    \1504\ See CAT NMS Plan, supra note 3, at Section 6.5(a)(ii).
---------------------------------------------------------------------------

d. Surveillance
    Rule 613(f) provides that the CAT NMS Plan must require that every 
national securities exchange and national securities association 
develop and implement a surveillance system, or enhance existing 
surveillance systems, reasonably designed to make use of the 
consolidated information contained in the consolidated audit trail. 
Rule 613(a)(3)(iv) provides that the CAT NMS Plan must require that the 
surveillance systems be implemented within fourteen months after 
effectiveness of the CAT NMS Plan.
(1) Initial Burden Hours and External Cost
    The CAT NMS Plan states that the estimated total cost to the 
Participants to implement surveillance programs within the Central 
Repository is $23,200,000.\1505\ This amount includes legal, 
consulting, and other costs of $560,000, as well as $17,500,000 in FTE 
costs for operational, technical/development, and compliance Staff to 
be engaged in the creation of surveillance programs.\1506\
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    \1505\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(iii)(B)(2).
    \1506\ Id. The Commission also notes that based upon the data 
provided by the Participants, the source of the remaining $5,140,000 
in initial costs to implement new or enhanced surveillance systems 
is unspecified. The Commission believes that this amount may be 
attributed to hardware costs because the Participants have not 
provided any hardware costs associated with surveillance elsewhere 
and the Commission believes that the Participants will likely incur 
costs to implement new or enhanced surveillance systems reasonably 
designed to make use of the consolidated audit trail data.
---------------------------------------------------------------------------

    Based on the estimates provided in the CAT NMS Plan, the Commission 
preliminarily estimates that the initial internal burden hours to 
implement new or enhanced surveillance systems reasonably designed to 
make use of the consolidated audit trail data for each Participant 
would be approximately 3,711.6 burden hours,\1507\ for an

[[Page 30791]]

aggregate initial burden hour amount of 74,232 burden hours.\1508\ The 
Commission also estimates that each Participant would, on average, 
incur an initial external cost of approximately $28,000 \1509\ for 
outsourced legal, consulting and other costs in order to implement new 
or enhanced surveillance systems, for a total of $285,000 in initial 
external costs,\1510\ for an aggregate one-time initial external cost 
of $5,700,000 across the 20 Participants to implement new or enhanced 
surveillance systems.\1511\
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    \1507\ ($17,500,000 in anticipated initial FTE costs)/(20 
Participants) = $875,000 in anticipated FTE costs per Participant. 
($875,000 in anticipated initial FTE costs per Participant)/
($424,350 FTE cost per Participant) = 2.06 anticipated initial FTEs 
per Participant. (2.06 FTEs) x (1,800 working hours per year) = 
3,711.6 initial burden hours per Participant to implement new or 
enhanced surveillance systems.
    \1508\ (3,711.6 initial burden hours per Participant to 
implement new or enhanced surveillance systems) x (20 Participants) 
= 74,232 aggregate initial burden hours.
    \1509\ $28,000 = $560,000/20 Participants.
    \1510\ $285,000 = ($23,200,000 in total initial surveillance 
costs--$17,500,000 in FTE costs)/(20 Participants).
    \1511\ $5,700,000 = $285,000 x 20 Participants.
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(2) Ongoing, Annual Burden Hours and External Cost
    The CAT NMS Plan states that the estimated total annual cost 
associated with the maintenance of surveillance programs for the 
Participants is $87,700,000.\1512\ This amount includes annual legal, 
consulting, and other costs of $1,000,000, as well as $66,700,000 in 
annual FTE costs for internal operational, technical/development, and 
compliance Staff to be engaged in the maintenance of surveillance 
programs.\1513\ Based on the estimates provided in the CAT NMS 
Plan,\1514\ the Commission preliminarily estimates that the ongoing 
internal burden hours to maintain the new or enhanced surveillance 
systems reasonably designed to make use of the consolidated audit trail 
data for each Participant would be approximately 14,146 annual burden 
hours,\1515\ for an aggregate annual burden hour amount of 282,920 
burden hours.\1516\ The Commission also estimates that each Participant 
would, on average, incur an annual external cost of approximately 
$50,000 \1517\ for outsourced legal, consulting and other costs in 
order to maintain the new or enhanced surveillance systems, for a total 
estimated ongoing external cost of $1,050,000,\1518\ for an estimated 
aggregate ongoing external cost of $21,000,000 across the 20 
Participants to maintain the surveillance systems.\1519\
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    \1512\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(iii)(B)(2).
    \1513\ Id. The Commission also notes that based upon the data 
provided by the Participants, the source of the remaining 
$21,000,000 in ongoing costs to maintain the new or enhanced 
surveillance systems is unspecified. The Commission believes that 
this amount may be attributed to hardware costs because the 
Participants have not provided any hardware costs associated with 
surveillance elsewhere and the Commission believes that the 
Participants would likely incur costs associated with maintaining 
the new or enhanced surveillance systems.
    \1514\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(iii)(B)(2).
    \1515\ ($66,700,000 in anticipated ongoing FTE costs)/(20 
Participants) = $3,335,000 in anticipated ongoing FTE costs per 
Participant. ($3,335,000 in anticipated ongoing FTE costs per 
Participant)/($424,350 FTE cost per Participant) = 7.86 anticipated 
FTEs per Participant. (7.86 FTEs) x (1,800 working hours per year) = 
14,146 ongoing burden hours per Participant to maintain the new or 
enhanced surveillance systems.
    \1516\ (14,146 annual burden hours per Participant to maintain 
new or enhanced surveillance systems) x (20 Participants) = 282,920 
aggregate annual burden hours.
    \1517\ $50,000 = $1,000,000 for ongoing legal, consulting and 
other costs associated with maintenance of surveillance programs/20 
Participants.
    \1518\ $1,050,000 = ($87,700,000 in total ongoing surveillance 
costs-$66,700,000 in ongoing FTE costs)/20 Participants
    \1519\ $21,000,000 = $1,050,000 x 20 Participants.
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e. Written Assessment of Operation of the Consolidated Audit Trail
    Rule 613(b)(6) provides that the CAT NMS Plan must require the 
Participants to provide the Commission a written assessment of the 
CAT's operation at least every two years, once the CAT NMS Plan is 
effective.\1520\ The assessment must address, at a minimum, with 
respect to the consolidated audit trail: (i) An evaluation of its 
performance; (ii) a detailed plan for any potential improvements to its 
performance; (iii) an estimate of the costs associated with any such 
potential improvements; and (iv) an estimated implementation timeline 
for any such potential improvements, if applicable.\1521\ Thus, the 
Participants must, among other things, undertake an analysis of the 
consolidated audit trail's technological and computer system 
performance.
---------------------------------------------------------------------------

    \1520\ 17 CFR 242.613(b)(6). See also Section IV.E.3.a, supra.
    \1521\ See 17 CFR 242.613(b)(6).
---------------------------------------------------------------------------

    The CAT NMS Plan states that the CCO would oversee the assessment 
required by Rule 613(b)(6), and would allow the Participants to review 
and comment on the assessment before it is submitted to the 
Commission.\1522\ The CCO would be an employee of the Plan Processor 
and would be compensated by the Plan Processor.\1523\ The Commission 
assumes that the overall cost and associated burden on the Participants 
to implement and maintain the Central Repository includes both the 
compensation for the Plan Processor as well as its employees for the 
implementation and maintenance of the Central Repository.
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    \1522\ See CAT NMS Plan, supra note 3, at Section 6.6.
    \1523\ Id. at Section 6.2(a).
---------------------------------------------------------------------------

    The Commission preliminarily estimates that it would take each 
Participant approximately 45 annual burden hours of internal legal, 
compliance, business operations, and information technology staff time 
to review and comment on the assessment prepared by the CCO of the 
operation of the consolidated audit trail as required by Rule 
613(b)(6).\1524\ The Commission preliminarily estimates that on 
average, each Participant would outsource 1.25 hours of legal time 
annually to assist in the review of the assessment, for an ongoing 
annual external cost of approximately $500.\1525\ Therefore, the

[[Page 30792]]

Commission preliminarily estimates that the ongoing annual burden of 
submitting a written assessment at least every two years, as required 
by Rule 613(b)(6), would be 45 ongoing burden hours per SRO plus $500 
of external costs for outsourced legal counsel per Participant per 
year, for an estimated aggregate annual ongoing burden of 900 hours 
\1526\ and an estimated aggregate ongoing external cost of 
$10,000.\1527\
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    \1524\ The Commission calculated the total estimated burden 
hours based on a similar formulation used for calculating the total 
estimated burden hours of Rule 613(i)'s requirement for a document 
addressing expansion of the CAT to other securities. See Section 
V.D.1.f., infra. The Commission assumes that the review and 
potential revision of the written assessment required by Rule 
613(b)(6) would be approximately one-half as burdensome as the 
document required by Rule 613(i) as the Participants are delegating 
the responsibility to prepare the written assessment required by 
Rule 613(b)(6) to the CCO and the Participants would only need to 
review the written assessment and revise it as necessary. As noted 
in note 1530, infra, to estimate the Rule 613(i) burden, the 
Commission is applying the internal burden estimate provided in the 
CAT NMS Plan for Plan development over a 6-month period, and 
dividing the result in half. See CAT NMS Plan, supra note 3, at 
Appendix C, Section B.7(b)(iii). To estimate the Rule 613(b)(6) 
written assessment burden, the Commission is dividing the result 
further by half. 0.667 FTEs required for all Participants per month 
to develop the CAT NMS Plan = (20 FTEs/30 months). 0.667 FTEs x 6 
months = 4 FTEs. 4 FTEs/2 = 2 FTEs needed for all of the 
Participants to create and submit the Rule 613(i) document. 2 FTEs/2 
= 1 FTE needed for all of the Participants to review and comment on 
the written assessment. (1 FTE x 1,800 working hours per year) = 
1,800 ongoing annual burden hours per year for all of the 
Participants to review and comment on the written assessment. (1,800 
burden hours/20 Participants) = 90 ongoing annual burden hours per 
Participant to review and comment on the written assessment prepared 
by the CCO. The Commission notes that this assessment must be filed 
with the Commission every two years and is providing an annualized 
estimate of the burden associated with the assessment as required 
for its Paperwork Reduction Act analysis. To provide an estimate of 
the annual burden associated with the assessment as required for its 
Paperwork Reduction Act analysis, Commission is dividing the 90 
ongoing burden hours in half (over two years) = 45 ongoing annual 
burden hours per Participant to review and comment on the written 
assessment prepared by the CCO.
    \1525\ $500 = ($400 per hour rate for outside legal services) x 
(1.25 hours). The Commission based this estimate on the assumption 
that the written assessment required by Rule 613(b)(6) would require 
approximately one-half the effort of drafting and submitting the 
document required by Rule 613(i) regarding the expansion of the CAT 
to other securities because the Participants have delegated the 
responsibility to draft the written assessment on the CCO, rather 
than having to draft it themselves (as with the expansion report), 
but would also have to review the written assessment and revise it 
as necessary. See Section V.D.1.f., infra. Because the written 
assessment is a biennial requirement, the Commission is further 
dividing the cost of the written assessment in half (over two years) 
to estimate the annual ongoing external cost per Participant for 
outside legal services to review and comment on the written 
assessment prepared by the CCO.
    \1526\ 900 ongoing annual burden hours = (45 ongoing annual 
burden hours) x (20 Participants).
    \1527\ $10,000 = 20 Participants x ($400 per hour rate for 
outside legal services) x (1.25 hours).
---------------------------------------------------------------------------

f. Document on Expansion to Other Securities
    Rule 613(i) provides that the CAT NMS Plan must require the 
Participants to jointly provide to the Commission, within six months 
after the CAT NMS Plan is effective, a document outlining how the 
Participants could incorporate into the consolidated audit trail 
information regarding: (1) Equity securities that are not NMS 
securities; \1528\ (2) debt securities; and (3) primary market 
transactions in equity securities that are not NMS securities and debt 
securities.\1529\ The document must also detail the order and 
Reportable Event data that each market participant may be required to 
provide, which market participants may be required to provide such 
data, an implementation timeline, and a cost estimate. Thus, the 
Participants must, among other things, undertake an analysis of 
technological and computer system acquisitions and upgrades that would 
be required to incorporate such an expansion.
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    \1528\ As noted above, the CAT NMS Plan would require the 
inclusion of OTC Equity Securities, while Rule 613 does not include 
such a requirement. See supra note 1408.
    \1529\ See 17 CFR 242.613(i).
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    The Commission preliminarily estimates that it would take each 
Participant approximately 180 burden hours of internal legal, 
compliance, business operations and information technology staff time 
to create a document addressing expansion of the consolidated audit 
trail to additional securities as required by Rule 613(i).\1530\ The 
Commission preliminarily estimates that on average, each Participant 
would outsource 25 hours of external legal time to create the document, 
for an aggregate one-time external cost of approximately $10,000.\1531\ 
Therefore, the Commission preliminarily estimates that the one-time 
initial burden of drafting the document required by Rule 613 would be 
180 initial burden hours plus $10,000 in initial external costs for 
outsourced legal counsel per Participant, for an estimated aggregate 
initial burden of 3,600 hours and an estimated aggregate initial 
external cost of $200,000.\1532\
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    \1530\ The Commission is basing this estimate on the internal 
burden provided in the CAT NMS Plan related to the development of 
the CAT NMS Plan. See CAT NMS Plan, supra note 3, at Appendix C, 
Section B.7(b)(iii) (stating ``[t]he Participants estimate that they 
have collectively contributed 20 FTEs in the first 30 months of the 
CAT NMS Plan development process''). Because this document is much 
more limited in scope than the CAT NMS Plan, and because the 
Commission assumes that in drafting the CAT NMS Plan, the 
Participants have already contributed time toward considering how 
the CAT can be expected to be expanded in accordance with Rule 
613(i), the Commission is applying the CAT NMS Plan development 
internal burden over a 6-month period (Rule 613(i) requires this 
document to be submitted to the Commission within six months after 
effectiveness of the CAT NMS Plan), divided by half. 0.667 FTEs 
required for all Participants per month to develop the CAT NMS Plan 
= (20 FTEs/30 months). 0.667 FTEs x 6 months = 4 FTEs. 4 FTEs/2 = 2 
FTEs needed for all of the Participants to create and submit the 
document. 2 FTEs x 1,800 working hours per year = 3,600 burden 
hours. 3,600 burden hours/20 Participants = 180 burden hours per 
Participant to create and file the document.
    \1531\ $10,000 = (25 hours of outsourced legal time per 
Participant) x ($400 per hour rate for outside legal services). The 
Commission derived the total estimated cost for outsourced legal 
counsel based on the assumption that the report required by Rule 613 
would require approximately fifteen percent of the Commission's 
approximated burden of drafting and filing the CAT NMS Plan. This 
assumption is based on the Participants leveraging their knowledge 
gained from their drafting and filing of the CAT NMS Plan and 
applying it to efficiently preparing the report required by Rule 613 
with respect to other securities' order and Reportable Events, 
implementation timeline and cost estimates.
    \1532\ The initial burden hour estimate is based on: (20 
Participants) x (180 initial burden hours to draft the report). The 
initial external cost estimate is based on: (20 Participants) x 
($10,000 for outsourced legal counsel).
---------------------------------------------------------------------------

2. Burden on Members of National Securities Exchanges and National 
Securities Associations
a. Data Collection and Reporting
    Rule 613(c)(1) requires the CAT NMS Plan to provide for an 
accurate, time-sequenced record of orders beginning with the receipt or 
origination of an order by a broker-dealer member of a Participant, and 
further documenting the life of the order through the process of 
routing, modification, cancellation and execution (in whole or in part) 
of the order. Rule 613(c) requires the CAT NMS Plan to impose 
requirements on broker-dealer members to record and report CAT 
information to the Central Repository in accordance with specified 
timelines.
    The Commission acknowledges the inherent difficulty in establishing 
precise burden estimates because the Commission does not know the exact 
method of data reporting the Participants would decide for broker-
dealers. For these estimates, the Commission is relying, in part, on 
the cost data provided by the Participants in the CAT NMS Plan,\1533\ 
and, as noted earlier, on its own estimates of the costs that broker-
dealers are likely to face for CAT implementation and ongoing reporting 
in compliance with Rule 613.\1534\
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    \1533\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b).
    \1534\ See Sections IV.F.1.c(1) and IV.F.1.c(2), supra.
---------------------------------------------------------------------------

    The Commission's estimates delineate broker-dealer firms by whether 
they insource or outsource, or are likely to insource or outsource, CAT 
Data reporting obligations.\1535\ The Commission preliminarily believes 
that firms that currently report high numbers of OATS ROEs 
strategically would decide to either self-report their CAT Data or 
outsource their CAT Data reporting functions, while the firms with the 
lowest levels of activity would be unlikely to have the infrastructure 
and specialized employees necessary to insource CAT Data reporting and 
would almost certainly outsource their CAT Data reporting 
functions.\1536\ The Commission recognizes that more active firms that 
will likely be CAT Reporters and insource regulatory data reporting 
functions may not have current OATS reporting obligations because they 
either are not FINRA members, or because they do not trade in NMS 
equity securities.\1537\
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    \1535\ See Section IV.F.1.c(2)B, supra.
    \1536\ Id.
    \1537\ The Commission also preliminarily recognizes as discussed 
above that some broker-dealer firms may strategically choose to 
outsource despite the Plan's working assumption that these broker-
dealers would insource their regulatory data reporting functions.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that there are 126 OATS-
reporting Insourcers and 45 non-OATS reporting Insourcers.\1538\ The 
Commission's estimation categorizes the remaining 1,629 broker-dealers 
that the Plan anticipates would have CAT Data reporting obligations as 
Outsourcers.\1539\
---------------------------------------------------------------------------

    \1538\ See Section IV.F.1.c(2)B, infra.
    \1539\ Id.

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[[Page 30793]]

(1) Insourcers
A. Large Non-OATS Reporting Broker-Dealers
i. Initial Burden Hours and External Cost
    The Commission relies on the Reporters Study's large broker-dealer 
cost estimates in estimating costs for large broker-dealers that can 
practicably decide between insourcing or outsourcing their regulatory 
data reporting functions. The Commission estimates that there are 14 
large broker-dealers that are not OATS reporters currently in the 
business of electronic liquidity provision that would be classified as 
Insourcer firms.\1540\
---------------------------------------------------------------------------

    \1540\ These broker-dealers are not FINRA members and thus have 
no regular OATS reporting obligations. See supra note 937.
---------------------------------------------------------------------------

    Additionally, the Commission estimates that there are 31 broker-
dealers that may transact in options but not in equities that can be 
classified as Insourcer firms.\1541\ Although the Exemptive Relief may 
relieve these firms of the obligation to report their option quoting 
activity to the Central Repository, these firms may have customer 
orders and other activity off-exchange that would cause them to incur a 
CAT reporting obligation.
---------------------------------------------------------------------------

    \1541\ See supra note 939.
---------------------------------------------------------------------------

    The Commission assumes the 31 options firms and 14 ELPs would be 
typical of the Reporters Study's large, non-OATS reporting firms; for 
these firms, the Commission relies on the cost estimates provided under 
Approach 1 \1542\ for large, non-OATS reporting firms in the CAT NMS 
Plan.
---------------------------------------------------------------------------

    \1542\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(i)(A)(2). The Reporters Study requested broker-dealer 
respondents to provide estimates to report to the Central Repository 
under two approaches. Approach 1 assumes CAT Reporters would submit 
CAT Data using their choice of industry protocols. Approach 2 
assumes CAT Reporters would submit data using a pre-specified 
format. Approach 1's aggregate costs are higher than those for 
Approach 2 for all market participants except in one case where 
service bureaus have lower Approach 1 costs. See supra note 946. For 
purposes of this Paperwork Reduction Act analysis, the Commission is 
not relying on the cost estimates for Approach 2 because overall the 
Approach 1 aggregate estimates represent the higher of the proposed 
approaches. The Commission believes it would be more comprehensive 
to use the higher of the two estimates for its Paperwork Reduction 
Act analysis estimates.
---------------------------------------------------------------------------

    The CAT NMS Plan provides the following average initial external 
cost and FTE count figures that a large non-OATS reporting broker-
dealer would expect to incur to adopt the systems changes needed to 
comply with the data reporting requirements of Rule 613 under Approach 
1: $450,000 in external hardware and software costs; 8.05 internal 
FTEs; \1543\ and $9,500 in external third party/outsourcing 
costs.\1544\ Based on this information, the Commission preliminarily 
estimates that the average initial burden associated with implementing 
regulatory data reporting to capture the required information and 
transmit it to the Central Repository in compliance with the Rule for 
each large, non-OATS reporting broker-dealer would be approximately 
14,490 initial burden hours.\1545\
---------------------------------------------------------------------------

    \1543\ Approach 1 also provided $3,200,000 in initial internal 
FTE costs. The Commission believes the $3,200,000 in internal FTE 
costs is the Participants' estimated cost of the 8.05 FTEs. (8.05 
FTEs) x ($401,440 Participants' assumed annual cost per FTE provided 
in the CAT NMS Plan) = $3,231,592. See CAT NMS Plan, supra note 3, 
at n. 192. See also supra note 1487.
    \1544\ See CAT NMS Plan, supra note 3, at Section 
B.7(b)(iii)(c)(2)(a). The Commission believes that the third party/
outsourcing costs may be attributed to the use of service bureaus 
(potentially), technology consulting, and legal services.
    \1545\ 14,490 initial burden hours = (8.05 FTEs for implementing 
CAT Data reporting systems) x (1,800 working hours per year).
---------------------------------------------------------------------------

    The Commission also preliminarily estimates that these broker-
dealers would, on average, incur approximately $450,000 in initial 
costs for hardware and software to implement the systems changes needed 
to capture the required information and transmit it to the Central 
Repository, and an additional $9,500 in initial third party/outsourcing 
costs.\1546\ Therefore, the Commission preliminarily estimates that the 
average one-time initial burden per ELP and options market-making firm 
would be 14,490 internal burden hours and external costs of 
$459,500,\1547\ for an estimated aggregate initial burden of 652,050 
hours \1548\ and an estimated aggregate initial external cost of 
$20,677,500.\1549\
---------------------------------------------------------------------------

    \1546\ See supra note 1544.
    \1547\ ($450,000 in initial hardware and software costs) + 
($9,500 initial third party/outsourcing costs) = $459,500 in initial 
external costs to implement data reporting systems.
    \1548\ The Commission preliminarily estimates that 45 large non-
OATS reporting broker-dealers would be impacted by this information 
collection. (45 large non-OATS reporting broker-dealers) x (14,490 
burden hours) = 652,050 initial burden hours to implement data 
reporting systems.
    \1549\ ($450,000 in hardware and software costs) + ($9,500 third 
party/outsourcing costs) x 45 large, non-OATS reporting broker-
dealers = $20,677,500 in initial external costs to implement data 
reporting systems.
---------------------------------------------------------------------------

ii. Ongoing, Annual Burden Hours in External Cost
    Once a large non-OATS reporting broker-dealer has established the 
appropriate systems and processes required for collection and 
transmission of the required information to the Central Repository, the 
Commission preliminarily estimates that the Rule would impose ongoing 
annual burdens associated with, among other things, personnel time to 
monitor each large non-OATS reporting broker-dealer's reporting of the 
required data and the maintenance of the systems to report the required 
data; and implementing changes to trading systems that might result in 
additional reports to the Central Repository. The CAT NMS Plan provides 
the following average ongoing external cost and internal FTE count 
figures that a large non-OATS reporting broker-dealer would expect to 
incur to maintain data reporting systems to be in compliance with Rule 
613: $80,000 in external hardware and software costs; 7.41 internal 
FTEs; \1550\ and $1,300 in external third party/outsourcing 
costs.\1551\ Based on this information, the Commission preliminarily 
believes that it would take a large non-OATS reporting broker-dealer 
13,338 burden hours per year \1552\ to continue to comply with the 
Rule. The Commission also preliminarily estimates that it would cost, 
on average, approximately $80,000 per year per large non-OATS reporting 
broker-dealer to maintain systems connectivity to the Central 
Repository and purchase any necessary hardware, software, and other 
materials, and an additional $1,300 in third party/outsourcing 
costs.\1553\
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    \1550\ Approach 1 also provided $3,000,000 in internal FTE costs 
related to maintenance. The Commission believes the $3,000,000 in 
ongoing internal FTE costs is the Participants' estimated cost of 
the 7.41 FTEs. (7.41 FTEs) x ($401,440 Participants' assumed annual 
cost per FTE provided in the CAT NMS Plan) = $2,974,670. See CAT NMS 
Plan, supra note 3, at n.192. See also supra note 1487.
    \1551\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(iii)(C)(2)(b). The CAT NMS Plan did not break down these 
third party costs into categories.
    \1552\ 13,338 ongoing burden hours = (7.41 ongoing FTEs to 
maintain CAT data reporting systems) x (1,800 working hours per 
year).
    \1553\ See supra note 1544; CAT NMS Plan, supra note 3, at 
Appendix C, Section B.7(b)(iii)(C)(2)(b).
---------------------------------------------------------------------------

    Therefore, the Commission preliminarily estimates that the average 
ongoing annual burden per large non-OATS reporting broker-dealer would 
be approximately 13,338 hours, plus $81,300 in external costs \1554\ to 
maintain the systems necessary to collect and transmit information to 
the Central Repository, for an estimated aggregate ongoing burden of 
600,210

[[Page 30794]]

hours \1555\ and an estimated aggregate ongoing external cost of 
$3,658,500.\1556\
---------------------------------------------------------------------------

    \1554\ ($80,000 in ongoing external hardware and software costs) 
+ ($1,300 ongoing external third party/outsourcing costs) = $81,300 
in ongoing external costs per large non-OATS reporting broker-
dealer.
    \1555\ The Commission estimates that 45 large non-OATS reporting 
broker-dealers would be impacted by this information collection. (45 
large non-OATS reporting broker-dealers) x (13,338 burden hours) = 
600,210 aggregate ongoing burden hours.
    \1556\ ($80,000 in ongoing external hardware and software costs) 
+ ($1,300 ongoing external third party/outsourcing costs) x (45 
large non-OATS reporting broker-dealers) = $3,658,500 in aggregate 
ongoing external costs.
---------------------------------------------------------------------------

B. Large OATS-Reporting Broker-Dealers
i. Initial Burden Hours and External Cost
    Based on the Commission's analysis of data provided by FINRA and 
discussions with market participants, the Commission estimates that 126 
broker-dealers, which reported more than 350,000 OATS ROEs between June 
15 and July 10, 2015, would strategically decide to either self-report 
CAT Data or outsource their CAT data reporting functions.\1557\ To 
conduct its Paperwork Burden Analysis for the 126 broker-dealers, the 
Commission is relying on the Reporters Study estimates used by the CAT 
NMS Plan of expected costs that a large OATS-reporting broker-dealer 
would incur as a result of the implementation of the consolidated audit 
trail under Approach 1.\1558\
---------------------------------------------------------------------------

    \1557\ See Section IV.F.1.c.2.B and Section IV.F.1.c(2)B.i, 
supra. See also supra note 901, stating that the Commission believes 
that broker-dealers that report fewer than 350,000 OATS ROEs per 
month are unlikely to be large enough to support the infrastructure 
required for insourcing data reporting activities.
    \1558\ See supra note 1544.
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    The CAT NMS Plan provides the following average initial external 
cost and internal FTE count figures that a large OATS-reporting broker-
dealer would expect to incur as a result of the implementation of the 
consolidated audit trail under Approach 1: $750,000 in hardware and 
software costs; 14.92 internal FTEs; \1559\ and $150,000 in external 
third party/outsourcing costs.\1560\ Based on this information the 
Commission preliminarily estimates that the average initial burden to 
develop and implement the needed systems changes to capture the 
required information and transmit it to the Central Repository in 
compliance with the Rule for large OATS-reporting broker-dealers would 
be approximately 26,856 internal burden hours.\1561\ The Commission 
also preliminarily estimates that these large OATS-reporting broker-
dealers would, on average, incur approximately $750,000 in initial 
external costs for hardware and software to implement the systems 
changes needed to capture the required information and transmit it to 
the Central Repository, and an additional $150,000 in initial external 
third party/outsourcing costs.\1562\
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    \1559\ Approach 1 also provided $6,000,000 in initial internal 
FTE costs. The Commission preliminarily believes the $6,000,000 in 
initial internal FTE costs is the Participants' estimated cost of 
the 14.92 FTEs. (14.92 FTEs) x ($401,440 Participants' assumed 
annual cost per FTE provided in the CAT NMS Plan) = $5,989,485. See 
CAT NMS Plan, supra note 3, at n. 192. See also supra note 1487.
    \1560\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(iii)(C)(2)(a). The CAT NMS Plan did not break down these 
third party costs into categories. The Commission preliminarily 
believes that these costs may be attributed to the use of service 
bureaus, technology consulting, and legal services.
    \1561\ 26,856 initial burden hours per large OATS-reporting 
broker-dealer = (14.92 FTEs for implementation of CAT data reporting 
systems) x (1,800 working hours per year).
    \1562\ See CAT NMS Plan, supra note 3, at Section 
B.7(b)(iii)(C)(2)(a).
---------------------------------------------------------------------------

    Therefore, the Commission preliminarily estimates that the average 
one-time initial burden per large OATS-reporting broker-dealer would be 
26,856 burden hours and external costs of $900,000,\1563\ for an 
estimated aggregate initial burden of 3,383,856 hours \1564\ and an 
estimated aggregate initial external cost of $113,400,000.\1565\
---------------------------------------------------------------------------

    \1563\ ($750,000 in initial external hardware and software 
costs) + ($150,000 initial external third party/outsourcing costs) = 
$900,000 in initial external costs per large OATS-reporting broker-
dealer to implement CAT data reporting systems.
    \1564\ The Commission preliminarily estimates that 126 large 
OATS-reporting broker-dealers would be impacted by this information 
collection. 126 large OATS-reporting broker-dealers x 26,856 burden 
hours = 3,383,856 initial burden hours to implement data reporting 
systems.
    \1565\ ($750,000 in initial external hardware and software 
costs) + ($150,000 initial external third party/outsourcing costs) x 
126 large OATS-reporting broker-dealers = $113,400,000 in initial 
external costs to implement data reporting systems.
---------------------------------------------------------------------------

ii. Ongoing, Annual Burden Hours and External Cost
    Once a large OATS-reporting broker-dealer has established the 
appropriate systems and processes required for collection and 
transmission of the required information to the Central Repository, the 
Commission preliminarily estimates that the Rule would impose on each 
broker-dealer ongoing annual burdens and costs associated with, among 
other things, personnel time to monitor each broker-dealer's reporting 
of the required data and the maintenance of the systems to report the 
required data; and implementing changes to trading systems which might 
result in additional reports to the Central Repository.
    The CAT NMS Plan provides the following average ongoing external 
cost and FTE count figures that a large OATS-reporting broker-dealer 
would expect to incur to maintain data reporting systems to be in 
compliance with Rule 613: $380,000 in ongoing external hardware and 
software costs; 10.03 internal FTEs; \1566\ and $120,000 in ongoing 
external third party/outsourcing costs.\1567\ Based on this information 
the Commission preliminarily believes that it would take a large OATS-
reporting broker-dealer 18,054 ongoing burden hours per year \1568\ to 
continue compliance with the Rule. The Commission preliminarily 
estimates that it would cost, on average, approximately $380,000 per 
year per large OATS-reporting broker-dealer to maintain systems 
connectivity to the Central Repository and purchase any necessary 
hardware, software, and other materials, and an additional $120,000 in 
external ongoing third party/outsourcing costs.\1569\
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    \1566\ Approach 1 also provided $4,000,000 in internal FTE costs 
related to maintenance. The Commission believes the $4,000,000 in 
ongoing internal FTE costs is the Participants' estimated cost of 
the 10.03 FTEs. (10.03 FTEs) x ($401,440 Participants' assumed 
annual cost per FTE provided in the CAT NMS Plan) = $4,026,443. See 
CAT NMS Plan, supra note 3, at n. 192. See also supra note 1487.
    \1567\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(iii)(C)(2)(b). The CAT NMS Plan did not categorize these 
third party costs. The Commission preliminarily believes that these 
costs may be attributed to the use of service bureaus, technology 
consulting, and legal services.
    \1568\ 18,054 ongoing burden hours = (10.03 ongoing FTEs for 
maintenance of CAT data reporting systems) x (1,800 working hours 
per year).
    \1569\ See CAT NMS Plan, supra note 3, at Appendix C, Section 
B.7(b)(iii)(C)(2)(b).
---------------------------------------------------------------------------

    Therefore, the Commission preliminarily estimates that the average 
ongoing annual burden per large OATS-reporting broker-dealer would be 
approximately 18,054 burden hours, plus $500,000 in external costs 
\1570\ to maintain the systems necessary to collect and transmit 
information to the Central Repository, for an estimated aggregate 
burden of 2,274,804 hours \1571\ and an estimated aggregate ongoing 
external cost of $63,000,000.\1572\
---------------------------------------------------------------------------

    \1570\ ($380,000 in ongoing external hardware and software costs 
+ $120,000 in ongoing external third party/outsourcing costs) = 
$500,000 in ongoing external costs per large OATS-reporting broker-
dealer.
    \1571\ The Commission preliminarily estimates that 126 large 
OATS-reporting broker-dealers would be impacted by this information 
collection. (126 large OATS-reporting broker-dealers) x (18,054 
burden hours) = 2,274,804 aggregate ongoing burden hours.
    \1572\ ($380,000 in ongoing external hardware and software costs 
+ $120,000 in ongoing external third party/outsourcing costs) x 126 
large OATS-reporting broker-dealers = $63,000,000 in aggregate 
ongoing external costs.

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[[Page 30795]]

(2) Outsourcing Firms
A. Small OATS-Reporting Broker-Dealers
i. Initial Burden Hours and External Cost
    Based on data provided by FINRA, the Commission estimates that 
there are 806 broker-dealers that report fewer than 350,000 OATS ROEs 
monthly. The Commission preliminarily believes that these broker-
dealers generally outsource their regulatory reporting obligations 
because during the period June 15-July 10, 2015, approximately 88.9% of 
their 350,000 OATS ROEs were reported through service bureaus, with 730 
of these broker-dealers reporting more than 99% of their OATS ROEs 
through one or more service bureaus.\1573\ The Commission estimates 
that these firms currently spend an aggregate of $100.1 million on 
annual outsourcing costs.\1574\ The Commission estimates these 806 
broker-dealers would spend $100.2 million in aggregate to outsource 
their regulatory data reporting to service bureaus to report in 
accordance with Rule 613,\1575\ or $124,373 per broker-dealer.\1576\ 
These external outsourcing cost estimates are calculated using the 
information from Staff discussions with service bureaus and other 
market participants, as applied to data provided by FINRA.\1577\
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    \1573\ See Section IV.F.1.c(2)B.i, supra. Because of the 
extensive use of service bureaus in these categories of broker-
dealers, the Commission assumes that these broker-dealers are likely 
to use service bureaus to accomplish their CAT data reporting.
    \1574\ The average broker-dealer in this category reported 
15,185 OATS ROEs from June 15-July 10, 2015; the median reported 
1,251 OATS ROEs. Of these broker-dealers, 39 reported more than 
100,000 OATS ROEs during the sample period. See Section 
IV.F.1.c(2)B.ii, supra.
    \1575\ Id.
    \1576\ $124,373 = $100,200,000/806 broker-dealers. This amount 
is the average estimated annual outsourcing cost to firms that 
currently report fewer than 350,000 OATS ROEs per month. Id.
    \1577\ See Section IV.F.1.c(2)B.ii, supra.
---------------------------------------------------------------------------

    Firms that outsource their regulatory data reporting still face 
internal staffing burdens associated with this activity. These 
employees perform activities such as answering inquiries from their 
service bureaus, and investigating reporting exceptions. Based on 
conversations with market participants, the Commission estimates that 
these firms currently have 0.5 full-time employees devoted to these 
activities.\1578\ The Commission estimates that these firms would need 
to hire one additional full-time employee for one year to implement CAT 
reporting requirements.\1579\
---------------------------------------------------------------------------

    \1578\ Id.
    \1579\ Id.
---------------------------------------------------------------------------

    Based on this information, the Commission preliminarily estimates 
that the average initial burden to implement the needed systems changes 
to capture the required information and transmit it to the Central 
Repository in compliance with the CAT NMS Plan for small OATS-reporting 
broker-dealers would be approximately 1,800 burden hours.\1580\ The 
Commission believes the burden hours would be associated with work 
performed by internal technology, compliance and legal staff in 
connection with the implementation of CAT data reporting. The 
Commission also preliminarily estimates that each small OATS-reporting 
broker-dealer would incur approximately
---------------------------------------------------------------------------

    \1580\ This estimate assumes that, based on the expected FTE 
count provided, a small OATS-reporting broker-dealer would have to 
hire 1 new FTE for implementation. The salary attributed to the 1 
FTE would be (1 x $424,350 FTE cost) = $424,350 per year. To 
determine the number of burden hours to be incurred by the current 
0.5 FTE for implementation, multiply 0.5 FTE by 1,800 hours per year 
= 900 initial burden hours.
---------------------------------------------------------------------------

    $124,373 in initial external outsourcing costs.\1581\ Therefore, 
the Commission preliminarily estimates that the average one-time 
initial burden per small OATS-reporting broker-dealer would be 1,800 
burden hours and external costs of $124,373, for an estimated aggregate 
initial burden of 1,450,800 hours \1582\ and an estimated aggregate 
initial external cost of $100,244,638.\1583\
---------------------------------------------------------------------------

    \1581\ See Section IV.F.1.c(2)B.ii, supra. The Commission 
preliminarily believes the outsourcing cost would be the cost of the 
service bureau, which would include the compliance and legal costs 
associated with changing to CAT Data reporting. The Commission 
assumes these costs of changing to CAT would be included in the cost 
of the service bureau because the broker-dealers would be relying on 
the expertise of the service bureau to report their data to CAT on 
their behalf. See supra note 941.
    \1582\ The Commission preliminarily estimates that 806 small 
OATS-reporting broker-dealers would be impacted by this information 
collection. (806 small OATS-reporting broker-dealers x 1,800 burden 
hours) = 1,450,800 aggregate initial burden hours.
    \1583\ ($124,373 in outsourcing costs) x (806 small OATS-
reporting broker-dealers) = $100,244,638 in aggregate initial 
external costs.
---------------------------------------------------------------------------

ii. Ongoing, Annual Burden Hours and External Cost
    Small OATS-reporting broker-dealers that outsource their regulatory 
data reporting would likely face internal staffing burdens and external 
costs associated with ongoing activity, such as maintaining any systems 
that transmit data to their service providers. Based on conversations 
with market participants, the Commission estimates these firms would 
need 0.75 FTEs on an ongoing basis to maintain CAT reporting.\1584\
---------------------------------------------------------------------------

    \1584\ See Section IV.F.1.c(2)B.ii, supra.
---------------------------------------------------------------------------

    Based on this information the Commission preliminarily believes 
that it would take a small OATS-reporting broker-dealer 1,350 ongoing 
burden hours per year \1585\ to continue compliance with the Rule. The 
Commission believes the burden hours would be associated with work 
performed by internal technology, compliance and legal staff in 
connection with the ongoing operation of CAT Data reporting. The 
Commission preliminarily estimates that it would cost, on average, 
approximately $124,373 in ongoing external outsourcing costs \1586\ to 
ensure ongoing compliance with Rule 613.
---------------------------------------------------------------------------

    \1585\ 1,350 ongoing burden hours = (0.75 FTE for maintenance of 
CAT Data reporting systems) x (1,800 working hours per year).
    \1586\ See Section IV.F.1.c(2)B.ii, supra. See supra note 1581.
---------------------------------------------------------------------------

    Therefore, the Commission preliminarily estimates that the average 
ongoing annual burden per small OATS-reporting broker-dealer would be 
approximately 1,350 hours, plus $124,373 in external costs, for an 
estimated aggregate ongoing burden of 1,088,100 hours \1587\ and an 
estimated aggregate ongoing external cost of $100,244,638.\1588\
---------------------------------------------------------------------------

    \1587\ The Commission preliminarily estimates that 806 small 
OATS-reporting broker-dealers would be impacted by this information 
collection. (806 small OATS-reporting broker-dealers x 1,350 burden 
hours) = 1,088,100 aggregate ongoing burden hours to ensure ongoing 
compliance with Rule 613.
    \1588\ $100,244,638 = $124,373 in ongoing outsourcing costs x 
806 broker-dealers.
---------------------------------------------------------------------------

B. Non-OATS Reporters
i. Initial Burden Hours and External Cost
    In addition to firms that currently report to OATS, the Commission 
estimates there are 799 broker-dealers that are currently exempt from 
OATS reporting rules due to firm size, or excluded because all of their 
order flow is routed to a single OATS reporter, such as a clearing 
firm, that would incur CAT reporting obligations.\1589\ A further 24 
broker-dealers have SRO memberships only with one Participant; \1590\ 
the Commission believes this group is comprised mostly of floor brokers 
and further preliminarily believes these firms would experience CAT 
implementation and ongoing reporting costs similar in magnitude to 
small equity broker-

[[Page 30796]]

dealers that currently have no OATS reporting responsibilities.\1591\
---------------------------------------------------------------------------

    \1589\ See Section IV.F.1.c(2)B.ii, supra. Rule 613 does not 
exclude from data reporting obligations SRO members that quote or 
execute transactions in NMS Securities and Listed Options that route 
to a single market participant. See also CAT NMS Plan, supra note 3, 
at Appendix C, Section B.7(b)(ii)(B)(2).
    \1590\ See Section IV.F.1.c(2)B.ii, supra.
    \1591\ Id.
---------------------------------------------------------------------------

    The Commission assumes these broker-dealers would have very low 
levels of CAT reporting, similar to those of the lowest activity firms 
that currently report to OATS. For these firms, the Commission assumes 
that under CAT they would incur the average estimated service bureau 
cost of broker-dealers that currently report fewer than 350,000 OATS 
ROEs per month, which is $124,373 annually.\1592\ Furthermore, because 
these firms have more limited data reporting requirements than other 
firms, the Commission assumes these firms currently have only 0.1 full-
time employees currently dedicated to regulatory data reporting 
activities.\1593\ The Commission assumes these firms would require 2 
full-time employees for one year to implement CAT.\1594\
---------------------------------------------------------------------------

    \1592\ Id.
    \1593\ Id.
    \1594\ Id.
---------------------------------------------------------------------------

    Based on this information, the Commission preliminarily estimates 
that the average initial burden to develop and implement the needed 
systems changes to capture the required information and transmit it to 
the Central Repository in compliance with the Rule for small, non-OATS-
reporting broker-dealers would be approximately 3,600 initial burden 
hours.\1595\ The Commission believes the burden hours would be 
associated with work performed by internal technology, compliance and 
legal staff in connection with the implementation of CAT Data 
reporting. The Commission also preliminarily estimates that each small 
non-OATS-reporting broker-dealer would incur approximately $124,373 in 
initial external outsourcing costs.\1596\
---------------------------------------------------------------------------

    \1595\ 3,600 initial burden hours = (2 FTEs for implementation 
of CAT Data reporting systems) x (1,800 working hours per year).
    \1596\ See supra note 1590.
---------------------------------------------------------------------------

    Therefore, the Commission preliminarily estimates that the average 
one-time initial burden per small OATS-reporting broker-dealer would be 
3,600 burden hours and external costs of $124,373 for an estimated 
aggregate initial burden of 2,962,800 hours \1597\ and an estimated 
aggregate initial external cost of $102,358,979.\1598\
---------------------------------------------------------------------------

    \1597\ The Commission preliminarily estimates that 823 small 
non-OATS-reporting broker-dealers would be impacted by this 
information collection. (823 small non-OATS-reporting broker-dealers 
x 3,600 burden hours) = 2,962,800 aggregate initial burden hours.
    \1598\ ($124,373 in outsourcing costs) x (823 small non-OATS-
reporting broker-dealers) = $102,358,979 in aggregate initial 
external costs.
---------------------------------------------------------------------------

ii. Ongoing, Annual Burden Hours and External Cost
    Small non-OATS-reporting broker-dealers that outsource their 
regulatory data reporting would likely face internal staffing burdens 
and costs associated with ongoing activity, such as maintaining any 
systems that transmit data to their service providers. Based on 
conversations with market participants, the Commission estimates these 
firms would need 0.75 full-time employees annually to maintain CAT 
reporting.
    Based on this information the Commission preliminarily believes 
that it would take a small non-OATS-reporting broker-dealer 1,350 
ongoing burden hours per year \1599\ to continue compliance with the 
Rule. The Commission preliminarily estimates that it would cost, on 
average, approximately $124,373 in ongoing external outsourcing costs 
\1600\ to ensure ongoing compliance with Rule 613. Therefore, the 
Commission preliminarily estimates that the average ongoing annual 
burden per small non-OATS-reporting broker-dealer would be 
approximately 1,350 hours, plus $124,373 in external costs, for an 
estimated aggregate ongoing burden of 1,111,050 hours \1601\ and an 
estimated aggregate ongoing external cost of $102,358,979.\1602\
---------------------------------------------------------------------------

    \1599\ 1,350 ongoing burden hours = (0.75 FTEs for maintenance 
of CAT data reporting systems) x (1,800 working hours per year).
    \1600\ The Commission assumes these firms would have very low 
levels of CAT reporting, similar to those of the lowest activity 
firms that currently report to OATS. For these firms, the Commission 
assumes that under CAT they would incur the average estimated 
service bureau cost of firms that currently OATS report fewer than 
350,000 OATS ROEs per month of $124,373 annually.
    \1601\ The Commission preliminarily estimates that 823 small 
non-OATS-reporting broker-dealers would be impacted by this 
information collection. (823 small non-OATS-reporting broker-dealers 
x 1,350 burden hours) = 1,111,050 aggregate ongoing burden hours to 
ensure ongoing compliance with Rule 613.
    \1602\ ($124,373 in ongoing external outsourcing costs) x 823 = 
$102,358,979 in aggregate ongoing external costs to ensure ongoing 
compliance with Rule 613.
---------------------------------------------------------------------------

E. Collection of Information is Mandatory

    Each collection of information discussed above would be a mandatory 
collection of information.

F. ConfidentialityC

    Rule 613 requires that the information to be collected and 
electronically provided to the Central Repository would only be 
available to the national securities exchanges, national securities 
association, and the Commission for the purpose of performing their 
respective regulatory and oversight responsibilities pursuant to the 
federal securities laws, rules and regulations. Further, the CAT NMS 
Plan is required to include policies and procedures to ensure the 
security and confidentiality of all information submitted to the 
Central Repository, and to ensure that all SROs and their employees, as 
well as all employees of the Central Repository, shall use appropriate 
safeguards to ensure the confidentiality of such data and shall agree 
not to use such data for any purpose other than surveillance and 
regulatory purposes. The Commission will receive confidential 
information. To the extent that the Commission does receive 
confidential information pursuant to this collection of information, 
such information will be kept confidential, subject to the provisions 
of applicable law.

G. Recordkeeping Requirements

    National securities exchanges and national securities associations 
would be required to retain records and information pursuant to Rule 
17a-1 under the Exchange Act.\1603\ Broker-dealers would be required to 
retain records and information in accordance with Rule 17a-4 under the 
Exchange Act.\1604\ The Plan Processor would be required to retain the 
information reported to Rule 613(c)(7) and (e)(6) for a period of not 
less than five years.\1605\
---------------------------------------------------------------------------

    \1603\ 17 CFR 240.17a-1.
    \1604\ 17 CFR 240.17a-4.
    \1605\ 17 CFR 242.613(c)(7) and (e)(6).
---------------------------------------------------------------------------

H. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2)(A), the Commission solicits 
comment to:
    (1) Evaluate whether the proposed collections are necessary for the 
proper performance of our functions, including whether the information 
shall have practical utility;
    (2) Evaluate the accuracy of our estimate of the burden of each 
collection of information;
    (3) Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected; and
    (4) Evaluate whether there are ways to minimize the burden of each 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    Persons submitting comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs,

[[Page 30797]]

Washington, DC 20503, and should also send a copy of their comments to 
Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F 
Street NE., Washington, DC 20549-1090, with reference to File No. 4-
698. Requests for materials submitted to OMB by the Commission with 
regard to these collections of information should be in writing, with 
reference to File No. 4-698, and be submitted to the Securities and 
Exchange Commission, Office of FOIA/PA Services, 100 F Street NE., 
Washington, DC 20549-2736. As OMB is required to make a decision 
concerning the collections of information between 30 and 60 days after 
publication in the Federal Register, a comment to OMB is best assured 
of having its full effect if OMB receives it within 30 days of 
publication.

VI. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number 4-698 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number 4-698. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the CAT NMS Plan that are filed with the 
Commission, and all written communications relating to the CAT NMS Plan 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE., Washington, DC 
20549 on official business days between 10:00 a.m. and 3:00 p.m. Copies 
of the submission will also be available for inspection and copying at 
the Participants' principal offices. All comments received will be 
posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number 4-698 and should be submitted on or before 
July 18, 2016.

    By the Commission.
Brent J. Fields,
Secretary.

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[FR Doc. 2016-10461 Filed 5-16-16; 8:45 am]
 BILLING CODE 8011-01-P


