2018-00314. Joint Industry Plan; Notice of Filing and Immediate Effectiveness of Amendment No. 4 to the National Market System Plan Governing the Consolidated Audit Trail by Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., ...  

  • Start Preamble January 5, 2018.

    I. Introduction

    On December 11, 2017, the Operating Committee for CAT NMS, LLC (the “Company”), on behalf of the following parties to the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”): [1] Cboe BYX Exchange, Inc., (previously known as Bats BYX Exchange, Inc.), Cboe BZX Exchange, Inc. (previously known as Bats BZX Exchange), Inc., Cboe EDGA Exchange, Inc. (previously known as Bats EDGA Exchange, Inc.), Cboe EDGX Exchange, Inc. (previously known as Bats EDGX Exchange, Inc.), BOX Options Exchange LLC, Cboe C2 Exchange, Inc., Cboe Exchange, Inc., Chicago Stock Exchange, Inc., Financial Industry Regulatory Authority, Inc., Nasdaq ISE, LLC (previously known as International Securities Exchange, Inc.), Investors' Exchange, LLC, Nasdaq GEMX (previously known as ISE Gemini, LLC), Nasdaq MRX (previously known as ISE Mercury, LLC), Miami International Securities Exchange, LLC, MIAX PEARL, LLC, Nasdaq BX, Inc. (previously known as NASDAQ BX, Inc.), Nasdaq PHLX LLC (previously known as NASDAQ PHLX LLC), The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE Arca, Inc., and NYSE American (previously known as NYSE MKT, LLC) (collectively, the “Participants,” “self-regulatory organizations” or “SROs”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) pursuant to Section 11A(a)(3) of the Securities Exchange Act of 1934 (“Exchange Act”) [2] and Rule 608 thereunder,[3] a proposal to amend the Plan (“Amendment No. 4”).[4] The proposed amendment would add a fee schedule to a new Exhibit B of the Plan which sets forth the CAT fees to be paid by the Participants. A copy of proposed Exhibit B to the CAT NMS Plan is attached as Appendix A hereto. The Participants have also included, and as attached hereto, an Appendix B containing two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier. The Commission is publishing this notice to solicit comments from interested persons on Amendment No. 4.[5]

    II. Description of the Plan

    Set forth in this Section II is the statement of the purpose and summary of Amendment No. 4, along with the information required by Rule 608(a)(4) and (5) under the Exchange Act,[6] prepared and submitted by the Participants to the Commission.[7]

    A. Description of the Amendments to the CAT NMS Plan

    (1) Executive Summary

    The following provides an executive summary of the CAT funding model approved by the Operating Committee, as well as Participants' obligations related to the payment of CAT Fees calculated pursuant to the CAT funding model. A detailed description of the CAT funding model and the CAT Fees follows this executive summary.

    • CAT Costs. The CAT funding model is designed to establish CAT-specific fees to collectively recover the costs of building and operating the CAT from all CAT Reporters, including Industry Members and Participants. The overall CAT costs used in calculating the CAT Fees in this fee filing are comprised of Plan Processor CAT costs and non-Plan Processor CAT costs incurred, and estimated to be incurred, from November 21, 2016 through November 21, 2017. Although the CAT costs from November 21, 2016 through November 21, 2017 were used in calculating the CAT Fees, the CAT Fees set forth in this fee filing would be in effect until the automatic sunset date, as discussed below. (See Section A(2)(E) below)
    • Bifurcated Funding Model. The CAT NMS Plan requires a bifurcated funding model, where costs associated with building and operating the CAT would be borne by (1) Participants and Industry Members that are Execution Venues for Eligible Securities through fixed tier fees based on market share, and (2) Industry Members (other than alternative trading systems (“ATSs”) that execute transactions in Eligible Securities (“Execution Venue ATSs”)) through fixed tier fees based on message traffic for Eligible Securities. (See Section A(2) below)Start Printed Page 1400
    • Industry Member Fees. Each Industry Member (other than Execution Venue ATSs) will be placed into one of seven tiers of fixed fees, based on “message traffic” in Eligible Securities for a defined period (as discussed below). Prior to the start of CAT reporting, “message traffic” will be comprised of historical equity and equity options orders, cancels, quotes and executions provided by each exchange and the Financial Industry Regulatory Authority, Inc. (“FINRA”) over the previous three months. After an Industry Member begins reporting to the CAT, “message traffic” will be calculated based on the Industry Member's Reportable Events reported to the CAT. Industry Members with lower levels of message traffic will pay a lower fee and Industry Members with higher levels of message traffic will pay a higher fee. To avoid disincentives to quoting behavior, Options Market Maker and equity market maker quotes will be discounted when calculating message traffic. (See Section A(2)(B) below)
    • Execution Venue Fees. Each Equity Execution Venue will be placed in one of four tiers of fixed fees based on market share, and each Options Execution Venue will be placed in one of two tiers of fixed fees based on market share. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period. For purposes of calculating market share, the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA OTC reporting facility (“ORF”) will be discounted. Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period. Equity Execution Venues with a larger market share will pay a larger CAT Fee than Equity Execution Venues with a smaller market share. Similarly, Options Execution Venues with a larger market share will pay a larger CAT Fee than Options Execution Venues with a smaller market share. (See Section A(2)(C) below)
    • Cost Allocation. For the reasons discussed below, in designing the model, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. In addition, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. (See Section A(2)(D) below)
    • Comparability of Fees. The CAT funding model charges CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) comparable CAT Fees. (See Section A(2)(F) below)
    • Fee Schedule. The quarterly CAT Fees for each tier for Participants are set forth in the two fee schedules in proposed Exhibit B to the CAT NMS Plan, one for Execution Venues for NMS Stocks and OTC Equity Securities, and one for Execution Venues for Listed Options. (See Section A(3) below)
    • Sunset Provision. The CAT Fees set forth in proposed Exhibit B would sunset automatically two years from their operative date. (See Section A(2)(J) below)

    (2) Description of the CAT Funding Model

    Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. In addition to a budget, Article XI of the CAT NMS Plan provides that the Operating Committee has discretion to establish funding for the Company, consistent with a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Participants and Industry Members that are Execution Venues through fixed tier fees based on market share, and (2) Industry Members (other than Execution Venue ATSs) through fixed tier fees based on message traffic. In its order approving the CAT NMS Plan, the Commission determined that the proposed funding model was “reasonable” [8] and “reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT.” [9]

    More specifically, the Commission stated in approving the CAT NMS Plan that “[t]he Commission believes that the proposed funding model is reasonably designed to allocate the costs of the CAT between the Participants and Industry Members.” [10] The Commission further noted the following:

    The Commission believes that the proposed funding model reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and . . . the Exchange Act specifically permits the Participants to charge members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.[11]

    Accordingly, the funding model approved by the Operating Committee imposes fees on both Participants and Industry Members.

    As discussed in Appendix C of the CAT NMS Plan, in developing and approving the approved funding model, the Operating Committee considered the advantages and disadvantages of a variety of alternative funding and cost allocation models before selecting the proposed model.[12] After analyzing the various alternatives, the Operating Committee determined that the proposed tiered, fixed fee funding model provides a variety of advantages in comparison to the alternatives.

    In particular, the fixed fee model, as opposed to a variable fee model, provides transparency, ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes. Additionally, a strictly variable or metered funding model based on message volume would be far more likely to affect market behavior and place an inappropriate burden on competition.

    In addition, reviews from varying time periods of current broker-dealer order and trading data submitted under existing reporting requirements showed a wide range in activity among broker-dealers, with a number of broker-dealers submitting fewer than 1,000 orders per month and other broker-dealers submitting millions and even billions of orders in the same period. Accordingly, the CAT NMS Plan includes a tiered approach to fees. The tiered approach helps ensure that fees are equitably allocated among similarly situated CAT Start Printed Page 1401Reporters and furthers the goal of lessening the impact on smaller firms.[13] In addition, in choosing a tiered fee structure, the Operating Committee concluded that the variety of benefits offered by a tiered fee structure, discussed above, outweighed the fact that CAT Reporters in any particular tier would pay different rates per message traffic order event or per market share (e.g., an Industry Member with the largest amount of message traffic in one tier would pay a smaller amount per order event than an Industry Member in the same tier with the least amount of message traffic). Such variation is the natural result of a tiered fee structure.[14] The Operating Committee considered several approaches to developing a tiered model, including defining fee tiers based on such factors as size of firm, message traffic or trading dollar volume. After analyzing the alternatives, it was concluded that the tiering should be based on message traffic which will reflect the relative impact of CAT Reporters on the CAT System.

    Accordingly, the CAT NMS Plan contemplates that costs will be allocated across the CAT Reporters on a tiered basis in order to allocate higher costs to those CAT Reporters that contribute more to the costs of creating, implementing and maintaining the CAT and lower costs to those that contribute less.[15] The fees to be assessed at each tier are calculated so as to recoup a proportion of costs appropriate to the message traffic or market share (as applicable) from CAT Reporters in each tier. Therefore, Industry Members generating the most message traffic will be in the higher tiers, and will be charged a higher fee. Industry Members with lower levels of message traffic will be in lower tiers and will be assessed a smaller fee for the CAT.[16] Correspondingly, Execution Venues with the highest market shares will be in the top tier, and will be charged higher fees. Execution Venues with the lowest market shares will be in the lowest tier and will be assessed smaller fees for the CAT.[17]

    The CAT NMS Plan states that Industry Members (other than Execution Venue ATSs) will be charged based on message traffic, and that Execution Venues will be charged based on market share.[18] While there are multiple factors that contribute to the cost of building, maintaining and using the CAT, processing and storage of incoming message traffic is one of the most significant cost drivers for the CAT.[19] Thus, the CAT NMS Plan provides that the fees payable by Industry Members (other than Execution Venue ATSs) will be based on the message traffic generated by such Industry Member.[20]

    In contrast to Industry Members, which determine the degree to which they produce message traffic that constitute CAT Reportable Events, the CAT Reportable Events of the Execution Venues are largely derivative of quotations and orders received from Industry Members that they are required to display. The business model for Execution Venues (other than FINRA), however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.

    Focusing on message traffic would make it more difficult to draw distinctions between large and small Execution Venues and, in particular, between large and small options exchanges. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (i.e., a single tier may include both Execution Venues and Industry Members). The Operating Committee's analysis found that the majority of exchanges (15 total) were grouped in Tiers 1 and 2. Moreover, virtually all of the options exchanges were in Tiers 1 and 2.[21] Given the resulting concentration of options exchanges in Tiers 1 and 2 under this approach, the analysis shows that a funding model for Execution Venues based on message traffic would make it more difficult to distinguish between large and small options exchanges, as compared to the proposed fee approach that bases fees for Execution Venues on market share.

    The CAT NMS Plan's funding model also is structured to avoid a “reduction in market quality.” [22] The tiered, fixed fee funding model is designed to limit the disincentives to providing liquidity to the market. For example, the Operating Committee expects that a firm that has a large volume of quotes would likely be categorized in one of the upper tiers, and would not be assessed a fee for this traffic directly as they would under a more directly metered model. In contrast, strictly variable or metered funding models based on message volume are far more likely to affect market behavior. In approving the CAT NMS Plan, the SEC stated that “[t]he Participants also offered a reasonable basis for establishing a funding model based on broad tiers, in that it may be . . . less likely to have an incremental deterrent effect on liquidity provision.” [23]

    The funding model also is structured to avoid a reduction market quality because it discounts Options Market Maker and equity market maker quotes when calculating message traffic for Options Market Makers and equity market makers, respectively. As discussed in more detail below, the Operating Committee determined to discount the Options Market Maker quotes by the trade to quote ratio for options when calculating message traffic for Options Market Makers. Similarly, to avoid disincentives to quoting behavior on the equities side as well, the Operating Committee determined to discount equity market maker quotes by the trade to quote ratio for equities when calculating message traffic for equity market makers. The proposed discounts recognize the value of the market makers' quoting activity to the market as a whole.

    The CAT NMS Plan is further structured to avoid potential conflicts raised by the Operating Committee determining fees applicable to its own members—the Participants. First, the Company will operate on a “break-even” basis, with fees imposed to cover costs and an appropriate reserve. Any surpluses will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits.[24] To ensure that the Participants' operation of the CAT will not contribute to the funding of their other operations, Section 11.1(c) of the CAT NMS Plan specifically states that “[a]ny surplus of the Company's revenues over its expenses shall be treated as an operational reserve to offset future fees.” In addition, as set forth in Article VIII of the CAT NMS Plan, the Company “intends to operate in a manner such that it qualifies as a `business league' within the meaning of Section 501(c)(6) of the [Internal Start Printed Page 1402Revenue] Code.” To qualify as a business league, an organization must “not [be] organized for profit and no part of the net earnings of [the organization can] inure[] to the benefit of any private shareholder or individual.” [25] As the SEC stated when approving the CAT NMS Plan, “the Commission believes that the Company's application for Section 501(c)(6) business league status addresses issues raised by commenters about the Plan's proposed allocation of profit and loss by mitigating concerns that the Company's earnings could be used to benefit individual Participants.” [26] The Internal Revenue Service recently has determined that the Company is exempt from federal income tax under Section 501(c)(6) of the Internal Revenue Code.

    The funding model also is structured to take into account distinctions in the securities trading operations of Participants and Industry Members. For example, the Operating Committee designed the model to address the different trading characteristics in the OTC Equity Securities market. Specifically, the Operating Committee proposes to discount the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities to adjust for the greater number of shares being traded in the OTC Equity Securities market, which is generally a function of a lower per share price for OTC Equity Securities when compared to NMS Stocks. In addition, the Operating Committee also proposes to discount Options Market Maker and equity market maker message traffic in recognition of their role in the securities markets. Furthermore, the funding model creates separate tiers for Equity and Options Execution Venues due to the different trading characteristics of those markets.

    Finally, by adopting a CAT-specific fee, the Operating Committee will be fully transparent regarding the costs of the CAT. Charging a general regulatory fee, which would be used to cover CAT costs as well as other regulatory costs, would be less transparent than the selected approach of charging a fee designated to cover CAT costs only.

    A full description of the funding model is set forth below. This description includes the framework for the funding model as set forth in the CAT NMS Plan, as well as the details as to how the funding model will be applied in practice, including the number of fee tiers and the applicable fees for each tier. The complete funding model is described below, including those fees that are to be paid by Industry Members. Proposed Exhibit B, however, does not apply to Industry Members; proposed Exhibit B only applies to Participants. The CAT Fees for Industry Members will be imposed separately pursuant to rules adopted by the individual self-regulatory organizations (“SROs[sic]).

    (A) Funding Principles

    Section 11.2 of the CAT NMS Plan sets forth the principles that the Operating Committee applied in establishing the funding for the Company. The Operating Committee has considered these funding principles as well as the other funding requirements set forth in the CAT NMS Plan and in Rule 613 in developing the proposed funding model. The following are the funding principles in Section 11.2 of the CAT NMS Plan:

    • To create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and other costs of the Company;
    • To establish an allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company's resources and operations;
    • To establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members' non-ATS activities are based upon message traffic; (iii) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members);
    • To provide for ease of billing and other administrative functions;
    • To avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and
    • To build financial stability to support the Company as a going concern.

    (B) Industry Member Tiering

    Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees to be payable by Industry Members, based on message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers.

    The CAT NMS Plan clarifies that the fixed fees payable by Industry Members pursuant to Section 11.3(b) shall, in addition to any other applicable message traffic, include message traffic generated by: (i) An ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. In addition, the Industry Member fees will apply to Industry Members that act as routing broker-dealers for exchanges. The Industry Member fees will not be applicable, however, to an ATS that qualifies as an Execution Venue, as discussed in more detail in the section on Execution Venue tiering.

    In accordance with Section 11.3(b), the Operating Committee approved a tiered fee structure for Industry Members (other than Execution Venue ATSs) as described in this section. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on CAT System resources of different Industry Members, and that establish comparable fees among the CAT Reporters with the most Reportable Events. The Operating Committee has determined that establishing seven tiers results in an allocation of fees that distinguishes between Industry Members with differing levels of message traffic. Thus, each such Industry Member will be placed into one of seven tiers of fixed fees, based on “message traffic” for a defined period (as discussed below).

    A seven tier structure was selected to provide a wide range of levels for tiering Industry Members such that Industry Members submitting significantly less message traffic to the CAT would be adequately differentiated from Industry Members submitting substantially more message traffic. The Operating Committee considered historical message traffic from multiple time periods, generated by Industry Members across all exchanges and as submitted to FINRA's Order Audit Trail System (“OATS”), and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message Start Printed Page 1403traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden on Industry Members that have less CAT-related activity. Furthermore, the selection of seven tiers establishes comparable fees among the largest CAT Reporters.

    Each Industry Member (other than Execution Venue ATSs) will be ranked by message traffic and tiered by predefined Industry Member percentages (the “Industry Member Percentages”). The Operating Committee determined to use predefined percentages rather than fixed volume thresholds to ensure that the total CAT Fees collected recover the expected CAT costs regardless of changes in the total level of message traffic. To determine the fixed percentage of Industry Members in each tier, the Operating Committee analyzed historical message traffic generated by Industry Members across all exchanges and as submitted to OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee identified seven tiers that would group firms with similar levels of message traffic.

    The percentage of costs recovered by each Industry Member tier will be determined by predefined percentage allocations (the “Industry Member Recovery Allocation”). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter message traffic on the CAT System as well as the distribution of total message volume across Industry Members while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Industry Members in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical message traffic upon which Industry Members had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of costs recovered for each tier were assigned, allocating higher percentages of recovery to tiers with higher levels of message traffic while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Industry Members and costs recovered per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Industry Members or the total level of message traffic.

    The following chart illustrates the breakdown of seven Industry Member tiers across the monthly average of total equity and equity options orders, cancels, quotes and executions in the second quarter of 2017 as well as message traffic thresholds between the largest of Industry Member message traffic gaps. The Operating Committee referenced similar distribution illustrations to determine the appropriate division of Industry Member percentages in each tier by considering the grouping of firms with similar levels of message traffic and seeking to identify relative breakpoints in the message traffic between such groupings. In reviewing the chart and its corresponding table, note that while these distribution illustrations were referenced to help differentiate between Industry Member tiers, the proposed funding model is driven by fixed percentages of Industry Members across tiers to account for fluctuating levels of message traffic over time. This approach also provides financial stability for the CAT by ensuring that the funding model will recover the required amounts regardless of changes in the number of Industry Members or the amount of message traffic. Actual messages in any tier will vary based on the actual traffic in a given measurement period, as well as the number of firms included in the measurement period. The Industry Member Percentages and Industry Member Recovery Allocation for each tier will remain fixed with each Industry Member's tier to be reassigned periodically, as described below in Section A(2)(I).

    Start Printed Page 1404

    Industry Member tierApproximate Message Traffic per Industry Member (Q2 2017) (orders, quotes, cancels and executions)
    Tier 1>10,000,000,000
    Tier 21,000,000,000-10,000,000,000
    Tier 3100,000,000-1,000,000,000
    Tier 41,000,000-100,000,000
    Tier 5100,000-1,000,000
    Tier 610,000-100,000
    Tier 7<10,000

    Based on the above analysis, the Operating Committee approved the following Industry Member Percentages and Industry Member Recovery Allocations:

    Industry Member tierPercentage of Industry MembersPercentage of Industry Member recoveryPercentage of total recovery
    Tier 10.90012.009.00
    Tier 22.15020.5015.38
    Tier 32.80018.5013.88
    Tier 47.75032.0024.00
    Tier 58.30010.007.50
    Tier 618.8006.004.50
    Tier 759.3001.000.75
    Total10010075

    For the purposes of creating these tiers based on message traffic, the Operating Committee determined to define the term “message traffic” separately for the period before the commencement of CAT reporting and for the period after the start of CAT reporting. The different definition for message traffic is necessary as there will be no Reportable Events as defined in the Plan, prior to the commencement of CAT reporting. Accordingly, prior to the start of CAT reporting, “message traffic” will be comprised of historical equity and equity options orders, cancels, quotes and executions provided by each exchange and FINRA over the previous three months. Prior to the start of CAT reporting, orders would be comprised of the total number of equity and equity options orders received and originated Start Printed Page 1405by a member of an exchange or FINRA over the previous three-month period, including principal orders, cancel/replace orders, market maker orders originated by a member of an exchange, and reserve (iceberg) orders as well as executions originated by a member of FINRA, and excluding order rejects, system-modified orders, order routes and implied orders.[27] In addition, prior to the start of CAT reporting, cancels would be comprised of the total number of equity and equity option cancels received and originated by a member of an exchange or FINRA over a three-month period, excluding order modifications (e.g., order updates, order splits, partial cancels) and multiple cancels of a complex order. Furthermore, prior to the start of CAT reporting, quotes would be comprised of information readily available to the exchanges and FINRA, such as the total number of historical equity and equity options quotes received and originated by a member of an exchange or FINRA over the prior three-month period. Additionally, prior to the start of CAT reporting, executions would be comprised of the total number of equity and equity option executions received or originated by a member of an exchange or FINRA over a three-month period.

    After an Industry Member begins reporting to the CAT, “message traffic” will be calculated based on the Industry Member's Reportable Events reported to the CAT as will be defined in the Technical Specifications.[28]

    Quotes of Options Market Makers and equity market makers will be included in the calculation of total message traffic for those market makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences.[29] To address potential concerns regarding burdens on competition or market quality of including quotes in the calculation of message traffic, however, the Operating Committee determined to discount the Options Market Maker quotes by the trade to quote ratio for options when calculating message traffic for Options Market Makers. Based on available data for June 2016 through June 2017, the trade to quote ratio for options is 0.01%. Similarly, to avoid disincentives to quoting behavior on the equities side, the Operating Committee determined to discount equity market maker quotes by the trade to quote ratio for equities. Based on available data for June 2016 through June 2017, the trade to quote ratio for equities is 5.43%.[30] The trade to quote ratio for options and the trade to quote ratio for equities will be calculated every three months when tiers are recalculated (as discussed below).

    The Operating Committee has determined to calculate fee tiers every three months, on a calendar quarter basis, based on message traffic from the prior three months. Based on its analysis of historical data, the Operating Committee believes that calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Industry Members while still providing predictability in the tiering for Industry Members. Because fee tiers will be calculated based on message traffic from the prior three months, the Operating Committee will begin calculating message traffic based on an Industry Member's Reportable Events reported to the CAT once the Industry Member has been reporting to the CAT for three months. Prior to that, fee tiers will be calculated as discussed above with regard to the period prior to CAT reporting.

    (C) Execution Venue Tiering

    Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees payable by Execution Venues. Section 1.1 of the CAT NMS Plan defines an Execution Venue as “a Participant or an alternative trading system (“ATS”) (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).” [31]

    The Operating Committee determined that ATSs should be included within the definition of Execution Venue. The Operating Committee believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges.

    Given the differences between Execution Venues that trade NMS Stocks and/or OTC Equity Securities and Execution Venues that trade Listed Options, Section 11.3(a) addresses Execution Venues that trade NMS Stocks and/or OTC Equity Securities separately from Execution Venues that trade Listed Options. Equity and Options Execution Venues are treated separately for two reasons. First, the differing quoting behavior of Equity and Options Execution Venues makes comparison of activity between such Execution Venues difficult. Second, Execution Venue tiers are calculated based on market share of share volume, and it is therefore difficult to compare market share between asset classes (i.e., equity shares versus options contracts). Discussed below is how the funding model treats the two types of Execution Venues.

    (I) NMS Stocks and OTC Equity Securities

    Section 11.3(a)(i) of the CAT NMS Plan states that each Execution Venue that (i) executes transactions or, (ii) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and not more than five tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be Start Printed Page 1406calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association's market share.

    In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Equity Execution Venues and Option Execution Venues. In determining the Equity Execution Venue Tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Equity Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Equity Execution Venue will be placed into one of four tiers of fixed fees, based on the Execution Venue's NMS Stocks and OTC Equity Securities market share. In choosing four tiers, the Operating Committee performed an analysis similar to that discussed above with regard to the non-Execution Venue Industry Members to determine the number of tiers for Equity Execution Venues. The Operating Committee determined to establish four tiers for Equity Execution Venues, rather than a larger number of tiers as established for non-Execution Venue Industry Members, because the four tiers were sufficient to distinguish between the smaller number of Equity Execution Venues based on market share. Furthermore, the selection of four tiers serves to help establish comparability among the largest CAT Reporters.

    Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Equity Execution Venue Percentages”). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee reviewed historical market share of share volume for Execution Venues. Equity Execution Venue market shares of share volume were sourced from market statistics made publicly-available by Bats Global Markets, Inc. (“Bats”). ATS market shares of share volume was sourced from market statistics made publicly-available by FINRA. FINRA trade reporting facility (“TRF”) and ORF market share of share volume was sourced from market statistics made publicly available by FINRA. Based on data from FINRA and otcmarkets.com, ATSs accounted for 39.12% of the share volume across the TRFs and ORFs during the recent tiering period. A 39.12/60.88 split was applied to the ATS and non-ATS breakdown of FINRA market share, with FINRA tiered based only on the non-ATS portion of its market share of share volume.

    The Operating Committee determined to discount the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF in recognition of the different trading characteristics of the OTC Equity Securities market as compared to the market in NMS Stocks. Many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—per share and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA would likely be subject to higher tiers than their operations may warrant. To address this potential concern, the Operating Committee determined to discount the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities and the market share of the FINRA ORF by multiplying such market share by the average shares per trade ratio between NMS Stocks and OTC Equity Securities in order to adjust for the greater number of shares being traded in the OTC Equity Securities market. Based on available data for the second quarter of 2017, the average shares per trade ratio between NMS Stocks and OTC Equity Securities is 0.17%.[32] The average shares per trade ratio between NMS Stocks and OTC Equity Securities will be recalculated every three months when tiers are recalculated.

    Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share. The percentage of costs recovered by each Equity Execution Venue tier will be determined by predefined percentage allocations (the “Equity Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of costs to be recovered from each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Equity Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Execution Venues in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical market share upon which Execution Venues had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of cost recovery for each tier were assigned, allocating higher percentages of recovery to the tier with a higher level of market share while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Equity Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Equity Execution Venues or changes in market share.

    Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations:

    Equity Execution Venue tierPercentage of Equity Execution VenuesPercentage of Execution Venue recoveryPercentage of total recovery
    Tier 125.0033.258.31
    Tier 242.0025.736.43
    Tier 323.008.002.00
    Start Printed Page 1407
    Tier 410.000.020.01
    Total1006716.75

    (II) Listed Options

    Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue's Listed Options market share. For these purposes, market share will be calculated by contract volume.

    In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Options Execution Venues. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Options Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Options Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's Listed Options market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to Industry Members (other than Execution Venue ATSs) to determine the number of tiers for Options Execution Venues. The Operating Committee determined to establish two tiers for Options Execution Venues, rather than a larger number, because the two tiers were sufficient to distinguish between the smaller number of Options Execution Venues based on market share. Furthermore, due to the smaller number of Options Execution Venues, the incorporation of additional Options Execution Venue tiers would result in significantly higher fees for Tier 1 Options Execution Venues and reduce comparability between Execution Venues and Industry Members. Furthermore, the selection of two tiers served to establish comparable fees among the largest CAT Reporters.

    Each Options Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Options Execution Venue Percentages”). To determine the fixed percentage of Options Execution Venues in each tier, the Operating Committee analyzed the historical and publicly available market share of Options Execution Venues to group Options Execution Venues with similar market shares across the tiers. Options Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats. The process for developing the Options Execution Venue Percentages was the same as discussed above with regard to Equity Execution Venues.

    The percentage of costs to be recovered from each Options Execution Venue tier will be determined by predefined percentage allocations (the “Options Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of cost recovery for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Options Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Furthermore, by using percentages of Options Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Options Execution Venues or changes in market share. The process for developing the Options Execution Venue Recovery Allocation was the same as discussed above with regard to Equity Execution Venues.

    Based on this analysis, the Operating Committee approved the following Options Execution Venue Percentages and Recovery Allocations:

    Options Execution Venue tierPercentage of Options Execution VenuesPercentage of Execution Venue recoveryPercentage of total recovery
    Tier 175.0028.257.06
    Tier 225.004.751.19
    Total100338.25

    (III) Market Share/Tier Assignments

    The Operating Committee determined that, prior to the start of CAT reporting, market share for Execution Venues would be sourced from publicly-available market data. Options and equity volumes for Participants will be sourced from market data made publicly available by Bats while Execution Venue ATS volumes will be sourced from market data made publicly available by FINRA and OTC Markets. Set forth in Appendix B to this letter are two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier.

    After the commencement of CAT reporting, market share for Execution Venues will be sourced from data reported to the CAT. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period (with the discounting of OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of Start Printed Page 1408the FINRA ORF, as described above). Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period.

    The Operating Committee has determined to calculate fee tiers for Execution Venues every three months based on market share from the prior three months. Based on its analysis of historical data, the Operating Committee believes calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Execution Venues while still providing predictability in the tiering for Execution Venues.

    (D) Allocation of Costs

    In addition to the funding principles discussed above, including comparability of fees, Section 11.1(c) of the CAT NMS Plan also requires expenses to be fairly and reasonably shared among the Participants and Industry Members. Accordingly, in developing the proposed fee schedules pursuant to the funding model, the Operating Committee calculated how the CAT costs would be allocated between Industry Members and Execution Venues, and how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. These determinations are described below.

    (I) Allocation Between Industry Members and Execution Venues

    In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovery from such Industry Members and Execution Venues, including 80%/20%, 75%/25%, 70%/30% and 65%/35% allocations. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75%/25% division maintained the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (i.e., those Industry Members in Tiers 1) that are comparable to the largest Equity Execution Venues and Options Execution Venues (i.e., those Execution Venues in Tier 1).

    Furthermore, the allocation of total CAT cost recovery recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 23 times more Industry Members expected to report to the CAT than Execution Venues (e.g., an estimated 1541 Industry Members versus 67 Execution Venues as of June 2017).

    (II) Allocation Between Equity Execution Venues and Options Execution Venues

    The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity and Options Execution Venues, including a 70%/30%, 67%/33%, 65%/35%, 50%/50% and 25%/75% split. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67%/33% allocation between Equity and Options Execution Venues maintained the greatest level of fee equitability and comparability based on the current number of Equity and Options Execution Venues. For example, the allocation establishes fees for the larger Equity Execution Venues that are comparable to the larger Options Execution Venues. Specifically, Tier 1 Equity Execution Venues would pay a quarterly fee of $81,047 and Tier 1 Options Execution Venues would pay a quarterly fee of $81,379. In addition to fee comparability between Equity Execution Venues and Options Execution Venues, the allocation also establishes equitability between larger (Tier 1) and smaller (Tier 2) Execution Venues based upon the level of market share. Furthermore, the allocation is intended to reflect the relative levels of current equity and options order events.

    (E) Fee Levels

    The Operating Committee determined to establish a CAT-specific fee to collectively recover the costs of building and operating the CAT. Accordingly, under the funding model, the sum of the CAT Fees is designed to recover the total cost of the CAT. The Operating Committee has determined overall CAT costs to be comprised of Plan Processor costs and non-Plan Processor costs, which are estimated to be $50,700,000 in total for the year beginning November 21, 2016.[33]

    The Plan Processor costs relate to costs incurred and to be incurred through November 21, 2017 by the Plan Processor and consist of the Plan Processor's current estimates of average yearly ongoing costs, including development costs, which total $37,500,000. This amount is based upon the fees due to the Plan Processor pursuant to the Company's agreement with the Plan Processor.

    The non-Plan Processor estimated costs incurred and to be incurred by the Company through November 21, 2017 consist of three categories of costs. The first category of such costs are third party support costs, which include legal fees, consulting fees and audit fees from November 21, 2016 until the date of filing as well as estimated third party support costs for the rest of the year. These amount to an estimated $5,200,000. The second category of non-Plan Processor costs are estimated cyber-insurance costs for the year. Based on discussions with potential cyber-insurance providers, assuming $2-5 million cyber-insurance premium on $100 million coverage, the Company has estimated $3,000,000 for the annual cost. The final cost figures will be determined following receipt of final underwriter quotes. The third category of non-Plan Processor costs is the CAT operational reserve, which is comprised of three months of ongoing Plan Processor costs ($9,375,000), third party support costs ($1,300,000) and cyber-insurance costs ($750,000). The Operating Committee aims to accumulate the necessary funds to establish the three-month operating reserve for the Company through the CAT Fees charged to CAT Reporters for the year. On an ongoing basis, the Operating Committee will account for any potential need to replenish the operating reserve or other changes to total cost during its annual budgeting process. The following table summarizes the Plan Processor and non-Start Printed Page 1409Plan Processor cost components which comprise the total estimated CAT costs of $50,700,000 for the covered period.

    Cost categoryCost componentAmount
    Plan ProcessorOperational Costs$37,500,000
    Non-Plan ProcessorThird Party Support Costs5,200,000
    Operational Reserve5,000,000 34
    Cyber-insurance Costs3,000,000
    Estimated Total$50,700,000

    Based on these estimated costs and the calculations for the funding model described above, the Operating Committee determined to impose the following fees: [35]

    For Industry Members (other than Execution Venue ATSs):

    TierPercentage of Industry MembersQuarterly CAT fee
    10.900$81,483
    22.15059,055
    32.80040,899
    47.75025,566
    58.3007,428
    618.8001,968
    759.300105

    For Execution Venues for NMS Stocks and OTC Equity Securities:

    TierPercentage of Equity Execution VenuesQuarterly CAT fee
    125.00$81,048
    242.0037,062
    323.0021,126
    410.00129

    For Execution Venues for Listed Options:

    TierPercentage of Options Execution VenuesQuarterly CAT fee
    175.00$81,381
    225.0037,629

    The Operating Committee has calculated the schedule of effective fees for Industry Members (other than Execution Venue ATSs) and Execution Venues in the following manner. Note that the calculation of CAT Fees assumes 52 Equity Execution Venues, 15 Options Execution Venues and 1,541 Industry Members (other than Execution Venue ATSs) as of June 2017.Start Printed Page 1410

    Calculation of Annual Tier Fees for Industry Members (“IM”)

    Industry Member tierPercentage of Industry MembersPercentage of Industry Member recoveryPercentage of total recovery
    Tier 10.90012.009.00
    Tier 22.15020.5015.38
    Tier 32.80018.5013.88
    Tier 47.75032.0024.00
    Tier 58.30010.007.50
    Tier 618.8006.004.50
    Tier 759.3001.000.75
    Total10010075
    Industry Member tierEstimated number of Industry Members
    Tier 114
    Tier 233
    Tier 343
    Tier 4119
    Tier 5128
    Tier 6290
    Tier 7914
    Total1,541
    Start Printed Page 1411

    Calculation of Annual Tier Fees for Equity Execution Venues (“EV”)

    Equity Execution Venue tierPercentage of Equity Execution VenuesPercentage of Execution Venue recoveryPercentage of total recovery
    Tier 125.0033.258.31
    Start Printed Page 1412
    Tier 242.0025.736.43
    Tier 323.008.002.00
    Tier 410.0049.000.01
    Total1006716.75
    Equity Execution Venue tierEstimated number of Equity Execution Venues
    Tier 113
    Tier 222
    Tier 312
    Tier 45
    Total52
    Start Printed Page 1413

    Calculation of Annual Tier Fees for Options Execution Venues (“EV”)

    Options Execution Venue tierPercentage of Options Execution VenuesPercentage of Execution Venue recoveryPercentage of total recovery
    Tier 175.0028.257.06
    Tier 225.004.751.19
    Total100338.25
    Options Execution Venue tierEstimated number of Options Execution Venues
    Tier 111
    Tier 24
    Total15
    Start Printed Page 1414

    Traceability of Total CAT Fees

    TypeIndustry Member tierEstimated number of membersCAT fees paid annuallyTotal recovery
    Industry MembersTier 114$325,932$4,563,048
    Tier 233236,2207,795,260
    Tier 343163,5967,034,628
    Tier 4119102,26412,169,416
    Tier 512829,7123,803,136
    Tier 62907,8722,282,880
    Tier 7914420383,880
    Total1,54138,032,248
    Equity Execution VenuesTier 113324,1924,214,496
    Tier 222148,2483,261,456
    Tier 31284,5041,014,048
    Tier 455162,580
    Total528,492,580
    Options Execution VenuesTier 111325,5243,580,764
    Tier 24150,516602,064
    Total154,182,828
    Total50,700,000
    Excess 367,656

    (F) Comparability of Fees

    The funding principles require a funding model in which the fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). Accordingly, in creating the model, the Operating Committee sought to establish comparable fees for the top tier of Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues. Specifically, each Tier 1 CAT Reporter would be required to pay a quarterly fee of approximately $81,000.

    (G) Billing Onset

    Under Section 11.1(c) of the CAT NMS Plan, to fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such development and implementation costs. The Company is currently incurring such development and implementation costs and will continue to do so prior to the commencement of CAT reporting and thereafter. In accordance with the CAT NMS Plan, all CAT Reporters, including both Industry Members and Execution Venues (including Participants), will be invoiced as promptly as possible following the latest Start Printed Page 1415of the operative date of this Plan amendment, and the related fee filings for the Industry Member CAT Fees.

    (H) Changes to Fee Levels and Tiers

    Section 11.3(d) of the CAT NMS Plan states that “[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.” With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary. In addition, the reviews will evaluate the estimated ongoing CAT costs and the level of the operating reserve. To the extent that the total CAT costs decrease, the fees would be adjusted downward, and to the extent that the total CAT costs increase, the fees would be adjusted upward.[37] Furthermore, any surplus of the Company's revenues over its expenses is to be included within the operational reserve to offset future fees. The limitations on more frequent changes to the fee, however, are intended to provide budgeting certainty for the CAT Reporters and the Company.[38] To the extent that the Operating Committee approves changes to the number of tiers in the funding model or the fees assigned to each tier, then the Operating Committee will file such changes with the SEC pursuant to Rule 608 of the Exchange Act, and the Participants will file such changes with the SEC pursuant to Section 19(b) of the Exchange Act and Rule 19b-4 thereunder, and any such changes will become effective in accordance with the requirements of those provisions.

    (I) Initial and Periodic Tier Reassignments

    The Operating Committee has determined to calculate fee tiers every three months based on market share or message traffic, as applicable, from the prior three months. For the initial tier assignments, the Company will calculate the relevant tier for each CAT Reporter using the three months of data prior to the commencement date. As with the initial tier assignment, for the tri-monthly reassignments, the Company will calculate the relevant tier using the three months of data prior to the relevant tri-monthly date. Any movement of CAT Reporters between tiers will not change the criteria for each tier or the fee amount corresponding to each tier.

    In performing the tri-monthly reassignments, the assignment of CAT Reporters in each assigned tier is relative. Therefore, a CAT Reporter's assigned tier will depend, not only on its own message traffic or market share, but also on the message traffic/market share across all CAT Reporters. For example, the percentage of Industry Members (other than Execution Venue ATSs) in each tier is relative such that such Industry Member's assigned tier will depend on message traffic generated across all CAT Reporters as well as the total number of CAT Reporters. The Operating Committee will inform CAT Reporters of their assigned tier every three months following the periodic tiering process, as the funding model will compare an individual CAT Reporter's activity to that of other CAT Reporters in the marketplace.

    The following demonstrates a tier reassignment. In accordance with the funding model, the top 75% of Options Execution Venues in market share are categorized as Tier 1 while the bottom 25% of Options Execution Venues in market share are categorized as Tier 2. In the sample scenario below, Options Execution Venue L is initially categorized as a Tier 2 Options Execution Venue in Period A due to its market share. When market share is recalculated for Period B, the market share of Execution Venue L increases, and it is therefore subsequently reranked and reassigned to Tier 1 in Period B. Correspondingly, Options Execution Venue K, initially a Tier 1 Options Execution Venue in Period A, is reassigned to Tier 2 in Period B due to decreases in its market share.

    Period APeriod B
    Options Execution VenueMarket share rankTierOptions Execution VenueMarket share rankTier
    Options Execution Venue A11Options Execution Venue A11
    Options Execution Venue B21Options Execution Venue B21
    Options Execution Venue C31Options Execution Venue C31
    Options Execution Venue D41Options Execution Venue D41
    Options Execution Venue E51Options Execution Venue E51
    Options Execution Venue F61Options Execution Venue F61
    Options Execution Venue G71Options Execution Venue I71
    Options Execution Venue H81Options Execution Venue H81
    Options Execution Venue I91Options Execution Venue G91
    Options Execution Venue J101Options Execution Venue J101
    Options Execution Venue K111Options Execution Venue L111
    Options Execution Venue L122Options Execution Venue K122
    Options Execution Venue M132Options Execution Venue N132
    Options Execution Venue N142Options Execution Venue M142
    Options Execution Venue O152Options Execution Venue O152

    For each periodic tier reassignment, the Operating Committee will review the new tier assignments, particularly those assignments for CAT Reporters that shift from the lowest tier to a higher tier. This review is intended to evaluate whether potential changes to the market or CAT Reporters (e.g., dissolution of a Start Printed Page 1416large CAT Reporter) adversely affect the tier reassignments.

    (J) Sunset Provision

    The Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee determined to include an automatic sunsetting provision for the proposed fees. Specifically, the Operating Committee determined to include a provision in the proposed fee schedule which states that “[t]hese Participant CAT Fees will automatically expire two years after their operative date.” The Operating Committee intends to monitor the operation of the funding model during this two year period and to evaluate its effectiveness during that period. Such a process will inform the Operating Committee's approach to funding the CAT after the two year period.

    (3) Proposed CAT Fee Schedule

    The Operating Committee proposes to add Exhibit B to the CAT NMS Plan to add a fee schedule setting forth the CAT Fees applicable to Participants. Proposed Exhibit B is set forth in Appendix A to this letter. Paragraph (a)(1) of proposed Exhibit B sets forth the CAT Fees applicable to Execution Venues for NMS Stocks and OTC Equity Securities. Specifically, paragraph (a)(1) states that the Company will assign each Execution Venue for NMS Stocks and/or OTC Equity Securities to a fee tier once every quarter, where such tier assignment is calculated by ranking each such Execution Venue based on its total market share (with a discount for the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA OTC reporting facility based on the average shares per trade ratio between NMS Stocks and OTC Equity Securities) for the three months prior to the quarterly tier calculation day and assigning each such Execution Venue to a tier based on that ranking and predefined percentages for such Execution Venues. The Execution Venues for NMS Stocks and/or OTC Equity Securities with the higher total quarterly market share will be ranked in Tier 1, and such Execution Venues with the lowest quarterly market share will be ranked in Tier 4. Specifically, paragraph (a)(1) states that, each quarter, each Execution Venue for NMS Stocks and/or OTC Equity Securities shall pay in the manner prescribed by the Company the following CAT Fee corresponding to the tier assigned by the CAT NMS, LLC for such Execution Venue for that quarter:

    TierPercentage of Execution Venues for NMS Stocks and/or OTC Equity SecuritiesQuarterly CAT fee
    125.00$81,048
    242.0037,062
    323.0021,126
    410.00129

    In addition, paragraph (a)(2) of the proposed Exhibit B states that the Company will assign each Execution Venue for Listed Options to a fee tier once every quarter, where such tier assignment is calculated by ranking each such Execution Venue based on its total market share for the three months prior to the quarterly tier calculation day and assigning each such Execution Venue to a tier based on that ranking and predefined percentages for such Execution Venues. The Execution Venues for Listed Options with the higher total quarterly market share will be ranked in Tier 1, and such Execution Venues with the lower quarterly market share will be ranked in Tier 2. Specifically, paragraph (b)(1) states that, each quarter, each Execution Venue for Listed Options shall pay in the manner prescribed by the Company the following CAT Fee corresponding to the tier assigned by the CAT NMS, LLC for such Execution Venue for that quarter:

    TierPercentage of Execution Venues for Listed OptionsQuarterly CAT fee
    175.00$81,381
    225.0037,629

    (4) Changes to Prior CAT Fee Plan Amendment

    The proposed funding model set forth in this amendment is a revised version of the Plan amendment filed with the Commission on May 9, 2017 (“Original Proposal”).[39] The Commission abrogated the Original Proposal on July 21, 2017.[40] Although the Original Proposal did not receive any comments, the Commission received a number of comment letters in response to the Participants' proposed rule changes to adopt CAT Fees to be charged to Industry Members, including Industry Members that are Execution Venue ATSs (“Industry Member Fee Filings”).[41] Because the text of the Industry Member Fee Filings is substantially similar to the Original Proposal, the SEC believed that the comments were relevant to the Original Proposal and summarized them in the Abrogation Order. In addition, the SEC suspended the Industry Member Fee Filings and instituted proceedings to determine whether to approve or disapprove the Industry Member Fee Filings.[42] Pursuant to those proceedings, additional comment letters were submitted regarding the proposed funding model.[43] In developing this Amendment No. 4, the Operating Committee carefully considered these comments and made a number of changes to the Original Proposal to address these comments where appropriate.

    This Amendment No. 4 makes the following changes to the Original Proposal: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATSs trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker Start Printed Page 1417quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Equity ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commences invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants as set forth in the Industry Member Fee Filings and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants; and (10) requires the proposed fees to automatically expire two years from their operative date.

    (A) Equity Execution Venues

    (i) Small Equity Execution Venues

    In the Original Proposal, the Operating Committee proposed to establish two fee tiers for Equity Execution Venues. The Commission and commenters raised the concern that, by establishing only two tiers, smaller Equity Execution Venues (e.g., those Equity ATSs representing less than 1% of NMS market share) would be placed in the same fee tier as larger Equity Execution Venues, thereby imposing an undue or inappropriate burden on competition.[44] To address this concern, the Operating Committee proposes to add two additional tiers for Equity Execution Venues, a third tier for smaller Equity Execution Venues and a fourth tier for the smallest Equity Execution Venues.

    Specifically, the Original Proposal had two tiers of Equity Execution Venues. Tier 1 required the largest Equity Execution Venues to pay a quarterly fee of $63,375. Based on available data, these largest Equity Execution Venues were those that had equity market share of share volume greater than or equal to 1%.[45] Tier 2 required the remaining smaller Equity Execution Venues to pay a quarterly fee of $38,820.

    To address concerns about the potential for the $38,820 quarterly fee to impose an undue burden on smaller Equity Execution Venues, the Operating Committee determined to move to a four tier structure for Equity Execution Venues. Tier 1 would continue to include the largest Equity Execution Venues by share volume (that is, based on currently available data, those with market share of equity share volume greater than or equal to one percent), and these Equity Execution Venues would be required to pay a quarterly fee of $81,048. The Operating Committee determined to divide the original Tier 2 into three tiers. The new Tier 2 Equity Execution Venues, which would include the next largest Equity Execution Venues by equity share volume, would be required to pay a quarterly fee of $37,062. The new Tier 3 Equity Execution Venues would be required to pay a quarterly fee of $21,126. The new Tier 4 Equity Execution Venues, which would include the smallest Equity Execution Venues by share volume, would be required to pay a quarterly fee of $129.

    In developing the proposed four tier structure, the Operating Committee considered keeping the existing two tiers, as well as shifting to three, four or five Equity Execution Venue tiers (the maximum number of tiers permitted under the Plan), to address the concerns regarding small Equity Execution Venues. For each of the two, three, four and five tier alternatives, the Operating Committee considered the assignment of various percentages of Equity Execution Venues to each tier as well as various percentage of Equity Execution Venue recovery allocations for each alternative. As discussed below in more detail, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the four tier alternative addressed the spectrum of different Equity Execution Venues. The Operating Committee determined that neither a two tier structure nor a three tier structure sufficiently accounted for the range of market shares of smaller Equity Execution Venues. The Operating Committee also determined that, given the limited number of Equity Execution Venues, that a fifth tier was unnecessary to address the range of market shares of the Equity Execution Venues.

    By increasing the number of tiers for Equity Execution Venues and reducing the proposed CAT Fees for the smaller Equity Execution Venues, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.[46] The larger number of tiers more closely tracks the variety of sizes of equity share volume of Equity Execution Venues. In addition, the reduction in the fees for the smaller Equity Execution Venues recognizes the potential burden of larger fees on smaller entities. In particular, the very small quarterly fee of $129 for Tier 4 Equity Execution Venues reflects the fact that certain Equity Execution Venues have a very small share volume due to their typically more focused business models.

    Accordingly, Amendment No. 4 proposes to amend paragraph (a)(1) of the proposed fee schedule as set forth in the Original Proposal to add the two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.

    (ii) Execution Venues for OTC Equity Securities

    In the Original Proposal, the Operating Committee proposed to group Execution Venues for OTC Equity Securities and Execution Venues for NMS Stocks in the same tier structure. The Commission and commenters raised concerns as to whether this determination to place Execution Venues for OTC Equity Securities in the same tier structure as Execution Venues for NMS Stocks would result in an undue or inappropriate burden on competition, recognizing that the application of share volume may lead to different outcomes as applied to OTC Start Printed Page 1418Equity Securities and NMS Stocks.[47] To address this concern, the Operating Committee proposes to discount the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (0.17% for the second quarter of 2017) in order to adjust for the greater number of shares being traded in the OTC Equity Securities market, which is generally a function of a lower per share price for OTC Equity Securities when compared to NMS Stocks.

    As commenters noted, many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks, which has the effect of overstating an Execution Venue's true market share when the Execution Venue is involved in the trading of OTC Equity Securities. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA may be subject to higher tiers than their operations may warrant.[48] The Operating Committee proposes to address this concern in two ways. First, the Operating Committee proposes to increase the number of Equity Execution Venue tiers, as discussed above. Second, the Operating Committee determined to discount the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF when calculating their tier placement. Because the disparity in share volume between Execution Venues trading in OTC Equity Securities and NMS Stocks is based on the different number of shares per trade for OTC Equity Securities and NMS Stocks, the Operating Committee believes that discounting the OTC Equity Securities share volume of such Execution Venue ATSs as well as the market share of the FINRA ORF would address the difference in shares per trade for OTC Equity Securities and NMS Stocks. Specifically, the Operating Committee proposes to impose a discount based on the objective measure of the average shares per trade ratio between NMS Stocks and OTC Equity Securities. Based on available data from the second quarter of 2017, the average shares per trade ratio between NMS Stocks and OTC Equity Securities is 0.17%.

    The practical effect of applying such a discount for trading in OTC Equity Securities is to shift Execution Venue ATSs trading OTC Equity Securities to tiers for smaller Execution Venues and with lower fees. For example, under the Original Proposal, one Execution Venue ATS trading OTC Equity Securities was placed in the first CAT Fee tier, which had a quarterly fee of $63,375. With the imposition of the proposed tier changes and the discount, this ATS would be ranked in Tier 3 and would owe a quarterly fee of $21,126.

    In developing the proposed discount for Equity Execution Venue ATSs trading OTC Equity Securities and FINRA, the Operating Committee evaluated different alternatives to address the concerns related to OTC Equity Securities, including creating a separate tier structure for Execution Venues trading OTC Equity Securities (like the separate tier for Options Execution Venues) as well as the proposed discounting method for Execution Venue ATSs trading OTC Equity Securities and FINRA. For these alternatives, the Operating Committee considered how each alternative would affect the recovery allocations. In addition, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee did not adopt a separate tier structure for Equity Execution Venues trading OTC Equity Securities as they determined that the proposed discount approach appropriately addresses the concern. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the trading patterns and operations in the OTC Equity Securities markets, and is an objective discounting method.

    By increasing the number of tiers for Equity Execution Venues and imposing a discount on the market share of share volume calculation for trading in OTC Equity Securities, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.[49] As discussed above, the larger number of tiers more closely tracks the variety of sizes of equity share volume of Equity Execution Venues. In addition, the proposed discount recognizes the different types of trading operations at Equity Execution Venues trading OTC Equity Securities versus those trading NMS Stocks, thereby more closing matching the relative revenue generation by Equity Execution Venues trading OTC Equity Securities to their CAT Fees.

    Accordingly, Amendment No. 4 proposes to amend paragraph (a)(1) of the proposed fee schedule as set forth in the Original Proposal to indicate that the OTC Equity Securities market share for Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF would be discounted. In addition, as discussed above, to address concerns related to smaller ATSs, including those that trade OTC Equity Securities, the Operating Committee proposes to amend paragraph (a)(1) of the proposed fee schedule to add two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.

    (B) Market Makers

    In the Original Proposal, the Operating Committee proposed to include both Options Market Maker quotes and equities market maker quotes in the calculation of total message traffic for such market makers for purposes of tiering for Industry Members (other than Execution Venue ATSs). The Commission and commenters raised questions as to whether the proposed treatment of Options Market Maker quotes may result in an undue or inappropriate burden on competition or may lead to a reduction in market quality.[50] To address this concern, the Operating Committee determined to discount the Options Market Maker quotes by the trade to quote ratio for options when calculating message traffic for Options Market Makers. Similarly, to avoid disincentives to quoting behavior on the equities side as well, the Operating Committee determined to discount equity market maker quotes by the trade to quote ratio for equities when Start Printed Page 1419calculating message traffic for equities market makers.

    In the Original Proposal, market maker quotes were treated the same as other message traffic for purposes of tiering for Industry Members (other than Execution Venue ATSs). Commenters noted, however, that charging Industry Members on the basis of message traffic will impact market makers disproportionately because of their continuous quoting obligations. Moreover, in the context of options market makers, message traffic would include bids and offers for every listed options strikes and series, which are not an issue for equities.[51] The Operating Committee proposes to address this concern in two ways. First, the Operating Committee proposes to discount Options Market Maker quotes when calculating the Options Market Makers' tier placement. Specifically, the Operating Committee proposes to impose a discount based on the objective measure of the trade to quote ratio for options. Based on available data from June 2016 through June 2017, the trade to quote ratio for options is 0.01%. Second, the Operating Committee proposes to discount equities market maker quotes when calculating the equities market makers' tier placement. Specifically, the Operating Committee proposes to impose a discount based on the objective measure of the trade to quote ratio for equities. Based on available data for June 2016 through June 2017, this trade to quote ratio for equities is 5.43%.

    The practical effect of applying such discounts for quoting activity is to shift market makers' calculated message traffic lower, leading to the potential shift to tiers for lower message traffic and reduced fees. Such an approach would move sixteen Industry Member CAT Reporters that are market makers to a lower tier than in the Original Proposal. For example, under the Original Proposal, Broker-Dealer Firm ABC was placed in the first CAT Fee tier, which had a quarterly fee of $101,004. With the imposition of the proposed tier changes and the discount, Broker-Dealer Firm ABC, an options market maker, would be ranked in Tier 3 and would owe a quarterly fee of $40,899.

    In developing the proposed market maker discounts, the Operating Committee considered various discounts for Options Market Makers and equity market makers, including discounts of 50%, 25%, 0.00002%, as well as the 5.43% for option market makers and 0.01% for equity market makers. Each of these options were considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the quoting requirement, is an objective discounting method, and has the desired potential to shift market makers to lower fee tiers.

    By imposing a discount on Options Market Makers and equities market makers' quoting traffic for the calculation of message traffic, the Operating Committee believes that the proposed fees for market makers would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Industry Members, and avoid disincentives, such as a reduction in market quality, as required under the funding principles of the CAT NMS Plan.[52] The proposed discounts recognize the different types of trading operations presented by Options Market Makers and equities market makers, as well as the value of the market makers' quoting activity to the market as a whole. Accordingly, the Operating Committee believes that the proposed discounts will not impact the ability of small Options Market Makers or equities market makers to provide liquidity.

    (C) Comparability/Allocation of Costs

    Under the Original Proposal, 75% of CAT costs were allocated to Industry Members (other than Execution Venue ATSs) and 25% of CAT costs were allocated to Execution Venues. This cost allocation sought to maintain the greatest level of comparability across the funding model, where comparability considered affiliations among or between CAT Reporters. The Commission and commenters expressed concerns regarding whether the proposed 75%/25% allocation of CAT costs is consistent with the Plan's funding principles and the Exchange Act, including whether the allocation places a burden on competition or reduces market quality. The Commission and commenters also questioned whether the approach of accounting for affiliations among CAT Reporters in setting CAT Fees disadvantages non-affiliated CAT Reporters or otherwise burdens competition in the market for trading services.[53]

    In response to these concerns, the Operating Committee determined to revise the proposed funding model to focus the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities. In light of the interconnected nature of the various aspects of the funding model, the Operating Committee determined to revise various aspects of the model to enhance comparability at the individual entity level. Specifically, to achieve such comparability, the Operating Committee determined to (1) decrease the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven; (2) change the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; and (3) adjust tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). With these changes, the proposed funding model provides fee comparability for the largest individual entities, with the largest Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues each paying a CAT Fee of approximately $81,000 each quarter.

    (i) Number of Industry Member Tiers

    In the Original Proposal, the proposed funding model had nine tiers for Industry Members (other than Execution Venue ATSs). The Operating Committee determined that reducing the number of tiers from nine tiers to seven tiers (and adjusting the predefined Industry Member Percentages as well) continues to provide a fair allocation of fees among Industry Members and appropriately distinguishes between Industry Members with differing levels of message traffic. In reaching this conclusion, the Operating Committee considered historical message traffic generated by Industry Members across all exchanges and as submitted to FINRA's OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of Start Printed Page 1420message traffic, while also achieving greater comparability in the model for the individual CAT Reporters with the greatest market share or message traffic.

    In developing the proposed seven tier structure, the Operating Committee considered remaining at nine tiers, as well as reducing the number of tiers down to seven when considering how to address the concerns raised regarding comparability. For each of the alternatives, the Operating Committee considered the assignment of various percentages of Industry Members to each tier as well as various percentages of Industry Member recovery allocations for each alternative. Each of these options was considered in the context of its effects on the full funding model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the seven tier alternative provided the most fee comparability at the individual entity level for the largest CAT Reporters, while both providing logical breaks in tiering for Industry Members with different levels of message traffic and a sufficient number of tiers to provide for the full spectrum of different levels of message traffic for all Industry Members.

    (ii) Allocation of CAT Costs Between Equity and Options Execution Venues

    The Operating Committee also determined to adjust the allocation of CAT costs between Equity Execution Venues and Options Execution Venues to enhance comparability at the individual entity level. In the Original Proposal, 75% of Execution Venue CAT costs were allocated to Equity Execution Venues, and 25% of Execution Venue CAT costs were allocated to Options Execution Venues. To achieve the goal of increased comparability at the individual entity level, the Operating Committee analyzed a range of alternative splits for revenue recovery between Equity and Options Execution Venues, along with other changes in the proposed funding model. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67/33 allocation between Equity and Options Execution Venues enhances the level of fee comparability for the largest CAT Reporters. Specifically, the largest Equity and Options Execution Venues would pay a quarterly CAT Fee of approximately $81,000.

    In developing the proposed allocation of CAT costs between Equity and Options Execution Venues, the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to a 70%/30%, 67%/33%, or 57.75%/42.25% allocation. For each of the alternatives, the Operating Committee considered the effect each allocation would have on the assignment of various percentages of Equity Execution Venues to each tier as well as various percentages of Equity Execution Venue recovery allocations for each alternative. Moreover, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the 67%/33% allocation between Equity and Options Execution Venues provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.

    (iii) Allocation of Costs Between Execution Venues and Industry Members

    The Operating Committee determined to allocate 25% of CAT costs to Execution Venues and 75% to Industry Members (other than Execution Venue ATSs), as it had in the Original Proposal. The Operating Committee determined that this 75%/25% allocation, along with the other changes proposed above, led to the most comparable fees for the largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). The largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) would each pay a quarterly CAT Fee of approximately $81,000.

    As a preliminary matter, the Operating Committee determined that it is appropriate to allocate most of the costs to create, implement and maintain the CAT to Industry Members for several reasons. First, there are many more broker-dealers expected to report to the CAT than Participants (i.e., 1,541 broker-dealer CAT Reporters versus 22 Participants). Second, since most of the costs to process CAT reportable data is generated by Industry Members, Industry Members could be expected to contribute toward such costs. Finally, as noted by the SEC, the CAT “substantially enhance[s] the ability of the SROs and the Commission to oversee today's securities markets,” [54] thereby benefitting all market participants. After making this determination, the Operating Committee analyzed several different cost allocations, as discussed further below, and determined that an allocation where 75% of the CAT costs should be borne by the Industry Members (other than Execution Venue ATSs) and 25% should be paid by Execution Venues was most appropriate and led to the greatest comparability of CAT Fees for the largest CAT Reporters.

    In developing the proposed allocation of CAT costs between Execution Venues and Industry Members (other than Execution Venue ATSs), the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to an 80%/20%, 70%/30%, or 65%/35% allocation. Each of these options was considered in the context of the full model, including the effect on each of the changes discussed above, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. In particular, for each of the alternatives, the Operating Committee considered the effect each allocation had on the assignment of various percentages of Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) to each relevant tier as well as various percentages of recovery allocations for each tier. The Operating Committee determined that the 75%/25% allocation between Execution Venues and Industry Members (other than Execution Venue ATSs) provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.

    (iv) Affiliations

    The funding principles set forth in Section 11.2 of the Plan require that the fees charged to CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). The proposed funding model satisfies this requirement. As discussed Start Printed Page 1421above, under the proposed funding model, the largest Equity Execution Venues, Options Execution Venues, and Industry Members (other than Execution Venue ATSs) pay approximately the same fee. Moreover, the Operating Committee believes that the proposed funding model takes into consideration affiliations between or among CAT Reporters as complexes with multiple CAT Reporters will pay the appropriate fee based on the proposed fee schedule for each of the CAT Reporters in the complex. For example, a complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member will a pay the same as another complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member.

    (v) Fee Schedule Changes

    Accordingly, Amendment No. 4 amends paragraphs (a)(1) and (2) of the proposed fee schedule as set forth in the Original Proposal to reflect the changes discussed in this section. Specifically, the Operating Committee proposes to amend paragraph (a)(1) and (2) of the proposed fee schedule to update the number of tiers, and the fees and percentages assigned to each tier to reflect the described changes.

    (D) Market Share/Message Traffic

    In the Original Proposal, the Operating Committee proposed to charge Execution Venues based on market share and Industry Members (other than Execution Venue ATSs) based on message traffic. Commenters questioned the use of the two different metrics for calculating CAT Fees.[55] The Operating Committee continues to believe that the proposed use of market share and message traffic satisfies the requirements of the Exchange Act and the funding principles set forth in the CAT NMS Plan. Accordingly, the proposed funding model continues to charge Execution Venues based on market share and Industry Members (other than Execution Venue ATSs) based on message traffic.

    In drafting the Plan and the Original Proposal, the Operating Committee expressed the view that the correlation between message traffic and size does not apply to Execution Venues, which they described as producing similar amounts of message traffic regardless of size. The Operating Committee believed that charging Execution Venues based on message traffic would result in both large and small Execution Venues paying comparable fees, which would be inequitable, so the Operating Committee determined that it would be more appropriate to treat Execution Venues differently from Industry Members in the funding model. Upon a more detailed analysis of available data, however, the Operating Committee noted that Execution Venues have varying levels of message traffic. Nevertheless, the Operating Committee continues to believe that a bifurcated funding model—where Industry Members (other than Execution Venue ATSs) are charged fees based on message traffic and Execution Venues are charged based on market share—complies with the Plan and meets the standards of the Exchange Act for the reasons set forth below.

    Charging Industry Members based on message traffic is the most equitable means for establishing fees for Industry Members (other than Execution Venue ATSs). This approach will assess fees to Industry Members that create larger volumes of message traffic that are relatively higher than those fees charged to Industry Members that create smaller volumes of message traffic. Since message traffic, along with fixed costs of the Plan Processor, is a key component of the costs of operating the CAT, message traffic is an appropriate criterion for placing Industry Members in a particular fee tier.

    The Operating Committee also believes that it is appropriate to charge Execution Venues CAT Fees based on their market share. In contrast to Industry Members (other than Execution Venue ATSs), which determine the degree to which they produce the message traffic that constitutes CAT Reportable Events, the CAT Reportable Events of Execution Venues are largely derivative of quotations and orders received from Industry Members that the Execution Venues are required to display. The business model for Execution Venues, however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.

    Similarly, focusing on message traffic would make it more difficult to draw distinctions between large and small exchanges, including options exchanges in particular. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (i.e., a single tier may include both Execution Venues and Industry Members). The Operating Committee's analysis found that the majority of exchanges (15 total) were grouped in Tiers 1 and 2. Moreover, virtually all of the options exchanges were in Tiers 1 and 2.[56] Given the concentration of options exchanges in Tiers 1 and 2, the Operating Committee believes that using a funding model based purely on message traffic would make it more difficult to distinguish between large and small options exchanges, as compared to the proposed bifurcated fee approach.

    In addition, the Operating Committee also believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges. For these reasons, the Operating Committee believes that charging Execution Venues based on market share is more appropriate and equitable than charging Execution Venues based on message traffic.

    (E) Time Limit

    In the Original Proposal, the Operating Committee did not impose any time limit on the application of the proposed CAT Fees. As discussed above, the Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee proposes to include a sunsetting provision in the proposed fee model. The proposed CAT Fees will sunset two years after the operative date for the CAT Fees. Such a provision will provide the Operating Committee and other market participants with the opportunity to reevaluate the performance of the proposed funding model.

    (F) Tier Structure/Decreasing Cost per Unit

    In the Original Proposal, the Operating Committee determined to use a tiered fee structure. The Commission and commenters questioned whether the decreasing cost per additional unit (of message traffic in the case of Industry Members, or of share volume in the case of Execution Venues) in the proposed fee schedules burdens competition by disadvantaging small Start Printed Page 1422Industry Members and Execution Venues and/or by creating barriers to entry in the market for trading services and/or the market for broker-dealer services.[57]

    The Operating Committee does not believe that decreasing cost per additional unit in the proposed fee schedules places an unfair competitive burden on Small Industry Members and Execution Venues. While the cost per unit of message traffic or share volume necessarily will decrease as volume increases in any tiered fee model using fixed fee percentages and, as a result, Small Industry Members and small Execution Venues may pay a larger fee per message or share, this comment fails to take account of the substantial differences in the absolute fees paid by Small Industry Members and small Execution Venues as opposed to large Industry Members and large Execution Venues. For example, under the fee proposals, Tier 7 Industry Members would pay a quarterly fee of $105, while Tier 1 Industry Members would pay a quarterly fee of $81,483. Similarly, a Tier 4 Equity Execution Venue would pay a quarterly fee of $129, while a Tier 1 Equity Execution Venue would pay a quarterly fee of $81,048. Thus, Small Industry Members and small Execution Venues are not disadvantaged in terms of the total fees that they actually pay. In contrast to a tiered model using fixed fee percentages, the Operating Committee believes that strictly variable or metered funding models based on message traffic or share volume would be more likely to affect market behavior and may present administrative challenges (e.g., the costs to calculate and monitor fees may exceed the fees charged to the smallest CAT Reporters).

    (G) Other Alternatives Considered

    In addition to the various funding model alternatives discussed above regarding discounts, number of tiers and allocation percentages, the Operating Committee also discussed other possible funding models. For example, the Operating Committee considered allocating the total CAT costs equally among each of the Participants, and then permitting each Participant to charge its own members as it deems appropriate.[58] The Operating Committee determined that such an approach raised a variety of issues, including the likely inconsistency of the ensuing charges, potential for lack of transparency, and the impracticality of multiple SROs submitting invoices for CAT charges. The Operating Committee therefore determined that the proposed funding model was preferable to this alternative.

    (H) Industry Member Input

    Commenters expressed concern regarding the level of Industry Member input into the development of the proposed funding model, and certain commenters have recommended a greater role in the governance of the CAT.[59] The Participants previously addressed this concern in its letters responding to comments on the Plan and the CAT Fees.[60] As discussed in those letters, the Participants discussed the funding model with the Development Advisory Group (“DAG”), the advisory group formed to assist in the development of the Plan, during its original development.[61] Moreover, Industry Members currently have a voice in the affairs of the Operating Committee and operation of the CAT generally through the Advisory Committee established pursuant to Rule 613(b)(7) and Section 4.13 of the Plan. The Advisory Committee attends all meetings of the Operating Committee, as well as meetings of various subcommittees and working groups, and provides valuable and critical input for the Participants' and Operating Committee's consideration. The Operating Committee continues to believe that that Industry Members have an appropriate voice regarding the funding of the Company.

    (I) Conflicts of Interest

    Commenters also raised concerns regarding Participant conflicts of interest in setting the CAT Fees.[62] The Participants previously responded to this concern in both the Plan Response Letter and the Fee Rule Response Letter.[63] As discussed in those letters, the Plan, as approved by the SEC, adopts various measures to protect against the potential conflicts issues raised by the Participants' fee-setting authority. Such measures include the operation of the Company as a not for profit business league and on a break-even basis, and the requirement that the Participants file all CAT Fees under Section 19(b) of the Exchange Act. The Operating Committee continues to believe that these measures adequately protect against concerns regarding conflicts of interest in setting fees, and that additional measures, such as an independent third party to evaluate an appropriate CAT Fee, are unnecessary.

    (J) Fee Transparency

    Commenters also argued that they could not adequately assess whether the CAT Fees were fair and equitable because the Operating Committee has not provided details as to what the Participants are receiving in return for the CAT Fees.[64] The Operating Committee provided a detailed discussion of the proposed funding model in the Plan, including the expenses to be covered by the CAT Fees. In addition, the agreement between the Company and the Plan Processor sets forth a comprehensive set of services to be provided to the Company with regard to the CAT. Such services include, without limitation: User support services (e.g., a help desk); tools to allow each CAT Reporter to monitor and correct their submissions; a comprehensive compliance program to monitor CAT Reporters' adherence to Rule 613; publication of detailed Technical Specifications for Industry Members and Participants; performing data linkage functions; creating comprehensive data security and confidentiality safeguards; creating query functionality for regulatory users (i.e., the Participants, and the SEC and SEC staff); and performing billing and collection functions. The Operating Committee further notes that the services provided by the Plan Processor and the costs related thereto were subject to a bidding process.

    (K) Funding Authority

    Commenters also questioned the authority of the Operating Committee to impose CAT Fees on Industry Members.[65] The Participants previously responded to this same comment in the Plan Response Letter and the Fee Rule Response Letter.[66] As the Participants previously noted, SEC Rule 613 specifically contemplates broker-dealers contributing to the funding of the CAT. In addition, as noted by the SEC, the CAT “substantially enhance[s] the ability of the SROs and the Commission to oversee today's securities markets,” [67] Start Printed Page 1423thereby benefitting all market participants. Therefore, the Operating Committing continues to believe that it is equitable for both Participants and Industry Members to contribute to funding the cost of the CAT.

    B. Governing or Constituent Documents

    Not applicable.

    C. Implementation of Amendment

    The terms of the proposed amendment will become effective upon filing pursuant to Rule 608(b)(3)(i) of the Exchange Act because it establishes a fee or other charge collected on behalf of all of the Participants in connection with access to, or use of, any facility contemplated by the plan (including changes in any provision with respect to distribution of any net proceeds from such fees or other charges to the sponsors and/or participants).[68] At any time within sixty days of the filing of this amendment, the Commission may summarily abrogate the amendment and require that it be refiled pursuant to paragraph (b)(1) [sic] of Rule 608, if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors or 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.

    D. Development and Implementation Phases

    Not applicable.

    E. Analysis of Impact on Competition

    The Operating Committee does not believe that the proposed amendment will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. The Operating Committee notes that the proposed amendment implements provisions of the CAT NMS Plan approved by the Commission, and is designed to assist the Participants in meeting their regulatory obligations pursuant to the Plan. Because all national securities exchanges and FINRA are subject to the proposed CAT Fees set forth in the proposed amendment, this is not a competitive filing that raises competition issues between and among the exchanges and FINRA.

    Moreover, as previously described, the Operating Committee believes that the proposed fee schedule fairly and equitably allocates costs among CAT Reporters. In particular, the proposed fee schedule is structured to impose comparable fees on similarly situated CAT Reporters, and lessen the impact on smaller CAT Reporters. CAT Reporters with similar levels of CAT activity will pay similar fees. For example, Industry Members (other than Execution Venue ATSs) with higher levels of message traffic will pay higher fees, and those with lower levels of message traffic will pay lower fees. Similarly, Execution Venue ATSs and other Execution Venues with larger market share will pay higher fees, and those with lower levels of market share will pay lower fees. Therefore, given that there is generally a relationship between message traffic and/or market share to the CAT Reporter's size, smaller CAT Reporters generally pay less than larger CAT Reporters. Accordingly, the Operating Committee does not believe that the CAT Fees would have a disproportionate effect on smaller or larger CAT Reporters. In addition, ATSs and exchanges will pay the same fees based on market share. Therefore, the Operating Committee does not believe that the fees will impose any burden on the competition between ATSs and exchanges. Accordingly, the Operating Committee believes that the proposed fees will minimize the potential for adverse effects on competition between CAT Reporters in the market.

    Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market.

    In addition, the Operating Committee believes that the proposed changes to the Original Proposal, as discussed above in detail, address certain competitive concerns raised by commenters, including concerns related to, among other things, smaller ATSs, ATSs trading OTC Equity Securities, market making quoting and fee comparability. As discussed above, the Operating Committee believes that the proposals address the competitive concerns raised by commenters.

    F. Written Understanding or Agreements Relating to Interpretation of, or Participation in, Plan.

    Not applicable.

    G. Approval by Plan Sponsors in Accordance With Plan

    Section 12.3 of the Plan states that, subject to certain exceptions, the Plan may be amended from time to time only by a written amendment, authorized by the affirmative vote of not less than two-thirds of all of the Participants, that has been approved by the SEC pursuant to Rule 608 or has otherwise become effective under Rule 608. In addition, Section 4.3(a)(vi) of the Plan requires the Operating Committee, by Majority Vote, to authorize action to determine the appropriate funding-related policies, procedures and practices-consistent with Article XI. The Operating Committee has satisfied both of these requirements.

    H. Description of Operation of Facility Contemplated by the Proposed Amendment

    Not applicable.

    I. Terms and Conditions of Access

    Not applicable.

    J. Method of Determination and Imposition, and Amount of, Fees and Charges

    Section A of this letter describes in detail how the Operating Committee developed the proposed CAT Fees, including a detailed discussion of the proposed funding model for the CAT.

    K. Method and Frequency of Processor Evaluation

    Not applicable.

    L. Dispute Resolution

    Section 11.5 of the CAT NMS Plan addresses the resolution of disputes regarding Participants' CAT Fees charged to Participants and Industry Members. Specifically, Section 11.5 states that disputes with respect to fees the Company charges Participants pursuant to Article XI of the CAT NMS Plan shall be determined by the Operating Committee or a Subcommittee designated by the Operating Committee. Decisions by the Operating Committee or such designated Subcommittee on such matters shall be binding on Participants, without prejudice to the rights of any Participant to seek redress from the SEC pursuant to Rule 608 or in any other appropriate forum. In addition, the Participants adopted rules to establish the procedures for resolving potential disputes related to CAT Fees charged to Industry Members.[69]

    III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. In particular, the Commission seeks comment on the following:Start Printed Page 1424

    Allocation of Costs

    (1) Commenters' views as to whether the allocation of CAT costs is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality.” [70]

    (2) Commenters' views as to whether the allocation of 25% of CAT costs to the Execution Venues (including all the Participants) and 75% to Industry Members, will incentivize or disincentivize the Participants to effectively and efficiently manage the CAT costs incurred by the Participants since they will only bear 25% of such costs.

    (3) Commenters' views on the determination to allocate 75% of all costs incurred by the Participants from November 21, 2016 to November 21, 2017 to Industry Members (other than Execution Venue ATSs), when such costs are development and build costs and when Industry Member reporting is scheduled to commence a year later, including views on whether such “fees, costs and expenses . . . [are] fairly and reasonably shared among the Participants and Industry Members” in accordance with the CAT NMS Plan.[71]

    (4) Commenters' views on whether an analysis of the ratio of the expected Industry Member-reported CAT messages to the expected SRO-reported CAT messages should be the basis for determining the allocation of costs between Industry Members and Execution Venues.[72]

    (5) Any additional data analysis on the allocation of CAT costs, including any existing supporting evidence.

    Comparability

    (6) Commenters' views on the shift in the standard used to assess the comparability of CAT Fees, with the emphasis now on comparability of individual entities instead of affiliated entities, including views as to whether this shift is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to establish a fee structure in which the fees charged to “CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).” [73]

    (7) Commenters' views as to whether the reduction in the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven, the revised allocation of CAT costs between Equity Execution Venues and Options Execution Venues from a 75%/25% split to a 67%/33% split, and the adjustment of all tier percentages and recovery allocations achieves comparability across individual entities, and whether these changes should have resulted in a change to the allocation of 75% of total CAT costs to Industry Members (other than Execution Venue ATSs) and 25% of such costs to Execution Venues.

    Discounts

    (8) Commenters' views as to whether the discounts for options market-makers, equities market-makers, and Equity ATSs trading OTC Equity Securities are clear, reasonable, and consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality,” [74] including views as to whether the discounts for market-makers limit any potential disincentives to act as a market-maker and/or to provide liquidity due to CAT fees.

    Calculation of Costs and Imposition of CAT Fees

    (9) Commenters' views as to whether the amendment provides sufficient information regarding the amount of costs incurred from November 21, 2016 to November 21, 2017, particularly, how those costs were calculated, how those costs relate to the proposed CAT Fees, and how costs incurred after November 21, 2017 will be assessed upon Industry Members and Execution Venues;

    (10) Commenters' views as to whether the timing of the imposition and collection of CAT Fees on Execution Venues and Industry Members is reasonably related to the timing of when the Company expects to incur such development and implementation costs.[75]

    (11) Commenters' views on dividing CAT costs equally among each of the Participants, and then each Participant charging its own members as it deems appropriate, taking into consideration the possibility of inconsistency in charges, the potential for lack of transparency, and the impracticality of multiple SROs submitting invoices for CAT charges.

    Burden on Competition and Barriers to Entry

    (12) Commenters' views as to whether the allocation of 75% of CAT costs to Industry Members (other than Execution Venue ATSs) imposes any burdens on competition to Industry Members, including views on what baseline competitive landscape the Commission should consider when analyzing the proposed allocation of CAT costs.

    (13) Commenters' views on the burdens on competition, including the relevant markets and services and the impact of such burdens on the baseline competitive landscape in those relevant markets and services.

    (14) Commenters' views on any potential burdens imposed by the fees on competition between and among CAT Reporters, including views on which baseline markets and services the fees could have competitive effects on and whether the fees are designed to minimize such effects.

    (15) Commenters' general views on the impact of the proposed fees on economies of scale and barriers to entry.

    (16) Commenters' views on the baseline economies of scale and barriers to entry for Industry Members and Execution Venues and the relevant markets and services over which these economies of scale and barriers to entry exist.

    (17) Commenters' views as to whether a tiered fee structure necessarily results in less active tiers paying more per unit than those in more active tiers, thus creating economies of scale, with supporting information if possible.

    (18) Commenters' views as to how the level of the fees for the least active tiers would or would not affect barriers to entry.

    (19) Commenters' views on whether the difference between the cost per unit (messages or market share) in less active tiers compared to the cost per unit in more active tiers creates regulatory economies of scale that favor larger competitors and, if so:

    (a) How those economies of scale compare to operational economies of scale; and

    (b) Whether those economies of scale reduce or increase the current advantages enjoyed by larger competitors or otherwise alter the competitive landscape.Start Printed Page 1425

    (20) Commenters' views on whether the fees could affect competition between and among national securities exchanges and FINRA, in light of the fact that implementation of the fees does not require the unanimous consent of all such entities, and, specifically:

    (a) Whether any of the national securities exchanges or FINRA are disadvantaged by the fees; and

    (b) If so, whether any such disadvantages would be of a magnitude that would alter the competitive landscape.

    (21) Commenters' views on any potential burden imposed by the fees on competitive quoting and other liquidity provision in the market, including, specifically:

    (a) Commenters' views on the kinds of disincentives that discourage liquidity provision and/or disincentives that the Commission should consider in its analysis;

    (b) Commenters' views as to whether the fees could disincentivize the provision of liquidity; and

    (c) Commenters' views as to whether the fees limit any disincentives to provide liquidity.

    (22) Commenters' views as to whether the amendment adequately responds to and/or addresses comments received on related filings.

    Comments may be submitted by any of the following methods:

    Electronic Comments

    Paper Comments

    • Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

    A. All submissions should refer to File Number 4-698.This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website (http://www.sec.gov/​rules/​sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed plan amendment that are filed with the Commission, and all written communications relating to the amendment between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the Participants' offices. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number 4-698 and should be submitted on or before February 1, 2018.

    Start Signature

    By the Commission.

    Eduardo A. Aleman,

    Assistant Secretary.

    End Signature Start Printed Page 1426

    Start Printed Page 1427

    Appendix B

    Equity Execution Venue Rank and Tier

    Market participantMarket share of share volume 76 (%)RankTier
    Financial Industry Regulatory Authority, Inc24.411851285014311
    The NASDAQ Stock Market LLC14.322131639451421
    New York Stock Exchange LLC13.163122217769131
    NYSE Arca, Inc9.396307429136541
    Cboe EDGX Exchange, Inc6.326763831465351
    Cboe BZX Exchange, Inc6.147822978934761
    Cboe BYX Exchange, Inc4.764378164771671
    NASDAQ BX, Inc3.140137281548481
    UBS ATS2.305869354885691
    Investors' Exchange, LLC2.1483648334229101
    Cboe EDGA Exchange, Inc1.8513467967001111
    CROSSFINDER1.6894565311740121
    SUPERX1.0115687555972131
    MS POOL (ATS-4)0.9188826526803142
    NASDAQ PHLX LLC0.8009596014408152
    J.P. MORGAN ATS (“JPM-X”)0.7936361365369162
    BARCLAYS ATS (“LX”)0.6719255553783172
    LEVEL ATS0.6571986459767182
    INSTINCT X0.5956036029620192
    BIDS TRADING L.P0.5837401323782202
    INSTINET CONTINUOUS BLOCK CROSSING SYSTEM (CBX)0.4723979596673212
    KCG MATCHING0.4682553983691222
    POSIT0.4435281677014232
    Chicago Stock Exchange, Inc0.4241409043731242
    SIGMA X0.3157563290949252
    MS TRAJECTORY CROSS (ATS-1)0.2654339378079262
    NYSE American LLC0.2342627717196272
    IBKR ATS0.2038196304470282
    CROSSSTREAM0.1772292674940292
    SIGMA X20.1705392273292302
    LIQUIDNET ATS0.1499973113804312
    MILLENNIUM0.1365496066290322
    CITICROSS0.1349428742591332
    LIQUIDNET H20 ATS0.1282036311445342
    DEALERWEB, INC0.1156677493258352
    OTC LINK ATS 770.1148240026713363
    BLOCKCROSS ATS0.0979883294279373
    INSTINET CROSSING0.0763929064441383
    CODA MARKETS, INC0.0662166896390393
    LUMINEX TRADING & ANALYTICS LLC0.0304261486817403
    MS RETAIL POOL0.0295389976553413
    CITIBLOC0.0251235534421423
    USTOCKTRADE SECURITIES, INC0.0089509616229433
    AQUA SECURITIES L.P0.0052275918715443
    XE0.0031219820548453
    Start Printed Page 1428
    GLOBAL OTC0.0002467471213463
    BARCLAYS DIRECTEX0.0001494994467473
    VARIABLE INVESTMENT ADVISORS, INC. ATS (VIAATS)0.0000002922675484
    FNC AG STOCK, LLC0.0000000607782494
    DBOT ATS, LLC0.0000000429086504
    PRO SECURITIES ATS0.0000000000004514
    NYSE National, Inc0.0000000000000524

    Options Execution Venue Rank and Tier

    Market participantMarket share of share volume (options contracts) 78 (%)RankTier
    Cboe Exchange, Inc17.3011
    NASDAQ PHLX LLC16.8921
    Cboe BZX Options Exchange, Inc12.3631
    The NASDAQ Options Market LLC10.0141
    Nasdaq ISE, LLC9.0651
    NYSE Arca, Inc7.7461
    NYSE American LLC7.6071
    Miami International Securities Exchange, LLC5.0781
    Nasdaq GEMX, LLC5.0491
    Cboe C2 Exchange, Inc3.79101
    BOX Options Exchange LLC2.30111
    Cboe EDGX Options Exchange, Inc1.40122
    NASDAQ BX, Inc0.70132
    MIAX PEARL, LLC0.61142
    Nasdaq MRX, LLC0.13152
    End Preamble

    Footnotes

    1.  On February 27, 2015, BATS-Y Exchange, Inc. (n/k/a Cboe BYX Exchange, Inc.), BATS Exchange, Inc. (n/k/a Cboe BZX Exchange, Inc.), BOX Options Exchange LLC, C2 Options Exchange, Incorporated (n/k/a Cboe C2 Exchange, Inc.), Chicago Board Options Exchange, Incorporated (n/k/a Cboe Exchange, Inc.), Chicago Stock Exchange, Inc., EDGA Exchange, Inc. (n/k/a Cboe EDGA Exchange, Inc.), EDGX Exchange, Inc. (n/k/a Cboe EDGX Exchange, Inc.), Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC (n/k/a Nasdaq ISE, LLC), ISE Gemini, LLC (n/k/a Nasdaq GEMX, LLC), Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc. (n/k/a Nasdaq BX, Inc.), NASDAQ OMX PHLX LLC (n/k/a Nasdaq PHLX LLC), The NASDAQ Stock Market LLC, National Stock Exchange, Inc. (n/k/a NYSE National, Inc.), New York Stock Exchange LLC, NYSE MKT LLC (n/k/a NYSE American LLC), and NYSE Arca, Inc. filed with the Commission, pursuant to Section 11A of the Exchange Act and Rule 608 of Regulation NMS thereunder, the CAT NMS Plan. 15 U.S.C. 78k-1; 17 CFR 242.608. The Plan was published for comment in the Federal Register on May 17, 2016, and approved by the Commission, as modified, on November 15, 2016. See Securities Exchange Act Release Nos. 77724 (April 27, 2016), 81 FR 30614 (May 17, 2016); 79318 (November 15, 2016), 81 FR 84696 (November 23, 2016). On January 30, 2017, the Commission noticed for immediate effectiveness an amendment to the Plan to add MIAX PEARL, LLC as a Participant. See Securities Exchange Act Release No. 79898, 82 FR 9250 (February 3, 2017).

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    4.  See Letter from Michael Simon, CAT NMS Plan Operating Committee Chair, to Brent J. Fields, Secretary, Commission, dated December 11, 2017 (“Transmittal Letter”). The Participants previously submitted an amendment to the CAT NMS Plan to establish Participant fees (“Amendment No. 2”). See Letter from Michael Simon, Chair, CAT NMS Plan Operating Committee, to Brent J. Fields, Secretary, Commission, dated May 22, 2017. See also Securities Exchange Act Release No. 80930 (June 14, 2017), 82 FR 28180 (June 20, 2017), available at https://www.sec.gov/​rules/​sro/​nms/​2017/​34-80930.pdf. The Commission issued an Order of Summary Abrogation of Amendment No. 2 on July 21, 2017, concluding that the amendment raised concerns and the justifications provided by the Participants were not sufficient for the Commission to determine whether the amendment was consistent with the Act. See Securities and Exchange Commission Release No. 81189 (July 21, 2017), 82 FR 35005 (July 27, 2017). On October 30, 2017, the Participants filed Amendment No. 3 to the CAT NMS Plan, which has been withdrawn and replaced and superseded in its entirety by Amendment No. 4.

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    6.  See 17 CFR 242.608(a)(4) and (a)(5).

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    7.  See Transmittal Letter, supra note 4.

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    8.  Approval Order at 84796.

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    9.  Id. at 84794.

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    10.  Id. at 84795.

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    11.  Id. at 84794.

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    12.  Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85006.

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    13.  Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85006.

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    14.  Moreover, as the SEC noted in approving the CAT NMS Plan, “[t]he Participants also have offered a reasonable basis for establishing a funding model based on broad tiers, in that it may be easier to implement.” Approval Order at 84796.

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    15.  Approval Order at 85005.

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    18.  Section 11.3(a) and (b) of the CAT NMS Plan.

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    19.  Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85005.

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    20.  Section 11.3(b) of the CAT NMS Plan.

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    21.  The Operating Committee notes that this analysis did not place MIAX PEARL in Tier 1 or Tier 2 since the exchange commenced trading on February 6, 2017.

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    22.  Section 11.2(e) of the CAT NMS Plan.

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    23.  Approval Order at 84796.

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    24.  Id. at 84792.

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    26.  Approval Order at 84793.

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    27.  Consequently, firms that do not have “message traffic” reported to an exchange or OATS before they are reporting to the CAT would not be subject to a fee until they begin to report information to CAT.

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    28.  If an Industry Member (other than an Execution Venue ATS) has no orders, cancels, quotes and executions prior to the commencement of CAT Reporting, or no Reportable Events after CAT reporting commences, then the Industry Member would not have a CAT Fee obligation.

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    29.  The SEC approved exemptive relief permitting Options Market Maker quotes to be reported to the Central Repository by the relevant Options Exchange in lieu of requiring that such reporting be done by both the Options Exchange and the Options Market Maker, as required by Rule 613 of Regulation NMS. See Securities Exchange Act Rel. No. 77265 (Mar. 1, 2017 [sic], 81 FR 11856 (Mar. 7, 2016). This exemption applies to Options Market Maker quotes for CAT reporting purposes only. Therefore, notwithstanding the reporting exemption provided for Options Market Maker quotes, Options Market Maker quotes will be included in the calculation of total message traffic for Options Market Makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences.

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    30.  The trade to quote ratios were calculated based on the inverse of the average of the monthly equity SIP and OPRA quote to trade ratios from June 2016-June 2017 that were compiled by the Financial Information Forum using data from NASDAQ and SIAC.

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    31.  Although FINRA does not operate an execution venue, because it is a Participant, it is considered an “Execution Venue” under the Plan for purposes of determining fees.

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    32.  The average shares per trade ratio for both NMS Stocks and OTC Equity Securities from the second quarter of 2017 was calculated using publicly available market volume data from Bats and OTC Markets Group, and the totals were divided to determine the average number of shares per trade between NMS Stocks and OTC Equity Securities.

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    33.  It is anticipated that CAT-related costs incurred prior to November 21, 2016 will be addressed via a separate filing.

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    34.  This $5,000,000 represents the gradual accumulation of the funds for a target operating reserve of $11,425,000.

    35.  Note that all monthly, quarterly and annual CAT Fees have been rounded to the nearest dollar.

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    36.  The amount in excess of the total CAT costs will contribute to the gradual accumulation of the target operating reserve of $11.425 million.

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    37.  The CAT Fees are designed to recover the costs associated with the CAT. Accordingly, CAT Fees would not be affected by increases or decreases in other non-CAT expenses incurred by the Participants, such as any changes in costs related to the retirement of existing regulatory systems, such as OATS.

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    38.  Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85006.

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    39.  Securities Exchange Act Rel. No. 80930 (June 14, 2017), 82 FR 28180 (June 20, 2017).

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    40.  Securities Exchange Act Rel. No. 81189 (July 21, 2017), 82 FR 35005 (July 27, 2017) (“Abrogation Order”).

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    41.  For a description of the Industry Member Fee Filings and the comments submitted in response to those Filings, see Securities Exchange Act Rel. No. 81067 (June 30, 2017), 82 FR 31656 (July 7, 2017) (“Suspension Order”).

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    42.  Suspension Order.

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    43.  See Letter from Stuart J. Kaswell, Executive Vice President, Managing Director and General Counsel, Managed Funds Association, to Brent J. Fields, Secretary, SEC (July 28, 2017) (“MFA Letter”); Letter from Theodore R. Lazo, Managing Director and Associate General Counsel, SIFMA, to Brent J. Fields, Secretary, SEC (July 28, 2017) (“SIFMA Letter”); Joanna Mallers, Secretary, FIA Principal Traders Group, to Brent J. Fields, Secretary, SEC (July 28, 2017) (“FIA Principal Traders Group Letter”); Letter from Kevin Coleman, General Counsel & Chief Compliance Officer, Belvedere Trading LLC, to Brent J. Fields, Secretary, SEC (July 28, 2017) (“Belvedere Letter”); Letter from W. Hardy Callcott, Sidley Austin LLP, to Brent J. Fields, Secretary, SEC (July 27, 2017) (“Sidley Letter”); Letter from John Kinahan, Chief Executive Officer, Group One Trading, L.P., to Brent J. Fields, Secretary, SEC (Aug. 10, 2017) (“Group One Letter”); and Letter from Joseph Molluso, Executive Vice President, Virtu Financial, to Brent J. Fields, Secretary, SEC (Aug. 18, 2017) (“Virtu Financial Letter”).

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    44.  See Abrogation Order at 35012; SIFMA Letter at 3.

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    45.  Note that while these equity market share thresholds were referenced as data points to help differentiate between Equity Execution Venue tiers, the proposed funding model is directly driven not by market share thresholds, but rather by fixed percentages of Equity Execution Venues across tiers to account for fluctuating levels of market share across time. Actual market share in any tier will vary based on the actual market activity in a given measurement period, as well as the number of Equity Execution Venues included in the measurement period.

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    46.  Section 11.2(b) of the CAT NMS Plan.

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    47.  See Abrogation Order at 35012-3.

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    48.  Abrogation Order at 35012.

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    49.  Section 11.2(b) of the CAT NMS Plan.

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    50.  See Abrogation Order at 35011; SIFMA Letter at 4-6; FIA Principal Traders Group Letter at 3; Sidley Letter at 2-6; Group One Letter at 2-6; and Belvedere Letter at 2.

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    51.  Abrogation Order at 35012.

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    52.  Section 11.2(b) of the CAT NMS Plan.

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    53.  See Abrogation Order at 35010-13; SIFMA Letter at 3; Sidley Letter at 6-7; Group One Letter at 2; and Belvedere Letter at 2.

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    54.  Securities Exchange Act Rel. No. 67457 (Jul 18, 2012), 77 FR 45722, 45726 (Aug. 1, 2012) (“Rule 613 Adopting Release”).

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    55.  Abrogation Order at 35011; FIA Principal Traders Group Letter at 2.

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    56.  The Participants note that this analysis did not place MIAX PEARL in Tier 1 or Tier 2 since the exchange commenced trading on February 6, 2017.

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    57.  Suspension Order at 31667.

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    58.  See FIA Principal Traders Group Letter at 2; Belvedere Letter at 4[sic].

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    59.  See Abrogation Order at 35010; MFA Letter at 1-2.

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    60.  Letter from Participants to Brent J. Fields, Secretary, SEC (Sept. 23, 2016) (“Plan Response Letter”); Letter from CAT NMS Plan Participants to Brent J. Fields, Secretary, SEC (June 29, 2017) (“Fee Rule Response Letter”).

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    61.  Fee Rule Response Letter at 2; Plan Response Letter at 18.

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    62.  See Abrogation Order at 35010; FIA Principal Traders Group at 3.

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    63.  See Plan Response Letter at 16, 17; Fee Rule Response Letter at 10-12.

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    64.  See FIA Principal Traders Group at 3; SIFMA Letter at 3.

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    65.  See Abrogation Order at 35009-10; SIFMA Letter at 2.

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    66.  See Plan Response Letter at 9-10; Fee Rule Response Letter at 3-4.

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    67.  Rule 613 Adopting Release at 45726.

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    69.  See Securities Exchange Act Rel. No. 81500 (Aug. 30, 2017), 82 FR 42143 (Sept. 6, 2017).

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    70.  Section 11.2(e) of the CAT NMS Plan.

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    71.  Section 11.1(c) of the CAT NMS Plan.

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    72.  The Notice for the CAT NMS Plan did not provide a comprehensive count of audit trail message traffic from different regulatory data sources, but the Commission did estimate the ratio of all SRO audit trail messages to OATS audit trail messages to be 1.9431. See Securities Exchange Act Release No. 77724 (April 27, 2016), 81 FR 30613, 30721 n.919 and accompanying text (May 17, 2016).

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    73.  Section 11.2(c) of the CAT NMS Plan.

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    74.  Section 11.2(e) of the CAT NMS Plan.

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    75.  Section 11.1(c) of the CAT NMS Plan.

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    BILLING CODE 8001-01-P

    BILLING CODE 8001-01-C

    BILLING CODE 8001-01-P

    BILLING CODE 8001-01-C

    BILLING CODE 8011-01-P

    BILLING CODE 8011-01-C

    [FR Doc. 2018-00314 Filed 1-10-18; 8:45 am]

    BILLING CODE 8011-01-P

Document Information

Published:
01/11/2018
Department:
Securities and Exchange Commission
EntryType:
Notice
Document Number:
2018-00314
Pages:
1399-1428 (30 pages)
Docket Numbers:
Release No. 34-82451, File No. 4-698
E.O. Citation:
of 1/5/2018
SectionNoes:
PDF File:
2018-00314.pdf