82 FR 23083 - Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee Schedule
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 96 (May 19, 2017)
Federal Register Volume 82, Issue 96 (May 19, 2017)
| Page Range | 23083-23100 | |
| FR Document | 2017-10131 |
[Federal Register Volume 82, Number 96 (Friday, May 19, 2017)] [Notices] [Pages 23083-23100] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-10131] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80676; File No. SR-PEARL-2017-20] Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee Schedule May 15, 2017. Pursuant to the provisions of Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on May 1, 2017, MIAX PEARL, LLC (``MIAX PEARL'' or ``Exchange'') filed with the Securities and Exchange Commission (``Commission'') a proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange is filing a proposal to amend the MIAX PEARL Fee Schedule (the ``Fee Schedule'') to adopt a fee schedule to establish the fees for Industry Members related to the National Market System Plan Governing the Consolidated Audit Trail (the ``CAT NMS Plan'' or ``Plan'').\3\ --------------------------------------------------------------------------- \3\ Unless otherwise specified, capitalized terms used in this fee filing are defined as set forth herein, the CAT Compliance Rule Series or in the CAT NMS Plan. --------------------------------------------------------------------------- The text of the proposed rule change is available on the Exchange's Web site at http://www.miaxoptions.com/rule-filings/pearl, at MIAX's principal office, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose Bats BYX Exchange, Inc., Bats BZX Exchange, Inc., Bats EDGA Exchange, Inc., Bats EDGX Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., Financial Industry Regulatory Authority, Inc. (``FINRA''), Investors' Exchange LLC, Miami International Securities Exchange, LLC, MIAX PEARL, LLC, NASDAQ BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC,\4\ NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, NYSE Arca, Inc. and NYSE National, Inc.\5\ (collectively, the ``Participants'') filed with the Commission, pursuant to Section 11A of the Exchange Act \6\ and Rule 608 of Regulation NMS thereunder,\7\ the CAT NMS Plan.\8\ The Participants filed the Plan to comply with Rule 613 of Regulation NMS under the Exchange Act. The Plan was published for comment in the Federal Register on May 17, 2016,\9\ and approved by the Commission, as modified, on November 15, 2016.\10\ The Plan is designed to create, implement and maintain a consolidated audit trail (``CAT'') that would capture customer and order event information for orders in NMS Securities and OTC Equity Securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution in a single consolidated data source. The Plan accomplishes this by creating CAT NMS, LLC (the ``Company''), of which each Participant is a member, to operate the CAT.\11\ Under the CAT NMS Plan, the Operating Committee of the Company (``Operating Committee'') has discretion to establish funding for the Company to operate the CAT, including establishing fees that the Participants will pay, and establishing fees for Industry Members that will be implemented by the Participants (``CAT Fees'').\12\ The Participants are required to file with the SEC under Section 19(b) of the Exchange Act any such CAT Fees applicable to Industry Members that the Operating Committee approves.\13\ Accordingly, the Exchange submits this fee filing to propose the Consolidated Audit Trail Funding Fees, which will require Industry Members that are [[Page 23084]] Exchange members to pay the CAT Fees determined by the Operating Committee. --------------------------------------------------------------------------- \4\ ISE Gemini, LLC, ISE Mercury, LLC and International Securities Exchange, LLC have been renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC, and Nasdaq ISE, LLC, respectively. See Securities Exchange Act Rel. No. 80248 (Mar. 15, 2017), 82 FR 14547 (Mar. 21, 2017); Securities Exchange Act Rel. No. 80326 (Mar. 29, 2017), 82 FR 16460 (Apr. 4, 2017); and Securities Exchange Act Rel. No. 80325 (Mar. 29, 2017), 82 FR 16445 (Apr. 4, 2017). \5\ National Stock Exchange, Inc. has been renamed NYSE National, Inc. See Securities Exchange Act Rel. No. 79902 (Jan. 30, 2017), 82 FR 9258 (Feb. 3, 2017). \6\ 15 U.S.C. 78k-1. \7\ 17 CFR 242.608. \8\ See Letter from the Participants to Brent J. Fields, Secretary, Commission, dated September 30, 2014; and Letter from Participants to Brent J. Fields, Secretary, Commission, dated February 27, 2015. On December 24, 2015, the Participants submitted an amendment to the CAT NMS Plan. See Letter from Participants to Brent J. Fields, Secretary, Commission, dated December 23, 2015. \9\ Securities Exchange Act Rel. No. 77724 (Apr. 27, 2016), 81 FR 30614 (May 17, 2016). \10\ Securities Exchange Act Rel. No. 79318 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016) (``Approval Order''). \11\ The Plan also serves as the limited liability company agreement for the Company. \12\ Section 11.1(b) of the CAT NMS Plan. \13\ Id. --------------------------------------------------------------------------- (1) Executive Summary The following provides an executive summary of the CAT funding model approved by the Operating Committee, as well as Industry Members' rights and obligations related to the payment of CAT Fees calculated pursuant to the CAT funding model. A detailed description of the CAT funding model and the CAT Fees follows this executive summary. (A) CAT Funding ModelCAT Costs. The CAT funding model is designed to establish CAT-specific fees to collectively recover the costs of building and operating the CAT from all CAT Reporters, including Industry Members and Participants. The overall CAT costs for the calculation of the CAT Fees in this fee filing are comprised of Plan Processor CAT costs and non-Plan Processor CAT costs incurred, and estimated to be incurred, from November 21, 2016 through November 21, 2017. (See Section 3(a)(2)(E) [sic] below) \14\ --------------------------------------------------------------------------- \14\ The Commission notes that references to Sections 3(a)(2) and 3(a)(3) in this Executive Summary should be instead to Sections II.A.1.(2) and II.A.1.(3), respectively. --------------------------------------------------------------------------- Bifurcated Funding Model. The CAT NMS Plan requires a bifurcated funding model, where costs associated with building and operating the CAT would be borne by (1) Participants and Industry Members that are Execution Venues for Eligible Securities through fixed tier fees based on market share, and (2) Industry Members (other than alternative trading systems (``ATSs'') that execute transactions in Eligible Securities (``Execution Venue ATSs'')) through fixed tier fees based on message traffic for Eligible Securities. (See Section 3(a)(2) [sic] below) Industry Member Fees. Each Industry Member (other than Execution Venue ATSs) will be placed into one of nine tiers of fixed fees, based on ``message traffic'' in Eligible Securities for a defined period (as discussed below). Prior to the start of CAT reporting, ``message traffic'' will be comprised of historical equity and equity options orders, cancels and quotes provided by each exchange and FINRA over the previous three months. After an Industry Member begins reporting to the CAT, ``message traffic'' will be calculated based on the Industry Member's Reportable Events reported to the CAT. Industry Members with lower levels of message traffic will pay a lower fee and Industry Members with higher levels of message traffic will pay a higher fee. (See Section 3(a)(2)(B) [sic] below) Execution Venue Fees. Each Equity Execution Venue will be placed in one of two tiers of fixed fees based on market share, and each Options Execution Venue will be placed in one of two tiers of fixed fees based on market share. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period. Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period. Equity Execution Venues with a larger market share will pay a larger CAT Fee than Equity Execution Venues with a smaller market share. Similarly, Options Execution Venues with a larger market share will pay a larger CAT Fee than Options Execution Venues with a smaller market share. (See Section 3(a)(2)(C) [sic] below) Cost Allocation. For the reasons discussed below, in designing the model, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. In addition, the Operating Committee determined to allocate 75 percent of Execution Venue costs recovered to Equity Execution Venues and 25 percent to Options Execution Venues. (See Section 3(a)(2)(D) [sic] below) Comparability of Fees. The CAT funding model requires that the CAT Fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members). (See Section 3(a)(2)(F) [sic] below) (B) CAT Fees for Industry Members Fee Schedule. The quarterly CAT Fees for each tier for Industry Members are set forth in the two fee schedules in the Consolidated Audit Trail Funding Fees, one for Equity ATSs and one for Industry Members other than Equity ATSs. (See Section 3(a)(3)(B) [sic] below) Quarterly Invoices. Industry Members will be billed quarterly for CAT Fees, with the invoices payable within 30 days. The quarterly invoices will identify within which tier the Industry Member falls. (See Section 3(a)(3)(C) [sic] below) Centralized Payment. Each Industry Member will receive from the Company one invoice for its applicable CAT Fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay its CAT Fees to the Company via the centralized system for the collection of CAT Fees established by the Operating Committee. (See Section 3(a)(3)(C) [sic] below) Billing Commencement. Industry Members will begin to receive invoices for CAT Fees as promptly as possible following the establishment of a billing mechanism. The Exchange will issue a Regulatory Circular to its members when the billing mechanism is established, specifying the date when such invoicing of Industry Members will commence. (See Section 3(a)(2)(G) [sic] below) (2) Description of the CAT Funding Model Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. As set forth in Article XI of the CAT NMS Plan, the CAT NMS Plan requires a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Participants and Industry Members that are Execution Venues through fixed tier fees based on market share, and (2) Industry Members (other than Execution Venue ATSs) through fixed tier fees based on message traffic. In its order approving the CAT NMS Plan, the Commission determined that the proposed funding model was ``reasonable'' \15\ and ``reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT.'' \16\ --------------------------------------------------------------------------- \15\ Approval Order at 84796. \16\ Id. at 84794. --------------------------------------------------------------------------- More specifically, the Commission stated in approving the CAT NMS Plan that ``[t]he Commission believes that the proposed funding model is reasonably designed to allocate the costs of the CAT between the Participants and Industry Members.'' \17\ The Commission further noted the following: --------------------------------------------------------------------------- \17\ Id. at 84795. --------------------------------------------------------------------------- The Commission believes that the proposed funding model reflects a [[Page 23085]] reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and . . . the Exchange Act specifically permits the Participants to charge their members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.\18\ --------------------------------------------------------------------------- \18\ Id. at 84794. --------------------------------------------------------------------------- Accordingly, the funding model imposes fees on both Participants and Industry Members. In addition, as discussed in Appendix C of the CAT NMS Plan, the Operating Committee considered the advantages and disadvantages of a variety of alternative funding and cost allocation models before selecting the proposed model.\19\ After analyzing the various alternatives, the Operating Committee determined that the proposed tiered, fixed fee funding model provides a variety of advantages in comparison to the alternatives. First, the fixed fee model, as opposed to a variable fee model, provides transparency, ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes.\20\ Additionally, a strictly variable or metered funding model based on message volume would be far more likely to affect market behavior and place an inappropriate burden on competition. Moreover, as the SEC noted in approving the CAT NMS Plan, ``[t]he Participants also have offered a reasonable basis for establishing a funding model based on broad tiers, in that it be may be easier to implement.'' \21\ --------------------------------------------------------------------------- \19\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85006. \20\ In choosing a tiered fee structure, the Participants concluded that the variety of benefits offered by a tiered fee structure, discussed above, outweighed the fact that Industry Members in any particular tier would pay different rates per message traffic order event (e.g., an Industry Member with the largest amount of message traffic in one tier would pay a smaller amount per order event than an Industry Member in the same tier with the least amount of message traffic). Such variation is the natural result of a tiered fee structure. \21\ Approval Order at 84796. --------------------------------------------------------------------------- In addition, multiple reviews of current broker-dealer order and trading data submitted under existing reporting requirements showed a wide range in activity among broker-dealers, with a number of broker- dealers submitting fewer than 1,000 orders per month and other broker- dealers submitting millions and even billions of orders in the same period. Accordingly, the CAT NMS Plan includes a tiered approach to fees. The tiered approach helps ensure that fees are equitably allocated among similarly situated CAT Reporters and furthers the goal of lessening the impact on smaller firms.\22\ The self-regulatory organizations considered several approaches to developing a tiered model, including defining fee tiers based on such factors as size of firm, message traffic or trading dollar volume. After analyzing the alternatives, it was concluded that the tiering should be based on the relative impact of CAT Reporters on the CAT System. --------------------------------------------------------------------------- \22\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85006. --------------------------------------------------------------------------- Accordingly, the CAT NMS Plan contemplates that costs will be allocated across the CAT Reporters on a tiered basis to allocate costs to those CAT Reporters that contribute more to the costs of creating, implementing and maintaining the CAT.\23\ The fees to be assessed at each tier are calculated so as to recoup a proportion of costs appropriate to the message traffic or market share (as applicable) from CAT Reporters in each tier. Therefore, Industry Members generating the most message traffic will be in the higher tiers, and therefore be charged a higher fee. Industry Members with lower levels of message traffic will be in lower tiers and will be assessed a smaller fee for the CAT.\24\ Correspondingly, Execution Venues with the highest market share will be in the top tier, and therefore will be charged a higher fee. Execution Venues with a lower market share will be in the lower tier and will be assessed a smaller fee for the CAT.\25\ --------------------------------------------------------------------------- \23\ Approval Order at 85005. \24\ Id. \25\ Id. --------------------------------------------------------------------------- The Commission also noted in approving the CAT NMS Plan that ``[t]he Participants have offered a credible justification for using different criteria to charge Execution Venues (market share) and Industry Members (message traffic)'' \26\ in the CAT funding model. While there are multiple factors that contribute to the cost of building, maintaining and using the CAT, processing and storage of incoming message traffic is one of the most significant cost drivers for the CAT.\27\ Thus, the CAT NMS Plan provides that the fees payable by Industry Members (other than Execution Venue ATSs) will be based on the message traffic generated by such Industry Member.\28\ --------------------------------------------------------------------------- \26\ Id. at 84796. \27\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85005. \28\ Section 11.3(b) of the CAT NMS Plan. --------------------------------------------------------------------------- The CAT NMS Plan provides that the Operating Committee will use different criteria to establish fees for Execution Venues and non- Execution Venues due to the fundamental differences between the two types of entities. In particular, the CAT NMS Plan provides that fees charged to CAT Reporters that are Execution Venues will be based on the level of market share and that costs charged to Industry Members (other than Execution Venue ATSs) will be based upon message traffic.\29\ Because most Participant message traffic consists of quotations, and Participants usually disseminate quotations in all instruments they trade, regardless of execution volume, Execution Venues that are Participants generally disseminate similar amounts of message traffic. Accordingly, basing fees for Execution Venues on message traffic would not provide the same degree of differentiation among Execution Venues that it does among Industry Members (other than Execution Venue ATSs). In contrast, execution volume more accurately delineates the different levels of trading activity of Execution Venues.\30\ --------------------------------------------------------------------------- \29\ Section 11.2(c) of the CAT NMS Plan. \30\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85005. --------------------------------------------------------------------------- The CAT NMS Plan's funding model also is structured to avoid a ``reduction in market quality.'' \31\ The tiered, fixed fee funding model is designed to limit the disincentives to providing liquidity to the market. For example, the Participants expect that a firm that had a large volume of quotes would likely be categorized in one of the upper tiers, and would not be assessed a fee for this traffic directly as they would under a more directly metered model. In contrast, strictly variable or metered funding models based on message volume were far more likely to affect market behavior. In approving the CAT NMS Plan, the SEC stated that ``[t]he Participants also offered a reasonable basis for establishing a funding model based on broad tiers, in that it may be . . . less likely to have an incremental deterrent effect on liquidity provision.'' \32\ --------------------------------------------------------------------------- \31\ Section 11.2(e) of the CAT NMS Plan. \32\ Approval Order at 84796. --------------------------------------------------------------------------- The CAT NMS Plan is structured to avoid potential conflicts raised by the Operating Committee determining fees applicable to its own members--the [[Page 23086]] Participants. First, the Company will be operated on a ``break-even'' basis, with fees imposed to cover costs and an appropriate reserve. Any surpluses will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits.\33\ To ensure that the Participants' operation of the CAT will not contribute to the funding of their other operations, Section 11.1(c) of the CAT NMS Plan specifically states that ``[a]ny surplus of the Company's revenues over its expenses shall be treated as an operational reserve to offset future fees.'' In addition, as set forth in Article VIII of the CAT NMS Plan, the Company ``intends to operate in a manner such that it qualifies as a `business league' within the meaning of Section 501(c)(6) of the [Internal Revenue] Code.'' To qualify as a business league, an organization must ``not [be] organized for profit and no part of the net earnings of [the organization can] inure[ ] to the benefit of any private shareholder or individual.'' \34\ As the SEC stated when approving the CAT NMS Plan, ``the Commission believes that the Company's application for Section 501(c)(6) business league status addresses issues raised by commenters about the Plan's proposed allocation of profit and loss by mitigating concerns that the Company's earnings could be used to benefit individual Participants.'' \35\ --------------------------------------------------------------------------- \33\ Id. at 84792. \34\ 26 U.S.C. 501(c)(6). \35\ Approval Order at 84793. --------------------------------------------------------------------------- Finally, by adopting a CAT-specific fee, the Participants will be fully transparent regarding the costs of the CAT. Charging a general regulatory fee, which would be used to cover CAT costs as well as other regulatory costs, would be less transparent than the selected approach of charging a fee designated to cover CAT costs only. A full description of the funding model is set forth below. This description includes the framework for the funding model as set forth in the CAT NMS Plan, as well as the details as to how the funding model will be applied in practice, including the number of fee tiers and the applicable fees for each tier. The Exchange notes that the complete funding model is described below, including those fees that are to be paid by the Participants. The proposed Consolidated Audit Trail Funding Fees, however, do not apply to the Participants; the proposed Consolidated Audit Trail Funding Fees only apply to Industry Members. The CAT fees for Participants will be imposed separately by the Operating Committee pursuant to the CAT NMS Plan. (A) Funding Principles Section 11.2 of the CAT NMS Plan sets forth the principles that the Operating Committee applied in establishing the funding for the Company. The Operating Committee has considered these funding principles as well as the other funding requirements set forth in the CAT NMS Plan and in Rule 613 in developing the proposed funding model. The following are the funding principles in Section 11.2 of the CAT NMS Plan: To create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and other costs of the Company; To establish an allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company's resources and operations; To establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members' non-ATS activities are based upon message traffic; (iii) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members); To provide for ease of billing and other administrative functions; To avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and To build financial stability to support the Company as a going concern. (B) Industry Member Tiering Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees to be payable by Industry Members, based on message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers. The CAT NMS Plan clarifies that the fixed fees payable by Industry Members pursuant to Section 11.3(b) shall, in addition to any other applicable message traffic, include message traffic generated by: (i) An ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. In addition, the Industry Member fees will apply to Industry Members that act as routing broker-dealers for exchanges. The Industry Member fees will not be applicable, however, to an ATS that qualifies as an Execution Venue, as discussed in more detail in the section on Execution Venue tiering. In accordance with Section 11.3(b), the Operating Committee approved a tiered fee structure for Industry Members (other than Execution Venue ATSs) as described in this section. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on CAT System resources of different Industry Members, and that establish comparable fees among the CAT Reporters with the most Reportable Events. The Operating Committee has determined that establishing nine tiers results in the fairest allocation of fees, best distinguishing between Industry Members with differing levels of message traffic. Thus, each such Industry Member will be placed into one of nine tiers of fixed fees, based on ``message traffic'' for a defined period (as discussed below). A nine tier structure was selected to provide the widest range of levels for tiering Industry Members such that Industry Members submitting significantly less message traffic to the CAT would be adequately differentiated from Industry Members submitting substantially more message traffic. The Operating Committee considered historical message traffic generated by Industry Members across all exchanges and as submitted to FINRA's Order Audit Trail System (``OATS''), and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that nine tiers would best group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden of Industry Members that have less CAT-related activity. Each Industry Member (other than Execution Venue ATSs) will be ranked [[Page 23087]] by message traffic and tiered by predefined Industry Member percentages (the ``Industry Member Percentages''). The Operating Committee determined to use predefined percentages rather than fixed volume thresholds to allow the funding model to ensure that the total CAT fees collected recover the intended CAT costs regardless of changes in the total level of message traffic. To determine the fixed percentage of Industry Members in each tier, the Operating Committee analyzed historical message traffic generated by Industry Members across all exchanges and as submitted to OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee identified tiers that would group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden on Industry Members that have less CAT- related activity. The percentage of costs recovered by each Industry Member tier will be determined by predefined percentage allocations (the ``Industry Member Recovery Allocation''). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter message traffic on the CAT System as well as the distribution of total message volume across Industry Members while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Industry Members in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical message traffic upon which Industry Members had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of costs recovered for each tier were assigned, allocating higher percentages of recovery to tiers with higher levels of message traffic while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Industry Members and costs recovered per tier, the Operating Committee sought to include stability and elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Industry Members or the total level of message traffic. The following chart illustrates the breakdown of nine Industry Member tiers across the monthly average of total equity and equity options orders, cancels and quotes in Q1 2016 and identifies relative gaps across varying levels of Industry Member message traffic as well as message traffic thresholds between the largest of Industry Member message traffic gaps. The Operating Committee referenced similar distribution illustrations to determine the appropriate division of Industry Member percentages in each tier by considering the grouping of firms with similar levels of message traffic and seeking to identify relative breakpoints in the message traffic between such groupings. In reviewing the chart and its corresponding table, note that while these distribution illustrations were referenced to help differentiate between Industry Member tiers, the proposed funding model is directly driven, not by fixed message traffic thresholds, but rather by fixed percentages of Industry Members across tiers to account for fluctuating levels of message traffic across time and to provide for the financial stability of the CAT by ensuring that the funding model will recover the required amounts regardless of changes in the number of Industry Members or the amount of message traffic. Actual messages in any tier will vary based on the actual traffic in a given measurement period, as well as the number of firms included in the measurement period. The Industry Member Percentages and Industry Member Recovery Allocation for each tier will remain fixed with each Industry Member's tier to be reassigned periodically, as described below in Section 3(a)(1)(H) [sic]. [GRAPHIC] [TIFF OMITTED] TN19MY17.004 [[Page 23088]] ------------------------------------------------------------------------ Monthly average message Industry member tier traffic per industry member (orders, quotes and cancels) ------------------------------------------------------------------------ Tier 1.................................... >10,000,000,000 Tier 2.................................... >1,000,000,000 Tier 3.................................... >100,000,000 Tier 4.................................... >2,500,000 Tier 5.................................... >200,000 Tier 6.................................... >50,000 Tier 7.................................... >5,000 Tier 8.................................... >1,000 Tier 9.................................... <=1,000 ------------------------------------------------------------------------ Based on the above analysis, the Operating Committee approved the following Industry Member Percentages and Recovery Allocations: ---------------------------------------------------------------------------------------------------------------- Percentage of Industry member tier Percentage of industry member Percentage of industry members recovery total recovery ---------------------------------------------------------------------------------------------------------------- Tier 1................................................. 0.500 8.50 6.38 Tier 2................................................. 2.500 35.00 26.25 Tier 3................................................. 2.125 21.25 15.94 Tier 4................................................. 4.625 15.75 11.81 Tier 5................................................. 3.625 7.75 5.81 Tier 6................................................. 4.000 5.25 3.94 Tier 7................................................. 17.500 4.50 3.38 Tier 8................................................. 20.125 1.50 1.13 Tier 9................................................. 45.000 0.50 0.38 -------------------------------------------------------- Total.............................................. 100 100 75 ---------------------------------------------------------------------------------------------------------------- For the purposes of creating these tiers based on message traffic, the Operating Committee determined to define the term ``message traffic'' separately for the period before the commencement of CAT reporting and for the period after the start of CAT reporting. The different definition for message traffic is necessary as there will be no Reportable Events as defined in the Plan, prior to the commencement of CAT reporting. Accordingly, prior to the start of CAT reporting, ``message traffic'' will be comprised of historical equity and equity options orders, cancels and quotes provided by each exchange and FINRA over the previous three months.\36\ Prior to the start of CAT reporting, orders would be comprised of the total number of equity and equity options orders received and originated by a member of an exchange or FINRA over the previous three-month period, including principal orders, cancel/replace orders, market maker orders originated by a member of an exchange, and reserve (iceberg) orders as well as order routes and executions originated by a member of FINRA, and excluding order rejects and implied orders.\37\ In addition, prior to the start of CAT reporting, cancels would be comprised of the total number of equity and equity option cancels received and originated by a member of an exchange or FINRA over a three-month period, excluding order modifications (e.g., order updates, order splits, partial cancels). Furthermore, prior to the start of CAT reporting, quotes would be comprised of information readily available to the exchanges and FINRA, such as the total number of historical equity and equity options quotes received and originated by a member of an exchange or FINRA over the prior three-month period. --------------------------------------------------------------------------- \36\ The SEC approved exemptive relief permitting Options Market Maker quotes to be reported to the Central Repository by the relevant Options Exchange in lieu of requiring that such reporting be done by both the Options Exchange and the Options Market Maker, as required by Rule 613 of Regulation NMS. See Securities Exchange Act Release No. 77265 (Mar. 1, 2017 [sic], 81 FR 11856 (Mar. 7, 2016). This exemption applies to Options Market Maker quotes for CAT reporting purposes only. Therefore, notwithstanding the reporting exemption provided for Options Market Maker quotes, Options Market Maker quotes will be included in the calculation of total message traffic for Options Market Makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences \37\ Consequently, firms that do not have ``message traffic'' reported to an exchange or OATS before they are reporting to the CAT would not be subject to a fee until they begin to report information to CAT. --------------------------------------------------------------------------- After an Industry Member begins reporting to the CAT, ``message traffic'' will be calculated based on the Industry Member's Reportable Events reported to the CAT as will be defined in the Technical Specifications.\38\ --------------------------------------------------------------------------- \38\ If an Industry Member (other than an Execution Venue ATS) has no orders, cancels or quotes prior to the commencement of CAT Reporting, or no Reportable Events after CAT reporting commences, then the Industry Member would not have a CAT fee obligation. --------------------------------------------------------------------------- The Operating Committee has determined to calculate fee tiers every three months, on a calendar quarter basis, based on message traffic from the prior three months. Based on its analysis of historical data, the Operating Committee believes that calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Industry Members while still providing predictability in the tiering for Industry Members. Because fee tiers will be calculated based on message traffic from the prior three months, the Operating Committee will begin calculating message traffic based on an Industry Member's Reportable Events reported to the CAT once the Industry Member has been reporting to the CAT for three months. Prior to that, fee tiers will be calculated as discussed above with regard to the period prior to CAT reporting. (C) Execution Venue Tiering Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee is [[Page 23089]] required to establish fixed fees payable by Execution Venues. Section 1.1 of the CAT NMS Plan defines an Execution Venue as ``a Participant or an alternative trading system (``ATS'') (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).'' \39\ --------------------------------------------------------------------------- \39\ Although FINRA does not operate an execution venue, because it is a Participant, it is considered an ``Execution Venue'' under the Plan for purposes of determining fees. --------------------------------------------------------------------------- The Participants determined that ATSs should be included within the definition of Execution Venue. Given the similarity between the activity of exchanges and ATSs, both of which meet the definition of an ``exchange'' as set forth in the Exchange Act and the fact that the similar trading models would have similar anticipated burdens on the CAT, the Participants determined that ATSs should be treated in the same manner as the exchanges for the purposes of determining the level of fees associated with the CAT.\40\ --------------------------------------------------------------------------- \40\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85005. --------------------------------------------------------------------------- Given the differences between Execution Venues that trade NMS Stocks and/or OTC Equity Securities and Execution Venues that trade Listed Options, Section 11.3(a) addresses Execution Venues that trade NMS Stocks and/or OTC Equity Securities separately from Execution Venues that trade Listed Options. Equity and Options Execution Venues are treated separately for two reasons. First, the differing quoting behavior of Equity and Options Execution Venues makes comparison of activity between Execution Venues difficult. Second, Execution Venue tiers are calculated based on market share of share volume, and it is therefore difficult to compare market share between asset classes (i.e., equity shares versus options contracts). Discussed below is how the funding model treats the two types of Execution Venues. (I) NMS Stocks and OTC Equity Securities Section 11.3(a)(i) of the CAT NMS Plan states that each Execution Venue that (i) executes transactions or, (ii) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and not more than five tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association's market share. In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Equity Execution Venues and Option Execution Venues. In determining the Equity Execution Venue Tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Equity Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Equity Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's NMS Stocks and OTC Equity Securities market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to the non-Execution Venue Industry Members to determine the number of tiers for Equity Execution Venues. The Operating Committee determined to establish two tiers for Equity Execution Venues, rather than a larger number of tiers as established for non-Execution Venue Industry Members, because the two tiers were sufficient to distinguish between the smaller number of Equity Execution Venues based on market share. Furthermore, the incorporation of additional Equity Execution Venue tiers would result in significantly higher fees for Tier 1 Equity Execution Venues and diminish comparability between Execution Venues and Industry Members. Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the ``Equity Execution Venue Percentages''). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee looked at historical market share of share volume for execution venues. Equities Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats Global Markets, Inc. (``Bats''). ATS market share of share volume was sourced from market statistics made publicly-available by FINRA. FINRA trading [sic] reporting facility (``TRF'') market share of share volume was sourced from market statistics made publicly available by Bats. As indicated by FINRA, ATSs accounted for 37.80% of the share volume across the TRFs during the recent tiering period. A 37.80/62.20 split was applied to the ATS and non-ATS breakdown of FINRA market share, with FINRA tiered based only on the non-ATS portion of its TRF market share of share volume. Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share of share volume. In doing so, the Participants considered that, as previously noted, Execution Venues in many cases have similar levels of message traffic due to quoting activity, and determined that it was simpler and more appropriate to have fewer, rather than more, Execution Venue tiers to distinguish between Execution Venues. The percentage of costs recovered by each Equity Execution Venue tier will be determined by predefined percentage allocations (the ``Equity Execution Venue Recovery Allocation''). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Equity Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Execution Venues in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical market share upon which Execution Venues had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of costs recovered for each tier were assigned, allocating higher percentages of recovery to the tier with a higher level of market share while avoiding any inappropriate burden on competition. Furthermore, due to the similar levels of impact on the CAT System across Execution Venues, there is less variation in CAT Fees between the highest and [[Page 23090]] lowest of tiers for Execution Venues. Furthermore, by using percentages of Equity Execution Venues and costs recovered per tier, the Operating Committee sought to include stability and elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Equity Execution Venues or changes in market share. Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations: ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of equity execution Percentage of Equity execution venue tier execution venue total venues recovery recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 25.00 26.00 6.50 Tier 2.......................................................... 75.00 49.00 12.25 ----------------------------------------------- Total....................................................... 100 75 18.75 ---------------------------------------------------------------------------------------------------------------- The following table exhibits the relative separation of market share of share volume between Tier 1 and Tier 2 Equity Execution Venues. In reviewing the table, note that while this division was referenced as a data point to help differentiate between Equity Execution Venue tiers, the proposed funding model is directly driven not by market share thresholds, but rather by fixed percentages of Equity Execution Venues across tiers to account for fluctuating levels of market share across time. Actual market share in any tier will vary based on the actual market activity in a given measurement period, as well as the number of Equity Execution Venues included in the measurement period. The Equity Execution Venue Percentages and Equity Execution Venue Recovery Allocation for each tier will remain fixed with each Equity Execution Venue tier to be reassigned periodically, as described below in Section 3(a)(1)(I) [sic]. ------------------------------------------------------------------------ Equity market share of Equity execution venue tier share volume (%) ------------------------------------------------------------------------ Tier 1.................................................. >=1 Tier 2.................................................. <1 ------------------------------------------------------------------------ (II) Listed Options Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue's Listed Options market share. For these purposes, market share will be calculated by contract volume. In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Options Execution Venues. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Options Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Options Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's Listed Options market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to Industry Members (other than Execution Venue ATSs) to determine the number of tiers for Options Execution Venues. The Operating Committee determined to establish two tiers for Options Execution Venues, rather than a larger number of tiers as established for Industry Members (other than Execution Venue ATSs), because the two tiers were sufficient to distinguish between the smaller number of Options Execution Venues based on market share. Furthermore, due to the smaller number of Options Execution Venues, the incorporation of additional Options Execution Venue tiers would result in significantly higher fees for Tier 1 Options Execution Venues and reduce comparability between Execution Venues and Industry Members. Each Options Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the ``Options Execution Venue Percentages''). To determine the fixed percentage of Options Execution Venues in each tier, the Operating Committee analyzed the historical and publicly available market share of Options Execution Venues to group Options Execution Venues with similar market shares across the tiers. Options Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats. The process for developing the Options Execution Venue Percentages was the same as discussed above with regard to Equity Execution Venues. The percentage of costs recovered by each Options Execution Venue tier will be determined by predefined percentage allocations (the ``Options Execution Venue Recovery Allocation''). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Options Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Furthermore, by using percentages of Options Execution Venues and costs recovered per tier, the Operating Committee sought to include stability and elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Options Execution Venues or changes in market share. The process for developing the Options Execution Venue Recovery Allocation was the same as discussed above with regard to Equity Execution Venues. Based on this analysis, the Operating Committee approved the following Options Execution Venue Percentages and Recovery Allocations: [[Page 23091]] ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of options execution Percentage of Options execution venue tier execution venue total venues recovery recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 75.00 20.00 5.00 Tier 2.......................................................... 25.00 5.00 1.25 ----------------------------------------------- Total....................................................... 100 25 6.25 ---------------------------------------------------------------------------------------------------------------- The following table exhibits the relative separation of market share of share volume between Tier 1 and Tier 2 Options Execution Venues. In reviewing the table, note that while this division was referenced as a data point to help differentiate between Options Execution Venue tiers, the proposed funding model is directly driven, not by market share thresholds, but rather by fixed percentages of Options Execution Venues across tiers to account for fluctuating levels of market share across time. Actual market share in any tier will vary based on the actual market activity in a given measurement period, as well as the number of Options Execution Venues included in the measurement period. The Options Execution Venue Percentages and Equity Execution Venue Recovery Allocation for each tier will remain fixed with each Options Execution Venue tier to be reassigned periodically, as described below in Section 3(a)(1)(I) [sic]. ------------------------------------------------------------------------ Options market share Options execution venue tier of share volume (%) ------------------------------------------------------------------------ Tier 1.................................................. >=1 Tier 2.................................................. <1 ------------------------------------------------------------------------ (III) Market Share/Tier Assignments The Operating Committee determined that, prior to the start of CAT reporting, market share for Execution Venues would be sourced from publicly-available market data. Options and equity volumes for Participants will be sourced from market data made publicly available by Bats while Execution Venue ATS volumes will be sourced from market data made publicly available by FINRA. Set forth in the Appendix are two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier. After the commencement of CAT reporting, market share for Execution Venues will be sourced from data reported to the CAT. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period. Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period. The Operating Committee has determined to calculate fee tiers for Execution Venues every three months based on market share from the prior three months. Based on its analysis of historical data, the Operating Committee believes calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Execution Venues while still providing predictability in the tiering for Execution Venues. (D) Allocation of Costs In addition to the funding principles discussed above, including comparability of fees, Section 11.1(c) of the CAT NMS Plan also requires expenses to be fairly and reasonably shared among the Participants and Industry Members. Accordingly, in developing the proposed fee schedules pursuant to the funding model, the Operating Committee calculated how the CAT costs would be allocated between Industry Members and Execution Venues, and how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. These determinations are described below. (I) Allocation Between Industry Members and Execution Venues In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovered from such Industry Members and Execution Venues. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75/25 division maintained the greatest level of comparability across the funding model, keeping in view that comparability should consider affiliations among or between CAT Reporters (e.g., firms with multiple Industry Members and/or exchange licenses). For example, the cost allocation establishes fees for the largest Industry Members (i.e., those Industry Members in Tiers 1, 2 and 3) that are comparable to the largest Equity Execution Venues and Options Execution Venues (i.e., those Execution Venues in Tier 1). In addition, the cost allocation establishes fees for Execution Venue complexes that are comparable to those of Industry Member complexes. For example, when analyzing alternative allocations, other possible allocations led to much higher fees for larger Industry Members than for larger Execution Venues or vice versa, and/or led to much higher fees for Industry Member complexes than Execution Venue complexes or vice versa. Furthermore, the allocation of total CAT costs recovered recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 25 times more Industry Members expected to report to the CAT than Execution Venues (e.g., an estimated 1,630 Industry Members versus 70 Execution Venues as of January 2017). (II) Allocation Between Equity Execution Venues and Options Execution Venues The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity and Options Execution Venues, including a 70/30, [[Page 23092]] 67/33, 65/35, 50/50 and 25/75 split. Based on this analysis, the Operating Committee determined to allocate 75 percent of Execution Venue costs recovered to Equity Execution Venues and 25 percent to Options Execution Venues. The Operating Committee determined that a 75/ 25 division between Equity and Options Execution Venues maintained elasticity across the funding model as well the greatest level of fee equitability and comparability based on the current number of Equity and Options Execution Venues. For example, the allocation establishes fees for the larger Equity Execution Venues that are comparable to the larger Options Execution Venues, and fees for the smaller Equity Execution Venues that are comparable to the smaller Options Execution Venues. In addition to fee comparability between Equity Execution Venues and Options Execution Venues, the allocation also establishes equitability between larger (Tier 1) and smaller (Tier 2) Execution Venues based upon the level of market share. Furthermore, the allocation is intended to reflect the relative levels of current equity and options order events. (E) Fee Levels The Operating Committee determined to establish a CAT-specific fee to collectively recover the costs of building and operating the CAT. Accordingly, under the funding model, the sum of the CAT Fees is designed to recover the total cost of the CAT. The Operating Committee has determined overall CAT costs to be comprised of Plan Processor costs and non-Plan Processor costs, which are estimated to be $50,700,000 in total for the year beginning November 21, 2016.\41\ --------------------------------------------------------------------------- \41\ It is anticipated that CAT-related costs incurred prior to November 21, 2016 will be addressed via a separate fee filing. --------------------------------------------------------------------------- The Plan Processor costs relate to costs incurred by the Plan Processor and consist of the Plan Processor's current estimates of average yearly ongoing costs, including development cost, which total $37,500,000. This amount is based upon the fees due to the Plan Processor pursuant to the agreement with the Plan Processor. The non-Plan Processor estimated costs incurred and to be incurred by the Company through November 21, 2017 consist of three categories of costs. The first category of such costs are third party support costs, which include historic legal fees, consulting fees and audit fees from November 21, 2016 until the date of filing as well as estimated third party support costs for the rest of the year. These amount to an estimated $5,200,000. The second category of non-Plan Processor costs are estimated insurance costs for the year. Based on discussions with potential insurance providers, assuming $2-5 million insurance premium on $100 million in coverage, the Company has received an estimate of $3,000,000 for the annual cost. The final cost figures will be determined following receipt of final underwriter quotes. The third category of non-Plan Processor costs is the operational reserve, which is comprised of three months of ongoing Plan Processor costs ($9,375,000), third party support costs ($1,300,000) and insurance costs ($750,000). The Operating Committee aims to accumulate the necessary funds for the establishment of the three-month operating reserve for the Company through the CAT Fees charged to CAT Reporters for the year. On an ongoing basis, the Operating Committee will account for any potential need for the replenishment of the operating reserve or other changes to total cost during its annual budgeting process. The following table summarizes the Plan Processor and non-Plan Processor cost components which comprise the total CAT costs of $50,700,000. ------------------------------------------------------------------------ Cost category Cost component Amount ------------------------------------------------------------------------ Plan Processor.................... Operational Costs... $37,500,000 Non-Plan Processor................ Third Party Support 5,200,000 Costs. Operational Reserve. \42\ 5,000,000 Insurance Costs..... 3,000,000 Estimated Total............... .................... 50,700,000 ------------------------------------------------------------------------ Based on the estimated costs and the calculations for the funding model described above, the Operating Committee determined to impose the following fees: \43\ --------------------------------------------------------------------------- \42\ This $5,000,000 represents the gradual accumulation of the funds for a target operating reserve of $11,425,000. \43\ Note that all monthly, quarterly and annual CAT Fees have been rounded to the nearest dollar. --------------------------------------------------------------------------- For Industry Members (other than Execution Venue ATSs): ---------------------------------------------------------------------------------------------------------------- Monthly CAT Quarterly CAT CAT fees paid Tier fee fee annually \44\ ---------------------------------------------------------------------------------------------------------------- 1............................................................... $33,668 $101,004 $404,016 2............................................................... 27,051 81,153 324,612 3............................................................... 19,239 57,717 230,868 4............................................................... 6,655 19,965 79,860 5............................................................... 4,163 12,489 49,956 6............................................................... 2,560 7,680 30,720 7............................................................... 501 1,503 6,012 8............................................................... 145 435 1,740 9............................................................... 22 66 264 ---------------------------------------------------------------------------------------------------------------- This column represents the approximate total CAT Fees paid each year by each Industry Member (other than Execution Venue ATSs) (i.e., ``CAT Fees Paid Annually'' = ``Monthly CAT Fee'' x 12 months). For Execution Venues for NMS Stocks and OTC Equity Securities: [[Page 23093]] ---------------------------------------------------------------------------------------------------------------- Monthly CAT Quarterly CAT CAT fees paid Tier fee fee annually \45\ ---------------------------------------------------------------------------------------------------------------- 1............................................................... $21,125 $63,375 $253,500 2............................................................... 12,940 38,820 155,280 ---------------------------------------------------------------------------------------------------------------- This column represents the approximate total CAT Fees paid each year by each Execution Venue for NMS Stocks and OTC Equity Securities (i.e., ``CAT Fees Paid Annually'' = ``Monthly CAT Fee'' x 12 months). For Execution Venues for Listed Options: ---------------------------------------------------------------------------------------------------------------- Monthly CAT Quarterly CAT CAT fees paid Tier fee fee annually \46\ ---------------------------------------------------------------------------------------------------------------- 1............................................................... $19,205 $57,615 $230,460 2............................................................... 13,204 39,612 158,448 ---------------------------------------------------------------------------------------------------------------- This column represents the approximate total CAT Fees paid each year by each Execution Venue for Listed Options (i.e., ``CAT Fees Paid Annually'' = ``Monthly CAT Fee'' x 12 months). As noted above, the fees set forth in the tables reflect the Operating Committee's decision to ensure comparable fees between Execution Venues and Industry Members. The fees of the top tiers for Industry Members (other than Execution Venue ATSs) are not identical to the top tier for Execution Venues, however, because the Operating Committee also determined that the fees for Execution Venue complexes should be comparable to those of Industry Member complexes. The difference in the fees reflects this decision to recognize affiliations. The Operating Committee has calculated the schedule of effective fees for Industry Members (other than Execution Venue ATSs) and Execution Venues in the following manner. Note that the calculation of CAT Reporter fees assumes 53 Equity Execution Venues, 15 Options Execution Venues and 1,631 Industry Members (other than Execution Venue ATSs) as of January 2017. Calculation of Annual Tier Fees for Industry Members [``IM''] ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of industry Percentage of Industry member tier industry member total recovery members recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 0.500 8.50 6.38 Tier 2.......................................................... 2.500 35.00 26.25 Tier 3.......................................................... 2.125 21.25 15.94 Tier 4.......................................................... 4.625 15.75 11.81 Tier 5.......................................................... 3.625 7.75 5.81 Tier 6.......................................................... 4.000 5.25 3.94 Tier 7.......................................................... 17.500 4.50 3.38 Tier 8.......................................................... 20.125 1.50 1.13 Tier 9.......................................................... 45.000 0.50 0.38 ----------------------------------------------- Total....................................................... 100 100 75 ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ Estimated number Industry member tier of industry members ------------------------------------------------------------------------ Tier 1............................................... 8 Tier 2............................................... 41 Tier 3............................................... 35 Tier 4............................................... 75 Tier 5............................................... 59 Tier 6............................................... 65 Tier 7............................................... 285 Tier 8............................................... 328 Tier 9............................................... 735 ------------------ Total............................................ 1,631 ------------------------------------------------------------------------ [[Page 23094]] [GRAPHIC] [TIFF OMITTED] TN19MY17.005 Calculation of Annual Tier Fees for Equity Execution Venues [``EV''] ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of Equity execution venue tier equity execution execution venue Percentage of venues recovery total recovery ---------------------------------------------------------------------------------------------------------------- Tier 1................................................. 25.00 26.00 6.50 Tier 2................................................. 75.00 49.00 12.25 -------------------------------------------------------- Total.............................................. 100 75 18.75 ---------------------------------------------------------------------------------------------------------------- [[Page 23095]] ------------------------------------------------------------------------ Estimated number Equity execution venue tier of equity execution venues ------------------------------------------------------------------------ Tier 1............................................... 13 Tier 2............................................... 40 ------------------ Total............................................ 53 ------------------------------------------------------------------------ [GRAPHIC] [TIFF OMITTED] TN19MY17.006 Calculation of Annual Tier Fees for Options Execution Venues [``EV''] ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of Options execution venue tier options execution venue Percentage of execution venues recovery total recovery ---------------------------------------------------------------------------------------------------------------- Tier 1................................................. 75.00 20.00 5.00 Tier 2................................................. 25.00 5.00 1.25 -------------------------------------------------------- Total.............................................. 100 25 6.25 ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ Estimated number Options execution venue tier of options execution venues ------------------------------------------------------------------------ Tier 1............................................... 11 Tier 2............................................... 4 ------------------ Total............................................ 15 ------------------------------------------------------------------------ [GRAPHIC] [TIFF OMITTED] TN19MY17.007 Traceability of Total CAT Fees ---------------------------------------------------------------------------------------------------------------- Estimated Type Industry member tier number of CAT fees paid Total recovery members annually ---------------------------------------------------------------------------------------------------------------- Industry Members...................... Tier 1.................. 8 $404,016 $3,232,128 Tier 2.................. 41 324,612 13,309,092 Tier 3.................. 35 230,868 8,080,380 Tier 4.................. 75 79,860 5,989,500 Tier 5.................. 59 49,956 2,947,404 Tier 6.................. 65 30,720 1,996,800 Tier 7.................. 285 6,012 1,713,420 Tier 8.................. 328 1,740 570,720 Tier 9.................. 735 264 194,040 ----------------------------------------------- Total............................. ........................ 1,631 .............. 38,033,484 Equity Execution Venues............... Tier 1.................. 13 253,500 3,295,500 [[Page 23096]] Tier 2.................. 40 155,280 6,211,200 ----------------------------------------------- Total............................. ........................ 53 .............. 9,506,700 Options Execution Venues.............. Tier 1.................. 11 230,460 2,535,060 Tier 2.................. 4 158,448 633,792 ----------------------------------------------- Total............................. ........................ 15 .............. 3,168,852 --------------- Total......................... ........................ .............. .............. 50,709,036 --------------- Excess \47\................... ........................ .............. .............. 9,036 ---------------------------------------------------------------------------------------------------------------- \47\ The amount in excess of the total CAT costs will contribute to the gradual accumulation of the target operating reserve of $11.425 million. (F) Comparability of Fees The funding principles require a funding model in which the fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). Accordingly, in creating the model, the Operating Committee sought to take account of the affiliations between or among CAT Reporters--that is, where affiliated entities may have multiple Industry Member and/or Execution Venue licenses, by maintaining relative comparability of fees among such affiliations with the most expected CAT-related activity. To do this, the Participants identified representative affiliations in the largest tier of both Execution Venues and Industry Members and compared the aggregate fees that would be paid by such firms. While the proposed fees for Tier 1 and Tier 2 Industry Members are relatively higher than those of Tier 1 and Tier 2 Execution Venues, Execution Venue complex fees are relatively higher than those of Industry Member complexes largely due to affiliations between Execution Venues. The tables set forth below describe the largest Execution Venue and Industry Member complexes and their associated fees: \48\ --------------------------------------------------------------------------- \48\ Note that the analysis of the complexes was performed on a best efforts basis, as all affiliations between the 1631 Industry Members may not be included. Execution Venue Complexes ---------------------------------------------------------------------------------------------------------------- Listing of equity Listing of options Total fees by Execution venue complex execution venue tiers execution venue tier EV complex ---------------------------------------------------------------------------------------------------------------- Execution Venue Complex 1............... Tier 1 (x2)...... Tier 1 (x4)...... $1,900,962 Tier 2 (x1)...... Tier 2 (x2)...... Execution Venue Complex 2............... Tier 1 (x2)...... Tier 1 (x2)...... 1,863,801 Tier 2 (x1)...... Execution Venue Complex 3............... Tier 1 (x2)...... Tier 1 (x2)...... 1,278,447 Tier 2 (x2)...... ---------------------------------------------------------------------------------------------------------------- Industry Member Complexes ---------------------------------------------------------------------------------------------------------------- Listing of industry member Total fees by Industry member complex tiers Listing of ATS tiers IM complex ---------------------------------------------------------------------------------------------------------------- Industry Member Complex 1............... Tier 1 (x2)...... Tier 2 (x1)...... $963,300 Industry Member Complex 2............... Tier 1 (x1)...... Tier 2 (x3)...... 949,674 Tier 4 (x1)...... Industry Member Complex 3............... Tier 1 (x1)...... Tier 2 (x1)...... 883,888 Tier 2 (x1)...... Industry Member Complex 4............... Tier 1 (x1)...... N/A....................... 808,472 Tier 2 (x1)...... Tier 4 (x1)...... Industry Member Complex 5............... Tier 2 (x1)...... Tier 2 (x1)...... 796,595 Tier 3 (x1)...... Tier 4 (x1)...... Tier 7 (x1)...... ---------------------------------------------------------------------------------------------------------------- [[Page 23097]] (G) Billing Onset Under Section 11.1(c) of the CAT NMS Plan, to fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such development and implementation costs. The Company is currently incurring such development and implementation costs and will continue to do so prior to the commencement of CAT reporting and thereafter. For example, the Plan Processor has required up-front payments to begin building the CAT. In addition, the Company continues to incur consultant and legal expenses on an on-going basis to implement the CAT. Accordingly, the Operating Committee determined that all CAT Reporters, including both Industry Members and Execution Venues (including Participants), would begin to be invoiced as promptly as possible following the establishment of a billing mechanism. The Exchange will issue a Regulatory Circular to its members when the billing mechanism is established, specifying the date when such invoicing of Industry Members will commence. (H) Changes to Fee Levels and Tiers Section 11.3(d) of the CAT NMS Plan states that ``[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.'' With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary. In addition, the reviews will evaluate the estimated ongoing CAT costs and the level of the operating reserve. To the extent that the total CAT costs decrease, the fees would be adjusted downward, and, to the extent that the total CAT costs increase, the fees would be adjusted upward.\49\ Furthermore, any surplus of the Company's revenues over its expenses is to be included within the operational reserve to offset future fees. The limitations on more frequent changes to the fee, however, are intended to provide budgeting certainty for the CAT Reporters and the Company.\50\ To the extent that the Operating Committee approves changes to the number of tiers in the funding model or the fees assigned to each tier, then the Exchange will file such changes with the SEC pursuant to Section 19(b) of the Exchange Act, and any such changes will become effective in accordance with the requirements of Section 19(b). --------------------------------------------------------------------------- \49\ The CAT Fees are designed to recover the costs associated with the CAT. Accordingly, CAT Fees would not be affected by increases or decreases in other non-CAT expenses incurred by the Participants, such as any changes in costs related to the retirement of existing regulatory systems, such as OATS. \50\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85006. --------------------------------------------------------------------------- (I) Initial and Periodic Tier Reassignments The Operating Committee has determined to calculate fee tiers every three months based on market share or message traffic, as applicable, from the prior three months. For the initial tier assignments, the Company will calculate the relevant tier for each CAT Reporter using the three months of data prior to the commencement date. As with the initial tier assignment, for the tri-monthly reassignments, the Company will calculate the relevant tier using the three months of data prior to the relevant tri-monthly date. The Exchange notes that any movement of CAT Reporters between tiers will not change the criteria for each tier or the fee amount corresponding to each tier. In performing the tri-monthly reassignments, the Exchange notes that the percentage of CAT Reporters in each assigned tier is relative. Therefore, a CAT Reporter's assigned tier will depend, not only on its own message traffic or market share, but it also will depend on the message traffic/market share across all CAT Reporters. For example, the percentage of Industry Members (other than Execution Venue ATSs) in each tier is relative such that such Industry Member's assigned tier will depend on message traffic generated across all CAT Reporters as well as the total number of CAT Reporters. The Operating Committee will inform CAT Reporters of their assigned tier every three months following the periodic tiering process, as the funding model will compare an individual CAT Reporter's activity to that of other CAT Reporters in the marketplace. The following demonstrates a tier reassignment. In accordance with the funding model, the top 75% of Options Execution Venues in market share are categorized as Tier 1 while the bottom 25% of Options Execution Venues in market share are categorized as Tier 2. In the sample scenario below, Options Execution Venue L is initially categorized as a Tier 2 Options Execution Venue in Period A due to its market share. When market share is recalculated for Period B, the market share of Execution Venue L increases, and it is therefore subsequently reranked and reassigned to Tier 1 in Period B. Correspondingly, Options Execution Venue K, initially a Tier 1 Options Execution Venue in Period A, is reassigned to Tier 2 in Period B due to decreases in its market share of share volume. -------------------------------------------------------------------------------------------------------------------------------------------------------- Period A Period B -------------------------------------------------------------------------------------------------------------------------------------------------------- Market share Market share Options execution venue rank Tier Options execution venue rank Tier -------------------------------------------------------------------------------------------------------------------------------------------------------- Options Execution Venue A...................... 1 1 Options Execution Venue A.............. 1 1 Options Execution Venue B...................... 2 1 Options Execution Venue B.............. 2 1 Options Execution Venue C...................... 3 1 Options Execution Venue C.............. 3 1 Options Execution Venue D...................... 4 1 Options Execution Venue D.............. 4 1 Options Execution Venue E...................... 5 1 Options Execution Venue E.............. 5 1 Options Execution Venue F...................... 6 1 Options Execution Venue F.............. 6 1 Options Execution Venue G...................... 7 1 Options Execution Venue I.............. 7 1 Options Execution Venue H...................... 8 1 Options Execution Venue H.............. 8 1 Options Execution Venue I...................... 9 1 Options Execution Venue G.............. 9 1 Options Execution Venue J...................... 10 1 Options Execution Venue J.............. 10 1 Options Execution Venue K...................... 11 1 Options Execution Venue L.............. 11 1 [[Page 23098]] Options Execution Venue L...................... 12 2 Options Execution Venue K.............. 12 2 Options Execution Venue M...................... 13 2 Options Execution Venue N.............. 13 2 Options Execution Venue N...................... 14 2 Options Execution Venue M.............. 14 2 Options Execution Venue O...................... 15 2 Options Execution Venue O.............. 15 2 -------------------------------------------------------------------------------------------------------------------------------------------------------- (3) Proposed CAT Fee Schedule The Exchange proposes the Consolidated Audit Trail Funding Fees to implement the CAT Fees determined by the Operating Committee on MIAX PEARL's Industry Members. The proposed fee schedule has three sections, covering definitions, the fee schedule for CAT Fees, and the timing and manner of payments. Each of these sections is discussed in detail below. (A) Definitions Paragraph (a) of the proposed fee schedule sets forth the definitions for the proposed fee schedule. Paragraph (a)(1) states that, for purposes of the Consolidated Audit Trail Funding Fees, the terms ``CAT NMS Plan,'' ``Industry Member,'' ``NMS Stock,'' ``OTC Equity Security'', and ``Participant'' are defined as set forth in Rule 1701 (Consolidated Audit Trail Compliance Rule--Definitions).\51\ --------------------------------------------------------------------------- \51\ The rules contained in Miami International Securities Exchange, LLC Rule Book Chapter XVII, as such rules may be in effect from time to time (the ``Chapter XVII Rules''), have been incorporated by reference into MIAX PEARL Chapter XVII, and are thus MIAX PEARL Rules and thereby applicable to MIAX PEARL members. MIAX PEARL members shall comply with the Chapter XVII Rules as though such rules were fully-set forth in the MIAX PEARL Rule Book. All defined terms, including any variations thereof, contained in Chapter XVII Rules shall be read to refer to the MIAX PEARL related meaning of such term. See Securities Exchange Act Release No. 80256 (March 15, 2017), 82 FR 14,526 (March 21, 2017) (SR-PEARL-2017-004) and Securities Exchange Act Release No. 80338 (March 29, 2017), 82 FR 16,464 (April 4, 2017). --------------------------------------------------------------------------- The proposed fee schedule imposes different fees on Equity ATSs and Industry Members that are not Equity ATSs. Accordingly, the proposed fee schedule defines the term ``Equity ATS.'' First, paragraph (a)(2) defines an ``ATS'' to mean an alternative trading system as defined in Rule 300(a) of Regulation ATS under the Securities Exchange Act of 1934, as amended, that operates pursuant to Rule 301 of Regulation ATS. This is the same definition of an ATS as set forth in Section 1.1 of the CAT NMS Plan in the definition of an ``Execution Venue.'' Then, paragraph (a)(4) defines an ``Equity ATS'' as an ATS that executes transactions in NMS Stocks and/or OTC Equity Securities. Paragraph (a)(3) of the proposed fee schedule defines the term ``CAT Fee'' to mean the Consolidated Audit Trail Funding Fee(s) to be paid by Industry Members as set forth in paragraph (b) in the proposed fee schedule. Finally, Paragraph (a)(6) defines an ``Execution Venue'' as a Participant or an ATS (excluding any such ATS that does not execute orders). This definition is the same substantive definition as set forth in Section 1.1 of the CAT NMS Plan. Paragraph (a)(5) defines an ``Equity Execution Venue'' as an Execution Venue that trades NMS Stocks and/or OTC Equity Securities. (B) Fee Schedule The Exchange proposes to impose the CAT Fees applicable to its Industry Members through paragraph (b) of the proposed fee schedule. Paragraph (b)(1) of the proposed fee schedule sets forth the CAT Fees applicable to Industry Members other than Equity ATSs. Specifically, paragraph (b)(1) states that the Company will assign each Industry Member (other than an Equity ATS) to a fee tier once every quarter, where such tier assignment is calculated by ranking each Industry Member based on its total message traffic for the three months prior to the quarterly tier calculation day and assigning each Industry Member to a tier based on that ranking and predefined Industry Member percentages. The Industry Members with the highest total quarterly message traffic will be ranked in Tier 1, and the Industry Members with lowest quarterly message traffic will be ranked in Tier 9. Each quarter, each Industry Member (other than an Equity ATS) shall pay the following CAT Fee corresponding to the tier assigned by the Company for such Industry Member for that quarter: ------------------------------------------------------------------------ Percentage of Tier industry Quarterly CAT members fee ------------------------------------------------------------------------ 1....................................... 0.500 $101,004 2....................................... 2.500 81,153 3....................................... 2.125 57,717 4....................................... 4.625 19,965 5....................................... 3.625 12,489 6....................................... 4.000 7,680 7....................................... 17.500 1,503 8....................................... 20.125 435 9....................................... 45.000 66 ------------------------------------------------------------------------ Paragraph (b)(2) of the proposed fee schedule sets forth the CAT Fees applicable to Equity ATSs.\52\ These are the same fees that Participants that trade NMS Stocks and/or OTC Equity Securities will pay. Specifically, paragraph (b)(2) states that the Company will assign each Equity ATS to a fee tier once every quarter, where such tier assignment is calculated by ranking each Equity Execution Venue based on its total market share of NMS Stocks and OTC Equity Securities for the three months prior to the quarterly tier calculation day and assigning each Equity Execution Venue to a tier based on that ranking and predefined Equity Execution Venue percentages. The Equity Execution Venues with the higher total quarterly market share will be ranked in Tier 1, and the Equity Execution Venues with the lower quarterly market share will be ranked in Tier 2. Specifically, paragraph (b)(2) states that, each quarter, each Equity ATS shall pay the following CAT Fee corresponding to the tier assigned by the Company for such Equity ATS for that quarter: --------------------------------------------------------------------------- \52\ Note that no fee schedule is provided for Execution Venue ATSs that execute transactions in Listed Options, as no such Execution Venue ATSs currently exist due trading restrictions related to Listed Options. ------------------------------------------------------------------------ Percentage of equity Quarterly CAT Tier execution fee venues ------------------------------------------------------------------------ 1....................................... 25.00 $63,375 2....................................... 75.00 38,820 ------------------------------------------------------------------------ (C) Timing and Manner of Payment Section 11.4 of the CAT NMS Plan states that the Operating Committee shall establish a system for the collection of fees authorized under the CAT NMS Plan. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. To implement the payment process to be adopted by the Operating Committee, [[Page 23099]] paragraph (c)(1) of the proposed fee schedule states that the Company will provide each Industry Member with one invoice each quarter for its CAT Fees as determined pursuant to paragraph (b) of the proposed fee schedule, regardless of whether the Industry Member is a member of multiple self-regulatory organizations. Paragraph (c)(1) further states that each Industry Member will pay its CAT Fees to the Company via the centralized system for the collection of CAT Fees established by the Company in the manner prescribed by the Company. MIAX PEARL will provide Industry Members with details regarding the manner of payment of CAT Fees by Regulatory Circular. Although the exact fee collection system and processes for CAT fees has not yet been established, all CAT fees will be billed and collected centrally through the Company, via the Plan Processor or otherwise. Although each Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay the CAT Fees to the Company via the centralized system for the collection of CAT fees established by the Company.\53\ --------------------------------------------------------------------------- \53\ Section 11.4 of the CAT NMS Plan. --------------------------------------------------------------------------- Section 11.4 of the CAT NMS Plan also states that Participants shall require each Industry Member to pay all applicable authorized CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). Section 11.4 further states that, if an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. Therefore, in accordance with Section 11.4 of the CAT NMS Plan, the Exchange proposes to adopt paragraph (c)(2) of the proposed fee schedule. Paragraph (c)(2) of the proposed fee schedule states that each Industry Member shall pay CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. 2. Statutory Basis The Exchange believes that its proposal to amend its Fee Schedule is consistent with the provisions of Section 6(b)(5) of the Act,\54\ which require, among other things, that the Exchange rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest, and not designed to permit unfair discrimination between customers, issuers, brokers and dealers, and Section 6(b)(4) of the Act,\55\ which requires that Exchange rules provide for equitable allocation of reasonable dues, fees and other charges among its members and issuers and other persons using its facilities. As discussed above, the SEC approved the bifurcated, tiered, fixed fee funding model in the CAT NMS Plan, finding it was reasonable and that it equitably allocated fees among Participants and Industry Members. The Exchange believes that the proposed tiered fees adopted pursuant to the funding model approved by the SEC in the CAT NMS Plan are reasonable, equitably allocated and not unfairly discriminatory. --------------------------------------------------------------------------- \54\ 15 U.S.C. 78f(b). \55\ 15 U.S.C. 78f(b)(4). --------------------------------------------------------------------------- The Exchange believes that this proposal is consistent with the Act because it implements, interprets or clarifies the provisions of the Plan, and is designed to assist the Exchange and its Industry Members in meeting regulatory obligations pursuant to the Plan. In approving the Plan, the SEC noted that the Plan ``is necessary and appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanism of a national market system, or is otherwise in furtherance of the purposes of the Act.'' \56\ To the extent that this proposal implements, interprets or clarifies the Plan and applies specific requirements to Industry Members, the Exchange believes that this proposal furthers the objectives of the Plan, as identified by the SEC, and is therefore consistent with the Act. --------------------------------------------------------------------------- \56\ Approval Order at 84697. --------------------------------------------------------------------------- The Exchange believes that the proposed tiered fees are reasonable. First, the total CAT Fees to be collected would be directly associated with the costs of establishing and maintaining the CAT, where such costs include Plan Processor costs and costs related to insurance, third party services and the operational reserve. The CAT Fees would not cover Participant services unrelated to the CAT. In addition, any surplus CAT Fees cannot be distributed to the individual Participants; such surpluses must be used as a reserve to offset future fees. Given the direct relationship between the fees and the CAT costs, the Exchange believes that the total level of the CAT Fees is reasonable. In addition, the Exchange believes that the proposed CAT Fees are reasonably designed to allocate the total costs of the CAT equitably between and among the Participants and Industry Members, and are therefore not unfairly discriminatory. As discussed in detail above, the proposed tiered fees impose comparable fees on similarly situated CAT Reporters. For example, those with a larger impact on the CAT (measured via message traffic or market share) pay higher fees, whereas CAT Reporters with a smaller impact pay lower fees. Correspondingly, the tiered structure lessens the impact on smaller CAT Reporters by imposing smaller fees on those CAT Reporters with less market share or message traffic. In addition, the funding model takes into consideration affiliations between CAT Reporters, imposing comparable fees on such affiliated entities. Moreover, the Exchange believes that the division of the total CAT costs between Industry Members and Execution Venues, and the division of the Execution Venue portion of total costs between Equity and Options Execution Venues, is reasonably designed to allocate CAT costs among CAT Reporters. The 75/25 division between Industry Members and Execution Venues maintains the greatest level of comparability across the funding model, keeping in view that comparability should consider affiliations among or between CAT Reporters (e.g., firms with multiple Industry Members or exchange licenses). Similarly, the 75/25 division between Equity and Options Execution Venues maintains elasticity across the funding model as well as the greatest level of fee equitability and comparability based on the current number of Equity and Options Execution Venues. Finally, the Exchange believes that the proposed fees are reasonable because they would provide ease of calculation, ease of billing and other administrative functions, and [[Page 23100]] predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes. B. Self-Regulatory Organization's Statement on Burden on Competition Section 6(b)(8) of the Act \57\ requires that Exchange rules not impose any burden on competition that is not necessary or appropriate. The Exchange does not believe that the proposed amendments to its Fee Schedule will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange notes that the proposed rule change implements provisions of the CAT NMS Plan approved by the Commission, and is designed to assist the Exchange in meeting its regulatory obligations pursuant to the Plan. Similarly, all national securities exchanges and FINRA are proposing this proposed fee schedule to implement the requirements of the CAT NMS Plan. Therefore, this is not a competitive fee filing and, therefore, it does not raise competition issues between and among the exchanges and FINRA. --------------------------------------------------------------------------- \57\ 15 U.S.C. 78f(b)(8). --------------------------------------------------------------------------- Moreover, as previously described, the Exchange believes that the proposed rule change fairly and equitably allocates costs among CAT Reporters. In particular, the proposed fee schedule is structured to impose comparable fees on similarly situated CAT Reporters, and lessen the impact on smaller CAT Reporters. CAT Reporters with similar levels of CAT activity will pay similar fees. For example, Industry Members (other than Execution Venue ATSs) with higher levels of message traffic will pay higher fees, and those with lower levels of message traffic will pay lower fees. Similarly, Execution Venue ATSs and other Execution Venues with larger market share will pay higher fees, and those with lower levels of market share will pay lower fees. Therefore, given that there is generally a relationship between message traffic and market share to the CAT Reporter's size, smaller CAT Reporters generally pay less than larger CAT Reporters. Accordingly, the Exchange does not believe that the CAT Fees would have a disproportionate effect on smaller or larger CAT Reporters. In addition, ATSs and exchanges will pay the same fees based on market share. Therefore, the Exchange does not believe that the fees will impose any burden on the competition between ATSs and exchanges. Accordingly, the Exchange believes that the proposed fees will minimize the potential for adverse effects on competition between CAT Reporters in the market. Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act,\58\ and Rule 19b-4(f)(2) \59\ thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. --------------------------------------------------------------------------- \58\ 15 U.S.C. 78s(b)(3)(A)(ii). \59\ 17 CFR 240.19b-4(f)(2). --------------------------------------------------------------------------- IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-PEARL-2017-20 on the subject line. Paper Comments Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-PEARL-2017-20. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-PEARL-2017-20, and should be submitted on or before June 9, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\60\ --------------------------------------------------------------------------- \60\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-10131 Filed 5-18-17; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 82, No. 96 / Friday, May 19, 2017 / Notices 23083
amendments, all written statements which Items have been prepared by the NASDAQ PHLX LLC, The NASDAQ
with respect to the proposed rule Exchange. The Commission is Stock Market LLC, New York Stock
change, security-based swap submission publishing this notice to solicit Exchange LLC, NYSE MKT LLC, NYSE
or advance notice that are filed with the comments on the proposed rule change Arca, Inc. and NYSE National, Inc.5
Commission, and all written from interested persons. (collectively, the ‘‘Participants’’) filed
communications relating to the with the Commission, pursuant to
proposed rule change, security-based I. Self-Regulatory Organization’s Section 11A of the Exchange Act 6 and
swap submission or advance notice Statement of the Terms of Substance of Rule 608 of Regulation NMS
between the Commission and any the Proposed Rule Change thereunder,7 the CAT NMS Plan.8 The
person, other than those that may be The Exchange is filing a proposal to Participants filed the Plan to comply
withheld from the public in accordance amend the MIAX PEARL Fee Schedule with Rule 613 of Regulation NMS under
with the provisions of 5 U.S.C. 552, will (the ‘‘Fee Schedule’’) to adopt a fee the Exchange Act. The Plan was
be available for Web site viewing and schedule to establish the fees for published for comment in the Federal
printing in the Commission’s Public Industry Members related to the Register on May 17, 2016,9 and
Reference Room, 100 F Street NE., National Market System Plan Governing approved by the Commission, as
Washington, DC 20549, on official the Consolidated Audit Trail (the ‘‘CAT modified, on November 15, 2016.10 The
business days between the hours of NMS Plan’’ or ‘‘Plan’’).3 Plan is designed to create, implement
10:00 a.m. and 3:00 p.m. Copies of such The text of the proposed rule change and maintain a consolidated audit trail
filings will also be available for is available on the Exchange’s Web site (‘‘CAT’’) that would capture customer
inspection and copying at the principal at http://www.miaxoptions.com/rule- and order event information for orders
office of ICE Clear Europe and on ICE filings/pearl, at MIAX’s principal office, in NMS Securities and OTC Equity
Clear Europe’s Web site at https:// and at the Commission’s Public Securities, across all markets, from the
www.theice.com/clear-europe/ Reference Room. time of order inception through routing,
regulation#rule-filings. cancellation, modification, or execution
All comments received will be posted II. Self-Regulatory Organization’s
in a single consolidated data source.
without change; the Commission does Statement of the Purpose of, and The Plan accomplishes this by creating
not edit personal identifying Statutory Basis for, the Proposed Rule CAT NMS, LLC (the ‘‘Company’’), of
information from submissions. You Change which each Participant is a member, to
should submit only information that In its filing with the Commission, the operate the CAT.11 Under the CAT NMS
you wish to make available publicly. All Exchange included statements Plan, the Operating Committee of the
submissions should refer to File concerning the purpose of and basis for Company (‘‘Operating Committee’’) has
Number SR–ICEEU–2017–007 and the proposed rule change and discussed discretion to establish funding for the
should be submitted on or before June any comments it received on the Company to operate the CAT, including
9, 2017. proposed rule change. The text of these establishing fees that the Participants
For the Commission, by the Division of statements may be examined at the will pay, and establishing fees for
Trading and Markets, pursuant to delegated places specified in Item IV below. The Industry Members that will be
authority.7 Exchange has prepared summaries, set implemented by the Participants (‘‘CAT
Eduardo A. Aleman, forth in sections A, B, and C below, of Fees’’).12 The Participants are required
Assistant Secretary. the most significant aspects of such to file with the SEC under Section 19(b)
[FR Doc. 2017–10129 Filed 5–18–17; 8:45 am] statements. of the Exchange Act any such CAT Fees
applicable to Industry Members that the
BILLING CODE 8011–01–P A. Self-Regulatory Organization’s Operating Committee approves.13
Statement of the Purpose of, and the Accordingly, the Exchange submits this
Statutory Basis for, the Proposed Rule fee filing to propose the Consolidated
SECURITIES AND EXCHANGE Change
COMMISSION Audit Trail Funding Fees, which will
1. Purpose require Industry Members that are
[Release No. 34–80676; File No. SR–
PEARL–2017–20] Bats BYX Exchange, Inc., Bats BZX
No. 80326 (Mar. 29, 2017), 82 FR 16460 (Apr. 4,
Exchange, Inc., Bats EDGA Exchange, 2017); and Securities Exchange Act Rel. No. 80325
Self-Regulatory Organizations; MIAX Inc., Bats EDGX Exchange, Inc., BOX (Mar. 29, 2017), 82 FR 16445 (Apr. 4, 2017).
PEARL, LLC; Notice of Filing and Options Exchange LLC, C2 Options 5 National Stock Exchange, Inc. has been renamed
Immediate Effectiveness of a Proposed Exchange, Incorporated, Chicago Board NYSE National, Inc. See Securities Exchange Act
Rule Change To Amend the Fee Rel. No. 79902 (Jan. 30, 2017), 82 FR 9258 (Feb. 3,
Options Exchange, Incorporated, 2017).
Schedule Chicago Stock Exchange, Inc., Financial 6 15 U.S.C. 78k–1.
May 15, 2017.
Industry Regulatory Authority, Inc. 7 17 CFR 242.608.
(‘‘FINRA’’), Investors’ Exchange LLC, 8 See Letter from the Participants to Brent J.
Pursuant to the provisions of Section Fields, Secretary, Commission, dated September 30,
Miami International Securities
19(b)(1) of the Securities Exchange Act 2014; and Letter from Participants to Brent J. Fields,
Exchange, LLC, MIAX PEARL, LLC,
of 1934 (‘‘Act’’ or ‘‘Exchange Act’’),1 and Secretary, Commission, dated February 27, 2015.
NASDAQ BX, Inc., Nasdaq GEMX, LLC, On December 24, 2015, the Participants submitted
Rule 19b–4 thereunder,2 notice is
Nasdaq ISE, LLC, Nasdaq MRX, LLC,4 an amendment to the CAT NMS Plan. See Letter
hereby given that on May 1, 2017, MIAX from Participants to Brent J. Fields, Secretary,
asabaliauskas on DSK3SPTVN1PROD with NOTICES
PEARL, LLC (‘‘MIAX PEARL’’ or 3 Unless otherwise specified, capitalized terms Commission, dated December 23, 2015.
‘‘Exchange’’) filed with the Securities used in this fee filing are defined as set forth herein,
9 Securities Exchange Act Rel. No. 77724 (Apr.
and Exchange Commission the CAT Compliance Rule Series or in the CAT 27, 2016), 81 FR 30614 (May 17, 2016).
10 Securities Exchange Act Rel. No. 79318 (Nov.
(‘‘Commission’’) a proposed rule change NMS Plan.
4 ISE Gemini, LLC, ISE Mercury, LLC and 15, 2016), 81 FR 84696 (Nov. 23, 2016) (‘‘Approval
as described in Items I, II, and III below, Order’’).
International Securities Exchange, LLC have been
11 The Plan also serves as the limited liability
renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC,
7 17 CFR 200.30–3(a)(12). company agreement for the Company.
and Nasdaq ISE, LLC, respectively. See Securities
1 15 U.S.C. 78s(b)(1). 12 Section 11.1(b) of the CAT NMS Plan.
Exchange Act Rel. No. 80248 (Mar. 15, 2017), 82 FR
2 17 CFR 240.19b–4. 14547 (Mar. 21, 2017); Securities Exchange Act Rel. 13 Id.
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![23084 Federal Register / Vol. 82, No. 96 / Friday, May 19, 2017 / Notices
Exchange members to pay the CAT Fees levels of message traffic will pay a • Quarterly Invoices. Industry
determined by the Operating higher fee. (See Section 3(a)(2)(B) [sic] Members will be billed quarterly for
Committee. below) CAT Fees, with the invoices payable
• Execution Venue Fees. Each Equity within 30 days. The quarterly invoices
(1) Executive Summary Execution Venue will be placed in one will identify within which tier the
The following provides an executive of two tiers of fixed fees based on Industry Member falls. (See Section
summary of the CAT funding model market share, and each Options 3(a)(3)(C) [sic] below)
approved by the Operating Committee, Execution Venue will be placed in one • Centralized Payment. Each Industry
as well as Industry Members’ rights and of two tiers of fixed fees based on Member will receive from the Company
obligations related to the payment of market share. Equity Execution Venue one invoice for its applicable CAT Fees,
CAT Fees calculated pursuant to the market share will be determined by not separate invoices from each
CAT funding model. A detailed calculating each Equity Execution Participant of which it is a member. The
description of the CAT funding model Venue’s proportion of the total volume Industry Members will pay its CAT Fees
and the CAT Fees follows this executive of NMS Stock and OTC Equity shares to the Company via the centralized
summary. reported by all Equity Execution Venues system for the collection of CAT Fees
(A) CAT Funding Model during the relevant time period. established by the Operating Committee.
Similarly, market share for Options (See Section 3(a)(3)(C) [sic] below)
• CAT Costs. The CAT funding model Execution Venues will be determined by • Billing Commencement. Industry
is designed to establish CAT-specific calculating each Options Execution Members will begin to receive invoices
fees to collectively recover the costs of Venue’s proportion of the total volume for CAT Fees as promptly as possible
building and operating the CAT from all of Listed Options contracts reported by following the establishment of a billing
CAT Reporters, including Industry all Options Execution Venues during mechanism. The Exchange will issue a
Members and Participants. The overall the relevant time period. Equity Regulatory Circular to its members
CAT costs for the calculation of the CAT Execution Venues with a larger market when the billing mechanism is
Fees in this fee filing are comprised of share will pay a larger CAT Fee than established, specifying the date when
Plan Processor CAT costs and non-Plan Equity Execution Venues with a smaller such invoicing of Industry Members
Processor CAT costs incurred, and market share. Similarly, Options will commence. (See Section 3(a)(2)(G)
estimated to be incurred, from Execution Venues with a larger market [sic] below)
November 21, 2016 through November share will pay a larger CAT Fee than
21, 2017. (See Section 3(a)(2)(E) [sic] Options Execution Venues with a (2) Description of the CAT Funding
below) 14 smaller market share. (See Section Model
• Bifurcated Funding Model. The 3(a)(2)(C) [sic] below) Article XI of the CAT NMS Plan
CAT NMS Plan requires a bifurcated • Cost Allocation. For the reasons requires the Operating Committee to
funding model, where costs associated discussed below, in designing the approve the operating budget, including
with building and operating the CAT model, the Operating Committee projected costs of developing and
would be borne by (1) Participants and determined that 75 percent of total costs operating the CAT for the upcoming
Industry Members that are Execution recovered would be allocated to year. As set forth in Article XI of the
Venues for Eligible Securities through Industry Members (other than Execution CAT NMS Plan, the CAT NMS Plan
fixed tier fees based on market share, Venue ATSs) and 25 percent would be requires a bifurcated funding model,
and (2) Industry Members (other than allocated to Execution Venues. In where costs associated with building
alternative trading systems (‘‘ATSs’’) addition, the Operating Committee and operating the Central Repository
that execute transactions in Eligible determined to allocate 75 percent of would be borne by (1) Participants and
Securities (‘‘Execution Venue ATSs’’)) Execution Venue costs recovered to Industry Members that are Execution
through fixed tier fees based on message Equity Execution Venues and 25 percent Venues through fixed tier fees based on
traffic for Eligible Securities. (See to Options Execution Venues. (See market share, and (2) Industry Members
Section 3(a)(2) [sic] below) Section 3(a)(2)(D) [sic] below) (other than Execution Venue ATSs)
• Industry Member Fees. Each • Comparability of Fees. The CAT
Industry Member (other than Execution through fixed tier fees based on message
funding model requires that the CAT traffic. In its order approving the CAT
Venue ATSs) will be placed into one of Fees charged to the CAT Reporters with
nine tiers of fixed fees, based on NMS Plan, the Commission determined
the most CAT-related activity (measured that the proposed funding model was
‘‘message traffic’’ in Eligible Securities by market share and/or message traffic,
for a defined period (as discussed ‘‘reasonable’’ 15 and ‘‘reflects a
as applicable) are generally comparable reasonable exercise of the Participants’
below). Prior to the start of CAT (where, for these comparability
reporting, ‘‘message traffic’’ will be funding authority to recover the
purposes, the tiered fee structure takes Participants’ costs related to the
comprised of historical equity and into consideration affiliations between
equity options orders, cancels and CAT.’’ 16
or among CAT Reporters, whether More specifically, the Commission
quotes provided by each exchange and Execution Venues and/or Industry
FINRA over the previous three months. stated in approving the CAT NMS Plan
Members). (See Section 3(a)(2)(F) [sic] that ‘‘[t]he Commission believes that the
After an Industry Member begins
below) proposed funding model is reasonably
reporting to the CAT, ‘‘message traffic’’
will be calculated based on the Industry (B) CAT Fees for Industry Members designed to allocate the costs of the CAT
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Member’s Reportable Events reported to between the Participants and Industry
• Fee Schedule. The quarterly CAT Members.’’ 17 The Commission further
the CAT. Industry Members with lower Fees for each tier for Industry Members
levels of message traffic will pay a lower noted the following:
are set forth in the two fee schedules in The Commission believes that the
fee and Industry Members with higher the Consolidated Audit Trail Funding proposed funding model reflects a
14 The Commission notes that references to
Fees, one for Equity ATSs and one for
Sections 3(a)(2) and 3(a)(3) in this Executive
Industry Members other than Equity 15 Approval Order at 84796.
Summary should be instead to Sections II.A.1.(2) ATSs. (See Section 3(a)(3)(B) [sic] 16 Id. at 84794.
and II.A.1.(3), respectively. below) 17 Id. at 84795.
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![Federal Register / Vol. 82, No. 96 / Friday, May 19, 2017 / Notices 23085
reasonable exercise of the Participants’ data submitted under existing reporting Thus, the CAT NMS Plan provides that
funding authority to recover the requirements showed a wide range in the fees payable by Industry Members
Participants’ costs related to the CAT. activity among broker-dealers, with a (other than Execution Venue ATSs) will
The CAT is a regulatory facility jointly number of broker-dealers submitting be based on the message traffic
owned by the Participants and . . . the fewer than 1,000 orders per month and generated by such Industry Member.28
Exchange Act specifically permits the other broker-dealers submitting millions The CAT NMS Plan provides that the
Participants to charge their members and even billions of orders in the same Operating Committee will use different
fees to fund their self-regulatory period. Accordingly, the CAT NMS Plan criteria to establish fees for Execution
obligations. The Commission further includes a tiered approach to fees. The Venues and non-Execution Venues due
believes that the proposed funding tiered approach helps ensure that fees to the fundamental differences between
model is designed to impose fees are equitably allocated among similarly the two types of entities. In particular,
reasonably related to the Participants’ situated CAT Reporters and furthers the the CAT NMS Plan provides that fees
self-regulatory obligations because the goal of lessening the impact on smaller charged to CAT Reporters that are
fees would be directly associated with firms.22 The self-regulatory Execution Venues will be based on the
the costs of establishing and organizations considered several level of market share and that costs
maintaining the CAT, and not unrelated approaches to developing a tiered charged to Industry Members (other
SRO services.18 model, including defining fee tiers than Execution Venue ATSs) will be
Accordingly, the funding model based on such factors as size of firm, based upon message traffic.29 Because
imposes fees on both Participants and message traffic or trading dollar volume. most Participant message traffic consists
Industry Members. After analyzing the alternatives, it was of quotations, and Participants usually
In addition, as discussed in Appendix concluded that the tiering should be disseminate quotations in all
C of the CAT NMS Plan, the Operating based on the relative impact of CAT instruments they trade, regardless of
Committee considered the advantages Reporters on the CAT System. execution volume, Execution Venues
and disadvantages of a variety of Accordingly, the CAT NMS Plan that are Participants generally
alternative funding and cost allocation contemplates that costs will be allocated disseminate similar amounts of message
models before selecting the proposed across the CAT Reporters on a tiered traffic. Accordingly, basing fees for
model.19 After analyzing the various basis to allocate costs to those CAT Execution Venues on message traffic
alternatives, the Operating Committee Reporters that contribute more to the would not provide the same degree of
determined that the proposed tiered, costs of creating, implementing and differentiation among Execution Venues
fixed fee funding model provides a maintaining the CAT.23 The fees to be that it does among Industry Members
variety of advantages in comparison to assessed at each tier are calculated so as (other than Execution Venue ATSs). In
the alternatives. First, the fixed fee to recoup a proportion of costs contrast, execution volume more
model, as opposed to a variable fee appropriate to the message traffic or accurately delineates the different levels
model, provides transparency, ease of market share (as applicable) from CAT of trading activity of Execution
calculation, ease of billing and other Reporters in each tier. Therefore, Venues.30
administrative functions, and Industry Members generating the most The CAT NMS Plan’s funding model
predictability of a fixed fee. Such factors message traffic will be in the higher also is structured to avoid a ‘‘reduction
are crucial to estimating a reliable tiers, and therefore be charged a higher in market quality.’’ 31 The tiered, fixed
revenue stream for the Company and for fee. Industry Members with lower levels fee funding model is designed to limit
permitting CAT Reporters to reasonably of message traffic will be in lower tiers the disincentives to providing liquidity
predict their payment obligations for and will be assessed a smaller fee for the to the market. For example, the
budgeting purposes.20 Additionally, a CAT.24 Correspondingly, Execution Participants expect that a firm that had
strictly variable or metered funding Venues with the highest market share a large volume of quotes would likely be
model based on message volume would will be in the top tier, and therefore will categorized in one of the upper tiers,
be far more likely to affect market be charged a higher fee. Execution and would not be assessed a fee for this
behavior and place an inappropriate Venues with a lower market share will traffic directly as they would under a
burden on competition. Moreover, as be in the lower tier and will be assessed more directly metered model. In
the SEC noted in approving the CAT a smaller fee for the CAT.25 contrast, strictly variable or metered
NMS Plan, ‘‘[t]he Participants also have The Commission also noted in
funding models based on message
approving the CAT NMS Plan that
offered a reasonable basis for volume were far more likely to affect
‘‘[t]he Participants have offered a
establishing a funding model based on market behavior. In approving the CAT
credible justification for using different
broad tiers, in that it be may be easier NMS Plan, the SEC stated that ‘‘[t]he
criteria to charge Execution Venues
to implement.’’ 21 Participants also offered a reasonable
In addition, multiple reviews of (market share) and Industry Members
(message traffic)’’ 26 in the CAT funding basis for establishing a funding model
current broker-dealer order and trading based on broad tiers, in that it may be
model. While there are multiple factors
that contribute to the cost of building, . . . less likely to have an incremental
18 Id. at 84794.
maintaining and using the CAT, deterrent effect on liquidity
19 Section B.7, Appendix C of the CAT NMS Plan,
processing and storage of incoming provision.’’ 32
Approval Order at 85006.
20 In choosing a tiered fee structure, the message traffic is one of the most The CAT NMS Plan is structured to
Participants concluded that the variety of benefits significant cost drivers for the CAT.27 avoid potential conflicts raised by the
asabaliauskas on DSK3SPTVN1PROD with NOTICES
offered by a tiered fee structure, discussed above, Operating Committee determining fees
outweighed the fact that Industry Members in any 22 Section B.7, Appendix C of the CAT NMS Plan, applicable to its own members—the
particular tier would pay different rates per message
traffic order event (e.g., an Industry Member with Approval Order at 85006.
23 Approval Order at 85005. 28 Section11.3(b) of the CAT NMS Plan.
the largest amount of message traffic in one tier
24 Id. 29 Section11.2(c) of the CAT NMS Plan.
would pay a smaller amount per order event than
25 Id. 30 Section B.7, Appendix C of the CAT NMS Plan,
an Industry Member in the same tier with the least
amount of message traffic). Such variation is the 26 Id. at 84796. Approval Order at 85005.
natural result of a tiered fee structure. 27 Section B.7, Appendix C of the CAT NMS Plan, 31 Section 11.2(e) of the CAT NMS Plan.
21 Approval Order at 84796. Approval Order at 85005. 32 Approval Order at 84796.
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![23086 Federal Register / Vol. 82, No. 96 / Friday, May 19, 2017 / Notices
Participants. First, the Company will be imposed separately by the Operating The CAT NMS Plan clarifies that the
operated on a ‘‘break-even’’ basis, with Committee pursuant to the CAT NMS fixed fees payable by Industry Members
fees imposed to cover costs and an Plan. pursuant to Section 11.3(b) shall, in
appropriate reserve. Any surpluses will addition to any other applicable
(A) Funding Principles
be treated as an operational reserve to message traffic, include message traffic
offset future fees and will not be Section 11.2 of the CAT NMS Plan generated by: (i) An ATS that does not
distributed to the Participants as sets forth the principles that the execute orders that is sponsored by such
profits.33 To ensure that the Operating Committee applied in Industry Member; and (ii) routing orders
Participants’ operation of the CAT will establishing the funding for the to and from any ATS sponsored by such
not contribute to the funding of their Company. The Operating Committee has Industry Member. In addition, the
other operations, Section 11.1(c) of the considered these funding principles as Industry Member fees will apply to
CAT NMS Plan specifically states that well as the other funding requirements Industry Members that act as routing
‘‘[a]ny surplus of the Company’s set forth in the CAT NMS Plan and in broker-dealers for exchanges. The
revenues over its expenses shall be Rule 613 in developing the proposed Industry Member fees will not be
treated as an operational reserve to funding model. The following are the applicable, however, to an ATS that
offset future fees.’’ In addition, as set funding principles in Section 11.2 of the qualifies as an Execution Venue, as
forth in Article VIII of the CAT NMS CAT NMS Plan: discussed in more detail in the section
Plan, the Company ‘‘intends to operate • To create transparent, predictable on Execution Venue tiering.
in a manner such that it qualifies as a revenue streams for the Company that In accordance with Section 11.3(b),
‘business league’ within the meaning of are aligned with the anticipated costs to the Operating Committee approved a
Section 501(c)(6) of the [Internal build, operate and administer the CAT tiered fee structure for Industry
Revenue] Code.’’ To qualify as a and other costs of the Company; Members (other than Execution Venue
business league, an organization must • To establish an allocation of the ATSs) as described in this section. In
‘‘not [be] organized for profit and no Company’s related costs among determining the tiers, the Operating
part of the net earnings of [the Participants and Industry Members that Committee considered the funding
organization can] inure[ ] to the benefit is consistent with the Exchange Act, principles set forth in Section 11.2 of
of any private shareholder or taking into account the timeline for the CAT NMS Plan, seeking to create
individual.’’ 34 As the SEC stated when implementation of the CAT and funding tiers that take into account the
approving the CAT NMS Plan, ‘‘the distinctions in the securities trading relative impact on CAT System
Commission believes that the operations of Participants and Industry resources of different Industry Members,
Company’s application for Section Members and their relative impact upon and that establish comparable fees
501(c)(6) business league status the Company’s resources and among the CAT Reporters with the most
addresses issues raised by commenters operations; Reportable Events. The Operating
about the Plan’s proposed allocation of Committee has determined that
• To establish a tiered fee structure in
profit and loss by mitigating concerns establishing nine tiers results in the
which the fees charged to: (i) CAT
that the Company’s earnings could be fairest allocation of fees, best
Reporters that are Execution Venues,
used to benefit individual distinguishing between Industry
including ATSs, are based upon the
Participants.’’ 35 Members with differing levels of
level of market share; (ii) Industry message traffic. Thus, each such
Finally, by adopting a CAT-specific
fee, the Participants will be fully Members’ non-ATS activities are based Industry Member will be placed into
transparent regarding the costs of the upon message traffic; (iii) the CAT one of nine tiers of fixed fees, based on
CAT. Charging a general regulatory fee, Reporters with the most CAT-related ‘‘message traffic’’ for a defined period
which would be used to cover CAT activity (measured by market share and/ (as discussed below). A nine tier
costs as well as other regulatory costs, or message traffic, as applicable) are structure was selected to provide the
would be less transparent than the generally comparable (where, for these widest range of levels for tiering
selected approach of charging a fee comparability purposes, the tiered fee Industry Members such that Industry
designated to cover CAT costs only. structure takes into consideration Members submitting significantly less
A full description of the funding affiliations between or among CAT message traffic to the CAT would be
model is set forth below. This Reporters, whether Execution Venue adequately differentiated from Industry
description includes the framework for and/or Industry Members); Members submitting substantially more
the funding model as set forth in the • To provide for ease of billing and message traffic. The Operating
CAT NMS Plan, as well as the details as other administrative functions; Committee considered historical
to how the funding model will be • To avoid any disincentives such as message traffic generated by Industry
applied in practice, including the placing an inappropriate burden on Members across all exchanges and as
number of fee tiers and the applicable competition and a reduction in market submitted to FINRA’s Order Audit Trail
fees for each tier. The Exchange notes quality; and System (‘‘OATS’’), and considered the
that the complete funding model is • To build financial stability to distribution of firms with similar levels
described below, including those fees support the Company as a going of message traffic, grouping together
that are to be paid by the Participants. concern. firms with similar levels of message
The proposed Consolidated Audit Trail (B) Industry Member Tiering traffic. Based on this, the Operating
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Funding Fees, however, do not apply to Committee determined that nine tiers
the Participants; the proposed Under Section 11.3(b) of the CAT would best group firms with similar
Consolidated Audit Trail Funding Fees NMS Plan, the Operating Committee is levels of message traffic, charging those
only apply to Industry Members. The required to establish fixed fees to be firms with higher impact on the CAT
CAT fees for Participants will be payable by Industry Members, based on more, while lowering the burden of
message traffic generated by such Industry Members that have less CAT-
33 Id.
at 84792. Industry Member, with the Operating related activity.
34 26U.S.C. 501(c)(6). Committee establishing at least five and Each Industry Member (other than
35 Approval Order at 84793. no more than nine tiers. Execution Venue ATSs) will be ranked
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![23088 Federal Register / Vol. 82, No. 96 / Friday, May 19, 2017 / Notices
Monthly average message
Industry member tier traffic per industry member
(orders, quotes and cancels)
Tier 1 .......................................................................................................................................................................... >10,000,000,000
Tier 2 .......................................................................................................................................................................... >1,000,000,000
Tier 3 .......................................................................................................................................................................... >100,000,000
Tier 4 .......................................................................................................................................................................... >2,500,000
Tier 5 .......................................................................................................................................................................... >200,000
Tier 6 .......................................................................................................................................................................... >50,000
Tier 7 .......................................................................................................................................................................... >5,000
Tier 8 .......................................................................................................................................................................... >1,000
Tier 9 .......................................................................................................................................................................... ≤1,000
Based on the above analysis, the following Industry Member Percentages
Operating Committee approved the and Recovery Allocations:
Percentage Percentage Percentage of
Industry member tier of industry of industry total recovery
members member recovery
Tier 1 .......................................................................................................................... 0.500 8.50 6.38
Tier 2 .......................................................................................................................... 2.500 35.00 26.25
Tier 3 .......................................................................................................................... 2.125 21.25 15.94
Tier 4 .......................................................................................................................... 4.625 15.75 11.81
Tier 5 .......................................................................................................................... 3.625 7.75 5.81
Tier 6 .......................................................................................................................... 4.000 5.25 3.94
Tier 7 .......................................................................................................................... 17.500 4.50 3.38
Tier 8 .......................................................................................................................... 20.125 1.50 1.13
Tier 9 .......................................................................................................................... 45.000 0.50 0.38
Total .................................................................................................................... 100 100 75
For the purposes of creating these by a member of an exchange or FINRA the CAT as will be defined in the
tiers based on message traffic, the over the previous three-month period, Technical Specifications.38
Operating Committee determined to including principal orders, cancel/ The Operating Committee has
define the term ‘‘message traffic’’ replace orders, market maker orders determined to calculate fee tiers every
separately for the period before the originated by a member of an exchange, three months, on a calendar quarter
commencement of CAT reporting and and reserve (iceberg) orders as well as basis, based on message traffic from the
for the period after the start of CAT order routes and executions originated prior three months. Based on its
reporting. The different definition for by a member of FINRA, and excluding analysis of historical data, the Operating
message traffic is necessary as there will order rejects and implied orders.37 In Committee believes that calculating tiers
be no Reportable Events as defined in addition, prior to the start of CAT based on three months of data will
the Plan, prior to the commencement of provide the best balance between
reporting, cancels would be comprised
CAT reporting. Accordingly, prior to the reflecting changes in activity by
of the total number of equity and equity
start of CAT reporting, ‘‘message traffic’’ Industry Members while still providing
option cancels received and originated predictability in the tiering for Industry
will be comprised of historical equity
by a member of an exchange or FINRA Members. Because fee tiers will be
and equity options orders, cancels and
quotes provided by each exchange and over a three-month period, excluding calculated based on message traffic from
FINRA over the previous three order modifications (e.g., order updates, the prior three months, the Operating
months.36 Prior to the start of CAT order splits, partial cancels). Committee will begin calculating
reporting, orders would be comprised of Furthermore, prior to the start of CAT message traffic based on an Industry
the total number of equity and equity reporting, quotes would be comprised of Member’s Reportable Events reported to
options orders received and originated information readily available to the the CAT once the Industry Member has
exchanges and FINRA, such as the total been reporting to the CAT for three
36 The SEC approved exemptive relief permitting number of historical equity and equity months. Prior to that, fee tiers will be
Options Market Maker quotes to be reported to the options quotes received and originated calculated as discussed above with
Central Repository by the relevant Options
Exchange in lieu of requiring that such reporting be
by a member of an exchange or FINRA regard to the period prior to CAT
done by both the Options Exchange and the Options over the prior three-month period. reporting.
Market Maker, as required by Rule 613 of
After an Industry Member begins (C) Execution Venue Tiering
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Regulation NMS. See Securities Exchange Act
Release No. 77265 (Mar. 1, 2017 [sic], 81 FR 11856 reporting to the CAT, ‘‘message traffic’’ Under Section 11.3(a) of the CAT
(Mar. 7, 2016). This exemption applies to Options will be calculated based on the Industry NMS Plan, the Operating Committee is
Market Maker quotes for CAT reporting purposes Member’s Reportable Events reported to
only. Therefore, notwithstanding the reporting
exemption provided for Options Market Maker 38 If an Industry Member (other than an Execution
quotes, Options Market Maker quotes will be 37 Consequently, firms that do not have ‘‘message Venue ATS) has no orders, cancels or quotes prior
included in the calculation of total message traffic traffic’’ reported to an exchange or OATS before to the commencement of CAT Reporting, or no
for Options Market Makers for purposes of tiering they are reporting to the CAT would not be subject Reportable Events after CAT reporting commences,
under the CAT funding model both prior to CAT to a fee until they begin to report information to then the Industry Member would not have a CAT
reporting and once CAT reporting commences CAT. fee obligation.
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![Federal Register / Vol. 82, No. 96 / Friday, May 19, 2017 / Notices 23089
required to establish fixed fees payable than five tiers of fixed fees, based on an share of share volume for execution
by Execution Venues. Section 1.1 of the Execution Venue’s NMS Stocks and venues. Equities Execution Venue
CAT NMS Plan defines an Execution OTC Equity Securities market share. For market share of share volume were
Venue as ‘‘a Participant or an alternative these purposes, market share for sourced from market statistics made
trading system (‘‘ATS’’) (as defined in Execution Venues that execute publicly-available by Bats Global
Rule 300 of Regulation ATS) that transactions will be calculated by share Markets, Inc. (‘‘Bats’’). ATS market
operates pursuant to Rule 301 of volume, and market share for a national share of share volume was sourced from
Regulation ATS (excluding any such securities association that has trades market statistics made publicly-
ATS that does not execute orders).’’ 39 reported by its members to its trade available by FINRA. FINRA trading [sic]
The Participants determined that reporting facility or facilities for reporting facility (‘‘TRF’’) market share
ATSs should be included within the reporting transactions effected of share volume was sourced from
definition of Execution Venue. Given otherwise than on an exchange in NMS market statistics made publicly
the similarity between the activity of Stocks or OTC Equity Securities will be available by Bats. As indicated by
exchanges and ATSs, both of which calculated based on share volume of FINRA, ATSs accounted for 37.80% of
meet the definition of an ‘‘exchange’’ as trades reported, provided, however, that the share volume across the TRFs
set forth in the Exchange Act and the the share volume reported to such during the recent tiering period. A
fact that the similar trading models national securities association by an 37.80/62.20 split was applied to the
would have similar anticipated burdens Execution Venue shall not be included ATS and non-ATS breakdown of FINRA
on the CAT, the Participants determined in the calculation of such national market share, with FINRA tiered based
that ATSs should be treated in the same security association’s market share. only on the non-ATS portion of its TRF
manner as the exchanges for the In accordance with Section 11.3(a)(i) market share of share volume.
purposes of determining the level of fees of the CAT NMS Plan, the Operating Based on this, the Operating
associated with the CAT.40 Committee approved a tiered fee Committee considered the distribution
Given the differences between structure for Equity Execution Venues of Execution Venues, and grouped
Execution Venues that trade NMS and Option Execution Venues. In together Execution Venues with similar
Stocks and/or OTC Equity Securities determining the Equity Execution levels of market share of share volume.
and Execution Venues that trade Listed Venue Tiers, the Operating Committee In doing so, the Participants considered
Options, Section 11.3(a) addresses considered the funding principles set that, as previously noted, Execution
Execution Venues that trade NMS forth in Section 11.2 of the CAT NMS Venues in many cases have similar
Stocks and/or OTC Equity Securities Plan, seeking to create funding tiers that levels of message traffic due to quoting
separately from Execution Venues that take into account the relative impact on activity, and determined that it was
trade Listed Options. Equity and system resources of different Equity simpler and more appropriate to have
Options Execution Venues are treated Execution Venues, and that establish fewer, rather than more, Execution
separately for two reasons. First, the comparable fees among the CAT Venue tiers to distinguish between
differing quoting behavior of Equity and Reporters with the most Reportable Execution Venues.
Options Execution Venues makes Events. Each Equity Execution Venue The percentage of costs recovered by
comparison of activity between will be placed into one of two tiers of each Equity Execution Venue tier will
Execution Venues difficult. Second, fixed fees, based on the Execution be determined by predefined percentage
Execution Venue tiers are calculated Venue’s NMS Stocks and OTC Equity allocations (the ‘‘Equity Execution
based on market share of share volume, Securities market share. In choosing two Venue Recovery Allocation’’). In
and it is therefore difficult to compare tiers, the Operating Committee determining the fixed percentage
market share between asset classes (i.e., performed an analysis similar to that allocation of costs recovered for each
equity shares versus options contracts). discussed above with regard to the non- tier, the Operating Committee
Discussed below is how the funding Execution Venue Industry Members to considered the impact of CAT Reporter
model treats the two types of Execution determine the number of tiers for Equity market share activity on the CAT
Venues. Execution Venues. The Operating System as well as the distribution of
Committee determined to establish two total market volume across Equity
(I) NMS Stocks and OTC Equity
tiers for Equity Execution Venues, rather Execution Venues while seeking to
Securities
than a larger number of tiers as maintain comparable fees among the
Section 11.3(a)(i) of the CAT NMS established for non-Execution Venue largest CAT Reporters. Accordingly,
Plan states that each Execution Venue Industry Members, because the two tiers following the determination of the
that (i) executes transactions or, (ii) in were sufficient to distinguish between percentage of Execution Venues in each
the case of a national securities the smaller number of Equity Execution tier, the Operating Committee identified
association, has trades reported by its Venues based on market share. the percentage of total market volume
members to its trade reporting facility or Furthermore, the incorporation of for each tier based on the historical
facilities for reporting transactions additional Equity Execution Venue tiers market share upon which Execution
effected otherwise than on an exchange, would result in significantly higher fees Venues had been initially ranked.
in NMS Stocks or OTC Equity Securities for Tier 1 Equity Execution Venues and Taking this into account along with the
will pay a fixed fee depending on the diminish comparability between resulting percentage of total recovery,
market share of that Execution Venue in Execution Venues and Industry the percentage allocation of costs
NMS Stocks and OTC Equity Securities, recovered for each tier were assigned,
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Members.
with the Operating Committee Each Equity Execution Venue will be allocating higher percentages of
establishing at least two and not more ranked by market share and tiered by recovery to the tier with a higher level
predefined Execution Venue of market share while avoiding any
39 Although FINRA does not operate an execution
percentages, (the ‘‘Equity Execution inappropriate burden on competition.
venue, because it is a Participant, it is considered Venue Percentages’’). In determining the Furthermore, due to the similar levels of
an ‘‘Execution Venue’’ under the Plan for purposes
of determining fees. fixed percentage of Equity Execution impact on the CAT System across
40 Section B.7, Appendix C of the CAT NMS Plan, Venues in each tier, the Operating Execution Venues, there is less variation
Approval Order at 85005. Committee looked at historical market in CAT Fees between the highest and
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![23090 Federal Register / Vol. 82, No. 96 / Friday, May 19, 2017 / Notices
lowest of tiers for Execution Venues. and elasticity within the funding model, Based on this analysis, the Operating
Furthermore, by using percentages of allowing the funding model to respond Committee approved the following
Equity Execution Venues and costs to changes in either the total number of Equity Execution Venue Percentages
recovered per tier, the Operating Equity Execution Venues or changes in and Recovery Allocations:
Committee sought to include stability market share.
Percentage of Percentage of
Equity Percentage of
equity execution
execution total
execution venue
venue tier recovery
venues recovery
Tier 1 ............................................................................................................................................ 25.00 26.00 6.50
Tier 2 ............................................................................................................................................ 75.00 49.00 12.25
Total ...................................................................................................................................... 100 75 18.75
The following table exhibits the For these purposes, market share will be Venue Percentages’’). To determine the
relative separation of market share of calculated by contract volume. fixed percentage of Options Execution
share volume between Tier 1 and Tier In accordance with Section 11.3(a)(ii) Venues in each tier, the Operating
2 Equity Execution Venues. In of the CAT NMS Plan, the Operating Committee analyzed the historical and
reviewing the table, note that while this Committee approved a tiered fee publicly available market share of
division was referenced as a data point structure for Options Execution Venues. Options Execution Venues to group
to help differentiate between Equity In determining the tiers, the Operating Options Execution Venues with similar
Execution Venue tiers, the proposed Committee considered the funding market shares across the tiers. Options
funding model is directly driven not by principles set forth in Section 11.2 of Execution Venue market share of share
market share thresholds, but rather by the CAT NMS Plan, seeking to create volume were sourced from market
fixed percentages of Equity Execution funding tiers that take into account the statistics made publicly-available by
Venues across tiers to account for relative impact on system resources of Bats. The process for developing the
fluctuating levels of market share across different Options Execution Venues, Options Execution Venue Percentages
time. Actual market share in any tier and that establish comparable fees was the same as discussed above with
will vary based on the actual market among the CAT Reporters with the most regard to Equity Execution Venues.
activity in a given measurement period, Reportable Events. Each Options The percentage of costs recovered by
as well as the number of Equity Execution Venue will be placed into one
each Options Execution Venue tier will
of two tiers of fixed fees, based on the
Execution Venues included in the be determined by predefined percentage
Execution Venue’s Listed Options
measurement period. The Equity allocations (the ‘‘Options Execution
market share. In choosing two tiers, the
Execution Venue Percentages and Venue Recovery Allocation’’). In
Operating Committee performed an
Equity Execution Venue Recovery determining the fixed percentage
analysis similar to that discussed above
Allocation for each tier will remain allocation of costs recovered for each
with regard to Industry Members (other
fixed with each Equity Execution Venue tier, the Operating Committee
than Execution Venue ATSs) to
tier to be reassigned periodically, as considered the impact of CAT Reporter
determine the number of tiers for
described below in Section 3(a)(1)(I) market share activity on the CAT
Options Execution Venues. The
[sic]. Operating Committee determined to System as well as the distribution of
establish two tiers for Options total market volume across Options
Equity market Execution Venues, rather than a larger Execution Venues while seeking to
Equity execution share of maintain comparable fees among the
venue tier share volume number of tiers as established for largest CAT Reporters. Furthermore, by
(%) Industry Members (other than Execution
Venue ATSs), because the two tiers using percentages of Options Execution
Tier 1 .................................... ≥1 were sufficient to distinguish between Venues and costs recovered per tier, the
Tier 2 .................................... <1 the smaller number of Options Operating Committee sought to include
Execution Venues based on market stability and elasticity within the
(II) Listed Options share. Furthermore, due to the smaller funding model, allowing the funding
number of Options Execution Venues, model to respond to changes in either
Section 11.3(a)(ii) of the CAT NMS the incorporation of additional Options the total number of Options Execution
Plan states that each Execution Venue Execution Venue tiers would result in Venues or changes in market share. The
that executes transactions in Listed significantly higher fees for Tier 1 process for developing the Options
Options will pay a fixed fee depending Options Execution Venues and reduce Execution Venue Recovery Allocation
on the Listed Options market share of comparability between Execution was the same as discussed above with
that Execution Venue, with the Venues and Industry Members. regard to Equity Execution Venues.
Operating Committee establishing at Each Options Execution Venue will Based on this analysis, the Operating
asabaliauskas on DSK3SPTVN1PROD with NOTICES
least two and no more than five tiers of be ranked by market share and tiered by Committee approved the following
fixed fees, based on an Execution predefined Execution Venue Options Execution Venue Percentages
Venue’s Listed Options market share. percentages, (the ‘‘Options Execution and Recovery Allocations:
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![Federal Register / Vol. 82, No. 96 / Friday, May 19, 2017 / Notices 23091
Percentage Percentage
Options Percentage
of options of execution
execution of total
execution venue
venue tier recovery
venues recovery
Tier 1 ............................................................................................................................................ 75.00 20.00 5.00
Tier 2 ............................................................................................................................................ 25.00 5.00 1.25
Total ...................................................................................................................................... 100 25 6.25
The following table exhibits the reported to the CAT. Equity Execution of total costs recovered would be
relative separation of market share of Venue market share will be determined allocated to Industry Members (other
share volume between Tier 1 and Tier by calculating each Equity Execution than Execution Venue ATSs) and 25
2 Options Execution Venues. In Venue’s proportion of the total volume percent would be allocated to Execution
reviewing the table, note that while this of NMS Stock and OTC Equity shares Venues. The Operating Committee
division was referenced as a data point reported by all Equity Execution Venues determined that this 75/25 division
to help differentiate between Options during the relevant time period. maintained the greatest level of
Execution Venue tiers, the proposed Similarly, market share for Options comparability across the funding model,
funding model is directly driven, not by Execution Venues will be determined by keeping in view that comparability
market share thresholds, but rather by calculating each Options Execution should consider affiliations among or
fixed percentages of Options Execution Venue’s proportion of the total volume between CAT Reporters (e.g., firms with
Venues across tiers to account for of Listed Options contracts reported by multiple Industry Members and/or
fluctuating levels of market share across all Options Execution Venues during exchange licenses). For example, the
time. Actual market share in any tier the relevant time period. cost allocation establishes fees for the
will vary based on the actual market The Operating Committee has largest Industry Members (i.e., those
activity in a given measurement period, determined to calculate fee tiers for Industry Members in Tiers 1, 2 and 3)
as well as the number of Options Execution Venues every three months that are comparable to the largest Equity
Execution Venues included in the based on market share from the prior Execution Venues and Options
measurement period. The Options three months. Based on its analysis of Execution Venues (i.e., those Execution
Execution Venue Percentages and historical data, the Operating Committee Venues in Tier 1). In addition, the cost
Equity Execution Venue Recovery believes calculating tiers based on three allocation establishes fees for Execution
Allocation for each tier will remain months of data will provide the best Venue complexes that are comparable to
fixed with each Options Execution balance between reflecting changes in those of Industry Member complexes.
Venue tier to be reassigned periodically, activity by Execution Venues while still For example, when analyzing
as described below in Section 3(a)(1)(I) providing predictability in the tiering alternative allocations, other possible
[sic]. for Execution Venues. allocations led to much higher fees for
larger Industry Members than for larger
(D) Allocation of Costs Execution Venues or vice versa, and/or
In addition to the funding principles led to much higher fees for Industry
Options
discussed above, including Member complexes than Execution
market
comparability of fees, Section 11.1(c) of Venue complexes or vice versa.
Options share of
execution the CAT NMS Plan also requires Furthermore, the allocation of total
share
venue tier expenses to be fairly and reasonably CAT costs recovered recognizes the
volume
(%)
shared among the Participants and difference in the number of CAT
Industry Members. Accordingly, in Reporters that are Industry Members
Tier 1 .................................... ≥1 developing the proposed fee schedules versus CAT Reporters that are Execution
Tier 2 .................................... <1
pursuant to the funding model, the Venues. Specifically, the cost allocation
Operating Committee calculated how takes into consideration that there are
(III) Market Share/Tier Assignments the CAT costs would be allocated approximately 25 times more Industry
The Operating Committee determined between Industry Members and Members expected to report to the CAT
that, prior to the start of CAT reporting, Execution Venues, and how the portion than Execution Venues (e.g., an
market share for Execution Venues of CAT costs allocated to Execution estimated 1,630 Industry Members
would be sourced from publicly- Venues would be allocated between versus 70 Execution Venues as of
available market data. Options and Equity Execution Venues and Options January 2017).
equity volumes for Participants will be Execution Venues. These
sourced from market data made publicly determinations are described below. (II) Allocation Between Equity
available by Bats while Execution Execution Venues and Options
Venue ATS volumes will be sourced (I) Allocation Between Industry Execution Venues
from market data made publicly Members and Execution Venues The Operating Committee also
available by FINRA. Set forth in the In determining the cost allocation analyzed how the portion of CAT costs
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Appendix are two charts, one listing the between Industry Members (other than allocated to Execution Venues would be
current Equity Execution Venues, each Execution Venue ATSs) and Execution allocated between Equity Execution
with its rank and tier, and one listing Venues, the Operating Committee Venues and Options Execution Venues.
the current Options Execution Venues, analyzed a range of possible splits for In considering this allocation of costs,
each with its rank and tier. revenue recovered from such Industry the Operating Committee analyzed a
After the commencement of CAT Members and Execution Venues. Based range of alternative splits for revenue
reporting, market share for Execution on this analysis, the Operating recovered between Equity and Options
Venues will be sourced from data Committee determined that 75 percent Execution Venues, including a 70/30,
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![Federal Register / Vol. 82, No. 96 / Friday, May 19, 2017 / Notices 23093
Monthly CAT Quarterly CAT CAT fees paid
Tier fee fee annually 45
1 ................................................................................................................................................... $21,125 $63,375 $253,500
2 ................................................................................................................................................... 12,940 38,820 155,280
This column represents the Stocks and OTC Equity Securities (i.e., For Execution Venues for Listed
approximate total CAT Fees paid each ‘‘CAT Fees Paid Annually’’ = ‘‘Monthly Options:
year by each Execution Venue for NMS CAT Fee’’ × 12 months).
Monthly CAT Quarterly CAT CAT fees paid
Tier fee fee annually 46
1 ................................................................................................................................................... $19,205 $57,615 $230,460
2 ................................................................................................................................................... 13,204 39,612 158,448
This column represents the of the top tiers for Industry Members The Operating Committee has
approximate total CAT Fees paid each (other than Execution Venue ATSs) are calculated the schedule of effective fees
year by each Execution Venue for Listed not identical to the top tier for for Industry Members (other than
Options (i.e., ‘‘CAT Fees Paid Execution Venues, however, because the Execution Venue ATSs) and Execution
Annually’’ = ‘‘Monthly CAT Fee’’ × 12 Operating Committee also determined Venues in the following manner. Note
months). that the fees for Execution Venue that the calculation of CAT Reporter
As noted above, the fees set forth in complexes should be comparable to fees assumes 53 Equity Execution
the tables reflect the Operating those of Industry Member complexes. Venues, 15 Options Execution Venues
Committee’s decision to ensure The difference in the fees reflects this and 1,631 Industry Members (other than
comparable fees between Execution decision to recognize affiliations. Execution Venue ATSs) as of January
Venues and Industry Members. The fees 2017.
CALCULATION OF ANNUAL TIER FEES FOR INDUSTRY MEMBERS
[‘‘IM’’]
Percentage of
Percentage of industry Percentage of
Industry member tier industry member total recovery
members recovery
Tier 1 ............................................................................................................................................ 0.500 8.50 6.38
Tier 2 ............................................................................................................................................ 2.500 35.00 26.25
Tier 3 ............................................................................................................................................ 2.125 21.25 15.94
Tier 4 ............................................................................................................................................ 4.625 15.75 11.81
Tier 5 ............................................................................................................................................ 3.625 7.75 5.81
Tier 6 ............................................................................................................................................ 4.000 5.25 3.94
Tier 7 ............................................................................................................................................ 17.500 4.50 3.38
Tier 8 ............................................................................................................................................ 20.125 1.50 1.13
Tier 9 ............................................................................................................................................ 45.000 0.50 0.38
Total ...................................................................................................................................... 100 100 75
Estimated number
Industry member tier of industry
members
Tier 1 .............................................................................................................................................................................................. 8
Tier 2 .............................................................................................................................................................................................. 41
Tier 3 .............................................................................................................................................................................................. 35
Tier 4 .............................................................................................................................................................................................. 75
Tier 5 .............................................................................................................................................................................................. 59
Tier 6 .............................................................................................................................................................................................. 65
Tier 7 .............................................................................................................................................................................................. 285
Tier 8 .............................................................................................................................................................................................. 328
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Tier 9 .............................................................................................................................................................................................. 735
Total ........................................................................................................................................................................................ 1,631
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![Federal Register / Vol. 82, No. 96 / Friday, May 19, 2017 / Notices 23097
(G) Billing Onset With such reviews, the Operating CAT Reporters between tiers will not
Under Section 11.1(c) of the CAT Committee will review the distribution change the criteria for each tier or the
NMS Plan, to fund the development and of Industry Members and Execution fee amount corresponding to each tier.
implementation of the CAT, the Venues across tiers, and make any In performing the tri-monthly
Company shall time the imposition and updates to the percentage of CAT reassignments, the Exchange notes that
collection of all fees on Participants and Reporters allocated to each tier as may the percentage of CAT Reporters in each
Industry Members in a manner be necessary. In addition, the reviews assigned tier is relative. Therefore, a
reasonably related to the timing when will evaluate the estimated ongoing CAT Reporter’s assigned tier will
the Company expects to incur such CAT costs and the level of the operating depend, not only on its own message
development and implementation costs. reserve. To the extent that the total CAT traffic or market share, but it also will
The Company is currently incurring costs decrease, the fees would be depend on the message traffic/market
such development and implementation adjusted downward, and, to the extent share across all CAT Reporters. For
costs and will continue to do so prior that the total CAT costs increase, the example, the percentage of Industry
to the commencement of CAT reporting fees would be adjusted upward.49 Members (other than Execution Venue
and thereafter. For example, the Plan Furthermore, any surplus of the ATSs) in each tier is relative such that
Processor has required up-front Company’s revenues over its expenses is such Industry Member’s assigned tier
payments to begin building the CAT. In to be included within the operational will depend on message traffic
addition, the Company continues to reserve to offset future fees. The generated across all CAT Reporters as
incur consultant and legal expenses on limitations on more frequent changes to well as the total number of CAT
an on-going basis to implement the the fee, however, are intended to Reporters. The Operating Committee
CAT. Accordingly, the Operating provide budgeting certainty for the CAT will inform CAT Reporters of their
Committee determined that all CAT Reporters and the Company.50 To the assigned tier every three months
Reporters, including both Industry extent that the Operating Committee following the periodic tiering process,
Members and Execution Venues approves changes to the number of tiers as the funding model will compare an
(including Participants), would begin to in the funding model or the fees individual CAT Reporter’s activity to
be invoiced as promptly as possible assigned to each tier, then the Exchange that of other CAT Reporters in the
following the establishment of a billing will file such changes with the SEC marketplace.
mechanism. The Exchange will issue a pursuant to Section 19(b) of the The following demonstrates a tier
Regulatory Circular to its members Exchange Act, and any such changes reassignment. In accordance with the
when the billing mechanism is will become effective in accordance funding model, the top 75% of Options
established, specifying the date when with the requirements of Section 19(b). Execution Venues in market share are
such invoicing of Industry Members (I) Initial and Periodic Tier categorized as Tier 1 while the bottom
will commence. Reassignments 25% of Options Execution Venues in
market share are categorized as Tier 2.
(H) Changes to Fee Levels and Tiers The Operating Committee has In the sample scenario below, Options
Section 11.3(d) of the CAT NMS Plan determined to calculate fee tiers every Execution Venue L is initially
states that ‘‘[t]he Operating Committee three months based on market share or categorized as a Tier 2 Options
shall review such fee schedule on at message traffic, as applicable, from the Execution Venue in Period A due to its
least an annual basis and shall make any prior three months. For the initial tier market share. When market share is
changes to such fee schedule that it assignments, the Company will recalculated for Period B, the market
deems appropriate. The Operating calculate the relevant tier for each CAT share of Execution Venue L increases,
Committee is authorized to review such Reporter using the three months of data and it is therefore subsequently
fee schedule on a more regular basis, but prior to the commencement date. As reranked and reassigned to Tier 1 in
shall not make any changes on more with the initial tier assignment, for the Period B. Correspondingly, Options
than a semi-annual basis unless, tri-monthly reassignments, the Execution Venue K, initially a Tier 1
pursuant to a Supermajority Vote, the Company will calculate the relevant tier Options Execution Venue in Period A,
Operating Committee concludes that using the three months of data prior to is reassigned to Tier 2 in Period B due
such change is necessary for the the relevant tri-monthly date. The to decreases in its market share of share
adequate funding of the Company.’’ Exchange notes that any movement of volume.
Period A Period B
Market Market
Options execution venue Tier Options execution venue Tier
share rank share rank
Options Execution Venue A .............. 1 1 Options Execution Venue A ............ 1 1
Options Execution Venue B .............. 2 1 Options Execution Venue B ............ 2 1
Options Execution Venue C .............. 3 1 Options Execution Venue C ............ 3 1
Options Execution Venue D .............. 4 1 Options Execution Venue D ............ 4 1
Options Execution Venue E .............. 5 1 Options Execution Venue E ............ 5 1
Options Execution Venue F .............. 6 1 Options Execution Venue F ............. 6 1
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Options Execution Venue G .............. 7 1 Options Execution Venue I .............. 7 1
Options Execution Venue H .............. 8 1 Options Execution Venue H ............ 8 1
Options Execution Venue I ............... 9 1 Options Execution Venue G ............ 9 1
Options Execution Venue J ............... 10 1 Options Execution Venue J ............. 10 1
Options Execution Venue K .............. 11 1 Options Execution Venue L ............. 11 1
49 The CAT Fees are designed to recover the costs Participants, such as any changes in costs related 50 Section B.7, Appendix C of the CAT NMS Plan,
associated with the CAT. Accordingly, CAT Fees to the retirement of existing regulatory systems, Approval Order at 85006.
would not be affected by increases or decreases in such as OATS.
other non-CAT expenses incurred by the
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![23100 Federal Register / Vol. 82, No. 96 / Friday, May 19, 2017 / Notices
predictability of a fixed fee. Such factors exchanges. Accordingly, the Exchange number should be included on the
are crucial to estimating a reliable believes that the proposed fees will subject line if email is used. To help the
revenue stream for the Company and for minimize the potential for adverse Commission process and review your
permitting CAT Reporters to reasonably effects on competition between CAT comments more efficiently, please use
predict their payment obligations for Reporters in the market. only one method. The Commission will
budgeting purposes. Furthermore, the tiered, fixed fee post all comments on the Commission’s
funding model limits the disincentives Internet Web site (http://www.sec.gov/
B. Self-Regulatory Organization’s
to providing liquidity to the market. rules/sro.shtml). Copies of the
Statement on Burden on Competition
Therefore, the proposed fees are submission, all subsequent
Section 6(b)(8) of the Act 57 requires structured to limit burdens on amendments, all written statements
that Exchange rules not impose any competitive quoting and other liquidity with respect to the proposed rule
burden on competition that is not provision in the market. change that are filed with the
necessary or appropriate. The Exchange Commission, and all written
does not believe that the proposed C. Self-Regulatory Organization’s communications relating to the
amendments to its Fee Schedule will Statement on Comments on the proposed rule change between the
result in any burden on competition that Proposed Rule Change Received From Commission and any person, other than
is not necessary or appropriate in Members, Participants, or Others those that may be withheld from the
furtherance of the purposes of the Act. Written comments were neither public in accordance with the
The Exchange notes that the proposed solicited nor received. provisions of 5 U.S.C. 552, will be
rule change implements provisions of available for Web site viewing and
the CAT NMS Plan approved by the III. Date of Effectiveness of the
printing in the Commission’s Public
Commission, and is designed to assist Proposed Rule Change and Timing for
Reference Room, 100 F Street NE.,
the Exchange in meeting its regulatory Commission Action
Washington, DC 20549, on official
obligations pursuant to the Plan. The foregoing rule change has become business days between the hours of
Similarly, all national securities effective pursuant to Section 10:00 a.m. and 3:00 p.m. Copies of the
exchanges and FINRA are proposing 19(b)(3)(A)(ii) of the Act,58 and Rule filing also will be available for
this proposed fee schedule to 19b–4(f)(2) 59 thereunder. At any time inspection and copying at the principal
implement the requirements of the CAT within 60 days of the filing of the office of the Exchange. All comments
NMS Plan. Therefore, this is not a proposed rule change, the Commission received will be posted without change;
competitive fee filing and, therefore, it summarily may temporarily suspend the Commission does not edit personal
does not raise competition issues such rule change if it appears to the identifying information from
between and among the exchanges and Commission that such action is submissions. You should submit only
FINRA. necessary or appropriate in the public information that you wish to make
Moreover, as previously described, interest, for the protection of investors, available publicly. All submissions
the Exchange believes that the proposed or otherwise in furtherance of the should refer to File Number SR–
rule change fairly and equitably purposes of the Act. If the Commission PEARL–2017–20, and should be
allocates costs among CAT Reporters. In takes such action, the Commission shall submitted on or before June 9, 2017.
particular, the proposed fee schedule is institute proceedings to determine For the Commission, by the Division of
structured to impose comparable fees on whether the proposed rule should be Trading and Markets, pursuant to delegated
similarly situated CAT Reporters, and approved or disapproved. authority.60
lessen the impact on smaller CAT Eduardo A. Aleman,
Reporters. CAT Reporters with similar IV. Solicitation of Comments
Assistant Secretary.
levels of CAT activity will pay similar Interested persons are invited to [FR Doc. 2017–10131 Filed 5–18–17; 8:45 am]
fees. For example, Industry Members submit written data, views, and
(other than Execution Venue ATSs) with BILLING CODE 8011–01–P
arguments concerning the foregoing,
higher levels of message traffic will pay including whether the proposed rule
higher fees, and those with lower levels change is consistent with the Act. SECURITIES AND EXCHANGE
of message traffic will pay lower fees. Comments may be submitted by any of COMMISSION
Similarly, Execution Venue ATSs and the following methods:
other Execution Venues with larger [Release No. 34–80675; File No. SR–MIAX–
market share will pay higher fees, and Electronic Comments 2017–18]
those with lower levels of market share • Use the Commission’s Internet
will pay lower fees. Therefore, given comment form (http://www.sec.gov/ Self-Regulatory Organizations; Miami
that there is generally a relationship International Securities Exchange,
rules/sro.shtml); or
between message traffic and market • Send an email to rule- LLC; Notice of Filing and Immediate
share to the CAT Reporter’s size, smaller comments@sec.gov. Please include File Effectiveness of a Proposed Rule
CAT Reporters generally pay less than Number SR–PEARL–2017–20 on the Change To Amend the Fee Schedule
larger CAT Reporters. Accordingly, the subject line. May 15, 2017.
Exchange does not believe that the CAT Pursuant to the provisions of Section
Fees would have a disproportionate Paper Comments
19(b)(1) of the Securities Exchange Act
effect on smaller or larger CAT • Send paper comments in triplicate
asabaliauskas on DSK3SPTVN1PROD with NOTICES
of 1934 (‘‘Act’’ or ‘‘Exchange Act’’),1 and
Reporters. In addition, ATSs and to Secretary, Securities and Exchange Rule 19b–4 thereunder,2 notice is
exchanges will pay the same fees based Commission, 100 F Street NE., hereby given that on May 1, 2017,
on market share. Therefore, the Washington, DC 20549–1090. Miami International Securities
Exchange does not believe that the fees All submissions should refer to File Exchange LLC (‘‘MIAX Options’’ or
will impose any burden on the Number SR–PEARL–2017–20. This file
competition between ATSs and 60 17 CFR 200.30–3(a)(12).
58 15 U.S.C. 78s(b)(3)(A)(ii). 1 15 U.S.C. 78s(b)(1).
57 15 U.S.C. 78f(b)(8). 59 17 CFR 240.19b–4(f)(2). 2 17 CFR 240.19b–4.
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Document Created: 2018-11-08 08:48:39
Document Modified: 2018-11-08 08:48:39
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| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
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| FR Citation | 82 FR 23083 |
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