Notice2024-29912
Joint Industry Plan; Order Approving Amendments to the National Market System Plan Governing the Consolidated Audit Trail Designed To Implement Cost Savings Measures
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
December 18, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 89 Issue 243 (Wednesday, December 18, 2024)</title>
</head>
<body><pre>
[Federal Register Volume 89, Number 243 (Wednesday, December 18, 2024)]
[Notices]
[Pages 103033-103051]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-29912]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101901; File No. 4-698]
Joint Industry Plan; Order Approving Amendments to the National
Market System Plan Governing the Consolidated Audit Trail Designed To
Implement Cost Savings Measures
December 12, 2024.
I. Introduction
On March 27, 2024, and pursuant to Section 11A(a)(3) of the
Securities Exchange Act of 1934 (the ``Exchange Act'') \1\ and Rule 608
of Regulation NMS thereunder,\2\ BOX Exchange LLC, Cboe BYX Exchange,
Inc., Cboe BZX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe EDGA
Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe Exchange, Inc., The
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. (``the Participants'') filed with the Securities and Exchange
Commission (the ``Commission'' or the ``SEC'') proposed amendments to
the national market system plan governing the consolidated audit trail
(the ``CAT NMS Plan'' or ``Plan'').\3\ These proposed amendments (the
``Proposal'') were designed to implement certain costs saving
measures,\4\ including: (A) provisions that would change processing,
query, and storage requirements for options market maker quotes in
listed options; (B) provisions that would permit the Plan Processor \5\
to move raw unprocessed data and interim operational copies of CAT Data
\6\
[[Page 103034]]
older than 15 days to what the Participants described as a more cost-
effective storage tier; (C) provisions that would permit the Plan
Processor to provide an interim CAT-Order-ID \7\ to regulatory users on
an ``as requested'' basis, rather than on a daily basis; and (D)
provisions that would codify and expand exemptive relief recently
provided by the Commission related to certain recordkeeping and data
retention requirements for industry testing data.\8\ The Proposal was
published for comment in the Federal Register on April 16, 2024.\9\
---------------------------------------------------------------------------
\1\ 15 U.S.C 78k-1(a)(3).
\2\ 17 CFR 242.608.
\3\ In July 2012, the Commission adopted Rule 613 of Regulation
NMS, which required the Participants to jointly develop and submit
to the Commission a national market system plan to create,
implement, and maintain a consolidated audit trail (the ``CAT'').
See Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR
45722 (Aug. 1, 2012) (``Rule 613 Adopting Release''); 17 CFR
242.613. On November 15, 2016, the Commission approved the CAT NMS
Plan. See Securities Exchange Act Release No. 78318 (Nov. 15, 2016),
81 FR 84696 (Nov. 23, 2016) (``CAT NMS Plan Approval Order''). The
CAT NMS Plan is Exhibit A to the CAT NMS Plan Approval Order. See
CAT NMS Plan Approval Order, at 84943-85034. The CAT NMS Plan
functions as the limited liability company agreement of the jointly
owned limited liability company formed under Delaware state law
through which the Participants conduct the activities of the CAT
(the ``Company''). Each Participant is a member of the Company and
jointly owns the Company on an equal basis. The Participants
submitted to the Commission a proposed amendment to the CAT NMS Plan
on August 29, 2019, which they designated as effective on filing.
Under the amendment, the limited liability company agreement of a
new limited liability company named Consolidated Audit Trail, LLC
serves as the CAT NMS Plan, replacing in its entirety the CAT NMS
Plan. See Securities Exchange Act Release No. 87149 (Sept. 27,
2019), 84 FR 52905 (Oct. 3, 2019).
\4\ See Letter from Brandon Becker, CAT NMS Plan Operating
Committee Chair, to Vanessa Countryman, Secretary, Commission, dated
March 27, 2024, available at <a href="https://catnmsplan.com/sites/default/files/2024-03/03.27.24-Proposed-CAT-NMS-Plan-Amendment-Cost-Savings-Amendment.pdf">https://catnmsplan.com/sites/default/files/2024-03/03.27.24-Proposed-CAT-NMS-Plan-Amendment-Cost-Savings-Amendment.pdf</a>. MIAX Sapphire, LLC was not a Participant to the CAT
NMS Plan when the Proposal was originally filed, but the
Participants filed an immediately-effective amendment to the CAT NMS
Plan on July 30, 2024 to add MIAX Sapphire, LLC as a Participant.
See Securities Exchange Act Release No. 100631 (July 31, 2024), 89
FR 64011 (Aug. 6, 2024).
\5\ The ``Plan Processor'' is ``the Initial Plan Processor or
any other Person selected by the Operating Committee pursuant to SEC
Rule 613 and Sections 4.3(b)(i) and 6.1, and with regard to the
Initial Plan Processor, the Selection Plan, to perform the CAT
processing functions required by SEC Rule 613 and set forth in this
Agreement.'' See CAT NMS Plan, supra note 3, at Section 1.1.
\6\ ``CAT Data'' is ``data derived from Participant Data,
Industry Member Data, SIP Data, and such other data as the Operating
Committee may designate as `CAT Data' from time to time.'' See id.
\7\ The ``CAT-Order-ID'' is ``a unique order identifier or
series of unique order identifiers that allows the central
repository to efficiently and accurately link all reportable events
for an order, and all orders that result from the aggregation or
disaggregation of such order.'' See 17 CFR 242.613(j)(1); see also
CAT NMS Plan, supra note 3, at Section 1.1 (```CAT-Order-ID' has the
same meaning provided in SEC Rule 613(j)(1).'').
\8\ See Securities Exchange Act Release No. 99023 (Nov. 27,
2023), 88 FR 84026 (Dec. 1, 2023) (``Industry Test Data Exemptive
Relief Order'').
\9\ See Securities Exchange Act Release No. 99938 (Apr. 10,
2024), 89 FR 26983 (Apr. 16, 2024) (``Notice''). Comments received
in response to the Notice can be found on the Commission's website
at <a href="https://www.sec.gov/comments/4-698/4-698-d.htm">https://www.sec.gov/comments/4-698/4-698-d.htm</a>.
---------------------------------------------------------------------------
On July 15, 2024, the Commission instituted proceedings pursuant to
Rule 608(b)(2)(i) of Regulation NMS,\10\ to determine whether to
disapprove the Proposal or to approve the Proposal with any changes or
subject to any conditions the Commission deems necessary or appropriate
after considering public comment (the ``OIP'').\11\
---------------------------------------------------------------------------
\10\ 17 CFR 242.608(b)(2)(i).
\11\ See Securities Exchange Act Release No. 100530 (July 15,
2024), 89 FR 58838 (July 19, 2024).
---------------------------------------------------------------------------
The Participants subsequently submitted an amendment to their
Proposal on September 20, 2024 (the ``Amendment''), which, among other
things, withdrew the proposed provisions that would have permitted the
Plan Processor to provide an interim CAT-Order-ID to regulatory users
on an ``as requested'' basis, rather than on a daily basis.\12\ The
Amendment was published for comment in the Federal Register on October
7, 2024.\13\ On October 8, 2024, to provide sufficient time to consider
the changes set forth in the Amendment and any comments received on the
Amendment, the Commission extended the period within which it must
conclude its proceedings to December 12, 2024.\14\
---------------------------------------------------------------------------
\12\ See Letter from Brandon Becker, CAT NMS Plan Operating
Committee Chair, to Vanessa Countryman, Secretary, Commission, dated
Sept. 20, 2024, available at <a href="https://www.sec.gov/comments/4-698/4698-522995-1501362.pdf">https://www.sec.gov/comments/4-698/4698-522995-1501362.pdf</a>.
\13\ See Securities Exchange Act Release No. 101225 (Oct 1,
2024), 89 FR 81120 (Oct. 7, 2024). Comments received in response to
the Amendment can be found on the Commission's website at <a href="https://www.sec.gov/comments/4-698/4-698-d.htm">https://www.sec.gov/comments/4-698/4-698-d.htm</a>.
\14\ See Securities Exchange Act Release No. 101277 (Oct. 8,
2024), 89 FR 83068 (Oct. 15, 2024).
---------------------------------------------------------------------------
This order approves the Proposal, as modified by the Amendment
(hereinafter, the ``Proposal'' unless otherwise noted).
II. Description of the Proposal, as Modified by the Amendment
The Commission is approving the proposed changes to the CAT NMS
Plan.\15\
---------------------------------------------------------------------------
\15\ See Notice at note 9, OIP at note 11, and Amendment at note
13 for further description of the changes proposed by the
Participants.
---------------------------------------------------------------------------
A. Processing, Query, and Storage Requirements for Options Market Maker
Quotes in Listed Options
The Participants proposed to amend the processing, query, and
storage requirements that apply to Options Market Maker \16\ quotes in
Listed Options \17\ through the inclusion of a new Section 3.4 in
Appendix D of the CAT NMS Plan. Section 6.3(d) of the CAT NMS Plan
currently requires each Participant to record and electronically report
to the Central Repository \18\ details for all Options Market Maker
quotes.\19\ With respect to Options Market Maker quotes in Listed
Options, Section 6.4(d)(iii) of the CAT NMS Plan states that Reportable
Events \20\ required pursuant to Section 6.3(d)(ii) and (iv) shall be
reported to the Central Repository by an Options Exchange in lieu of
the reporting of such information by the Options Market Maker.\21\
Section 6.4(d)(iii) of the CAT NMS Plan also requires Options Market
Makers to report to an Options Exchange the time at which a quote in a
Listed Option is sent to the Options Exchange (and, if applicable, any
subsequent quote modifications and/or cancellation time when such
modification or cancellation is originated by the Options Market
Maker), pursuant to compliance rules established by the Options
Exchanges.\22\ Quote sent time information must be reported to the
Central Repository by the Options Exchange in lieu of reporting by the
Options Market Maker.\23\
---------------------------------------------------------------------------
\16\ An ``Options Market Maker'' is a ``broker-dealer registered
with an exchange for the purpose of making markets in options
contracts on the exchange.'' See CAT NMS Plan, supra note 3, at
Section 1.1. Each Participant has also promulgated rules for its
members that generally govern what constitutes a ``market maker
quote'' and/or ``market maker quotation'' for that Participant. See,
e.g., The Nasdaq Stock Market LLC Rules, Options 2, Section 5,
``Market Maker Quotations''; Cboe Exchange, Inc. Rule 5.52, ``Market
Maker Quotes''; NYSE Arca, Inc. Rule 6.37AP-O, ``Market Maker
Quotations.''
\17\ A ``Listed Option'' is ``any option traded on a registered
national securities exchange or automated facility of a national
securities association.'' See Rule 600(b)(35) of Regulation NMS; see
also CAT NMS Plan, supra note 3, at Section 1.1. (defining a
``Listed Option'' as having ``the meaning set forth in Rule
600(b)(35) of Regulation NMS.''). Subsequent to approval of the CAT
NMS Plan, Rule 600(b)(35) was redesignated as Rule 600(b)(43)
without any changes to its terms.
\18\ ``Central Repository'' means ``the repository responsible
for the receipt, consolidation, and retention of all information
reported to the CAT pursuant to SEC Rule 613 and [the CAT NMS
Plan.]'' See CAT NMS Plan, supra note 3, at Section 1.1.
\19\ See Notice, supra note 9, at 26985.
\20\ A ``Reportable Event'' includes, but is not limited to,
``the original receipt or origination, modification, cancellation,
routing, execution (in whole or in part) and allocation of an order,
and receipt of a routed order.'' See CAT NMS Plan, supra note 3, at
Section 1.1.
\21\ See Notice, supra note 9, at 26985.
\22\ Id.
\23\ Id.; see also CAT NMS Plan, supra note 3, at Section
6.4(d)(iii).
---------------------------------------------------------------------------
The CAT NMS Plan requires all CAT Data reported to the Central
Repository to be processed and assembled to create the complete
lifecycle of each Reportable Event.\24\ Appendix D, Section 3 of the
CAT NMS Plan states that the Plan Processor must use a ``daisy chain
approach,'' in which a series of unique order identifiers, assigned to
all order events handled by CAT Reporters,\25\ are linked together by
the Central Repository and assigned a single CAT-generated CAT-Order-ID
that is associated with each individual order event and used to create
the complete lifecycle of an order.\26\ Timelines for data processing
and data availability are described in Section 6.1 and Section 6.2 of
Appendix D of the CAT NMS Plan.\27\ The CAT NMS Plan further provides
that regulators will have access to processed CAT Data through an
online targeted query tool and through user-defined direct queries and
bulk extract tools described in Section 8.1 and Section 8.2 of Appendix
D of the CAT NMS Plan.\28\
---------------------------------------------------------------------------
\24\ See Notice, supra note 9, at 26985; see also CAT NMS Plan,
supra note 3, at Section 6.5(b)(i) (requiring the Plan Processor to
link CAT data).
\25\ ``CAT Reporter'' means ``each national securities exchange,
national securities association and Industry Member that is required
to record and report information to the Central Repository pursuant
to SEC Rule 613(c).'' See CAT NMS Plan, supra note 3, at Section
1.1.
\26\ See also Notice, supra note 9, at 26985.
\27\ Id.
\28\ Id. See also CAT NMS Plan, supra note 3, at Section
6.5(c)(ii).
---------------------------------------------------------------------------
The Participants proposed to amend the CAT NMS Plan to provide that
Options Market Maker quotes in Listed Options will not be subject to
any requirement to link and create an order lifecycle, and will not
undergo any linkage validation, linkage feedback, or lifecycle
enrichment processing, but
[[Page 103035]]
will undergo ingestion validation.\29\ The Participants stated that, as
described in Section 5.1 (Market Maker Quotes) of the Plan Participant
Technical Specifications, there are two types of events used to report
Options Market Maker quotes in Listed Options: Option Quote (``OQ'')
events, which are used to report a new quote or a quote replacement,
and Option Quote Cancel (``OQC'') events, which are used to report when
a quote is canceled.\30\ The Participants also stated that only OQ and/
or OQC events would be subject to the amended processing, query, and
storage requirements.\31\ All other options events \32\ would continue
to be subject to the requirement to link and create an order lifecycle,
would continue to undergo linkage validation, linkage feedback, and
linkage enrichment processing, and would continue to be available as
usual to regulatory users through existing query tools.\33\ The
Proposal does not alter any of the reporting obligations set forth
under the CAT NMS Plan \34\ including, without limitation, obligations
to accurately report OQ and OQC events, obligations related to the
reporting of ``all Material Terms of the Order'' for Options Market
Maker quotes or obligations related to the reporting of the time at
which a quote in a Listed Option is sent to an Options Exchange.\35\
---------------------------------------------------------------------------
\29\ See Amendment, supra note 13, at proposed Section 3.4.
\30\ See id. at 81121; see also CAT Reporting Technical
Specifications for Plan Participant v. 4.1.0-r22 (Sept. 10, 2024),
at Section 5.1, available at <a href="https://catnmsplan.com/sites/default/files/2024-09/9.10.2024-CAT-Reporting_Technical_Specifications_for_Participants_4.1.0-r22.pdf">https://catnmsplan.com/sites/default/files/2024-09/9.10.2024-CAT-Reporting_Technical_Specifications_for_Participants_4.1.0-r22.pdf</a>.
\31\ See Amendment, supra note 13, at 81121.
\32\ See Part III.B, Table 1, Note 1 infra for further
description of other options events; see also Letter from Brandon
Becker, CAT NMS Plan Operating Committee Chair, to Vanessa
Countryman, Secretary, Commission, dated July 8, 2024, at 6-7,
available at <a href="https://www.sec.gov/comments/4-698/4698-489583-1406426.pdf">https://www.sec.gov/comments/4-698/4698-489583-1406426.pdf</a> (``Participant Letter''). Additionally, when an Options
Market Maker quote is on one side of an ``Options Trade'' or ``OT''
event, the Participants explained that the quote side of the OT
event will not be linked to the Options Market Maker quote via the
linkage process. Rather, a single event lifecycle will be created
that contains only the quote side of the OT event. The Participants
stated that regulators would be able to ``readily identify'' the
Options Market Maker quote executed in an OT event via the quoteID
field on the side of the OT event involving the Options Market Maker
quote. In addition, the Participants explained that the side of the
OT event that does not involve an Options Market Maker quote would
be linked with the relevant order, would include the order lifecycle
related to such order, and would be subject to all lifecycle
enrichment processing. See Amendment, supra note 13, at 81121.
\33\ See, e.g., Participant Letter, supra note 32, at 6-7;
Amendment, supra note 13, at 81121.
\34\ See, e.g., Notice, supra note 9, at 26984.
\35\ See, e.g., CAT NMS Plan, supra note 3, at Section
6.4(d)(iii); id. at Section 6.3(ii)(G) and (iv)(E).
---------------------------------------------------------------------------
While such reporting obligations would not be altered by proposed
Section 3.4 of Appendix D, the Proposal alters the Plan Processor's
obligations regarding the processing, query, and storage of Options
Market Maker quotes in Listed Options. Specifically, the Plan Processor
would be required by proposed Section 3.4 of Appendix D only to ingest
and store Options Market Maker quotes in Listed Options.\36\ Pursuant
to proposed Section 3.4 of Appendix D, the Plan Processor would not be
required to also link and create an order lifecycle for Options Market
Maker quotes in Listed Options, and such data would not undergo any
linkage validation, linkage feedback, or lifecycle enrichment
processing, although it would undergo ingestion validation.\37\
Proposed Section 3.4 of Appendix D would state that unlinked data for
Options Market Maker quotes in Listed Options would be made available
to regulators by T+1 at 12:00 p.m. Eastern Time.\38\
---------------------------------------------------------------------------
\36\ See Notice, supra note 9, at 26984.
\37\ Id. at 26984 n.15; Amendment, supra note 13 at proposed
Appendix D, Section 3.4. See also Amendment, supra note 13, at 81121
(citing Appendix B-1 and Appendix B-3 of the CAT Reporting Technical
Specifications for Plan Participants, Version 4.1.0-r.21 (Apr. 15,
2024), available at <a href="https://www.catnmsplan.com/sites/default/files/2024-04/04.15.2024-CAT_Reporting_Technical_Specifications_for_Participants_4.1.0-r21.pdf">https://www.catnmsplan.com/sites/default/files/2024-04/04.15.2024-CAT_Reporting_Technical_Specifications_for_Participants_4.1.0-r21.pdf</a>, which describe data ingestion error codes and linkage
validation error codes). Aside from ``linkage validation,'' the CAT
NMS Plan would continue to obligate the Plan Processor to perform
the other kinds of data validation that are required by Section 7.2
of the CAT NMS Plan.
\38\ See Amendment, supra note 13, at proposed Appendix D,
Section 3.4. In addition, the Participants proposed to make
conforming changes to certain provisions of Appendix D to include
cross-references to proposed Section 3.4. See id. at 81121-22; see
also id. at proposed Appendix D, Section 3, Section 6.1, and Section
8.1.1.
---------------------------------------------------------------------------
The Participants clarified the impact of this change by explaining
that the following data elements would no longer be available for
Options Market Maker quotes in Listed Options under proposed Section
3.4 of Appendix D: Derived Next Event Timestamp/Derived Next Event
Epoch Timestamp, CAT Lifecycle Sequence Number, CAT Lifecycle ID (i.e.,
CAT Order ID and Venue Order ID), and Derived Next Event Type Code.\39\
In addition, certain processing enrichments, which the Participants
characterized as ``linkage metadata,'' would no longer be available
under proposed Section 3.4 of Appendix D: Intra Venue Link Status Code,
Unlinked Indicator, Lifecycle Assembly Date, and Associated
Lifecycles.\40\ Nevertheless, proposed Section 3.4 of Appendix D would
require the Plan Processor to provide to regulatory users, upon
request, the business and technical requirements needed to re-create
the eliminated data elements and/or enrichments, as well as the code
the Plan Processor currently uses to derive these eliminated data
elements and/or enrichments from the unprocessed Options Market Maker
quotes in Listed Options.\41\
---------------------------------------------------------------------------
\39\ See id. at 81124.
\40\ Id. The Participants also explained that the Top Indicator
data element would not be affected, because it is not a processing
enrichment available on Participant events like Options Market Maker
quotes on Listed Options. Id.
\41\ Id. According to the Participants, the Plan Processor would
not update this code and/or logic following approval of proposed
Section 3.4; rather, it would ``maintain a copy of each so that they
may be provided to any regulators that might request them in the
future,'' such that regulators would ``all receive the same version
of the code and/or logic regardless of whether they make their
request immediately upon the approval of the [Amendment] or at some
point in the future.'' See Participant Letter, supra note 32, at 6.
However, the Participants stated that the ``regulatory groups of
each of the Participants have indicated that they do not require
these data elements to perform their surveillance and regulatory
functions and/or have the capability to derive these data elements
themselves.'' See Participant Letter, supra note 32, at 6.
---------------------------------------------------------------------------
The CAT NMS Plan currently requires that the Plan Processor provide
access to CAT Data to the Participants and the Commission through
various query tools, including an online targeted query tool that
provides authorized users with the ability to retrieve CAT Data via an
online query screen that includes the ability to choose from a variety
of pre-defined selection criteria and user-defined direct queries and
bulk extracts that provide authorized users with the ability to
retrieve CAT Data via a query tool or language that allows users to
query all available attributes and data sources.\42\ The online
targeted query tool functionality provided by FINRA CAT, the current
Plan Processor, is provided by tools that are sometimes referred to as
``DIVER'' or ``MIRS.'' ``BDSQL'' is the user-defined direct query tool
provided by FINRA CAT, and ``Direct Read'' is the bulk extract tool
provided by FINRA CAT.
---------------------------------------------------------------------------
\42\ See CAT NMS Plan, supra note 3, at Section 6.10(c); see id.
at Appendix D, Section 8.1 and Section 8.2. See also id. at Section
6.5(c)(ii) (requiring the CAT to ``allow the ability to return
results of queries that are complex in nature, including market
reconstruction and the status of order books at varying time
intervals).
---------------------------------------------------------------------------
Under proposed Section 3.4 of Appendix D, Options Market Maker
quotes in Listed Options would be accessible through BDSQL and Direct
Read interfaces only and would not be
[[Page 103036]]
accessible through DIVER.\43\ In addition, the Participants stated that
elimination of linkage and feedback processes would remove Options
Market Maker quotes in Listed Options from certain DIVER and/or MIRS
interfaces: Options Market Replay, OLA Viewer, and All-Related
Lifecycle Event queries.\44\ These DIVER and MIRS tools currently
enable regulatory users with less expertise in sophisticated
programming skills to access CAT Data. BDSQL and Direct Read--which
will be the only query tools that still contain Options Market Maker
quotes in Listed Options data under the Proposal--require programming
skills in remote data processing and/or knowledge of structured query
programming language. The Participants explained that the BDSQL and
Direct Read interfaces ``represent a significantly more cost-efficient
method of providing access'' to the relevant data,\45\ insofar as the
Plan Processor estimated that ``the continued optimization of Options
Market Maker Quotes to make them available via DIVER would cost
approximately $2.8 million per year.'' \46\ The Participants stated
that each of their regulatory groups would be able to conduct their
regulatory programs accessing Options Market Maker quotes in Listed
Options using only BDSQL and Direct Read and that each regulatory group
supported the proposed modification.\47\
---------------------------------------------------------------------------
\43\ See Amendment, supra note 13, at proposed Appendix D,
Section 3.4; see also Participant Letter, supra note 32, at 5.
\44\ See Notice, supra note 9, at 26984.
\45\ See Participant Letter, supra note 32, at 5.
\46\ Id. According to the Participants, this estimate consisted
of ``approximately (i) $2.2 million per year in compute costs for
producing the DIVER-specific hash partition copy of Options Market
Maker Quotes, and (ii) $600,000 per year in storage costs for one
year's worth of DIVER-specific copies of Options Market Maker
Quotes.'' Id. The Participants explained that these costs were
included in the larger processing and storage cost estimates
described below. See Amendment, supra note 13, at 88123; see also
notes 53-57 and associated text infra.
\47\ See Notice, supra note 9, at 26985; see also Participant
Letter, supra note 32, at 5.
---------------------------------------------------------------------------
The Participants estimated that costs related to creating
lifecycles for Options Market Maker quotes in Listed Options were $30
million in 2023.\48\ However, the Participants acknowledged, in their
Proposal, that they had already begun to implement certain measures to
reduce the costs associated with lifecycle linkages for Options Market
Maker quotes in Listed Options, pursuant to exemptive relief issued by
the Commission in November 2023.\49\ The Participants stated that the
November 2023 Exemptive Relief Order allows the Plan Processor to
create lifecycle linkages for Options Market Maker quotes in Listed
Options only once by T+2 at 8 a.m. Eastern Time (as opposed to
requiring both an interim lifecycle by T+1 at 9 p.m. Eastern Time and a
final lifecycle by T+5 at 8 a.m. Eastern Time).\50\ The Participants
stated that they expected the above-described ``single pass'' approach
to generating lifecycles for options quotes to result in annual savings
of approximately $5.4 million upon implementation in April 2024,\51\
and the Commission understands that this ``single pass'' functionality
has now been implemented.
---------------------------------------------------------------------------
\48\ See Notice, supra note 9, at 26985.
\49\ See Securities Exchange Act Release No. 98848 (Nov. 2,
2023), 88 FR 77128 (Nov. 8, 2023) (``November 2023 Exemptive Relief
Order'').
\50\ See Notice, supra note 9, at 26984 n.15 (citing November
2023 Exemptive Relief Order). The Participants stated that the Plan
Processor would no longer be required to create any lifecycle
linkages for Options Market Maker quotes in Listed Options under
their Proposal. See id. at 26984.
\51\ Id. at 26984.
---------------------------------------------------------------------------
The Participants estimated that the Proposal would result in
approximately $20 million in additional annual cost savings in the
first year, such that the cost impact of Options Market Maker quotes in
Listed Options on the CAT would be reduced from approximately $24.4
million (inclusive of anticipated savings resulting from the
implementation of the options quotes ``single pass'' proposal described
above) to approximately $4.0 million annually.\52\
---------------------------------------------------------------------------
\52\ See id. at 26984-85. The Participants stated that their
cost savings estimates assumed an approximate 65% reduction in
compute runtime associated with options exchange events and an
approximate 80% reduction in storage footprint through the
elimination of versioned options quote data (e.g., interim, final,
DIVER-optimized, OLA copies). See id. at 26985 n.19.
---------------------------------------------------------------------------
According to the Participants, approximately $12 million of these
estimated $20 million in cost savings would be attributable to
``linkage processing and data processing reductions, assuming 22
processing days per month for a total of 264 processing days in a year
and based on data volumes observed in the first half of 2024.'' \53\
Specifically, the Participants stated that ``[l]inkage processing costs
would be reduced from approximately $27,000 per day to $0 per day,
resulting in estimated annual linkage processing savings of $7,128,000
($27,000/day x 264 days). Data processing costs (i.e., costs
attributable to data ingestion and preparation and publication of data
versions to the relevant regulatory interfaces) would be reduced from
approximately $27,000 per day to $9,000 per day, resulting in estimated
annual data processing savings of $4,752,000 ($18,000/day x 264
days).'' \54\ The Participants explained that these estimated cost
savings could increase if ``data volumes continue to increase as they
have historically . . . .'' \55\ The Participants further estimated
that approximately $8 million of the estimated $20 million in cost
savings would be attributable to ``the reduction in the storage
footprint for Options Market Maker Quotes in Listed Options through the
elimination of versioned quote data (i.e., T+2 8 a.m. ET, T+5 8 a.m.
ET, DIVER and OLA copies).'' \56\ The Participants explained that this
estimate assumed a ``reduction of the current production storage
footprint of approximately 37.5 petabytes (PB) per month based on the
data volumes from the first half of 2024 to approximately 9 PB per
month'' across various storage tiers.\57\
---------------------------------------------------------------------------
\53\ See Amendment, supra note 13, at 81123.
\54\ Id.
\55\ Id.
\56\ Id.
\57\ Id.
---------------------------------------------------------------------------
The Participants stated that one-time implementation costs, which
would ``generally consist of Plan Processor labor costs associated with
coding and software development, as well as any related cloud fees
associated with the development, testing and load testing of the
proposed changes,'' were expected to be ``minimal relative to overall
cost savings'' and explained that such costs ``may vary based on
various factors, including the details of any requirements in any final
amendment approved by the Commission and any changes in labor costs.''
\58\ The Participants stated that ``[o]ngoing operational costs, other
than cloud hosting costs'' would not be affected by the proposed
amendments.\59\ They also stated that actual future savings could be
more or less than their estimates due to changes in a number of
variables on which their estimates were based, including ``current CAT
NMS Plan requirements; reporting by Participants, Industry Members, and
market data providers; observed data rates and volumes; current storage
and compute pricing discounts, compute reservations, and cost savings
plans (i.e., including savings attributable to the daily On-Demand
Capacity Reservations and Compute Savings Plan); and associated cloud
fees.'' \60\ The Participants stated that they believed that ``the cost
savings
[[Page 103037]]
estimates and assumptions [were] reasonable and provide[d] an adequate
basis for the Commission to evaluate the costs and benefits'' of their
Proposal.\61\
---------------------------------------------------------------------------
\58\ Id.
\59\ Id.
\60\ See Participant Letter, supra note 32, at 2; see also
Amendment, supra note 13, at 81122-23. ``Industry Member'' means ``a
member of a national securities exchange or a member of a national
securities association.'' See CAT NMS Plan, supra note 3, at Section
1.1.
\61\ See Amendment, supra note 13, at 81122-23.
---------------------------------------------------------------------------
Although the Participants represented that Options Market Maker
quotes in Listed Options are the single largest data source for the
CAT, comprising approximately 98% of all options exchange events and
approximately 75% of all transaction volume stored in the CAT,\62\ the
Participants stated the changes set forth in the Proposal would have a
limited impact on regulators.\63\ The Participants stated that
regulators would still have access to unlinked Options Market Maker
quotes in Listed Options by T+1 at 12:00 p.m. Eastern Time under the
Proposal and asserted that regulatory users would be able to derive the
currently available data enrichments if needed.\64\ The Participants
further stated that ``[l]inkage validation is not necessary for Options
Market Maker Quotes because the quoteID is an effective replacement for
tying quotes to trades.'' \65\ Since the vast majority of Options
Market Maker quotes in Listed Options lifecycles consist of just two
events--the quote and its subsequent cancellation--the Participants
also explained that the number of Options Market Maker quotes in Listed
Options that result in an execution and/or allocation in the first
place would be extremely low.\66\ Finally, the Participants stated that
their usage data ``demonstrates'' that Options Market Maker quotes in
Listed Options lifecycles are ``very rarely accessed by regulators.''
\67\
---------------------------------------------------------------------------
\62\ See Notice, supra note 9, at 26984.
\63\ Id. at 26984-85.
\64\ Id. at 26984.
\65\ See Participant Letter, supra note 32, at 4.
\66\ See Notice, supra note 9, at 26985.
\67\ Id. at 26984.
---------------------------------------------------------------------------
Two commenters were supportive of these aspects of the
Proposal.\68\ For example, SIFMA stated that the ``enormity of this
data set . . . has created costs and challenges far beyond those
envisioned when CAT was approved.'' \69\ SIFMA explained that the
``quote-to-trade ratio in listed options markets is so large that the
operational costs of linking quotes to trades is an unreasonable
burden'' that had not been supported by a cost-benefit analysis.\70\
Moreover, SIFMA stated that ``the ratio keeps increasing, with [its]
member data showing the most recent peak of 32,000 quotes per trade in
the U.S. options market in December 2023,'' a ratio that they stated
was ``nearly 4 times greater than the ratio described'' in the CAT NMS
Plan Approval Order.\71\ SIFMA further expressed concern that there
were no forces to ``constrain the increase in this ratio'' and asserted
that ``certain SEC market structure initiatives might only accelerate
the increase.'' \72\ Given the ``extremely small number of quotes''
with a ``corresponding trade,'' SIFMA did not believe it was reasonable
to spend so much on processing and storage costs for Options Market
Maker quotes in Listed Options, especially if such data would continue
to be reported to the CAT and if ``the SEC or a Participant can use the
quote data as part of its surveillance or investigation patterns,
albeit with the need to perform some additional computations.'' \73\
FIF supported the Proposal, but suggested that the Commission go
further and eliminate Options Market Maker quotes in Listed Options
from the CAT altogether.\74\ FIF also requested that the Commission and
the Participants ``conduct'' and make public ``a cost-benefit analysis
of maintaining Options Market Maker Quotes in CAT vs. removing them
from CAT.'' \75\
---------------------------------------------------------------------------
\68\ See Letter from Howard Meyerson, Managing Director,
Financial Information Forum, to Secretary, Commission, dated May 7,
2024, available at <a href="https://www.sec.gov/comments/4-698/4698-467591-1256394.pdf">https://www.sec.gov/comments/4-698/4698-467591-1256394.pdf</a> (``FIF Letter I''); Letter from Ellen Greene, Managing
Director, Equities and Options Market Structure, and Joseph
Corcoran, Managing Director, Associate General Counsel, The
Securities Industry and Financial Markets Association, to Vanessa
Countryman, Secretary, Commission, dated May 31, 2024, available at
<a href="https://www.sec.gov/comments/4-698/4698-479631-1372454.pdf">https://www.sec.gov/comments/4-698/4698-479631-1372454.pdf</a> (``SIFMA
Letter I''); Letter from Howard Meyerson, Managing Director,
Financial Information Forum, to Secretary, Commission, dated October
25, 2024, available at <a href="https://www.sec.gov/comments/4-698/4698-534415-1532782.pdf">https://www.sec.gov/comments/4-698/4698-534415-1532782.pdf</a> (``FIF Letter II''); Letter from Ellen Greene,
Managing Director, Equities and Options Market Structure, and Joseph
Corcoran, Managing Director, Associate General Counsel, The
Securities Industry and Financial Markets Association, to Vanessa
Countryman, Secretary, Commission, dated October 28, 2024, available
at <a href="https://www.sec.gov/comments/4-698/4698-535155-1534962.pdf">https://www.sec.gov/comments/4-698/4698-535155-1534962.pdf</a>
(``SIFMA Letter II''). Nasdaq also commented in support of the
proposed amendments, reiterating points made by the Participants in
their filings and noting the support of SIFMA and FIF. See also
Letter from Jeffrey S. Davis, Senior Vice President, Principal
Deputy General Counsel, Nasdaq, Inc., to Vanessa A. Countryman,
Secretary, Commission, dated July 1, 2024 (``Nasdaq Letter''),
available at <a href="https://www.sec.gov/comments/4-698/4698-487351-1391254.pdf">https://www.sec.gov/comments/4-698/4698-487351-1391254.pdf</a>.
\69\ SIFMA Letter I at 1-2; SIFMA Letter II at 1-2.
\70\ SIFMA Letter I at 2-3.
\71\ Id. at 2 (citing CAT NMS Plan Approval Order, supra note 3,
at 84750).
\72\ Id. For example, SIFMA explained that the Commission's
recent ``tick size proposal has the potential to significantly
expand the amount of quoting activity in the equities and listed
options markets.'' Id. at 2 n.7.
\73\ Id. at 2-3.
\74\ FIF Letter I at 2; FIF Letter II at 2.
\75\ FIF Letter I at 2.
---------------------------------------------------------------------------
Rule 608(b)(2) states that the Commission shall approve a 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 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.\76\ When
evaluating the estimated cost savings of approximately $20 million
annually (and potentially more if data volumes continue to increase as
they have historically) in light of the reduced functionalities for
Options Market Maker quotes in Listed Options,\77\ the Proposal
satisfies the approval standard set forth in Rule 608.\78\
---------------------------------------------------------------------------
\76\ 17 CFR 242.608(b)(2). See also 15 U.S.C. 78k-1 (authorizing
the Commission, by rule or order, to authorize or require the self-
regulatory organizations to act jointly with respect to matters as
to which they share authority under the Exchange Act in planning,
developing, operating, or regulating a facility of the national
market system).
\77\ See Amendment, supra note 13, at 81122-23. See also notes
53-57 and associated text supra.
\78\ The Commission recognizes that there are additional
measures beyond the specific amendments proposed by the Participants
here that could further reduce CAT costs or could identify areas for
potential additional cost savings, such as FIF's suggestions that
Options Market Maker quotes in Listed Options be eliminated from the
CAT altogether and/or that the Commission and the Participants
should conduct a separate ``cost-benefit analysis of maintaining
Options Market Maker Quotes in CAT vs. removing them from CAT.'' See
notes 74-75 and associated text supra. But, in our view, it is
appropriate to proceed with the Participants' Proposal at this time.
Approval of proposed Section 3.4 of Appendix D advances FIF's stated
goal to ``manage and reduce CAT operating costs,'' FIF Letter I at
2, and does not foreclose the Commission's or the Participants'
ability to consider additional cost savings opportunities in the
future. Nor does the existence of such additional measures or
potential analyses call into question the proposed amendments'
satisfaction of the approval standard set forth by Rule 608(b)(2) or
otherwise warrant a departure from the policy choices proposed by
the Participants.
---------------------------------------------------------------------------
In reaching this conclusion, the Commission emphasizes several
important considerations. The Proposal would preserve some of the
functionality that would have otherwise been available to regulators
with respect to Options Market Maker quotes in Listed Options, and the
Commission continues to believe that such data has substantial
regulatory value.\79\
[[Page 103038]]
Specifically, under proposed Section 3.4 of Appendix D, regulators
would still have direct access to unlinked Options Market Maker quotes
in Listed Options by T+1 at 12:00 p.m. Eastern Time.\80\ Regulators
would also still be able to use two of the existing query tools--BDSQL
and Direct Read--to access the relevant data, although access to this
data through DIVER and certain MIRS interfaces would be eliminated.\81\
---------------------------------------------------------------------------
\79\ Although the Participants have represented that usage data
``demonstrates that such data is very rarely accessed by
regulators,'' see Notice, supra note 9, at 26984, such usage data
was obtained before the Participants represented to the Commission
that CAT implementation was complete and does not reflect current
usage patterns. Such data is therefore not dispositive evidence of
the lack of regulatory need. See CAT Q2 & Q3 2024 Quarterly Progress
Report, available at <a href="https://catnmsplan.com/sites/default/files/2024-07/CAT_Q2-and-Q3-2024-QPR.pdf">https://catnmsplan.com/sites/default/files/2024-07/CAT_Q2-and-Q3-2024-QPR.pdf</a>.
\80\ See Amendment, supra note 13, at proposed Section 3.4.
\81\ Id.
---------------------------------------------------------------------------
The Commission further understands that proposed Section 3.4 of
Appendix D would also require the Plan Processor to provide regulators,
on request, with the business and technical requirements needed to re-
create data elements and/or enrichments that would otherwise be
eliminated for Options Market Maker quotes in Listed Options, as well
as the code currently used by the Plan Processor to derive those data
elements and/or enrichments.\82\ It may be feasible for regulators to
perform such ad hoc processing of Options Market Maker Quotes in Listed
Options, if they have adequate staff possessing the necessary
specialized skills for this work and access to the necessary technical
tools. In part, this is because lifecycles for Options Market Maker
quotes in Listed Options data are generally less complex compared to
lifecycles that include other CAT events, in that Options Market Maker
quotes in Listed Options lifecycles usually involve only a single
broker-dealer, a single exchange, an exchange quote, and a single
cancel or trade event.\83\ At the same time, ad hoc processing would
likely require technical assistance from the Plan Processor and would
impose costs on the regulator. The magnitude of this cost depends on
the complexity of revising the code for regulators' systems, the
frequency of updates required to maintain the code, and the chosen
amount and frequency of data processed. Finally, the CAT NMS Plan will
continue to obligate Participants to ``adopt policies and procedures,
including standards, requiring CAT Data reported to the Central
Repository [to] be timely, accurate, and complete, and to ensure the
integrity of such CAT Data (e.g., that such CAT Data has not been
altered and remains reliable),'' \84\ and each Participant's rulebook
obligates its members to record and report CAT data in a manner that
ensures its timeliness, accuracy, integrity and completeness.\85\
---------------------------------------------------------------------------
\82\ See id.
\83\ See, e.g., Part III.B infra.
\84\ See CAT NMS Plan, supra note 3, at Section 6.5(d)(ii).
\85\ See, e.g., Nasdaq General Equity and Options Rule 7,
Section 11(a) (``Industry Members are required to record and report
data to the Central Repository as required by this General 7 in a
manner that ensures the timeliness, accuracy, integrity and
completeness of such data.''); Cboe Rule 7.30(a) (``Industry Members
are required to record and report data to the Central Repository as
required by this Section B in a manner that ensures the timeliness,
accuracy, integrity and completeness of such data.''); NYSE Rule
6893(a) (``Industry Members are required to record and report data
to the Central Repository as required by this Rule Series in a
manner that ensures the timeliness, accuracy, integrity and
completeness of such data.'').
---------------------------------------------------------------------------
B. Storage for Raw Unprocessed Data, Interim Operational Data, and/or
Submission and Feedback Files Older Than 15 Days
The CAT NMS Plan requires CAT Data to be ``directly available and
searchable electronically without manual intervention for at least six
years'' \86\ and within certain query tool response times.\87\ These
requirements apply not only to the final corrected data version that is
delivered to regulators by T+5 at 8 a.m. Eastern Time, but also to raw
unprocessed data and various types of interim operational data, as well
as to copies of all submission and feedback files provided to CAT
Reporters as part of the correction process.\88\ Specifically, with
respect to raw unprocessed data and interim operational copies of data
created between T+1 and T+5, Section 6.2 of Appendix D of the CAT NMS
Plan provides that, prior to 12:00 p.m. Eastern Time on T+1, raw
unprocessed data that has been ingested by the Plan Processor must be
available to Participants' regulatory staff and the SEC, and between
12:00 p.m. Eastern Time on T+1 and T+5, access to all iterations of
processed data must be available to Participants' regulatory staff and
the SEC.\89\
---------------------------------------------------------------------------
\86\ See CAT NMS Plan, supra note 3, at Section 6.5(b)(i) and
Appendix D, Section 1.4.
\87\ See, e.g., CAT NMS Plan, supra note 3, at Appendix D,
Section 8.1 and 8.2. The Participants explained that the Commission
had granted conditional exemptive relief from certain performance
requirements related to the online targeted query tool. See Notice,
supra note 9, at 26986; see also November 2023 Exemptive Relief
Order, supra note 49.
\88\ See Notice, supra note 9, at 26986.
\89\ CAT NMS Plan, supra note 3, at Appendix D, Section 6.2.
---------------------------------------------------------------------------
The Participants distinguish between Raw Unprocessed Data, Interim
Operational Data, and/or submission and feedback files in the
Amendment, which would define Raw Unprocessed Data as ``data that has
been ingested by the Plan Processor and made available to regulators
prior to 12:00 p.m. Eastern Time on T+1.'' \90\ Interim Operational
Data, on the other hand, would be defined as ``all processed, validated
and unlinked data made available to regulators by T+1 at 12:00 p.m. ET
and all iterations of processed data made available to regulators
between T+1 and T+5, but excludes the final version of corrected data
that is made available at T+5 at 8:00 a.m. ET.'' \91\ Currently, the
Participants explained that such data is supplanted in all CAT query
tools by the final version of corrected data that is made available to
regulators at T+5 at 8:00 a.m. Eastern Time.\92\ The Participants
stated, however, that such data remains available to regulators after
T+5 ``without manual intervention'' via the use of CAT data management
APIs.\93\
---------------------------------------------------------------------------
\90\ See Amendment, supra note 13, at proposed Section 6.3.
\91\ Id. The Commission understands, from Staff discussions with
the Participants, that Options Market Maker quotes in Listed Options
would not qualify as Raw Unprocessed Data, Interim Operational Data,
and/or submission and feedback files, and this Order does not
approve application of proposed Section 6.3 of Appendix D to Options
Market Maker quotes in Listed Options. See, e.g., id. (stating that
``Interim Operational Data'' does not include ``processed data
relating to Options Market Maker quotes in Listed Options made
available to regulators by T+1 at 12:00 p.m. ET'').
\92\ See Notice, supra note 9, at 26986.
\93\ Id.
---------------------------------------------------------------------------
To enable such access, Raw Unprocessed Data, Interim Operational
Data, and submission and feedback files are stored in S3 Intelligent
Tiers provided by the cloud service provider that currently hosts the
CAT System, Amazon Web Services (``AWS'').\94\ Data files that are
either new or that have been recently read by a regulatory user are
stored in the S3 Frequent Access tier.\95\ Files that have not been
read by a regulatory user for 30 days are moved to the S3 Infrequent
Access tier.\96\ Files that have not been read by a regulatory user for
90 days are moved to the S3 Archive Instant Access tier.\97\ Once a
regulatory user accesses an older file, it is moved back into the S3
Frequent Access tier.\98\
---------------------------------------------------------------------------
\94\ See Participant Letter, supra note 32, at 3-4.
\95\ See Amendment, supra note 13, at 81122 n.18.
\96\ Id.
\97\ Id.
\98\ See Participant Letter, supra note 32, at 3.
---------------------------------------------------------------------------
The Participants stated that regulatory users generally access the
latest, corrected version of CAT data \99\ and
[[Page 103039]]
therefore stated that Raw Unprocessed Data, Interim Operational Data,
and/or submission and feedback files generally do not provide any
regulatory value after the final corrected data is delivered by T+5 at
8 a.m. Eastern Time.\100\ The Participants asserted that cost savings
could be achieved by archiving Raw Unprocessed Data, Interim
Operational Data, and/or submission and feedback files older than 15
days to a more cost-effective storage tier that is optimized for
infrequent access.
---------------------------------------------------------------------------
\99\ When a regulator queries CAT Data, the Participants
explained that the CAT currently provides results to the user based
on the latest, most current version of the data. Between T+1 and
T+5, the CAT query tools will return the latest iteration of
processed data available, and any interim data versions are
ultimately supplanted in all CAT query tools by the final version of
corrected data that is made available at T+5 at 8:00 a.m. ET. See
Amendment, supra note 13, at 81123.
\100\ See Notice, supra note 9, 26986; see also Amendment, supra
note 13, at 81122. According to the Participants, after four years
of operation, the Plan Processor has not seen any regulatory usage
of this interim operational data. See Notice, supra note 9, 26986;
see also Amendment, supra note 13, at 81123.
---------------------------------------------------------------------------
Specifically, the Participants proposed to add new Section 6.3 to
Appendix D of the CAT NMS Plan that would state that Raw Unprocessed
Data, Interim Operational Data, and/or submission and feedback files
older than 15 days may be retained in an archive storage tier that
would not be directly available and searchable electronically without
manual intervention and that would not be subject to any query tool
performance requirements until it is restored to an accessible storage
tier.\101\ The Participants stated that Raw Unprocessed Data, Interim
Operational Data, and/or submission and feedback files not older than
15 days, as well as all final, corrected data, would remain accessible
``without manual intervention'' within required query tool response
times.\102\
---------------------------------------------------------------------------
\101\ See Amendment, supra note 13, at proposed Section 6.3. The
Participants anticipated that ``archived data would be restored to
the S3 Frequent Access tier,'' but cautioned that ``[s]torage tiers
are subject to change based on future technology developments and
product offerings.'' See id. at 81122 n.18.
\102\ See Notice, supra note 9, at 26986.
---------------------------------------------------------------------------
Proposed Section 6.3 of Appendix D would also state that the Plan
Processor would restore archived data to an accessible storage tier
upon request to the CAT Help Desk by an authorized regulatory user from
the Participants or a senior officer from the Commission.\103\ The
Participants explained that archived data would be restored generally
within several hours or business days of a request to the CAT Help Desk
that is maintained pursuant to Section 10.3 of Appendix D of the CAT
NMS Plan, depending on the volume and size of the date range of the
requested data restore. For example, they stated that a request to
restore a single day of data may take less than 24 hours, whereas a
request to restore a year's worth of data may take several days.\104\
The Participants further represented that the Plan Processor would
develop policies and procedures to ensure the confidentiality of any
regulator requests to obtain data subject to proposed Section 6.3 of
Appendix D.\105\
---------------------------------------------------------------------------
\103\ See Amendment, supra note 13, at proposed Section 6.3. In
addition, the Participants proposed to add references to proposed
Section 6.3 of Appendix D to Section 6.5(d)(i) and Section 1.4 of
Appendix D of the CAT NMS Plan. See id. at 81122.
\104\ See Notice, supra note 9, at 26986. By contrast, the
Participants stated that, when the Commission adopted the CAT NMS
Plan, ``[m]ost current data sources do not provide direct access to
most regulators, and data requests can take as long as weeks or even
months to process.'' See id. (citing CAT NMS Plan Approval Order,
supra note 3, at 84833 and Rule 613 Adopting Release, supra note 3,
at 45729).
\105\ Id.
---------------------------------------------------------------------------
Accordingly, the Participants stated that they believed that the
anticipated savings associated with optimizing storage costs, which
they estimated as approximately $1 million in annual costs, outweighed
the impact on regulatory access to this data.\106\ The Participants
reached their estimate by calculating the savings that would result
from moving Raw Unprocessed Data, Interim Operational Data, and/or
submission and feedback files from the S3 Frequent Access tier to the
Glacier Deep Archive tier, ``based on data volumes observed in the
first half of 2024.'' \107\ The Participants stated that one-time
implementation costs, which would ``generally consist of Plan Processor
labor costs associated with coding and software development, as well as
any related cloud fees associated with the development, testing and
load testing of the proposed changes,'' were expected to be ``minimal
relative to overall cost savings'' and explained that such costs ``may
vary based on various factors, including the details of any
requirements in any final amendment approved by the Commission and any
changes in labor costs.'' \108\ The Participants stated that
``[o]ngoing operational costs, other than cloud hosting costs'' would
not be affected by the proposed amendments.\109\ They also stated that
actual future savings could be more or less than their estimates due to
changes in a number of variables on which their estimates were based,
including ``current CAT NMS Plan requirements; reporting by
Participants, Industry Members, and market data providers; observed
data rates and volumes; current storage and compute pricing discounts,
compute reservations, and cost savings plans (i.e., including savings
attributable to the daily On-Demand Capacity Reservations and Compute
Savings Plan); and associated cloud fees.'' \110\ The Participants
stated that they believed that ``the cost savings estimates and
assumptions [were] reasonable and provide[d] an adequate basis for the
Commission to evaluate the costs and benefits'' of their Proposal.\111\
---------------------------------------------------------------------------
\106\ Id. The Participants stated that their Proposal, as
revised by the Amendment, would not delete the data subject to
proposed Section 6.3 of Appendix D, but simply move it to a ``more
cost-effective'' storage tier requiring some ``manual
intervention.'' Upon restoration to an accessible storage tier, the
Participants stated that the relevant data would be ``available and
searchable electronically . . . in the same manner as it is today.''
See Amendment supra note 13, at 81123-24.
\107\ See Amendment, supra, note 13, at 81123. The Participants
further explained that the ``affected data currently represents
approximately 52% of the daily storage footprint in CAT.
Specifically, raw unprocessed data (i.e., as-submitted data)
represents approximately 16% of the daily storage footprint, and
interim operational copies (i.e., T+1 12 p.m. ET, T+1 9 p.m. T, and
associated DIVER copies) represent approximately 36% of the daily
storage footprint.'' See id. at 81123 n.27.
\108\ Id. at 81123.
\109\ Id.
\110\ See Participant Letter, supra note 32, at 2; see also
Amendment, supra note 13, at 81122-23.
\111\ See Amendment, supra note 13, at 81122-23.
---------------------------------------------------------------------------
Both commenters supported this aspect of the Proposal.\112\ SIFMA
further urged the Commission to consider ``whether its recordkeeping
requirements are appropriate'' and to ``embark on a more comprehensive
undertaking about what other data can be moved to more cost-effective
storage solutions.'' \113\ FIF suggested that, ``[i]f the Operational
Data does not provide any value to CAT Reporters \114\ or to regulators
after T+5, there is no reason to store this data after T+5.'' \115\
Conversely, if the Commission and the Participants issued a public
report that ``explains the regulatory value of maintaining this
Operational Data,'' FIF stated that it would ``agree with the proposal
. . . to move the Operational Data to a more cost-effective storage
tier.'' \116\ FIF further requested that the Commission and the
Participants ``publish an analysis as to whether this data could be
stored in tiers within AWS S3, such as Glacier or Glacier Deep Archive,
that could be more cost effective than the AWS S3 Intelligent Tier, as
proposed in the Participant
[[Page 103040]]
filing.'' \117\ In addition, FIF stated that ``enhanced transparency
regarding the operation of the CAT system is necessary and
appropriate'' and expressed concern that ``there could be other
requirements that the Commission is imposing on the . . . Participants
that either do not provide regulatory value or are beyond the scope of
CAT.'' \118\ FIF requested that the Commission ``provide
clarification'' as to why Industry Members and their customers should
be ``required to incur costs for storage of data that has no regulatory
value.'' \119\
---------------------------------------------------------------------------
\112\ FIF Letter I at 3; SIFMA Letter I at 3. See also Nasdaq
Letter (reiterating points made by the Participants in their filings
and noting the support of SIFMA and FIF).
\113\ SIFMA Letter I at 3.
\114\ ``CAT Reporter'' means ``each national securities
exchange, national securities association and Industry Member that
is required to record and report information to the Central
Repository pursuant to SEC Rule 613(c).'' See CAT NMS Plan, supra
note 3, at Section 1.1.
\115\ FIF Letter I at 3; FIF Letter II at 2.
\116\ FIF Letter I at 3.
\117\ Id. Contrary to FIF's suggestion, the Commission
understands that the Participants do, in fact, propose to store Raw
Unprocessed Data, Interim Operational Data, and/or submission and
feedback files older than 15 days in tiers like Glacier Deep
Archive. See, e.g., note 107 and associated text supra.
\118\ FIF Letter I at 3-4.
\119\ Id.
---------------------------------------------------------------------------
The Commission does not agree that Raw Unprocessed Data, Interim
Operational Data, and/or submission and feedback files have no
regulatory value after final data is published at 8 a.m. Eastern Time
on T+5. Although the Participants have represented that Raw Unprocessed
Data, Interim Operational Data, and/or submission and feedback files
has not yet been accessed by regulatory users,\120\ the Participants
have only very recently represented to the Commission that CAT
implementation is complete.\121\ Current use is therefore not
necessarily a reliable or dispositive reflection of the regulatory need
for Raw Unprocessed Data, Interim Operational Data, and/or submission
and feedback files. The Commission does agree, however, that the
expected regulatory use cases involving this subset of data would
likely not be time-sensitive, such that the Participants' proposal to
move Raw Unprocessed Data, Interim Operational Data, and/or submission
and feedback files to a more cost-effective storage tier after 15 days
reflects a reasonable approach.\122\ Accordingly, and pursuant to Rule
608(b)(2) under the Exchange Act, the Commission finds that it is
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 to approve the
proposed amendments that relate to the storage of Raw Unprocessed Data,
Interim Operational Data, and/or submission and feedback files.
---------------------------------------------------------------------------
\120\ See, e.g., Notice, supra note 9, at 26986.
\121\ See CAT Q2 & Q3 2024 Quarterly Progress Report, available
at <a href="https://catnmsplan.com/sites/default/files/2024-07/CAT_Q2-and-Q3-2024-QPR.pdf">https://catnmsplan.com/sites/default/files/2024-07/CAT_Q2-and-Q3-2024-QPR.pdf</a>.
\122\ 17 CFR 242.608(b)(2). The Commission recognizes that the
amendments proposed by the Participants here are not the only
measures that could potentially reduce the costs of storing CAT
Data. As noted above, commenters made several additional
suggestions, including that the Commission consider revisions to its
recordkeeping requirements, that the Commission evaluate what other
data might be moved to more cost-effective storage solutions, that
the Commission eliminate storage of Raw Unprocessed Data, Interim
Operational Data, and/or submission and feedback files after T+5,
and that the Commission and the Participants issue a public report
explaining the value of maintaining such data. See notes 113-119 and
associated text supra. But, in our view, it is appropriate to
proceed with the Participants' Proposal at this time. Approval of
proposed Section 6.3 of Appendix D achieves cost savings sought by
SIFMA and FIF without foreclosing the Commission's or the
Participants' ability to consider additional cost savings measures
in the future. And the existence of these additional cost savings
measures or potential analyses does not call into question the
proposed amendments' satisfaction of the approval standard set forth
by Rule 608(b)(2) or otherwise warrant a departure from the policy
choices proposed by the Participants.
---------------------------------------------------------------------------
C. Codification and Expansion of Exemptive Relief Permitting Deletion
of Industry Test Data Older Than Three Months
According to the Participants, Industry Members and Participants
submit data to the CAT pursuant to required and voluntary testing,
feedback files related to such data, and output files that hold the
detailed transactions, referred to herein as ``Industry Test Data.''
\123\ Under Section 1.2 of Appendix D of the CAT NMS Plan, such
Industry Test Data must be saved for three months.\124\ Separate from
this specific three-month retention requirement, Rule 17a-1 under the
Exchange Act requires every national securities exchange and national
securities association to keep and preserve at least one copy of all
documents, including all correspondence, memoranda, papers, books,
notices, accounts, and other such records as shall be made or received
by it in the course of its business as such and in the conduct of its
self-regulatory activity, and to keep all such documents for a period
of not less than five years, the first two years in an easily
accessible place, subject to the destruction and disposition provisions
of Rule 17a-6 under the Exchange Act.\125\ Section 9.1 of the CAT NMS
Plan, the general recordkeeping provision for the CAT NMS Plan, also
states, in relevant part, that the Company shall maintain complete and
accurate books and records of the Company in accordance with Rule 17a-1
under the Exchange Act.\126\
---------------------------------------------------------------------------
\123\ Separately, the Participants stated that CAT LLC, through
the Plan Processor, also retains ``[o]perational metrics associated
with industry testing (including but not limited to testing results,
firms who participated, and amount of data reported and linked)''
for six years, in accordance with the CAT NMS Plan. See Notice,
supra note 9, at 26988 n.30; see also CAT NMS Plan, supra note 3, at
Appendix D, Section 1.2. The Participants explained that the
Proposal would not affect such operational metrics. See Notice,
supra note 9, at 26988 n.30.
\124\ See Notice, supra note 9, at 26988.
\125\ See 17 CFR 240.17a-1(a)-(b) and 17 CFR 240.17a-6; 15
U.S.C. 78q. See also Notice, supra note 9, at 26988. The
Participants explained that the CAT is a facility of each of the
Participants to the CAT NMS Plan. See Notice, supra note 9, at
26988.
\126\ See id. at 26988-89.
---------------------------------------------------------------------------
The Participants explained that, on June 2, 2023, CAT LLC requested
exemptive relief from Rule 17a-1 under the Exchange Act and certain
provisions of the CAT NMS Plan relating to the retention of Industry
Test Data beyond three months.\127\ On November 27, 2023, the
Commission granted the requested relief.\128\ The Participants stated
that their previous request for exemptive relief and the Industry Test
Data Exemptive Relief Order apply only to Industry Test Data related to
the CAT order and transaction system, not to the customer account and
information system (``CAIS'').\129\
---------------------------------------------------------------------------
\127\ See Notice, supra note 9, at 26988; see also Letter from
Brandon Becker, CAT NMS Plan Operating Committee Chair, to Vanessa
Countryman, Secretary, Commission, dated June 2, 2023, <a href="https://catnmsplan.com/sites/default/files/2023-06/06.02.23-Exemptive-Request-Test-Data-Retention.pdf">https://catnmsplan.com/sites/default/files/2023-06/06.02.23-Exemptive-Request-Test-Data-Retention.pdf</a>. As explained in the exemptive
request, CAT LLC does not believe that Industry Test Data
constitutes documents covered by Rule 17a-1 under the Exchange Act
and adheres to its view that the specific three-month period for
Industry Test Data supersedes the more general, longer retention
periods in the CAT NMS Plan, but submitted the exemptive request to
obtain regulatory clarity in light of Staff comments that the longer
retention periods set forth in Rule 17a-1 under the Exchange Act and
the CAT NMS Plan may apply to Industry Test Data.
\128\ See Industry Test Data Exemptive Relief Order, supra note
8.
\129\ See Notice, supra note 9, at 26988.
---------------------------------------------------------------------------
The Participants therefore proposed to amend Section 1.2 of
Appendix D of the CAT NMS Plan to provide that test data (whether
related to the CAT order and transaction system or to the CAIS) may be
deleted by the Plan Processor after three months.\130\ Proposed Section
1.2 of Appendix D would continue to state that operational metrics
associated with industry testing (including, but not limited to,
testing results, firms who participated, and amount of data reported
and linked) must be stored for the same duration as the CAT production
data.\131\
---------------------------------------------------------------------------
\130\ Id. at 26989.
\131\ Id.
---------------------------------------------------------------------------
The Participants explained that eliminating Industry Test Data
older than three months as permitted by the Industry Test Data
Exemptive Relief
[[Page 103041]]
Order is expected to achieve approximately $1 million per year in
savings.\132\ According to the Participants, the proposed amendments
would not generate additional cost savings beyond those achievable
pursuant to the Industry Test Data Exemptive Relief Order,\133\
although the Participants generally noted that actual future savings
could be more or less than their estimates due to changes in a number
of variables on which their estimates were based, including ``current
CAT NMS Plan requirements; reporting by Participants, Industry Members,
and market data providers; observed data rates and volumes; current
storage and compute pricing discounts, compute reservations, and cost
savings plans (i.e., including savings attributable to the daily On-
Demand Capacity Reservations and Compute Savings Plan); and associated
cloud fees.'' \134\ The Participants stated that one-time
implementation costs, which would ``generally consist of Plan Processor
labor costs associated with coding and software development, as well as
any related cloud fees associated with the development, testing and
load testing of the proposed changes,'' were expected to be ``minimal
relative to overall cost savings'' and explained that such costs ``may
vary based on various factors, including the details of any
requirements in any final amendment approved by the Commission and any
changes in labor costs.'' \135\ The Participants stated that
``[o]ngoing operational costs, other than cloud hosting costs'' would
not be affected by the proposed amendments.\136\ The Participants
stated that they believed that ``the cost savings estimates and
assumptions [were] reasonable and provide[d] an adequate basis for the
Commission to evaluate the costs and benefits'' of their Proposal.\137\
---------------------------------------------------------------------------
\132\ Id.
\133\ Id.
\134\ See Participant Letter, supra note 32, at 2; see also
Amendment, supra note 13, at 81122-23.
\135\ See Amendment, supra note 13, at 81123.
\136\ Id.
\137\ Id. at 81122-23.
---------------------------------------------------------------------------
Two commenters, SIFMA and FIF, supported this aspect of the
Proposal.\138\ FIF further stated that it supported ``deletion of all
test data after one week'' and requested that the Commission and the
Participants ``publish a cost-benefit analysis of any mandate to retain
test data beyond one week,'' which analysis should ``identify any use
cases that would involve access to test data beyond one week, including
the regulatory purpose.'' \139\
---------------------------------------------------------------------------
\138\ SIFMA Letter I at 4; FIF Letter I at 5. See also Nasdaq
Letter (reiterating points made by the Participants in their filings
and noting the support of SIFMA and FIF).
\139\ FIF Letter I at 5; FIF Letter II at 2.
---------------------------------------------------------------------------
The Commission understands from the Participants that the primary
purpose of Industry Test Data is to facilitate CAT Reporter testing
needs and not to facilitate regulatory use.\140\ The Commission
therefore agrees with the Participants and the commenters that, in
light of the approximately $1 million per year cost for retaining
Industry Test Data beyond three months, the proposed approach to
retention of Industry Test Data is reasonable. Accordingly, and
pursuant to Rule 608(b)(2) under the Exchange Act, the Commission finds
that it is 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
to approve the provisions of the Proposal that relate to the retention
of Industry Test Data.\141\
---------------------------------------------------------------------------
\140\ See, e.g., Industry Test Data Exemptive Relief Order,
supra note 8, at 84027. The Commission recognizes that there are
additional measures beyond those proposed by the Participants here
that could further reduce the costs associated with retaining
Industry Test Data, such as FIF's suggestions that Industry Test
Data be deleted after one week and/or that the Commission and that
the Participants conduct a related cost-benefit analysis. But, in
our view, it is appropriate to proceed with the Participants'
Proposal at this time. Approval of proposed Section 1.2 of Appendix
D advances FIF's stated goal to ``manage and reduce CAT operating
costs,'' FIF Letter I at 2, and does not foreclose the Commission's
or the Participants' ability to consider additional cost savings
measures in the future. And the existence of these additional cost
savings measures or potential analyses does not call into question
the proposed amendments' satisfaction of the approval standard set
forth by Rule 608(b)(2) or otherwise warrant a departure from the
policy choices proposed by the Participants.
\141\ 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------
Although the Participants did not specifically also request
exemptive relief from Rule 17a-1 under the Exchange Act with respect to
Industry Test Data related to the CAIS,\142\ such relief is necessary
in order to effectuate the Proposal, as Rule 17a-1 would otherwise
require Industry Test Data related to the CAIS to be retained for a
longer time period. For the above-described reasons, and consistent
with its action in the Industry Test Data Retention Exemptive Relief
Order, the Commission finds that it is appropriate in the public
interest and consistent with the protection of investors under Section
36 of the Exchange Act,\143\ as well as 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 under Rule 608(e) under the Exchange
Act,\144\ to grant relief that exempts each Participant from the longer
recordkeeping and data retention requirements for CAIS-related Industry
Test Data that otherwise would apply as set forth in Rule 17a-1 under
the Exchange Act.\145\
---------------------------------------------------------------------------
\142\ 17 CFR 240.17a-1; see also 15 U.S.C. 78q (requiring, among
other things, the Participants and their members to make and keep
for prescribed periods such records, furnish such copies thereof,
and make and disseminate such reports as the Commission, by rule,
prescribes as necessary in the public interest, for the protection
of investors, or otherwise in furtherance of the purposes of the
Exchange Act). As the Participants explain, the Commission has
already granted such exemptive relief for Industry Test Data related
to the order and transaction system. See note 129 and associated
text supra; see also Industry Test Data Exemptive Relief Order,
supra note 8.
\143\ 15 U.S.C. 78mm(a)(1).
\144\ 17 CFR 242.608(e).
\145\ 17 CFR 240.17a-1.
---------------------------------------------------------------------------
D. Other Comments Received on the Proposal
Both commenters proposed that additional steps be taken to further
manage and reduce CAT operating costs.\146\ For instance, SIFMA
expressed concern that the Commission, ``the primary beneficiary of the
CAT, . . . does not pay for it, and thus does not have a direct
incentive to consider costs, or opportunities for cost savings, in
connection with making decisions regarding its operation.'' \147\ SIFMA
stated that the Commission's ``rejection'' of provisions that would
have permitted the Plan Processor to provide an interim CAT-Order-ID to
regulatory users on an ``as requested'' basis, rather than on a daily
basis--provisions that were initially included in the Proposal,\148\
but withdrawn by the Participants \149\--suggested that ``costs and
cost savings are not necessarily a Commission priority in connection
with decision-making regarding the operation of the CAT.'' \150\
---------------------------------------------------------------------------
\146\ See, e.g., FIF Letter I at 2; SIFMA Letter I at 1.
\147\ SIFMA Letter II at 2. See also note 173 and associated
text for a discussion of how investors benefit from CAT-enabled
regulatory activities.
\148\ See Notice, supra note 9, at proposed Appendix D, Section
6.1.
\149\ See Amendment, supra note 13, at 81120, 81122.
\150\ SIFMA Letter II at 2-3. SIFMA also noted that ``the level
of detail the Commission required the Participants to provide to
justify other aspects of the proposed Cost Savings Amendments in
Amendment No. 1, such as requiring the Participants to provide
actual data on the proposed savings related to the processing,
query, and storage requirements for options market maker quotes,
goes well beyond what the Commission required the Participants to
provide in their last set of CAT fee filings.'' SIFMA Letter II at
3. SIFMA stated that ``[t]hese inconsistent actions by the
Commission,'' including its ``failure . . . to offer data to support
the regulatory value of the interim CAT-Order-ID,'' suggested ``that
while the Commission is concerned about preserving what it perceives
as the regulatory utility of the CAT, it does not necessarily give
equal weight or consideration to the ever-increasing costs
associated with operating it.'' Id. at 3. The Commission does not
agree that it has acted in a manner inconsistent with its
obligations. In each of the proceedings discussed by the commenter,
the Commission has sought from the Participants the information
necessary to make the required findings in accordance with the rules
and regulations that govern the Commission action at issue.
---------------------------------------------------------------------------
[[Page 103042]]
SIFMA therefore suggested that the Commission and the Participants
should ``assess their own CAT usage patterns and needs to identify
further cost saving measures.'' \151\ SIFMA further stated that the CAT
``should be operated to meet the reasonable and legitimate needs of
regulators, and not as a monolith to address any regulatory use case
regardless of the costs.'' \152\
---------------------------------------------------------------------------
\151\ SIFMA Letter I at 2; SIFMA Letter II at 4.
\152\ SIFMA Letter I at 2; SIFMA Letter II at 4.
---------------------------------------------------------------------------
SIFMA stated that the ``Commission's action in connection with
Amendment No. 1 to the proposed Cost Savings Amendment'' demonstrated
the need for the Participants and the Commission to ``provide Industry
Members with a more meaningful opportunity to contribute their
experience and expertise to the CAT's budget setting and cost savings
processes.'' \153\ Specifically, SIFMA recommended that the
Participants establish a separate working group that includes Industry
Members to focus on ways the CAT System can be made more efficient from
a cost perspective while still achieving its goals, rather than relying
on the existing Cost Management Working Group, which is comprised
solely of Participant members.\154\ ``Without more direct involvement
by Industry Members in the CAT budgeting process,'' SIFMA stated that
``there is an insufficient structural framework and incentives to bring
CAT costs under control.'' \155\
---------------------------------------------------------------------------
\153\ SIFMA Letter I at 1; SIFMA Letter II at 3-4.
\154\ SIFMA Letter I at 1; SIFMA Letter II at 3-4.
\155\ SIFMA Letter I at 1; SIFMA Letter II at 4.
---------------------------------------------------------------------------
FIF expressed similar concerns.\156\ Noting that the Participants
have recently estimated ``total CAT operating expenses of $248,846,076
for 2025,'' FIF stated that this ``14.8% increase over the estimated
CAT operating expenses for 2024'' was ``not sustainable over the long-
term.'' \157\ FIF stated that it was ``imperative that the Commission
take steps to manage CAT operating costs,'' including approval of the
Proposal and other recommendations made by FIF in their comment letters
that were not included in the Proposal.\158\ FIF further requested that
the Commission ``publish a report setting forth the factors giving rise
to the significant estimated cost increase for 2025 and whether these
factors will continue to apply year-over-year for the foreseeable
future.'' \159\ FIF stated that the Commission ``should not impose CAT
reporting requirements that are beyond the scope of Commission Rule 613
and the CAT NMS Plan'' and that ``[p]roposed changes to current CAT
processing or reporting requirements that could involve further
significant increases in CAT operating costs should be subject to an
appropriate cost-benefit analysis that is included as part of a CAT NMS
Plan amendment.'' \160\
---------------------------------------------------------------------------
\156\ Some of these concerns were also set forth in a previous
comment letter to the Commission that was jointly submitted by SIFMA
and FIF. See FIF Letter I, at 5 n.19; see also Letter from Joseph
Corcoran, Managing Director, Associate General Counsel, and Ellen
Greene, Managing Director, Equities & Options Market Structure,
SIFMA, and Howard Meyerson, Managing Director, FIF, to Secretary,
Commission, dated July 31, 2023, available at <a href="https://www.sec.gov/comments/4-698/4698-238359-498762.pdf">https://www.sec.gov/comments/4-698/4698-238359-498762.pdf</a>.
\157\ See Letter from Howard Meyerson, Managing Director, FIF,
to Secretary, Commission, dated Dec. 2, 2024, at 2, available at
<a href="https://www.sec.gov/comments/4-698/4698-544735-1559702.pdf">https://www.sec.gov/comments/4-698/4698-544735-1559702.pdf</a> (``FIF
Letter III'').
\158\ Id. In addition to the measures described above, FIF urged
the Commission to ``reevaluate the currently-mandated CAT processing
timeframes, which FIF members consider to be a major contributor to
the high CAT operating costs.'' Id.; see also FIF Letter I at 5.
\159\ FIF Letter III at 2.
\160\ FIF Letter I at 5.
---------------------------------------------------------------------------
Contrary to the assertions of SIFMA, both the Commission and the
Participants have demonstrated their commitment to reducing CAT costs
where appropriate--and even where there is some amount of regulatory
loss--as evidenced by the very existence of the cost savings measures
proposed by the Participants and approved herein by the
Commission.\161\ The Participants have already formed a Cost Management
Working Group comprised of senior members of the Participants that
works to find and address cost management needs,\162\ and the findings
of this group are discussed with the Industry Members that sit on the
CAT's Advisory Committee.\163\ There are also meaningful and reasonable
constraints set on the CAT budgeting process, including a process that
gives Industry Members a chance to review and publicly comment on the
CAT's budget and that requires Commission review of CAT funding.\164\
And the Commission agrees with FIF that any amendments to the
requirements of Rule 613 and/or the CAT NMS Plan must be pursued
either: (1) through a Commission-led rule-making process that includes
public notice and comment and economic analysis; or (2) through the
amendment process set forth under Rule 608, which would require the
Participants to file with the Commission a proposed amendment to the
CAT NMS Plan, subject that amendment to public notice and comment, and
generally require approval by the Commission and a consideration of the
impact of the amendment on efficiency, competition, and capital
formation.\165\
---------------------------------------------------------------------------
\161\ See also Nasdaq Letter at 2-3 (``Similar to SIFMA and FIF,
Nasdaq believes that reducing CAT costs requires more work and
exploration of other methods. The Cost Savings Amendment is the
beginning of what Nasdaq expects will be a range of strategies to
lessen the increasing costs. . . . . Participants are proposing
these changes as a first step in their efforts to reduce CAT costs
while exploring further cost-saving measures.'').
\162\ See Securities Exchange Act Release No. 98290 (Sept. 6,
2023), 88 FR 62628, 62655 (Sept. 12, 2023) (``CAT Funding Model
Approval Order'').
\163\ See CAT NMS Plan, supra note 3, at Section 4.13.
\164\ See, e.g., CAT Funding Model Approval Order, supra note
162, at 62652-57.
\165\ See 17 CFR 242.608; see also 17 CFR 242.613(a)(5) (``No
national market system plan filed pursuant to this section, or any
amendment thereto, shall become effective unless approved by the
Commission or otherwise permitted in accordance with the procedures
set forth in Sec. 242.608. In determining whether to approve the
national market system plan, or any amendment thereto, and whether
the national market system plan is in the public interest under
Sec. 242.608(b)(2), the Commission shall consider the impact of the
national market system plan or amendment, as applicable, on
efficiency, competition, and capital formation.'').
---------------------------------------------------------------------------
In determining whether any particular cost savings amendment meets
the approval standard set forth in Rule 608(b)(2), the Commission
evaluates and balances many factors, including the amount of costs
savings as well as the potential downstream harms to investors and the
U.S. financial markets that could result from less effective regulatory
oversight by the SROs and the Commission. The Commission emphasizes
that its approval of the specific cost savings amendments that the
Participants have proposed for consideration in this proceeding does
not foreclose future consideration of additional cost savings
amendments and analyses, including the withdrawn interim CAT-Order-ID
proposal and the other measures suggested by commenters.\166\
---------------------------------------------------------------------------
\166\ See also notes 78, 122, and 140 supra.
---------------------------------------------------------------------------
III. Efficiency, Competition, and Capital Formation
A. Introduction
In determining whether to approve an amendment to the CAT NMS Plan
and whether that amendment is in the public interest, Rule 613 requires
the Commission to consider the impact of that amendment on efficiency,
competition, and capital formation.\167\
[[Page 103043]]
The Participants stated that their proposed amendments ``will have a
positive impact on competition, efficiency, and capital formation.''
\168\ The Commission has analyzed the potential impacts of the
Proposal.
---------------------------------------------------------------------------
\167\ 17 CFR 242.613(a)(5).
\168\ See Notice, supra note 9, at 26989.
---------------------------------------------------------------------------
Based on its analysis, and after considering potential sources of
imprecision in the Participants' estimates, the Commission concludes
that savings in operating costs will enhance the operational efficiency
of CAT,\169\ while the changes to CAT Data will lessen some regulatory
efficiencies. These changes to regulatory efficiencies, however, are
likely to be limited for regulatory activities using small samples of
data but potentially more significant for certain time-sensitive
regulatory activities using large amounts of data. Effects on market
efficiency, competition, and capital formation, stemming from the
impacts of the Proposal on regulatory and operational efficiencies,
will likely be second-order and limited.
---------------------------------------------------------------------------
\169\ See infra note 188.
---------------------------------------------------------------------------
B. Baseline
In analyzing the impact of the Proposal on efficiency, competition
and capital formation, the Commission considered the current CAT Data
\170\ as the baseline. Specifically, the baseline consists of the
current properties, and the actual and potential regulatory usages of
the CAT Data, in the absence of the Proposal. CAT Data was intended to
make possible reconstruction of market events,\171\ market analysis and
research that inform policy decisions, regulatory activities such as
market surveillance, examinations and investigations, and more
efficient execution of numerous other regulatory functions.\172\ In the
CAT NMS Plan Approval Order, the Commission explained how investors
benefit from the CAT-enabled improvements to such regulatory
activities.\173\
---------------------------------------------------------------------------
\170\ See supra note 6 for a description of ``CAT Data.''
\171\ In market reconstructions, regulators aim to provide an
accurate and factual accounting of what transpired during a market
event. These market events often encompass activities in many
securities across multiple trading venues. See CAT NMS Plan Approval
Order, supra note 3, at 84805.
\172\ See CAT NMS Plan Approval Order, supra note 3, at 84833-
84840.
\173\ A discussion of the expected benefits and regulatory usage
of the CAT NMS Plan is available in the CAT NMS Plan Approval Order.
See CAT NMS Plan Approval Order, supra note 3, at 84816-84840.
---------------------------------------------------------------------------
The first provision of the Proposal focuses on Options Market Maker
quotes in Listed Options. Along with their lifecycle linkages and
associated derived fields, Options Market Maker quotes in Listed
Options are currently accessible via an online targeted query tool,
called DIVER. Alternatively, regulatory users with specialized
knowledge of remote data processing and the structured query
programming language (``SQL'') can use BDSQL to construct and run their
own complex queries.\174\
---------------------------------------------------------------------------
\174\ Id. at Section 6.10(c)(i)(B) (requiring the user-defined
direct queries tool to provide authorized users with the ability to
retrieve CAT Data via a query tool or language that allows users to
query all available attributes and data sources). See also supra
note 45 and associated text.
---------------------------------------------------------------------------
The Participants stated that, while the Options Market Maker quotes
in Listed Options constitute the largest component of CAT Data,\175\
only a small fraction of them end in an execution or allocation.\176\
In addition, the Proposal stated that ``the vast majority of Options
Market Maker Quote lifecycles consist of just two events--the quote and
its subsequent cancellation,'' \177\ which suggests that these quotes
have simple lifecycles.
---------------------------------------------------------------------------
\175\ The Participants state that these quotes comprise
approximately 98% of all options exchange events and approximately
75% of all transaction volume stored in the CAT. They, however, do
not specify the time period over which these estimates were
obtained. See Notice, supra note 9, at 26984.
\176\ See Notice, supra note 9, at 26984; see also Participant
Letter, supra note 32, at 2.
\177\ See Notice, supra note 9, at 26984.
---------------------------------------------------------------------------
Figure 1 shows the backdrop of the evolution of Options Market
Maker quotes in Listed Options, which is that the options market has
experienced noticeable overall growth. As Figure 1 shows, the volumes
in both the equity and the options markets (equity shares traded and
options contracts traded, respectively) have markedly increased since
early 2020. While volume growth has somewhat stagnated in the equity
market since 2021, volume has continued to grow in the options market.
Between 2016 and 2022, the volume of equity shares traded increased by
61 percent and options contracts traded increased by 153 percent.
BILLING CODE 8011-01-P
[[Page 103044]]
[GRAPHIC] [TIFF OMITTED] TN18DE24.073
BILLING CODE 8011-01-C
Table 1 presents an analysis of CAT Data from the first quarter of
2024. It shows that, approximately 90 percent of all options-related
events and 80 percent of all events in CAT are Options Market Maker
quotes in Listed Options,\178\ which include both OQ and OQC
events.\179\ OQ events account for approximately 72 percent of all
options-related events and 63 percent of all events in CAT.
---------------------------------------------------------------------------
\178\ These estimates are similar to those presented in the
Notice. See supra note 175.
\179\ Lifecycles that include both OQ and OQC events can have
more than two events. For example, lifecycles with both OQ and OQC
events can also have quote modifications and partial executions. See
also supra note 30 and associated text.
Table 1--The Shares of Options Quote Events and Options Market Maker Quotes in Listed Options in CAT
[January 2024-March 2024]
----------------------------------------------------------------------------------------------------------------
Jan-24 Feb-24 Mar-24
----------------------------------------------------------------------------------------------------------------
Panel A (numbers in billions)
----------------------------------------------------------------------------------------------------------------
All events in CAT (1) [= (2) + (9)]............................. 8,164 7,811 7,892
All options-related events in CAT (2) [= (3) + (8)]......... 7,166 6,905 7,039
All options exchange events (3) [= (4) + (7)]........... 6,817 6,530 6,655
OMM \a\ quotes in Listed Options (4) [= (5) + (6)].. 6,528 6,225 6,340
Options quote (OQ) events (5)................... 5,287 4,884 4,896
Options quote cancel (OQC) events (6)........... 1,241 1,341 1,444
Other options exchange events (7)................... 289 305 315
Industry member options-related events (8).............. 349 376 384
All equities events in CAT (9).............................. 998 906 853
----------------------------------------------------------------------------------------------------------------
Panel B (%)
----------------------------------------------------------------------------------------------------------------
Options quote events as percent of all options exchange events 78 75 74
[=100*(5)/(3)].................................................
Options quote events as percent of all options-related events in 74 71 70
CAT [=100*(5)/(2)].............................................
Options quote events as percent of all events in CAT [=100*(5)/ 65 63 62
(1)]...........................................................
Options Market Maker quotes in Listed Options as percent of all 96 95 95
options exchange events [=100*(4)/(3)].........................
Options Market Maker quotes in Listed Options as percent of all 91 90 90
options-related events in CAT [=100*(4)/(2)]...................
Options Market Maker quotes in Listed Options as percent of all 80 80 80
events in CAT [=100*(4)/(1)]...................................
----------------------------------------------------------------------------------------------------------------
Source: CAT Data.
[[Page 103045]]
Notes: (1) Other options exchange events include options order accepted, options order modified and options
order canceled events, internal options route and options cancel route events, options trade events, and
various other options exchange events. Industry member options-related events include industry member options
events and industry member multi-leg events. (2) All equities events in CAT include all equities exchange
events and industry member equities events. (3) All events in CAT include all options exchange events, all
equities exchange events, and all industry member events.
\a\ OMM refers to Options Market Maker.
Further analysis of options trades associated with Options Market
Maker quotes in Listed Options, in the options market data from Q1-
2024,\180\ showed that the number of option trades associated with
Options Market Maker quotes in Listed Options as percent of CAT OQ
events is small, 0.001 percent or less.\181\ The analysis, however,
also shows that a substantial portion of all options trades,
approximately 20 percent, is associated with Options Market Maker
quotes.
---------------------------------------------------------------------------
\180\ In this analysis, both OQ events and option trade (OT)
events are defined as one-sided events. Thus, each side of a trade
is counted as a separate trade.
\181\ This supports the Participants' statements, see supra note
176.
---------------------------------------------------------------------------
An analysis of lifecycles of Options Market Maker quotes in
selected Listed Options shows that at least for some options on some
days these lifecycles can be more complex than suggested by the
Participants.\182\ For these selected Options, 63 percent of the
Options Market Maker quotes had a lifecycle with two events, while
almost 10 percent had lifecycles that included five or more events.
---------------------------------------------------------------------------
\182\ Focusing on one day, March 7, 2024, this analysis studied
the Listed Options on one widely traded ETF. The number of CAT
events per CAT lifecycle reflects the number of CAT events that
occurred on March 7, 2024, for CAT lifecycles that had an options
quote event also on March 7, 2024. On March 7, 2024, options with
the underlying ETF used in this analysis had one of the highest
volumes of options exchange CAT events across all underlying
symbols. See supra note 177 and associated text for the
Participant's characterization of the lifecycles of the Options
Market Maker quotes in Listed Options.
---------------------------------------------------------------------------
The second provision of the Proposal involves Raw Unprocessed Data,
Interim Operational Data and/or submission and feedback files data.
These data are currently available without ``manual intervention'' for
at least six years within certain query tools.\183\ These data are
currently stored within the Central Repository via AWS S3-FA storage
tier for the first 30 days, in the S3-Infrequent Access tier for the
next 60 days, and in the S3-Archive Instant Access tier
thereafter.\184\ Access to such data prior to the availability of final
data can improve the timeliness of regulatory activities for those
regulators who do not already have such data.\185\
---------------------------------------------------------------------------
\183\ See supra notes 86-87 and associated text.
\184\ See supra note 94 and associated text.
\185\ See CAT NMS Plan Approval Order, supra note 3, at 84831
for a discussion of the improvements to timeliness of access to such
data. In addition, based on Commission staff's knowledge of CAT,
these are the only data within CAT that identify error records and
corrections.
---------------------------------------------------------------------------
The third provision of the Proposal relates to the retention of
Industry Test Data.\186\ Industry Members and Participants submit data
to CAT pursuant to both required and voluntary testing; CAT retains the
Industry Test Data in connection with such testing. Industry Test Data
associated with CAIS is required to be retained for six years whereas
CAT LLC was previously permitted to eliminate Industry Test Data
related to the CAT order and transaction system after three
months.\187\ The Participants proposed that test data (whether related
to the CAT order and transaction system or to the CAIS) may be deleted
by the Plan Processor after three months.
---------------------------------------------------------------------------
\186\ See supra section II.C, supra note 123 and associated
text.
\187\ In November 2023, the CAT LLC was granted exemptive relief
from the requirement to retain Industry Test Data for six years and
was permitted to eliminate such data after three months. The
Participants stated that this exemptive relief applied only to
Industry Test Data related to the CAT order and transaction system,
not to CAIS. See supra section II.C, supra notes 127-128 and
associated text.
---------------------------------------------------------------------------
C. Efficiency
The Commission analyzed three types of efficiency impacts from the
Proposal: operational efficiency in terms of cost savings of operating
the Central Repository; \188\ regulatory efficiency in terms of the
impact of changes in CAT Data on regulatory activities; and market
efficiency in the form of second order impacts on the market.
---------------------------------------------------------------------------
\188\ Economically, operational efficiency refers to the
effective use of resources to generate a given output. In the case
of CAT, the output refers to the CAT Data, which are generated for
regulatory purposes. Even though the outputs, CAT Data, under the
proposal are not the same as that in the absence of the proposal,
the analysis of operational efficiency is simplified by focusing on
the use of resources as measured by the cost savings, net of
implementation costs; the efficiency effects of changes in CAT Data
are discussed separately (as impacts on regulatory efficiency).
---------------------------------------------------------------------------
As discussed further below, cost savings in operating the Central
Repository represent an enhancement of the operational efficiency of
CAT. The changes to CAT Data from the Proposal will lessen some
regulatory efficiencies by delaying certain regulatory activities.
While these inefficiencies could be relatively more significant for
certain time-sensitive regulatory activities involving large amounts of
data, in general, these inefficiencies are likely to be limited.\189\
Effects on market efficiency, competition, and capital formation, which
stem from the aforementioned impacts of the Proposal on regulatory and
operational efficiencies, will likely be second-order and, hence, also
limited.
---------------------------------------------------------------------------
\189\ The Participants characterized the impact of the Proposal
as a whole, on regulatory functions, regulatory users or CAT Data,
as ``limited'' or ``minimal.'' See Notice, supra note 9, at 26983-
26986; see also Amendment, supra note 13, at 81121; Participant
Letter, supra note 32, at 1.
---------------------------------------------------------------------------
1. Operational Efficiency
The Proposal will result in operational cost savings, net of
implementation costs, of operating the Central Repository, which will
reduce the CAT Fees borne by Participants, Industry Members, and
investors (through pass-throughs). The Participants' estimates of cost
savings could be imprecise, however. The actual cost savings could
differ from the projected cost savings for several reasons including:
(1) assumptions used to generate estimates, (2) uncertainty in the
future direction of a number of factors, (3) implementation costs,
which are not included in the estimates, (4) some of the cost savings
representing costs transferred to regulators, and (5) potential
interactions of the Proposal with a recent regulatory change. These
issues could mean that the Participants' estimates are somewhat over-
estimated or, alternatively, potentially considerably underestimated,
depending upon the assumptions and methodologies used.
a. Estimated Cost Savings, Methodologies and Assumptions
The Proposal will result in meaningful cost savings even when
considering some of the alternate methodologies and assumptions
discussed below. The Participants estimate that the cost savings will
be $21 million in the first year, which is 11 percent of the total
operating costs of CAT in 2023.\190\ The Participants state
[[Page 103046]]
that they believe their assumptions and estimates are reasonable.\191\
The Commission acknowledges the necessity of using simplifying
assumptions to generate estimates and that such assumptions can affect
the precision of the estimates. The Commission has considered the
methodologies and assumptions and concludes that there are at least
three issues that could affect the magnitude of the cost estimates--two
relating to the volume of CAT Data affected and one relating to a
processing cost assumption. However, the cost savings will be
meaningful regardless of these issues.
---------------------------------------------------------------------------
\190\ For 2023 total operating costs, see Consolidated Audit
Trail, LLC, 2023 Financial and Operating Budget (Revised as of Nov.
7, 2023) available at <a href="https://www.catnmsplan.com/sites/default/files/2023-11/11.07.23-CAT-2023-Financial-and-Operating-Budget.pdf">https://www.catnmsplan.com/sites/default/files/2023-11/11.07.23-CAT-2023-Financial-and-Operating-Budget.pdf</a>;
see also Consolidated Audit Trail, LLC, 2023 Financial and Operating
Budget, <a href="https://www.catnmsplan.com/sites/default/files/2024-01/01.17.24-CAT-Q4-2023-Budget-vs-Actual.pdf">https://www.catnmsplan.com/sites/default/files/2024-01/01.17.24-CAT-Q4-2023-Budget-vs-Actual.pdf</a> (last visited Oct. 23,
2024).
\191\ See Participant Letter, supra note 32, at 3.
---------------------------------------------------------------------------
The Participants' cost estimates \192\ are generated using current
costs. Specifically, the Participants state that, among other things,
cost savings estimates are based on ``observed data rates and volumes;
current discounts, reservations and cost savings plans; and associated
cloud fees.'' \193\ The Commission agrees that using current costs to
generate cost savings estimates is reasonable and recognizes that the
cost savings in the future could change depending on factors discussed
in the next section.\194\
---------------------------------------------------------------------------
\192\ See supra sections II.A, II.B, and II.C for additional
discussions of these estimates.
\193\ See Notice, supra note 9, at 26983, note 8. See also,
Participant Letter, supra note 32, at 2; Amendment, supra note 13,
at 81122.
\194\ In addition, the cost savings estimates for the provision
on Raw Unprocessed, Interim Operational Data and/or submission and
feedback files do not include any Options Market Maker quotes on
Listed Options data. This helps to ensure that this provision does
not also count cost savings that would be attributed to the
provision that would set forth the new processing, query, and
storage requirements for Options Market Maker quotes in Listed
Options (i.e., Participants do not double count cost savings).
---------------------------------------------------------------------------
The Participants' storage cost saving estimates are annual cost
savings for the first year. However, the CAT NMS Plan requires the
storage of six years of data, so the maximum annual cost savings would
not be achieved in the first year.\195\ Indeed, the Proposal will
result in additional potential annual cost savings each year until the
Proposal affects the annual storage of six years of data. Based on the
current assumptions, the cost savings could eventually reach $48
million per year for the provision on Options Market Maker quotes in
Listed Options.\196\ Likewise, the storage cost savings from the
provision on Raw Unprocessed, Interim Operational Data and/or
submission and feedback files could reach $6 million per year to
account for a baseline of storing six years of data in an S3 storage
tier.\197\ These additional annual cost savings would not be expected
in full until six years after the implementation of the Proposal.
---------------------------------------------------------------------------
\195\ None of the Notice, Participant Letter, or Amendment
states directly whether the costs are estimated for one year or six
years of data. While the Participants state that they assume current
CAT requirements, they also state that the estimates for the Options
Market Maker quotes in Listed Options provision are ``in the first
year.'' See Notice, supra note 9, at 26983-26985; see also
Participant Letter, supra note 32, at 1-2 and 8.
\196\ These estimates assume that the Participants' cost savings
estimates are for one year of data, such that cost savings
eventually reflect five additional years of data. The $48 million
estimate is six times the $8 million estimate for the first year.
This assumes constant message traffic and the Participants' 1:1:8
cost ratio across the S3 storage tiers. See supra note 56 and
associated text; see also Notice, supra note 9, at 26983, note 8.
\197\ The $6 million estimate is six times the $1 million annual
estimate. This assumes constant message traffic and the
Participants' 1:1:8 cost ratio across the S3 storage tiers. See
supra note 132 and associated text; see also Notice, supra note 9,
at 26983, note 8.
---------------------------------------------------------------------------
The Participants' estimates may also not account for the one-time
cost savings for affected historical data. The primary historical CAT
Data affected by the Proposal are the Raw Unprocessed, Interim
Operational Data and/or submission and feedback files.\198\ All Raw
Unprocessed, Interim Operational Data and/or submission and feedback
files older than 15 days will be moved to a cheaper storage tier,
including historical data. However, the Participants describe the cost
savings estimates as ``annual,'' \199\ suggesting that they do not
account for historical data. We estimate that including historical data
could add up to $4 million in one-time cost savings.\200\
---------------------------------------------------------------------------
\198\ While the CAIS test data provision will also affect
historical data, those data are much smaller and have a much shorter
history.
\199\ See e.g., Notice, supra note 9, at 26986.
\200\ If we assume the same annual storage footprint and add
four additional years of data, we get an additional cost savings of
$4 million. However, the CAT NMS Plan was not fully implemented for
the entire four years, and therefore the storage footprint of later
years is larger than earlier years. A smaller storage footprint for
this cost savings would result in a smaller cost savings estimate.
---------------------------------------------------------------------------
The Participants, however, likely over-estimated the $12 million
estimate in annual processing cost savings from the provision on
Options Market Maker quotes in Listed Options. To generate this
estimate, the Participants apparently assumed that the per message
linkage costs of options events were the same as those for equities
events,\201\ but this is unlikely.\202\ As the CAT Funding Model
Approval Order discusses, the linkage processing of equities orders is
generally more complex than the linkage processing of options
orders.\203\ Further, Options Market Maker quotes in Listed Options
have mostly simple lifecycles.\204\ However, the volume of the Options
Market Maker quotes in Listed Options data suggests that they will
still account for a large proportion of overall linkage processing
costs.\205\ Therefore, while the cost savings could be less than $12
million, they will likely still be large.
---------------------------------------------------------------------------
\201\ The $12 million estimate allocates $27,000/day to linkages
involving Options Market Maker quotes in Listed Options. When
comparing this figure to others from the Participants, it seems to
be in line with the relative volume of Options Market Maker quotes
in Listed Options in CAT Data, indicating that this figure comes
from an implied assumption of similar per message linkage costs. See
Amendment, supra note 13, at 81123; see also Notice, supra note 9,
at 26983-26984 and 26988.
\202\ The Commission understood that complexity of the order
lifecycles is a cost driver within the linkage processing. See CAT
Funding Model Approval Order, supra note 162, at 62677.
\203\ See CAT Funding Model Approval Order, supra note 162, at
62678. The ``Linker'' costs involve looking across four days of data
to link order messages across a lifecycle. See id, at 62677. Certain
order handling practices of Industry Members, such as the use of
riskless principal transactions, involve relatively more complex
linkages. See id.
\204\ This is consistent with the analysis presented above
regarding complexities of lifecycles in the Options Market Maker
quotes in Listed Options. See supra section III.B; see also supra
note 177 and the associated text.
\205\ As the Participants stated, ``there is not a linear
relationship between volume and costs; rather, a combination of
volume and processing complexity drive costs.'' See Notice, supra
note 9, at 26984, note 14.
---------------------------------------------------------------------------
The Participants did not estimate any cost savings from the
provision on CAIS test data but reiterated the $1 million cost savings
from the prior related exemptive relief.\206\ We expect these test data
to have a small storage footprint. While the cost savings will be
positive, they are unlikely to increase the approximate magnitude of
the cost savings from the prior exemptive relief.
---------------------------------------------------------------------------
\206\ See Notice, supra note 9, at 26989.
---------------------------------------------------------------------------
b. Future Magnitude of Cost Savings
The Participants recognize that the actual future cost savings
could differ from the estimates because of uncertainty in several
factors.\207\ These factors include the number of exchanges, Plan
requirements, data rates and volumes, discounts, reservations and cost
savings plans, and cloud fees.\208\ The Participants also state that
future cost savings could be greater than
[[Page 103047]]
the estimates as data volumes grow over time.\209\ The Participants
produce cost savings estimates that apply only to the first year of
implementation.\210\ However, the cost savings estimated for the first
year may not continue at the same level for at least two reasons: (1)
changes in the costs of cloud computing, and (2) changes in the
frequency of regulatory requests to have data restored.
---------------------------------------------------------------------------
\207\ See Notice, supra note 9, at 26983, note 8; see also
Participant Letter, supra note 32, at 2-3.
\208\ See Notice, supra note 9, at 26983, note 8; see also
Participant Letter, supra note 32, at 2.
\209\ See Participant Letter, supra note 32, at 2.
\210\ The Participants state that all costs and savings
projections are estimates only and reflect the current state and
costs of CAT operations. See the Proposal, supra note 4, at 2; see
also Participant Letter, supra note 32, at 2-3.
---------------------------------------------------------------------------
Cost savings (and CAT operational costs) could decline as cloud
computing evolves. The storage and computing services industries,
technologically, are among the most rapidly evolving industries. In
some estimates, the costs of host computer and storage services have
steadily declined.\211\ Similar trends can be observed in the pricing
of some of the cloud storage products.\212\ The Participants' estimated
cost savings of $21 million are based on the current cloud computing
and storage costs.\213\ Therefore, declines in cloud computing costs
could result in smaller than expected future cost savings.
---------------------------------------------------------------------------
\211\ See, for example, the Federal Reserve Bank of St. Louis
publication of monthly aggregate cost data on host computers and
servers, at <a href="https://fred.stlouisfed.org/series/WPU11510116">https://fred.stlouisfed.org/series/WPU11510116</a> (last
visited Dec 5, 2024); the cost estimate for Machinery and Equipment:
Host Computers, Multiusers (Mainframes, Unix and PC Servers) in
August 2024 is 26 percent of that in December 2004. In contrast, the
same publication estimated that the cost for all commodities for
August 2024 is 170 percent of that in December 2004. From December
2004 until March 2021, the price of host computers and servers was
on a downward trend. Then, from March 2021 to July 2022, these
prices rose. Prices have since stayed close to or below June 22
level. Note that different indices use different methodologies and
industry/product classifications and these estimates can be
different from estimates by other agencies.
\212\ On November 1, 2008, for example, AWS Storage (standard)
was priced at $0.12 per GB per month. In August of 2024, S3
(standard) was priced as ``Over 500 TB/Month $0.021 per GB'' (a
decline of 83 percent). New service tiers were also introduced, for
example, in August of 2024, S3 Infrequent Access (long lived but
infrequently accessed data that needs millisecond access) was priced
as ``All Storage/Month $0.0125 per GB'' (90 percent decline compared
to the 2008 product), S3 Archive Instant Access as ``All Storage/
Month $0.004 per GB,'' and S3 Glacier Deep Archive (long-term
archiving, accessed once or twice in a year and can be restored
within 12 hours) was priced as ``All Storage/Month $0.00099 per GB''
(99 percent decline compared to the 2008 product). See AWS, New
Tiered Pricing for Amazon S3 Storage, (Oct. 9, 2009) available at
<a href="https://aws.amazon.com/about-aws/whats-new/2008/10/09/new-tiered-pricing-for-amazon-s3-storage/">https://aws.amazon.com/about-aws/whats-new/2008/10/09/new-tiered-pricing-for-amazon-s3-storage/</a>; see also AWS, Amazon S3 Pricing,
available at <a href="https://aws.amazon.com/s3/pricing/">https://aws.amazon.com/s3/pricing/</a> (last visited Dec.
5, 2024).
\213\ $20 million of these savings are based on a 65 percent
reduction in computer runtime for Options Exchange events, and an 80
percent reduction in storage footprint. See Participant Letter,
supra note 32, at 3.
---------------------------------------------------------------------------
On the other hand, if message traffic keeps increasing, then,
despite the rapid technological advancements, the future cost savings
could be higher than those estimated for the first year.\214\ Indeed,
one new options exchange has started operations since the publication
of the Notice, likely resulting in a higher volume of Options Market
Maker quotes in Listed Options.\215\ In addition, one new equities
exchange has been approved since the costs were estimated, potentially
increasing the storage footprint of Raw Unprocessed Data, Interim
Operational Data, and/or submission and feedback files.\216\
---------------------------------------------------------------------------
\214\ This is also acknowledged by the Participants, who state
that, ``If data volumes continue to increase as they have
historically, the associated costs avoided would similarly
increase.'' See Amendment, supra note 13, at 81123.
\215\ This exchange is MIAX Sapphire, LLC. See supra note 4.
\216\ This exchange is 24X National Exchange LLC. See Securities
Exchange Act Release No. 34-101777 (Nov. 27, 2024), 89 FR 97092
(Dec. 6, 2024).
---------------------------------------------------------------------------
Cost savings from the provision on Raw Unprocessed, Interim
Operational Data and/or submission and feedback files will be reduced
by any data requests by regulators to restore such data.\217\
Participants state that retrieving data from Glacier Deep Archive
storage is costly and the costs are a function of the size of the data
being pulled in addition to the speed with which the request must be
fulfilled.\218\ This $1 million savings is also based, in part, on an
expectation of usage of Raw Unprocessed, Interim Operational Data and/
or submission and feedback files older than 15 days that matches the
previous four years.\219\ According to the Participants, these data
were not used during the development of the CAT NMS Plan over the last
four years.\220\
---------------------------------------------------------------------------
\217\ See Notice, supra note 9, at 26986, where the Participants
state, ``Upon request by the SEC or one of the Participants to the
CAT Help Desk, archived data would be restored by the Plan Processor
to an accessible storage tier, at which point it would be available
and searchable electronically by regulatory users in the same manner
it is today.''
\218\ See Notice, supra note 9, at 26986.
\219\ See Notice, supra note 9, at 26986.
\220\ See infra note 253 253and associated text.
---------------------------------------------------------------------------
c. Implementation Costs
The Amendment states that ``the one-time implementation costs are
expected to be minimal relative to overall cost savings.'' \221\ While
the Participants do not estimate implementation costs, the Commission
can compare anticipated implementation activity to that of recent
Commission final rules that include estimates for such activity.
According to the Participants, ``[o]ne-time implementation costs will
generally consist of Plan Processor labor costs associated with coding
and software development, as well as any related cloud feed associated
with the development, testing and load testing of the proposed
changes.'' \222\ The Participants state that, ``[o]ngoing operational
costs, other than cloud hosting costs,'' will not be affected by the
proposed amendments.\223\ The Commission agrees that the implementation
costs seem minimal relative to overall cost savings.
---------------------------------------------------------------------------
\221\ See Amendment, supra note 13, at 81123.
\222\ Id.
\223\ See Amendment, supra note 13, at 81123.
---------------------------------------------------------------------------
The Proposal will result in costs to the Plan Processor with
respect to developing policies and procedures, revising and testing
coding changes, and revising user manuals and training materials.
Policies and procedures will dictate how the Plan Processor responds to
requests to restore the operational data and ensure confidentiality in
the request.\224\ Implementing the Proposal will also require changes
to programming code to change the processing of affected CAT Data.
Finally, user manuals and training will have to be revised to ensure
they reflect the CAT Data and access for regulators after the Proposal.
---------------------------------------------------------------------------
\224\ See Notice, supra note 9, at 26986.
Table 2--Implementation Costs for Comparable Compliance Actions
------------------------------------------------------------------------
Implementation activity Lowest estimate Highest estimate
------------------------------------------------------------------------
Developing Policies and Procedures $49,000 $53,000
\a\..............................
Revising and Testing Code \b\..... 20,000 114,000
------------------------------------------------------------------------
\a\ See infra note 225.
\b\ See infra note 226.
[[Page 103048]]
Table 2 shows ranges of implementation costs for implementation
activities in recent Commission final rules. The Commission expects the
Proposal to fall near the lower end of these ranges, and possibly below
them. The estimates for developing policies and procedures in Table 2
apply to policies and procedures that codify business practices,\225\
which would be a bigger effort than the policies and procedures for
fulfilling requests to restore data. Second, the Commission expects the
coding changes necessary to implement the Proposal to involve fewer
labor hours than the comparison rules for revising code in Table
2.\226\ Finally, while the recent Commission final rules surveyed did
not separately itemize the costs of revising user manuals and training
(and thus are not included in Table 2), the Commission expects that the
costs will be lower than the costs of developing policies and
procedures.
---------------------------------------------------------------------------
\225\ See e.g., Standards for Covered Clearing Agencies for U.S.
Treasury Securities and Application of the Broker-Dealer Customer
Protection Rule with Respect to U.S. Treasury Securities, Release
No. 34-99149 (Dec. 13, 2023), 89 FR 2714 (Jan. 16, 2024) (``Treasury
Clearing Adopting Release'') at note 981 for the high estimate,
rounded down from $53,425; Covered Clearing Agency Resilience and
Recovery and Orderly Wind-Down Plans, Release No. Securities
Exchange Act Release No. 34-101446 (Oct. 25, 2024), 89 FR 91000
(Nov. 18, 2024) (``Covered Clearing Adopting Release'') at 183 for
the low estimate.
\226\ Estimates for coding changes from recent Commission final
rules vary based on programming staff labor from 50 hours for code
revisions to calculate metrics to 300 hours for code revisions to
accept new information in the CAT Central Repository. See Short
Position and Short Activity Reporting by Institutional Investment
Managers, Release No. 34-98738 (Oct. 13, 2023), 88 FR 75100 (Nov. 1,
2023) (the ``Short Position Reporting Adopting Release'') at 75144,
note 475 for the high estimate. Among other changes, this release
amended section 6.4(d)(ii) of the CAT NMS Plan (the ``Bona Fide
Market Maker Amendment'') requiring the 25 Plan Participants to
update their compliance rules by July 2. See Short Position
Reporting Adopting Release, section VI for a discussion of the Bona
Fide Market Maker Amendment. Implementing the Bona Fide Market Maker
Amendment will involve approximately 300 labor hours spread across
programming, database administration, business and legal personnel.
The Commission anticipates that coding changes to implement the
Proposal involve a similar mix of labor as in the Bona Fide Market
Maker Amendment but will need fewer hours. For the low estimate,
rounded down from $20,075, see Disclosure of Order Execution
Information, Release No. 34-99679 (March 6, 2024), 89 FR 26428
(April 15, 2024) (``Order Disclosure Adopting Release''), at 26499
note 951. These costs reflect approximately 50 labor hours spread
across programming and compliance personnel. While the amendments in
the Commission's recent Order Disclosure Adopting Release involve
entities other than the Central Repository, the types of coding
revisions may involve a similar effort. These numbers are rounded to
the nearest thousand to reflect imprecision.
---------------------------------------------------------------------------
The Commission understands, from Staff discussions with the
Participants, that moving data to Glacier Deep Archive is a service
provided by the cloud provider and, thus, costs are unaffected by the
Proposal. In addition, the proposed amendments will not involve any
costs of building security for the Glacier Deep Archive because the
Plan Processor has already built such security measures.
As for ongoing implementation costs, the Proposal could result in
ongoing costs related to an increase in help desk demands to assist
regulatory staff requesting assistances in linking Options Market Maker
quotes in Listed Options lifecycles, and restoration of Raw
Unprocessed, Interim Operational Data and/or submission and feedback
files older than 15 days.
d. Cost Transfers to Regulators
Regulators may undertake activities to mitigate the impact of the
proposed amendments on regulatory activities and, as a result, incur
costs. For regulatory activity that necessitates lifecycle information
for Options Market Maker quotes in Listed Options, regulators could
reduce the impact of the Proposal by revising lifecycle-producing code
from the Plan Processor to apply it to their systems, maintaining such
code over time, and processing data with that code.\227\ The cost of
applying and maintaining the code as well as processing data with the
code is a cost transfer from the Company to regulators. The magnitude
of this cost depends on the complexity of revising the code for
regulators' systems, the frequency of updates required to maintain the
code, and the chosen amount and frequency of data processed. In
addition, regulators could incur staffing costs to mitigate the loss of
data in DIVER and MIRS query tools \228\ and to request restorations of
Raw Unprocessed, Interim Operational Data and/or submission and
feedback files older than 15 days. The costs incurred by regulators
would reduce the cost savings of the proposed amendments. However, cost
savings would still be meaningful after taking these transfers into
consideration.
---------------------------------------------------------------------------
\227\ See infra section III.C.2.a.(i).
\228\ See infra section III.C.2.a.(ii) for a discussion of the
impact of the provision that Options Market Maker quotes in Listed
Options will no longer be available in DIVER.
---------------------------------------------------------------------------
e. Interaction With Tick Size Adopting Release
One commenter stated that the rules and amendments proposed in the
Tick Size Proposing Release \229\ (the ``Proposed Tick Size Rules'')
had ``the potential to significantly expand the amount of quoting
activity in the . . . listed options markets,'' \230\ implying that the
costs of linking Options Market Maker quotes in Listed Options would
increase following the implementation of the Proposed Tick Size Rules.
The commenter did not provide an explanation as to why they expected
the Proposed Tick Size Rules would increase Options Market Maker quotes
in Listed Options, and while the Commission has considered this
potential interaction, it finds the connection is unclear. Regardless,
the cost savings in the Proposal will still be meaningful as to all
Options Market Maker quotes in Listed Options.
---------------------------------------------------------------------------
\229\ See Regulation NMS: Minimum Pricing Increments, Access
Fees, and Transparency of Better Priced Orders, Release No. 34-96494
(Dec. 14, 2022), 87 FR 80266 (Dec. 29, 2022) (``Tick Size Proposing
Release'').
\230\ See SIFMA Letter I, supra note 68, at 2, stating that
``the [quote-to-trade ratio] is nearly 4 times greater than the
ratio. described in the SEC's approval order,'' and citing to the
tick size proposal in stating that ``certain SEC market structure
initiatives might only accelerate the increase.''
---------------------------------------------------------------------------
2. Regulatory efficiency
Regulatory efficiency refers to the efficiency of regulatory
activities conducted by SROs and/or the Commission necessary to protect
investors, maintain fair, orderly, and efficient markets, and
facilitate capital formation.\231\ In analyzing how the Proposal will
impact regulatory efficiency, the Commission assessed how the Proposal
will impact regulatory activities.
---------------------------------------------------------------------------
\231\ See CAT NMS Plan Approval Order, supra note 3, at 84833-
84840 for a discussion of the benefits from the types of regulatory
activities that the CAT NMS Plan was intended to improve.
---------------------------------------------------------------------------
The Commission identified regulatory inefficiencies resulting from
the Proposal. Most of these regulatory inefficiencies are
transitional.\232\ The other regulatory inefficiencies will be
permanent in nature and will occur each time certain regulatory use
cases arise.\233\ The Commission concludes that the regulatory
inefficiencies will have a limited overall impact.
---------------------------------------------------------------------------
\232\ See infra section III.C.2.a.(ii).
\233\ For example, each time a regulator has to create
lifecycles for a set of Options Market Maker quotes. See infra
section III.C.2.a.(i).
---------------------------------------------------------------------------
a. Options Market Maker Quotes in Listed Options
The Participants state that the provision of the proposed
amendments involving Options Market Maker quotes in Listed Options will
have a ``limited impact on the regulatory function of the CAT.'' The
Commission expects that this provision will delay potential regulatory
activities involving lifecycle linkages for Options Market Maker quotes
in Listed Options and reduce the
[[Page 103049]]
accessibility of Options Market Maker quotes in Listed Options.\234\
The Commission expects the mitigation mechanisms--e.g., the provision
of code from the Plan Processor and the use of the quoteID field--to
partially alleviate the delays created by the Proposal.\235\ The
removal of Options Market Maker quotes from DIVER will result in
certain regulatory inefficiencies; most of these inefficiencies,
however, will dissipate in the long run.\236\
---------------------------------------------------------------------------
\234\ The lifecycle linkages and derived fields will not be
available as they will not be produced and while the unprocessed
Options Market Maker quotes in Listed Options will remain in the CAT
Data they will no longer be available in DIVER.
\235\ The field quoteID is the internal ID assigned to the
order/quote by the exchange.
\236\ See infra notes 252251-253252, and associated text.
---------------------------------------------------------------------------
(i) Cessation of Processing of Options Market Maker Quotes by the Plan
Processor
The loss of the linkage processing and derived fields specified in
the Proposal could adversely affect investigations, examinations, or
market analyses that rely on the lifecycle information in Options
Market Maker data in CAT.\237\ When the Plan Processor ceases lifecycle
processing on Options Market Maker quotes in Listed Options, CAT Data
will no longer include a CAT-Lifecycle-ID. The absence of CAT-
Lifecycle-IDs for Options Market Maker quotes will delay any regulatory
activities involving order linkages for Options Marker Maker quotes in
Listed Options.\238\ Lack of lifecycle linkages would also preclude
derived fields such as Derived Next Event Timestamp (and Type Code)
from being used by regulators to make regulatory activities, such as
order book reconstructions, easier and faster.
---------------------------------------------------------------------------
\237\ See, e.g., CAT NMS Plan Approval Order, supra note 3, at
84826-84827, 84831-84832, 84834 and 84839 for a discussion of the
benefits of linking order data.
\238\ See CAT NMS Plan Approval Order, supra note 3, at 84834-
84840 for examples of regulatory activities improved by having ready
access to linkage information. Types of regulatory activities
include analysis and reconstruction of market events, market
analysis and research, and surveillance and investigations (SRO
surveillance, SRO and Commission examinations, and SRO and
Commission enforcement investigations). Regulatory activities
involving Options Market Maker quotes in Listed Options can fall
into any of these activities.
---------------------------------------------------------------------------
To mitigate the impact of this provision, regulators will have the
option of requesting from the Plan Processor the code underlying the
current linkage processing for Options Market Maker quotes in Listed
Options for the purpose of creating the lifecycles and derived fields
themselves.\239\ While such code could be helpful, it may also need to
be modified by regulators to run on their own systems. Further, the
Plan Processor will not update this code over time, and thus,
regulators will need to maintain it themselves.\240\ Also, the
processing and maintenance of lifecycle linkages of Options Market
Maker quotes in Listed Options will shift from a single entity (the
Plan Processor) to multiple regulators. Such decentralization could
result in duplicative efforts across regulators.
---------------------------------------------------------------------------
\239\ See supra note 82 and associated text. See also Notice,
supra note 9, at 26984; Participant Letter, supra note 32, at 5-6.
\240\ See supra note 41. The Plan Processor technicians
presumably have more expertise on particular changes to CAT Data
affecting their linkage code than data users at SROs or the
Commission.
---------------------------------------------------------------------------
The Commission recognizes that potential delays depend on how
complex the linkage processes are. A simpler linkage process will
reduce the inefficiencies associated with decentralization and stale
code. The Participants stated that ``the vast majority of options
market maker quote lifecycles consist of just two events,'' \241\ and
that ``[e]xecutions that result from Options Market Maker quotes will
identify the quoteId of the quote that resulted in an execution,''
\242\ which suggests that these quotes have simple lifecycle
processing.
---------------------------------------------------------------------------
\241\ See Notice, supra note 9, at 26984.
\242\ Id. In addition, the Participants stated that ``[l]inkage
validation is not necessary for Options Market Maker [q]uotes
because quoteID is an effective replacement for tying quotes to
trades.'' See Participant Letter, supra note 32, at 4.
---------------------------------------------------------------------------
While the majority of lifecycles of Options Market Maker quotes in
Listed Options, with or without trades, may contain only two events, a
substantial number of lifecycles could be more complex.\243\ The
Proposal further states that a large portion of lifecycles of Options
Market Maker quotes in Listed Options do not involve any execution or
allocation.\244\ However, regulatory activities that analyze lifecycles
or reconstruct order books are not restricted to lifecycles that
contain trades.
---------------------------------------------------------------------------
\243\ See section III.B, supra note 182 and associated text.
\244\ See Participant Letter, supra note 32, at 2.
---------------------------------------------------------------------------
Similarly, while having a quoteID on all options events in the
lifecycle of an Options Market Maker quote in Listed Options can
simplify the process of linking events,\245\ quote ID does not fully
substitute for CAT-Lifecycle-ID in all instances. An analysis of the
effectiveness of quoteID in linking trades to quotes, and linking
lifecycles more generally, found that quoteID is approximately 95
percent as effective as CAT-Lifecycle-ID is.\246\
---------------------------------------------------------------------------
\245\ See Participant Letter, supra note 32, at 4; see also
Notice, supra note 9, at 26984.
\246\ For the purpose of this Order, using a day's trading (the
day of March 7, 2024), 2,706,647 options trade events linked to
Options Market Maker quotes were analyzed. The analysis focused on
whether the lifecycles (using CAT Lifecycle IDs) contained
information sufficient for regulators to create the lifecycles
themselves, absent the CAT Lifecycle ID. The analysis studied the
linkages using a combination of Exchange ID, OSI Symbol ID, quoteID,
Side, and Event Date and found that 142,578 (approximately 5
percent) trades did not contain information sufficient to link to
the quote (if not using the CAT-Lifecycle-ID). For any remaining
unlinked trades, other elements of the linkage processing currently
used by the Plan Processor might offer additional means or methods
for linking trades to quotes once the Proposal is implemented. Also,
regulators may be able to obtain the information necessary to link
trades to quotes by making information requests to the relevant
Market Makers and/or exchanges. However, this would involve
significant delays.
---------------------------------------------------------------------------
Resulting delays from the implementation of the Proposal will vary
across the impacted regulatory activities. Certain analyses using high
volumes of data (e.g., the January 2021 volatility \247\) are more
likely to face a large number of disparate complexities in linkage
processing, which could take more time to address. Also, in these
cases, the aforementioned challenges in using quoteID and Plan
Processor code could be significant if such regulatory activities are
time-sensitive. The implementation of the Proposal likely will have a
limited impact for regulatory activities that focus on small
samples,\248\ where the Plan Processor's code and quoteID may be
sufficient to avoid meaningful delays associated with linkage
complexities.
---------------------------------------------------------------------------
\247\ See Staff Report on Equity and Options Market Structure
Conditions in Early 2021, (Oct. 14, 2021) available at <a href="https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf">https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf</a>.
\248\ A small sample, for example, could involve trades on a
particular day, in a specific option contract by a specific market
maker.
---------------------------------------------------------------------------
(ii) Loss of Options Market Maker Quotes in Listed Options in Tools
Such as DIVER and MIRS
The provision of the proposed amendments involving the Options
Market Maker quotes in Listed Options will also eliminate Options
Market Maker quotes in Listed Options from DIVER. The Participants
state that, ``[t]he regulatory groups of each of the Participants have
indicated that they are able to conduct their regulatory programs
accessing Options Market Maker Quotations via BDSQL and/or Direct Read,
and each group supports the proposed modification.'' \249\
---------------------------------------------------------------------------
\249\ See Participant Letter, supra note 32, at 5.
---------------------------------------------------------------------------
The loss of Options Market Maker quotes in Listed Options from
DIVER may delay regulatory activities, at least
[[Page 103050]]
in the short-term. While use of DIVER does not require programming
skills in remote data processing and/or knowledge of structured query
programming language,\250\ regulatory users seeking to access Options
Market Maker quotes in Listed Options will now have to do so through
BDSQL and Direct Read, which do require such specialized skills and are
therefore less user-friendly.\251\ This may create some inefficiencies
in the short term for regulatory activities involving Option Market
Maker quotes.\252\ Over a longer term, however, some regulatory users
may become more familiar with BDSQL and Direct Read. Further,
regulators could also adjust by creating internal tools for to
replicate the same targeted queries they would otherwise run on DIVER.
Once the code has been written out, BDSQL would likely be less time-
consuming compared to DIVER, which can offset the delays. However, this
could result in another inefficiency should multiple SROs and the
Commission create code to replicate the commonly-used functionality
formerly centralized within DIVER.
---------------------------------------------------------------------------
\250\ See supra note 174, and associated text.
\251\ The Commission previously discussed the economic impact of
how user-friendly CAT access tools would be. In discussing how the
CAT NMS Plan would improve the accessibility of regulatory data by
providing regulators with direct access to the consolidated CAT
Data, the Commission stated that improving accessibility of
regulatory data over the regulatory baseline requires ensuring that
enough SRO and Commission staff members are able to use the [access]
system supplied by the Central Repository when they need it. The
Commission also discussed its belief that the ability to use the
direct access system depends, among other things, on how user-
friendly the system is. See Securities Exchange Act Release No. 34-
77724 (April 27, 2016), 81 FR 30614 (May 17, 2016) at 30689.
\252\ Some regulatory users might have to rely on regulatory
users with programing skills to assist them in affected regulatory
activities. This could increase the workload of regulatory users
with programming skills and slow down other regulatory activities
involving CAT. In addition, regulators would spend more time writing
code to pull data from BDSQL than they expend to select from among
the pre-defined criteria in DIVER.
---------------------------------------------------------------------------
b. Raw Unprocessed, Interim Operational Data and/or Submission and
Feedback Files
Based on the potential future use of Raw Unprocessed, Interim
Operational Data and/or submission and feedback files older than 15
days, as well as the Participants' statements on past use, the
Commission expects the Proposal not to have a consequential negative
impact on regulatory efficiency. Some future regulatory activities of
SROs could depend on the use of the Raw Unprocessed, Interim
Operational Data and/or submission and feedback files older than 15
days, and therefore may be affected by a delay in access to data. It
could, for example, be used by SROs to investigate patterns of errors
in CAT Data submissions by their members.\253\ However, such regulatory
activities are unlikely to be time-sensitive.
---------------------------------------------------------------------------
\253\ See supra note 120 and associated text. The Proposal could
delay Designated Examining Authorities (``DEAs'') examinations of
CAT reporting errors by their members if these examinations require
restoring data.
---------------------------------------------------------------------------
3. Market Efficiency
Market efficiency could be slightly negatively impacted by the
Proposal with the impact coming from reductions in regulatory
efficiency.\254\ Since the impact of the Proposal on regulatory
efficiency is limited, the impact on market efficiency will be minimal.
There could also be minor improvements in market efficiency due to a
reduction in CAT fees.\255\
---------------------------------------------------------------------------
\254\ See supra sections III.C.2.a. and III.C.2.b. for the
impact of the Amendment on regulatory efficiency. The impact on CAT
data in terms of reduced accessibility and timeliness could lead to
a modest reduction in the deterrence effects of CAT. See CAT NMS
Plan Approval Order, supra note 3, at 84836, note 2266. The reduced
timeliness could also allow violative behaviors to persist for
slightly longer.
\255\ The CAT Funding Approval Order concludes that the expected
magnitude of CAT Fees ``are expected to be relatively small'' based
on a comparison of illustrative fees to other per share transaction
costs. See CAT Funding Model Approval Order, supra note 162, at
62682. Therefore, a reduction in CAT fees would also be small when
distributed on a per share basis.
---------------------------------------------------------------------------
D. Competition
The Participants believe that the Proposal will have a positive
impact on competition.\256\ The Commission expects that the Proposal is
likely to result in slightly reduced CAT fees, which could dampen
existing competitive advantages for some market participants relative
to the baseline,\257\ but this is unlikely to have a meaningful effect
on competition.\258\ To the extent that the Proposal results in a
modest reduction in the deterrence effects of CAT and a potential
increase in persistence of violative behaviors,\259\ there could be a
resulting small adverse effect on competition in the market for trading
services.\260\ None of these effects on competition, however, is likely
to be meaningfully large.
---------------------------------------------------------------------------
\256\ See Notice, supra note 9, at 26989.
\257\ The CAT Funding Model establishes the framework under
which CAT costs will be allocated among Participants and Industry
Members, resulting in competitive advantages for some Participants
and Industry Members over others. Such competitive advantages are
dampened by a reduction in CAT costs as a result of the Proposal.
See CAT Funding Model Approval Order, supra note 162, at 62684-
62685.
\258\ See supra section III.C.3. for a discussion of why the
reduction in fees will likely be small.
\259\ See supra note 254254.
\260\ A reduction in the deterrence effects of CAT and a
potential increase in the persistence of violative behaviors could
impact the market for trading services. See supra note 254 for a
discussion of the effect of the Proposal on deterrence; see also CAT
NMS Plan Approval Order, supra note 3, at 84885.
---------------------------------------------------------------------------
E. Capital Formation
The Participants state that the Proposal will have a positive
impact on capital formation.\261\ While they do not explain the
mechanism, they state that the savings under the proposed amendments
will ``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.'' \262\ The Commission
does not expect that the cost savings will result in any meaningful
positive impact on capital formation.\263\ In addition, any adverse
impact on capital formation resulting from the regulatory
inefficiencies created by the proposed amendments will also be
small.\264\
---------------------------------------------------------------------------
\261\ See Notice, supra note 9, at 26989.
\262\ Id.
\263\ See supra note 255 255for why CAT fees, which are passed
on to market participants, are unlikely to be meaningfully lowered
on a per share basis under the Proposal.
\264\ Violative behavior could persist longer as a result of a
decrease in timeliness of regulatory actions. However, the effect on
regulatory actions is likely to be small. Therefore, the effect on
capital formation is likely to be small.
---------------------------------------------------------------------------
IV. Conclusion
For the reasons discussed, the Commission, pursuant to Section 11A
of the Exchange Act,\265\ and Rule 608(b)(2) \266\ thereunder, is
approving the proposed changes to the CAT NMS Plan, as those changes
are set forth in the Proposal. Section 11A of the Exchange Act
authorizes the Commission, by rule or order, to authorize or require
the self-regulatory organizations to act jointly with respect to
matters as to which they share authority under the Exchange Act in
planning, developing, operating, or regulating a facility of the
national market system.\267\ Rule 608 of Regulation NMS authorizes two
or more SROs, acting jointly, to file with the Commission proposed
amendments to an effective NMS plan,\268\ and further provides that the
Commission shall approve an amendment to an effective NMS plan if it
finds that the amendment is necessary or appropriate in the public
interest, for the protection of investors and the maintenance of fair
and orderly
[[Page 103051]]
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.\269\
---------------------------------------------------------------------------
\265\ 15 U.S.C. 78k-1.
\266\ 17 CFR 242.608(b)(2).
\267\ See 15 U.S.C. 78k-1(a)(3)(B).
\268\ See 17 CFR 242.608.
\269\ See 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------
For the reasons set forth above, the Commission finds that the
proposed changes to the CAT NMS Plan, as set forth in the Proposal,
meet the required standard.
It is therefore ordered, pursuant to Section 11A of the Exchange
Act,\270\ and Rule 608(b)(2) \271\ thereunder, that such changes be,
and hereby are, approved.
---------------------------------------------------------------------------
\270\ 15 U.S.C. 78k-1.
\271\ 17 CFR 242.608(b)(2).
By the Commission.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-29912 Filed 12-17-24; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on December 18, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.