Notice2023-16518
Order Granting a Temporary Conditional Exemption Pursuant to Section 36(a)(1) of the Securities Exchange Act of 1934 and Rule 608(e) of Regulation NMS Under the Exchange Act, Relating to the Reporting of Certain Activities on the Floor of National Securities Exchanges and Certain Activities by Industry Members Off Exchange Floors, as Required by Section 6.4(d) of the National Market System Plan Governing the Consolidated Audit Trail
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 3, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 148 (Thursday, August 3, 2023)</title>
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[Federal Register Volume 88, Number 148 (Thursday, August 3, 2023)]
[Notices]
[Pages 51369-51371]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-16518]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98023]
Order Granting a Temporary Conditional Exemption Pursuant to
Section 36(a)(1) of the Securities Exchange Act of 1934 and Rule 608(e)
of Regulation NMS Under the Exchange Act, Relating to the Reporting of
Certain Activities on the Floor of National Securities Exchanges and
Certain Activities by Industry Members Off Exchange Floors, as Required
by Section 6.4(d) of the National Market System Plan Governing the
Consolidated Audit Trail
I. Introduction
By letter dated March 31, 2023, BOX Exchange LLC, Cboe BYX
Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe
EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc.,
Financial Industry Regulatory Authority, Inc., Investors Exchange LLC,
Long-Term Stock Exchange, Inc., MEMX LLC, Miami International
Securities Exchange LLC, MIAX Emerald, LLC, MIAX PEARL, LLC, NASDAQ BX,
LLC, Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC, NASDAQ PHLX
LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, NYSE
American LLC, NYSE Arca, Inc., NYSE Chicago, Inc., and NYSE National,
Inc., (collectively, the ``Participants'' or ``SROs'') requested that
the Securities and Exchange Commission (``Commission'') grant temporary
conditional exemptive relief to the Participants from the National
Market System Plan Governing the Consolidated Audit Trail (``CAT NMS
Plan''),\1\ pursuant to its authority under section 36(a)(1) of the
Securities Exchange Act of 1934 (``Exchange Act'') \2\ and Rule 608(e)
of Regulation NMS under the Exchange Act, from certain reporting
requirements in section 6.4(d) of the CAT NMS Plan relating to certain
activities on the floors of national securities exchanges and certain
activities by Industry Members off exchange floors (``upstairs
activity'').\3\
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\1\ The CAT NMS Plan was approved by the Commission, as
modified, on November 15, 2016. See Securities Exchange Act Release
No. 79318 (November 15, 2016), 81 FR 84696 (November 23, 2016)
(``CAT NMS Plan Approval Order'').
\2\ 15 U.S.C. 78mm(a)(1).
\3\ See letter from the Participants to Vanessa Countryman,
Secretary, Commission, dated March 31, 2023 (the ``March 31, 2023
Exemption Request''). Unless otherwise noted, capitalized terms are
used as defined in the CAT NMS Plan. ``Upstairs'' is a term used to
describe the off-exchange market. For example, trading that occurs
within a broker-dealer firm or between two broker-dealers in the
over-the-counter market would be described as occurring
``upstairs.''
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Section 36(a)(1) of the Exchange Act grants the Commission the
authority, with certain limitations, to ``conditionally or
unconditionally exempt any person, security, or transaction . . . from
any provision or provisions of [the Exchange Act] or of any rule or
regulation thereunder, to the extent that such exemption is necessary
or appropriate in the public interest, and is consistent with the
protection of investors.'' \4\ Under Rule 608(e) of Regulation NMS, the
Commission may ``exempt from [Rule 608], either unconditionally or on
specified terms and conditions, any self-regulatory organization,
member thereof, or specified security, if the Commission determines
that such exemption is consistent with the public interest, the
protection of investors, the maintenance of fair and orderly markets
and the removal of impediments to, and perfection of the mechanism of,
a national market system.'' \5\
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\4\ 15 U.S.C. 78mm(a)(1).
\5\ 17 CFR 242.608(e).
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For the reasons set forth below, the Commission believes that it is
consistent with the purposes of the Exchange Act to grant temporary
conditional exemptive relief relating to the reporting of: (1) Floor
broker verbal announcements of firm orders on an exchange that are
otherwise reported as systematized orders; (2) market maker verbal
announcements of firm quotes on an exchange trading floor; (3)
telephone discussions between an Industry Member and a client that may
involve firm bid and offer communications; and (4) unstructured
electronic and verbal communications that are not currently captured by
Industry Member order management or execution systems (e.g., Bloomberg
chats, text messages), subject to certain conditions, and expiring on
July 31, 2026.
II. Background and Request for Relief
On November 12, 2020, pursuant to section 36(a)(1) of the Exchange
Act,\6\ and Rule 608(e) of the Exchange Act,\7\ the Commission granted
the Participants an exemption, until July 31, 2023, from the
requirement in section 6.4(d) of the CAT NMS Plan that requires each
Participant, through its Compliance Rule, to require its Industry
Members to record and electronically report to the Central Repository:
(1) Floor broker verbal announcements of firm orders on an exchange
that are otherwise reported as systematized orders; (2) market maker
verbal announcements of firm quotes on an exchange trading floor; (3)
telephone discussions between an Industry Member and a client that may
involve firm bid and offer communications; and (4) unstructured
electronic and verbal communications that are not currently captured by
Industry Member order management or execution systems (e.g., Bloomberg
chats, text messages), subject to certain conditions.\8\
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\6\ 15 U.S.C. 78mm(a)(1).
\7\ 17 CFR 242.608(e).
\8\ Securities Exchange Act Release No. 90405, 85 FR 73544
(November 18, 2020) (the ``2020 Order'').
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In the March 31, 2023 Exemption Request, the Participants request
that the Commission extend the temporary exemptive relief granted in
the 2020 Order for an additional three years, to July 31, 2026. In
support of their request, the Participants reiterate their belief that
the verbal floor activity and unstructured verbal and electronic
upstairs activity at issue were not previously contemplated by Rule 613
or the CAT NMS Plan.\9\ The Participants state that the Commission
disagreed with the Participants' view in the 2020 Order, but did not
cite to any discussion in the CAT NMS Plan or the CAT NMS Plan Adopting
Release regarding the activity at issue, nor did the Commission address
the Participants' assertion that there was no cost-benefit analysis
related to the capture and reporting of this activity in the CAT NMS
Plan Adopting Release.\10\
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\9\ March 31, 2023 Exemptive Request, at 4.
\10\ See id. at 4.
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The Participants also state that potential technological or
business breakthroughs contemplated by the 2020 Order have not
materialized, with neither natural language processing nor voice
recognition technology currently sophisticated enough to reliably,
accurately and consistently capture, parse and analyze and report
interactions in the current trading environments and workflows.\11\
Accordingly, the Participants state that they, CAT Advisory Committee
members, and Industry Member groups, including the Financial
Information Forum (FIF), have considered this issue and continue to
believe that capturing and interpreting this activity in an
[[Page 51370]]
automated manner without human intervention is not possible with
current technology, nor would it be cost-effective to manually capture
this activity.\12\
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\11\ See id. at 5.
\12\ See id.
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The Participants also state that manually capturing and reporting
verbal activity would be costly, inconsistent, prone to error, and
disruptive.\13\ The Participants state that manually capturing these
events is impracticable and not cost-effective because it would require
listening to every verbal interaction either live or from tape and/or
sifting through electronic communications, and that the determination
of whether unstructured electronic and verbal activity involves a firm
bid or offer is a manual, subjective process that could be highly prone
to error resulting in overreporting and/or underreporting to the
CAT.\14\ This would lead to inconsistent or less accurate data across
CAT Reporters, because Industry Members will capture the same activity
differently, resulting in misleading or incomplete views of
transactions and limit regulators' ability to determine compliance with
any reporting requirement.\15\
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\13\ See id. at 5-6.
\14\ See id.
\15\ See id. at 6.
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In addition, the Participants do not believe that the reporting of
the verbal and manual quotes and orders at issue in the 2020 Order
would provide meaningful value from a regulatory or surveillance
perspective.\16\ The Participants state that orders on exchange floors
are systematized and reportable to CAT, and manual orders in ``upstairs
activity'' whether or not trades occur on an exchange floor or off-
floor are also reportable to CAT.\17\ The Participants also represent
that the CAT Advisory Committee believes that bilateral negotiations in
upstairs activity, such as between asset brokers and broker-dealers, or
between two broker-dealers, are currently captured when the broker
either creates an order, as in from an asset manager, or accepts an
order, as in from another broker-dealer, and when the trade execution
occurs.\18\ The Participants also state that verbal floor and
unstructured verbal and electronic upstairs activities do not lend
themselves to the types of market manipulation considered in the
adoption of Rule 613, and that the costs of compliance would outweigh
any incremental value for regulatory or surveillance purposes.\19\
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\16\ See id. at 5-6.
\17\ See id. at 6-7.
\18\ See id. at 7.
\19\ See id.
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III. Discussion of Participants' Exemption Request
The Commission has carefully considered the Participants' exemption
request. The Commission believes that extending temporary exemptive
relief is, pursuant to section 36(a)(1) of the Exchange Act,
appropriate in the public interest and consistent with the protection
of investors, and that pursuant to Rule 608(e), this exemption is
consistent with the public interest, the protection of investors, the
maintenance of fair and orderly markets and the removal of impediments
to, and the perfection of a national market system.
The Participants dispute the Commission's position that verbal and
manual quotes and orders are required to be reported to the CAT.\20\
Because the Commission believes that the Participants' request for an
extension of the temporary exemption from these reporting requirements
is reasonable, we do not address their arguments here.
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\20\ See 2020 Order, supra note 8, at 73547; CAT NMS Plan at
Section 1.1.
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The Commission believes that extending the temporary exemptive
relief should allow Participants and Industry Members time to
collaborate, develop, and implement a reporting framework, guidelines,
FAQs, and scenarios necessary for effective and efficient reporting of
floor-based verbal quotes and order and upstairs activity.
Based on the foregoing, pursuant to section 36(a)(1) of the
Exchange Act, it is appropriate in the public interest and consistent
with the protection of investors, and pursuant to Rule 608(e), it is
consistent with the public interest, the protection of investors, the
maintenance of fair and orderly markets and the removal of impediments
to, and the perfection of a national market system to extend
conditional temporary relief for the reporting of: (1) Floor broker
verbal announcements of firm orders on an exchange that are otherwise
reported as systematized orders; (2) market maker verbal announcements
of firm quotes on an exchange trading floor; (3) telephone discussions
between an Industry Member and a client that may involve firm bid and
offer communications; and (4) unstructured electronic and verbal
communications that are not currently captured by Industry Member order
management or execution systems (e.g., Bloomberg chats, text messages).
Extending the temporary exemptive relief until July 31, 2026, would
provide Participants the time to develop and implement any necessary
reporting guidance, specifications, and any technical changes to the
CAT and is approximately four years after the date by which the
Participants previously estimated that the CAT would be fully
implemented, July 11, 2022.\21\ It would also provide CAT Reporters the
time to fully consider and implement how to report such events and
create the necessary technological and process changes required to
capture these required quotes and orders while minimizing potential
business disruptions and impacts to existing workflows. However, the
Commission believes it is appropriate to provide exemptive relief
subject to certain conditions discussed below.
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\21\ See Securities Exchange Act Release No. 88890 (May 15,
2020), 85 FR 31322, 31334 (May 22, 2020).
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IV. Conclusion
The Commission believes it is appropriate to extend the temporary
exemptive relief that exempts each Participant from the requirement in
section 6.4(d) of the CAT NMS Plan for each Participant, through its
Compliance Rule, to require its Industry Members to record and
electronically report to the Central Repository the following
communications, until July 31, 2026: (1) Floor broker verbal
announcements of firm orders on an exchange that are otherwise reported
as systematized orders; (2) market maker verbal announcements of firm
quotes on an exchange trading floor; (3) telephone discussions between
an Industry Member and a client that may involve firm bid and offer
communications; and (4) unstructured electronic and verbal
communications that are not currently captured by Industry Member order
management or execution systems (e.g., Bloomberg chats, text messages).
As a condition to this relief, the Participants must provide the
Commission a written status update on the reporting of these quotes and
orders by July 31, 2025, including, for both verbal activity on
exchange floors and upstairs activity separately, an analysis of the
feasibility of traders contemporaneously recording firm bid and offer
information for verbal and manual quotes and orders, and an
implementation plan for the reporting of these quotes and orders.
Furthermore, this implementation plan for the reporting of these quotes
and orders must: (1) identify verbal and manual workflows to facilitate
the reporting of these quotes and orders; (2) provide or reference
published guidelines for
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Industry Members for determining when verbal or manual communications
become firm and are required to be reported; and (3) provide or
reference published technical specifications to allow for the reporting
of verbal and manual quotes and orders by Industry Members. The purpose
of these conditions is to help ensure that the Participants establish a
framework necessary to permit the reporting of verbal and manual quotes
and orders by Industry Members before the expiration of the temporary
conditional exemptive relief.
Accordingly, it is hereby ordered, pursuant to section 36(a)(1) of
the Exchange Act,\22\ and Rule 608(e) of the Exchange Act \23\ that the
Participants are granted an exemption, until July 31, 2026, from the
requirement in section 6.4(d) of the CAT NMS Plan that requires each
Participant, through its Compliance Rule, to require its Industry
Members to record and electronically report to the Central Repository:
(1) Floor broker verbal announcements of firm orders on an exchange
that are otherwise reported as systematized orders; (2) market maker
verbal announcements of firm quotes on an exchange trading floor; (3)
telephone discussions between an Industry Member and a client that may
involve firm bid and offer communications; and (4) unstructured
electronic and verbal communications that are not currently captured by
Industry Member order management or execution systems (e.g., Bloomberg
chats, text messages), subject to the conditions described above.
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\22\ 15 U.S.C. 78mm(a)(1).
\23\ 17 CFR 242.608(e).
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By the Commission.
Dated: July 28, 2023.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-16518 Filed 8-2-23; 8:45 am]
BILLING CODE 8011-01-P
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