Notice2024-27352
Joint Industry Plan; Order Instituting Proceedings To Determine Whether To Approve or Disapprove an 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
November 22, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 226 (Friday, November 22, 2024)</title>
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<body><pre>
[Federal Register Volume 89, Number 226 (Friday, November 22, 2024)]
[Notices]
[Pages 92726-92729]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-27352]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101648; File No. 4-698]
Joint Industry Plan; Order Instituting Proceedings To Determine
Whether To Approve or Disapprove an Amendment to the National Market
System Plan Governing the Consolidated Audit Trail Regarding Reporting
of Certain Verbal Activity, Floor and Upstairs Activity
November 18, 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'')) 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\ Notice of the Verbal
Quotes Amendment was published in the Federal Register on August 20,
2024.\5\
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\1\ The CAT NMS Plan is a national market system plan approved
by the Commission pursuant to Section 11A of the Exchange Act and
the rules and regulations thereunder. See Securities Exchange Act
Release No. 79318 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016). The
full text of the CAT NMS Plan is available at <a href="http://www.catnmsplan.com">www.catnmsplan.com</a>.
Unless otherwise defined herein, capitalized terms used herein are
defined as set forth in the CAT NMS Plan.
\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
August 2, 2024.
\5\ See Securities Exchange Act Release No. 100727 (Aug. 14,
2024), 89 FR 67499 (Aug. 20, 2024) (the ``Notice'').
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This order institutes proceedings, under Rule 608(b)(2)(i) of
Regulation NMS,\6\ to determine whether to disapprove the Verbal Quotes
Amendment or to approve the Verbal Quotes Amendment with any changes or
subject to any conditions the Commission deems necessary or
appropriate.
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\6\ 17 CFR 242.608(b)(2)(i).
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II. Background
Rule 613(j)(9) of Regulation NMS and Section 1.1 of the CAT NMS
Plan define the term ``reportable event'' as including, but not limited
to, the original receipt or origination, modification, cancellation,
routing, and execution (in whole or in part) of an order, and receipt
of a routed order.\7\ The term ``order'' is defined in Rule 613(j)(8)
of Regulation NMS and Section 1.1 of the CAT NMS Plan as including: (i)
any order received by a member of a national securities exchange or
national securities association from any person; (ii) any order
originated by a member of a national securities exchange or national
securities association; or (iii) any bid or offer.\8\ ``Bid'' and
``offer'' are defined in Rule 600(b)(16) of 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.\9\
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\7\ 17 CFR 242.613(j)(9).
\8\ 17 CFR 242.613(j)(9).
\9\ 17 CFR 242.600(b)(8).
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Rule 613 and the CAT NMS Plan both require that the Industry
Members and the Participants capture and report quotes and orders that
meet the definition of a CAT reportable event, with no exclusion for
verbal quotes and orders.\10\ The Commission previously
[[Page 92727]]
granted CAT LLC's request for temporary exemptive relief until July 31,
2026 \11\ for the reporting to CAT of the following activities: (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).'' \12\
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\10\ Unstructured verbal or manual communications on exchange
floors and ``upstairs'' are reportable events under Rule 613 and the
CAT NMS Plan because firm verbal quotes and orders, whether they
occur on an exchange floor or ``upstairs,'' are reportable to CAT if
they are a firm bid or offer. See Securities Exchange Act Release
No. 90405 (Nov. 12, 2020), 85 FR 73544, at 73546-547 (Nov. 18, 2020)
(``November 2020 Exemptive Order'').
\11\ See November 2020 Exemptive Order (granting the requested
relief until July 31, 2023); Securities Exchange Act Release No.
98023 (July 28, 2023), 88 FR 51369 (Aug. 3, 2023) (the ``July 2023
Exemptive Order'') (extending the relief until July 31, 2026).
\12\ See Notice, 89 FR at 67499.
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III. Summary of the Verbal Quotes Amendment
CAT LLC proposes to amend the CAT NMS Plan to state that the
activities subject to the July 2023 Exemptive Order (the ``Exempt
Activities'') shall not be reportable as Participant Data or Recorded
Industry Member Data that Participants and Industry Members, as
applicable, must record and report to the Central Repository.\13\
Specifically, proposed new Section 6.3(g) of the CAT NMS Plan would
state the following:
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\13\ See Notice, 89 FR at 67499.
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``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).'' \14\
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\14\ See id. at 67501. CAT LLC states that the term ``client''
in the Verbal Quotes Amendment is intended to include both a non-
Industry Member customer of the Industry Member or another Industry
Member. Id. 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. Id.
CAT LLC states that the Verbal Quotes Amendment is intended to have
an effect similar to permanent incorporation into the CAT NMS Plan of
the existing Commission-approved temporary exemptive relief within the
July 2023 Exemptive Order, without the added conditions to relief.\15\
CAT LLC states that the Verbal Quotes Amendment is not intended to
affect activity that is currently reported to CAT or to otherwise
modify the categories in the July 2023 Exemptive Order.\16\
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\15\ Id. The July 2023 Exemptive Order conditioned relief on the
Participants providing the Commission a written status update on the
reporting of these quotes and orders by July 31, 2025, including,
for both verbal activity on exchange floors and upstairs activity
separately, an analysis of the feasibility of traders
contemporaneously recording firm bid and offer information for
verbal and manual quotes and orders, and an implementation plan for
the reporting of these quotes and orders. July 2023 Exemptive Order,
88 FR at 51370-71.
\16\ See Notice, 89 FR at 67501.
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CAT LLC states that the Verbal Quotes Amendment is merited because
of the impact on overall CAT costs of requiring reporting of the Exempt
Activities.\17\ CAT LLC estimates that these costs could be in the
billions.\18\ CAT LLC further states that the Verbal Quotes Amendment
is appropriate because it is technologically infeasible to reliably,
accurately, and consistently collect and report data concerning the
Exempt Activities.\19\
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\17\ See id.
\18\ See id. A letter cited by CAT LLC provides additional
detail on these estimates. See Letter from Howard Meyerson, Managing
Director, Financial Information Forum, to Commission at 20 (Dec. 16,
2022) (``December 2022 FIF Letter'').
\19\ Id.
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CAT LLC also states that no technological developments have
occurred that would make reporting the Exempt Activities cost-
effective.\20\ CAT LLC states that market participants continue to work
on developing this technology, but that a number of Industry Members
have conducted internal analyses on this question and concluded that
there is currently no artificial intelligence software or algorithm
with a feasible architecture to accurately capture and report the
Exempt Activities to the CAT in an automated manner.\21\ CAT LLC states
that, given that the technology has not developed in the four years
since the original November 2020 Exemptive Order, it is ``exceedingly
unlikely'' that it will develop to a usable point over the next two
years.\22\ Moreover, because there is no existing technological
solution, CAT LLC states that reporting the Exempt Activities would
require substantial human intervention, which would also add
significantly to the costs.\23\ Specifically, CAT LLC states that the
only way for the Participants and Industry Members to report the Exempt
Activities to the CAT would be to manually capture these events by
requiring a human being to listen to every verbal interaction of every
floor broker, market maker, or upstairs trader either live or from
tape, and/or to sift through electronic communications to determine if
and precisely when a quote was given and whether it was firm.\24\ CAT
LLC states that there also would be considerable costs to implement the
reporting of the Exempt Activities beyond the above-described costs to
maintain such reporting.\25\ CAT LLC further states that reporting the
Exempt Activities would also disrupt trading and reduce the use of firm
quotations and orders.\26\
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\20\ See Notice at 67502-03.
\21\ See id. (citing December 2022 FIF Letter at 5).
\22\ See Notice at 67502.
\23\ See Notice at 67502-03.
\24\ Id.
\25\ Id.
\26\ See Notice at 67503.
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CAT LLC states that these significant costs ``would not provide
enough value from a regulatory and surveillance perspective to outweigh
their substantial costs'' because most of the relevant data that could
be gleaned from the Exempt Activities is already gathered in some other
form in CAT.\27\ CAT LLC states that on all exchanges with floor
trading, every order must be systematized upon receipt by the floor
broker on the floor of the exchange and is reportable to the CAT.\28\
CAT LLC states that an order is ``systematized'' when (A) the order is
sent electronically to the floor broker's system at the exchange; or
(B) the order is manually systematized by the floor broker upon receipt
outside of the floor broker's system and prior to representation in the
floor trading crowd.\29\ CAT LLC states that therefore all firm bids or
offers represented by a floor broker must be associated with orders
that have already been systematized.\30\ CAT LLC states that because
the Participants require that any firm verbal interest expressed by a
floor broker must be related to a CAT reportable systematized order,
and any resulting trade must be reported to CAT, all verbal interest
expressed by a floor broker that may be a CAT Reportable Event is
already reported to CAT.\31\ In addition, CAT LLC states that any
cancellation or change to an order transmitted to an exchange floor
broker must occur within
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the systematized order record.\32\ CAT LLC states that there is
additional information that would be associated with the Exempt
Activities, but states that such additional information does not need
to be captured to allow for effective surveillance and regulation of
exchange floor activity.\33\
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\27\ Id.
\28\ Id.
\29\ See Notice at 67503.
\30\ Id.
\31\ See Notice at 67502-03.
\32\ Id.
\33\ See id.
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CAT LLC states therefore that the ultimate regulatory value-add of
expanding the existing CAT reporting to include the Exempt Activities
is minimal given the scope of the data associated with the Exempt
Activities that is already reported.\34\ CAT LLC further states that
communications related to the Exempt Activities do not lend themselves
to the types of market manipulation considered in the adoption of Rule
613 because such communications are not widely disseminated.\35\ CAT
LLC concludes that any small incremental value added for regulatory
purposes would be significantly outweighed by costs imposed on Industry
Members, their customers, and the Participants, as well as the
disruption to trading on Participant trading floors.\36\
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\34\ See id.
\35\ See id.
\36\ Id.
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IV. Summary of Comments
The Commission received one comment letter in connection with the
Verbal Quotes Amendment.\37\ The commenter supports the Verbal Quotes
Amendment stating that: (i) automated capture of the Exempt Activities
is not possible based on current technology; (ii) the costs for
manually capturing, interpreting and reporting the Exempt Activities
will be significant; \38\ (iii) the CAT NMS Plan and the Commission's
approval order do not address these significant costs; (iv) Industry
Members will curtail their current verbal activity in the absence of
relief, which could result in reduced execution quality for customer
orders and reduced market liquidity; (v) prices communicated in
upstairs one-to-one unstructured communications are not firm because
they are not binding on the communicating party and always require a
further affirmative action by the communicating party; (vi) that the
regulatory value of the data is not clear; and (vii) the Exemptive
Activities could be defined as ``pre-order communications,'' but are
not orders under Commission Rule 613 because they cannot result in a
trade execution unless an order is transmitted and received subsequent
to such a pre-order communication and prior to the time of trade
execution'' \39\
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\37\ See Letter from Howard Meyerson, Managing Director,
Financial Information Forum (``FIF'') to Secretary, Commission,
dated September 9, 2024, available at <a href="https://www.sec.gov/comments/4-698/4698-518035-1490942.pdf">https://www.sec.gov/comments/4-698/4698-518035-1490942.pdf</a> (``September 2024 FIF Letter''),
enclosing December 2022 FIF Letter.
\38\ FIF states that the annual cost to report the Exempt
Activities would be in excess of $4.4 billion, subject to an
increase for inflation in the period of time following the
submission of the December 2022 FIF Letter. September 2024 FIF
Letter at 3.
\39\ September 2024 FIF Letter at 2-4.
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FIF states that if the Commission does not provide permanent relief
for reporting the Exempt Activities, it would be necessary for the
Commission to: (i) provide support for this position based on
Commission precedent; \40\ (ii) publicly communicate its reasoning in
writing; (iii) clearly explain the conditions under which specific
verbal activity would be or would not be reportable to CAT; and (iv)
ensure that the CAT system and CAT documentation are updated to clearly
describe the required reporting (including how specific fields, such as
duration, should be reported).\41\ FIF states that the Commission would
need to complete these four steps at least three years prior to any
implementation of CAT reporting for the Exempt Activities.\42\
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\40\ FIF states that unstructured verbal and electronic upstairs
activities are not reportable to CAT under Rule 613 because they
represent indications of interest--not orders. December 2022 FIF
Letter at 11-12. CAT LLC states that the analysis in the December
2022 FIF Letter explaining why unstructured verbal and electronic
upstairs activities are not reportable to CAT under Rule 613
(including the challenges that would be associated with reporting
those activities) applies equally to communications on exchange
trading floors. See Notice, supra note 5, at 67499.
\41\ September 2024 FIF Letter at 4.
\42\ Id.
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V. Proceedings To Determine Whether To Approve or Disapprove the Verbal
Quotes Amendment and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Rule
608(b)(2)(i) of Regulation NMS,\43\ and Rules 700 and 701 of the
Commission's Rules of Practice,\44\ to determine whether to disapprove
the Verbal Quotes Amendment or to approve the Verbal Quotes Amendment
with any changes or subject to any conditions the Commission deems
necessary or appropriate. The Commission is instituting proceedings to
have sufficient time to consider the issues raised by the proposal,
including comments received. Institution of proceedings does not
indicate that the Commission has reached any conclusions with respect
to any of the issues involved. Rather, as described below, the
Commission seeks and encourages interested persons to provide comment
on the Verbal Quotes Amendment.
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\43\ 17 CFR 242.608(b)(2)(i).
\44\ 17 CFR 201.700; 17 CFR 201.701.
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Rule 608(b)(2) of Regulation NMS provides that the Commission
``shall approve a national market system plan or proposed amendment to
an effective national market system plan, with such changes or subject
to such conditions as the Commission may deem necessary or appropriate,
if it finds that such plan or amendment is necessary or appropriate in
the public interest, for the protection of investors and the
maintenance of fair and orderly markets, to remove impediments to, and
perfect the mechanisms of, a national market system, or otherwise in
furtherance of the purposes of the [Exchange] Act.'' \45\ Rule
608(b)(2) further provides that the Commission shall disapprove a
national market system plan or proposed amendment if it does not make
such a finding.\46\ In the Notice, the Commission sought comment on the
proposed amendment, including whether the proposed amendment is
consistent with the Exchange Act.\47\ In this order, pursuant to Rule
608(b)(2)(i) of Regulation NMS,\48\ the Commission is providing notice
of the grounds for disapproval under consideration:
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\45\ 17 CFR 242.608(b)(2).
\46\ Id.
\47\ See Notice at 67504.
\48\ 17 CFR 242.608(b)(2)(i).
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<bullet> whether, consistent with Rule 608 of Regulation NMS, the
Participants have demonstrated that the Verbal Quotes Amendment is
necessary or appropriate in the public interest, for the protection of
investors and the maintenance of fair and orderly markets, to remove
impediments to, and perfect the mechanisms of, a national market
system, or otherwise in furtherance of the purposes of the Exchange
Act; \49\ and
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\49\ 17 CFR 242.608(b)(2).
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<bullet> whether, and if so how, the Verbal Quotes Amendment would
affect efficiency, competition or capital formation.
Under the Commission's Rules of Practice, the ``burden to
demonstrate that a NMS plan filing is consistent with the Exchange Act
and the rules and regulations issued thereunder . . . is on the plan
participants that filed the NMS plan filing.'' \50\ The description of
the NMS plan filing, its purpose and operation, its effect, and a legal
analysis of its consistency with applicable requirements must all be
sufficiently
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detailed and specific to support an affirmative Commission finding, and
``[a] mere assertion that the NMS plan filing is consistent with those
requirements is not sufficient.'' \51\ Any failure of the plan
participants that filed the NMS plan filing to provide such detail and
specificity may result in the Commission not having a sufficient basis
to make an affirmative finding that the NMS plan filing is consistent
with the Act and the applicable rules and regulations thereunder.\52\
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\50\ 17 CFR 201.701(b)(3)(ii).
\51\ Id.
\52\ Id.
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VI. Commission's Solicitation of Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the Verbal Quotes Amendment. In particular, the Commission invites
the written views of interested persons concerning whether the Verbal
Quotes Amendment is consistent with the Exchange Act, the rules and
regulations thereunder, or any other provisions of the CAT NMS Plan.
The Commission asks that commenters address the sufficiency and merit
of the Participants' statements in support of the Verbal Quotes
Amendment, and to consider the impact of the Verbal Quotes Amendment on
efficiency, competition, and capital formation, in addition to any
other comments they may wish to submit about the Verbal Quotes
Amendment.
Although there do not appear to be any issues relevant to approval
or disapproval that would be facilitated by an oral presentation of
views, data, and arguments, the Commission will consider, pursuant to
Rule 608(b)(2)(i) of Regulation NMS, any request for an opportunity to
make an oral presentation.
Interested persons are invited to submit written data, views, and
arguments regarding whether the Verbal Quotes Amendment should be
approved or disapproved by December 13, 2024. Any person who wishes to
file a rebuttal to any other person's submission must file that
rebuttal by December 27, 2024. Comments may be submitted by any of the
following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#e391968f86ce808c8e8e868d9790a3908680cd848c95"><span class="__cf_email__" data-cfemail="fd8f889198d09e9290909893898ebd8e989ed39a928b">[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 (CAT Verbal Quotes
Amendment). 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 Verbal Quotes Amendment that
are filed with the Commission, and all written communications relating
to the Verbal Quotes 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 10:00 a.m. and 3:00 p.m. Copies of the filing also will be
available for inspection and copying at the Participants' principal
offices. 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 submitted material that is obscene or subject to copyright
protection. All submissions should refer to File Number 4-698 (CAT
Verbal Quotes Amendment) and should be submitted on or before December
13, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\53\
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\53\ 17 CFR 200.30-3(a)(85).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-27352 Filed 11-21-24; 8:45 am]
BILLING CODE 8011-01-P
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