Notice2024-18565
Joint Industry Plan; Notice of Filing of Amendment to the National Market System Plan Governing the Consolidated Audit Trail Regarding Reporting of Certain Verbal Activity, Floor and Upstairs Activity
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Published
August 20, 2024
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 89 Issue 161 (Tuesday, August 20, 2024)</title>
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[Federal Register Volume 89, Number 161 (Tuesday, August 20, 2024)]
[Notices]
[Pages 67499-67505]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-18565]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100727; File No. 4-698]
Joint Industry Plan; Notice of Filing of Amendment to the
National Market System Plan Governing the Consolidated Audit Trail
Regarding Reporting of Certain Verbal Activity, Floor and Upstairs
Activity
August 14, 2024.
I. Introduction
On August 2, 2024, the Consolidated Audit Trail, LLC (``CAT LLC''),
on behalf of the following parties to the National Market System Plan
Governing the Consolidated Audit Trail (the ``CAT NMS Plan'' or
``Plan''): \1\ BOX Exchange LLC; Cboe BYX Exchange, Inc., Cboe BZX
Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc.,
Cboe C2 Exchange, Inc., Cboe Exchange, Inc., Financial Industry
Regulatory Authority, Inc., Investors Exchange LLC, Long-Term Stock
Exchange, Inc., MEMX, LLC, Miami International Securities Exchange LLC,
MIAX Emerald, LLC, MIAX PEARL, LLC, Nasdaq BX, Inc., Nasdaq GEMX, LLC,
Nasdaq ISE, LLC, Nasdaq MRX, LLC, Nasdaq PHLX LLC, The NASDAQ Stock
Market LLC, New York Stock Exchange LLC, NYSE American LLC, NYSE Arca,
Inc., NYSE Chicago, Inc., and NYSE National, Inc. (collectively, the
``Participants,'' ``self-regulatory organizations,'' or ``SROs'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
pursuant to Section 11A(a)(3) of the Securities Exchange Act of 1934
(``Exchange Act''),\2\ and Rule 608 thereunder,\3\ a proposed amendment
to the CAT NMS Plan to amend existing requirements for the consolidated
audit trail (``CAT'') regarding the reporting of certain verbal
activity, floor and upstairs activity (the ``Verbal Quotes
Amendment'').\4\ Set forth in Section II is the statement of purpose
and summary of the amendment, along with information required by Rules
608(a)(4) and 608(a)(5) under the Exchange Act,\5\ and Exhibit A, which
contains the proposed revisions to the CAT NMS Plan, all substantially
as prepared and submitted by the Participants to the Commission.\6\ The
Commission is publishing this notice to solicit comments from
interested persons on the amendment.\7\
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\1\ The CAT NMS Plan is a national market system plan approved
by the Commission pursuant to Section 11A of the Exchange Act and
the rules and regulations thereunder. See Securities Exchange Act
Release No. 79318 (November 15, 2016), 81 FR 84696 (November 23,
2016). The full text of the CAT NMS Plan is available at
<a href="http://www.catnmsplan.com">www.catnmsplan.com</a>.
\2\ 15 U.S.C 78k-1(a)(3).
\3\ 17 CFR 242.608.
\4\ See Letter from Brandon Becker, CAT NMS Plan Operating
Committee Chair, to Vanessa Countryman, Secretary, Commission, dated
March 27, 2024 (the ``Transmittal Letter'').
\5\ See 17 CFR 242.608(a)(4) and 17 CFR 242.608(a)(5).
\6\ See Transmittal Letter, supra note 4. Unless otherwise
defined herein, capitalized terms used herein are defined as set
forth in the CAT NMS Plan.
\7\ 17 CFR 242.608.
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II. Description of the Plan
CAT LLC proposes to amend the CAT NMS Plan to clearly and
permanently exclude the following activities from reporting to the
Central Repository:
i. floor broker verbal announcements of firm orders on an exchange
that are otherwise reported as systematized orders;
ii. market maker verbal announcements of firm quotes on an exchange
trading floor;
iii. telephone discussions between an Industry Member and a client
that may involve firm bid and offer communications; and
iv. unstructured electronic and verbal communications that are not
currently captured by Industry Member order management or execution
systems (e.g., Bloomberg chats, text messages)
(the foregoing (i)-(iv), collectively, the ``Exempt Activities'').
CAT LLC has consistently reiterated its longstanding view that the
Exempt Activities were never contemplated by Rule 613 or the CAT NMS
Plan, and has noted that there is no discussion in the CAT NMS Plan or
the CAT NMS Plan Adopting Release regarding these activities.\8\
Likewise, the Financial Information Forum (``FIF'') has also made clear
that unstructured verbal and electronic upstairs activities are not
reportable to CAT under Rule 613 because they represent indications of
interest--not orders.\9\ The Participants believe that the analysis in
the December 2022 FIF Letter explaining why unstructured verbal and
electronic upstairs activities are not reportable to CAT under Rule 613
(including the challenges that would be associated with reporting those
activities) applies equally to communications on exchange trading
floors. Nevertheless, because the Commission has expressed a different
interpretation of Rule 613 and the CAT NMS Plan,\10\ CAT LLC previously
requested, and the Commission granted, temporary exemptive relief
related to reporting of the Exempt Activities through July 31, 2026
(the ``July 2023 Exemptive Order'').\11\
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\8\ Letter from Brandon Becker, CAT NMS Plan Operating Committee
Chair, to Vanessa Countryman, Secretary, Commission (Mar. 31, 2023),
<a href="https://www.catnmsplan.com/sites/default/files/2023-03/03.31.23-CAT-Exemption-Request-Verbal-Floor-and-Upstairs-Activity.pdf">https://www.catnmsplan.com/sites/default/files/2023-03/03.31.23-CAT-Exemption-Request-Verbal-Floor-and-Upstairs-Activity.pdf</a> (the
``March 2023 Exemption Request''); Letter from Michael Simon, CAT
NMS Plan Operating Committee Chair, to Vanessa Countryman,
Secretary, Commission (July 1, 2020) (the ``July 2020 Exemption
Request''), <a href="https://www.catnmsplan.com/sites/default/files/2020-07/07.01.2020-Exemptive-Request-Re-Verbal-Activity.pdf">https://www.catnmsplan.com/sites/default/files/2020-07/07.01.2020-Exemptive-Request-Re-Verbal-Activity.pdf</a>. While seeking
to clarify the Plan in this regard, the Participants continue to
believe that the Exempt Activities are not required to be reported
by Rule 613 or the CAT NMS Plan. Nothing herein should be construed
to the contrary with respect to this position. To the extent the SEC
disagrees with the proposed amendments to the CAT NMS Plan outlined
herein, the Participants reserve all of their rights with respect to
the Participants' position that reporting of the Exempt Activities
to CAT was never contemplated by Rule 613 or the CAT NMS Plan.
\9\ Letter from Howard Meyerson, Managing Director, Financial
Information Forum, to Commission at 11-12 (Dec. 16, 2022)
(``December 2022 FIF Letter'').
\10\ Exchange Act Release No. 90405 (Nov. 12, 2020), 85 FR 73544
(Nov. 18, 2020) (``November 2020 Exemptive Order''), <a href="https://www.sec.gov/rules/exorders/2020/34-90405.pdf">https://www.sec.gov/rules/exorders/2020/34-90405.pdf</a>.
\11\ Exchange Act Release No. 98023 (July 28, 2023), 88 FR 51369
(Aug. 3, 2023) (``July 2023 Exemptive Order''), <a href="https://www.sec.gov/files/rules/exorders/2023/34-98023.pdf">https://www.sec.gov/files/rules/exorders/2023/34-98023.pdf</a>. In June 2022, CAT LLC
submitted a request for permanent exemptive relief; however, the
Commission did not respond to this request. Accordingly, CAT LLC is
now submitting this Plan amendment. See Letter from Michael Simon,
CAT NMS Plan Operating Committee Chair, to Vanessa Countryman,
Secretary, Commission (June 3, 2022) (the ``June 2022 Exemption
Request''), <a href="https://catnmsplan.com/sites/default/files/2022-06/06.03.2022-CAT-Exemption-Request-Verbal-Floor-and-UpstairsActivity-Final.pdf">https://catnmsplan.com/sites/default/files/2022-06/06.03.2022-CAT-Exemption-Request-Verbal-Floor-and-UpstairsActivity-Final.pdf</a>.
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[[Page 67500]]
To provide certainty to market participants moving forward given
the conflicting interpretations of Rule 613 and the CAT NMS Plan, and
to avoid the significant cost burdens that would be imposed by
requiring the reporting of the Exempt Activities, the Verbal Quotes
Amendment would explicitly and permanently exclude the Exempt
Activities from CAT reporting. At a time when the Participants are
seeking to reduce CAT-related costs, any potential marginal regulatory
benefit of such reporting is substantially outweighed by the
significant costs and burdens required to do so, including the billions
of dollars in additional associated costs required to implement and
maintain the reporting requirements.
As discussed further below, the Verbal Quotes Amendment should be
approved because:
<bullet> In addition to the substantial direct costs of building
and maintaining the CAT itself, CAT Reporters would incur significant
implementation and maintenance costs in order to report the Exempt
Activities. CAT LLC is focused on identifying changes to the CAT NMS
Plan that would reduce overall CAT costs, and requiring the Exempt
Activities to be reported directly conflicts with those cost-saving
efforts.
<bullet> When it originally granted exemptive relief, the
Commission recognized that capturing data concerning the Exempt
Activities would require significant manual human intervention, but
theorized that future technological and business developments,
including artificial intelligence, might make reporting the Exempt
Activities cost-effective in the future. While recent advancements in
artificial intelligence have garnered considerable attention, current
technology is not sophisticated enough to reliably, accurately, and
consistently capture, parse, analyze, and report these interactions in
the current trading environments and workflows given stringent CAT
reporting requirements.
<bullet> Therefore, the Exempt Activities could only be reported
using manual means. Consequently, the costs to Participants and
Industry Members of reporting the Exempt Activities to the Central
Repository are estimated to be in the billions of dollars per year and
would impose additional ongoing operational, technological, and support
burdens on Participants and Industry Members.
<bullet> In addition to imposing substantial costs, manually
reviewing verbal and unstructured electronic activities would be
inconsistent and prone to error because human reviewers would be
required to determine whether verbal and unstructured electronic
activities involve a firm bid or offer, which is a necessarily
subjective determination.
<bullet> Thus, any investment by Participants and Industry Members
to develop the necessary operational capacity, procedures, and
technological infrastructure to report the Exempt Activities to the CAT
would not be cost-justified because that reporting would be costly,
resource-intensive, inconsistent, and prone to error. That is, the
costs associated with any such investment would significantly outweigh
any potential marginal regulatory benefit that might be achieved if the
Exempt Activities were reported to the CAT.
<bullet> Requiring reporting of the Exempt Activities to the CAT
also would impose added ongoing operational burdens, disrupt trading,
and give firms and market makers an incentive to use indications of
interest that are not reportable to CAT rather than firm orders or bids
or offers. Such a shift in market practice would ultimately be to the
detriment of investors.
Each of these issues is discussed further below.
The proposed changes to the CAT NMS Plan to implement the Verbal
Quotes Amendment are set forth in Exhibit A to this filing.
Requirements Pursuant to Rule 608(a)
A. Description of the Proposed Amendments to the CAT NMS Plan
1. Permanently Exclude the Exempt Activities From CAT Reporting
a. CAT Reporting Requirements
Under Rule 613(c)(7) of Regulation NMS and Sections 6.3(d) and
6.4(d) of the CAT NMS Plan, reportable events are based on, among other
things, the receipt, routing, and execution of orders.\12\ Rule
613(j)(8) and the CAT NMS Plan provide that ``orders'' include: ``(i)
Any order received by a member of a national securities exchange or
national securities association from any person; (ii) Any order
originated by a member of a national securities exchange or national
securities association; or (iii) Any bid or offer.'' A ``bid'' or
``offer'' is defined in Regulation NMS as the bid price or offer price
communicated by a member of an exchange or association to any broker-
dealer or to any customer, at which it is willing to buy or sell one or
more round lots of an NMS security, as principal or agent, but
excluding indications of interest.\13\ In the Rule 613 Adopting
Release, the SEC indicates that for purposes of Rule 613
``[i]ndications of interest are different than orders because they are
not firm offers to trade, but are essentially invitations to
negotiate.'' \14\ Because indications of interest and other non-firm
indications of a willingness to buy or sell a security are not
``orders'' or ``bids'' or ``offers'' under SEC rules, actions involving
them do not constitute reportable events under the CAT NMS Plan.\15\
Firm indications of a willingness to buy or sell a security are orders,
bids, or offers and have certain reportable events associated with them
pursuant to the CAT NMS Plan.
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\12\ Rule 613(j)(9) provides that ``[t]he term reportable event
shall include, but not be limited to, the original receipt or
origination, modification, cancellation, routing, and execution (in
whole or in part) of an order, or receipt of a routed order.''
\13\ 17 CFR 242.600(b)(8) (emphasis added).
\14\ Exchange Act Release No. 67457 (July 18, 2012), 77 FR
45722, 45747 (Aug. 1, 2012) (emphasis added) (``Rule 613 Adopting
Release'').
\15\ See Consolidated Audit Trail, Exchange Act Release No.
67457 (July 18, 2012), 77 FR 45722, 45747 (Aug. 1, 2012) (``The
Commission, however, is not including indications of interest in the
definition of `order' for purposes of the consolidated audit trail
because the Commission believes that the utility of the information
such data would provide to regulators would not justify the costs of
reporting the information.''). See also FAQ B3 and B38 regarding
indications of interest (``IOI'') and requests for quotes (``RFQ''),
available at <a href="http://www.catnmsplan.com/faq/index.html">www.catnmsplan.com/faq/index.html</a>.
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b. Current Commission Exemptive Order
Reporting the Exempt Activities to the Central Repository currently
is not required pursuant to the July 2023 Exemptive Order, which will
expire on July 31, 2026.\16\ Accordingly, the Participants are filing
the Verbal Quotes Amendment with the Commission to permanently exclude
the Exempt Activities from reporting to the Central Repository. If
approved, the Verbal Quotes Amendment would supersede the July 2023
Exemptive Order in its entirety and, therefore, render the reporting
provisions required in the July 2023 Exemptive Order moot.
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\16\ See July 2023 Exemptive Order; November 2020 Exemptive
Order.
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c. Proposed Revisions to the CAT NMS Plan
To provide clarity to market participants, CAT LLC proposes to
[[Page 67501]]
amend the CAT NMS Plan to state that the Exempt Activities do not fall
within the scope of Participant Data or Recorded Industry Member Data
that Participants and Industry Members, as applicable, must record and
report to the Central Repository. Specifically, CAT LLC proposes to add
new Section 6.3(g) to the CAT NMS Plan. New Section 6.3(g) would be
entitled ``Verbal Activity, Floor and Upstairs Activity'' and would
state the following:
``(g) Verbal Activity, Floor and Upstairs Activity.
Notwithstanding any other provision of SEC Rule 613 or the CAT NMS
Plan, the following categories of data shall not be reportable to
the Central Repository under Section 6.3(d):
(i) floor broker verbal announcements of firm orders on an
exchange that are otherwise reported as systematized orders;
(ii) market maker verbal announcements of firm quotes on an
exchange trading floor;
(iii) telephone discussions between an Industry Member and a
client that may involve firm bid and offer communications; and
(iv) unstructured electronic and verbal communications that are
not currently captured by Industry Member order management or
execution systems (e.g., electronic chats, text messages).''
In addition, CAT LLC proposes to add references to new Section
6.3(g) to Section 6.3(d) and Section 6.4(d)(i) of the CAT NMS Plan.
Specifically, CAT LLC proposes to add the parenthetical phrase
``(subject to the exclusions outlined in Section 6.3(g))'' to Section
6.3(d) and Section 6.4(d)(i) of the CAT NMS Plan.
For the avoidance of doubt, the proposed Plan amendment is intended
to have an effect similar to permanent incorporation into the CAT NMS
Plan of the existing Commission-approved provisions of the July 2023
Exemptive Order. It is not intended to affect activity that is
currently reported to CAT or to otherwise modify the categories in the
July 2023 Exemptive Order as applied to date. In addition, for the
avoidance of doubt, the term ``client'' in romanette (iii) above is
intended to include both a non-Industry Member customer of the Industry
Member or another Industry Member.
2. Justifications for the Verbal Quotes Amendment
a. Overall CAT Costs Are Unsustainable and Must Be Reduced, Not
Increased
Overall CAT costs include not only the direct costs incurred by CAT
LLC in building and maintaining the CAT, but also the costs incurred by
CAT Reporters in order to comply with CAT reporting requirements.
Market participants, FINRA, SEC Commissioners, and members of Congress
have all raised significant concerns about the extent of CAT costs.\17\
CAT LLC is focused on identifying changes to the CAT NMS Plan that
would reduce both the costs imposed on CAT LLC to build and maintain
the CAT and the costs imposed on Participants and Industry Members to
comply with CAT reporting requirements. Among other initiatives, CAT
LLC has recently filed Plan amendments and exemptive requests aimed at
reducing direct costs associated with building and maintaining the
CAT.\18\ The direct costs of building and maintaining the CAT are
significant, and, therefore, costs that would be incurred by
Participants and Industry Members to comply with CAT reporting
requirements should be carefully controlled, especially in the absence
of a fully implemented funding model.\19\ Here, the costs that would be
incurred by Participants and Industry Members, collectively, related to
reporting data concerning the Exempt Activities are estimated to be in
the billions in the aggregate. Requiring CAT Reporters to incur these
costs over the next two years in order to begin reporting the Exempt
Activities, along with the additional costs that would be required to
maintain that reporting, directly conflicts with CAT LLC's ongoing
cost-saving efforts. Moreover, as described in more detail below, any
potential marginal utility of the information such data would provide
to regulators would not justify the added costs and burdens of
reporting the information.
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\17\ See, e.g., Letter from Rep. Bill Huizenga, Chairman, House
Subcommittee on Oversight and Investigations, and Rep. Ann Wagner,
Chairman, House Subcommittee on Capital Markets, to Deborah J.
Jeffrey, Inspector General, Commission (Dec. 11, 2023) (``Huizenga-
Wagner Letter''); Letter from Joseph Corcoran, Managing Director,
Associate General Counsel, SIFMA, Ellen Greene, Managing Director,
Equities & Options Market Structure, SIFMA, Howard Meyerson,
Managing Director, Financial Information Forum, to Commission (July
31, 2023); Hester Peirce, Who's Paying?: Statement on the CAT's
Funding Model (Sept. 6, 2023) <a href="https://www.sec.gov/news/statement/peirce-statement-cat-funding-090623">https://www.sec.gov/news/statement/peirce-statement-cat-funding-090623</a> (``Peirce Dissent''); Robert
Cook, President and CEO, FINRA, Testimony Before the House Financial
Services Subcommittee on Capital Markets, Examining the Agenda of
Regulators, SROs (Self-Regulatory Organizations), and Standards-
Setters for Accounting, Auditing (Dec. 12, 2023) <a href="https://plus.cq.com/doc/congressionaltranscripts-7899923?3">https://plus.cq.com/doc/congressionaltranscripts-7899923?3</a>.
\18\ See, e.g., Exchange Act Release No. 99938 (Apr. 10, 2024),
89 FR 26983 (Apr. 16, 2024) (proposing cost savings amendments
expected to result in approximately $23 million in annual cost
savings in the first year with limited impact on the regulatory
function of the CAT).
\19\ Although the Commission recently has approved a funding
model, it has determined to temporarily suspend the Participants'
fee filings to recover any historical costs incurred prior to
January 1, 2022. CAT reporting should not be expanded to introduce
new CAT costs absent a fully implemented funding model. Exchange Act
Release No. 98290 (Sept. 6, 2023), 88 FR 62628 (Sept. 12, 2023),
<a href="https://www.sec.gov/files/rules/sro/nms/2023/34-98290.pdf">https://www.sec.gov/files/rules/sro/nms/2023/34-98290.pdf</a>.
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b. It Remains Technologically Infeasible to Reliably, Accurately, and
Consistently Collect Data Concerning the Exempt Activities for CAT
Reporting Without Human Intervention
It would be unreasonable to impose a technologically infeasible
requirement on CAT Reporters. Without human intervention, it remains
technologically infeasible to reliably, accurately, and consistently
collect and report data concerning the Exempt Activities, which include
verbal floor activity and unstructured verbal and electronic upstairs
activity. The Commission has recognized that manually capturing and
reporting verbal and electronic activity through human intervention
would be impracticable and not cost-effective.\20\ Accordingly, the
Commission's original November 2020 Exemptive Order was premised on the
Commission's belief that future technological breakthroughs in
artificial intelligence would make collecting information concerning
the Exempt Activities more feasible by the time the temporary exemptive
relief expires. These developments have not materialized in a way that
would allow market participants to effectively and reliably capture
data associated with the Exempt Activities for reporting to the Central
Repository without human intervention. For example, FIF has provided
the Commission with numerous examples of the challenges associated with
verbal and unstructured electronic communications to illustrate why it
is not feasible for Industry Members to automate the reporting of the
Exempt Activities to the CAT.\21\
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\20\ November 2020 Exemptive Order at 73547.
\21\ See December 2022 FIF Letter at 5, 14-18. While the
December 2022 FIF Letter focuses on these challenges in the context
of upstairs activities, these same challenges exist for Industry
Members and Participants on exchange trading floors.
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To be sure, many market participants are exploring how recent
advancements in artificial intelligence, including machine learning,
natural language processing, and voice recognition technology, may be
used in various business functions. Nevertheless, current artificial
intelligence technology is not sophisticated enough to reliably,
accurately, and consistently capture, parse, analyze, and report these
interactions in the current trading environments and workflows given
stringent CAT reporting requirements. A number of Industry Members have
conducted internal analyses on this question and concluded that there
is
[[Page 67502]]
currently no artificial intelligence software or algorithm with a
feasible architecture to accurately capture and report the Exempt
Activities to the CAT in an automated manner.\22\ In particular, those
Industry Members provided detailed explanations regarding why natural
language processing is not suitable for this purpose.\23\
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\22\ December 2022 FIF Letter at 5.
\23\ December 2022 FIF Letter at 19.
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Notably, it has been four years since the Commission posited that
technological and business developments could advance to such an extent
that automated processes could be used to capture and report the Exempt
Activities to the CAT in an efficient and reliable manner. Given the
amount of time that has passed since the Commission first contemplated
those developments and the amount of further advancement that is still
required, it is exceedingly unlikely that the necessary developments
will materialize in the next two years. Furthermore, even if those
developments were to materialize, the potential regulatory benefit of
reporting the Exempt Activities to the CAT is limited given the scope
of data related to the Exempt Activities that it already reported, as
outlined further in Section A.2.d below.\24\
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\24\ Therefore, even if the contemplated technological and
business developments permitting automated reporting of the Exempt
Activities did potentially occur someday, they would still need to
be evaluated from a cost-benefit perspective before requiring the
Exempt Activities to be reported to the CAT.
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In short, because the technological and business developments
anticipated in the current temporary exemptive relief have not
materialized in a manner that lends itself to the efficient and
accurate reporting of the Exempt Activities, the only way for
Participants and Industry Members to report data associated with the
Exempt Activities to the CAT would be to manually capture that data
through human intervention, which the Commission has recognized would
not be practical or cost-effective, as discussed in more detail below.
Again, any potential marginal utility of the information such data
would provide to regulators would not justify the added costs and
burdens of reporting the information.
c. Because Reporting the Exempt Activities Would Require Substantial
Human Intervention, the Costs of Reporting the Exempt Activities to the
Central Repository Would Be Significant and Vastly Outweigh Any
Potential Marginal Regulatory Benefit
Importantly, the costs associated with reporting the Exempt
Activities would include more than just the direct costs to CAT LLC
associated with CAT reporting. Rather, they would also include
substantial costs incurred by Participants and Industry Members in
addition to the costs incurred by CAT LLC.\25\ For example, because the
Exempt Activities have never been reportable to an audit trail,
Participants and Industry Members would need to establish, implement,
and maintain procedures to collect and record data associated with the
Exempt Activities in the Central Repository. These costs would be
especially significant as applied to the Exempt Activities because
there is currently no effective way for Participants and Industry
Members to collect the required data to be reported to the Central
Repository in a cost-justified or consistent manner.\26\
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\25\ See Peirce Dissent; Huizenga-Wagner Letter.
\26\ In addition to financial costs, reporting the Exempt
Activities to CAT would impose significant ongoing and resource-
intensive operational, technological, and support burdens on
Participants and Industry Members.
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As discussed in greater detail above, the technological and
business developments on which the current temporary exemptive relief
is based, including developments in artificial intelligence, have not
materialized. Therefore, the only way for the Participants and Industry
Members to report the Exempt Activities to the CAT would be to manually
capture these events by requiring a human being to listen to every
verbal interaction of every floor broker, market maker, or upstairs
trader either live or from tape, and/or to sift through electronic
communications to determine if and precisely when a quote was given and
whether it was firm. This manual review would be impracticable and
costly because it would require Industry Members that are floor brokers
and floor-based market makers, many of which are small firms, to hire
additional staff and develop new technology resources to capture and
analyze data associated with the Exempt Activities.\27\ The
Participants estimate that the discussions of each floor broker and
floor-based market maker would need to be tracked on a one-to-one basis
by a full-time equivalent (``FTE'') responsible for parsing and
interpreting when a CAT-reportable event has occurred.\28\ It would not
be practicable for floor brokers or floor-based market makers to
capture their own verbal interactions in real time without severely
impacting existing workflows and those floor brokers' and floor-based
market makers' ability to participate in fast-moving markets because
doing so would require them to pause and turn their attention away from
the market to record their verbalized quote.\29\ With respect to
upstairs activities, similar manual intervention would be required to
consistently capture, parse, analyze, and report data concerning the
Exempt Activities.\30\ Any such manual reporting processes would be
inconsistent and prone to error because human reviewers would be
required to determine whether verbal and unstructured electronic
activities involve a firm bid or offer, which is a necessarily
subjective determination. Indeed, the Commission has previously
acknowledged that ``the reporting of such orders and quotes [i.e., the
Exempt Activities] involves complexity and/or costs, especially because
capture of this information may require significant manual
intervention.'' \31\
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\27\ Letter from Mike Simon, CAT NMS Plan Operating Committee
Chair, to Vanessa Countryman, Secretary, Commission, Appendix A at
11 (June 3, 2022), <a href="https://www.catnmsplan.com/sites/default/files/2022-06/06.03.2022-CAT-Exemption-Request-Verbal-Floor-and-Upstairs-Activity-Final.pdf">https://www.catnmsplan.com/sites/default/files/2022-06/06.03.2022-CAT-Exemption-Request-Verbal-Floor-and-Upstairs-Activity-Final.pdf</a> (``June 2022 Exemption Request'').
\28\ Id.
\29\ Id.
\30\ Id.
\31\ November 2020 Exemptive Order at 73547.
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The Participants previously estimated the costs associated with
developing the operational and technological infrastructure necessary
for Participants to report the Exempt Activities to the CAT. In
particular, $64.35 million to $112.86 million per year would be
required to designate an FTE for each floor broker and floor-based
market maker with an additional one-time cost of $20 million to $30
million on top of direct personnel costs to build the additional space
required to support the increased number of personnel performing the
manual reviews because the relevant exchanges do not currently have
room for the additional staff to be present on the exchange floor.\32\
Similarly, Industry Members would be required to hire additional staff
and to update their technology systems to manually capture and report
the Exempt Activities to the CAT, which Industry Members estimate would
cost the industry a total of more than $4.4 billion per year.\33\ These
estimated costs are substantial, and there is no reason to believe that
they would have decreased
[[Page 67503]]
since they were previously calculated.\34\ These costs may very well be
passed through to investors. Furthermore, the manual nature of the
reviews would also make it exceedingly likely that a CAT Reporter will
miss the requirement to report CAT data by T+1 at 8:00 a.m. ET.
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\32\ See June 2022 Exemption Request at Appendix A. The
Participants estimate that each FTE would cost between $130,000 and
$228,000 annually, inclusive of compensation and benefits. On the
relevant NYSE, Cboe, and Nasdaq exchanges alone, there are
approximately 495 floor brokers and designated market makers
requiring an FTE to interpret their communications.
\33\ December 2022 FIF Letter at 6, 20-21.
\34\ See June 2022 Exemption Request at Appendix A; December
2022 FIF Letter at 6, 20-21. If a new rulemaking were proposed to
make the Exempt Activities reportable to CAT, then the Participants
would update these cost estimates as part of the detailed cost-
benefit analysis that would be required in connection with
considering a new reporting requirement.
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Requiring reporting of the Exempt Activities to the CAT also would
disrupt trading and reduce the benefits of floor trading because of the
added burdens it would impose on open outcry bidding and offering,
which would ultimately be to the detriment of investors. The difficulty
in capturing and reporting verbal and unstructured electronic
activities will give firms and markets an incentive to use indications
of interest that are not reportable to CAT rather than firm orders or
bids or offers. The CAT was intended to enhance audit trails for
regulators, not impact how Industry Members source market liquidity and
trade.
Because current estimates of the costs that Participants and
Industry Members would need to incur to report the Exempt Activities to
the Central Repository are substantial, vastly outweigh any limited
potential regulatory benefit (i.e., because reporting would be
inconsistent and prone to error) and would disrupt trading and reduce
the use of firm quotations and orders, the CAT NMS Plan should be
amended to clarify that the Exempt Activities are excluded from CAT
reporting. To the extent the Commission would seek to impose such an
obligation in the future, it should be accomplished through formal
rulemaking, which should include a cost-benefit analysis of any
potential marginal utility of the information such data would provide
to regulators that would justify the added costs and burdens of
reporting the information.
d. Including the Exempt Activities in the Central Repository Would
Provide Limited Added Benefit for Regulatory and Surveillance Purposes
The Participants do not believe that reporting the Exempt
Activities to the CAT would provide enough value from a regulatory or
surveillance perspective to outweigh their substantial costs. On all
exchanges with floor trading, every order must be systematized upon
receipt by the floor broker on the floor of the exchange and is
reportable to the CAT. An order is ``systematized'' when (A) the order
is sent electronically to the floor broker's system at the exchange; or
(B) the order is manually systematized by the floor broker upon receipt
outside of the floor broker's system and prior to representation in the
floor trading crowd.\35\ To the extent a floor broker is not holding a
systematized order, the floor broker is not eligible to represent any
firm bid or offer, or to request firm quotes from in-crowd market
participants on the floor of an exchange.\36\ Accordingly, all firm
bids or offers represented by a floor broker must be associated with
orders that have already been systematized. Conversely, any activity by
the floor broker prior to systematization cannot be related to an
order, bid, or offer pursuant to the CAT NMS Plan. Because the
Participants require that any firm verbal interest expressed by a floor
broker must be related to a CAT reportable systematized order, and any
resulting trade must be reported to CAT, all verbal interest expressed
by a floor broker that may be a CAT Reportable Event is already
reported to CAT. Further, any cancellation or change to an order
transmitted to an exchange floor broker must occur within the
systematized order record. In short, every order verbalized on an
exchange floor by a floor broker has already been systematized, and
that systematization is already reportable to the CAT. Likewise, with
respect to upstairs activity, manual orders (including any orders
following from indications of interest) are already reportable to the
CAT. And trades, whether occurring on an exchange floor or off-floor,
are also already reportable to the CAT. The Reportable Events that are
currently captured for exchange floor transactions are adequate to
achieve CAT's regulatory purposes. The additional information that
would be associated with the Exempt Activities does not need to be
captured to allow for effective surveillance and regulation of exchange
floor activity.
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\35\ See, e.g., Consolidated Options Audit Trail System
(``COATS'') requirements, such as Cboe Rule 5.7(f). NYSE options
exchanges require that particular elements of an order be
systematized so that the exchange may fulfill requirements for COATS
reporting. See NYSE Arca Rule 6.67-O and NYSE American Rule 955NY.
\36\ See NYSE Rule 7.35B, NYSE Arca Rule 6.67-O, NYSE American
Rule 955NY and Cboe Rule 5.91(a)(4).
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Similarly, with respect to bilateral negotiations in upstairs
activity, such as between customers and broker-dealers, or between two
broker-dealers, the Reportable Events that are currently captured when
the broker either creates an order when dealing with a customer, or
accepts an order from another broker-dealer, and when the trade
execution occurs are adequate to achieve CAT's regulatory purposes. In
these ``event types,'' all necessary information required to fulfill
CAT reporting requirements--customer, broker-dealer, time stamps, FDID,
etc.--are captured. The additional information that would be associated
with the Exempt Activities does not need to be captured to allow for
effective surveillance of upstairs activity.
The ultimate regulatory value-add of expanding the existing CAT
reporting to include the Exempt Activities is minimal given the scope
of the data associated with the Exempt Activities that is already
reported. Moreover, because they are not widely disseminated,
communications related to the Exempt Activities do not lend themselves
to the types of market manipulation considered in the adoption of Rule
613.\37\ Any small incremental value added for regulatory purposes
would be significantly outweighed by costs imposed on Industry Members,
their customers, and the Participants, as well as the disruption to
trading on Participant trading floors.
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\37\ See, e.g., Exchange Act Release No. 67457 (July 18, 2012),
77 FR 45722 (Aug. 1, 2012) (explaining that the CAT would be useful
in investigating frontrunning, spoofing and layering in today's
high-speed electronic markets).
---------------------------------------------------------------------------
B. Governing or Constituent Documents
Not applicable.
C. Implementation of Amendment
The Participants propose to implement the proposal upon approval of
the proposed amendment to the CAT NMS Plan.
D. Development and Implementation Phases
Not applicable.
E. Analysis of Impact on Competition
CAT LLC does not believe that the proposed amendment would result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act. The proposed amendment
would continue the status quo under the current temporary exemptive
relief related to the Exempt Activities. Therefore, the proposed
amendment does not introduce any new competition concerns. Indeed, CAT
LLC believes that the proposed amendment will have a positive impact on
competition, efficiency, and capital formation. The
[[Page 67504]]
proposed amendment will provide clarity to market participants about
their regulatory obligations and result in substantial savings in costs
and cost avoidance opportunities while continuing to provide minimal
impact on the regulatory use of CAT Data. Such substantial savings and
cost avoidance opportunities would inure to the benefit of all
participants in the markets for NMS Securities and OTC Equity
Securities, including Participants, Industry Members, and most
importantly, the investors. Furthermore, CAT LLC believes that any
action to require the reporting of the Exempt Activities to CAT would
impose a significant burden on competition that would be unnecessary
and not appropriate for the reasons cited herein. To the extent that
the Commission would seek to impose such an obligation in the future,
it should be accomplished through formal rulemaking that includes a
cost-benefit analysis and an analysis of the impact on competition.
F. Written Understanding or Agreements Relating to Interpretation of,
or Participation in Plan
Not applicable.
G. Approval by Plan Sponsors in Accordance With Plan
Section 12.3 of the CAT NMS Plan states that, subject to certain
exceptions, the CAT NMS Plan may be amended from time to time only by a
written amendment, authorized by the affirmative vote of not less than
two-thirds of all of the Participants, that has been approved by the
SEC pursuant to Rule 608 of Regulation NMS under the Exchange Act or
has otherwise become effective under Rule 608 of Regulation NMS under
the Exchange Act. In addition, the proposed amendment was discussed
during Operating Committee meetings. The Participants, by a vote of the
Operating Committee taken on July 2, 2024, have authorized the filing
of this proposed amendment with the SEC in accordance with the CAT NMS
Plan.
H. Description of Operation of Facility Contemplated by the Proposed
Amendment
Not applicable.
I. Terms and Conditions of Access
Not applicable.
J. Method of Determination and Imposition, and Amount of, Fees and
Charges
Not applicable.
K. Method and Frequency of Processor Evaluation
Not applicable.
L. Dispute Resolution
Not applicable.
* * * * *
EXHIBIT A
Proposed Revisions to the CAT NMS Plan
Additions italicized; deletions [bracketed]
* * * * *
ARTICLE VI
FUNCTIONS AND ACTIVITIES OF CAT SYSTEM
* * * * *
Section 6.3. Data Recording and Reporting by Participants.
* * * * *
(d) Participant Data. Subject to Section 6.3(c), and Appendix D,
Reporting and Linkage Requirements, and in accordance with the
Technical Specifications, each Participant shall record and
electronically report to the Central Repository the following details
for each order and each Reportable Event (subject to the exclusions
outlined in Section 6.3(g)), as applicable (``Participant Data''):
* * * * *
(g) Verbal Activity, Floor and Upstairs Activity. Notwithstanding
any other provision of SEC Rule 613 or the CAT NMS Plan, the following
categories of data shall not be reportable to the Central Repository
under Section 6.3(d):
(i) floor broker verbal announcements of firm orders on an exchange
that are otherwise reported as systematized orders;
(ii) market maker verbal announcements of firm quotes on an
exchange trading floor;
(iii) telephone discussions between an Industry Member and a client
that may involve firm bid and offer communications; and
(iv) unstructured electronic and verbal communications that are not
currently captured by Industry Member order management or execution
systems (e.g., electronic chats, text messages).
* * * * *
Section 6.4. Data Recording and Reporting by Industry Members.
* * * * *
(d) Required Industry Member Data.
(i) Subject to Section 6.4(c) and Section 6.4(d)(iii) with respect
to Options Market Makers, and consistent with Appendix D, Reporting and
Linkage Requirements, and the Technical Specifications, each
Participant shall, through its Compliance Rule, require its Industry
Members to record and electronically report to the Central Repository
for each order and each Reportable Event the information referred to in
Section 6.3(d) (subject to the exclusions outlined in Section 6.3(g)),
as applicable (``Recorded Industry Member Data'').
* * * * *
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the amendment is
consistent with the Exchange Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#1d6f687178307e7270707873696e5d6e787e337a726b"><span class="__cf_email__" data-cfemail="95e7e0f9f0b8f6faf8f8f0fbe1e6d5e6f0f6bbf2fae3">[email protected]</span></a>. Please include
file number 4-698 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number 4-698. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed amendment that are filed with
the Commission, and all written communications relating to the proposed
amendment between the Commission and any person, other than those that
may be withheld from the public in accordance with the provisions of 5
U.S.C. 552, will be available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of the filing also will be available for inspection and
copying at the principal offices of the Participants. Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available publicly. We may
redact in part or withhold entirely from publication
[[Page 67505]]
submitted material that is obscene or subject to copyright protection.
All submissions should refer to file number 4-698 and should be
submitted on or before September 10, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
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\38\ 17 CFR 200.30-3(a)(85).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-18565 Filed 8-19-24; 8:45 am]
BILLING CODE 8011-01-P
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