2024-29912. Joint Industry Plan; Order Approving Amendments to the National Market System Plan Governing the Consolidated Audit Trail Designed To Implement Cost Savings Measures

Table 1—The Shares of Options Quote Events and Options Market Maker Quotes in Listed Options in CAT

[January 2024-March 2024]

	Jan-24	Feb-24	Mar-24
Panel A (numbers in billions)
All events in CAT (1) [= (2) + (9)]	8,164	7,811	7,892
All options-related events in CAT (2) [= (3) + (8)]	7,166	6,905	7,039
All options exchange events (3) [= (4) + (7)]	6,817	6,530	6,655
OMM a quotes in Listed Options (4) [= (5) + (6)]	6,528	6,225	6,340
Options quote (OQ) events (5)	5,287	4,884	4,896
Options quote cancel (OQC) events (6)	1,241	1,341	1,444
Other options exchange events (7)	289	305	315
Industry member options-related events (8)	349	376	384
All equities events in CAT (9)	998	906	853
Panel B (%)
Options quote events as percent of all options exchange events [=100*(5)/(3)]	78	75	74
Options quote events as percent of all options-related events in CAT [=100*(5)/(2)]	74	71	70
Options quote events as percent of all events in CAT [=100*(5)/(1)]	65	63	62
Options Market Maker quotes in Listed Options as percent of all options exchange events [=100*(4)/(3)]	96	95	95
Options Market Maker quotes in Listed Options as percent of all options-related events in CAT [=100*(4)/(2)]	91	90	90
Options Market Maker quotes in Listed Options as percent of all events in CAT [=100*(4)/(1)]	80	80	80
Source: CAT Data. ( print page 103045)
Notes: (1) Other options exchange events include options order accepted, options order modified and options order canceled events, internal options route and options cancel route events, options trade events, and various other options exchange events. Industry member options-related events include industry member options events and industry member multi-leg events. (2) All equities events in CAT include all equities exchange events and industry member equities events. (3) All events in CAT include all options exchange events, all equities exchange events, and all industry member events.
a  OMM refers to Options Market Maker.

Further analysis of options trades associated with Options Market Maker quotes in Listed Options, in the options market data from Q1-2024,^[180] showed that the number of option trades associated with Options Market Maker quotes in Listed Options as percent of CAT OQ events is small, 0.001 percent or less.^[181] The analysis, however, also shows that a substantial portion of all options trades, approximately 20 percent, is associated with Options Market Maker quotes.

An analysis of lifecycles of Options Market Maker quotes in selected Listed Options shows that at least for some options on some days these lifecycles can be more complex than suggested by the Participants.^[182] For these selected Options, 63 percent of the Options Market Maker quotes had a lifecycle with two events, while almost 10 percent had lifecycles that included five or more events.

The second provision of the Proposal involves Raw Unprocessed Data, Interim Operational Data and/or submission and feedback files data. These data are currently available without “manual intervention” for at least six years within certain query tools.^[183] These data are currently stored within the Central Repository via AWS S3-FA storage tier for the first 30 days, in the S3-Infrequent Access tier for the next 60 days, and in the S3-Archive Instant Access tier thereafter.^[184] Access to such data prior to the availability of final data can improve the timeliness of regulatory activities for those regulators who do not already have such data.^[185]

The third provision of the Proposal relates to the retention of Industry Test Data.^[186] Industry Members and Participants submit data to CAT pursuant to both required and voluntary testing; CAT retains the Industry Test Data in connection with such testing. Industry Test Data associated with CAIS is required to be retained for six years whereas CAT LLC was previously permitted to eliminate Industry Test Data related to the CAT order and transaction system after three months.^[187] The Participants proposed that test data (whether related to the CAT order and transaction system or to the CAIS) may be deleted by the Plan Processor after three months.

C. Efficiency

The Commission analyzed three types of efficiency impacts from the Proposal: operational efficiency in terms of cost savings of operating the Central Repository; ^[188] regulatory efficiency in terms of the impact of changes in CAT Data on regulatory activities; and market efficiency in the form of second order impacts on the market.

As discussed further below, cost savings in operating the Central Repository represent an enhancement of the operational efficiency of CAT. The changes to CAT Data from the Proposal will lessen some regulatory efficiencies by delaying certain regulatory activities. While these inefficiencies could be relatively more significant for certain time-sensitive regulatory activities involving large amounts of data, in general, these inefficiencies are likely to be limited.^[189] Effects on market efficiency, competition, and capital formation, which stem from the aforementioned impacts of the Proposal on regulatory and operational efficiencies, will likely be second-order and, hence, also limited.

1. Operational Efficiency

The Proposal will result in operational cost savings, net of implementation costs, of operating the Central Repository, which will reduce the CAT Fees borne by Participants, Industry Members, and investors (through pass-throughs). The Participants' estimates of cost savings could be imprecise, however. The actual cost savings could differ from the projected cost savings for several reasons including: (1) assumptions used to generate estimates, (2) uncertainty in the future direction of a number of factors, (3) implementation costs, which are not included in the estimates, (4) some of the cost savings representing costs transferred to regulators, and (5) potential interactions of the Proposal with a recent regulatory change. These issues could mean that the Participants' estimates are somewhat over-estimated or, alternatively, potentially considerably underestimated, depending upon the assumptions and methodologies used.

a. Estimated Cost Savings, Methodologies and Assumptions

The Proposal will result in meaningful cost savings even when considering some of the alternate methodologies and assumptions discussed below. The Participants estimate that the cost savings will be $21 million in the first year, which is 11 percent of the total operating costs of CAT in 2023.^[190] The Participants state ( print page 103046) that they believe their assumptions and estimates are reasonable.^[191] The Commission acknowledges the necessity of using simplifying assumptions to generate estimates and that such assumptions can affect the precision of the estimates. The Commission has considered the methodologies and assumptions and concludes that there are at least three issues that could affect the magnitude of the cost estimates—two relating to the volume of CAT Data affected and one relating to a processing cost assumption. However, the cost savings will be meaningful regardless of these issues.

The Participants' cost estimates ^[192] are generated using current costs. Specifically, the Participants state that, among other things, cost savings estimates are based on “observed data rates and volumes; current discounts, reservations and cost savings plans; and associated cloud fees.” ^[193] The Commission agrees that using current costs to generate cost savings estimates is reasonable and recognizes that the cost savings in the future could change depending on factors discussed in the next section.^[194]

The Participants' storage cost saving estimates are annual cost savings for the first year. However, the CAT NMS Plan requires the storage of six years of data, so the maximum annual cost savings would not be achieved in the first year.^[195] Indeed, the Proposal will result in additional potential annual cost savings each year until the Proposal affects the annual storage of six years of data. Based on the current assumptions, the cost savings could eventually reach $48 million per year for the provision on Options Market Maker quotes in Listed Options.^[196] Likewise, the storage cost savings from the provision on Raw Unprocessed, Interim Operational Data and/or submission and feedback files could reach $6 million per year to account for a baseline of storing six years of data in an S3 storage tier.^[197] These additional annual cost savings would not be expected in full until six years after the implementation of the Proposal.

The Participants' estimates may also not account for the one-time cost savings for affected historical data. The primary historical CAT Data affected by the Proposal are the Raw Unprocessed, Interim Operational Data and/or submission and feedback files.^[198] All Raw Unprocessed, Interim Operational Data and/or submission and feedback files older than 15 days will be moved to a cheaper storage tier, including historical data. However, the Participants describe the cost savings estimates as “annual,” ^[199] suggesting that they do not account for historical data. We estimate that including historical data could add up to $4 million in one-time cost savings.^[200]

The Participants, however, likely over-estimated the $12 million estimate in annual processing cost savings from the provision on Options Market Maker quotes in Listed Options. To generate this estimate, the Participants apparently assumed that the per message linkage costs of options events were the same as those for equities events,^[201] but this is unlikely.^[202] As the CAT Funding Model Approval Order discusses, the linkage processing of equities orders is generally more complex than the linkage processing of options orders.^[203] Further, Options Market Maker quotes in Listed Options have mostly simple lifecycles.^[204] However, the volume of the Options Market Maker quotes in Listed Options data suggests that they will still account for a large proportion of overall linkage processing costs.^[205] Therefore, while the cost savings could be less than $12 million, they will likely still be large.

The Participants did not estimate any cost savings from the provision on CAIS test data but reiterated the $1 million cost savings from the prior related exemptive relief.^[206] We expect these test data to have a small storage footprint. While the cost savings will be positive, they are unlikely to increase the approximate magnitude of the cost savings from the prior exemptive relief.

b. Future Magnitude of Cost Savings

The Participants recognize that the actual future cost savings could differ from the estimates because of uncertainty in several factors.^[207] These factors include the number of exchanges, Plan requirements, data rates and volumes, discounts, reservations and cost savings plans, and cloud fees.^[208] The Participants also state that future cost savings could be greater than ( print page 103047) the estimates as data volumes grow over time.^[209] The Participants produce cost savings estimates that apply only to the first year of implementation.^[210] However, the cost savings estimated for the first year may not continue at the same level for at least two reasons: (1) changes in the costs of cloud computing, and (2) changes in the frequency of regulatory requests to have data restored.

Cost savings (and CAT operational costs) could decline as cloud computing evolves. The storage and computing services industries, technologically, are among the most rapidly evolving industries. In some estimates, the costs of host computer and storage services have steadily declined.^[211] Similar trends can be observed in the pricing of some of the cloud storage products.^[212] The Participants' estimated cost savings of $21 million are based on the current cloud computing and storage costs.^[213] Therefore, declines in cloud computing costs could result in smaller than expected future cost savings.

On the other hand, if message traffic keeps increasing, then, despite the rapid technological advancements, the future cost savings could be higher than those estimated for the first year.^[214] Indeed, one new options exchange has started operations since the publication of the Notice, likely resulting in a higher volume of Options Market Maker quotes in Listed Options.^[215] In addition, one new equities exchange has been approved since the costs were estimated, potentially increasing the storage footprint of Raw Unprocessed Data, Interim Operational Data, and/or submission and feedback files.^[216]

Cost savings from the provision on Raw Unprocessed, Interim Operational Data and/or submission and feedback files will be reduced by any data requests by regulators to restore such data.^[217] Participants state that retrieving data from Glacier Deep Archive storage is costly and the costs are a function of the size of the data being pulled in addition to the speed with which the request must be fulfilled.^[218] This $1 million savings is also based, in part, on an expectation of usage of Raw Unprocessed, Interim Operational Data and/or submission and feedback files older than 15 days that matches the previous four years.^[219] According to the Participants, these data were not used during the development of the CAT NMS Plan over the last four years.^[220]

c. Implementation Costs

The Amendment states that “the one-time implementation costs are expected to be minimal relative to overall cost savings.” ^[221] While the Participants do not estimate implementation costs, the Commission can compare anticipated implementation activity to that of recent Commission final rules that include estimates for such activity. According to the Participants, “[o]ne-time implementation costs will generally consist of Plan Processor labor costs associated with coding and software development, as well as any related cloud feed associated with the development, testing and load testing of the proposed changes.” ^[222] The Participants state that, “[o]ngoing operational costs, other than cloud hosting costs,” will not be affected by the proposed amendments.^[223] The Commission agrees that the implementation costs seem minimal relative to overall cost savings.

The Proposal will result in costs to the Plan Processor with respect to developing policies and procedures, revising and testing coding changes, and revising user manuals and training materials. Policies and procedures will dictate how the Plan Processor responds to requests to restore the operational data and ensure confidentiality in the request.^[224] Implementing the Proposal will also require changes to programming code to change the processing of affected CAT Data. Finally, user manuals and training will have to be revised to ensure they reflect the CAT Data and access for regulators after the Proposal.

Table 2—Implementation Costs for Comparable Compliance Actions

Implementation activity	Lowest estimate	Highest estimate
Developing Policies and Procedures a	$49,000	$53,000
Revising and Testing Code b	20,000	114,000
a   See infra note 225.
b   See infra note 226.