Notice2025-11331
Joint Industry Plan; Order Approving an Amendment to the National Market System Plan Governing the Consolidated Audit Trail, as Modified by the Commission, Regarding the Reporting of Certain Verbal Activity, Floor and Upstairs Activity
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Published
June 20, 2025
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 90 Issue 117 (Friday, June 20, 2025)</title>
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[Federal Register Volume 90, Number 117 (Friday, June 20, 2025)]
[Notices]
[Pages 26337-26352]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-11331]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103275; File No. 4-698]
Joint Industry Plan; Order Approving an Amendment to the National
Market System Plan Governing the Consolidated Audit Trail, as Modified
by the Commission, Regarding the Reporting of Certain Verbal Activity,
Floor and Upstairs Activity
June 16, 2025.
I. Introduction
On August 2, 2024, Consolidated Audit Trail, LLC (``CAT LLC''), on
behalf of the following parties to the National Market System Plan
Governing the Consolidated Audit Trail (the ``CAT NMS Plan'' or
``Plan''): \1\ BOX Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX
Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc.,
Cboe C2 Exchange, Inc., Cboe Exchange, Inc., Financial Industry
Regulatory Authority, Inc., Investors Exchange LLC, Long-Term Stock
Exchange, Inc., MEMX, LLC, Miami International Securities Exchange LLC,
MIAX Emerald, LLC, MIAX PEARL, LLC, Nasdaq BX, Inc., Nasdaq GEMX, LLC,
Nasdaq ISE, LLC, Nasdaq MRX, LLC, Nasdaq PHLX LLC, The NASDAQ Stock
Market LLC, New York Stock Exchange LLC, NYSE American LLC, NYSE Arca,
Inc., NYSE Chicago, Inc., and NYSE National, Inc. (collectively, the
``Participants,'' ``self-regulatory organizations,'' or ``SROs'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
pursuant to Section 11A(a)(3) of the Securities Exchange Act of 1934
[[Page 26338]]
(``Exchange Act''),\2\ and Rule 608 of Regulation NMS,\3\ a proposed
amendment (``Proposed Amendment'') to the CAT NMS Plan to amend
existing requirements for the consolidated audit trail (``CAT'')
regarding the reporting of certain verbal activity, floor and upstairs
\4\ activity (the ``Verbal Quotes Amendment''). The Proposed Amendment
was published for comment in the Federal Register on August 20,
2024.\5\ On November 18, 2024, the Commission instituted proceedings to
determine whether to disapprove the Proposed Amendment or to approve
the Proposed Amendment with any changes or subject to any conditions
the Commission deems necessary or appropriate.\6\ On February 12, 2025,
the Commission designated a longer period within which to conclude
proceedings regarding the Proposed Amendment.\7\ On April 17, 2025, the
Commission extended the period within which to conclude proceedings
regarding the Proposed Amendment to June 16, 2025.\8\ This order
approves the Proposed Amendment, as modified herein, with such changes
the Commission deems necessary or appropriate, which are described in
detail below. For the reasons discussed below, the Commission finds
that the Proposed Amendment, as modified, 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
mechanism of a national market system, or is otherwise in furtherance
of the purposes of the Exchange Act. A copy of the Proposed Amendment,
marked to reflect the modifications the Commission has made, is
attached in Appendix A to this order.
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\1\ The CAT NMS Plan is a national market system plan approved
by the Commission pursuant to Section 11A of the Exchange Act and
the rules and regulations thereunder. See Securities Exchange Act
Release No. 79318 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016). The
latest version of the CAT NMS Plan is available at <a href="https://catnmsplan.com/about-cat/cat-nms-plan">https://catnmsplan.com/about-cat/cat-nms-plan</a>.
\2\ 15 U.S.C. 78k-1(a)(3) (stating that the Commission is
authorized to, among other things, ``by rule or order, to authorize
or require self-regulatory organizations to act jointly with respect
to matters as to which they share authority under this chapter in
planning, developing, operating, or regulating a national market
system (or a subsystem thereof) or one or more facilities
thereof'').
\3\ 17 CFR 242.608.
\4\ ``Upstairs'' is a term used to describe the off-exchange
market. For example, trading that occurs within a broker-dealer firm
or between two broker-dealers in the over-the-counter market would
be described as occurring ``upstairs.''
\5\ See Notice of Filing of Amendment to the National Market
System Plan Governing the Consolidated Audit Trail, Exchange Act
Release No. 100727 (Aug. 14, 2024), 89 FR 67499 (``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-e.htm">https://www.sec.gov/comments/4-698/4-698-e.htm</a>.
\6\ See Exchange Act Release No. 101648, 89 FR 92726 (Nov. 22,
2024).
\7\ See Exchange Act Release No. 102404, 90 FR 9941 (Feb. 19,
2025).
\8\ See Exchange Act Release No. 102882, 90 FR 16902 (Apr. 22,
2025).
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II. Background
Rule 613(j)(9) of Regulation NMS and Section 1.1 of the CAT NMS
Plan define the term ``reportable event'' as including, but not limited
to, the original receipt or origination, modification, cancellation,
routing, and execution (in whole or in part) of an order, and receipt
of a routed order.\9\ The term ``order'' is defined in Rule 613(j)(8)
of Regulation NMS and Section 1.1 of the CAT NMS Plan as including: (i)
any order received by a member of a national securities exchange or
national securities association from any person; (ii) any order
originated by a member of a national securities exchange or national
securities association; or (iii) any bid or offer.\10\ ``Bid or offer''
is defined in Rule 600(b)(16) of Regulation NMS as the bid price or the
offer price communicated by a member of a national securities exchange
or a member of a national securities association to any broker-dealer,
or to any customer, at which it is willing to buy or sell one or more
round lots of an NMS security, as principal or agent, but excluding
indications of interest.\11\ Rule 613 and the CAT NMS Plan both require
that the Industry Members and the Participants record and report
certain details for quotes \12\ and orders that meet the definition of
order and CAT reportable event.\13\
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\9\ 17 CFR 242.613(j)(9); CAT NMS Plan, Section 1.1.
\10\ 17 CFR 242.613(j)(8); CAT NMS Plan, Section 1.1 (stating
that ``Order'' or ``order'' has, ``with respect to Eligible
Securities, the meaning set forth in SEC Rule 613(j)(8).'').
\11\ 17 CFR 242.600(b)(16).
\12\ Quotation is defined in Rule 600(b)(86) of Regulation NMS
to mean a bid or an offer. 17 CFR 242.600(b)(86).
\13\ See CAT NMS Plan, supra note 1, at Section 6.3(d)
and.6.4(d). Many unstructured verbal or manual communications on
exchange floors and ``upstairs'' are reportable events under Rule
613 and the CAT NMS Plan because firm verbal quotes and orders,
whether they occur on an exchange floor or ``upstairs,'' are
reportable to CAT if they are a firm bid or offer. See Securities
Exchange Act Release No. 90405 (Nov. 12, 2020), 85 FR 73544, 73546-
547 (Nov. 18, 2020) (``November 2020 Exemptive Order'').
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On November 12, 2020, pursuant to Section 36(a)(1) of the Exchange
Act,\14\ and Rule 608(e) of the Exchange Act,\15\ the Commission
granted the Participants an exemption, until July 31, 2023, from the
requirement in Section 6.4(d) of the CAT NMS Plan that requires each
Participant, through its Compliance Rule, to require its Industry
Members to record and electronically report to the Central Repository:
(1) Floor broker verbal announcements of firm orders on an exchange
that are otherwise reported as systematized orders; (2) market maker
verbal announcements of firm quotes on an exchange trading floor; (3)
telephone discussions between an Industry Member and a client that may
involve firm bid and offer communications; and (4) unstructured
electronic and verbal communications that are not currently captured by
Industry Member order management or execution systems (e.g., electronic
chats, text messages) (the foregoing (1)-(4), collectively, the
``Exempt Activities''), subject to certain conditions.\16\ On July 28,
2023 pursuant to Section 36(a)(1) of the Exchange Act,\17\ and Rule
608(e) of the Exchange Act,\18\ the Commission granted the Participants
further temporary exemptive relief for the reporting of the Exempt
Activities, until July 31, 2026, subject to certain conditions.\19\
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\14\ 15 U.S.C. 78mm(a)(1).
\15\ 17 CFR 242.608(e).
\16\ See November 2020 Exemptive Order, supra note 13.
\17\ 15 U.S.C. 78mm(a)(1).
\18\ 17 CFR 242.608(e).
\19\ Securities Exchange Act Release No. 98023, 88 FR 51369
(Aug. 3, 2023) (the ``July 2023 Exemptive Order'').
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III. Description of the Proposal
CAT LLC proposes to amend the CAT NMS Plan to permanently exclude
the Exempt Activities from reporting to the Central Repository.
Specifically, CAT LLC proposes to amend Article VI, Section 6.3 of the
CAT NMS Plan to add a new subsection 6.3(g) which would state that,
notwithstanding any other provision of SEC Rule 613 or the CAT NMS
Plan, the following categories of data shall not be reportable to the
Central Repository under Section 6.3(d): (i) floor broker verbal
announcements of firm orders on an exchange that are otherwise reported
as systematized orders; (ii) market maker verbal announcements of firm
quotes on an exchange trading floor; (iii) telephone discussions
between an Industry Member and a client that may involve firm bid and
offer communications; and (iv) unstructured electronic and verbal
communications that are not currently captured by Industry Member order
management or execution systems (e.g., electronic chats, text
messages). In addition, both Section 6.3(d), relating to Participant
reporting requirements, and Section 6.4(d)(i), relating to Industry
Member reporting requirements, would be amended to reference the
exclusions outlined in Section 6.3(g).
CAT LLC states that the Verbal Quotes Amendment is intended to have
an effect similar to permanent incorporation into the CAT NMS Plan of
[[Page 26339]]
the existing Commission-approved temporary exemptive relief within the
July 2023 Exemptive Order, without the added conditions to relief.\20\
CAT LLC states that the Verbal Quotes Amendment is not intended to
affect activity that is currently reported to CAT or to otherwise
modify the categories in the July 2023 Exemptive Order.\21\
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\20\ See id. The July 2023 Exemptive Order conditioned relief on
the Participants providing the Commission a written status update on
the reporting of these quotes and orders by July 31, 2025,
including, for both verbal activity on exchange floors and upstairs
activity separately, an analysis of the feasibility of traders
contemporaneously recording firm bid and offer information for
verbal and manual quotes and orders, and an implementation plan for
the reporting of these quotes and orders. See July 2023 Exemptive
Order, 88 FR at 51370-71.
\21\ See Notice, at 67501.
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CAT LLC states that the Verbal Quotes Amendment is merited because
of the impact on overall CAT costs of requiring reporting of the Exempt
Activities.\22\ CAT LLC states that Industry Members would be required
to hire additional staff and to update their technology systems to
manually capture and report the Exempt Activities to the CAT, which
Industry Members estimate would cost the industry a total of more than
$4.4 billion per year.\23\ With respect to Participant reporting, CAT
LLC states that $64.35 million to $112.86 million per year would be
required to designate a full-time equivalent for each floor broker and
floor-based market maker with an additional one-time cost of $20
million to $30 million on top of direct personnel costs to build the
additional space required to support the increased number of personnel
performing the manual reviews because the relevant exchanges do not
currently have room for the additional staff to be present on the
exchange floor.\24\ CAT LLC further states that the Verbal Quotes
Amendment is appropriate because it is technologically infeasible to
reliably, accurately, and consistently collect and report data
concerning the Exempt Activities without human intervention.\25\
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\22\ See id.
\23\ See id. at 67502. A letter cited by CAT LLC provides
additional detail on these estimates. See Letter from Howard
Meyerson, Managing Director, Financial Information Forum, at 20
(Dec. 16, 2022) (``December 2022 FIF Letter'').
\24\ See Notice, at 67501.
\25\ See id.
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CAT LLC also states that no technological developments have
occurred that would make reporting the Exempt Activities cost-
effective.\26\ CAT LLC states that the Commission's original November
2020 Exemptive Order was premised on the Commission's belief that
future technological breakthroughs in artificial intelligence would
make collecting information concerning the Exempt Activities more
feasible by the time the temporary exemptive relief expires.\27\ CAT
LLC states that market participants are exploring how recent
advancements in artificial intelligence, including machine learning,
natural language processing, and voice recognition technology, may be
used in various business functions, but that a number of Industry
Members have conducted internal analyses and concluded that there is
currently no artificial intelligence software or algorithm with a
feasible architecture to accurately capture and report the Exempt
Activities to the CAT in an automated manner.\28\ CAT LLC states that,
given that the technology has not developed in the four years since the
original November 2020 Exemptive Order, it is exceedingly unlikely that
it will develop to a usable point over the next two years.\29\
Moreover, because there is no existing technological solution, CAT LLC
states that reporting the Exempt Activities would require substantial
human intervention, which would also add significantly to the
costs.\30\ Specifically, CAT LLC states that the only way for the
Participants and Industry Members to report the Exempt Activities to
the CAT would be to manually capture these events by requiring a human
being to listen to every verbal interaction of every floor broker,
market maker, or upstairs trader either live or from tape, and/or to
sift through electronic communications to determine if and precisely
when a quote was given and whether it was firm.\31\ CAT LLC further
states that reporting the Exempt Activities would also disrupt trading
and reduce the benefits of floor trading because of the added burdens
it would impose on open outcry bidding and offering, which would
ultimately be to the detriment of investors. CAT LLC further states
that the difficulty in capturing and reporting verbal and unstructured
electronic activities will give firms and markets an incentive to use
indications of interest that are not reportable to CAT rather than firm
orders or bids or offers and that the CAT was intended to enhance audit
trails for regulators, not impact how Industry Members source market
liquidity and trade.\32\
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\26\ See id. at 67502-03.
\27\ See id. at 67501.
\28\ See id. at 67501-02 (citing December 2022 FIF Letter, at
5).
\29\ See id. at 67502.
\30\ See id. at 67502-03.
\31\ See id. at 67502.
\32\ See id. at 67503.
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CAT LLC states that the reporting of Exempt Activities would not
provide enough value from a regulatory or surveillance perspective to
outweigh their substantial costs.\33\ CAT LLC states that on all
exchanges with floor trading, every order must be systematized upon
receipt by the floor broker on the floor of the exchange and is
reportable to the CAT.\34\ CAT LLC states that an order is
``systematized'' when (A) the order is sent electronically to the floor
broker's system at the exchange; or (B) the order is manually
systematized by the floor broker upon receipt outside of the floor
broker's system and prior to representation in the floor trading
crowd.\35\ CAT LLC states that to the extent a floor broker is not
holding a systematized order, the floor broker is not eligible to
represent any firm bid or offer, or to request firm quotes from in-
crowd market participants on the floor of an exchange. CAT LLC states
that therefore all firm bids or offers represented by a floor broker
must be associated with orders that have already been systematized.\36\
CAT LLC states that because the Participants require that any firm
verbal interest expressed by a floor broker must be related to a CAT
reportable systematized order, and any resulting trade must be reported
to CAT, all verbal interest expressed by a floor broker that may be a
CAT Reportable Event is already reported to CAT.\37\ In addition, CAT
LLC states that any cancellation or change to an order transmitted to
an exchange floor broker must occur within the systematized order
record.\38\ CAT LLC states that therefore every order verbalized on an
exchange floor by a floor broker has already been systematized, and
that systematization is already reportable to the CAT. CAT LLC further
states that, likewise, with respect to upstairs activity, manual orders
(including any orders following from indications of interest) are
already reportable to the CAT and trades, whether occurring on an
exchange floor or off-floor, are also already reportable to the CAT.
CAT LLC states that the additional information that would be associated
with the Exempt Activities does not need to be captured to allow for
effective
[[Page 26340]]
surveillance and regulation of exchange floor activity.\39\
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\33\ See id.
\34\ See id.
\35\ See id.
\36\ See id.
\37\ See id.
\38\ See id.
\39\ See id.
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CAT LLC states therefore that the ultimate regulatory value-add of
expanding the existing CAT reporting to include the Exempt Activities
is minimal given the scope of the data associated with the Exempt
Activities that is already reported.\40\ CAT LLC further states that
communications related to the Exempt Activities do not lend themselves
to the types of market manipulation considered in the adoption of Rule
613 because such communications are not widely disseminated.\41\ CAT
LLC states that any small incremental value added for regulatory
purposes would be significantly outweighed by costs imposed on Industry
Members, their customers, and the Participants, as well as the
disruption to trading on Participant trading floors.\42\ In addition,
CAT LLC states that it is focused on identifying changes to the CAT NMS
Plan that would reduce overall CAT costs, and requiring the Exempt
Activities to be reported directly conflicts with those cost-saving
efforts.\43\
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\40\ See id.
\41\ See id.
\42\ See id.
\43\ See id. at 67500-01 (stating that costs that would be
incurred by Participants and Industry Members to comply with CAT
reporting requirements should be carefully controlled).
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IV. Discussion
A. The Applicable Standard of Review
Rule 608(a) of Regulation NMS states that any two or more self-
regulatory organizations, acting jointly, may file a national market
system plan or may propose an amendment to an effective national market
system plan by submitting the text of the plan or amendment to the
Commission by email, together with a statement of the purpose of such
plan or amendment and, to the extent applicable, the documents and
information required by paragraphs (a)(4) and (5) of Rule 608.\44\
Under Rule 608(b)(2) of Regulation NMS, the Commission shall approve a
national market system plan or proposed amendment to an effective
national market system plan, with such changes or subject to such
conditions as the Commission may deem necessary or appropriate, if it
finds that such plan or amendment is necessary or appropriate in the
public interest, for the protection of investors and the maintenance of
fair and orderly markets, to remove impediments to, and perfect the
mechanisms of, a national market system, or otherwise in furtherance of
the purposes of the Exchange Act.\45\ The Commission shall disapprove a
national market system plan or proposed amendment if it does not make
such a finding.\46\
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\44\ 17 CFR 242.608(a).
\45\ 17 CFR 242.608(b)(2).
\46\ See id. Approval or disapproval of a national market system
plan, or an amendment to an effective national market system plan
(other than an amendment initiated by the Commission), shall be by
order. Id. In addition, Rule 700(b)(3)(ii) of the Commission's Rules
of Practice states that ``[t]he burden to demonstrate that a NMS
plan filing is consistent with the Exchange Act and the rules and
regulations issued thereunder that are applicable to NMS plans is on
the plan participants that filed the NMS plan filing.'' 17 CFR
201.700(b)(3)(ii). ``Any failure of the plan participants that filed
the NMS plan filing to provide such detail and specificity may
result in the Commission not having a sufficient basis to make an
affirmative finding that a NMS plan filing is consistent with the
Exchange Act and the rules and regulations issued thereunder that
are applicable to NMS plans.'' Id.
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For the reasons described below, the Commission deems it
appropriate to modify the Proposed Amendment as described below and
finds that the Proposed Amendment, as modified herein, is consistent
with the requirements of Section 11A and Rule 608 thereunder, and 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.\47\
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\47\ 17 CFR 242.608(b)(2).
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B. Comment Letters
The Commission received a comment letter from the NYSE
Exchanges,\48\ which, among other things, expressed support for the
Verbal Quotes Amendment.\49\ The commenter states that, as outlined in
the Proposal, any potential regulatory benefit of verbal quoting
activity data is substantially outweighed by the significant costs and
burdens.\50\ The Commission further received a comment letter
supporting the NYSE Letter's recommendation to approve the Verbal
Quotes Amendment, and additionally stating that the Commission should
review all of its orders granting temporary exemptive relief from CAT
reporting requirements with a view to making them permanent, and that
full cost-benefit analyses should be required for any future CAT
guidance and rulemakings that impose new requirements.\51\
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\48\ The NYSE Exchanges include New York Stock Exchange LLC,
NYSE American LLC, NYSE Arca, Inc., NYSE National, Inc. and NYSE
Texas, Inc. (collectively, ``NYSE'').
\49\ See Letter from Jaime Klima, General Counsel, NYSE, dated
April 24, 2025, available at <a href="https://www.sec.gov/comments/4-698/4698-598195-1737842.pdf">https://www.sec.gov/comments/4-698/4698-598195-1737842.pdf</a> (``NYSE Letter'').
\50\ See id. at 3.
\51\ See Letter from Joseph Corcoran, Managing Director and
Associate General Counsel and Gerald O'Hara, Vice President and
Assistant General Counsel, Securities Industry and Financial Markets
Association, dated June 6, 2025, available at <a href="https://www.sec.gov/comments/4-698/4698-610487-1785814.pdf">https://www.sec.gov/comments/4-698/4698-610487-1785814.pdf</a>.
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The Commission also received three comment letters from one
commenter supportive of the Verbal Quotes Amendment.\52\ This commenter
supports the Verbal Quotes Amendment by stating that: (i) automated
capture of the Exempt Activities is not possible based on current
technology; (ii) the costs for manually capturing, interpreting and
reporting the Exempt Activities will be significant; \53\ (iii) the CAT
NMS Plan and the Commission's approval order do not address these
significant costs; (iv) Industry Members will curtail their current
verbal activity in the absence of relief, which could result in reduced
execution quality for customer orders and reduced market liquidity; (v)
prices communicated in upstairs one-to-one unstructured communications
are not firm because they are not binding on the communicating party
and always require a further affirmative action by the communicating
party; (vi) that the regulatory value of the data is not clear; and
(vii) the Exempt Activities could be defined as ``pre-order
communications,'' but are not orders under Commission Rule 613 because
they cannot result in a trade execution unless an order is transmitted
and received subsequent to such a pre-order communication and prior to
the time of trade execution.'' \54\
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\52\ See Letter from Howard Meyerson, Managing Director,
Financial Information Forum (``FIF''), dated September 9, 2024,
available at <a href="https://www.sec.gov/comments/4-698/4698-518035-1490942.pdf">https://www.sec.gov/comments/4-698/4698-518035-1490942.pdf</a> (``September 2024 FIF Letter''), enclosing December 2022
FIF Letter; Letter from Howard Meyerson, Managing Director, FIF,
dated December 6, 2024, available at <a href="https://www.sec.gov/comments/4-698/4698-558515-1603022.pdf">https://www.sec.gov/comments/4-698/4698-558515-1603022.pdf</a> (``December 2024 FIF Letter''); Letter
from Howard Meyerson, Managing Director, FIF, dated April 28, 2025,
available at <a href="https://www.sec.gov/comments/4-698/4698-596335-1730023.pdf">https://www.sec.gov/comments/4-698/4698-596335-1730023.pdf</a> (``April 2025 FIF Letter'').
\53\ FIF states that the annual cost to report the Exempt
Activities would be in excess of $4.4 billion, subject to an
increase for inflation in the period of time following the
submission of the December 2022 FIF Letter. See September 2024 FIF
Letter, at 2; December 2024 FIF Letter, at 2; April 2025 FIF Letter
at 12.
\54\ See September 2024 FIF Letter, at 2-4; see also April 2025
FIF Letter (requesting that the Commission confirm that pre-order
communications are not reportable to CAT or provide a permanent
exemption from the requirement for firms to report these pre-order
communications to CAT).
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This commenter further states that manual pre-order communications
are far more costly to capture and report to
[[Page 26341]]
CAT as compared to electronic activity, while having significantly less
surveillance value than orders.\55\ The commenter also states that CAT
Plan Participants have estimated total CAT operating expenses for 2025
of $248,846,076, which is a 14.8% increase over the 2024 estimated CAT
operating expenses for 2024, and that this type of annual cost increase
is not sustainable in the long-term.\56\ The commenter states that the
Commission should focus on ways to reduce CAT operating costs prior to
introducing any new mandates to CAT that would involve significant
costs for industry members (and ultimately customers), including
disruption of current trading practices that have developed over many
years.\57\
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\55\ See September 2024 FIF Letter, at 2-4.
\56\ See December 2024 FIF Letter, at 3.
\57\ See id.
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This commenter further states that if the Commission considers that
the Exempt Activities are orders, bids or offers under Commission Rule
613 and does not provide permanent relief for reporting the Exempt
Activities, it would be necessary for the Commission to: (i) provide
support for this position based on Commission precedent; \58\ (ii)
publicly communicate its reasoning in writing; (iii) clearly explain
the conditions under which specific verbal activity would be or would
not be reportable to CAT; and (iv) ensure that the CAT system and CAT
documentation are updated to clearly describe the required reporting
(including how specific fields, such as duration, should be
reported).\59\ This commenter also states that the Commission would
need to complete these four steps at least three years prior to any
implementation of CAT reporting for the Exempt Activities.\60\
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\58\ The commenter states that unstructured verbal and
electronic upstairs activities are not reportable to CAT under Rule
613 because they represent indications of interest--not orders. See
December 2022 FIF Letter, at 11-12. CAT LLC states that the analysis
in the December 2022 FIF Letter explaining why unstructured verbal
and electronic upstairs activities are not reportable to CAT under
Rule 613 (including the challenges that would be associated with
reporting those activities) applies equally to communications on
exchange trading floors. See Notice, at 67499.
\59\ See September 2024 FIF Letter, at 4.
\60\ See id.
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C. Categories of Verbal and Manual Activities
The Commission views the activities covered by this amendment as
fitting into two categories: (1) verbal activity on exchange floors,
which are defined in the Proposed Amendment and in proposed
modifications to the CAT NMS Plan as floor broker verbal announcements
of firm orders on an exchange that are otherwise reported as
systematized orders and market maker verbal announcements of firm
quotes on an exchange trading floor; \61\ and (2) ``upstairs'' verbal
and manual activity, which is defined in the Proposed Amendment and the
proposed modifications to the CAT NMS Plan as telephone discussions
between an Industry Member and a client that may involve firm bid and
offer communications and unstructured electronic and verbal
communications that are not currently captured by Industry Member order
management or execution systems (e.g., electronic chats, text
messages).\62\ For the purposes of analyzing the Proposed Amendment and
this order the Commission has considered these categories separately
and ultimately believes it is appropriate to treat each category
differently.
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\61\ See proposed CAT NMS Plan Section 6.3(g)(i) and (ii). See
Notice, at 67504.
\62\ See proposed CAT NMS Plan Section 6.3(g)(i) and (ii). See
Notice, at 67504.
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As discussed further below, while the Commission is approving the
amendment with respect to the upstairs verbal and manual activity as
proposed, the Commission deems it appropriate to modify the proposed
amendment to Section 6.3 of the Plan for (1) floor broker verbal
announcements of firm orders on an exchange that are otherwise reported
as systematized orders and (2) market maker verbal announcements of
firm quotes on an exchange trading floor to add the phrase ``until July
31, 2030,'' in front of Sections 6.3(g)(i) and 6.3(g)(ii) of the
Plan.\63\
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\63\ 17 CFR 242.608(b)(2). The approved CAT NMS Plan amendment
language, as modified by the Commission, is in Appendix A. The
Commission recognizes that CAT LLC disputes that the Exempt
Activities are required under Section 6.3(d) of the Plan. See
Notice, at 67499. The Commission does not intend the modified
amendment to establish any new Plan requirements or to resolve any
dispute over whether the Exempt Activities are required under the
Plan. Rather, the Commission understands the amendment to exclude
the specified categories of data (either permanently or until July
31, 2030) to the extent those categories of data are reportable
under Section 6.3(d).
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1. Verbal Activity on Exchange Floors
Under the July 2023 Exemptive Order, Participants and Industry
Members are not required to report any information relating to the
verbalization of floor orders by floor brokers,\64\ or the quotes
verbalized by floor market makers in response to the verbalization of
floor orders by floor brokers. The July 2023 Exemptive Order exempts
the reporting to the CAT of any other firm bid or offers made verbally
prior to submission of crossed orders for electronic execution. In
reliance on this exemption, floor brokers' announcements of orders on
an exchange floor are not reported to CAT and floor market maker bids
and offers in response to floor brokers verbal orders are not reported
to the CAT today. Because confirmed trades on exchange floors must be
submitted electronically by floor brokers for execution, information
regarding matching interest verbally expressed by floor market makers
that is ultimately part of the executed trade is reported to the CAT,
but this can be an incomplete picture of what was expressed by floor
market makers because the order and the trade submitted and reported to
the CAT would only show the amount of market maker interest that was
matched for execution, and not the full amount that was offered. Market
maker interest that is verbally expressed in open outcry that does not
become part of the executed trade is not reported to the CAT currently
in any fashion.
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\64\ The floor broker's systemization of the order prior to its
verbalization of the floor, however, is reported to the CAT today.
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Thus, regulators currently have little insight into verbal floor
activity except through the reporting of systematized and executed
floor orders and surveillance by physical oversight of the open outcry
process, primarily by exchange officials. The reporting of verbal
activity on exchange floors would help regulators better identify
potential violations of broker-dealer best execution obligations, firm
bid/offer obligations and exchange priority rules.\65\ Information on
verbal quotes and orders on exchange floors would also help regulators
in understanding market structure, including the competition for orders
and execution quality. Reporting would also help regulators identify
instances of floor participants backing away from quotes and orders,
such as floor brokers routing orders elsewhere after open outcry (e.g.,
in order to obtain a ``clean cross'' or otherwise limit floor market
maker
[[Page 26342]]
participation), and issues relating to the allocation of trades to
floor participants.
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\65\ When adopting Rule 613, the Commission stated that many of
the benefits of a consolidated audit trail can only be achieved if
all orders and quotations are included, and that it is important for
the consolidated audit trail to capture information for all
principal orders and market maker quotations because principal
orders and market maker quotations represent a significant amount of
order and transaction activity in the U.S. markets. See Securities
Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722, 45746
(Aug. 1, 2012). The Commission continued to state that the
consolidated audit trail would allow regulators to efficiently
surveil for manipulative and other illegal activity by market making
and other proprietary trading firms, and that including principal
orders and market maker quotations in the consolidated audit trail
would permit the SROs to more efficiently monitor the market for
violations of SRO rules. Id.
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The information provided by CAT LLC does not meet its burden to
establish that providing a permanent exception to reporting obligations
for verbal activity on exchange floors is necessary or appropriate. As
discussed in greater detail below, of the twenty five national
securities exchanges, only five options exchanges and one equity
exchange have physical trading floors, but floor trading can represent
a substantial portion of trading volume for those exchanges.\66\ In
addition, while floor trading can make up a small percentage of options
trades, the notional volume of floor trading can be much larger,
highlighting that trades on floors can be very large and an important
trading method for market participants and as such it needs to be
included in CAT for effective regulatory oversight purposes.\67\
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\66\ See infra Section V.A.2.a. An analysis of data from OPRA
Option Trade Reports shows that, in Q4 2024, trading on exchanges
floors made up 41.6% of options trading in terms of notional volume
and 7.7% of executed options contracts. See infra note 105. The
Commission understands that the nature of trading activity on the
equity trading floor differs from the options floors, including the
importance of the closing auction on the equity trading floor.
According to New York Stock Exchange LLC, the closing auction on the
equity trading floor is the single largest liquidity event of the
day and can account for over 20% of daily volume, and the community
of floor brokers and designated market makers on the equity floor
contribute over 35% of that close liquidity, on average. See NYSE
Auctions, ``The Closing Auction,'' available at: <a href="https://www.nyse.com/auctions">https://www.nyse.com/auctions</a>. Due to these differences, the regulatory
value of the Exempt Activities insofar as they relate to equity
floor trading would likely differ from the regulatory value of
information regarding verbal and manual activity on options trading
floors, as would the relative difficulty in capturing such verbal
and manual activity. CAT LLC and commenters do not distinguish
between equities and options floors in their request or analyses.
\67\ See infra note 105 (explaining that the largest single-day
percentage of floor trading (in terms of notional volume) was 64.4%
in Q4 2024, even though floor trades made up just 0.24% of options
trades in Q4 2024 on average and 0.35% at most). The Commission does
not have specific data on what portion of trades that occur upstairs
involve reportable firm verbal or manual communications, but a
commenter states that well under one-hundredth of one percent of
orders would involve a manual pre-order communication. See September
2024 FIF Letter, at 5.
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The Commission recognizes that the reporting of such information
will impose costs on the Participants and Industry Members, but while
there are costs to reporting the Exempt Activities on trading floors,
the costs provided by CAT LLC and a commenter are likely overstated.
CAT LLC estimates that it would cost $64.35 million to $112.86 million
per year to designate a full-time employee for each floor broker and
floor-based market maker with an additional one-time cost of $20
million to $30 million on top of direct personnel costs to build the
additional space required to support the increased number of personnel
performing the manual reviews because the relevant exchanges do not
currently have room for the additional staff to be present on the
exchange floor.\68\ However, this estimate is based on an assumption
that every floor broker and every floor-based market maker would need a
full-time employee solely to report to the CAT, and is based on a
commenter's estimate of costs that include both floor and upstairs
verbal and manual activity.\69\ But, as discussed below, the Commission
believes that this methodology may overstate the costs of reporting
this information to CAT because floor verbal activity is distinct from
verbal and manual activity on the upstairs market insofar as much of
the relevant information that would be reported to CAT is already
systematized, floor brokers and floor market makers have handheld and
other electronic devices to facilitate the open outcry process,\70\ and
floor verbal activity is governed by exchange rules.
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\68\ See Notice, at 67502.
\69\ See id. at 67502-03.
\70\ To the extent systematized orders are or can be reflected
in handhelds or other electronic devices, it may be easier to report
responses to such orders because some of the required data will
already be systemized (e.g., symbol, side and other key terms of the
order).
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CAT LLC and a commenter state that Industry Members have analyzed
the issue and have concluded that there is currently no artificial
intelligence software or algorithm with a feasible architecture to
accurately capture and report the Exempt Activities to the CAT in an
automated manner.\71\ However, the verbal and manual activity
scenarios, examples, and discussion of the challenges of natural
language processing attached to the December 2022 FIF Letter all relate
to upstairs verbal and manual activity.\72\ CAT LLC states that the
same challenges exist for Industry Members and Participants on exchange
trading floors, but as discussed below, activity on exchange trading
floors is different than upstairs activity because of exchange rules
and the nature of floor activity. In addition, unlike upstairs verbal
and manual activity, and as stated by CAT LLC, every floor order must
be systematized by the floor broker prior to representation and is
reportable to the CAT, and to the extent a floor broker is not holding
a systematized order, the floor broker is not eligible to represent any
firm bid or offer.\73\ Thus, capturing verbal quote and order
information on an exchange floor does not involve the same complexity
and/or costs as capturing upstairs verbal and manual activity.\74\
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\71\ See Notice, at 67501-02; September 2024 FIF Letter, at 2
(citing December 2022 FIF Letter, at 5).
\72\ See December 2022 FIF Letter, at Attachment I, II, and IV.
\73\ See Notice, at 67503.
\74\ For example, the December 2022 FIF Letter provides several
upstairs scenarios in which a determination of what communications
are CAT reportable would require both careful analysis and more
clarity in CAT reporting rules. See December 2022 FIF Letter, at
Attachment I, II, and IV.
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Industry Members engaged in floor activities are subject to
exchange rules that govern when orders and quotes vocalized in open
outcry on exchange floors are firm.\75\ Floor brokers are required to
announce order(s) that the floor broker is representing to the trading
crowd prior to submitting the systematized order for execution.\76\
Responses from floor market makers are firm quotes under the exchange
rules--for example, Nasdaq PHLX LLC rules specify that, among other
things, during public outcry once the trading crowd has provided a
quote, it will remain in effect until (A) a reasonable amount of time
has passed, or (B) there is a significant change in the price of the
underlying security, or (C) the market given in response to the request
has been improved.\77\ These verbalized orders and quotes in open
outcry are ``firm,'' and even though they are firm for a short period
of time, they are reportable CAT events much like the routing of an
immediate-or-cancel order on electronic markets, which is ``firm'' only
upon receipt and immediately canceled if not executed.
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\75\ See, e.g., BOX Exchange LLC (``BOX'') Rule 7580(e)(2); NYSE
Arca LLC (``Arca'') Rule 6.73-O (stating that for a floor bid or
offer ``to be effective, a bid or offer must . . . be made by open
outcry at the trading post where the option is traded'').
\76\ The Commission believes that existing exchange rules
requiring systemization prior to open outcry would reduce risk that
reporting would be inconsistent and prone to error, unlike the
upstairs market.
\77\ See Nasdaq PHLX, LLC Rules, Options 8, Section 2(a)(9). See
also Exchange Act Release No. 90880 (Jan. 8, 2021), 86 FR 3217, 3221
(Jan. 14, 2021) (SR-Phlx-2021-03) (stating that ``Floor Market Maker
quotes are considered firm when announced in open outcry and once
accepted the transaction may be effectuated within FBMS,'' and ``a
Floor Market Maker that experiences issues with internet connection,
makes an error or otherwise is unaware of recent news in a
particular option, would be held to a quote verbalized in open
outcry''); Cboe Exchange, Inc. Rule 5.52(a) (stating that ``Market-
Maker bids and offers are firm for all orders under this Rule and
Rule 602 of Regulation NMS under the Exchange Act [ ] for the number
of contracts specified in the bid or offer, except if'' certain
exceptions apply).
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The Participants and Industry Members could establish methods for
capturing verbal order and quote information communicated on exchange
[[Page 26343]]
floors that are more cost-effective and efficient than the proposal
that each floor participant be required to hire a full-time employee
solely for CAT reporting. For example, CAT LLC states that orders on
exchange trading floors are electronically systematized for execution,
and executions resulting from the verbal representation of these orders
and floor market maker responses will continue to be required to be
reported to the CAT.\78\ Thus, to capture verbal order information, the
initial floor broker verbalizations of systematized orders would
require the addition of a timestamp identifying when the floor broker
verbally announced the order in open outcry, but otherwise the material
terms of the verbal order are already systematized electronically.
Additionally, floor brokers generally use handhelds or other electronic
devices when on the floor to facilitate the required systematization of
orders, to facilitate the reporting of when a floor broker initially
announces an order in open outcry and any verbalized revisions to that
order in negotiations with the trading crowd. Thus, for simple floor
trades that involve the verbal representation of a systematized order
by a floor broker and subsequent submission for electronic execution
with floor market maker responses included as appropriate, floor
brokers could satisfy verbal reporting obligations by electronically
communicating when these already systematized orders were presented
verbally to the trading crowd, potentially through handheld devices or
electronic equipment already used for the systematization of the order.
The same devices and electronic equipment could be used to record
verbal modifications and cancellations of that systematized order--and
at least for modifications, such verbal modifications already must be
systematized by the floor broker if the order is to be submitted
electronically for execution. Participants or Industry Members could
develop updated software for those handhelds or other electronic
devices that would allow those devices to be used to record the
reportable floor-based verbal quote or order activities, and the
Commission notes that at least one exchange currently requires floor
brokers to electronically record the time at which the floor broker
initially represents a systematized order to the trading crowd.\79\
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\78\ See Notice, at 67502-03. In addition, CAT LLC states that
any cancellation or change to an order transmitted to an exchange
floor broker must occur within the systematized order record. Id.
\79\ See Rules of Cboe Exchange, Inc., at Chapter 5, Section G,
Rule 5.91(a)(4), available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/C1_Exchange_Rule_Book.pdf">https://cdn.cboe.com/resources/regulation/rule_book/C1_Exchange_Rule_Book.pdf</a> (stating that a floor
broker's use of due diligence in handling and executing an order
includes, among other things, ``subject to the requirement to
systematize orders prior to representation pursuant to Rule 5.7(f),
electronically recording the time via a PAR workstation at which the
Floor Broker initially represents the order to the trading crowd'').
Cboe Exchange, Inc. rules also state that the use of hand signal
communications on the Exchange's trading floor may be used to
initiate an order, to increase or decrease the size of an order, to
change an order's limit price, to cancel an order, or to activate a
market order, and that any initiation, cancellation, or change of an
order relayed to a Floor Broker through the use of hand signals also
must be systematized. See Cboe Exchange, Inc. Rule 5.7,
Interpretation and Policies .02. While this activity is prior to the
open outcry process, the Commission believes that the requirements
in the Cboe rules suggest that floor brokers may not require a new
full-time staff member for each individual floor broker trader to
record verbal and manual activity that occurs in open outcry. This
is another example of floor brokers being required to electronically
systematize verbally or manually conveyed information, in addition
to the existing requirement that floor brokers electronically record
and electronically report matching floor market maker interest that
is verbally expressed in open outcry, all of which is currently
required and done without severely impacting existing workflows or
floor brokers' ability to participate in fast-moving markets.
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With respect to floor market maker quotes, the Commission
understands that floor market makers provide verbal quotes based on
already electronically systematized information (i.e., no floor market
makers are currently sua sponte providing verbal quotes on exchange
floors without real-time awareness of the market for relevant
securities). CAT LLC has not established that it is necessary to have a
full-time employee to capture the timing of vocalization of that
interest because it may be possible for already systematized electronic
information to form the basis for CAT reporting by exchanges or floor
participants. Floor market maker or exchange provided systems could be
modified to allow floor market makers to quickly notate when a quote is
verbally expressed in response to a floor broker's bid or offer, based
on already electronic information containing the material terms of the
quote. Alternatively, floor brokers could be required pursuant to
exchange rules to record all verbal responses by floor market makers on
their handheld devices or other electronic devices, and not just record
the responses of floor market makers required for execution, which
floor brokers are already required to do for matching interest verbally
expressed by floor market makers. Due to potential alternative means of
reporting verbal activity on exchange floors, the Commission does not
believe that the cost estimates CAT LLC has provided demonstrate that
it is necessary or appropriate to permanently remove the reporting of
floor-based verbal quotes and orders from the CAT NMS Plan.
Given the concerns raised about costs and implementation by CAT LLC
and commenter, the Commission is providing the Participants and
Industry Members five years to implement cost-effective reporting of
floor-based verbal quotes and orders. Amending the CAT NMS Plan to
codify a deadline of July 31, 2030, for the reporting of verbal quotes
and orders that occur on exchange floors provides Participants and
Industry Members an appropriate amount of time to modify existing
technology and update processes necessary for cost-effective reporting
of verbal quotes and orders on exchange floors. In addition, it would
provide sufficient time for Participants to update technical
specifications and guidance such as reporting scenarios and FAQs, as
well as any other changes required.\80\
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\80\ A commenter has previously noted that current CAT
documentation does not provide sufficient guidance for reporting
floor trading activity. See December 2022 FIF Letter, at 8-9. The
Commission agrees with the commenter that changes to CAT
documentation and the CAT system will be required to facilitate the
reporting of floor verbal quotes and orders, and believes that five
years should be sufficient time to accomplish those changes.
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2. Upstairs Verbal and Manual Activity
Unlike verbal activity on exchange floors, the Commission believes
it is appropriate for CAT LLC to amend the CAT NMS Plan to permanently
exclude the requirement that Participants and Industry Members report
the Exempt Activities insofar as they relate to verbal and manual
activity that occurs outside of exchange facilities, specifically: (1)
telephone discussions between an Industry Member and a client that may
involve firm bid and offer communications; and (2) unstructured
electronic and verbal communications that are not currently captured by
Industry Member order management or execution systems (e.g., electronic
chats or text messages).
As discussed above, the Commission believes that verbal and manual
activity that occurs off exchange floors is distinct from activity that
occurs on exchange floors. Unlike on-exchange floor verbal quotes and
orders, which CAT LLC states involve verbal announcements of firm
orders by floor brokers that have already been systematized,\81\ CAT
LLC and
[[Page 26344]]
commenters have not stated that telephone discussions and unstructured
electronic and verbal communications by Industry Members involve
communications of firm bids or offers that have already been
systematized. In addition, upstairs verbal and manual activity is
unlike the vocalization of on-exchange floor market bids and offers and
floor market maker quotes, which is governed by exchange rules.
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\81\ See Notice, at 67503.
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Therefore, unlike floor orders, reporting of these unstructured
electronic and verbal communications would require significant business
and technological changes across broker-dealers and the CAT to
accommodate the capture, systematization and reporting of this
activity. A commenter estimates the costs of reporting of verbal and
manual order information to be over $4.4 billion \82\ The Commission
believes this overall estimate is overstated because, among other
reasons, the analysis assumes that every one of the estimated traders
that use verbal or manual quotes and orders would each need a full-time
employee to comply with the reporting requirement and that each of
those full-time employees would have a salary of $522,651. However, the
Commission recognizes the need to reduce costs and believes that in the
absence of technological advances to accurately capture and report
upstairs verbal and manual activity in a cost-effective manner, it is
not appropriate to require that Industry Members modify systems,
workflows, physical infrastructure and hire additional staff for the
manual and expensive endeavor of reporting upstairs verbal and manual
order information.
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\82\ See supra note 23.
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The upstairs verbal and manual communications covered by this
aspect of the Proposed Amendment include a wide range of activity,
including firm bids or offers made by broker-dealers to another broker-
dealer or customer(s) via telephone calls, text messages, instant
messaging applications, emails, or other unstructured electronic means,
and potentially involving multiple methods of communication and/or
involving multiple parties.\83\ While this information would help
regulators better identify potential violations of securities laws and
regulations, including violations of best execution obligations, firm
bid/offer obligations, and additionally help regulators in
understanding market structure including providing a better
understanding of the range and amount of verbal and manual activity in
the upstairs market and the behavior of market participants, as
described above, CAT LLC and a commenter estimate that the costs of
reporting upstairs verbal and manual activity would be magnitudes
greater than reporting floor verbal quotes and orders.\84\ In the
upstairs market there are no exchange rules that govern how verbal and
manual activity occurs, including no requirement that upstairs orders
be systematized before verbal or manual bids and offers are made, and
thus reporting of Exempt Activities in the upstairs market would be a
significantly manual activity in the absence of technological
developments that would lead to the efficient and accurate reporting of
upstairs verbal and manual activity, imposing significant costs on
market participants. Thus, unlike for floor-based activity, the
regulatory value of reporting of verbal and manual activity that occurs
off exchange floors does not justify the costs of requiring the
reporting of this activity.
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\83\ A commenter provided verbal activity scenarios that include
scenarios involving simultaneous voice and chat communications, chat
messages referencing terms of a separate FIX order transmission, and
communications involving multiple discussions spanning significant
time periods, multiple languages, and multiple methods of
communication. See September 2022 FIF Letter, Attachment I.
\84\ See supra notes 23 and 24, and accompanying text.
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In addition, CAT LLC and a commenter state that requiring the
reporting of telephone discussions between an Industry Member and a
client that may involve firm bid and offer communications, and
unstructured electronic and verbal communications that are not
currently captured by Industry Member order management or execution
systems (e.g., electronic chats or text messages), could negatively
modify market participant behavior and market structure. According to
CAT LLC and a commenter, without permanent relief from reporting these
firm bids and offers, Industry Members would be incentivized to provide
non-firm indications of interest to other Industry Members and
customers, which could result in reduced execution quality, reduced
market liquidity, and potentially disrupt trading. The Commission
agrees, especially in light of the difficulty of determining when
upstairs verbal and manual communications are ``firm.'' While the
reporting of these upstairs activities would have regulatory value, the
potential effect on market participant behavior and market structure
would likely negatively impact their regulatory value. The Commission
does not believe a similar concern exists on exchange floors, where
firms are subject to exchange rules on the firmness of vocalizations on
the exchange floor, and there is less ambiguity about when a vocalized
bid or offer is firm.
Pursuant to the CAT NMS Plan as amended, Industry Members will
still be obligated to report the same information related to verbal or
manual orders and executions as they do today. As stated by CAT LLC,
the Verbal Quotes Amendment is not intended to affect activity that is
currently reported to CAT.\85\ For example, on exchange trading floors
executions resulting from the verbal representation of floor broker
orders and floor market maker responses will continue be required to be
reported to the CAT.\86\ In addition, for verbal or manual trades made
upstairs, executions will still be subject to existing reporting
requirements, such as the requirement to report to CAT when the broker
either creates an order when dealing with a customer, or accepts an
order from another broker-dealer, and when the trade execution
occurs.\87\
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\85\ See Notice, at 67501.
\86\ See id. at 67502-03. In addition, CAT LLC states that any
cancellation or change to an order transmitted to an exchange floor
broker must occur within the systematized order record. Id.
\87\ See id. at 67503.
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V. Efficiency, Competition, and Capital Formation
In determining whether to approve a proposed amendment to the CAT
NMS Plan, and whether such amendment is in the public interest, Rule
613 requires the Commission to consider the potential effects of the
proposed amendment on efficiency, competition, and capital
formation.\88\ The Commission has reviewed the arguments about such
effects put forth by CAT LLC and independently analyzed the likely
effects of the Proposed Amendment on efficiency, competition, and
capital formation. Based on its analysis, the Commission concludes that
the Proposed Amendment, as modified herein, could have a positive
impact on operational efficiency, a negative impact on regulatory
efficiency, and a mixed effect on market efficiency. The Proposed
Amendment, as modified herein, is also expected to have a mixture of
positive and negative impacts on competition, and it is not expected to
have any meaningful impact on capital formation. These effects are
discussed below.
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\88\ 17 CFR 242.613(a)(5).
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[[Page 26345]]
A. Baseline
1. Regulatory Baseline and Current Market Practice
In analyzing the impact of the Proposed Amendment on efficiency,
competition and capital formation, the Commission considered the
baseline to consist of the current regulatory framework for the Exempt
Activities, which includes the requirement to report the Exempt
Activities to CAT under Rule 613 and the CAT NMS Plan, as well as
market practice under the November 2020 and July 2023 Exemptive Orders.
In particular, the baseline represents the current state of the world,
including the existing Commission-approved temporary exemptive relief
within the July 2023 Exemptive Order, which expires on July 31, 2026,
and the extent to which market participants have undertaken certain
actions toward the reporting of the Exempt Activities.
The CAT NMS Plan requires the reporting of ``Manual Order Events,''
which, as defined by the CAT NMS Plan, are non-electronic
communications of order-related information for which CAT Reporters
must record and report the time of the event.\89\ As the Commission
stated in the November 2020 Exemptive Order and reiterates here, Rule
613 and the CAT NMS Plan both require the capture and reporting of
verbal quotes and orders, because they are a subset of Manual Order
Events.\90\
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\89\ See CAT NMS Plan at Section 1.1 (defining ``Manual Order
Events'' as ``a non-electronic communication of order-related
information for which CAT Reporters must record and report the time
of the event'' and defining ``CAT Reporter'' as ``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 also supra
notes 9-13 and corresponding text for further discussion of
reporting requirements under CAT.
\90\ See November 2020 Exemptive Order, supra note 13, at 73547.
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Due to the temporary exemptive relief for the reporting of the
Exempt Activities under the November 2020 Exemptive Order, and its
subsequent extension under the July 2023 Exemptive Order, the Exempt
Activities are currently not being reported to the CAT. Thus, the
benefits of having information about the Exempt Activities in the CAT,
which are primarily expected to be benefits related to regulatory
activities such as market surveillance, examinations and
investigations, and more efficient execution of numerous other
regulatory functions, have not been realized.\91\ In the CAT NMS Plan
Approval Order, the Commission explained how investors benefit from the
CAT-enabled improvements to such regulatory activities.\92\ In the
November 2020 Exemptive Order, the Commission stated that collecting
verbal quotes and orders would provide regulatory benefits that do not
currently exist.\93\ The Commission also stated that regulators do not
have detailed information relating to most verbal quotes and orders,
which would allow regulators to more capably perform regulatory and
surveillance functions, and that it does not believe it is appropriate
to exclude such quotes and orders from CAT reporting, which often are
more complex and/or involve larger-sized orders.\94\
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\91\ See Securities Exchange Act Release No. 78318 (Nov. 15,
2016), 81 FR 84696 (Nov. 23, 2016) (``CAT NMS Plan Approval
Order''), at 84833-40 for a discussion of the regulatory benefits of
CAT, including the regulatory benefits of reporting exempt
activities. One regulatory benefit of reporting exempt activities is
that it allows regulators to access data in a single data source.
See also CAT NMS Plan Approval Order, at 84738 for a discussion on a
recommendation by a commenter that certain broker-dealers using
manual orders should be exempt from CAT reporting obligations. The
Commission stated that such an exemption would result in an audit
trail that does not capture all orders by all participants in the
securities markets. The Commission further stated that data from all
broker-dealers is necessary for regulatory purposes and did not
provide an exemption for firms using manual orders as recommended.
In addition, CAT includes data on principal orders, market maker
quotes, and quote sent times for options market maker quotes, which
were not all captured by the SRO audit trails that existed when CAT
was approved. See id. at 84811. Also, when approving the CAT NMS
Plan, the Commission explained that centralized linking should
generally promote the accuracy and efficiency of the resulting data.
See id. at 84826. In the notice of the CAT NMS Plan, the Commission
explained that the inability to link all records affects the
accuracy of the resulting data and can force an inefficient manual
linkage process that would delay the completion of the data
collection and analysis portion of the examination, investigation,
or reconstruction. See Securities Exchange Act Release No. 77724, 81
FR 30614, at 30670 for a discussion of the regulatory benefits of
linking and combining data.
\92\ 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, at 84816-40.
\93\ See November 2020 Exemptive Order, supra note 13, at 73547.
The Commission gave the example that the reporting of firm verbal
quotes from floor market makers would allow regulators to determine
whether a market maker has ``backed away'' from a firm quote. The
Commission did not reference the regulatory benefits of the Exempt
Activities in the July 2023 Exemptive Order.
\94\ See id.
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The current lack of reporting of the Exempt Activities in CAT data
suggests also that market participants have likely not incurred the
full implementation costs of reporting the Exempt Activities. In the
November 2020 Exemptive Order granting the initial temporary exemption
for reporting the Exempt Activities, the Commission acknowledged the
difficulties of implementing the reporting of such events, and that the
exchanges with floors and Industry Members did not have the means to
collect the information necessary for reporting verbal activity on
exchange floors or upstairs.\95\ The Commission reiterated in the July
2023 Exemptive Order that extending the temporary exemptive relief
should allow Participants and Industry Members time to collaborate,
develop, and implement a reporting framework, guidelines, FAQs, and
scenarios necessary for effective and efficient reporting of floor-
based verbal quotes and orders and upstairs activity.\96\
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\95\ See id.
\96\ See July 2023 Exemptive Order, supra note 19, at 51370.
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Both CAT LLC and one commenter to the Proposed Amendment commented
on lingering technological problems and provided estimates of the costs
of reporting the Exempt Activities. CAT LLC estimates that these costs
could be in the billions and states that it is technologically
infeasible to reliably, accurately, and consistently collect and report
data concerning the Exempt Activities, and that no technological
developments have occurred that would make reporting the Exempt
Activities cost effective.\97\ A commenter projected an annual cost in
excess of $4.4 billion to manually capture the Exempt Activities.\98\
The Commission recognizes that reporting the Exempt Activities to CAT
will impose costs on the Participants and Industry Members, but the
Commission believes that the costs provided by CAT LLC and this
commenter are likely overstated, particularly for floor-based verbal
activity.\99\ CAT LLC also stated that, since current technology is not
sophisticated enough to reliably capture and report the Exempt
Activities, such activities could only be reported manually, which
would lead to inconsistent reporting that is prone to error due to the
need for human
[[Page 26346]]
review.\100\ The Commission recognizes current technological challenges
with reporting the Exempt Activities, particularly in the upstairs
market.\101\
---------------------------------------------------------------------------
\97\ See supra note 26.
\98\ See September 2024 FIF Letter, at 2; December 2024 FIF
Letter, at 2; December 2022 FIF Letter, at 6-8 and 20-21; April 2025
FIF Letter, at 6. This cost estimate is based on the assumption
that, for each trader at a firm, one full-time compliance person at
that firm will be required to review all of the phone conversations
and unstructured electronic communications of that trader and
manually input this data into a quote capture system. See December
2022 FIF Letter, at 6-8.
\99\ See supra Section IV.C, acknowledging that the reporting of
such information will impose costs on the Participants and Industry
Members, but noting that the Commission believes that the costs
provided by CAT LLC and a commenter are likely overstated.
\100\ See Notice, at 67500. That the automated capture of the
Exempt Activities is not possible based on current technology was
supported by a commenter; see September 2024 FIF Letter, at 2;
December 2022 FIF Letter, at 5 and 14-19.
\101\ See supra Section IV.C.2 for a discussion of technological
and other challenges involved in reporting activity in the upstairs
market. See also Notice, at 67500.
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2. Competition Baseline
The Exempt Activities consist of activities that occur in two
separate subcategories within the market for trading services: first,
verbal floor activity, which takes place on exchanges' trading floors;
and second, unstructured verbal and electronic upstairs activity, which
occurs on the so-called ``upstairs'' market.\102\ The following
discusses the competitive landscape of each of these markets.
---------------------------------------------------------------------------
\102\ ``Upstairs'' is a term used to describe the off-exchange
market. See supra note 4.
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a. Exchange Floor Trading
The market for exchange trading services in options and equities
consists of 25 national securities exchanges currently operating, of
which five options exchanges and one equity exchange have physical
trading floors \103\ that typically operate alongside electronic
markets. The Commission understands that floor trading in the equity
markets is limited to certain order types and times of day; \104\
however, in the options market, floor trading can represent a
substantial portion of trading volume.
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\103\ This includes the New York Stock Exchange, LLC in the
equity market, as well as BOX Exchange LLC; Cboe Exchange, Inc.;
Nasdaq PHLX LLC; NYSE American LLC; and NYSE Arca, Inc. in the
options market. One additional options exchange, MIAX SAPPHIRE, LLC,
expects to open a physical trading floor on June 30, 2025. See,
e.g., <a href="https://www.miaxglobal.com/alert/2024/12/06/miax-sapphire-options-exchange-trading-floor-update-notification-important">https://www.miaxglobal.com/alert/2024/12/06/miax-sapphire-options-exchange-trading-floor-update-notification-important</a>. In
addition, several of these exchanges have so-called ``virtual
trading floors,'' which allow market participants remote access to
an electronic program with video, audio, and chat functions that is
intended to take the place of open outcry in the event that the
exchange's physical trading floor becomes inoperable. See Securities
Exchange Act Release No. 90658 (Dec. 14, 2020) (Cboe Exchange, Inc.;
Order Granting Accelerated Approval of a Proposed Rule Change) and
Securities Exchange Act Release No. 91714 (Apr. 29, 2021) (Notice of
Filing of Proposed Rule Change to Adopt BOX Rule 7670 to Establish a
Virtual Trading Floor on BOX).
\104\ In particular, the Commission understands that most floor
trading in the equity market happens at market close, particularly
in NYSE's Closing Auction, through the use of discretionary orders
(``D-orders''), which are orders exclusively available through NYSE
floor brokers that allow orders to be entered or cancelled up until
one second before the auction clears (vs. 15 minutes for other types
of orders). See, e.g., ``D-ORDER<SUP>TM</SUP> orders: The Floor
Broker's modern trading tool,'' available at <a href="https://www.nyse.com/article/trading/d-order">https://www.nyse.com/article/trading/d-order</a>, stating that interest represented via the
floor currently contributes more than one-third of NYSE's total
Closing Auction volume; see also ``NYSE Closing Auction: price
discovery opportunities reach new highs'' (August 29, 2024),
available at <a href="https://www.nyse.com/data-insights/nyse-closing-auction-price-discovery-opportunities-reach-new-highs">https://www.nyse.com/data-insights/nyse-closing-auction-price-discovery-opportunities-reach-new-highs</a>, stating that
as of Aug. 2024, Closing D-Orders account for over 46% of the NYSE
Closing Auction executed volume.
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A Commission staff analysis of data from OPRA Option Trade Reports
shows that, in the fourth quarter of 2024, trading on options exchange
floors made up 41.6% of options trading in terms of notional volume and
7.7% of executed options contracts.\105\ The analysis considers various
measures meant to capture exchanges' share of floor trading (including
the percentage of floor trades, contract volume, and notional trading
volume) across the five options exchanges with physical trading floors
during the fourth quarter of 2024. Also included is a measure of the
exchanges' overall market share (measured as the percentage of total
notional options trading volume taking place on that exchange).
---------------------------------------------------------------------------
\105\ The analysis uses data from OPRA Option Trade Reports,
collected from MIDAS. Floor trades are defined as options trades
that are marked in OPRA with message types SLFT (Single Leg Floor
Trade), MLFT (Multi Leg floor trade), MFSL (Multi Leg floor trade
against single leg(s)), TLFT (Stock Options floor trade), TFSL
(Stock Options floor trade against single leg(s)), and CBMO (Multi
Leg Floor Trade of Proprietary Products). See OPRA Pillar Input
Specification (Dec. 6, 2024), available at <a href="https://cdn.opraplan.com/documents/OPRA_Pillar_Output_Specification.pdf">https://cdn.opraplan.com/documents/OPRA_Pillar_Output_Specification.pdf</a>. Floor trading can
also represent a much larger portion of trading volume on any given
day; for example, the largest single-day percentage of floor trading
(in terms of notional volume) was 64.4% in Q4 2024. At the same
time, floor trades made up just 0.24% of options trades in Q4 2024
on average (single-day maximum of 0.35%), highlighting that trades
on the floor tend to be very large.
---------------------------------------------------------------------------
Table 1 shows that floor market share (in terms of the notional
value of floor trading volume) tends to be less concentrated across the
five options exchanges than their overall market share (in terms of
overall notional trading volume).
Table 1--Floor Trading Market Share by Options Exchange, Q4 2024
----------------------------------------------------------------------------------------------------------------
Floor market Floor market Floor market Overall market
Options exchange share (% of floor share (% of floor share (% of floor share (% of total
trades) contract volume) notional volume) notional volume)
----------------------------------------------------------------------------------------------------------------
BOX Exchange LLC.................... 45.0 26.5 9.0 5.6
Cboe Exchange, Inc.................. 46.1 31.2 80.1 50.7
Nasdaq PHLX LLC..................... 6.7 25.8 8.5 8.1
NYSE American LLC................... 1.4 9.4 1.7 2.9
NYSE Arca, Inc...................... 0.8 7.1 0.7 7.4
----------------------------------------------------------------------------------------------------------------
This table shows various statistics meant to capture the distribution of shares of floor trading across the
options exchanges that offer physical trading floors. Column 1 measures the number of options floor trades on
each exchange, divided by the total number of options floor trades across all exchanges. Column 2 measures the
number of options contracts traded on a given exchange's trading floor, divided by the total number of options
contracts traded across all exchange floors. Column 3 measures the total notional value of options traded on a
given exchange's trading floor, divided by the sum of notional options volume traded across all exchange
floors. Columns 1-3 use data from OPRA Option Trade Reports, collected from MIDAS. Floor trades are defined as
options trades that are marked in OPRA with message types SLFT (Single Leg Floor Trade), MLFT (Multi Leg floor
trade), MFSL (Multi Leg floor trade against single leg(s)), TLFT (Stock Options floor trade), TFSL (Stock
Options floor trade against single leg(s)), and CBMO (Multi Leg Floor Trade of Proprietary Products). See OPRA
Pillar Input Specification (Dec. 6, 2024), available at <a href="https://cdn.opraplan.com/documents/OPRA_Pillar_Output_Specification.pdf">https://cdn.opraplan.com/documents/OPRA_Pillar_Output_Specification.pdf</a>. Overall Market Share in column 4 is calculated as the sum of notional
volume traded on a given exchange, as a percentage of the total notional volume traded across all options
exchanges (including those without trading floors), using data for Q4 2024 from CBOE's U.S. Options Market
Volume Summary, available at <a href="https://www.cboe.com/us/options/market_statistics/">https://www.cboe.com/us/options/market_statistics/</a>. The sum of Column 4 is less
than 100% because it only includes the respective market shares of options exchanges with trading floors. The
market share of the overall options market belonging to exchanges that do not operate trading floors is not
included in Column 4.
[[Page 26347]]
It is difficult to interpret this further because, unlike in the
equities markets, the products traded on options exchange trading
floors tend to be proprietary products that are not cross-listed across
options exchanges and, as a result, are traded exclusively on the
listing exchange.\106\ To the extent that these products do not have
substantially similar substitute products that are traded on other
exchanges, the degree to which options exchange floors compete with one
another or with electronic exchanges for order flow would be
limited.\107\ Furthermore, the differences between market shares in
terms of floor trade numbers and floor notional volume show that there
is variation across exchanges in terms of average floor trade sizes.
For example, while BOX Exchange, LLC handles 45% of all options floor
trades, it handles only around a quarter of floor trading in terms of
notional value, implying that this exchange likely handles a large
number of smaller-sized trades. Lastly, the significant differences
between floor market share and overall market share for some exchanges
implies that the amount of floor trading as a percentage of an
exchange's total options trading varies significantly across
exchanges.\108\ As such, floor trading may be of varying importance to
different exchanges' business models.
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\106\ For example, the Commission understands that options floor
trading on Cboe tends to be concentrated in S&P 500 Index (SPX)
options, Cboe Volatility Index (VIX) options, Russell 2000 Index
(RUT) and SPDR S&P 500 ETF Trust (SPY) options, most of which are
proprietary Cboe products.
\107\ For certain options, there are substitute products that
are traded on other exchanges, but these may not be perfect
substitutes. For example, any options exchange can develop products
with SPY as underlying to list those products and other options
exchanges indeed trade options on SPY, which could compete with SPX
options. Other options exchanges also have options on volatility
indices meant to compete with VIX options.
\108\ For example, based on OPRA Option Trade Reports data,
floor trading represented more than 70% of the notional value of
options traded on BOX Exchange LLC in Q4 2024, but just 9.6% of the
notional value of options traded on NYSE Arca over the same time
period.
---------------------------------------------------------------------------
In some cases, exchange trading floors may compete directly with
electronic limit order books for both orders and participants, though
this competition may be limited. For example, exchange trading floors
are often used for larger and complex orders that benefit from more
human intervention,\109\ implying that exchange trading floors have a
competitive advantage for these types of orders.\110\ At the same time,
there is mixed evidence that market participants are easily able to
substitute electronic markets for exchange floor trading on equity
exchanges, e.g., following the closure of exchange floors during the
COVID-19 pandemic.\111\
---------------------------------------------------------------------------
\109\ See, e.g., supra note 94. Order sizes on trading floors
vary widely, and as mentioned above, it appears likely that BOX
Exchange handles a large number of smaller-sized trades.
\110\ Some electronic exchanges have sought to create features
meant to compete for capture some order flow that floor exchanges
attract. For example, the International Securities Exchange
introduced a ``facilitation mechanism'' to compete for order flow
that tended to be directed to exchange floors. See Securities
Exchange Act Release No. 49056 (Jan. 12, 2004), 69 FR 2798, 2799
(Jan. 20, 2004) (Notice of Filing of Proposed Rule Change and
Amendment No. 1 thereto by International Securities Exchange, Inc.,
Relating to Pricing of Block and Facilitation Trades).
\111\ See, e.g., Cox, J., & Woods, D, COVID-19 and market
structure dynamics, 147 Journal of Banking & Finance, 106362 (2023),
finding that the closing of the NYSE floor was not consequential for
U.S. markets since many electronic trading platforms and trading
algorithms have replaced the role of human traders. But see
Brogaard, J., Ringgenberg, M. C., & Roesch, D, 80(1) Does floor
trading matter?, The Journal of Finance, 375-414 (2024), finding
that liquidity deteriorated during the floor closures, as in-person
human interaction facilitates the transfer of valuable information
in a way that cannot be easily replaced with algorithms.
---------------------------------------------------------------------------
Floor brokers and floor market makers operate on exchange trading
floors.\112\ Some market participants employ floor brokers to trade on
their behalf; these market participants are likely to be institutional
traders engaged in large and/or complex trades. The Commission is not
able to estimate the total number of entities that engage in floor
trading on exchange floors across both equity and options exchanges.
The Commission estimates that there are currently 21 firms that
maintain floor brokers in equity markets; \113\ due to the higher
overall share of floor trading on options markets, it is likely that
there are more firms that are active in floor trading on options
exchanges. The baseline also consists of the existing capacity
constraints on physical exchange trading floors, which may limit the
number of market makers and broker-dealers that can engage in floor
trading.
---------------------------------------------------------------------------
\112\ Floor brokers are typically individuals that register to
participate on an exchange trading floor for the purpose of
accepting and handling orders; floor market makers are market makers
that have a physical presence on an exchange's trading floor and
have quoting obligations, providing quotes electronically, in open
outcry, and/or otherwise verbally.
\113\ See NYSE, Trading Floor Broker Directory, available at
<a href="https://www.nyse.com/trading-floor-broker-directory">https://www.nyse.com/trading-floor-broker-directory</a> (last visited
April 30, 2025).
---------------------------------------------------------------------------
As the Exempt Activities have, up to now, been exempted from CAT
reporting requirements, the Commission does not have quantitative
information on, and is unable to quantify, the extent to which the
Exempt Activities are used in floor trading, and neither CAT LLC in the
Proposed Amendment nor any commenter to the Proposed Amendment offer
quantitative estimates of these Exempt Activities. However, the
Commission is able to quantify the market share of floor trading, e.g.,
see Table 1, which reports market shares of floor trading of options
exchanges.
b. Upstairs Activity
The upstairs market has traditionally functioned through
intermediaries (i.e., broker-dealers), who facilitate block trading by
locating counterparties for large trades (typically large institutional
investors whose trades are liquidity-motivated and not based on
information).\114\ The importance of the upstairs market for
facilitating institutional trading has likely decreased over recent
years, due to the growing use of algorithms and smart order routers,
which permit institutional investors and their broker-dealers to break
large parent orders up into smaller child orders for the purposes of
routing (thus serving as a substitute to the use of the upstairs
market),\115\ as well as the growing importance of Alternative Trading
Systems (``ATSs'').\116\ According to one industry report, the upstairs
market represented about 14.4% of off-exchange trading as of the third
quarter of 2021.\117\ Major participants in this market include large
banks, for whom balance sheet adjustments often require trading in
large blocks, as well as ETF market makers and institutional brokers
that specialize in block trading.\118\ Confirming the purpose of the
upstairs market as facilitating large-sized trades, the report found
that, for these participants, a significant majority of their upstairs
trading is done in block
[[Page 26348]]
sizes.\119\ According to one commenter, the upstairs market provides
price discovery and assists in minimizing market impact, particularly
for stocks and options that are less liquid or have wider spreads.\120\
---------------------------------------------------------------------------
\114\ See, e.g., Madhavan, A., & Cheng, M., In search of
liquidity: Block trades in the upstairs and downstairs markets, The
Review of Financial Studies, 175-203 (1997).
\115\ See Beason T. & Wahal S., The Anatomy of Trading
Algorithms (working paper Jan. 21, 2021), available at <a href="https://ssrn.com/abstract=3497001">https://ssrn.com/abstract=3497001</a> (retrieved from SSRN Elsevier database).
\116\ For example, academic papers have found evidence that high
frequency traders and other institutional investors make up a
substantial fraction of odd-lot trades. See, e.g., Hardy J., et al.,
Are All Odd-lots the Same? Odd-lot Transactions By Order Submission
and Trader Type, 79 Journal of Banking & Finance, 1 (2017); O'Hara
M., et al., What's Not There: Odd lots and Market Data, 69 Journal
of Finance, 2199 (2014).
\117\ See Rosenblatt Securities, A Closer Look at Off-Exchange
and Retail Market Share (November 4, 2021), available at <a href="https://www.rbltresearch.com/ngdox/viewer/fcec4a21-4ab3-4583-8f98-7111bde9cae0">https://www.rbltresearch.com/ngdox/viewer/fcec4a21-4ab3-4583-8f98-7111bde9cae0</a> (``Rosenblatt''). In order to arrive at an estimate of
the size of the upstairs market, the authors of this report exclude
from FINRA's non-ATS OTC data all trading that is unlikely to be
upstairs trading, such as OTC closing trade prints and trading by
off-exchange venues that they know to not be engaged in upstairs
trading, including wholesalers and single-dealer platforms (SDPs).
The same report estimated that off-exchange trading made up 44% of
total equity trading in October 2021.
\118\ See, e.g., Rosenblatt, at 6.
\119\ See Rosenblatt, at 7-8.
\120\ See December 2022 FIF Letter, at 3.
---------------------------------------------------------------------------
As the Exempt Activities have been exempted from CAT reporting
requirements, the Commission does not have information related to, and
is unable to estimate, the extent to which the Exempt Activities are
used in the upstairs market. However, according to one commenter, less
than one out of ten thousand orders in the upstairs trading market
involve the Exempt Activities.\121\ There may be barriers to entry to
the upstairs market for market makers in the form of reputational
capital.\122\ Additionally, there may be barriers to entry to the
upstairs market in the form of the costs of setting up the
infrastructure for market makers to engage in the Exempt Activities in
the upstairs market (such as acquiring email and chat functionalities)
however, such costs are likely to be small.
---------------------------------------------------------------------------
\121\ See September 2024 FIF Letter, at 5.
\122\ For example, academic literature has shown that
reputational capital is highly valued among upstairs market makers.
See, e.g., Smith, B.F., Turnbull, D.A.S., & White, R.W., Upstairs
market for principal and agency trades: Analysis of adverse
information and price effects, The Journal of Finance, 1723-1746
(2001).
---------------------------------------------------------------------------
B. Efficiency
The Commission analyzed three types of efficiency impacts from the
Proposed Amendment, as modified herein: operational efficiency in terms
of CAT operations \123\ or the processes for collecting and reporting
CAT data; regulatory efficiency in terms of the impact on regulatory
activities; and market efficiency in terms of trading and price
formation. The Commission expects the Proposed Amendment, as modified
herein, to have some impacts on efficiency, some of which may be
positive and some of which may be negative. The Commission expects the
impacts of the Proposed Amendment, as modified herein, to be different
for the upstairs market and for floor trading. Amending the CAT NMS
Plan to permanently exclude the Exempt Activities for the upstairs
market will result in permanent operational efficiency gains and
regulatory efficiency losses. For floor trading, amending the CAT NMS
Plan to codify a deadline of July 31, 2030, for reporting the Exempt
Activities to the CAT will result in temporary operational efficiency
gains and regulatory efficiency losses that will end when the temporary
exemption expires on July 31, 2030. However, the Proposed Amendment, as
modified herein, is expected to have only minor effects on market
efficiency for both the upstairs market and floor trading, as discussed
below. A permanent exemption for floor trading would have resulted in
marginally more cost savings but with a reduction in regulatory
efficiency.
---------------------------------------------------------------------------
\123\ Economically, operational efficiency refers to the
effective use of resources to generate a given output. In the case
of CAT, the output refers to CAT data, which are generated for
regulatory purposes. The analysis of operational efficiency is
simplified by focusing on the use of resources as measured by the
cost savings, net of implementation costs, whereas the efficiency
effects of changes in CAT data are discussed separately (as impacts
on regulatory efficiency).
---------------------------------------------------------------------------
1. Operational Efficiency
a. Upstairs Market
By making the exemption permanent and eliminating the possibility
that the Exempt Activities in the upstairs market will be required to
be reported, the Proposed Amendment, as modified herein, will
incrementally increase operational efficiency, because the Exempt
Activities for the upstairs market will not be included in CAT. This
means that the Central Repository will not incur the costs of
processing and storing the CAT data stemming from the Exempt Activities
in the upstairs market. These costs savings, and thus the improvements
to operational efficiency, are likely to be small as long as the Exempt
Activities in the upstairs market constitute only a relatively small
share of overall market activity currently reported to CAT. The
Proposed Amendment, as modified herein, will also improve the
operational efficiency of CAT by eliminating any potential costs by CAT
LLC or the Plan Processor, which could be substantial, in developing
technical specifications and providing guidance on which upstairs
activities would be required to be recorded and reported.\124\
---------------------------------------------------------------------------
\124\ See supra Section IV.C for a discussion of additional
costs of including the Exempt Activities in the upstairs market
because there are no exchange rules that govern when or whether a
particular communication by an Industry member is ``firm'' and thus
reportable to CAT.
---------------------------------------------------------------------------
b. Floor Trading
By extending the temporary exemption for the reporting of the
Exempt Activities for floor trading, the Proposed Amendment, as
modified herein, will have a small temporary positive impact on
operational efficiency. In particular, delaying the CAT reporting
requirement for the Exempt Activities for floor trading from July 31,
2026, to July 31, 2030, will delay the costs associated with processing
and storing of these data until July 31, 2030, and result in temporary
improvements to operational efficiency during this time. These
improvements to operational efficiency, are likely to be relatively
small because we do not expect that reporting the Exempt Activities for
floor trading following the expiration of the exemption on July 31,
2030, will require significantly more processing and storage in the
Central Repository relative to current CAT data.
Participants and Industry Members who will eventually be required
to record and report the Exempt Activities could also experience an
operational efficiency improvement from the delay. In particular, the
delay will provide time to explore more efficient solutions to
systematize verbal activity so that Participants and Industry Members
can collect and report data on the Exempt Activities for floor
trading.\125\
---------------------------------------------------------------------------
\125\ See discussion in Section IV.C.1 for further information
on how the material terms of verbal orders and quotes are already
systematized electronically. This discussion also explains why the
costs put forth by CAT LLC appear overstated with respect to the
Exempt Activities for floor trading. See also supra note 78.
---------------------------------------------------------------------------
The Proposed Amendment would have incrementally improved
operational efficiency relative to extending the expiration of the
temporary exemption for floor trading because it would have made the
exemption permanent and eliminated, rather than delay, the requirement
to report the Exempt Activities for floor trading to CAT. Thus, the
Proposed Amendment, would have resulted in lower costs associated with
processing and storing CAT data because the Exempt Activities for floor
trading would never be included in CAT. The Commission believes these
cost savings and the resulting improvements to operational efficiency
of the CAT would have been small because we expect the Exempt
Activities would not require significantly more processing and storage
in the Central Repository than current CAT data.
2. Regulatory Efficiency
a. Upstairs Market
The Proposed Amendment, as modified herein, is expected reduce
regulatory efficiency with respect to the oversight of trading in the
upstairs market. In particular, the Proposed Amendment, as modified
herein, represents a potential loss of information in CAT after July
31, 2026, because it will make permanent the current temporary
exemption of reporting information about the Exempt Activities to CAT
for the upstairs
[[Page 26349]]
market, which would have been required to be reported after July 31,
2026.\126\ The Commission has previously stated that the information
about the Exempt Activities would allow regulators to more capably
perform regulatory and surveillance functions.\127\ The inclusion of
this information in CAT would have reduced the effort needed for
regulators to engage in regulatory oversight of the upstairs market.
This potential loss of efficiency could increase the time and
complexity of oversight of the upstairs market relative to having
access to the Exempt Activities in the upstairs market in CAT, reducing
regulatory efficiency for the upstairs market after July 31, 2026,
assuming that recording and reporting such information would eventually
be feasible.
---------------------------------------------------------------------------
\126\ See supra Section IV.C for a discussion of the information
that is missing from CAT because of the exemption for the Exempt
Activities.
\127\ See supra note 93, citing the November 2020 Exemptive
Order, in which the Commission gave the example that the reporting
of firm verbal quotes from floor market makers would allow
regulators to determine whether a market maker has ``backed away''
from a firm quote. See also supra Section IV.C.2 for a discussion of
other use cases for CAT data on the Exempt Activities from the
upstairs market.
---------------------------------------------------------------------------
The Commission believes that such a potential reduction in
regulatory efficiency might be limited for two reasons: the potential
avoidance of reportable activity to CAT and, for the activity reported,
potential inconsistency and inaccuracy of the Exempt Activities for the
upstairs market in CAT data. First, in the absence of an exemption,
Industry Members might be incentivized to avoid CAT reporting by
increasing their use of non-firm IOIs and other activity that is not
reported to CAT in place of the currently Exempt Activities that would
be reported to CAT.\128\ This would reduce the potential regulatory
gain of including the Exempt Activities in the upstairs market in CAT,
and thus, reduces the regulatory inefficiencies of not including them.
---------------------------------------------------------------------------
\128\ See supra Section IV.C.2, which states that according to
CAT LLC and one commenter, without permanent relief from reporting
these firm bids and offers, Industry Members would be incentivized
to provide non-firm indications of interest to other Industry
Members and customers.
---------------------------------------------------------------------------
Second, CAT LLC states that the regulatory value of including the
Exempt Activities for the upstairs market in CAT would be limited.\129\
In particular, CAT LLC states that such records would be inconsistent
and prone to error because recording such information would require
human reviewers to make subjective determinations of what to
report.\130\ The Commission agrees that such inconsistencies and errors
could reduce the regulatory value of including the Exempt Activities
for the upstairs market in CAT and that this limits the reductions in
regulatory efficiency.
---------------------------------------------------------------------------
\129\ See supra note 33 and associated text.
\130\ See Notice, at 67502-03.
---------------------------------------------------------------------------
The permanent exemption from CAT reporting requirements for the
Exempt Activities in the upstairs market could also reduce regulatory
efficiency if it incentivizes Industry Members to move activity
currently reported to CAT to the upstairs market. In particular, if
market participants expected that the Exempt Activities in the upstairs
market would eventually require reporting to CAT, the permanent
exemption may reduce the perceived costs of the upstairs market
relative to alternatives that currently report to CAT. If so, this
could result in the movement of some activity to the upstairs market
from those alternatives.\131\ Such activity would then not be available
in CAT data, resulting in a potential increase in the time and effort
to engage in certain regulatory activities needing this information,
reducing regulatory efficiency.
---------------------------------------------------------------------------
\131\ See infra Section V.C.1, which discusses the impact of the
Proposed Amendments, as modified, on the competition and entry in
the upstairs market.
---------------------------------------------------------------------------
b. Floor Trading
The Proposed Amendment, as modified herein, is expected to have a
small negative impact on regulatory efficiency for floor trading. The
Proposed Amendment, as modified herein, will amend the CAT NMS Plan to
extend the deadline to July 31, 2030, for the reporting of the Exempt
Activities that occur on exchange floors. To the extent that the Exempt
Activities would have been required to be reported at the expiration of
the current temporary exemption on July 31, 2026, this represents a
delay of information in CAT, at least until the expiration of the
extended temporary exemption.\132\ The Commission has previously stated
that the information about the Exempt Activities is valuable for
regulatory and surveillance functions and would allow regulators to
more capably perform regulatory and surveillance functions.\133\
Therefore, the extension delays an improvement in regulatory
efficiency.
---------------------------------------------------------------------------
\132\ See supra Section IV.C for a discussion of the information
that is missing from CAT because of the exemption for the Exempt
Activities.
\133\ See supra Section V.A; see also supra note 93, citing the
November 2020 Exemptive Order, wherein the Commission stated that
collecting verbal quotes and orders would provide regulatory
benefits that do not currently exist. The Commission gave the
example that the reporting of firm verbal quotes from floor market
makers would allow regulators to determine whether a market maker
has ``backed away'' from a firm quote. The Commission also stated
that regulators do not have detailed information relating to most
verbal quotes and orders, which would allow regulators to more
capably perform regulatory and surveillance functions, and that it
did not believe it is appropriate to exclude such quotes and orders
from CAT reporting, which often are more complex and/or involve
larger-sized orders.
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CAT LLC stated that much of the information of the Exempt
Activities is already reported to CAT, including initial customer
orders and their resulting trades. The Commission understands, however,
that while information regarding the lifecycles of customer orders
represented on a floor is included in CAT, information about the market
maker quotes that bid and offer to interact with those customer orders
is not reported to CAT. In particular, CAT does not include any
information about the bids and offers that do not trade against
customer orders represented on the floor and does not include all
information of value about the bids and offers that do trade against
such customer orders. The improved surveillance and commensurate
regulatory benefits that would be achieved by having direct and timely
access to this activity in CAT will therefore be delayed until July 31,
2030, under the Proposed Amendment, as modified.
The temporary exemption for the Exempt Activities for floor trading
may also incentivize Industry Members to continue the use or increase
the use of the Exempt Activities in place of activity reportable to
CAT,\134\ thereby circumventing having to report those activities to
CAT. In particular, if some market participants engage in Exempt
Activities on trading floors because they are not reportable to CAT (or
because it costs less because they are not reportable) instead of an
alternative trading activity that requires reporting to CAT, such
activity will not be reported to CAT until after the temporary
exemption expires. Therefore, the delay in the exemption could delay
the inclusion of this activity in CAT and its commensurate improvements
to regulatory efficiency.
---------------------------------------------------------------------------
\134\ For example, Industry Members could increase their use of
verbal quotes rather than entering a limit order that would be added
to a limit order book.
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Despite current technological limitations that may hinder the
ability of market participants to report their floor trading activity
to CAT, which is scheduled to commence on July 26, 2026, the Proposed
Amendment, as amended herein, could nevertheless have a positive impact
on regulatory
[[Page 26350]]
efficiency if a delay in mandated CAT reporting provides the additional
time (and availability of other critical resources) needed for the
development of technology that more accurately reflects the Exempt
Activities on the floor. Regarding current technological limitations,
CAT LLC states that current technology is not sophisticated enough to
reliably, accurately, and consistently capture, parse, analyze, and
report the Exempt Activities.\135\ If the technology available by 2030
can more accurately capture verbal activity than the technology
available by 2026, then the extension will promote more accurate data,
which promotes regulatory efficiency.
---------------------------------------------------------------------------
\135\ See Notice, at 67500.
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Since the extension of the exemptive relief from CAT reporting
requirements for Exempt Activities on trading floors is set to expire
on July 31, 2030, the associated regulatory efficiency losses stemming
from this extension discussed above will be temporary. In particular,
the modification to the Proposed Amendment reduces the regulatory
efficiency loss relative to the original proposal, because it will
allow regulators to begin accessing CAT data for Exempt Activities on
trading floors on July 31, 2030, which would have otherwise been
permanently exempt under the Proposed Amendment. Having the information
on the Exempt Activities on the floor eventually in CAT data will
reduce the potential for regulators to have to request information on
such Exempt Activities to the extent that there is a record for them
from Participants and Industry Members when needed. This will improve
regulatory efficiency. Therefore, the Proposed Amendment, as modified
herein, will result in improved regulatory efficiency, relative to the
original Proposed Amendment, although this improved efficiency will be
delayed until July 31, 2030.
3. Market Efficiency
a. Upstairs Market
The Proposed Amendment, as modified herein, is expected to lead to
minor and mixed effects on market efficiency through its application to
the upstairs market. In particular, it could promote market efficiency
by removing any current incentives to avoid the upstairs market for
situations in which the upstairs market provides the most efficient
executions or avoiding any increased incentives to avoid the upstairs
market in such situations. On the other hand, it could harm market
efficiency if it creates incentives to send orders to the upstairs
market when doing so is not efficient, such as when it reduces pre-
trade transparency.
The Proposed Amendment, as modified, will promote market efficiency
if it incentivizes market participants to increase their use of the
Exempt Activities in the upstairs market when it is efficient for them
to do so. By making the exemption permanent and eliminating the
possibility that Exempt Activities in the upstairs market will be
required to be reported, the Proposed Amendment, as modified herein,
prevents a future cost increase of such activity. If market
participants are currently curtailing this activity because of these
future cost increases,\136\ they may increase such activity when the
exemption becomes permanent. An increase in the Exempt Activities in
the upstairs market when it is efficient for them to do so, e.g.,
facilitating block trading in the upstairs market,\137\ promotes market
efficiency.
---------------------------------------------------------------------------
\136\ See September 2024 FIF Letter, at 2-4. See also supra note
54 and associated text.
\137\ For example, one commenter stated that the upstairs market
provides an important function for minimizing market impact and
facilitating price discovery. See December 2022 FIF Letter, at 3.
While the opportunity to reduce price impact is particularly
beneficial to market participants seeking to execute large trades,
any improvement in price discovery provides market-wide efficiency
gains that accrue to a wide array of market participants.
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In addition, the Proposed Amendment, as modified, promotes
efficiency by preventing any increase in incentives to avoid such
activity, which could alter market structure and result in worse
execution outcomes. CAT LLC and one commenter state that requiring the
reporting of the Exempt Activities in the upstairs market to CAT could
negatively modify market participant behavior and market
structure.\138\ Specifically, CAT LLC and this commenter state that
without permanent relief from reporting the Exempt Activities in the
upstairs market, Industry Members would be incentivized to rely on non-
firm IOIs, which could result in reduced execution quality, reduced
market liquidity, and potentially disrupt trading. As a result, this
could have a negative impact on market efficiency. Making the exemption
permanent prevents this potential negative impact, thus promoting
efficiency.
---------------------------------------------------------------------------
\138\ See supra Section IV.C.2 for further discussion.
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On the other hand, making the exemption permanent for the upstairs
market could also have a negative impact on market efficiency. The
Commission also recognizes that, if the Exempt Activities are used more
widely in the upstairs market after the exemption is made permanent and
are used in place of non-exempt activities to a greater degree,\139\
market efficiency could be affected by a reduction in pre-trade
transparency because the Exempt Activities are not disseminated widely
to the market, while many non-exempt activities are.\140\ For example,
to the extent that institutional traders (and their brokers) begin to
utilize the services of upstairs trading desks in lieu of smart order
routing systems,\141\ this would represent a shift away from a system
of trading with widely disseminated quotes (i.e., any limit orders
routed to national securities exchanges via smart order routers would
be disseminated widely to the market through both the SIP and
proprietary exchange data products) and towards a system of trading in
which quotes are not disseminated in publicly available market data.
This would represent a decrease in pre-trade transparency. A decrease
in pre-trade transparency may negatively affect the efficiency of the
trading process and price discovery, which may lead to lower market and
price efficiency.
---------------------------------------------------------------------------
\139\ Either in response to the exemption being made permanent
or in response to changing market structure and conditions in
conjunction with the fact that the Exempt Activities are not
required to be reported to CAT.
\140\ For example, an Exempt Activity could be a bilateral
negotiation between two parties through messages in a chat that only
the two parties can see. To the extent that, as a result of the
Proposed Amendment, these parties begin to make use of such
bilateral negotiations instead of, e.g., submitting quotes to public
markets, this could reduce pre-trade transparency.
\141\ The usage of the upstairs market does not have to be due
to the Exempt Activities not being required to be reported to CAT,
it could be due to other factors, e.g., changes in market structure
or market conditions that favor the upstairs market.
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b. Floor Trading
The Proposed Amendment, as modified herein, is expected to lead to
mixed and minor effects on market efficiency for floor trading. By
extending the temporary exemption for the Exempt Activities for floor
trading, the Proposed Amendment, as modified herein, would delay the
costs of CAT Reporting, which may lead market participants to increase
their use of the Exempt Activities for floor trading when it is
efficient for them to do so. This could have a positive impact on
market efficiency. However, because extending the temporary exemption
only delays the requirement to report the Exempt Activities for floor
trading, the impact, if any, will be minor.
The Proposed Amendment would have incrementally improved market
efficiency relative to extending the
[[Page 26351]]
expiration of the temporary exemption for floor trading because it
would have made the exemption permanent and eliminated, rather than
delay, the requirement to report the Exempt Activities for floor
trading to CAT. Thus, the Proposed Amendment could have led market
participants to increase their use of the Exempt Activities when it is
efficient for them to do so permanently rather than at some point
limiting or reducing their use of the Exempt Activities in response to
the expiration of the extension on July 31, 2030.
On the other hand, the Commission recognizes that some market
participants may have believed that the Commission would provide a
permanent exemption for floor activities. As such, the modified
proposal, which only provides a temporary exemption, may increase the
incentive of some market participants to continue using non-exempt
activities instead of switching towards floor trading. This, in turn,
could help prevent a reduction in pre-trade transparency because the
Exempt Activities are not disseminated widely to the market, while many
non-exempt activities are.\142\ An increase in pre-trade transparency
may positively affect the efficiency of the trading process and price
discovery, which may lead to greater market and price efficiency.
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\142\ Verbal quotes on the trading floor are not reported to the
SIP and therefore provide less pre-trade transparency relative to
the limit order book, wherein all quotes are reported to the SIP.
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C. Competition
The Commission analyzed the potential impact from the Proposed
Amendment on competition in the financial markets. The Commission
expects the Proposed Amendment, as modified herein, to provide small
competitive advantages to the upstairs market and floor trading
relative to alternatives to these two trading venues, such as
electronic exchange limit order books in the case of floor trading, and
smart order routers or ATSs in the case of the upstairs market.\143\ In
addition, in reducing the operating costs of CAT, these cost savings
will marginally reduce the competitive advantages and disadvantages
inherent in the CAT Funding Model.\144\
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\143\ See supra Section V.A.2.a for a discussion of the market
that exchange floor trading competes in. See also supra Section
V.A.2.b for a discussion of the market that upstairs trading
competes in.
\144\ See Securities Exchange Act Release No. 98290 (Sep. 6,
2023), 88 FR 62628 (Sep. 12, 2023). See also Securities Exchange Act
Release No. 101901 (Dec. 12, 2024), 89 FR 103033 (Dec. 18, 2024).
For example, the permanent exemption for the upstairs market under
the Proposed Amendment, as modified herein, will allow Participants
to potentially avoid certain potential costs that would be
distributed through the CAT Funding Model. Examples of these include
the potential cost of filing for future extensions as well as any
potential cost associated with future extensions (e.g., in the prior
November 2020 and July 2023 Exemptive Orders, Participants were
required to submit a written status update on the reporting of
Exempt Activities).
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1. Upstairs Market
Overall, the Commission expects small impacts on competition
resulting from the permanent exemption for the upstairs market, because
market participants already use Exempt Activities under the current
temporary exemption for the upstairs market, and the costs associated
with building out infrastructure with which to conduct Exempt
Activities in the upstairs market are likely not to be large as to
prohibit market participants from pursuing profitable
opportunities.\145\
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\145\ The costs for physical infrastructure, such as phone
lines, chats, and other forms of electronic communication methods,
are likely to be small in most cases. However, because the upstairs
market relies on relationships, the largest costs could come from
hiring employees who have connections and relationships that allow
them to be efficient and competitive in the upstairs market.
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By permanently exempting Exempt Activities and eliminating the
possibility that the Exempt Activities will be required to be reported
for the upstairs market, the Proposed Amendment, as modified herein,
could provide a competitive advantage for Exempt Activities in the
upstairs market relative to other alternatives and could also increase
the competition within the upstairs market. In particular, the Exempt
Activities in the upstairs market will not incur the costs of CAT
reporting. Having lower costs could put the upstairs market at a
competitive advantage. In addition, not having to incur the costs of
CAT reporting of the Exempt Activities could reduce the costs of entry
into the upstairs market, though this cost reduction could be small
relative to other costs of entry.\146\
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\146\ Some cost components of entry in the upstairs market are
likely to be relatively low, such as acquiring email and chat
functionalities. However, the overall cost of entry, including the
opportunity cost of deploying human and other resources to the
upstairs market instead of other potentially profitable ventures and
the cost of acquiring reputational capital, are likely to far
outweigh CAT reporting costs of the Exempt Activities. See, e.g.,
supra note 116 and associated text for a discussion of the costs of
reputational capital. In addition, the Exempt Activities may
comprise only a small fraction of the overall upstairs market,
highlighting the relatively low cost of CAT reporting compared to
the overall costs of entry and operation in the upstairs market. For
example, according to one commenter, less than one out of ten
thousand orders in the upstairs trading market involve the Exempt
Activities. See September 2024 FIF Letter, at 5. Nevertheless, any
reduction in costs may encourage entry in the upstairs market for
firms that were previously considering entry. See also supra Section
V.A.2.b for discussion of entry costs in the upstairs market.
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2. Floor Trading
Overall, the Commission expects small impacts on competition due to
the extension of the temporary exemption for floor trading. By
extending the temporary exemption for the Exempt Activities and thus
delaying costs, the Proposed Amendment, as modified herein, could
provide a competitive advantage in floor trading relative to
alternatives and could increase the competition to provide floor
trading. While the extension could encourage or temporarily continue
the encouragement of floor trading relative to alternatives that report
to CAT, market participants already use the Exempt Activities under the
current temporary exemption and the costs associated with building out
infrastructure with which to conduct additional Exempt Activities on
trading floors is likely to be small in most cases.\147\
---------------------------------------------------------------------------
\147\ See supra note 145 for further discussion.
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The Proposed Amendment would have incrementally improved the
competitive advantage of floor trading relative to extending the
expiration of the temporary extension for floor trading because it
would have made the exemption permanent and eliminated, rather than
delayed, the requirement to report the Exempt activities for floor
trading to CAT. Thus, the Proposed Amendment might have increased the
competition in floor trading as well as make floor trading more
competitive relative to alternative trading venues permanently rather
than until the expiration of the extension on July 31, 2030.
D. Capital Formation
CAT LLC states that the savings and cost avoidance opportunities
under the Proposed Amendment 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.'' \148\ The Commission expects the Proposed
Amendment, as modified herein, to have a mixed effect on capital
formation. It will promote capital formation by improving operational
efficiency due to a reduction or delay in costs, with the greater cost
reduction for the Exempt Activities in the upstairs market.\149\
However, the mixed effects of the Proposed Amendment, as modified,
[[Page 26352]]
on market efficiency will in turn result in mixed effects on capital
formation.\150\ In contrast, the negative impact on regulatory
efficiency \151\ will negatively impact capital formation if it reduces
the ability of regulators to perform surveillance and other functions.
This could reduce investor confidence in the markets, leading to an
increase in the cost of capital. However, as the impact of the Proposed
Amendment, as modified herein, on regulatory efficiency is expected to
be limited,\152\ the impact of a reduction in regulatory efficiency on
capital formation is also expected to be limited.
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\148\ See Notice, at 67504.
\149\ See supra Section IV.C.2 for a discussion of technological
and other challenges involved in reporting activity in the upstairs
market.
\150\ See supra Section V.B.3 for a discussion of the impact of
the Proposed Amendments, as modified, on market efficiency.
\151\ See supra Section V.B.2 for a discussion of the regulatory
inefficiencies related to the lack of information about the Exempt
Activities in CAT data.
\152\ See id.
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Compared to the Proposed Amendment, as modified herein, the
Proposed Amendment would have had additional or dampening effects on
capital formation through its differential effects on cost reduction,
market efficiency, and regulatory efficiency, which are discussed in
previous sections. For example, the additional cost reduction would
have resulted in a larger positive effect on capital formation, though
still not large; \153\ the mixed effects on market efficiency would
still have resulted in a mixed effect on capital formation; \154\ and
the reduced regulatory efficiency would have resulted in a larger
reduction in capital formation.\155\
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\153\ See supra Section V.A.2.a for a discussion of potential
CAT-reporting costs that would be incurred by floor brokers under
the Proposed Amendment, as modified. Such costs would not be
incurred under the Proposed Amendment.
\154\ See supra Section V.B.3 for a discussion of the impact of
the Proposed Amendment on market efficiency.
\155\ See supra Section V.B.2 for a discussion of the impact of
the Proposed Amendment on regulatory efficiency.
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VI. Conclusion
For the reasons set forth above, the Commission finds that the
Proposed Amendment, as modified herein, is consistent with the
requirements of Section 11A and Rule 608 thereunder, in that the
Proposed Amendment, as modified herein, 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.
It is therefore ordered, pursuant to Section 11A of the Exchange
Act,\156\ and Rule 608(b)(2) thereunder,\157\ that the Proposed
Amendment (File No. 4-698), as modified herein, be, and hereby is,
approved.
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\156\ 15 U.S.C. 78k-1.
\157\ 17 CFR 242.608.
By the Commission.
Stephanie J. Fouse,
Assistant Secretary.
Appendix A
Approved Revisions to the CAT NMS Plan
Additions italicized; deletions [bracketed]
* * * * *
Article VI
Functions and Activities of CAT System
* * * * *
Section 6.3. Data Recording and Reporting by Participants.
* * * * *
(d) Participant Data. Subject to Section 6.3(c), and Appendix D,
Reporting and Linkage Requirements, and in accordance with the
Technical Specifications, each Participant shall record and
electronically report to the Central Repository the following
details for each order and each Reportable Event (subject to the
exclusions outlined in Section 6.3(g)), as applicable (``Participant
Data''):
* * * * *
(g) Verbal Activity, Floor and Upstairs Activity.
Notwithstanding any other provision of SEC Rule 613 or the CAT NMS
Plan, the following categories of data shall not be reportable to
the Central Repository under Section 6.3(d):
(i) until July 31, 2030, floor broker verbal announcements of
firm orders on an exchange that are otherwise reported as
systematized orders;
(ii) until July 31, 2030, market maker verbal announcements of
firm quotes on an exchange trading floor;
(iii) telephone discussions between an Industry Member and a
client that may involve firm bid and offer communications; and
(iv) unstructured electronic and verbal communications that are
not currently captured by Industry Member order management or
execution systems (e.g., electronic chats, text messages).
* * * * *
Section 6.4. Data Recording and Reporting by Industry Members.
* * * * *
(d) Required Industry Member Data.
(i) Subject to Section 6.4(c) and Section 6.4(d)(iii) with
respect to Options Market Makers, and consistent with Appendix D,
Reporting and Linkage Requirements, and the Technical
Specifications, each Participant shall, through its Compliance Rule,
require its Industry Members to record and electronically report to
the Central Repository for each order and each Reportable Event the
information referred to in Section 6.3(d) (subject to the exclusions
outlined in Section 6.3(g)), as applicable (``Recorded Industry
Member Data'').
* * * * *
[FR Doc. 2025-11331 Filed 6-18-25; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on June 20, 2025.
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