# Joint Industry Plan; Order Instituting Proceedings To Determine Whether To Approve or Disapprove an Amendment to the National Market System Plan Governing the Consolidated Audit Trail > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2021-15810 ## Record - **Collection:** Federal Register - **Document type:** Notice - **Published:** July 26, 2021 - **Citation:** 86 FR 40114 ## Text SECURITIES AND EXCHANGE COMMISSION [Release No. 34-92451; File No. 4-698] Joint Industry Plan; Order Instituting Proceedings To Determine Whether To Approve or Disapprove an Amendment to the National Market System Plan Governing the Consolidated Audit Trail July 20, 2021. I. Introduction On March 31, 2021, the Operating Committee for Consolidated Audit Trail, LLC (“CAT LLC” or 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 BOX Exchange LLC; Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc., Financial Industry Regulatory Authority, Inc. (“FINRA”), Investors Exchange LLC, Long-Term Stock Exchange, Inc., Miami International Securities Exchange LLC, MEMX, LLC, MIAX Emerald, LLC, MIAX PEARL, LLC, Nasdaq BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC, Nasdaq PHLX LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago, Inc., and NYSE National, Inc. (collectively, the “Participants,” “self-regulatory organizations,” or “SROs”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) pursuant to Section 11A(a)(3) of the Securities Exchange Act of 1934 (“Exchange Act”), 2 and Rule 608 thereunder, 3 a proposed amendment (“Proposed Amendment”) to the CAT NMS Plan to implement a revised funding model (“Proposed Funding Model”) for the consolidated audit trail (“CAT”) and to establish a fee schedule for Participant CAT fees in accordance with the Proposed Funding Model (“Participant Fee Schedule”). The Proposed Amendment was published for comment in the Federal Register on April 21, 2021. 4 1 The CAT NMS Plan is a national market system plan approved by the Commission pursuant to Section 11A of the Exchange Act and the rules and regulations thereunder. See Securities Exchange Act Release No. 79318 (November 15, 2016), 81 FR 84696 (November 23, 2016). 2 15 U.S.C. 78k-1(a)(3). 3 17 CFR 242.608. 4 See Notice of Filing of Amendment to the National Market System Plan Governing the Consolidated Audit Trail, Release No. 91555 (April 14, 2021), 86 FR 21050 (“Notice”). Comments received in response to the Notice can be found on the Commission's website at https://www.sec.gov/comments/4-698/4-698-a.htm. This order institutes proceedings, under Rule 608(b)(2)(i) of Regulation NMS, 5 to determine whether to disapprove the Proposed Amendment or to approve the Proposed Amendment with any changes or subject to any conditions the Commission deems necessary or appropriate after considering public comment. 5 17 CFR 242.608(b)(2)(i). II. Background On July 11, 2012, the Commission adopted Rule 613 of Regulation NMS, which required the SROs to submit a national market system (“NMS”) plan to create, implement and maintain a consolidated audit trail that would capture customer and order event information for orders in NMS securities. 6 On November 15, 2016, the Commission approved the CAT NMS Plan. 7 Under the CAT NMS Plan, the Operating Committee of the Company, of which each Participant is a member, has the discretion (subject to the funding principles set forth in the Plan) to establish funding for the Company to operate the CAT, including establishing fees to be paid by the Participants and Industry Members. 8 6 17 CFR 242.613. 7 See supra note 1. 8 The CAT NMS Plan defines “Industry Member” as “a member of a national securities exchange or a member of a national securities association.” See CAT NMS Plan, supra note 1, at Section 1.1. See also id. at Section 11.1(b). The Plan specified that, in establishing the funding of the Company, the Operating Committee shall establish “a tiered fee structure in which the fees charged to: (1) CAT Reporters 9 that are Execution Venues, 10 including ATSs, 11 are based upon the level of market share; (2) Industry Members' non-ATS activities are based upon message traffic; and (3) 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 Venues and/or Industry Members).” 12 Under the Plan, such fees are to be implemented in accordance with various funding principles, including an “allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act taking into account . . . distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company resources and operations” and the “avoid[ance of] any disincentives such as placing an inappropriate burden on competition and reduction in market quality.” 13 9 The CAT NMS Plan defines “CAT Reporter” as “each national securities exchange, national securities association and Industry Member that is required to record and report information to the Central Repository pursuant to SEC Rule 613(c).” Id. at Section 1.1. 10 The CAT NMS Plan defines “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).” Id. 11 Id. 12 Id. at Section 11.2(c). See Article XI of the CAT NMS Plan for additional detail. 13 See CAT NMS Plan, supra note 1, at Section 11.2(b) and (e). On May 15, 2020, the Commission adopted amendments to the CAT NMS Plan designed to increase the Participants' financial accountability for the timely completion of the CAT (“Financial Accountability Amendments”). 14 The Financial Accountability Amendments added Section 11.6 to the CAT NMS Plan to govern the recovery from Industry Members of any fees, costs, and expenses (including legal and consulting fees, costs and expenses) incurred by or for the Company in connection with the development, implementation and operation of the CAT from June 22, 2020 until such time that the Participants have completed Full Implementation of CAT NMS Plan Requirements 15 (“Post-Amendment Expenses”). Section 11.6 establishes target deadlines for four critical implementation milestones (Periods 1, 2, 3 and 4) 16 and reduces the amount of fee recovery available to the Participants if these deadlines are missed. 17 14 See Securities Exchange Act Release No. 88890, 85 FR 31322 (May 22, 2020). 15 “Full Implementation of CAT NMS Plan Requirements” means “the point at which the Participants have satisfied all of their obligations to build and implement the CAT, such that all CAT system functionality required by Rule 613 and the CAT NMS Plan has been developed, successfully tested, and fully implemented at the initial Error Rates specified by Section 6.5(d)(i) or less, including functionality that efficiently permits the Participants and the Commission to access all CAT Data required to be stored in the Central Repository pursuant to Section 6.5(a), including Customer Account Information, Customer-ID, Customer Identifying Information, and Allocation Reports, and to analyze the full lifecycle of an order across the national market system, from order origination through order execution or order cancellation, including any related allocation information provided in an Allocation Report. This Financial Accountability Milestone shall be considered complete as of the date identified in a Quarterly Progress Report meeting the requirements of Section 6.6(c).” See CAT NMS Plan, supra note 1, at Section 1.1. 16 Id. at Section 11.6(a)(i). 17 Id. at Section 11.6(a)(ii) and (iii). On April 21, 2021, the Nasdaq and Cboe Participants 18 filed proposed rule changes to adopt a fee schedule to establish CAT fees applicable to their Industry Members 19 in accordance with the Proposed Funding Model (the “Industry Member Fee Filings”). In the Industry Member Fee Filings, the Nasdaq and Cboe Participants stated that the fee schedule provisions will become operative upon the Commission's approval of the Proposed Amendment. On June 17, 2021, the Commission temporarily suspended the Nasdaq and Cboe Participants' Industry Member Fee Filings and instituted proceedings to determine whether those filings should be approved or disapproved. 20 18 Cboe BYX Exchange, Inc. (“CboeBYX”), Cboe BZX Exchange, Inc. (“CboeBZX”), Cboe C2 Exchange, Inc. (“C2”), Cboe EDGA Exchange, Inc. (“Cboe EDGA”), Cboe EDGX Exchange, Inc. (“Cboe EDGX”), Cboe Exchange, Inc. (“Cboe”), NASDAQ BX, Inc. (“BX”), Nasdaq GEMX, LLC (“GEMX”), Nasdaq ISE, LLC (“ISE”), Nasdaq MRX, LLC (“MRX”), NASDAQ PHLX LLC (“Phlx”), The NASDAQ Stock Market LLC (“Nasdaq”) (collectively, the “Nasdaq and Cboe Participants”). 19 See Securities Exchange Act Release Nos. 91750 (May 4, 2021), 86 FR 25045 (May 10, 2021) (SR-BX-2021-018) (“Proposed Fee Filing Notice”); 91751 (May 4, 2021), 86 FR 24941 (May 10, 2021) (SR-PHLX-2021-25); 91752 (May 4, 2021), 86 FR 24921 (May 10, 2021) (SR-NASDAQ-2021-029); 91753 (May 4, 2021), 86 FR 24994 (May 10, 2021) (SR-MRX-2021-05); 91755 (May 4, 2021), 86 FR 25035 (May 10, 2021) (SR-ISE-2021-08); 91756 (May 4, 2021), 86 FR 24979 (May 10, 2021) (SR-GEMX-2021-03); 91757 (May 4, 2021), 86 FR 24911 (May 10, 2021) (SR-C2-2021-008); 91758 (May 4, 2021), 86 FR 25004 (May 10, 2021) (SR-CboeEDGX-2021-024); 91759 (May 4, 2021), 86 FR 24956 (May 10, 2021) (SR-CboeEDGA-2021-010); 91760 (May 4, 2021), 86 FR 24966 (May 10, 2021) (SR-CBOE-2021-030); 91761 (May 4, 2021), 86 FR 25016 (May 10, 2021) (SR-CboeBYX-2021-011); and 91762 (May 4, 2021), 86 FR 24931 (May 10, 2021) (SR-CboeBZX-2021-034). 20 See Securities Exchange Act Release No. 92207 (June 17, 2021), 86 FR 33448 (June 24, 2021). III. Summary of Proposal Under the Proposed Amendment, the Operating Committee proposes to revise certain aspects of the funding model set forth in Article XI of the CAT NMS Plan (the “Original Funding Model”). The Original Funding Model uses a bifurcated funding approach in which costs associated with building and operating the CAT would be borne by (1) Industry Members (other than ATSs that execute transactions in Eligible Securities 21 (“Execution Venue ATSs”)) through fixed tiered fees based on message traffic for Eligible Securities, and (2) Participants and Industry Members that are Execution Venue ATSs for Eligible Securities through fixed tiered fees based on market share. The Operating Committee proposes to amend the CAT NMS Plan to adopt the Proposed Funding Model. The Proposed Funding Model would continue to require many of the same elements as the Original Funding Model, including the bifurcated funding approach, and the use of market share and message traffic. 22 The Proposed Funding Model, however, would revise the Original Funding Model in certain ways, including (1) dividing the CAT costs between Participants and Industry Members, rather than between Execution Venues and Industry Members (other than Execution Venue ATSs); (2) removing share volume in OTC Equity Securities from the calculation of market share for national securities associations; (3) eliminating the use of tiers in calculating CAT fees for Participants and Industry Members; (4) removing from the CAT NMS Plan funding principles the requirement that the fees charged to CAT Reporters with the most CAT-related activity be generally comparable; (5) eliminating references to fixed fees for Participants and Industry Members; (6) adopting certain minimum and maximum CAT fees for Industry Members and Participants; and (7) imposing certain discounts for market making activity when calculating Industry Member CAT fees. 21 The CAT NMS Plan defines “Eligible Securities” as including NMS securities and OTC Equity Securities.” See CAT NMS Plan, supra note 1, at Section 1.1. 22 In the description of the Proposed Amendment, the Operating Committee states that message traffic will be calculated based on Industry Members' Reportable Events reported to the CAT, as defined in the CAT Reporting Technical Specifications for Industry Members (“IM Reporting Tech Specs”), and that Reporting Events in the current IM Reporting Tech Specs that will be counted as message traffic include the New Order Event, the Order Route Event and Trade Event, but will not include reporting activity related to Customer information as established in the CAT Reporting Customer and Account Technical Specifications for Industry Members. The Operating Committee notes that the Reportable Events may vary if the IM Reporting Tech Specs are amended. See Notice, supra note 4, at 21056-21057. The Operating Committee also proposes to adopt a fee schedule to establish the CAT fees applicable to Participants based on the Proposed Funding Model. The Participant Fee Schedule would establish the allocation percentages and other variables for calculating the CAT fees under the Proposed Funding Model. A. Proposed Funding Model 1. Categorization of Alternative Trading Systems The Original Funding Model employs a bifurcated approach in which costs associated with building and operating the CAT would be borne by (1) Participants and Industry Members that are Execution Venue ATSs for Eligible Securities through fees based on market share, and (2) Industry Members (other than Execution Venue ATSs) through fees based on message traffic. Under the Proposed Funding Model, the concept of an Execution Venue would be eliminated, and CAT costs would be divided between Participants as a group and Industry Members as a group; Execution Venue ATSs would be treated like other Industry Members, instead of like Participants. 23 The Operating Committee explains that this would simplify the Proposed Funding Model by requiring all Industry Members (instead of Industry Members other than Execution Venue ATSs) to pay fees based on message traffic and would address any concerns that treating Execution Venue ATSs as Participants would create a barrier to entry for smaller ATSs. 24 Accordingly, under the Proposed Amendment, the Operating Committee proposes to delete the definition of the term “Execution Venue” and related provisions from the CAT NMS Plan. 25 23 Id. at 21053. 24 Id. 25 Id. 2. Treatment of OTC Equity Securities The Original Funding Model includes reported share volume in OTC Equity Securities in the calculation of market share for national securities associations. 26 The Operating Committee proposes to delete references to OTC Equity Securities from Section 11.3(a)(i) of the CAT NMS Plan. Accordingly, under the Proposed Funding Model, the calculation of market share for national securities associations would be based solely on the share volume of trades reported in NMS Stocks. 27 The Operating Committee explains that the inclusion of OTC Equity Securities share volume in the calculation of market share would likely subject FINRA to higher fees since FINRA would be assessed CAT fees based on market share calculated by share volume, noting that many OTC Equity Securities are priced below one dollar and transactions in such OTC Equity Securities tend to involve larger quantities of shares than transactions in NMS Stocks. 28 26 Id. at 21061. 27 Id. 28 See Notice, supra note 4, at 21061. 3. No Tiered Fees The Original Funding Model requires the use of tiered fees for Industry Members and Participants. 29 The Operating Committee proposes to amend Sections 11.1(d), 11.2(c), 11.3(a) and 11.3(b) of the CAT NMS Plan to eliminate the concept of tiered fees from the CAT NMS Plan. 30 Accordingly, under the Proposed Funding Model, each Industry Member would pay a fee based on its percentage of total Industry Member message traffic (subject to proposed market maker message traffic discounts, 31 a minimum fee 32 and a maximum fee 33 ), and each Participant would pay a fee based on market share. 34 The Operating Committee believes that tiered fees require continued reassessment of changes in message traffic, and that these assessments would be subjective and overly complex. 35 29 Id. at 21055, 21060. 30 Id. 31 See infra Section III.A.7. 32 See infra Section III.A.6.a. 33 Id. 34 See Notice, supra note 4, at 21055, 21060. 35 Id. at 21056. The Operating Committee notes that it is eliminating tiered fees for Participants for the same reasons it provided with regard to eliminating tiered fees for Industry Members. Id. 4. Elimination of Fee Comparability Requirement From the CAT NMS Plan Funding Principles Section 11.2(c) of the CAT NMS Plan 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. Section 11.2(c) explains that for comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters. The Operating Committee proposes to remove this requirement from Section 11.2(c) of the Plan. According to the Operating Committee, the comparability provision was used to determine tiers under the Original Funding Model; however, since the Operating Committee proposes to remove fee tiering from the Proposed Funding Model, 36 they believe this provision is no longer relevant. 37 36 See supra Section III.A.3. 37 See Notice, supra note 4, at 21056. 5. No Fixed Fees The Operating Committee proposes to amend Sections 11.3(a) and (b) of the Plan to eliminate references to “fixed fees” to be paid by Industry Members and Participants from the CAT NMS Plan. 38 Accordingly, under the Proposed Funding Model, the CAT fees to be paid by Industry Members would vary in accordance with their message traffic and the CAT fees to be paid by the Participants would vary in accordance with their market share. 39 38 Id. at 21059, 21062. 39 Id. 6. Minimum and Maximum Fees a. Minimum and Maximum Industry Member CAT Fees The Operating Committee proposes to amend Section 11.3(b) of the CAT NMS Plan to provide that each Industry Member would be subject to a base minimum Industry Member CAT fee (“Minimum Industry Member CAT Fee”) and a maximum Industry Member CAT fee (“Maximum Industry Member CAT Fee”). 40 In the Participants' description of the Proposed Amendment, the Operating Committee states that the Minimum Industry Member CAT Fee would be $125 per quarter for an Industry Member whose CAT fee would be less than $125 per quarter, even if it has not yet begun to report to the CAT. 41 If any Industry Member is required to pay the Minimum Industry Member CAT Fee, the total additional amount paid by all such Industry Members over the amount they otherwise would have paid as a result of their message traffic calculation would be discounted from all Industry Members other than those that were subject to a Minimum Industry Member CAT Fee in accordance with their message traffic percentage (“Minimum Industry Member CAT Fee Re-Allocation”). 42 The Operating Committee explains that the Minimum Industry CAT Fee is intended to ensure that all Industry Members meaningfully contribute to the funding of the CAT. 43 40 Id. at 21058. 41 Id. 42 Options Market Makers and Equity Market Makers would be required to pay the Minimum Industry Member CAT Fee if their quarterly CAT fee calculated with the market maker discounts is less than $125 per quarter. Id. at 21058, n.56. 43 See Notice, supra note 4, at 21058-59. The Operating Committee also states that the Maximum Industry Member CAT Fee would be the fee calculated based on 8% of the total message traffic for Industry Members. 44 If an Industry Member's fee is subject to the Maximum Industry Member CAT Fee, any excess amount which the Industry Member would have paid as a fee above such Maximum Industry Member CAT Fee will be re-allocated among all Industry Members (including any Industry Members subject to the Maximum Industry Member CAT Fee and any Industry Members subject to the Minimum Industry Member CAT Fee) in accordance with their percentage of total message traffic (“Maximum Industry Member CAT Fee Re-Allocation”). 45 The Operating Committee explains that the Maximum Industry Member CAT Fee is intended to act as a cap on fees for certain Industry Members that, based on message traffic alone, may be subject to “a significant allocation of Total CAT Costs.” 46 44 Id. at 21059. 45 Id. 46 Id. b. Minimum Participant Fee The Operating Committee proposes to amend Section 11.3(a) of the CAT NMS Plan to impose a minimum fee to be payable by each Participant (“Minimum Participant Fee”) in addition to fees based on market share. The Operating Committee explains that this fee would “ensure that all Participants provide a meaningful contribution to the funding of the CAT” 47 and facilitate billing and other administrative functions. 48 47 Id. at 21060. 48 Id. at 21059. c. Maximum Equities Participant Fee The Operating Committee proposes to amend Section 11.3(a)(i) of the CAT NMS Plan to provide that any Participant that is a national securities association shall pay a maximum fee established by the Operating Committee (“Maximum Equities Participant Fee”) instead of the higher fee calculated based on such Participant's market share. If a Participant's fee is limited to such maximum fee, any excess amount which the Participant otherwise would have paid as a fee above such maximum amount will be re-allocated among all Equities Participants, including any Equities Participants that are subject to the maximum fee, in accordance with their market share. 49 The Operating Committee explains that FINRA could have a significant allocation of the CAT fees due to the large volume of NMS Stock activity subject to trade reporting on FINRA facilities, so the Maximum Equities Participant Fee would cap the costs allocated to FINRA. In addition, the Operating Committee states that, as one of the largest regulatory users of CAT, FINRA should pay a proportionate percentage of the CAT fees commensurate with its market share, and that market share is a “fair and reasonable basis for assessing regulatory usage, expense and burden among the Participants.” 50 49 See Notice, supra note 4, at 21061. 50 Id. at 21062. 7. Market Maker Discounts The Operating Committee proposes to amend Section 11.3(b) of the CAT NMS Plan to add market maker message traffic discounts to the Proposed Funding Model. Under the Original Funding Model, there is no distinction between the treatment of message traffic for market maker Industry Members and message traffic for non-market maker Industry Members for purposes of calculating Industry Member CAT fees. The Operating Committee explains that the proposed discounts are intended to address concerns raised previously that treating market maker message traffic the same as other message traffic for purposes of calculating Industry Member CAT fees would disproportionately impact market makers because of their continuous quoting obligations and result in an undue or inappropriate burden on competition or a reduction in liquidity and market quality. 51 The Operating Committee believes that the proposed discounts would lower CAT fees for market makers and encourage their provision of liquidity to the market. 52 51 Id. at 21057. See also Securities Exchange Act Release No. 81067 (June 30, 2017), 82 FR 31656 (July 7, 2017) (“Suspension of and Order Instituting Proceedings to Determine Whether to Approve or Disapprove Proposed Rule Changes to Establish Fees for Industry Members to Fund the Consolidated Audit Trail”). 52 See Notice, supra note 4, at 21057. In the Participants' description of the Proposed Amendment, the Operating Committee states that Options Market Maker message traffic would be discounted based on the trade-to-quote ratio for options when calculating the message traffic of an Industry Member that is an Options Market Maker, 53 and that the trade-to-quote ratio for the Options Market Maker discount would be calculated each quarter based on the prior quarter's CAT Data. 54 The proposed discount would be calculated by dividing the adjusted trade count 55 by the total number of quotes received by the securities information processors (“SIP”) from an exchange. 56 Each Options Market Maker's CAT fee would be calculated by multiplying its discounted percentage of total Industry Member message traffic during the relevant time period by the Industry Member Allocation, 57 subject to the Minimum Industry Member CAT Fee and the Maximum Industry Member CAT Fee. 58 53 Id. at 21058. The CAT NMS Plan defines “Options Market Maker” as “a broker-dealer registered with an exchange for the purpose of making markets in options contracts traded on the exchange.” See CAT NMS Plan, supra note 1, at Section 1.1. 54 The CAT NMS Plan defines “CAT Data” as “data derived from Participant Data, Industry Member Data, SIP Data, and such other data as the Operating Committee may designate as `CAT Data' from time to time.” Id. 55 The Proposed Amendment describes the adjusted trade count as “the total number of trades for the quarter minus the total number of trade busts.” See Notice, supra note 4, at 21058. 56 For each Options Market Maker, the discount would apply to “(1) all message traffic reported to the CAT by the Options Market Maker related to an order originated by a market maker in its market making account for a security in which it is registered . . . and (2) all message traffic for which a `quote sent time' is reported by an Options Exchange on behalf of the given Options Market Maker.” Id. 57 See infra Section III.B.2. 58 See Notice, supra note 4, at 21058. Under the Proposed Funding Model, when calculating the message traffic of an Industry Member that is an equity market maker in NMS Stocks (“Equity Market Maker”), its discounted market making message traffic count would be calculated by multiplying its market making message traffic in NMS Stocks by the NMS Stock trade-to-quote ratio. 59 In the Participants' description of the Proposed Amendment, the Operating Committee states that the trade-to-quote ratio would be calculated each quarter based on the prior quarter's CAT Data. 60 The proposed discount would be calculated by dividing the adjusted trade count by the total number of quotes received by the SIP from an exchange. The Equity Market Maker's CAT fee would be calculated by multiplying its discounted percentage of total Industry Member message traffic during the relevant time period by the Industry Member Allocation, 61 subject to the Minimum Industry Member CAT Fee and the Maximum Industry Member CAT Fee. 62 The discounted message traffic of Options Market Makers and Equity Market Makers would be counted as part of total Industry Member message traffic. 63 59 Id. 60 Id. 61 See infra Section III.B.2. 62 See Notice, supra note 4, at 21058. 63 Id. B. Participant Fee Schedule 1. Total CAT Costs Under the Proposed Funding Model, the CAT fees for the relevant period would be designed to cover the total CAT costs associated with developing, implementing and operating the CAT for the relevant period (“Total CAT Costs”). 64 In the proposed Participant Fee Schedule, the Operating Committee proposes to define Total CAT Costs as “the total budgeted costs for the CAT for the relevant year.” In addition: 64 Id. at 21050. The total budgeted costs for the CAT for the relevant year shall be the total CAT costs set forth in the annual operating budget approved by the Operating Committee pursuant to Section 11.1(a) of the CAT NMS Plan. The total budgeted costs for the CAT for the relevant year may be adjusted on a quarterly basis as the Operating Committee reasonably deems appropriate for the prudent operation of the Company. To the extent that the Operating Committee adjusts the total budgeted costs for the CAT for the relevant year during its quarterly budget review, the adjusted budgeted costs for the CAT will be used in calculating the remaining CAT fees for that year. 65 65 Id. at 21074. The Operating Committee explains that using Total CAT Costs budgeted for the year, rather than already incurred CAT costs, would allow the Company to collect fees before bills become payable. 66 The Operating Committee notes that, pursuant to Section 11.1(c) of the CAT NMS Plan, any surpluses collected will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits. 67 66 Id. at 21063. 67 Id. 2. 75%-25% Allocation Between Industry Members and Participants The Proposed Funding Model contemplates allocating CAT costs between Participants and Industry Members to permit the calculation of CAT fees based on market share for Participants and based on message traffic for Industry Members. 68 The Operating Committee proposes to implement this allocation through a 75%-25% allocation between Industry Members and Participants. 69 The Participant CAT fees that are a part of the proposed Participant Fee Schedule—Appendix B to the Proposed Amendment—would apply this allocation to Participants. Participants would file proposed rule changes to apply this allocation to Industry Members. 70 In calculating CAT fees for the relevant period under the Proposed Funding Model, Industry Members as a group would pay 75% of the Total CAT Costs for the relevant period (“Industry Member Allocation”) 71 and Participants as a group would pay 25% of the Total CAT Costs for the relevant period (“Participant Allocation”). 72 68 In the Original Funding Model, costs were allocated between Execution Venues and certain Industry Members, whereas the Proposed Funding Model proposes to allocate costs between Participants and Industry Members. 69 See Notice, supra note 4, at 21054. 70 As of the date of this Order, only the Nasdaq and Cboe Participants have filed proposed rule changes. See supra note 19. 71 The proposed Participant Fee Schedule states “[t]he Industry Member Allocation for each quarter shall be 75% of 1/4th of the Total CAT Costs for the relevant year.” See Notice, supra note 4, at 21055. Under the Proposed Funding Model, each Industry Member would pay a CAT fee calculated by multiplying its message traffic percentage of total Industry Member message traffic per quarter by the Industry Member Allocation, subject to the market maker discounts for message traffic, as applicable, as well as the Minimum Industry Member CAT Fee and the Maximum Industry Member CAT Fee. Id. 72 Id. at 21054. The proposed Participant Fee Schedule states “[t]he Participant Allocation for each quarter shall be 25% of 1/4th of the Total CAT Costs for the relevant year.” Id. at 21055. In proposing a 75%-25% allocation between Industry Members and Participants, the Operating Committee states that it considered a variety of different potential allocations between Industry Members and Participants. 73 For example, the Operating Committee states that it considered alternatives in which Participants paid larger contributions than 25% of the total CAT costs ( e.g., a 50%-50% allocation between Industry Members and Participants) and alternatives in which Participants paid smaller contributions than 25% of the total CAT costs. 74 In the scenario where the Participants paid larger contributions than the 25% allocation, the Operating Committee believed that this was not fair or equitable to the Participants. 75 The Operating Committee came to this conclusion by assessing the number of Industry Members compared to Participants, noting that “there are only 25 Participants and approximately 1,237 Industry Members, as of December 2020”, and analyzing the total revenue, noting that “Participants only represented approximately 4% of the total CAT Reporter revenue; Industry Members represented 96% of the total CAT Reporter revenue.” 76 Thus, the Operating Committee determined that allocating more than 25% of the total CAT costs to the Participants was not fair and equitable. Similarly, the Operating Committee did not believe that the revenue based allocation approach would be fair to the Industry Members because it would impose such a significant percentage (96%) of CAT costs on Industry Members. 77 Additionally, the Operating Committee determined that there would be practical difficulties in assessing the appropriate revenue figures for all CAT Reporters. Based upon its analysis, the Operating Committee decided that alternative approaches based upon revenue were not appropriate and could potentially have unfair impacts on both the Industry Members and the Participants. 78 Ultimately, the Operating Committee believes that the 75%-25% allocation will create a more equitable fee split because the Industry Members with the most message traffic and the Participant complexes with the most market share would pay comparable CAT fees. 79 The Operating Committee analyzed data from the fourth quarter of 2020, and determined that the three Industry Members with the most message traffic and the Participant complexes with the highest CAT fees would pay annual CAT fees in a similar range of five to six million dollars. 80 73 Id. at 21054. 74 Id. 75 See Notice, supra note 4, at 21055. 76 Industry Member revenue was calculated based on the total revenue reported in the Industry Member's FOCUS reports. Participant revenue was calculated based on revenue information provided in Form 1 amendments and/or publicly reported figures. Participants are not required to file uniform FOCUS-type reports regarding revenue like Industry Members. Accordingly, the revenue calculation for Participants is not as straightforward as for Industry Members. Id. at 21055, n.31. 77 Id. at 21055. 78 Id. 79 Id. 80 Id. 3. Participant CAT Fees As described above, the Proposed Funding Model provides that the Operating Committee shall establish a minimum fee to be payable by each Participant in addition to a fee based on market share. In the proposed Participant Fee Schedule, the Operating Committee establishes 0.75% of the Participant Allocation as the Minimum Participant Fee 81 regardless of market share. 82 The total Minimum Participant Fees to be paid by each Participant would be subtracted from the Participant Allocation to determine the “Adjusted Participant Allocation.” 83 81 See Notice, supra note 4, at 21060. 82 Id. 83 Id. The proposed Participant Fee Schedule provides that the Equities Participant Allocation would be 60% of the Adjusted Participant Allocation and the Options Participant Allocation would be 40% of the Adjusted Participant Allocation. 84 The Operating Committee explained that this allocation was determined through negotiations among the Participants. 85 84 Id. at 21061. A Participant with both options and equities market share would be treated as both an Options Participant and an Equities Participant. Id. 85 Id. Each Participant would pay a quarterly Participant CAT fee to recover the costs of the CAT going forward. For Equities Participants, the quarterly Participant CAT Fee would be calculated by multiplying the Equities Participant Allocation by each Equities Participant's percentage of total market share of NMS Stocks for all Equities Participants for the prior quarter, subject to the Maximum Equities Participant Fee (if applicable), and in addition to the Minimum Participant Fee. 86 For Options Participants, the quarterly Participant CAT fee would be calculated by multiplying the Options Participant Allocation by each Options Participant's percentage of total market share in Listed Options for the prior quarter, in addition to the Minimum Participant Fee. 87 86 See Notice, supra note 4, at 21061. 87 Id. at 21062. The quarterly Participant CAT fee would be a quarterly CAT fee based on market share from the prior quarter and the allocation of Total CAT Costs under the Proposed Funding Model for the relevant year. 88 The Operating Committee proposes a fee schedule to implement the quarterly Participant CAT fee whereby each Participant would be assessed a CAT fee, on a quarterly basis, that is 25% of 1/4th of the total budgeted annual CAT costs for the relevant year, using CAT Data to calculate market share from the prior quarter of the relevant year. 89 88 Id. at 21062, 21063. 89 Id. at 21063-21064. Under the Proposed Funding Model, FINRA, as a national securities association, would be subject to the Maximum Equities Participant Fee as set by the Operating Committee. The Operating Committee proposes to establish in the Participant Fee Schedule a Maximum Equities Participant Fee equal to the greater of (x) 20% of the Equities Participant Allocation or (y) the highest CAT fee required to be paid by any other Equities Participant plus 5% of such highest CAT fee. 90 Accordingly, as discussed above, FINRA would pay its quarterly Participant CAT fee based on its market share in NMS Stocks, subject to the Maximum Equities Participant Fee. 90 Id. at 21061. 4. Collection of Fees The Participants' description of the Proposed Amendment states that the Operating Committee proposes to establish a system for the collection of CAT fees pursuant to Section 11.4 of the CAT NMS Plan. The Company will provide each Participant with an invoice setting forth the quarterly Participant CAT fee for each payment period. Each Participant will pay its CAT fees to the Company via the centralized system for the collection of CAT fees. 91 91 Id. at 21068. IV. Summary of Comments The Commission received 19 comment letters on the Proposed Amendment. 92 15 comment letters object to the Proposed Amendment 93 and one comment letter supports the Proposed Amendment. 94 In addition, the Commission received two comment letters requesting data from the Operating Committee, 95 one comment letter requesting data from the Company, 96 and one comment letter from the Operating Committee providing additional details on an illustrative example in Exhibit B to the Proposed Amendment, 97 and two response letters from the Operating Committee. 98 92 See Letters to Vanessa Countryman, Secretary, Commission from Doug Patterson, Chief Compliance Officer, Cutler Group, LP, dated June 1, 2021, available at https://www.sec.gov/comments/4-698/4698-8855258-238423.pdf (“Cutler Letter”); Kelvin To, Founder and President, Data Boiler Technologies, LLC, dated May 3, 2021, available at https://www.sec.gov/comments/4-698/4698-8749987-237362.pdf (“Data Boiler Letter”); Joanna Mallers, Secretary, FIA Principal Traders Group, dated May 7, 2021, available at https://www.sec.gov/comments/4-698/4698-8776522-237685.pdf (“FIA PTG May 7th Letter”); Joanna Mallers, Secretary, FIA Principal Traders Group, dated May 12, 2021, available at https://www.sec.gov/comments/4-698/4698-8793902-237843.pdf (“FIA PTG May 12th Letter”); Matthew Price, Chief Operations Officer, Fidelity Capital Markets, dated May 12, 2021, available at https://www.sec.gov/comments/4-698/4698-8791746-237802.pdf (“Fidelity Letter”); Howard Meyerson, Managing Director, Financial Information Forum, dated April 29, 2021, available at https://www.sec.gov/comments/4-698/4698-8736502-237163.pdf (“FIF April 29th Letter”); Howard Meyerson, Managing Director, Financial Information Forum, dated May 21, 2021, available at https://www.sec.gov/comments/4-698/4698-8843662-238307.pdf (“FIF May 21st Letter”); Marcia E. Asquith, Executive Vice President, Board and External Relations, Financial Industry Regulatory Authority, Inc., dated May 12, 2021, available at https://www.sec.gov/comments/4-698/4698-8793900-237824.pdf (“FINRA Letter”); Andrew Stevens, General Counsel, IMC, dated May 20, 2021, available at https://www.sec.gov/comments/4-698/4698-8819440-238105.pdf (“IMC Letter”); Michael Lewin, Chief Executive Officer, Istra LLC, dated May 27, 2021, available at https://www.sec.gov/comments/4-698/4698-8847370-238329.pdf (“Istra Letter”); Gary Goldsholle, Chief Regulatory Officer and General Counsel, Long-Term Stock Exchange, Inc., dated May 19, 2021, available at https://www.sec.gov/comments/4-698/4698-8815749-238025.pdf (“LTSE Letter”); Kirsten Wegner, Chief Executive Officer, Modern Markets Initiative, dated May 6, 2021, available at https://www.sec.gov/comments/4-698/4698-8771339-237583.pdf (“MMI Letter”); Michael Blaugrund, Chief Operating Officer, NYSE Inc., dated May 10 2021, available at https://www.sec.gov/comments/4-698/4698-8779961-237701.pdf (“NYSE Letter”); William Bartlett, Chief Executive Officer, Parallax Volatility Advisers, L.P., dated June 28, 2021, available at https://www.sec.gov/comments/4-698/4698-9006549-246006.pdf (“Parallax Letter”); Ellen Greene, Managing Director, Equity and Options Market Structure, Securities Industry and Financial Markets Association, dated May 12, 2021, available at https://www.sec.gov/comments/4-698/4698-8790951-237769.pdf (“SIFMA Letter”); James Toes, President and Chief Executive Officer, and Andrew D'Amore, Chairman of the Board, Security Traders Association, dated June 11, 2021, available at https://www.sec.gov/comments/4-698/4698-8905922-244113.pdf (“STA Letter”); Gunjan Chauhan, Senior Managing Director, Global Head of SPDR Capital Markets, State Street Global Advisors, dated May 12, 2021, available at https://www.sec.gov/comments/4-698/4698-8793896-237842.pdf (“SSGA Letter”); Kevin Donohue, General Counsel, Tower Research Capital LLC, dated May 12, 2021, available at https://www.sec.gov/comments/4-698/4698-8793895-237841.pdf (“Tower Letter”); and Thomas M. Merritt, Deputy General Counsel, dated May 12, 2021, available at https://www.sec.gov/comments/4-698/4698-8790127-237768.pdf (“Virtu Letter”). 93 See Data Boiler Letter; Fidelity Letter; FIA PTG May 12th Letter; FINRA Letter; IMC Letter; Istra Letter; LTSE Letter; MMI Letter; NYSE Letter; SIFMA Letter; SSGA Letter; STA Letter; Tower Letter; and Virtu Letter. 94 See Cutler Letter (stating “[h]aving reviewed the Proposal, and having compared it to the previous CAT funding model, we see the Amendment as a vast improvement that is more fair and equitable to both Market Participants and Industry Members. We would urge that the Commission approve this amendment.”). Id. at 1. 95 See FIF April 29th Letter; FIF May 21st Letter. 96 See FIA PTG May 7th Letter. 97 See Letter to Vanessa Countryman, Secretary, Commission from Michael Simon, CAT NMS Plan Operating Committee Chair, dated May 5, 2021, available at https://www.sec.gov/comments/4-698/4698-8760381-237447.pdf (“CAT Operating Committee May 5th Letter”). 98 See Letters to Vanessa Countryman, Secretary, Commission from Michael Simon, CAT NMS Plan Operating Committee Chair, dated July 14, 2021, available at https://www.sec.gov/comments/4-698/4698-9061305-246406.pdf (“CAT Operating Committee July 14th Letter I”); from Michael Simon, CAT NMS Plan Operating Committee Chair, dated July 14, 2021, available at https://www.sec.gov/comments/4-698/4698-9061306-246406.pdf (“CAT Operating Committee July 14th Letter II”). CAT Operating Committee July 14th Letter II states, “these responses represent the consensus of the Participants, but that all Participants may not fully agree with each response set forth in this letter.” CAT Operating Committee July 14th Letter II at 1-2. Scope of Costs To Be Recovered From Industry Members Several commenters question the scope of the CAT costs proposed to be recovered from Industry Members. 99 Two commenters state that Industry Members should only be responsible for the direct costs to build and operate the CAT, not the Participants' costs of doing business as SROs, such as insurance and consulting costs. 100 One commenter states that the Exchange Act and Rule 613 do not even require the CAT NMS Plan to impose fees on Industry Members, 101 and that the Participants have failed to justify an “additive CAT fee,” 102 and notes the Participants were exclusively responsible for developing the CAT and for making decisions about the implementation costs for the CAT. 103 Another commenter asks for justification for why Industry Members should bear the costs of the CAT build when they had no involvement in the process. 104 99 See SIFMA Letter at 4; Virtu Letter at 5-6; FIA PTG May 12th Letter at 5; Data Boiler Letter at 8; Tower Letter at 3. 100 See SIFMA Letter at 4; FIA PTG May 12th Letter at 5. 101 See Virtu Letter at 2. 102 Id. at 3. 103 Id. at 2. 104 See MMI Letter at 3. Similarly, this commenter also requests the rationale for why “a small number of brokers should pay the vast majority of the now-inflated cost without having any insight or authority into the methodology and rationale for the cost?” Id. at 2. The Operating Committee responds that its proposed Maximum Industry Member CAT Fee would institute a cap on fees to fairly allocate costs to Industry Members to avoid certain Industry Members paying a significant allocation of Total CAT Costs. See CAT Operating Committee July 14th Letter II at 6-7. In response to comments objecting to the imposition of CAT costs on Industry Members, 105 the Operating Committee states that Industry Members should be required to pay CAT costs in accordance with Rule 613 and the CAT NMS Plan. 106 The Operating Committee adds that, because all market participants would benefit from the enhanced regulatory oversight provided by the CAT, Industry Members and Participants should both contribute to covering its costs. 107 105 See Virtu Letter at 2-3; MMI Letter at 3. 106 See CAT Operating Committee July 14th Letter II at 4-5. 107 Id. at 5-6. Six commenters object to the proposed imposition of historical costs on Industry Members. 108 Several commenters note that Industry Members had no input into or control over the decisions resulting in the historical costs, including the selection of Thesys Technologies, LLC as the initial plan processor, 109 and the subsequent transition to FINRA as the plan processor. 110 One commenter states, “the Participants must meet a high bar for the Commission to alter course and support any proposed rule changes that require non-Participants to pay the Thesys costs.” 111 One commenter questions the rationale for requiring Industry Members to pay 75% of the cost of the transition to FINRA, explaining that FINRA is completely funded by the industry. 112 Two commenters object to requiring Industry Members to pay the legal and consulting fees incurred by Participants prior to the approval of the CAT NMS Plan. 113 Two commenters criticize the Proposed Amendment for requiring new Industry Members to pay CAT fees to recover historical costs, while exempting new Participants from such a requirement. 114 108 See SIFMA Letter at 6; Virtu Letter at 5-6; Data Boiler Letter at 8; Istra Letter at 2-3; Tower Letter at 3; Fidelity Letter at 3, 5; MMI Letter at 3; Parallax Letter at 1. 109 See SIFMA Letter at 6; Virtu Letter at 5-6; Fidelity Letter at 3, 5; Tower Letter at 3; MMI Letter at 3. 110 See Virtu Letter at 6. 111 See Parallax Letter at 1. 112 See Virtu Letter at 6. 113 See Tower Letter at 3; SIFMA Letter at 6. 114 See Virtu Letter at 6; SIFMA Letter at 6-7. In response to comments questioning the scope of the costs to be recovered from Industry Members, 115 the Operating Committee states that the recovery from Industry Members of the historical costs, Thesys-related costs and third-party expenses (including legal, consulting and audit expenses) is consistent with the CAT NMS Plan and the Exchange Act. 116 The Operating Committee states that, when approving the CAT NMS Plan, the Commission noted that the Exchange Act permits the Participants to charge their members fees to fund their self-regulatory obligations and that the Plan funding model was designed to impose fees reasonably related to the Participants' self-regulatory obligations since the fees would be directly associated with the costs to build and maintain the CAT. 117 Additionally, the Operating Committee states that the Commission considered that the Participants could recover the costs of creating and funding the CAT central repository in the adopting release for Rule 613. 118 The Operating Committee explains that these costs are critical to the creation, implementation and maintenance of the Plan and therefore should be within the scope of CAT fees. 119 115 See Data Boiler Letter at 8; FIA PTG May 12th Letter at 2; Fidelity Letter at 3, 5; Istra Letter at 2-3; MMI Letter at 3; SIFMA Letter at 6; Tower Letter at 3; Virtu Letter at 5-6. 116 See CAT Operating Committee July 14th Letter I at 5. 117 Id. at 5. 118 Id. at 5-6. 119 Id. at 6. Lack of Industry Member Input Several commenters express concern that the proposal was developed without the involvement of Industry Members. 120 One commenter states that it is “incredulous of the process used to construct a proposed allocation model in which Industry Members are allocated 75% of the expenses yet had no meaningful input into the model's development.” 121 Another commenter opines that Industry Members are being required to shoulder most of the costs of the CAT without having had any insight into the costs. 122 Two commenters note the lack of representation of Industry Members on the Operating Committee. 123 One commenter believes that the technical expertise of the industry should be involved in the development of a new cost allocation proposal that contains “a full explanation of the proposed operating costs and . . . an appropriately detailed public disclosure of the operating budget.” 124 Another commenter suggests that the Commission ask the Participants to engage with the industry “to establish a workable allocation methodology that is simple, predictable and aligns responsibility for funding regulatory infrastructure with receiving economic benefits of the marketplace.” 125 120 See SIFMA Letter at 2; STA Letter at 2-3; Data Boiler Letter at 8; FIA PTG May 12th Letter at 2-3; IMC Letter at 2-3; Fidelity Letter at 2-3, 4; Tower Letter at 7; MMI Letter at 2, 3, 4. 121 See FIA PTG May 12th Letter at 3. 122 See MMI Letter at 2, 3. 123 See Tower Letter at 7; Data Boiler Letter at 6. See also Parallax Letter at 2 (suggesting the admission of Industry Members and independent parties as members of the Operating Committee, along with full internal disclosure of costs, would benefit the operation of the CAT NMS Plan). 124 See Tower Letter at 7. 125 See NYSE Letter at 5. See also SIFMA Letter at 2 (agreeing with this statement). In response to comments noting a lack of industry participation in the development of the Proposed Funding Model, 126 the Operating Committee explains that the CAT Advisory Committee and the public notice and comment processes afforded by Rule 608 of Regulation NMS 127 and Section 19 of the Exchange Act 128 have provided Industry Members and other market participants the opportunity to express their views on the funding model. 129 With respect to the comments expressing concern over a lack of Industry Member representation on the Operating Committee, the Operating Committee states that Industry Members can provide meaningful input on CAT matters through the current governance structure without compromising Commission and SRO oversight of Industry Members. 130 126 See FIA PTG May 12th Letter at 2-3; Fidelity Letter at 2-4; IMC Letter at 2; SIFMA Letter at 2; STA Letter at 2-3; Tower Letter at 7. 127 17 CFR 242.608. 128 15 U.S.C. 78s. 129 See CAT Operating Committee July 14th Letter I at 7-8. 130 Id. at 8. Participant Conflicts of Interest Six commenters believe that the Participants have conflicts of interest that are reflected in the cost allocation proposed for the Participants and Industry Members. 131 Two commenters believe that the Participants are attempting to further their commercial interests through the proposal at the expense of their Industry Member competitors. 132 One commenter believes that the Participants are conflicted when determining how much of their own costs they should pay and suggests greater transparency to expose any Participant conflicts. 133 Another commenter states, “[t]o permit for-profit exchanges to allocate 75% of the costs of the CAT to Industry Members furthers the Participants' commercial interests at the expense of the Industry Members, who have no choice but to pay such fees or else be subject to regulatory actions by the Participants.” 134 This commenter suggests that the Commission require the Participants to resubmit a proposal with a transparent analysis and requests that Industry Members be permitted adequate representation on the Operating Committee. 135 131 See SIFMA Letter at 2; Virtu Letter at 2, 6; FIA PTG May 12th Letter at 2, 3, 4; Tower Letter at 1, 5, 7; Istra Letter at 2; MMI Letter at 4. See also Parallax Letter at 3-4 (stating that the proposed market maker discounts benefit the Participants who have set the standards for market-making activity, including activity resulting in message traffic with low order to trade ratios). 132 See SIFMA Letter at 2; Virtu Letter at 2. 133 See FIA PTG May 12th Letter at 3. 134 See Tower Letter at 5. 135 See Tower Letter at 5. In response to the comments regarding potential conflicts of interests behind the proposed cost allocation for Participants and Industry Members, 136 the Operating Committee states that it disagrees with the comments and notes that the CAT NMS Plan contains measures to protect against potential conflicts of interest related to CAT fees, “including the fee filing requirements under the Exchange Act and operating the CAT on a break-even basis.” 137 136 See Data Boiler Letter at 6, 7; FIA PTG May 12th letter at 2, 3; MMI Letter at 4; Parallax Letter at 3-4; Tower Letter at 1, 5, 7. 137 See CAT Operating Committee July 14th Letter I at 8. Lack of Transparency Several commenters express concern that the Proposed Funding Model lacks sufficient transparency into the operating budget as well as the costs proposed to be recovered by the CAT fees. 138 One commenter believes the lack of cost data would make it impossible for the Commission and Industry Members to determine whether the CAT is operating efficiently. 139 The commenter adds that detailed cost information would be useful for Industry Members to evaluate whether certain of their activities are causing the CAT to incur higher operating costs, and consequently causing increases in their own CAT fees. 140 This commenter added that it is impossible to evaluate whether the Proposed Funding Model is consistent with the Exchange Act due to lack of information; in particular, details concerning sources of the costs and the operating budget. 141 Similarly, another commenter suggests the provision of non-proprietary cost information to allow meaningful input from Industry Members. 142 Another commenter believes that it “feels like we are being asked to hand over [a] blank check with the amount to be filled in later.” 143 One commenter states, “the Amendment is virtually silent on the use of funds and offers no budget for the CAT's ongoing operation.” 144 138 See SIFMA Letter at 4-5; Virtu Letter at 4-5; SSGA Letter at 1-2; Fidelity Letter at 2, 4-5; NYSE Letter at 2; STA Letter at 1, 3-4; Tower Letter at 2, 5, 7; MMI Letter at 2, 3-4; FIA PTG May 12th Letter at 2, 5; IMC Letter at 1, 2; Istra Letter at 1, 2; Parallax Letter at 1-2, 5. 139 See SIFMA Letter at 5. 140 Id. at 5. 141 Id. at 4. 142 See STA Letter at 3. 143 See Virtu Letter at 4. 144 See NYSE Letter at 2. Commenters request detailed information on the historical costs and the operating budget. 145 One commenter recommends that the Proposed Amendment disclose its costs and technical requirements, and detail the historical costs and projected annual budget for the Plan operating expenses, professional services expenses, and plan processor expenses. 146 The commenter recommends that the Participants make the annual budget public in the future. 147 Another commenter states that the Proposed Amendment lacks an explanation for the 2021 estimated cost of $133 million, including the scale of CAT processing, number of reported transactions, data storage sizes and processing performed. 148 The commenter states that an operating budget is necessary to determine how much of CAT costs is variable based on message traffic. 149 The commenter recommends that the Operating Committee propose a new cost allocation plan that includes a full accounting of the historical costs and justification for charging these costs to Industry Members. 150 The commenter also recommends that the new proposal explain its proposed operating costs and publicly disclose its operating budget. 151 145 Id. at 2; Tower Letter at 2, 7; Istra Letter at 2; Fidelity Letter at 5; MMI Letter at 2-3, 4; FIA PTG May 12th Letter at 5; Parallax Letter at 1-2, 5. 146 See NYSE Letter at 2. 147 Id. at 2. 148 See Tower Letter at 2. 149 Id. at 2. 150 Id. at 7. 151 Id. at 7. Another commenter notes that the Proposed Amendment lacks detail on the historical CAT assessment costs and requests the Participants to provide the opportunity to review the costs incurred before the CAT NMS Plan was approved, noting that Industry Members should be permitted “to refute the validity of any cost and its allocation to Industry Members.” 152 Another commenter states that the Proposed Amendment provides no transparency into historical and annual costs. 153 One commenter requests the Commission to require the Participants to provide a cost-sharing structure with greater transparency, including a full accounting of historical costs and a detailed public explanation of the proposed operating costs. 154 The commenter urges greater transparency in the operating budget, the cost allocation model, and on variable costs, such as messaging costs, and fixed costs, such as payroll costs. 155 152 See Fidelity Letter at 5. 153 See FIA PTG May 12th Letter at 5. 154 See MMI Letter at 2-3. 155 Id. at 4. Commenters also request a breakdown of the estimated CAT costs and operating budget. 156 Two commenters request a copy of the 2021 operating budget with quarterly updates including actual and revised projections. 157 One of the commenters also requests data to permit each Industry Member to calculate its fees, including the data used by the Operating Committee to calculate the estimates in Exhibit B to the Proposed Amendment. 158 In a response, the Operating Committee provides the following data: (1) The budgeted Total CAT Costs for 2021; (2) total Industry Member message traffic counts, including the total message counts for Options Market Makers and Equity Market Makers, used in the proposal's Exhibit B; (3) unrounded trade-to-quote ratios for Listed Options and NMS Stocks; and (4) the method used to calculate an Industry Member's quarterly CAT fees. 159 The Operating Committee states that Industry Members can contact FINRA CAT to learn which of the anonymized Industry Member information in Exhibit B represents its traffic, as well as its total message traffic count and percentage or number of its reported events that were treated as events of Options Market Makers or Equity Market Makers. 160 The Operating Committee also agrees to provide information to permit an Industry Member to calculate its actual CAT fees on an ongoing basis. 161 Subsequently, the first commenter requests further information to understand the impact of the funding proposal and help each Industry Member reconcile the data it received from the Operating Committee and its internal records. 162 The second commenter finds the response from the Operating Committee insufficient and requests a copy of the 2021 operating budget and any quarterly updates and projected costs, a breakdown of fixed and variable expenses, and provision to Industry Members of data used to support the selected funding model and the funding models that were rejected. 163 156 See SSGA Letter at 2; Fidelity Letter at 5; FIF April 29th Letter at 1, 2; FIA PTG May 7th Letter at 2. 157 See FIF April 29th Letter at 1; FIA PTG May 7th Letter at 2; FIA PTG May 12th Letter at 2. 158 See FIF April 29th Letter at 2. This commenter also requests that the Operating Committee publicly provide the options and equity trade-to-quote ratios used in the Proposed Amendment's Exhibit B and the aggregate number of reportable events of each type that are counted toward the total number of reportable events. Id. 159 See CAT Operating Committee May 5th Letter. This response was also noted by the Operating Committee in a response to comments. See CAT Operating Committee July 14th Letter II at 16. 160 See CAT Operating Committee May 5th Letter at 2. 161 Id. at 2, n.8. 162 See FIF May 21st Letter at 2-3. 163 See FIA PTG May 12th Letter at 2. Several commenters believe the lack of transparency prevents Industry Members from estimating their costs and fees. 164 One commenter believes that the Proposed Amendment lacks information needed by Industry Members to calculate their fees as well as to analyze the fairness and accuracy of the funding model. 165 The commenter notes that 75 of 1,237 Industry Members would be allocated 99% of Industry Member fees, and that the Proposed Amendment claims that this is fair without factual support. 166 One commenter acknowledges the data subsequently provided in the response from the Operating Committee 167 and suggests that the Participants regularly provide updated message traffic data to Industry Members to allow them to estimate their CAT fees. 168 Another commenter opines that the supplementary message traffic data and the 2021 budget information provided by the Operating Committee is insufficient to allow Industry Members to project their CAT fees. 169 One commenter suggests that cost recovery should have “transparent inputs” that would permit Industry Members to predict their costs and understand the costs of their actions. 170 164 See Tower Letter at 3; SIFMA Letter at 5, 9; Virtu Letter at 4. 165 See Tower Letter at 3. 166 Id. 167 See CAT Operating Committee May 5th Letter. 168 See SIFMA Letter at 5. 169 See Virtu Letter at 4. 170 See Istra Letter at 2-3. In response to comments requesting additional transparency into CAT costs, 171 the Operating Committee states that it has made publicly available substantial annual cost data by providing, upon request, its audited financial statements from the inception of Consolidated Audit Trail LLC and CAT NMS, LLC through 2020, as required by Section 9.2(a) of the CAT NMS Plan. 172 The Operating Committee explains that the audited financial statements contain the following cost categories: “technology costs, legal, amortization of developed technology, consulting, insurance, professional and administration, and public relations.” 173 The Operating Committee also states that the Proposed Funding Model would provide additional cost transparency through the provision of the operating budget at the start of each year, as well as the budgeted Total CAT Costs to be used in calculating the quarterly CAT fees, and any quarterly budget adjustments. 174 The Operating Committee adds that it proposes to provide additional cost information to the industry through webinars, among other methods, 175 and notes the cost-related information it provided in its May 5th letter. 176 171 See FIA PTG May 12th Letter at 2, 5; Fidelity Letter at 3, 5; Istra Letter at 2; MMI Letter at 3, 4; NYSE Letter at 2; Parallax Letter at 1-2; SIFMA Letter at 4; STA Letter at 3; SSGA Letter at 1-2; Tower Letter at 2, 4, 7; Virtu Letter at 4. 172 See CAT Operating Committee July 14th Letter I at 4. 173 Id. 174 Id. 175 Id. 176 Id. at 3-4. See also CAT Operating Committee May 5th Letter. Several commenters believe the Proposed Amendment does not properly explain increases in historical and annual costs in excess of prior estimates. 177 One commenter states, “[t]here may well be appropriate—or at least understandable—reasoning for historical and ongoing costs to greatly exceed expectations, and that is for the Participants to explain and the Commission to review as part of its oversight of the SROs.” 178 Two commenters ask if any corresponding benefits accompany the increased cost estimates. 179 One commenter expresses concern that the Participants have no accountability for the costs of the project. 180 Another commenter requests assurances that the CAT will not become an “ever-growing expense” for the industry and investors. 181 Another commenter, a proprietary trading firm, states that it “captures real time market data feeds from over 100 venues around the world, in a variety of different products . . . The processing of this historical market data might reasonably be compared to the kind of processing that the CAT is expected to do . . . While we do not claim that this is a perfect comparison, we do posit that the cost to build and maintain the CAT should be reasonably comparable.” 182 The commenter states that its annual cost for this platform is ten times less than the cost provided in the Proposed Amendment. 183 177 See FIA PTG May 12th Letter at 4-5; SSGA Letter at 1-2; Istra Letter at 2; MMI Letter at 1-2, 3-4; Tower Letter at 1, 2-4; Parallax Letter at 2. 178 See Parallax Letter at 2. 179 See MMI Letter at 2; SSGA Letter at 2. 180 See FIA PTG May 12th Letter at 5. 181 See SSGA Letter at 2. 182 See Tower Letter at 4. 183 Id. In response to comments questioning the increases in CAT costs from prior estimates, 184 the Operating Committee explains that data processing and storage costs are the primary CAT cost drivers and that these costs have increased significantly each year. 185 First, the Operating Committee states that these costs are directly related to data volumes reported to the CAT and that the markets have experienced record high volumes, noting that in 2019 and 2021, data volumes were five times greater than estimated. 186 To address the increased volume, the CAT's storage and computing needs have accordingly increased. 187 Second, the Operating Committee explains that the phased introduction of CAT reporting and functionality results in “a substantial increase in message traffic, processing complexity and storage requirements.” 188 Third, the Operating Committee states that the processing and storage of the many complex reporting scenarios relating to Industry Member market activity require complicated algorithms that result in “significant data processing and storage costs.” 189 Finally, the Operating Committee notes that the combination of record CAT Data volumes with the stringent performance timelines and operational requirements applicable to the processing of CAT Data do not allow much flexibility for cost reductions. 190 184 See FIA PTG May 12th Letter at 4-5; Istra Letter at 2; MMI Letter at 1-2, 4; Parallax Letter at 1-2; SSGA Letter at 1-2; Tower Letter at 1-4. 185 See CAT Operating Committee July 14th Letter I at 2. 186 Id. 187 Id. 188 Id. at 3. 189 Id. 190 Id. Some commenters believe that the Proposed Funding Model lacks the transparency needed to incentivize the Participants to manage CAT costs efficiently. 191 One commenter states the lack of transparency precludes the Operating Committee's accountability and suggests a full audit of the CAT's historical costs, ongoing budget and a comparison to its estimated benefits. 192 Another commenter believes that allowing Industry Members greater visibility into CAT's expenses would increase the Participants' accountability to manage costs. 193 191 See SIFMA Letter at 5; Fidelity Letter at 3, 5; Tower Letter at 2; FIA PTG May 12th Letter at 5. 192 See Istra Letter at 1. 193 See Fidelity Letter at 5. In response to comments urging more transparency to ensure the Participants manage CAT Costs efficiently, 194 the Operating Committee states that it “has a strong focus on cost management and is significantly incented to keep costs at an appropriate level.” 195 The Operating Committee notes that it actively pursues cost saving measures and has a Cost Management Working Group to address cost management needs. 196 Additionally, the Operating Committee states that the plan processor regularly reviews options to lower compute and storage needs and works with CAT technology providers to provide services in a cost-effective manner. 197 194 See FIA PTG May 12th Letter at 5; Fidelity Letter at 3; Tower Letter at 2, 7. 195 See CAT Operating Committee July 14th Letter I at 4-5. 196 Id. at 5. 197 Id. Finally, one commenter states that the Proposed Amendment needs to explain what would happen if actual CAT operating costs exceed the budget and what would happen if the CAT becomes over-budget. The commenter believes that a revised amendment should provide further details on the CAT budget and potential budget surpluses. 198 In response to the comment, 199 the Operating Committee explains that it would address budget shortfalls or excess fees through updates to the budgets and operational reserves. 200 The Operating Committee states that to recover the costs of CAT on an ongoing basis, it will use the costs in the annual operating budget as the Total CAT Costs to be used to calculate CAT fees, and that these budgeted costs may be adjusted on a quarterly basis to address any changes to the budget. 201 The Operating Committee states that if CAT fees exceed the CAT costs, despite quarterly budget adjustments, any surplus would be treated as an operational reserve to offset fees in future payments, in accordance with Section 11.1(c) of the CAT NMS Plan. 202 If CAT fees are less than CAT costs, the Operating Committee states that it “may address the shortfall by using the operational reserve, including the amount of the shortfall in future fees and/or seeking to recover the costs via other measures in accordance with the Exchange Act.” 203 198 See Fidelity Letter at 3, 5. 199 Id. at 5. 200 See CAT Operating Committee July 14th Letter I at 6. 201 Id. at 6-7. 202 Id. at 7. 203 Id. Allocation of Costs Between Industry Members and Participants Many commenters raise concerns about the proposed allocation of costs between Industry Members and Participants. 204 Several commenters argue that the allocation lacks justification for the decision to recover 75% of Total CAT Costs from Industry Members and 25% from Participants. 205 Two commenters believe the allocation to Industry Members is “arbitrary and unsupportable” under the Exchange Act. 206 One commenter challenges the Participants' justification for the allocation—that there are more Industry Members than Participants and Industry Members receive much more revenue than Participants—as not providing a rational basis on which to claim that the Proposed Amendment provides for a fair allocation of reasonable fees and does not impose an undue burden on competition. 207 Another commenter states, “[i]t is unclear from the proposal why the ability to pay is a corollary to CAT costs and an appropriate factor in justifying the split.” 208 One commenter states that costs are not deemed reasonable because a party can afford the costs, because the costs are not large enough to be material, or because the costs can be shared among thousands of Industry Members. 209 Another commenter believes that the cost allocation should have focused on what market participants should pay based on costs and benefits, rather than ability to pay based on aggregate revenues. 210 204 See Fidelity Letter at 2-4; NYSE Letter at 1-2; Tower Letter at 4-5; MMI Letter at 4-5; Istra Letter at 3; SIFMA Letter at 5-8; Virtu Letter at 3-6; Data Boiler Letter at 7; FIA PTG May 12th Letter at 3, 4; FINRA Letter at 3, 4-5; Parallax Letter at 2-3. 205 See Fidelity Letter at 3-4; NYSE Letter at 1-2; Tower Letter at 4-5; MMI Letter at 4-5; Istra Letter at 3; Virtu Letter at 3-4; SIFMA Letter at 5-6. 206 See SIFMA Letter at 5-6; Virtu Letter at 3. 207 See SIFMA Letter at 5-6. 208 See Fidelity Letter at 4. 209 See Parallax Letter at 2. 210 See Virtu Letter at 3-4. One commenter believes the cost allocation is inequitable and an undue burden on Industry Members. 211 The commenter believes that CAT fees should only be imposed on beneficiaries of CAT services, 212 allocated in proportion to benefit received. 213 The commenter believes that market participants that pose higher risks and potential conflicts of interest should pay higher fees than other market participants. 214 211 See Data Boiler Letter at 6, 7. 212 Id. at 6. 213 Id. at 7. 214 Id. at 8. One commenter approves the proposed elimination of tiering, but expresses concern at the allocation, stating that allocating set percentages of total costs to one group over another is the wrong approach. 215 The commenter criticizes the Proposed Amendment for basing the allocation on ensuring that the highest paying Industry Members pay the same as the highest paying Participants. 216 Additionally, this commenter believes that Participants would have no incentive to manage costs if they are only responsible for 25% of Total CAT Costs. 217 For the same reason, another commenter believes there is little incentive for Participants to justify their historical costs or manage a reasonable and efficient operating budget. 218 The commenter believes the cost allocation methodology differences between the Industry Members and the Participants warrants further discussion and transparency. 219 215 See FIA PTG May 12th Letter at 4. The Operating Committee acknowledges the commenter's support of the elimination of tiering. See CAT Operating Committee July 14th Letter II at 8, 13. 216 See FIA PTG May 12th Letter at 4. 217 Id. 218 See MMI Letter at 4-5. 219 Id. at 5. One commenter notes that the Proposed Funding Model does not explain how the 75% allocation to Industry Members relates to overall CAT costs resulting from Industry Member reporting and therefore may not be supported by Section 11.2(a) and Section 11.2(b) of the CAT NMS Plan. 220 Another commenter suggests a 50%-50% cost allocation between Industry Members and Participants and argues that any allocation should be transparent and predictable and supported by evidence. 221 The commenter suggests that Industry Member costs be allocated based on the value any Industry Member receives from the market. 222 One commenter believes the proposal lacks information for commenters to understand how CAT costs are allocated across asset classes. 223 The commenter suggests the creation of a predictable cost allocation methodology reached through engagement with Industry Members that aligns costs with the receipt of benefits from the market. 224 220 See FINRA Letter at 5. Section 11.2(a) of the CAT NMS Plan requires the Operating Committee, in establishing the funding of the Company, to create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and the other costs of the Company. Section 11.2(b) requires the Operating Committee 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 Company resources and operations. 221 See Istra Letter at 5-6. 222 Id. 223 See NYSE Letter at 4. 224 Id. at 5. One commenter believes the proposed allocation is arbitrary because the Participants override the allocation with adjusted allocations, such as the proposed market maker discounts, the Minimum Industry Member CAT Fee and the Maximum Industry Member CAT Fee, and the treatment of OTC Equity Security share volume. 225 The commenter believes the Proposed Funding Model would shift the regulatory cost of overseeing one Industry Member to another Industry Member, with the potential effect of retail investors who transact with small Industry Members indirectly subsidizing sophisticated investors who transact with large market-makers. 226 The commenter states, “the Operating Committee has not provided a sufficient regulatory case for a proposed funding model which imposes different costs for the same CAT reportable events.” 227 225 See Parallax Letter at 3. 226 Id. 227 Id. Several commenters believe the proposed cost allocation between Industry Members and Participants ignores the time investment and costs already incurred by Industry Members to report to the CAT. 228 One commenter notes that Industry Members have had to develop internal systems for CAT reporting and that Industry Members have provided critical assistance to the Participants in developing Industry Member CAT Technical Specifications. 229 The commenter opines that an analysis of the costs incurred by Industry Members for internal compliance would demonstrate that the Industry Allocation is not an equitable allocation of reasonable fees. 230 Another commenter notes that the Proposed Amendment does not mention the substantial time and cost invested by Industry Members into refining reporting specifications and building CAT reporting platforms, 231 and one other commenter believes that the Proposed Amendment ignores the substantial costs that Industry Members have incurred associated with the development, testing and implementation of the CAT. 232 228 See SIFMA Letter at 7-8; FIA PTG May 12th Letter at 5; Tower Letter at 4-5. See also Fidelity Letter at 2 (stating that Industry Members have spent much time and money on building systems to comply with CAT requirements but will not be reimbursed for these costs). 229 See SIFMA Letter at 7-8. See also STA Letter at 3 (describing collaborative efforts by Industry Members and Participants to develop technical specifications). 230 See SIFMA Letter at 7-8. 231 See Tower Letter at 4-5. 232 See FIA PTG May 12th Letter at 5. One commenter states that the Proposed Funding Model treats affiliated Participants differently than affiliated Industry Members without explaining how this inconsistency is consistent with the Exchange Act. 233 The commenter explains that affiliated Participants would be charged based on aggregate market share as a single complex, while affiliated Industry Members would be charged individually based on individual message traffic. The commenter states, “[t]his methodology seems to be rooted in the Participants' view that it provides for a fair allocation of fees under the proposal because it results in the largest Participant complexes being charged approximately the same level of fees as the largest Industry Members.” The commenter notes that the result is not a fair allocation of reasonable fees as the largest Industry Members have multiple affiliates that, if viewed as a single aggregated complex like affiliated Participants, would pay greater CAT fees than the largest Participant complexes. 234 233 See SIFMA Letter at 8. 234 Id. One commenter questions why equities and options message traffic is combined for Industry Member cost allocation purposes, unlike the Participant Allocation where 60% of the Total CAT Costs would be allocated to Equities Participants and 40% would be allocated to Options Participants. 235 The commenter states, “[i]f message traffic is indeed the major driver of CAT costs, then it stands to reason that at least 40% of the Industry Member costs be allocated to options (as in the Participants' allocation framework), if not significantly more.” 236 235 See Istra Letter at 3-4. 236 Id. at 4. Four commenters note that, under the proposed allocation, Industry Members must not only cover their allocation of the Total CAT Costs, but they must also fund FINRA, which would owe its own share of Participant CAT fees. 237 One commenter believes that, including FINRA's allocation, the Industry Member Allocation would exceed 80%. 238 The commenter notes that the Proposed Amendment does not explain why FINRA should be treated the same way as exchanges for allocation purposes when Industry Members pay FINRA's operation costs through regulatory fees and fines. 239 Another commenter believes that FINRA will raise its fees to help pay for its own Participant Allocation, further increasing the cost to be borne by Industry Members. 240 This commenter suggests that the Participants should submit a new proposal with a cost methodology supported by data that Industry Members can evaluate. 241 FINRA itself comments, “[o]ne effect of adopting these unsupported allocation criteria would be an unjustified increase in FINRA's fee assessments . . .” 242 FINRA also states that because it relies on regulatory fees from members, the Proposed Funding Model would reallocate FINRA's costs to Industry Members in addition to the CAT fees to be borne by Industry Members. 243 237 See Virtu Letter at 4, 6; Fidelity Letter at 4; SIFMA Letter at 7; Tower Letter at 5. 238 See SIFMA Letter at 7. 239 Id. 240 See Fidelity Letter at 4. 241 Id. 242 See FINRA Letter at 9. 243 Id. In response to comments questioning the justification for the proposed 75%-25% allocation, 244 the Operating Committee states that this allocation “continues to be an equitable allocation of reasonable CAT fees between Industry Members and Participants that balances the costs paid by each CAT Reporter and the regulatory benefits each receives.” 245 The Operating Committee reiterates the arguments it made in support of the allocation from the Proposed Amendment. 246 244 See Data Boiler Letter at 7; FIA PTG May 12th Letter at 4; Fidelity Letter at 2-4; FINRA Letter at 5; Istra Letter at 3; MMI Letter at 4; NYSE Letter at 2; Parallax Letter at 2; SIFMA Letter at 5-8; STA Letter at 4; Tower Letter at 4; Virtu Letter at 3-4. 245 See CAT Operating Committee July 14th Letter II at 2. 246 Id. at 2-4; Notice, supra note 4 at 21054-21055. Several commenters state that the Proposed Amendment does not consider whether regulatory fees and fines paid by Industry Members could offset the costs of CAT. 247 One commenter asserts that the Proposed Funding Model did not consider using exchange regulatory revenues or profits as sources of funding and did not explain why fines paid by Industry Members for CAT reporting violations could not offset the costs of operating the CAT. 248 In addition, the commenter states that the Proposed Funding Model did not analyze whether FINRA's Trading Activity Fee (“TAF”) could offset the costs of CAT when OATS is retired, or whether FINRA could reduce the TAF rate. 249 The commenter said that inclusion of this analysis would reveal that the Industry Allocation is not an equitable allocation of reasonable fees. 250 Another commenter argues that Industry Members pay membership fees, registration and licensing fees, and regulatory fees to Participants, yet the Proposed Funding Model did not address how these fees are allocated and why Industry Members must be responsible for a new funding requirement. 251 One commenter believes that revenues from fines should be allocated to the Company's operating reserve in order to decrease CAT costs. 252 247 See Tower Letter at 5; SIFMA Letter at 7; Virtu Letter at 3; FIA PTG May 12th Letter at 5; Parallax Letter at 4. See also Data Boiler Letter at 7 (suggesting that fines and settlements should fund the CAT). 248 See SIFMA Letter at 7. See also MMI Letter at 5-6 (stating that information is needed concerning any potential cost-savings to FINRA from OATS retirement that could offset the cost of running the CAT, as well as a proposed TAF increase in 2022); Virtu Letter at 4 (stating that the Proposed Amendment should have analyzed whether FINRA's TAF could offset CAT costs after OATS has been retired). 249 See SIFMA Letter at 7. 250 Id. 251 See Virtu Letter at 3. 252 See FIA PTG May 12th Letter at 5. In response to comments suggesting that regulatory fines and cost savings due to the retirement of OATS should be used to decrease CAT costs, 253 the Operating Committee states that it will not reduce CAT fees based on the ancillary effects of the CAT. 254 The Operating Committee explains that the proposed CAT fees account for the costs to create, implement and maintain the CAT, not other aspects of the Participants' regulatory operations. 255 253 Id.; MMI Letter at 5-6; SIFMA Letter at 7; Tower Letter at 5; Virtu Letter at 4. 254 See CAT Operating Committee July 14th Letter I at 6. 255 Id. Finally, one commenter argues that the elimination of comparability as a funding principle removes support for the proposed cost allocation. 256 The commenter explains that comparability was key to the decision to propose the 75%-25% allocation to Industry Members and Participants when the Participants previously proposed CAT fees in 2017. 257 The commenter explains that the Participants removed comparability from the funding model because the Proposed Funding Model no longer assesses fees through tiers. 258 The commenter states, “if the principle driving the change to a no-tier approach is to assess fees more transparently on CAT Reporters in direct relation to the costs that each creates for the CAT with its reporting activity, the Proposed Funding Model fails to apply this principle consistently.” 259 The commenter adds that the Proposed Amendment does not discuss the impact of the removal of the tiers and the comparability principle on the funding model. 260 256 See FINRA Letter at 2-4. 257 On May 9, 2017, the Operating Committee for the Company filed proposed Amendment No. 2 to the CAT NMS Plan to establish the CAT fees to be paid by the Participants. See Letter from Michael Simon, CAT NMS Plan Operating Committee Chair, to Brent J. Fields, Secretary, Commission, dated May 9, 2017. See also Securities Exchange Act Release No. 80930 (June 14, 2017), 82 FR 28180 (June 20, 2017). The Commission issued an order of summary abrogation of Amendment No. 2 on July 21, 2017. See Securities Exchange Act Release No. 81189 (July 21, 2017), 82 FR 35005 (July 27, 2017). The Participants subsequently filed proposed Amendment No. 3 to the CAT NMS Plan on October 30, 2017 to establish the Participant CAT fees. See Letter from Michael Simon, CAT NMS Plan Operating Committee Chair, to Brent J. Fields, Secretary, Commission, dated October 30, 2017. On December 11, 2017, the Operating Committee filed proposed Amendment No. 4 to the CAT NMS Plan, which replaced and superseded Amendment No. 3 in its entirety. See Letter from Michael Simon, CAT NMS Plan Operating Committee Chair, to Brent J. Fields, Secretary, Commission, dated December 11, 2017. See also Securities Exchange Act Release No. 82451 (January 5, 2018), 83 FR 1399 (January 11, 2018). The Participants withdrew Amendment No. 4 to the CAT NMS Plan on January 11, 2018. See Letter from Michael Simon, CAT NMS Plan Operating Committee Chair, to Brent J. Fields, Secretary, Commission, dated January 10, 2018. See also Securities Exchange Act Release No. 82892 (March 16, 2018), 83 FR 12633 (March 22, 2018). 258 See FINRA Letter at 4. 259 Id. 260 Id. at 7, n.17. In response to the comment, 261 the Operating Committee explains that the comparability provision was used to determine fee tiers. Since a tiered fee structure would not be used under the Proposed Funding Model, the Operating Committee believes it is appropriate to delete the comparability provision as it is no longer relevant. 262 261 Id. at 2-4. 262 See CAT Operating Committee July 14th Letter II at 4. Allocation of Costs Between Equities and Options Participants Two commenters argue that the Proposed Amendment failed to justify the proposed 60%-40% allocation of costs between Equities and Options Participants. 263 Both commenters believe the Proposed Amendment lacks justification to support the allocation. 264 One commenter notes that the Participants previously stated that message traffic is a key cost driver of the CAT. 265 The commenter attests that the Proposed Funding Model would assess Options Participants, which generate significantly more message traffic than Equities Participants, a lesser amount of the total CAT costs than Equities Participants. 266 This commenter believes the result is inconsistent with the CAT's cost alignment principles 267 and that the Operating Committee does not explain how the result is consistent with the funding principles or the Exchange Act. 268 The other commenter believes the allocation is arbitrary and unfairly discriminatory. 269 The commenter opines that the explanation provided by the Participants—that the allocation was “subject to negotiations among the Participants”—is not a basis for approval under the Exchange Act, and notes that the majority of votes on the Operating Committee are held by Participants that operate options exchanges. 270 263 See LTSE Letter at 5; FINRA Letter at 6. See also NYSE Letter at 2 (describing the proposed allocation as part of “an incomprehensible, distorted program”); MMI Letter at 5 (requesting further transparency and discussion on cost allocation methodology differences between Participants and Industry Members). 264 See LTSE Letter at 5; FINRA Letter at 6. 265 See FINRA Letter at 6. 266 Id. 267 See Section 11.2(a) and Section 11.2(b) of the CAT NMS Plan. 268 See FINRA Letter at 6. 269 See LTSE Letter at 5. 270 Id. In response to the comments, 271 the Operating Committee states that the proposed 60%-40% allocation of costs between Equities Participants and Options Participants is an appropriate allocation that is consistent with the CAT NMS Plan, which contemplates allocating Participant CAT fees based on activity in options and equities, and explains that the allocation was the subject of negotiations among the Participants. 272 271 See FINRA Letter at 6; LTSE Letter at 5; MMI Letter at 5; NYSE Letter at 2. 272 See CAT Operating Committee July 14th Letter II at 13-14. Use of Message Traffic for Industry Members Several commenters object to the use of message traffic as the basis of Industry Member CAT fees. 273 One commenter believes that message traffic is not an appropriate measure for allocating fees to Industry Members. 274 The commenter notes that the Participants “control how message traffic is defined, how message traffic is processed, and whether steps can be taken to reduce message traffic.” 275 The commenter argues that charging only Industry Members based on message traffic is not a fair allocation of reasonable fees because it creates no incentive for the Participants to control CAT message traffic and CAT costs. 276 The commenter believes the proliferation of exchanges has resulted in higher CAT message traffic, and thus higher costs, but notes that this is not analyzed in the funding model. 277 Another commenter suggests that additional data is needed to support the apportionment of CAT costs according to message count. 278 273 See SIFMA Letter at 8-10; Istra Letter at 3, 5; Virtu Letter at 5; SSGA Letter at 2; Data Boiler Letter at 7. See also NYSE Letter at 1, 3 (recommending a cost allocation framework based on executed share volume) and STA Letter at 4 (agreeing with the suggestion to use executed share volume); Fidelity Letter at 4 (stating that the Proposed Amendment has not explained why Industry Members must pay CAT fees based on message traffic while Participants will pay based on market share). 274 See SIFMA Letter at 8-9. 275 Id. at 9. 276 Id. 277 Id. 278 See MMI Letter at 4. One commenter notes that the elimination of comparability as a funding principle removes support for the proposed requirement to base Industry Members CAT fees on message traffic and Participant CAT fees on market share. 279 The commenter explains that comparability was key to the decision to propose message traffic as the basis of Industry Member CAT fees and market share as the basis of Execution Venue CAT fees when the Participants previously proposed CAT fees in 2017. 280 279 See FINRA Letter at 3-4. 280 See supra note 257. Two commenters believe that the Proposed Funding Model needs to examine the impact of options quoting activity on CAT. 281 One commenter states that Options Market Maker quoting comprises the “vast majority” of CAT messaging and that the design of the CAT should be reevaluated in case CAT is being “weighed down by options activity with little impact on market quality and traded volume.” 282 The other commenter states that the Proposed Funding Model lacks an analysis of the message traffic and costs generated by Options Market Makers that are required by SRO rules to provide quotes in over a million options series, even those that do not trade. 283 281 See Istra Letter at 2; SIFMA Letter at 9. 282 See Istra Letter at 2. 283 See SIFMA Letter at 9. In response to comments questioning the use of message traffic as a basis of Industry Member CAT fees, 284 the Operating Committee states that “the use of message traffic for allocating CAT costs among Industry Members is consistent with the CAT NMS Plan as approved by the Commission, and the proposal did not seek to change the use of message traffic for this purpose in the Proposed Funding Model.” 285 The Operating Committee notes that it explored allocating the Industry Member Allocation based on revenue related to activities in Eligible Securities, but decided it would be difficult to determine the types of Industry Member revenue to include in the calculation of a CAT fee using this approach. 286 284 See Istra Letter at 4-5; MMI Letter at 4; SIFMA Letter at 8-9. 285 See CAT Operating Committee July 14th Letter II at 6. 286 Id. One commenter suggests that the Reportable Events that will constitute message traffic be defined in the CAT NMS Plan, rather than in the IM Reporting Tech Specs, so that any changes to the Reportable Events that would be defined as message traffic would be subject to the notice and comment process. 287 In response to the comment, 288 the Operating Committee states that “delineating the method for reporting Reportable Events used in the message traffic count in the Technical Specifications, rather than the CAT NMS Plan, is appropriate because the technical approach to reporting specific Reportable Events may vary over time.” 289 287 See Fidelity Letter at 2, 3. 288 Id. 289 See CAT Operating Committee July 14th Letter II at 6. Commenters also believe that the use of message traffic as a basis of Industry Member CAT fees could affect market participant behavior with harmful consequences to the markets. 290 Two commenters believe the Participants have not analyzed the impact of the proposed approach on the markets. 291 One commenter states that the Proposed Funding Model does not address whether market makers would reduce their quoting activity in order to reduce their CAT fees, even with the proposed market maker discounts. 292 The other commenter believes that such a reduction in message traffic could impact liquidity. 293 290 See SIFMA Letter at 9; Virtu Letter at 5; Istra Letter at 5; SSGA Letter at 2. 291 See SIFMA Letter at 9; Virtu Letter at 5. 292 See SIFMA Letter at 9. 293 See Virtu Letter at 5. One commenter believes that using message traffic as the basis of Industry Member CAT fees will hurt the provision of liquidity and harm market quality. 294 The commenter explains, “[a] message that becomes displayed on an exchange has obvious value to the entire market and not only to the broker (or its customer) providing that liquidity. Taxing the message will naturally discourage its provision.” 295 The commenter emphasizes the benefits of displayed quoting on the markets and the negative consequences of the potential reduction in this activity that could result from the proposed approach. 296 294 See Istra Letter at 5. 295 Id. 296 Id. One commenter discusses the potential negative impact on ETFs caused by the use of message traffic as the basis for Industry Member CAT fees. 297 The commenter believes that the proposed approach would result in a reduction in quoting to minimize CAT fees. 298 The commenter states that ETF market making activity is message-intensive and any changes in behavior caused by the proposed approach could “interfere with the arbitrage mechanism and negate the work by Industry Members and exchanges to promote tighter bid-ask spreads, deeper markets and greater participation among liquidity providers.” 299 297 See SSGA Letter at 2. 298 Id. 299 Id. In response to comments questioning the effects of the use of message traffic to calculate fees on the markets, 300 the Operating Committee states that its proposed market maker discounts and the proposed Maximum Industry Member CAT Fee are designed to address potential disincentives. Additionally, the Operating Committee states that the market maker discounts “recognize the value of the market making activity to the market as a whole.” 301 300 See Istra Letter at -5; MMI Letter at 4; SIFMA Letter at 9; SSGA Letter at 2; Tower Letter at 1; Virtu Letter at 5. 301 See CAT Operating Committee July 14th Letter II at 7. Use of Market Share for Participants Several commenters believe that Participants should be assessed fees based on message traffic rather than market share. 302 The commenters note that the primary driver of CAT costs is the processing and storage of message traffic; therefore, Participants should be assessed CAT fees based on message traffic. 303 302 See FIA PTG May 12th Letter at 3; LTSE Letter at 2-3; FINRA Letter at 6-7, 9. 303 See FIA PTG May 12th Letter at 3; LTSE Letter at 2; FINRA Letter at 6-7, 9. One commenter believes that using market share to determine Participant CAT fees “gives a free pass to Plan Participants who generate high levels of message traffic but have very little market share.” 304 This commenter believes that using message traffic as the basis of Industry Member CAT fees and market share as the basis of Participant CAT fees is inherently discriminatory, maximizes Industry Member costs and minimizes Participant costs, and appears to result from Participant conflicts of interest and a lack of industry input until the funding model. 305 Another commenter believes that using message traffic as the basis of Industry Member CAT fees and market share as the basis of Participant CAT fees is discriminatory and unsupportable. 306 One commenter believes the Proposed Amendment fails to explain why Industry Members will be assessed fees based on message traffic while Participants will be assessed fees based on market share. 307 Two commenters believe that the Participants will have no incentives to limit message traffic to lower costs if they are not being charged CAT fees based on message traffic. 308 304 See FIA PTG May 12th Letter at 3. See also SIFMA Letter at 9 (stating that message traffic is a key driver of CAT costs and that the Participants generate a significant amount of message traffic, yet the Participants propose to base their own CAT fees on market share). See also Parallax Letter at 3 (recommending an analysis of the amount of message traffic that is driven by the Participants, such as market maker quoting). 305 See FIA PTG May 12th Letter at 3. 306 See IMC Letter at 2. 307 See Fidelity Letter at 4. See also LTSE Letter at 2-3 (stating that the Participants have provided no metrics to support their rationale that message traffic is not an appropriate basis for Participant CAT fees because their message traffic is derivative of quotes and orders received from Industry Members that the Participants are required to display) and NYSE Letter at 2 (stating that the Proposed Amendment does not justify why some costs should be split by message traffic and other costs should be split by market share). 308 See Virtu Letter at 5; LTSE Letter at 3. Another commenter, FINRA, believes that requiring market share to be the basis of Participant costs is inconsistent with CAT cost alignment principles 309 because message traffic is the key driver of costs, not market share. 310 The commenter notes that if the Participants believe FINRA's CAT fee would be too low based on its message traffic, FINRA would consider paying a more appropriate amount or an allocation based on a combination of message traffic and market share. 311 309 See supra note 267. 310 See FINRA Letter at 6. 311 Id. at 9. This commenter also objects to the use of market share in determining its CAT fees. 312 The commenter states that it would be responsible for 20% of the Equities Participant Allocation even though it generates less than 1% of equities message traffic reported to the CAT. 313 The commenter explains that its market share would be based on trade reporting volume reported through its facilities, which is also reported by Industry Members. 314 The commenter asks how this is consistent with the Operating Committee's rationale for the use of market share to determine Participant CAT fees—that message traffic is not an appropriate basis for Participants because their message traffic is derivative of Industry Member reporting activity. 315 In addition, the commenter states that the Operating Committee justifies the use of market share for Participants because their business models are focused on executions; however, the commenter notes that “given FINRA's unique role, trade volume is reported through FINRA for regulatory purposes, not to serve FINRA's business purposes.” 316 The commenter adds that the Operating Committee justifies the use of market share as a basis for FINRA's CAT fees as FINRA would be one of the largest regulatory users of the CAT. 317 The commenter asks “why regulatory usage is offered only to justify FINRA's allocation of the proposed fee that is based on unrelated criteria (market share), particularly when all Participants may use CAT data for regulatory purposes.” 318 The commenter argues that the Operating Committee has not analyzed the costs of regulatory usage, and states that if a regulatory usage fee is appropriate, it should apply to all Participants. 319 312 Id. at 7-9. 313 Id. at 8. 314 Id. at 7. 315 Id. at 7. 316 See FINRA Letter at 7-8. 317 Id. at 8. 318 Id. 319 Id. at 8-9. In response to comments questioning the use of market share to calculate Participant fees, 320 the Operating Committee states that the CAT NMS Plan contemplates that Participants pay a CAT fee that is based on market share. After considering alternatives to the use of market share, the Operating Committee concluded that market share would equitably allocate CAT fees among Participants. The Operating Committee reiterates arguments it made in support of the use of market share in the Proposed Amendment. 321 320 See FIA PTG May 12th Letter at 3; Fidelity Letter at 4; FINRA Letter at 6-7; IMC Letter at 2; LTSE Letter at 2-3; MMI Letter at 5; NYSE Letter at 2; SIFMA Letter at 8-9. 321 See CAT Operating Committee July 14th Letter II at 12-13; Notice, supra note 4, at 21060. Maximum Equities Participant Fee Two commenters object to the Maximum Equities Participant Fee because they believe that the sole Participant subject to the fee—FINRA—would be unfairly afforded preferential treatment. 322 One commenter believes that FINRA should receive a higher portion of CAT costs than Participants that lack a surveillance business because FINRA can capitalize off of the predecessor plan processor's development work and its technology will benefit from CAT. 323 The commenter believes that FINRA should not be permitted re-allocation of its CAT fee under the Maximum Equities Participant Fee. 324 The commenter also states, “[a]lthough we acknowledge that the nature of OTC trading in penny level may inherently be different from the proposed message traffic measurement use in Equity/Listed Option Group Split, similar arguments may apply to thinly traded securities, ESG stocks, etc., which SEC rule should avoid `craft-out.'” 325 322 See Data Boiler Letter at 8-9; LTSE Letter at 5. See also NYSE Letter at 2 (noting the added complexity of the “bespoke fee structure for FINRA”). 323 See Data Boiler Letter at 8-9. 324 Id. at 9. 325 Id. at 8. In response to the comment noting the nature of trading in OTC Equity Securities, 326 the Operating Committee states that it proposes to exclude OTC Equity Securities share volume from the calculation of market share for national securities exchanges. The Operating Committee reiterates the arguments it made in support of the proposed exclusion of OTC Equity Securities share volume in the Proposed Amendment. 327 326 Id. 327 See CAT Operating Committee July 14th Letter II at 14; Notice, supra note 4, at 21061. The other commenter believes that the Maximum Equities Participant Fee market share caps and re-allocation are arbitrary and unfairly discriminatory. 328 The commenter believes that the proposal lacks justification for requiring other Equities Participants to be allocated FINRA's market share when FINRA's activity does not occur on their markets. 329 The commenter notes, “[t]he stated rationale that this is necessary for the FINRA fees to be `fair and reasonable' is subjective, unsupported by any data, and further highlights the shortcomings of a fee model based on market share.” 330 328 See LTSE Letter at 5. 329 Id. 330 Id. One commenter, FINRA, also objects to the Maximum Equities Participant Fee because it is based on the use of market share for calculating FINRA's CAT fees, which FINRA believes is inconsistent with the funding principles of the CAT NMS Plan and ill-suited to FINRA's unique model. 331 331 See supra text accompanying notes 312-319. In response to comments received on the Maximum Equities Participant Fee, 332 the Operating Committee reiterates the arguments it made in support of the proposed Maximum Equities Participant Fee in the Proposed Amendment. 333 332 See Data Boiler Letter at 9; FINRA Letter at 7-9; LTSE Letter at 5; NYSE Letter at 2. 333 See CAT Operating Committee July 14th Letter II at 15; Notice, supra note 4, at 21062. Minimum Participant Fee One commenter objects to the proposed Minimum Participant Fee as inconsistent with the notion that market share is a fair method of allocation, 334 and as arbitrary and unfairly discriminatory. 335 The commenter states that this fee would be paid by every Participant, regardless of its market share, and notes that this fee can significantly increase even if a Participant itself is not creating increased costs to the CAT. 336 The commenter questions why some Participants would incur a higher Minimum Participant Fee when only certain Participants engage in activity that results in increased CAT message traffic. 337 The commenter also notes that a Participant that operates both an options and equities exchange would be assessed only one Minimum Participant Fee. 338 334 See LTSE Letter at 4. 335 See LTSE Letter at 4. See also NYSE Letter at 2 (noting the added complexity of the Minimum Participant Fee). 336 See LTSE Letter at 4. 337 Id. at 4-5. 338 Id. at 4, n.9. In response to the comments on the Minimum Participant Fee, 339 the Operating Committee reiterates the arguments it made in support of the proposed Minimum Participant Fee in the Proposed Amendment. 340 339 Id. at 4-5; NYSE Letter at 2. 340 See CAT Operating Committee July 14th Letter II at 15; Notice, supra note 4, at 21060. Maximum Industry Member CAT Fee Several commenters express concern about the Maximum Industry Member CAT Fee. 341 One commenter believes the Maximum Industry Member CAT Fee “exacerbates inequalities” 342 and believes that small firms should not be responsible for subsidizing the CAT fees for the top 36 firms that generate the vast majority of message traffic. 343 Similarly, another commenter believes that a lack of transparency into the re-allocation of CAT fees for Industry Members in excess of the Maximum Industry Member CAT Fee adds complexity and makes it difficult for Industry Members to calculate their costs under the Proposed Funding Model. 344 This commenter also believes the cap of 8% of total Industry Member CAT message traffic is arbitrary. 345 341 See Data Boiler Letter at 7-8; Tower Letter at 6; FINRA Letter at 5-6; MMI Letter at 5; SIFMA Letter at 9. 342 See Data Boiler Letter at 7. 343 Id. 344 See SIFMA Letter at 9. 345 Id. Another commenter objects to the 8% cap, explaining that the proposal has not fully justified the cap, and that it provides large brokers an unfair advantage by requiring other Industry Members, including their direct competitors, to pay the large brokers' re-allocation of fees in excess of the Maximum Industry Member CAT Fee. 346 Finally, one commenter believes the Proposed Funding Model insufficiently analyzes the “cross-subsidization that results from the proposed minimum and maximum Industry Member fees” nor does it explain the reasoning behind the creation of the Maximum Industry Member CAT Fee. 347 346 See Tower Letter at 6. 347 See FINRA Letter at 5. In response to comments on the Maximum Industry Member CAT Fee, 348 the Operating Committee reiterates the arguments it made in support of the proposed Maximum Industry CAT Fee in the Proposed Amendment. 349 348 See Data Boiler Letter at 7-8; FINRA Letter at 5-6; MMI Letter at 5; SIFMA Letter at 9; Tower Letter at 6. 349 See CAT Operating Committee July 14th Letter II at 12; Notice, supra note 4, at 21059. Minimum Industry Member CAT Fee Two commenters object to the Minimum Industry Member CAT Fee. 350 One of the commenters believes the Minimum Industry Member CAT Fee poses an undue burden on Industry Members and, by charging a “de minimis fee,” is inconsistent with Section 11.2(d), which requires the Operating Committee to provide for ease of billing and other administrative functions. 351 350 See Data Boiler Letter at 7; FINRA Letter at 5-6. 351 See Data Boiler Letter at 7. The other commenter believes the proposal lacks justification for the Minimum Industry CAT Fee, explaining that the fee could increase for firms with little message traffic due to the redistribution of CAT fees in excess of the Maximum Industry Member CAT Fee. 352 The commenter states this result was not discussed in the Proposed Funding Model nor was there a discussion of how the result is consistent with the CAT funding principles. 353 352 See FINRA Letter at 5-6. 353 See FINRA Letter at 5-6. In response to the comments, 354 the Operating Committee reiterates the arguments it made in support of the proposed Minimum Industry Member CAT Fee in the Proposed Amendment. 355 354 See Data Boiler Letter at 7; FINRA Letter at 5-6. 355 See CAT Operating Committee July 14th Letter II at 7; Notice, supra note 4, at 21058-21059. Market Maker Discounts Five commenters object to the proposed market maker discounts. 356 One commenter objects to the market maker discounts due to what it deems the improper discounting of Equity Market Maker message traffic and the preferential treatment of Options Market Makers at the expense of equities Industry Members. 357 The commenter criticizes the trade-to-quote ratio that is the basis of the proposed market maker discounts, explaining that it “ignores the realities of the market.” 358 The commenter suggests only including trades executed on-exchange and not off-exchange in the ratio. 359 Additionally, the commenter objects to the use of the SIP best bid and offer information in deriving the trade-to-quote ratio, explaining that this method undercounts the “activity and value contribution of equities market makers and further underestimates any market maker discount.” 360 The commenter also argues that, after the Options Market Maker discount, equities Industry Members would be required to pay 95% of the CAT cost when only responsible for 12% of the message traffic, a “grossly unfair cross-subsidy.” 361 The commenter states that at least 40% of Industry Member costs should be borne by options Industry Members if message traffic is the key driver of CAT costs. 362 Another commenter states that the “massive discounts” demonstrate that the Participants “have not found a way to perform the core functions needed for market surveillance, without the cost of it putting at risk an entire segment of the industry.” 363 356 See Data Boiler Letter at 7, 8, 9; SIFMA Letter at 9; Tower Letter at 5-6; Istra Letter at 3-5; Parallax Letter at 3. 357 See Istra Letter at 3-5. 358 Id. at 4-5. See also Parallax Letter at 3 (stating that the trade-to-quote ratio needs further analysis). 359 See Istra Letter at 4. 360 Id. at 5. 361 Id. at 4. 362 Id. 363 See Parallax Letter at 3. This commenter also suggests that there should be a process to confirm that Industry Members accurately identify themselves as market makers to receive the proposed market maker discounts, and penalties for those who wrongfully identify themselves or their activities to receive a discount. Id. Similarly, another commenter states that 89% of all Industry Member CAT Reportable Events comes from Options Market Makers, but the proposed Options Market Maker discount reduces 99% of the billable events for Options Market Makers, with the result being 94% of Industry Members' share allocated to equities non-market makers. 364 The commenter urges the Participants to justify this shift of costs to Industry Members that are not Options Market Makers and notes that the Proposed Amendment has not analyzed the effects of the discounts or has demonstrated that the discounts will be effective. 365 The commenter states that the Proposed Amendment is lacking in several other areas with respect to these discounts; there is no discussion of: (1) How the proposed market maker discount provides a pricing advantage to market makers that is unavailable to other market participants; (2) how the trade-to-quote ratio is the correct metric to use for determining the market maker discounts; (3) how the discount incentivizes market makers to quote more without trading more; (4) how/whether the discount calculation will change if the trade-to-quote ratio significantly changes; and (5) any impacts on liquidity and market participant behavior. 366 The commenter also believes the Proposed Amendment lacks a discussion of its potential impact on business lines across the industry, such as, for example, its effect on ATSs, which would not be considered market makers and thus could incur high costs. 367 The commenter attests that the Proposed Amendment lacks the information necessary to assess the effect of the proposed market maker discounts, such as the number of transactions resulting from market makers and how market-makers transactions should be discounted from the total number of transactions using the trade-to-quote ratio. 368 364 See Tower Letter at 6. 365 Id. at 5-6. See also Parallax Letter at 4 (stating that it is important to understand the extent to which Industry Members would benefit from the discounts). 366 See Tower Letter at 5. 367 Id. at 6. 368 Id. at 3. In response to the comment on the proposal's potential effects on business lines across the industry, 369 the Operating Committee states that it sought to limit any negative effects on certain CAT Reporters resulting from the use of message traffic to calculate fees, such as through the proposed market maker discounts and the proposed Maximum Industry Member CAT Fee. 370 369 Id. at 6. 370 See CAT Operating Committee July 14th Letter II at 7. One commenter opposes any market maker discounts, but notes that smaller market makers that do not pay or receive rebates deserve subsidies to encourage their participation. 371 Another commenter believes the impact of market maker discounts, as well as the Maximum Industry Member CAT Fee, adds complexity and makes it difficult for Industry Members to calculate their costs. 372 In response to comments on the market maker discounts, 373 the Operating Committee reiterates its rationale for proposing the discounts from the Proposed Amendment. 374 371 See Data Boiler Letter at 9. 372 See SIFMA Letter at 9. 373 See FIA PTG May 12th Letter at 4; IMC Letter at 2; Data Boiler Letter at 7; SIFMA Letter at 9; Istra Letter at 2-4; Parallax Letter at 3; Tower Letter at 5-6. 374 See CAT Operating Committee July 14th Letter II at 9; Notice, supra note 4, at 21057-21058. Two commenters endorse the proposed market maker discounts. 375 One commenter believes any funding plan should include these discounts and that additional product-specific discounts should be considered. 376 Another commenter believes the discounts prevent market makers from incurring “a disproportionate percentage of CAT costs, which could impact their provision of liquidity.” 377 375 See IMC Letter at 2; FIA PTG May 12th Letter at 4. 376 See IMC Letter at 2. 377 See FIA PTG May 12th Letter at 4. One commenter requests clarification on the proposed market maker discounts, specifying “cost allocation data and projections on market maker vs. non-market maker liquidity providers.” 378 The commenter also asks for further transparency and discussion on the application of the discounts on Industry Members with the most message traffic, at the expense of other Industry Members. 379 378 See MMI Letter at 5. 379 Id. Proposed Alternative Funding Models Several commenters suggest alternatives to the Proposed Funding Model. 380 One commenter believes that fines and settlements should fund the CAT and that market participants that pose higher risks should pay higher CAT fees due to regulators' “extra efforts in deciphering their complex business activities.” 381 The commenter also suggests the Suspicious Activity Report (“SAR”) 382 as a basis for determining Industry Member CAT fees, stating that Industry Members that underreport on the SAR should have increased fines. 383 The commenter believes that dark pools should pay higher CAT fees than SROs because they pose higher potential risks due to lack of transparency and “vulnerability to conflicts of interest,” 384 and also notes that internalizers or market makers may pose more of a risk than dark pools due to greater vulnerability to conflicts of interest. 385 380 See NYSE Letter at 2-5; Data Boiler Letter at 7-8; STA Letter at 4; FIA PTG May 12th Letter at 4; Istra Letter at 5-6; IMC Letter at 3; MMI Letter at 5. 381 See Data Boiler Letter at 8. 382 12 CFR 21.11. 383 See Data Boiler Letter at 7-8. 384 Id. 385 Id. In response to this comment, the Operating Committee states that the Proposed Funding Model would treat ATSs as Industry Members, requiring all Industry Members to pay a fee based on message traffic rather than requiring some ATSs to pay a fee based on market share and some ATSs to pay a fee based on message traffic, and would also address concerns that treating Execution Venue ATSs as Participants could create a barrier to entry for smaller ATSs. See CAT Operating Committee July 14th Letter II at 7-8. Other commenters recommend a funding model administered similar to the Commission's Section 31 fees. 386 Two commenters [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2021-15810. Public record. Not legal advice.