
[Federal Register Volume 82, Number 106 (Monday, June 5, 2017)]
[Notices]
[Pages 25820-25827]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-11507]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80813; File No. SR-NASDAQ-2017-055]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Eliminate Requirements That 
Will Be Duplicative of CAT

May 30, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 26, 2017, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III, below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the Rule 7000A series relating to 
the Order Audit Trail System, Rule 8211 and Chapter IX, Section IV 
relating to Electronic Blue Sheets, Chapter VII, Section VII relating 
to account identification, and Chapter V, Section VII relating to the 
Consolidated Options Audit Trail System to reflect changes to these 
rules once members are effectively reporting to the Consolidated Audit 
Trail (``CAT'') and the CAT's accuracy and reliability meets certain 
standards as described below.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend the Rule 7000A series relating to 
the Order Audit Trail System (``OATS''), Rule 8211 and Chapter IX, 
Section IV relating to Electronic Blue Sheets (``EBS''), Chapter VII, 
Section VII relating to account identification, and Chapter V, Section 
VII relating to the Consolidated Options Audit Trail System (``COATS'') 
to reflect changes to these rules once members are effectively 
reporting to the CAT, and the CAT's accuracy and reliability meets 
certain standards as described below.\3\
---------------------------------------------------------------------------

    \3\ The Exchange initially filed the proposed rule change on May 
15, 2017 (SR-NASDAQ-2017-050). On May 26, 2017, the Exchange 
withdrew that filing and submitted this filing.
---------------------------------------------------------------------------

Background
    Bats BYX Exchange, Inc.; Bats BZX Exchange, Inc.; Bats EDGA 
Exchange, Inc.; Bats EDGX Exchange, Inc.; BOX Options Exchange LLC; C2 
Options Exchange, Incorporated; Chicago Board Options Exchange, 
Incorporated; Chicago Stock Exchange, Inc.; FINRA; International 
Securities Exchange, LLC; Investors' Exchange LLC; ISE Gemini, LLC; ISE 
Mercury, LLC; Miami International Securities Exchange LLC; MIAX PEARL, 
LLC; NASDAQ BX, Inc.; NASDAQ PHLX LLC; The NASDAQ Stock Market LLC; 
National Stock Exchange, Inc.; New York Stock Exchange LLC; NYSE MKT 
LLC; and NYSE Arca, Inc. (collectively, the ``Participants'') filed 
with the Commission, pursuant to Section 11A of the Exchange Act \4\ 
and Rule 608 of

[[Page 25821]]

Regulation NMS thereunder,\5\ the National Market System Plan Governing 
the Consolidated Audit Trail (the ``CAT NMS Plan'' or ``Plan'').\6\ The 
Participants filed the Plan to comply with Rule 613 of Regulation NMS 
under the Exchange Act.\7\ The Plan was published for comment in the 
Federal Register on May 17, 2016,\8\ and approved by the Commission, as 
modified, on November 15, 2016.\9\ On March 15, 2017, the Commission 
approved the new Nasdaq Rule 6800 Series and Chapter IX, Section 8 to 
implement provisions of the CAT NMS Plan that are applicable to Nasdaq 
members.\10\
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78k-1.
    \5\ 17 CFR 242.608.
    \6\ See Letter from the Participants to Brent J. Fields, 
Secretary, Commission, dated September 30, 2014; and Letter from 
Participants to Brent J. Fields, Secretary, Commission, dated 
February 27, 2015. On December 24, 2015, the Participants submitted 
an amendment to the CAT NMS Plan. See Letter from Participants to 
Brent J. Fields, Secretary, Commission, dated December 23, 2015.
     ISE Gemini, LLC, ISE Mercury, LLC and International Securities 
Exchange, LLC have been renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC, 
and Nasdaq ISE, LLC, respectively. See Securities Exchange Act 
Release No. 80248 (March 15, 2017), 82 FR 14547 (March 21, 2017); 
Securities Exchange Act Release No. 80326 (March 29, 2017), 82 FR 
16460 (April 4, 2017); and Securities Exchange Act Release No. 80325 
(March 29, 2017), 82 FR 16445 (April 4, 2017).
     National Stock Exchange, Inc. has been renamed NYSE National, 
Inc. See Securities Exchange Act Release No. 79902 (Jan. 30, 2017), 
82 FR 9258 (February 3, 2017).
    \7\ 17 CFR 242.613.
    \8\ Securities Exchange Act Release No. 77724 (April 27, 2016), 
81 FR 30614 (May 17, 2016).
    \9\ Securities Exchange Act Release No. 79318 (November 15, 
2016), 81 FR 84696 (November 23, 2016) (``Approval Order'').
    \10\ See Securities Exchange Act Release No. 80256 (March 15, 
2017), 82 FR 14526 (March 21, 2017) (SR-NASDAQ-2017-008).
---------------------------------------------------------------------------

    The CAT NMS Plan is designed to create, implement, and maintain a 
consolidated audit trail that will capture in a single consolidated 
data source customer and order event information for orders in NMS 
Securities and OTC Equity Securities, across all markets, from the time 
of order inception through routing, cancellation, modification, or 
execution. Among other things, Section C.9. of Appendix C to the Plan, 
as modified by the Commission, requires each Participant to ``file with 
the SEC the relevant rule change filing to eliminate or modify its 
duplicative rules within six (6) months of the SEC's approval of the 
CAT NMS Plan.'' \11\ The Plan notes that ``the elimination of such 
rules and the retirement of such systems [will] be effective at such 
time as CAT Data meets minimum standards of accuracy and reliability.'' 
\12\ Finally, the Plan requires the rule filing to discuss the 
following:
---------------------------------------------------------------------------

    \11\ CAT NMS Plan, Appendix C, Section C.9.
    \12\ See id.
---------------------------------------------------------------------------

    (i) Specific accuracy and reliability standards that will determine 
when duplicative systems will be retired, including, but not limited 
to, whether the attainment of a certain Error Rate should determine 
when a system duplicative of the CAT can be retired;
    (ii) whether the availability of certain data from Small Industry 
Members two years after the Effective Date would facilitate a more 
expeditious retirement of duplicative systems; and
    (iii) whether individual Industry Members can be exempted from 
reporting to duplicative systems once their CAT reporting meets 
specified accuracy and reliability standards, including, but not 
limited to, ways in which establishing cross-system regulatory 
functionality or integrating data from existing systems and the CAT 
would facilitate such Individual Industry Member exemptions.\13\
---------------------------------------------------------------------------

    \13\ See id.
---------------------------------------------------------------------------

Changes to OATS
    In response to these requirements, Nasdaq is proposing to delete 
the Rule 7000A Series (the ``OATS Rules'') from the Nasdaq rulebook 
once the CAT achieves the specific accuracy and reliability standards 
described below, and Nasdaq has determined that its usage of the CAT 
Data has not revealed material issues that have not been corrected, 
confirmed that the CAT includes all data necessary to allow Nasdaq to 
continue to meet its surveillance obligations,\14\ and confirmed that 
the Plan Processor is sufficiently meeting all of its obligations under 
the CAT NMS Plan.\15\
---------------------------------------------------------------------------

    \14\ As noted in the Participants' September 23, 2016 response 
to comment letters on the Plan, the Participants ``worked to keep 
[the CAT] gap analyses up-to-date by including newly-added data 
fields in these duplicative systems, such as the new OATS data 
fields related to the tick size pilot and ATS order book changes, in 
the gap analyses.'' See Letter from Participants to Brent J. Fields, 
Secretary, Commission, dated September 23, 2016, at 21. The 
Participants noted that they ``will work with the Plan Processor and 
the industry to develop detailed Technical Specifications to ensure 
that by the time Industry Members are required to report to the CAT, 
the CAT will include all data elements necessary to facilitate the 
rapid retirement of duplicative systems.'' Id.
    \15\ Nasdaq notes that the OATS Rules were originally proposed 
to fulfill one of the undertakings contained in an order issued by 
the Commission relating to the settlement of an enforcement action 
against the National Association of Securities Dealers, Inc. for 
failure to adequately enforce its rules. See Securities Exchange Act 
Release No. 39729 (March 6, 1998), 63 FR 12559 (March 13, 1998). In 
approving the OATS Rules, the Commission concluded that OATS 
satisfied the conditions of the SEC's order and was consistent with 
the Exchange Act. See id. at 12566-67.
---------------------------------------------------------------------------

Specific Accuracy and Reliability Standards
    The first issue the Plan requires the proposed rule change to 
discuss is ``specific accuracy and reliability standards that will 
determine when duplicative systems will be retired, including, but not 
limited to, whether the attainment of a certain Error Rate should 
determine when a system duplicative of the CAT can be retired.'' \16\ 
Nasdaq believes that relevant error rates are the primary, but not the 
sole, metric by which to determine the CAT's accuracy and reliability 
and will serve as the baseline requirement needed before OATS can be 
retired to account for information being available in the CAT.
---------------------------------------------------------------------------

    \16\ See id. [sic]
---------------------------------------------------------------------------

    As discussed in Section A.3.(b) of Appendix C to the CAT NMS Plan, 
the Participants established an initial Error Rate, as defined in the 
Plan, of 5% on initially submitted data (i.e., data as submitted by a 
CAT Reporter before any required corrections are performed). The 
Participants noted in the Plan that their expectation was that ``error 
rates after reprocessing of error corrections will be de minimis.'' 
\17\ The Participants based this Error Rate on their consideration of 
``current and historical OATS Error Rates, the magnitude of new 
reporting requirements on the CAT Reporters and the fact that many CAT 
Reporters may have never been obligated to report data to an audit 
trail.'' \18\
---------------------------------------------------------------------------

    \17\ See CAT NMS Plan, Appendix C, Section A.3(b), at n.102.
    \18\ Id.
---------------------------------------------------------------------------

    Nasdaq agrees with the Participants' conclusion that a 5% pre-
correction threshold ``strikes the balance of 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, as well as having a sufficient level of accuracy to 
facilitate the retirement of existing regulatory reports and systems 
where possible.'' \19\ However, Nasdaq believes that, when assessing 
the accuracy and reliability of the data for the purposes of retiring 
OATS, the error thresholds should be measured in more granular ways and 
should also include minimum error rates of post-correction data, which 
represents the data most likely to be used by Nasdaq to conduct 
surveillance. Although Nasdaq is proposing to measure the appropriate 
error rates in the aggregate, rather than firm-by-firm, Nasdaq believes 
that the error rates for equity securities should be measured 
separately from options since options

[[Page 25822]]

orders are not currently reported regularly or included in OATS.
---------------------------------------------------------------------------

    \19\ Id.
---------------------------------------------------------------------------

    To ensure the CAT's accuracy and reliability, Nasdaq is proposing 
that, before OATS could be retired, the CAT would generally need to 
achieve a sustained error rate for Industry Member reporting in each of 
the categories below for a period of at least 180 days of 5% or lower, 
measured on a pre-correction or as-submitted basis and 2% or lower on a 
post-correction basis (measured at T+5).\20\ Nasdaq is proposing to 
measure the 5% pre-correction and 2% post-correction thresholds by 
averaging the error rate across the period, not require a 5% pre-
correction and 2% post-correction maximum each day for 180 consecutive 
days. Nasdaq believes that measuring each of the thresholds over the 
course of 180 days will ensure that the CAT consistently meets minimum 
accuracy and reliability thresholds for Industry Member reporting while 
also ensuring that single-day measurements do not unduly affect the 
overall measurements.
---------------------------------------------------------------------------

    \20\ The Plan requires that the Plan Processor must ensure that 
regulators have access to corrected and linked order and Customer 
data by 8:00 a.m. Eastern Time on T+5. See CAT NMS Plan, Appendix C, 
Section A.2(a).
---------------------------------------------------------------------------

    Nasdaq is proposing to use error rates in each the following 
categories, measured separately for options and for equities, to assess 
whether the threshold pre- and post-correction error rates are being 
met:
     Rejection Rates and Data Validations. Data validations for 
the CAT, while not expected to be designed the same as OATS, must be 
functionally equivalent to OATS in accordance with the CAT NMS Plan 
(i.e., the same types of basic data validations must be performed by 
the Plan Processor to comply with the CAT NMS Plan requirements). 
Appendix D of the Plan, for example, requires that certain file 
validations \21\ and syntax and context checks be performed on all 
submitted records.\22\ If a record does not pass these basic data 
validations, it must be rejected and returned to the CAT Reporter to be 
corrected and resubmitted.\23\ The specific validations can be 
determined only after the Plan Processor has finalized the Industry 
Member Technical Specifications; however, the Plan also requires the 
Plan Processor to provide daily statistics on rejection rates after the 
data has been processed, including the number of files rejected and 
accepted, the number of order events accepted and rejected, and the 
number of each type of report rejected.\24\ Nasdaq is proposing that, 
over the 180-day period, aggregate rejection rates (measured separately 
for equities and options) must be no more than 5% pre-correction or 2% 
post-correction across all CAT Reporters.
---------------------------------------------------------------------------

    \21\ See CAT NMS Plan, Appendix D, Section 7.2. The Plan 
requires the Plan Processor to confirm that file transmission and 
receipt are in the correct formats, including validation of header 
and trailers on the submitted report, confirmation of a valid 
Exchange[sic]-Assigned Market Participant Identifier, and 
verification of the number of records in the file. Id.
    \22\ See id. The Plan notes that syntax and context checks would 
include format checks (i.e., that data is entered in the specified 
format); data type checks (i.e., that the data type of each 
attribute conforms to the specifications); consistency checks (i.e., 
that all attributes for a record of a specified type are 
consistent); range/logic checks (i.e., that each attribute for every 
record has a value within specified limits and the values provided 
are associated with the event type they represent); data validity 
checks (i.e., that each attribute for every record has an acceptable 
value); completeness checks (i.e., that each mandatory attribute for 
every record is not null); and timeliness checks (i.e., that the 
records were submitted within the submission timelines). Id.
    \23\ See id.
    \24\ See id.
---------------------------------------------------------------------------

     Intra-Firm Linkages. The Plan requires that ``the Plan 
Processor must be able to link all related order events from all CAT 
Reporters involved in the lifecycle of an order.'' \25\ At a minimum, 
this requirement includes the creation of an order lifecycle between 
``[a]ll order events handled within an individual CAT Reporter, 
including orders routed to internal desks or departments with different 
functions (e.g., an internal ATS).'' \26\ Nasdaq is proposing that 
aggregate intra-firm linkage rates across all Industry Member Reporters 
must be at least 95% pre-correction and 98% post-correction.
---------------------------------------------------------------------------

    \25\ CAT NMS Plan, Appendix D, Section 3.
    \26\ Id.
---------------------------------------------------------------------------

     Inter-Firm Linkages. The order linkage requirements in the 
Plan also require that the Plan Processor be able to create the 
lifecycle between orders routed between broker-dealers.\27\ Nasdaq is 
proposing that at least a 95% pre-correction and 98% post-correction 
aggregate match rate be achieved for orders routed between two Industry 
Member Reporters.\28\
---------------------------------------------------------------------------

    \27\ Id.
    \28\ This assumes linkage statistics will include both unlinked 
route reports and new orders where no related route report could be 
found.
---------------------------------------------------------------------------

     Order Linkage Rates. In addition to creating linkages 
within and between broker-dealers, the Plan also includes requirements 
that the Plan Processor be able to create lifecycles to link various 
pieces of related orders.\29\ For example, the Plan requires linkages 
between customer orders and ``representative'' orders created in firm 
accounts for the purpose of facilitating a customer order, various legs 
of option/equity complex orders, riskless principal orders, and orders 
worked through average price accounts.\30\ Nasdaq is proposing that 
there be at least a 95% pre-correction and 98% post-correction linkage 
rate for multi-legged orders (e.g., related equity/options orders, VWAP 
orders, riskless principal transactions).
---------------------------------------------------------------------------

    \29\ See CAT NMS Plan, Appendix D, Section 3.
    \30\ See id.
---------------------------------------------------------------------------

     Exchange and TRF/ORF Match Rates. The Plan requires that 
an order lifecycle be created to link ``[o]rders routed from broker-
dealers to exchanges'' and ``[e]xecuted orders and trade reports.'' 
\31\ Nasdaq is proposing at least a 95% pre-correction and 98% post-
correction aggregate match rate to each equity exchange for orders 
routed from Industry Members to an exchange and, for over-the-counter 
executions, the same match rate for orders linked to trade reports.
---------------------------------------------------------------------------

    \31\ Id.
---------------------------------------------------------------------------

    In addition to these minimum error rates and matching thresholds 
that generally must be met before OATS can be retired, Nasdaq believes 
that during the minimum 180-day period during which the thresholds are 
calculated, Nasdaq's use of the data in the CAT must confirm that (i) 
usage over that time period has not revealed material issues that have 
not been corrected, (ii) the CAT includes all data necessary to allow 
Nasdaq to continue to meet its surveillance obligations, and (iii) the 
Plan Processor is sufficiently meeting all of its obligations under the 
CAT NMS Plan. Nasdaq believes this time period to use the CAT Data is 
necessary to reveal any errors that may manifest themselves only after 
surveillance patterns and other queries have been run and to confirm 
that the Plan Processor is meeting its obligations and performing its 
functions adequately.
Small Industry Member Data Availability
    The second issue the Plan requires the proposed rule change to 
address is ``whether the availability of certain data from Small 
Industry Members two years after the Effective Date would facilitate a 
more expeditious retirement of duplicative systems.''
    Nasdaq believes that there is no effective way to retire OATS until 
all current OATS reporters are reporting to the CAT. Although Technical 
Specifications for Industry Members are not yet available, Nasdaq 
believes it would be inefficient, less reliable, and more costly to 
attempt to marry the OATS and CAT databases for a temporary period to 
allow some Nasdaq members to report to CAT while others

[[Page 25823]]

continue to report to OATS. Consequently, Nasdaq has concluded at this 
time that having data from those Small Industry Members currently 
reporting to OATS available two years after the Effective Date would 
substantially facilitate a more expeditious retirement of OATS. For 
this reason, Nasdaq supports an amendment to the Plan that would 
require current OATS Reporters that are ``Small Industry Members'' to 
report two years after the Effective Date (instead of three). Nasdaq 
intends to work with the other Participants to submit a proposed 
amendment to the Plan to require Small Industry Members that are OATS 
Reporters to report two years after the Effective Date.
    Nasdaq has identified approximately 300 member firms that currently 
report to OATS and meet the definition of ``Small Industry Member;'' 
however, only ten of these firms submit information to OATS on their 
own behalf, and eight of the ten firms report very few orders to 
OATS.\32\ The vast majority of these 300 firms use third parties to 
fulfill their reporting obligations, and many of these third parties 
will begin reporting to CAT in November 2018. Consequently, Nasdaq 
believes that the burden on current OATS Reporters that are ``Small 
Industry Members'' would not be significant if those firms are required 
to report to CAT beginning in November 2018 rather than November 2019. 
The burdens, however, are significantly greater for those firms that 
are not reporting to OATS currently; therefore, Nasdaq does not believe 
it would be necessary or appropriate to accelerate CAT reporting for 
``Small Industry Members'' that are not currently reporting to OATS, 
and Nasdaq would not support an amendment to the Plan to accelerate CAT 
reporting for ``Small Industry Members'' that are not currently OATS 
Reporters.
---------------------------------------------------------------------------

    \32\ For example, in one recent month, eight of the ten firms 
submitted fewer than 100 reports during the month, with four firms 
submitting fewer than 50.
---------------------------------------------------------------------------

Individual Industry Member Exemptions
    The final issue the Plan requires the proposed rule change to 
address is ``whether individual Industry Members can be exempted from 
reporting to duplicative systems once their CAT reporting meets 
specified accuracy and reliability standards, including, but not 
limited to, ways in which establishing cross-system regulatory 
functionality or integrating data from existing systems and the CAT 
would facilitate such Individual Industry Member exemptions.''
    As described above, Nasdaq believes that a single cut-over from 
OATS to CAT is highly preferable to a firm-by-firm approach and is not 
proposing to exempt members from the OATS requirements on a firm-by-
firm basis. The primary benefit to a firm-by-firm exemptive approach 
would be to reduce the amount of time an individual firm is required to 
report to a legacy system (e.g., OATS) if it is also accurately and 
reliably reporting to the CAT. Nasdaq believes that the overall 
accuracy and reliability thresholds for the CAT described above would 
need to be met under any conditions before firms could stop reporting 
to OATS. Moreover, as discussed above, Nasdaq supports amending the 
Plan to accelerate the reporting requirements for Small Industry 
Members that are OATS Reporters to report on the same timeframe as all 
other OATS Reporters. If such an amendment were approved by the 
Commission, there would be no need to exempt members from OATS 
requirements on a firm-by-firm basis.
Changes to EBS and Account Identification Rules
    The EBS rule is Nasdaq's rule regarding the automated submission of 
specific trading data to Nasdaq upon request using the Electronic Blue 
Sheet system. Rule 8211 applies to EBS reporting for equity securities, 
while Chapter IX, Section 4 applies EBS reporting to options. Rule 8211 
and Chapter IX, Section 4 require members to submit certain trade 
information as prescribed by Nasdaq Regulation, including, for 
proprietary transactions, the clearing house number or alpha symbol of 
the member submitting the data, the identifying symbol assigned to the 
security, and the date the transaction was executed.
    Chapter VII, Section VII imposes certain account identification 
requirements on Market Makers. Specifically, Chapter VII, Section VII 
requires, among other things, that each Market Maker shall file with 
Nasdaq Regulation and keep current a list identifying all accounts for 
stock, options and related securities trading in which the Market Maker 
may, directly or indirectly, engage in trading activities or over which 
it exercises investment discretion. The rule also prohibits a Market 
Maker from engaging in stock, options or related securities trading in 
an account which has not been reported pursuant to this rule.
    Once broker-dealer reporting to the CAT has begun, the CAT will 
contain the data the Participants would otherwise have requested via 
the EBS system for purposes of NMS Securities and OTC Equity 
Securities. Consequently, Nasdaq will not need to use the EBS system or 
request information pursuant to these rules for NMS Securities or OTC 
Equity Securities for time periods after CAT reporting has begun if the 
appropriate accuracy and reliability thresholds are achieved, including 
an acceptable accuracy rate for customer and account information. 
However, these rules cannot be completely eliminated immediately upon 
the CAT achieving the appropriate thresholds because Nasdaq Regulation 
staff may still need to request information pursuant to these rules for 
trading activity occurring before a member was reporting to the 
CAT.\33\ In addition, these rules apply to information regarding 
transactions involving securities that will not be reportable to the 
CAT, such as fixed-income securities; thus, these rules must remain in 
effect with respect to those transactions indefinitely or until those 
transactions are captured in the CAT.
---------------------------------------------------------------------------

    \33\ Firms are required to maintain the trade information for 
pre-CAT transactions in equities and options pursuant to applicable 
rules, such as books and records retention requirements, for the 
relevant time period, which is generally three or six years 
depending upon the record. See 17 CFR 240.17a-3(a), 240.17a-4.
---------------------------------------------------------------------------

    The proposed rule change proposes to add new Supplementary Material 
to Rule 8211, Chapter VII, Section VII and Chapter IX, Section 4 to 
clarify how Nasdaq will request data under these rules after members 
are reporting to the CAT. Specifically, the proposed Supplementary 
Material to these rules will note that Nasdaq Regulation will request 
information under these rules only if the information is not available 
in the CAT because, for example, the transactions in question occurred 
before the firm was reporting information to the CAT or involved 
securities that are not reportable to the CAT. In essence, under the 
new Supplementary Material, Nasdaq Regulation will make requests under 
these rules if and only if the information is not otherwise available 
through the CAT.
    The CAT NMS Plan states, however, that the elimination of rules 
that are duplicative of the requirements of the CAT and the retirement 
of the related systems should be effective at such time as CAT Data 
meets minimum standards of accuracy and reliability.\34\ Accordingly, 
as discussed in more detail below, Nasdaq believes that the EBS data 
may be replaced by CAT Data at a date after all Industry Members are 
reporting to the CAT when the proposed

[[Page 25824]]

error rate thresholds have been met, and Nasdaq has determined that its 
usage of the CAT Data has not revealed material issues that have not 
been corrected, confirmed that the CAT includes all data necessary to 
allow Nasdaq to continue to meet its surveillance obligations, and 
confirmed that the Plan Processor is sufficiently meeting all of its 
obligations under the CAT NMS Plan.
---------------------------------------------------------------------------

    \34\ Id. [sic]
---------------------------------------------------------------------------

    Nasdaq believes CAT Data should not be used in place of EBS data 
until all Participants and Industry Members are reporting data to CAT. 
In this way, Nasdaq will continue to have access to the necessary data 
to perform its regulatory duties.
    The CAT NMS Plan requires that a rule filing to eliminate a 
duplicative rule address whether ``the availability of certain data 
from Small Industry Members two years after the Effective Date would 
facilitate a more expeditious retirement of duplicative systems.'' \35\ 
Nasdaq believes that the submission of data to the CAT by Small 
Industry Members a year earlier than is required in the CAT NMS Plan, 
at the same time as the other Industry Members, would expedite the 
replacement of EBS data with CAT Data, as Nasdaq believes that the CAT 
would then have all necessary data from the Industry Members for Nasdaq 
to perform the regulatory surveillance that currently is performed via 
EBS. For this reason, Nasdaq supports amending the CAT NMS Plan to 
require Small Industry Members to report data to the CAT two years 
after the Effective Date (instead of three), and intends to work with 
other Participants toward that end.
---------------------------------------------------------------------------

    \35\ Id.
---------------------------------------------------------------------------

    The CAT NMS Plan requires that this rule filing address ``whether 
individual Industry Members can be exempted from reporting to 
duplicative systems once their CAT reporting meets specified accuracy 
and reliability standards, including, but not limited to, ways in which 
establishing cross-system regulatory functionality or integrating data 
from existing systems and the CAT would facilitate such Individual 
Industry Member exemptions.'' \36\ Nasdaq believes that a single cut-
over from EBS to CAT is highly preferable to a firm-by-firm approach 
and is not proposing to exempt members from the EBS requirements on a 
firm-by-firm basis. Nasdaq believes that providing such individual 
exemptions to Industry Members would be inefficient, more costly, and 
less reliable than the single cut-over. Providing individual exemptions 
would require the exchanges to create, for a brief temporary period, a 
cross-system regulatory function and to integrate data from EBS and the 
CAT to avoid creating any regulatory gaps as a result of such 
exemptions. Such a function would be costly to create and would give 
rise to a greater likelihood of data errors or other issues. Given the 
limited time in which such exemptions would be necessary, Nasdaq does 
not believe that such exemptions would be an appropriate use of limited 
resources. Moreover, the primary benefit to a firm-by-firm exemptive 
approach would be to reduce the amount of time an individual firm is 
required to comply with EBS if it is also accurately and reliably 
reporting to the CAT. Nasdaq believes that the overall accuracy and 
reliability thresholds for the CAT described above would need to be met 
under any conditions before firms could stop reporting to EBS, and as 
discussed above, by accelerating Small Industry Members to report on 
the same timeframe as all other Industry Members, there is no need to 
exempt members from EBS requirements on a firm-by-firm basis.
---------------------------------------------------------------------------

    \36\ Id.
---------------------------------------------------------------------------

    The CAT NMS Plan also requires that a rule filing to eliminate a 
duplicative rule to provide ``specific accuracy and reliability 
standards that will determine when duplicative systems will be retired, 
including, but not limited to, whether the attainment of a certain 
Error Rate should determine when a system duplicative of the CAT can be 
retired.'' \37\ Nasdaq believes that it is critical that the CAT Data 
be sufficiently accurate and reliable for Nasdaq to perform the 
regulatory functions that it now performs via EBS. Accordingly, Nasdaq 
believes that the CAT Data should meet specific quantitative error 
rates, as well as certain qualitative requirements.
---------------------------------------------------------------------------

    \37\ Id.
---------------------------------------------------------------------------

    Nasdaq believes that, before CAT Data may be used in place of EBS 
data, the CAT would need to achieve a sustained error rate for a period 
of at least 180 days of 5% or lower measured on a pre-correction or as-
submitted basis, and 2% or lower on a post-correction basis (measured 
at T+5).\38\ Nasdaq proposes to measure the 5% pre-correction and 2% 
post-correction thresholds by averaging the error rate across the 
period, not require a 5% pre-correction and 2% post-correction maximum 
each day for 180 consecutive days. Nasdaq believes that measuring each 
of the thresholds over the course of 180 days will ensure that the CAT 
consistently meets minimum accuracy and reliability thresholds while 
also ensuring that single-day measurements do not unduly affect the 
overall measurements. Nasdaq proposes to measure the appropriate error 
rates in the aggregate, rather than firm-by-firm. The 2% and 5% error 
rates are in line with the proposed retirement threshold for other 
systems, such as OATS and COATS.
---------------------------------------------------------------------------

    \38\ The Plan requires that the Plan Processor must ensure that 
regulators have access to corrected and linked order and Customer 
data by 8:00 a.m. Eastern Time on T+5. See CAT NMS Plan, at C-15.
---------------------------------------------------------------------------

    In addition to these minimum error rates before using CAT Data 
instead of EBS data, Nasdaq believes that during the minimum 180-day 
period during which the thresholds are calculated, Nasdaq's use of the 
data in the CAT must confirm that (i) usage over that time period has 
not revealed material issues that have not been corrected, (ii) the CAT 
includes all data necessary to allow Nasdaq to continue to meet its 
surveillance obligations, and (iii) the Plan Processor is sufficiently 
meeting all of its obligations under the CAT NMS Plan. Nasdaq believes 
this time period to use the CAT Data is necessary to reveal any errors 
that may manifest themselves only after surveillance patterns and other 
queries have been run and to confirm that the Plan Processor is meeting 
its obligations and performing its functions adequately.
Changes to COATS
    The options exchanges utilize COATS to collect and review data 
regarding options orders, quotes and transactions. The Participants 
have provided COATS technical specifications to the Plan Processor for 
the CAT for use in developing the Technical Specifications for the CAT, 
and the Participants are working with the Plan Processor to include the 
necessary COATS data elements in the CAT Technical Specifications. 
Accordingly, although the Technical Specifications for the CAT have not 
yet been finalized, Nasdaq and the other options exchanges propose to 
eliminate COATS in accordance with the proposed timeline discussed 
below.
    Nasdaq adopted Chapter V, Section 7 to implement certain reporting 
requirements related to COATS, and therefore proposes to eliminate the 
information reporting requirements of that rule and replacing those 
requirements with a requirement that members report information 
pursuant to this rule as required by the Exchange's CAT compliance 
rule, Chapter IX, Section 8.\39\ Among other things,

[[Page 25825]]

Chapter V, Section 7 requires an Options Participant to ensure that 
each options order received from a Customer for execution on the Nasdaq 
Options Market is recorded and time-stamped immediately, and also at 
the time of any modification or cancellation of the order. The rule 
also specifies the information that must be contained at a minimum, 
including a unique order identification, the underlying security, 
opening/closing designation, the identity of the Clearing Participant, 
and the Options Participant identification.
---------------------------------------------------------------------------

    \39\ COATS was developed to comply with an order of the 
Commission requiring the then-options exchanges to ``design and 
implement'' a consolidated audit trail to ``enable the options 
exchanges to reconstruct markets promptly, effectively surveil them 
and enforce order handling, firm quote, trade reporting and other 
rules.'' See Section IV.B.e.(v) of the Commission's Order 
Instituting Public Administrative Proceedings Pursuant to Sections 
19(h)(1) of the Securities Exchange Act of 1934, Making Findings and 
Imposing Remedial Sanctions (the ``Order''). See Securities Exchange 
Act Release No. 43268 (September 11, 2000) and Administrative 
Proceeding File No. 3-10282. As noted, the Plan is designed to 
create, implement and maintain a CAT that would capture customer and 
order event information for orders in NMS Securities and OTC Equity 
Securities, across all markets, from the time of order inception 
through routing, cancellation, modification, or execution in a 
single consolidated data source. Nasdaq has already adopted rules to 
enforce compliance by its Industry Members, as applicable, with the 
provisions of the Plan. Once the CAT is fully operational, it will 
be appropriate to delete Nasdaq's rules implemented to comply with 
the Order as duplicative of the CAT. Accordingly, Nasdaq believes 
that it would continue to be in compliance with the requirements of 
the Order once the CAT is fully operational and the COATS rules are 
deleted.
---------------------------------------------------------------------------

    The CAT NMS Plan states that the elimination of rules that are 
duplicative of the requirements of the CAT and the retirement of the 
related systems should be effective at such time as CAT Data meets 
minimum standards of accuracy and reliability.\40\ As discussed in more 
detail below, Nasdaq and the other options exchanges believe that COATS 
may be retired at a date after all Industry Members are reporting to 
the CAT when the proposed error rate thresholds have been met, and 
Nasdaq has determined that its usage of the CAT Data has not revealed 
material issues that have not been corrected, confirmed that the CAT 
includes all data necessary to allow Nasdaq to continue to meet its 
surveillance obligations, and confirmed that the Plan Processor is 
sufficiently meeting all of its obligations under the CAT NMS Plan.
---------------------------------------------------------------------------

    \40\ Id. [sic]
---------------------------------------------------------------------------

    Nasdaq believes COATS should not be retired until all Participants 
and Industry Members that report data to COATS are reporting comparable 
data to the CAT. In this way, Nasdaq will continue to have access to 
the necessary data to perform its regulatory duties.
    The CAT NMS Plan requires that a rule filing to eliminate a 
duplicative rule address whether ``the availability of certain data 
from Small Industry Members two years after the Effective Date would 
facilitate a more expeditious retirement of duplicative systems.'' \41\ 
The Exchange believes COATS should not be retired until all 
Participants and Industry Members that report data to COATS are 
reporting comparable data to the CAT. While the early submission of 
options data to the CAT by Small Industry Members could expedite the 
retirement of COATS, the Exchange believes that it premature to 
consider such a change and that additional analysis would be necessary 
to determine whether such early reporting by Small Industry Members 
would be feasible.
---------------------------------------------------------------------------

    \41\ Id.
---------------------------------------------------------------------------

    The CAT NMS Plan requires that this rule filing address ``whether 
individual Industry Members can be exempted from reporting to 
duplicative systems once their CAT reporting meets specified accuracy 
and reliability standards, including, but not limited to, ways in which 
establishing cross-system regulatory functionality or integrating data 
from existing systems and the CAT would facilitate such Individual 
Industry Member exemptions.'' \42\ Nasdaq believes that a single cut-
over from COATS to CAT is highly preferable to a firm-by-firm approach 
and is not proposing to exempt members from the COATS requirements on a 
firm-by-firm basis. Nasdaq and the other options exchanges believe that 
providing such individual exemptions to Industry Members would be 
inefficient, more costly, and less reliable than the single cut-over. 
Providing individual exemptions would require the options exchanges to 
create, for a brief temporary period, a cross-system regulatory 
function and to integrate data from COATS and the CAT to avoid creating 
any regulatory gaps as a result of such exemptions. Such a function 
would be costly to create and would give rise to a greater likelihood 
of data errors or other issues. Given the limited time in which such 
exemptions would be necessary, Nasdaq and the other options exchanges 
do not believe that such exemptions would be an appropriate use of 
limited resources.
---------------------------------------------------------------------------

    \42\ Id.
---------------------------------------------------------------------------

    The CAT NMS Plan also requires that a rule filing to eliminate a 
duplicative rule to provide ``specific accuracy and reliability 
standards that will determine when duplicative systems will be retired, 
including, but not limited to, whether the attainment of a certain 
Error Rate should determine when a system duplicative of the CAT can be 
retired.'' \43\ Nasdaq believes that it is critical that the CAT Data 
be sufficiently accurate and reliable for the Exchange to perform the 
regulatory functions that it now performs via COATS. Accordingly, 
Nasdaq believes that the CAT Data should meet specific quantitative 
error rates, as well as certain qualitative requirements.
---------------------------------------------------------------------------

    \43\ Id.
---------------------------------------------------------------------------

    Nasdaq and the other options exchanges believe that, before COATS 
may be retired, the CAT would need to achieve a sustained error rate 
for a period of at least 180 days of 5% or lower measured on a pre-
correction or as-submitted basis, and 2% or lower on a post-correction 
basis (measured at T+5).\44\ Nasdaq proposes to measure the 5% pre-
correction and 2% post-correction thresholds by averaging the error 
rate across the period, not require a 5% pre-correction and 2% post-
correction maximum each day for 180 consecutive days. Nasdaq believes 
that measuring each of the thresholds over the course of 180 days will 
ensure that the CAT consistently meets minimum accuracy and reliability 
thresholds while also ensuring that single-day measurements do not 
unduly affect the overall measurements. Nasdaq proposes to measure the 
appropriate error rates in the aggregate, rather than firm-by-firm. In 
addition, Nasdaq proposes to measure the error rates for options only, 
not equity securities, as only options are subject to COATS. The 2% and 
5% error rates are in line with the proposed retirement threshold for 
OATS.
---------------------------------------------------------------------------

    \44\ The Plan requires that the Plan Processor must ensure that 
regulators have access to corrected and linked order and Customer 
data by 8:00 a.m. Eastern Time on T+5. See CAT NMS Plan, at C-15.
---------------------------------------------------------------------------

    In addition to these minimum error rates before COATS can be 
retired, Nasdaq believes that during the minimum 180-day period during 
which the thresholds are calculated, Nasdaq's use of the data in the 
CAT must confirm that (i) usage over that time period has not revealed 
material issues that have not been corrected, (ii) the CAT includes all 
data necessary to allow Nasdaq to continue to meet its surveillance 
obligations, and (iii) the Plan Processor is sufficiently meeting all 
of its obligations under the CAT NMS Plan. Nasdaq believes this time 
period to use the CAT Data is necessary to reveal any errors that may 
manifest themselves only after surveillance patterns and other queries 
have been run and to confirm that the Plan Processor is meeting its 
obligations and performing its functions adequately.
    If the Commission approves the proposed rule change, Nasdaq will

[[Page 25826]]

announce the implementation date of the proposed rule change in a 
Regulatory Notice that will be published once Nasdaq concludes the 
thresholds for accuracy and reliability described above have been met 
and that the Plan Processor is sufficiently meeting all of its 
obligations under the CAT NMS Plan.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\45\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\46\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78f(b).
    \46\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Nasdaq believes that the proposed rule change fulfills the 
obligation in the CAT NMS Plan for Nasdaq to submit a proposed rule 
change to eliminate or modify duplicative rules. In approving the Plan, 
the SEC noted that the Plan ``is necessary and appropriate in the 
public interest, for the protection of investors and the maintenance of 
fair and orderly markets, to remove impediments to, and perfect the 
mechanism of a national market system, or is otherwise in furtherance 
of the purposes of the Act.'' \47\ As this proposal implements the 
Plan, Nasdaq believes that this proposal furthers the objectives of the 
Plan, as identified by the SEC, and is therefore consistent with the 
Exchange Act.
---------------------------------------------------------------------------

    \47\ Approval Order at 84697.
---------------------------------------------------------------------------

    Moreover, the purpose of the proposed rule change is to eliminate 
rules that require the submission of duplicative data to the exchange. 
The elimination of such duplicative requirements will reduce 
unnecessary costs and other compliance burdens for Nasdaq and its 
members, and therefore, will enhance the efficiency of the securities 
markets. Furthermore, Nasdaq believes that the approach set forth in 
the proposed rule change strikes the appropriate balance between 
ensuring that Nasdaq is able to continue to fulfill its statutory 
obligation to protect investors and the public interest by ensuring its 
surveillance of market activity remains accurate and effective while 
also establishing a reasonable timeframe for elimination or 
modification of its rules that will be rendered duplicative after 
implementation of the CAT.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Section 6(b)(8) of the Exchange Act \48\ requires that the 
Exchange's rules not impose any burden on competition that is not 
necessary or appropriate. Nasdaq does not believe that the proposed 
rule change will result in any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. Nasdaq notes that the proposed rule change implements the 
requirements of the CAT NMS Plan approved by the Commission regarding 
the elimination of rules and systems that are duplicative the CAT, and 
is designed to assist Nasdaq in meeting its regulatory obligations 
pursuant to the Plan. Similarly, all exchanges and FINRA are proposing 
the elimination of their rules related to OATS, EBS and COATS to 
implement the requirements of the CAT NMS Plan. Therefore, this is not 
a competitive rule filing and, therefore, it does not raise competition 
issues between and among the self-regulatory organizations and/or their 
members.
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Although written comments on the proposed rule change were not 
solicited, two commenters, the Financial Information Forum (``FIF'') 
and the Securities Industry and Financial Markets Association 
(``SIFMA''), submitted letters to the Participants regarding the 
retirement of systems related to the CAT.\49\ In its comment letter, 
with regard to the retirement of duplicative systems more generally, 
FIF recommends that the Participants continue the effort to incorporate 
current reporting obligations into the CAT in order to replace existing 
reportable systems with the CAT. In addition, FIF further recommends 
that, once a CAT Reporter achieves satisfactory reporting data quality, 
the CAT Reporter should be exempt from reporting to any duplicative 
reporting systems. FIF believes that these recommendations ``would 
serve both an underlying regulatory objective of more immediate and 
accurate access to data as well as an industry objective of reduced 
costs and burdens of regulatory oversight.'' \50\ In its comments about 
EBS specifically, FIF states that the retirement of the EBS 
requirements should be a high priority, and that the CAT should be 
designed to include the requisite data elements to permit the rapid 
retirement of the EBS system.\51\ Similarly, SIFMA states that ``the 
establishment of the CAT must be accompanied by the prompt elimination 
of duplicative systems,'' and ``recommend[ed] that the initial 
technical specifications be designed to facilitate the immediate 
retirement of . . . duplicative reporting systems.'' \52\
---------------------------------------------------------------------------

    \49\ Letter from William H. Hebert, FIF, to Participants re: 
Milestone for Participants' rule change filings to eliminate/modify 
duplicative rules, dated April 12, 2017 (``FIF Letter''); Letter 
from Kenneth E. Bentsen, Jr., SIFMA, to Participants re: Selection 
of Thesys as CAT Processor, dated April 4, 2017 (``SIFMA Letter''), 
at 2.
    \50\ FIF Letter at 2.
    \51\ Id.
    \52\ SIFMA Letter at 2.
---------------------------------------------------------------------------

    As discussed above, Nasdaq agrees with the commenters that the 
OATS, EBS and COATS reporting requirements should be replaced by the 
CAT reporting requirements as soon as accurate and reliable CAT Data is 
available. To this end, Nasdaq anticipates that the CAT will be 
designed to collect the data necessary to permit the retirement of 
OATS, EBS and COATS. As discussed above, Nasdaq disagrees with the 
recommendation to provide individual exemptions to those CAT Reporters 
who obtain satisfactory data reporting quality; however, Nasdaq 
supports amendments to the CAT NMS Plan that would accelerate reporting 
for Small Industry Members that are currently reporting to OATS to 
facilitate the retirement of that system.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

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

[[Page 25827]]

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2017-055 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2017-055. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml).
    Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2017-055 and should 
be submitted on or before June 26, 2017.
---------------------------------------------------------------------------

    \53\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\53\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-11507 Filed 6-2-17; 8:45 am]
 BILLING CODE 8011-01-P


