82 FR 23344 - Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Its Schedule of Fees and Assessments To Adopt a Fee Schedule To Establish Fees for Industry Members Related to the National Market System Plan Governing the Consolidated Audit Trail
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 97 (May 22, 2017)
Federal Register Volume 82, Issue 97 (May 22, 2017)
| Page Range | 23344-23361 | |
| FR Document | 2017-10295 |
[Federal Register Volume 82, Number 97 (Monday, May 22, 2017)] [Notices] [Pages 23344-23361] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-10295] [[Page 23344]] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80691; File No. SR-CHX-2017-08] Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Its Schedule of Fees and Assessments To Adopt a Fee Schedule To Establish Fees for Industry Members Related to the National Market System Plan Governing the Consolidated Audit Trail May 16, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given that on May 3, 2017, the Chicago Stock Exchange, Inc. (``CHX'' or the ``Exchange'') filed with the Securities and Exchange Commission (``Commission'') the 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 CHX proposes to amend its Schedule of Fees and Assessments (the ``Fee Schedule'') to establish fees for Industry Members related to the National Market System Plan Governing the Consolidated Audit Trail (the ``CAT NMS Plan'' or ``Plan''). The text of this proposed rule change is available on the Exchange's Web site at (www.chx.com) and in 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 CHX included statements concerning the purpose of and basis for the proposed rule changes 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 CHX 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 Statutory Basis for, the Proposed Rule Changes 1. Purpose The Exchange, 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, 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,\3\ NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, NYSE Arca, Inc. and NYSE National, Inc.\4\ (collectively, the ``Plan Participants'') \5\ 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 Plan 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 Plan 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 Plan Participants will pay, and establishing fees for Industry Members that will be implemented by the Plan Participants (``CAT Fees'').\12\ The Plan 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 Exchange members to pay the CAT Fees determined by the Operating Committee. --------------------------------------------------------------------------- \3\ 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). \4\ 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). \5\ A ``Participant'' is a ``member'' of the Exchange for purposes of the Act. See CHX Article 1, Rule 1(s). For clarity, the term ``Plan Participant'' will be used herein when referring to Participants of the Plan. \6\ 15 U.S.C. 78k-1. \7\ 17 CFR 242.608. \8\ See Letter from the Plan Participants to Brent J. Fields, Secretary, Commission, dated September 30, 2014; and Letter from Plan Participants to Brent J. Fields, Secretary, Commission, dated February 27, 2015. On December 24, 2015, the Plan Participants submitted an amendment to the CAT NMS Plan. See Letter from Plan 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 Plan 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) Plan Participants [[Page 23345]] 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 Plan 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 an Information Memorandum 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) Plan 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 [Plan] Participants' funding authority to recover the [Plan] 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 Plan [sic] 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 reasonable exercise of the [Plan] Participants' funding authority to recover the [Plan] Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the [Plan] Participants and . . . the Exchange Act specifically permits the [Plan] 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 [Plan] Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated Exchange [sic] services.\18\ --------------------------------------------------------------------------- \18\ Id. at 84794. Accordingly, the funding model imposes fees on both Plan 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 [[Page 23346]] 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 [Plan] 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 SROs 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 [Plan] 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 Plan Participant message traffic consists of quotations, and Plan Participants usually disseminate quotations in all instruments they trade, regardless of execution volume, Execution Venues that are Plan 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 Plan 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 [Plan] 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 Plan 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 Plan Participants as profits.\33\ To ensure that the Plan 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 [Plan] Participants.'' \35\ --------------------------------------------------------------------------- \33\ Id. at 84792. \34\ 26 U.S.C. 501(c)(6). \35\ Approval Order at 84793. --------------------------------------------------------------------------- [[Page 23347]] Finally, by adopting a CAT-specific fee, the Plan 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 Plan Participants. The proposed Consolidated Audit Trail Funding Fees, however, do not apply to the Plan Participants; the proposed Consolidated Audit Trail Funding Fees only apply to Industry Members. The CAT fees for Plan 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 Plan 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 Plan 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 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 [[Page 23348]] 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] TN22MY17.000 [[Page 23349]] ------------------------------------------------------------------------ Monthly average message traffic per industry Industry member tier 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 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 ---------------------------------------------------------------------------------------------------------------- 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, 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 required to establish fixed fees payable by Execution Venues. Section 1.1 of the CAT NMS Plan defines an Execution Venue as ``a [Plan] 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 Plan Participant, it is considered an ``Execution Venue'' under the Plan for purposes of determining fees. --------------------------------------------------------------------------- The Plan Participants determined that ATSs should be included within the [[Page 23350]] 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 Plan 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 Plan 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 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: [[Page 23351]] ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of equity execution Percentage of Equity execution venue tier execution venue total 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 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 Equity execution venue tier share of 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: ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of options execution Percentage of Options execution venue tier execution venue total recovery venues recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 75.00 20.00 5.00 Tier 2.......................................................... 25.00 5.00 1.25 ----------------------------------------------- Total....................................................... 100 25 6.25 ---------------------------------------------------------------------------------------------------------------- [[Page 23352]] 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 Plan 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 Plan 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, 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, [[Page 23353]] 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. --------------------------------------------------------------------------- \42\ This $5,000,000 represents the gradual accumulation of the funds for a target operating reserve of $11,425,000. ------------------------------------------------------------------------ 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\ --------------------------------------------------------------------------- \43\ Note that all monthly, quarterly and annual CAT Fees have been rounded to the nearest dollar. \44\ 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). \45\ 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 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 ---------------------------------------------------------------------------------------------------------------- For Execution Venues for NMS Stocks and OTC Equity Securities: ---------------------------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------------------- For Execution Venues for Listed Options: [[Page 23354]] ---------------------------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \46\ 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). --------------------------------------------------------------------------- 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 of Industry member tier 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 23355]] [GRAPHIC] [TIFF OMITTED] TN22MY17.001 Calculation of Annual Tier Fees for Equity Execution Venues (``EV'') ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of equity execution Percentage of Equity execution venue tier execution venue total recovery venues recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 25.00 26.00 6.50 Tier 2.......................................................... 75.00 49.00 12.25 ----------------------------------------------- Total....................................................... 100 75 18.75 ---------------------------------------------------------------------------------------------------------------- [[Page 23356]] ------------------------------------------------------------------------ Estimated number of Equity execution venue tier equity execution venues ------------------------------------------------------------------------ Tier 1.................................................. 13 Tier 2.................................................. 40 --------------- Total............................................... 53 ------------------------------------------------------------------------ [GRAPHIC] [TIFF OMITTED] TN22MY17.002 Calculation of Annual Tier Fees for Options Execution Venues (``EV'') ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of options execution Percentage of Options execution venue tier execution venue total recovery venues recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 75.00 20.00 5.00 Tier 2.......................................................... 25.00 5.00 1.25 ----------------------------------------------- Total....................................................... 100 25 6.25 ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ Estimated number of Options execution venue tier options execution venues ------------------------------------------------------------------------ Tier 1.................................................. 11 Tier 2.................................................. 4 --------------- Total............................................... 15 ------------------------------------------------------------------------ [GRAPHIC] [TIFF OMITTED] TN22MY17.003 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 [[Page 23357]] Tier 9.................... 735 264 194,040 --------------------------------------------------------------------------- Total........................... .......................... 1,631 .............. 38,033,484 Equity Execution Venues............. Tier 1.................... 13 253,500 3,295,500 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 ---------------------------------------------------------------------------------------------------------------- (F) Comparability of Fees --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 Plan 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 23358]] (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 Plan 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 Plan Participants), would begin to be invoiced as promptly as possible following the establishment of a billing mechanism. The Exchange will issue an Information Memorandum 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 SROs, 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 23359]] 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 the Exchange's Industry Members. The proposed fee schedule under Section R of the CHX 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 ``Plan Participant'' are defined as set forth under Article 23, Rule 1 (Consolidated Audit Trail--Definitions) of the CHX Rules. 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 Plan 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.\51\ These are the same fees that Plan 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: --------------------------------------------------------------------------- \51\ 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, 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. The Exchange will provide Industry Members with details regarding the manner of payment of CAT Fees by Information Memorandum. [[Page 23360]] 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 Plan Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Plan Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Plan 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.\52\ --------------------------------------------------------------------------- \52\ Section 11.4 of the CAT NMS Plan. --------------------------------------------------------------------------- Section 11.4 of the CAT NMS Plan also states that Plan 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 proposed 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 the proposed rule change is consistent with the provisions of Section 6(b)(5) of the Act,\53\ which require, among other things, that rules of the exchange 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 dealer [sic], and Section 6(b)(4) of the Act,\54\ which requires that the rules of the exchange provide for the equitable allocation of reasonable dues, fees, and other charges among 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 Plan 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. --------------------------------------------------------------------------- \53\ 15 U.S.C. 78f(b)(5). \54\ 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.'' \55\ 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. --------------------------------------------------------------------------- \55\ 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 Plan Participant services unrelated to the CAT. In addition, any surplus CAT Fees cannot be distributed to the individual Plan 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 Plan 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 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 of Burden on Competition Section 6(b)(8) of the Act \56\ require [sic] that the rules of the Exchange not impose any burden on competition that is not necessary or appropriate. The Exchange does not believe that the proposed rule change will result in any burden on competition that is not [[Page 23361]] 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. --------------------------------------------------------------------------- \56\ 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 Regarding the Proposed Rule Changes Received From Members, Participants or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Changes and Timing for Commission Action The foregoing rule change is effective upon filing pursuant to Section 19(b)(3)(A)(ii) of the Act \57\ and subparagraph(f)(2) of Rule 19b-4 thereunder \58\ because it establishes or changes a due, fee or other charge imposed by the Exchange. --------------------------------------------------------------------------- \57\ 15 U.S.C. 78s(b)(3)(A)(ii). \58\ 17 CFR 240.19b-4(f)(2). --------------------------------------------------------------------------- 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. 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-CHX-2017-08 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-CHX-2017-08. 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-CHX-2017-08, and should be submitted on or before June 12, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\59\ --------------------------------------------------------------------------- \59\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-10295 Filed 5-19-17; 8:45 am] BILLING CODE 8011-01-P
![23344 Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices
SECURITIES AND EXCHANGE A. Self-Regulatory Organization’s time of order inception through routing,
COMMISSION Statement of the Purpose of, and cancellation, modification, or execution
Statutory Basis for, the Proposed Rule in a single consolidated data source.
[Release No. 34–80691; File No. SR–CHX– Changes The Plan accomplishes this by creating
2017–08] CAT NMS, LLC (the ‘‘Company’’), of
1. Purpose
which each Plan Participant is a
Self-Regulatory Organizations; The Exchange, Bats BYX Exchange, member, to operate the CAT.11 Under
Inc., Bats BZX Exchange, Inc., Bats the CAT NMS Plan, the Operating
Chicago Stock Exchange, Inc.; Notice
EDGA Exchange, Inc., Bats EDGX Committee of the Company (‘‘Operating
of Filing and Immediate Effectiveness
Exchange, Inc., BOX Options Exchange Committee’’) has discretion to establish
of Proposed Rule Change To Amend
LLC, C2 Options Exchange, funding for the Company to operate the
Its Schedule of Fees and Assessments
Incorporated, Chicago Board Options CAT, including establishing fees that
To Adopt a Fee Schedule To Establish Exchange, Incorporated, Financial
Fees for Industry Members Related to the Plan Participants will pay, and
Industry Regulatory Authority, Inc. establishing fees for Industry Members
the National Market System Plan (‘‘FINRA’’), Investors’ Exchange LLC,
Governing the Consolidated Audit Trail that will be implemented by the Plan
Miami International Securities Participants (‘‘CAT Fees’’).12 The Plan
May 16, 2017. Exchange, LLC, MIAX PEARL, LLC, Participants are required to file with the
NASDAQ BX, Inc., Nasdaq GEMX, LLC, SEC under Section 19(b) of the
Pursuant to Section 19(b)(1) of the Nasdaq ISE, LLC, Nasdaq MRX, LLC,3 Exchange Act any such CAT Fees
Securities Exchange Act of 1934 NASDAQ PHLX LLC, The NASDAQ applicable to Industry Members that the
(‘‘Act’’),1 and Rule 19b–4 2 thereunder, Stock Market LLC, New York Stock Operating Committee approves.13
notice is hereby given that on May 3, Exchange LLC, NYSE MKT LLC, NYSE Accordingly, the Exchange submits this
2017, the Chicago Stock Exchange, Inc. Arca, Inc. and NYSE National, Inc.4 fee filing to propose the Consolidated
(‘‘CHX’’ or the ‘‘Exchange’’) filed with (collectively, the ‘‘Plan Participants’’) 5 Audit Trail Funding Fees, which will
the Securities and Exchange filed with the Commission, pursuant to require Industry Members that are
Commission (‘‘Commission’’) the Section 11A of the Exchange Act 6 and Exchange members to pay the CAT Fees
proposed rule change as described in Rule 608 of Regulation NMS determined by the Operating
Items I, II and III below, which Items thereunder,7 the CAT NMS Plan.8 The Committee.
have been prepared by the Exchange. Plan Participants filed the Plan to
The Commission is publishing this comply with Rule 613 of Regulation (1) Executive Summary
notice to solicit comments on the NMS under the Exchange Act. The Plan The following provides an executive
proposed rule change from interested was published for comment in the summary of the CAT funding model
persons. Federal Register on May 17, 2016,9 and approved by the Operating Committee,
approved by the Commission, as as well as Industry Members’ rights and
I. Self-Regulatory Organization’s modified, on November 15, 2016.10 The obligations related to the payment of
Statement of the Terms of Substance of Plan is designed to create, implement CAT Fees calculated pursuant to the
the Proposed Rule Change and maintain a consolidated audit trail CAT funding model. A detailed
CHX proposes to amend its Schedule (‘‘CAT’’) that would capture customer description of the CAT funding model
of Fees and Assessments (the ‘‘Fee and order event information for orders and the CAT Fees follows this executive
Schedule’’) to establish fees for Industry in NMS Securities and OTC Equity summary.
Members related to the National Market Securities, across all markets, from the
(A) CAT Funding Model
System Plan Governing the 3 ISE Gemini, LLC, ISE Mercury, LLC and • CAT Costs. The CAT funding model
Consolidated Audit Trail (the ‘‘CAT International Securities Exchange, LLC have been is designed to establish CAT-specific
NMS Plan’’ or ‘‘Plan’’). The text of this renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC,
and Nasdaq ISE, LLC, respectively. See Securities fees to collectively recover the costs of
proposed rule change is available on the
Exchange Act Rel. No. 80248 (Mar. 15, 2017), 82 FR building and operating the CAT from all
Exchange’s Web site at (www.chx.com) 14547 (Mar. 21, 2017); Securities Exchange Act Rel. CAT Reporters, including Industry
and in the Commission’s Public No. 80326 (Mar. 29, 2017), 82 FR 16460 (Apr. 4,
Members and Plan Participants. The
Reference Room. 2017); and Securities Exchange Act Rel. No. 80325
(Mar. 29, 2017), 82 FR 16445 (Apr. 4, 2017). overall CAT costs for the calculation of
II. Self-Regulatory Organization’s 4 National Stock Exchange, Inc. has been renamed the CAT Fees in this fee filing are
Statement of the Purpose of, and NYSE National, Inc. See Securities Exchange Act comprised of Plan Processor CAT costs
Rel. No. 79902 (Jan. 30, 2017), 82 FR 9258 (Feb. 3,
Statutory Basis for, the Proposed Rule 2017).
and non-Plan Processor CAT costs
Change 5 A ‘‘Participant’’ is a ‘‘member’’ of the Exchange incurred, and estimated to be incurred,
for purposes of the Act. See CHX Article 1, Rule from November 21, 2016 through
In its filing with the Commission, the 1(s). For clarity, the term ‘‘Plan Participant’’ will be November 21, 2017. (See Section
CHX included statements concerning used herein when referring to Participants of the
3(a)(2)(E) [sic] below 14)
Plan.
the purpose of and basis for the 6 15 U.S.C. 78k–1. • Bifurcated Funding Model. The
proposed rule changes and discussed 7 17 CFR 242.608. CAT NMS Plan requires a bifurcated
any comments it received on the 8 See Letter from the Plan Participants to Brent J. funding model, where costs associated
proposed rule change. The text of these Fields, Secretary, Commission, dated September 30, with building and operating the CAT
statements may be examined at the 2014; and Letter from Plan Participants to Brent J. would be borne by (1) Plan Participants
places specified in Item IV below. The Fields, Secretary, Commission, dated February 27,
mstockstill on DSK30JT082PROD with NOTICES
2015. On December 24, 2015, the Plan Participants
CHX has prepared summaries, set forth submitted an amendment to the CAT NMS Plan.
11 The Plan also serves as the limited liability
in sections A, B and C below, of the See Letter from Plan Participants to Brent J. Fields, company agreement for the Company.
12 Section 11.1(b) of the CAT NMS Plan.
most significant aspects of such Secretary, Commission, dated December 23, 2015.
9 Securities Exchange Act Rel. No. 77724 (Apr. 13 Id.
statements.
27, 2016), 81 FR 30614 (May 17, 2016). 14 The Commission notes that references to
10 Securities Exchange Act Rel. No. 79318 (Nov. Sections 3(a)(2) and 3(a)(3) in this Executive
1 15 U.S.C. 78s(b)(1). 15, 2016), 81 FR 84696 (Nov. 23, 2016) (‘‘Approval Summary should be instead to Sections II.A.1.(2)
2 17 CFR 240.19b–4. Order’’). and II.A.1.(3), respectively.
VerDate Sep<11>2014 23:17 May 19, 2017 Jkt 241001 PO 00000 Frm 00175 Fmt 4703 Sfmt 4703 E:\FR\FM\22MYN1.SGM 22MYN1](https://thefederalregister.org/doc/82_FR_23441/page/1.svg)
![Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices 23345
and Industry Members that are addition, the Operating Committee and operating the Central Repository
Execution Venues for Eligible Securities determined to allocate 75 percent of would be borne by (1) Plan Participants
through fixed tier fees based on market Execution Venue costs recovered to and Industry Members that are
share, and (2) Industry Members (other Equity Execution Venues and 25 percent Execution Venues through fixed tier fees
than alternative trading systems to Options Execution Venues. (See based on market share, and (2) Industry
(‘‘ATSs’’) that execute transactions in Section 3(a)(2)(D) [sic] below) Members (other than Execution Venue
Eligible Securities (‘‘Execution Venue • Comparability of Fees. The CAT ATSs) through fixed tier fees based on
ATSs’’)) through fixed tier fees based on funding model requires that the CAT message traffic. In its order approving
message traffic for Eligible Securities. Fees charged to the CAT Reporters with the CAT NMS Plan, the Commission
(See Section 3(a)(2) [sic] below) the most CAT-related activity (measured determined that the proposed funding
• Industry Member Fees. Each by market share and/or message traffic, model was ‘‘reasonable’’ 15 and ‘‘reflects
Industry Member (other than Execution as applicable) are generally comparable a reasonable exercise of the [Plan]
Venue ATSs) will be placed into one of (where, for these comparability Participants’ funding authority to
nine tiers of fixed fees, based on purposes, the tiered fee structure takes recover the [Plan] Participants’ costs
‘‘message traffic’’ in Eligible Securities into consideration affiliations between related to the CAT.’’ 16
for a defined period (as discussed or among CAT Reporters, whether More specifically, the Commission
below). Prior to the start of CAT Execution Venues and/or Industry stated in approving the CAT NMS Plan
reporting, ‘‘message traffic’’ will be Members). (See Section 3(a)(2)(F) [sic] that ‘‘[t]he Commission believes that the
comprised of historical equity and below) proposed funding model is reasonably
equity options orders, cancels and designed to allocate the costs of the CAT
quotes provided by each exchange and (B) CAT Fees for Industry Members
between the Plan [sic] Participants and
FINRA over the previous three months. • Fee Schedule. The quarterly CAT Industry Members.’’ 17 The Commission
After an Industry Member begins Fees for each tier for Industry Members further noted the following:
reporting to the CAT, ‘‘message traffic’’ are set forth in the two fee schedules in
The Commission believes that the
will be calculated based on the Industry the Consolidated Audit Trail Funding proposed funding model reflects a reasonable
Member’s Reportable Events reported to Fees, one for Equity ATSs and one for exercise of the [Plan] Participants’ funding
the CAT. Industry Members with lower Industry Members other than Equity authority to recover the [Plan] Participants’
levels of message traffic will pay a lower ATSs. (See Section 3(a)(3)(B) [sic] costs related to the CAT. The CAT is a
fee and Industry Members with higher below) regulatory facility jointly owned by the [Plan]
levels of message traffic will pay a • Quarterly Invoices. Industry Participants and . . . the Exchange Act
higher fee. (See Section 3(a)(2)(B) [sic] Members will be billed quarterly for specifically permits the [Plan] Participants to
below) CAT Fees, with the invoices payable charge their members fees to fund their self-
• Execution Venue Fees. Each Equity within 30 days. The quarterly invoices regulatory obligations. The Commission
further believes that the proposed funding
Execution Venue will be placed in one will identify within which tier the model is designed to impose fees reasonably
of two tiers of fixed fees based on Industry Member falls. (See Section related to the [Plan] Participants’ self-
market share, and each Options 3(a)(3)(C) [sic] below) regulatory obligations because the fees would
Execution Venue will be placed in one • Centralized Payment. Each Industry be directly associated with the costs of
of two tiers of fixed fees based on Member will receive from the Company establishing and maintaining the CAT, and
market share. Equity Execution Venue one invoice for its applicable CAT Fees, not unrelated Exchange [sic] services.18
market share will be determined by not separate invoices from each Plan Accordingly, the funding model
calculating each Equity Execution Participant of which it is a member. The imposes fees on both Plan Participants
Venue’s proportion of the total volume Industry Members will pay its CAT Fees and Industry Members.
of NMS Stock and OTC Equity shares to the Company via the centralized In addition, as discussed in Appendix
reported by all Equity Execution Venues system for the collection of CAT Fees C of the CAT NMS Plan, the Operating
during the relevant time period. established by the Operating Committee. Committee considered the advantages
Similarly, market share for Options (See Section 3(a)(3)(C) [sic] below) and disadvantages of a variety of
Execution Venues will be determined by • Billing Commencement. Industry
alternative funding and cost allocation
calculating each Options Execution Members will begin to receive invoices
models before selecting the proposed
Venue’s proportion of the total volume for CAT Fees as promptly as possible
model.19 After analyzing the various
of Listed Options contracts reported by following the establishment of a billing
alternatives, the Operating Committee
all Options Execution Venues during mechanism. The Exchange will issue an
determined that the proposed tiered,
the relevant time period. Equity Information Memorandum to its
fixed fee funding model provides a
Execution Venues with a larger market members when the billing mechanism is
variety of advantages in comparison to
share will pay a larger CAT Fee than established, specifying the date when
the alternatives. First, the fixed fee
Equity Execution Venues with a smaller such invoicing of Industry Members
model, as opposed to a variable fee
market share. Similarly, Options will commence. (See Section 3(a)(2)(G)
model, provides transparency, ease of
Execution Venues with a larger market [sic] below)
share will pay a larger CAT Fee than calculation, ease of billing and other
Options Execution Venues with a (2) Description of the CAT Funding administrative functions, and
smaller market share. (See Section Model predictability of a fixed fee. Such factors
3(a)(2)(C) [sic] below) Article XI of the CAT NMS Plan are crucial to estimating a reliable
• Cost Allocation. For the reasons requires the Operating Committee to revenue stream for the Company and for
mstockstill on DSK30JT082PROD with NOTICES
discussed below, in designing the approve the operating budget, including permitting CAT Reporters to reasonably
model, the Operating Committee projected costs of developing and 15 Approval Order at 84796.
determined that 75 percent of total costs operating the CAT for the upcoming 16 Id.at 84794.
recovered would be allocated to year. As set forth in Article XI of the 17 Id. at 84795.
Industry Members (other than Execution CAT NMS Plan, the CAT NMS Plan 18 Id. at 84794.
Venue ATSs) and 25 percent would be requires a bifurcated funding model, 19 Section B.7, Appendix C of the CAT NMS Plan,
allocated to Execution Venues. In where costs associated with building Approval Order at 85006.
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![23346 Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices
predict their payment obligations for and will be assessed a smaller fee for the in market quality.’’ 31 The tiered, fixed
budgeting purposes.20 Additionally, a CAT.24 Correspondingly, Execution fee funding model is designed to limit
strictly variable or metered funding Venues with the highest market share the disincentives to providing liquidity
model based on message volume would will be in the top tier, and therefore will to the market. For example, the Plan
be far more likely to affect market be charged a higher fee. Execution Participants expect that a firm that had
behavior and place an inappropriate Venues with a lower market share will a large volume of quotes would likely be
burden on competition. Moreover, as be in the lower tier and will be assessed categorized in one of the upper tiers,
the SEC noted in approving the CAT a smaller fee for the CAT.25 and would not be assessed a fee for this
NMS Plan, ‘‘[t]he [Plan] Participants The Commission also noted in traffic directly as they would under a
also have offered a reasonable basis for approving the CAT NMS Plan that more directly metered model. In
establishing a funding model based on ‘‘[t]he [Plan] Participants have offered a contrast, strictly variable or metered
broad tiers, in that it be may be easier credible justification for using different funding models based on message
to implement.’’ 21 criteria to charge Execution Venues volume were far more likely to affect
In addition, multiple reviews of (market share) and Industry Members market behavior. In approving the CAT
current broker-dealer order and trading (message traffic)’’ 26 in the CAT funding NMS Plan, the SEC stated that ‘‘[t]he
data submitted under existing reporting model. While there are multiple factors [Plan] Participants also offered a
requirements showed a wide range in that contribute to the cost of building, reasonable basis for establishing a
activity among broker-dealers, with a maintaining and using the CAT, funding model based on broad tiers, in
number of broker-dealers submitting processing and storage of incoming that it may be . . . less likely to have
fewer than 1,000 orders per month and message traffic is one of the most an incremental deterrent effect on
other broker-dealers submitting millions significant cost drivers for the CAT.27 liquidity provision.’’ 32
and even billions of orders in the same Thus, the CAT NMS Plan provides that The CAT NMS Plan is structured to
period. Accordingly, the CAT NMS Plan the fees payable by Industry Members avoid potential conflicts raised by the
includes a tiered approach to fees. The (other than Execution Venue ATSs) will Operating Committee determining fees
tiered approach helps ensure that fees be based on the message traffic applicable to its own members—the
are equitably allocated among similarly generated by such Industry Member.28 Plan Participants. First, the Company
situated CAT Reporters and furthers the The CAT NMS Plan provides that the will be operated on a ‘‘break-even’’
goal of lessening the impact on smaller Operating Committee will use different basis, with fees imposed to cover costs
firms.22 The self-regulatory criteria to establish fees for Execution and an appropriate reserve. Any
organizations considered several Venues and non-Execution Venues due surpluses will be treated as an
approaches to developing a tiered to the fundamental differences between operational reserve to offset future fees
model, including defining fee tiers the two types of entities. In particular, and will not be distributed to the Plan
based on such factors as size of firm, the CAT NMS Plan provides that fees Participants as profits.33 To ensure that
message traffic or trading dollar volume. charged to CAT Reporters that are the Plan Participants’ operation of the
After analyzing the alternatives, it was Execution Venues will be based on the CAT will not contribute to the funding
concluded that the tiering should be level of market share and that costs of their other operations, Section 11.1(c)
based on the relative impact of CAT charged to Industry Members (other of the CAT NMS Plan specifically states
Reporters on the CAT System. than Execution Venue ATSs) will be that ‘‘[a]ny surplus of the Company’s
Accordingly, the CAT NMS Plan based upon message traffic.29 Because revenues over its expenses shall be
contemplates that costs will be allocated most Plan Participant message traffic treated as an operational reserve to
across the CAT Reporters on a tiered consists of quotations, and Plan offset future fees.’’ In addition, as set
basis to allocate costs to those CAT Participants usually disseminate forth in Article VIII of the CAT NMS
Reporters that contribute more to the quotations in all instruments they trade, Plan, the Company ‘‘intends to operate
costs of creating, implementing and regardless of execution volume, in a manner such that it qualifies as a
maintaining the CAT.23 The fees to be Execution Venues that are Plan ‘business league’ within the meaning of
assessed at each tier are calculated so as Participants generally disseminate Section 501(c)(6) of the [Internal
to recoup a proportion of costs similar amounts of message traffic. Revenue] Code.’’ To qualify as a
appropriate to the message traffic or Accordingly, basing fees for Execution business league, an organization must
market share (as applicable) from CAT Venues on message traffic would not ‘‘not [be] organized for profit and no
Reporters in each tier. Therefore, provide the same degree of part of the net earnings of [the
Industry Members generating the most differentiation among Execution Venues organization can] inure[] to the benefit
message traffic will be in the higher that it does among Industry Members of any private shareholder or
tiers, and therefore be charged a higher (other than Execution Venue ATSs). In individual.’’ 34 As the SEC stated when
fee. Industry Members with lower levels contrast, execution volume more approving the CAT NMS Plan, ‘‘the
of message traffic will be in lower tiers accurately delineates the different levels Commission believes that the
of trading activity of Execution Company’s application for Section
20 In choosing a tiered fee structure, the SROs
Venues.30 501(c)(6) business league status
concluded that the variety of benefits offered by a addresses issues raised by commenters
tiered fee structure, discussed above, outweighed The CAT NMS Plan’s funding model
about the Plan’s proposed allocation of
the fact that Industry Members in any particular tier also is structured to avoid a ‘‘reduction
would pay different rates per message traffic order profit and loss by mitigating concerns
event (e.g., an Industry Member with the largest 24 Id.
that the Company’s earnings could be
mstockstill on DSK30JT082PROD with NOTICES
amount of message traffic in one tier would pay a used to benefit individual [Plan]
25 Id.
smaller amount per order event than an Industry
Member in the same tier with the least amount of 26 Id.at 84796. Participants.’’ 35
message traffic). Such variation is the natural result 27 Section B.7, Appendix C of the CAT NMS Plan,
31 Section 11.2(e) of the CAT NMS Plan.
of a tiered fee structure. Approval Order at 85005.
21 Approval Order at 84796. 28 Section 11.3(b) of the CAT NMS Plan. 32 Approval Order at 84796.
22 Section B.7, Appendix C of the CAT NMS Plan, 29 Section 11.2(c) of the CAT NMS Plan. 33 Id. at 84792.
Approval Order at 85006. 30 Section B.7., Appendix C of the CAT NMS 34 26 U.S.C. 501(c)(6).
23 Approval Order at 85005. Plan, Approval Order at 85005. 35 Approval Order at 84793.
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![Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices 23349
Monthly average Monthly average Based on the above analysis, the
message traffic message traffic Operating Committee approved the
per industry per industry following Industry Member Percentages
Industry member tier Industry member tier
member member
(orders, quotes (orders, quotes and Recovery Allocations:
and cancels) and cancels)
Tier 1 .............................. >10,000,000,000 Tier 6 .............................. >50,000
Tier 2 .............................. >1,000,000,000 Tier 7 .............................. >5,000
Tier 3 .............................. >100,000,000 Tier 8 .............................. >1,000
Tier 4 .............................. >2,500,000 Tier 9 .............................. ≤1,000
Tier 5 .............................. >200,000
Percentage
Percentage of industry Percentage of
of industry
Industry member tier 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
For the purposes of creating these originated by a member of an exchange, basis, based on message traffic from the
tiers based on message traffic, the and reserve (iceberg) orders as well as prior three months. Based on its
Operating Committee determined to order routes and executions originated analysis of historical data, the Operating
define the term ‘‘message traffic’’ by a member of FINRA, and excluding Committee believes that calculating tiers
separately for the period before the order rejects and implied orders.37 In based on three months of data will
commencement of CAT reporting and addition, prior to the start of CAT provide the best balance between
for the period after the start of CAT reporting, cancels would be comprised reflecting changes in activity by
reporting. The different definition for of the total number of equity and equity Industry Members while still providing
message traffic is necessary as there will option cancels received and originated predictability in the tiering for Industry
be no Reportable Events as defined in by a member of an exchange or FINRA Members. Because fee tiers will be
the Plan, prior to the commencement of over a three-month period, excluding calculated based on message traffic from
CAT reporting. Accordingly, prior to the order modifications (e.g., order updates, the prior three months, the Operating
start of CAT reporting, ‘‘message traffic’’ order splits, partial cancels). Committee will begin calculating
will be comprised of historical equity Furthermore, prior to the start of CAT message traffic based on an Industry
and equity options orders, cancels and reporting, quotes would be comprised of Member’s Reportable Events reported to
quotes provided by each exchange and information readily available to the the CAT once the Industry Member has
FINRA over the previous three exchanges and FINRA, such as the total been reporting to the CAT for three
months.36 Prior to the start of CAT number of historical equity and equity months. Prior to that, fee tiers will be
reporting, orders would be comprised of options quotes received and originated calculated as discussed above with
the total number of equity and equity by a member of an exchange or FINRA regard to the period prior to CAT
options orders received and originated over the prior three-month period. reporting.
by a member of an exchange or FINRA After an Industry Member begins
reporting to the CAT, ‘‘message traffic’’ (C) Execution Venue Tiering
over the previous three-month period,
including principal orders, cancel/ will be calculated based on the Industry Under Section 11.3(a) of the CAT
replace orders, market maker orders Member’s Reportable Events reported to NMS Plan, the Operating Committee is
the CAT as will be defined in the required to establish fixed fees payable
36 The SEC approved exemptive relief permitting Technical Specifications.38 by Execution Venues. Section 1.1 of the
Options Market Maker quotes to be reported to the The Operating Committee has CAT NMS Plan defines an Execution
Central Repository by the relevant Options determined to calculate fee tiers every Venue as ‘‘a [Plan] Participant or an
Exchange in lieu of requiring that such reporting be alternative trading system (‘‘ATS’’) (as
done by both the Options Exchange and the Options
three months, on a calendar quarter
Market Maker, as required by Rule 613 of defined in Rule 300 of Regulation ATS)
Regulation NMS. See Securities Exchange Act 37 Consequently, firms that do not have ‘‘message that operates pursuant to Rule 301 of
Release No. 77265 (Mar. 1, 2017, 81 FR 11856 (Mar. traffic’’ reported to an exchange or OATS before Regulation ATS (excluding any such
mstockstill on DSK30JT082PROD with NOTICES
7, 2016). This exemption applies to Options Market they are reporting to the CAT would not be subject ATS that does not execute orders).’’ 39
Maker quotes for CAT reporting purposes only. to a fee until they begin to report information to
CAT.
The Plan Participants determined that
Therefore, notwithstanding the reporting exemption
provided for Options Market Maker quotes, Options 38 If an Industry Member (other than an Execution ATSs should be included within the
Market Maker quotes will be included in the Venue ATS) has no orders, cancels or quotes prior
calculation of total message traffic for Options to the commencement of CAT Reporting, or no 39 Although FINRA does not operate an execution
Market Makers for purposes of tiering under the Reportable Events after CAT reporting commences, venue, because it is a Plan Participant, it is
CAT funding model both prior to CAT reporting then the Industry Member would not have a CAT considered an ‘‘Execution Venue’’ under the Plan
and once CAT reporting commences. fee obligation. for purposes of determining fees.
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![23350 Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices
definition of Execution Venue. Given trades reported, provided, however, that the share volume across the TRFs
the similarity between the activity of the share volume reported to such during the recent tiering period. A
exchanges and ATSs, both of which national securities association by an 37.80/62.20 split was applied to the
meet the definition of an ‘‘exchange’’ as Execution Venue shall not be included ATS and non-ATS breakdown of FINRA
set forth in the Exchange Act and the in the calculation of such national market share, with FINRA tiered based
fact that the similar trading models security association’s market share. only on the non-ATS portion of its TRF
would have similar anticipated burdens In accordance with Section 11.3(a)(i) market share of share volume.
on the CAT, the Plan Participants of the CAT NMS Plan, the Operating Based on this, the Operating
determined that ATSs should be treated Committee approved a tiered fee Committee considered the distribution
in the same manner as the exchanges for structure for Equity Execution Venues of Execution Venues, and grouped
the purposes of determining the level of and Option Execution Venues. In together Execution Venues with similar
fees associated with the CAT.40 determining the Equity Execution levels of market share of share volume.
Given the differences between Venue Tiers, the Operating Committee In doing so, the Plan Participants
Execution Venues that trade NMS considered the funding principles set considered that, as previously noted,
Stocks and/or OTC Equity Securities forth in Section 11.2 of the CAT NMS Execution Venues in many cases have
and Execution Venues that trade Listed Plan, seeking to create funding tiers that similar levels of message traffic due to
Options, Section 11.3(a) addresses take into account the relative impact on quoting activity, and determined that it
Execution Venues that trade NMS system resources of different Equity was simpler and more appropriate to
Stocks and/or OTC Equity Securities Execution Venues, and that establish have fewer, rather than more, Execution
separately from Execution Venues that comparable fees among the CAT Venue tiers to distinguish between
trade Listed Options. Equity and Reporters with the most Reportable Execution Venues.
Options Execution Venues are treated Events. Each Equity Execution Venue The percentage of costs recovered by
separately for two reasons. First, the will be placed into one of two tiers of each Equity Execution Venue tier will
differing quoting behavior of Equity and fixed fees, based on the Execution be determined by predefined percentage
Options Execution Venues makes Venue’s NMS Stocks and OTC Equity allocations (the ‘‘Equity Execution
comparison of activity between Securities market share. In choosing two Venue Recovery Allocation’’). In
Execution Venues difficult. Second, tiers, the Operating Committee determining the fixed percentage
Execution Venue tiers are calculated performed an analysis similar to that allocation of costs recovered for each
based on market share of share volume, discussed above with regard to the non- tier, the Operating Committee
and it is therefore difficult to compare Execution Venue Industry Members to considered the impact of CAT Reporter
market share between asset classes (i.e., determine the number of tiers for Equity market share activity on the CAT
equity shares versus options contracts). Execution Venues. The Operating System as well as the distribution of
Discussed below is how the funding Committee determined to establish two total market volume across Equity
model treats the two types of Execution tiers for Equity Execution Venues, rather Execution Venues while seeking to
Venues. than a larger number of tiers as maintain comparable fees among the
established for non-Execution Venue largest CAT Reporters. Accordingly,
(I) NMS Stocks and OTC Equity Industry Members, because the two tiers following the determination of the
Securities were sufficient to distinguish between percentage of Execution Venues in each
Section 11.3(a)(i) of the CAT NMS the smaller number of Equity Execution tier, the Operating Committee identified
Plan states that each Execution Venue Venues based on market share. the percentage of total market volume
that (i) executes transactions or, (ii) in Furthermore, the incorporation of for each tier based on the historical
the case of a national securities additional Equity Execution Venue tiers market share upon which Execution
association, has trades reported by its would result in significantly higher fees Venues had been initially ranked.
members to its trade reporting facility or for Tier 1 Equity Execution Venues and Taking this into account along with the
facilities for reporting transactions diminish comparability between resulting percentage of total recovery,
effected otherwise than on an exchange, Execution Venues and Industry the percentage allocation of costs
in NMS Stocks or OTC Equity Securities Members. recovered for each tier were assigned,
will pay a fixed fee depending on the Each Equity Execution Venue will be allocating higher percentages of
market share of that Execution Venue in ranked by market share and tiered by recovery to the tier with a higher level
NMS Stocks and OTC Equity Securities, predefined Execution Venue of market share while avoiding any
with the Operating Committee percentages, (the ‘‘Equity Execution inappropriate burden on competition.
establishing at least two and not more Venue Percentages’’). In determining the Furthermore, due to the similar levels of
than five tiers of fixed fees, based on an fixed percentage of Equity Execution impact on the CAT System across
Execution Venue’s NMS Stocks and Venues in each tier, the Operating Execution Venues, there is less variation
OTC Equity Securities market share. For Committee looked at historical market in CAT Fees between the highest and
these purposes, market share for share of share volume for execution lowest of tiers for Execution Venues.
Execution Venues that execute venues. Equities Execution Venue Furthermore, by using percentages of
transactions will be calculated by share market share of share volume were Equity Execution Venues and costs
volume, and market share for a national sourced from market statistics made recovered per tier, the Operating
securities association that has trades publicly-available by Bats Global Committee sought to include stability
reported by its members to its trade Markets, Inc. (‘‘Bats’’). ATS market and elasticity within the funding model,
share of share volume was sourced from allowing the funding model to respond
mstockstill on DSK30JT082PROD with NOTICES
reporting facility or facilities for
reporting transactions effected market statistics made publicly- to changes in either the total number of
otherwise than on an exchange in NMS available by FINRA. FINRA trading [sic] Equity Execution Venues or changes in
Stocks or OTC Equity Securities will be reporting facility (‘‘TRF’’) market share market share.
calculated based on share volume of of share volume was sourced from Based on this analysis, the Operating
market statistics made publicly Committee approved the following
40 Section B.7, Appendix C of the CAT NMS Plan, available by Bats. As indicated by Equity Execution Venue Percentages
Approval Order at 85005. FINRA, ATSs accounted for 37.80% of and Recovery Allocations:
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![Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices 23351
Percentage Percentage of
of equity execution Percentage of
Equity execution venue tier execution venue total 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
share of share maintain comparable fees among the
Equity execution venue tier number of tiers as established for
volume 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
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:
Percentage Percentage of
of options execution Percentage of
Options execution venue tier execution venue total recovery
mstockstill on DSK30JT082PROD with NOTICES
venues recovery
Tier 1 ............................................................................................................................................ 75.00 20.00 5.00
Tier 2 ............................................................................................................................................ 25.00 5.00 1.25
Total ...................................................................................................................................... 100 25 6.25
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![23352 Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices
The following table exhibits the The Operating Committee has allocations led to much higher fees for
relative separation of market share of determined to calculate fee tiers for larger Industry Members than for larger
share volume between Tier 1 and Tier Execution Venues every three months Execution Venues or vice versa, and/or
2 Options Execution Venues. In based on market share from the prior led to much higher fees for Industry
reviewing the table, note that while this three months. Based on its analysis of Member complexes than Execution
division was referenced as a data point historical data, the Operating Committee Venue complexes or vice versa.
to help differentiate between Options believes calculating tiers based on three Furthermore, the allocation of total
Execution Venue tiers, the proposed months of data will provide the best CAT costs recovered recognizes the
funding model is directly driven, not by balance between reflecting changes in difference in the number of CAT
market share thresholds, but rather by activity by Execution Venues while still Reporters that are Industry Members
fixed percentages of Options Execution providing predictability in the tiering versus CAT Reporters that are Execution
Venues across tiers to account for for Execution Venues. Venues. Specifically, the cost allocation
fluctuating levels of market share across takes into consideration that there are
(D) Allocation of Costs approximately 25 times more Industry
time. Actual market share in any tier
will vary based on the actual market In addition to the funding principles Members expected to report to the CAT
activity in a given measurement period, discussed above, including than Execution Venues (e.g., an
as well as the number of Options comparability of fees, Section 11.1(c) of estimated 1,630 Industry Members
Execution Venues included in the the CAT NMS Plan also requires versus 70 Execution Venues as of
measurement period. The Options expenses to be fairly and reasonably January 2017).
Execution Venue Percentages and shared among the Plan Participants and
Industry Members. Accordingly, in (II) Allocation Between Equity
Equity Execution Venue Recovery Execution Venues and Options
Allocation for each tier will remain developing the proposed fee schedules
pursuant to the funding model, the Execution Venues
fixed with each Options Execution
Operating Committee calculated how The Operating Committee also
Venue tier to be reassigned periodically,
the CAT costs would be allocated analyzed how the portion of CAT costs
as described below in Section 3(a)(1)(I)
between Industry Members and allocated to Execution Venues would be
[sic].
Execution Venues, and how the portion allocated between Equity Execution
Options of CAT costs allocated to Execution Venues and Options Execution Venues.
market share Venues would be allocated between In considering this allocation of costs,
Options execution venue tier of share Equity Execution Venues and Options the Operating Committee analyzed a
volume Execution Venues. These range of alternative splits for revenue
determinations are described below. recovered between Equity and Options
Tier 1 .................................... ≥1
Tier 2 .................................... <1
Execution Venues, including a 70/30,
(I) Allocation Between Industry 67/33, 65/35, 50/50 and 25/75 split.
Members and Execution Venues Based on this analysis, the Operating
(III) Market Share/Tier Assignments In determining the cost allocation Committee determined to allocate 75
The Operating Committee determined between Industry Members (other than percent of Execution Venue costs
that, prior to the start of CAT reporting, Execution Venue ATSs) and Execution recovered to Equity Execution Venues
market share for Execution Venues Venues, the Operating Committee and 25 percent to Options Execution
would be sourced from publicly- analyzed a range of possible splits for Venues. The Operating Committee
available market data. Options and revenue recovered from such Industry determined that a 75/25 division
equity volumes for Plan Participants Members and Execution Venues. Based between Equity and Options Execution
will be sourced from market data made on this analysis, the Operating Venues maintained elasticity across the
publicly available by Bats while Committee determined that 75 percent funding model as well the greatest level
Execution Venue ATS volumes will be of total costs recovered would be of fee equitability and comparability
sourced from market data made publicly allocated to Industry Members (other based on the current number of Equity
available by FINRA. Set forth in the than Execution Venue ATSs) and 25 and Options Execution Venues. For
Appendix are two charts, one listing the percent would be allocated to Execution example, the allocation establishes fees
current Equity Execution Venues, each Venues. The Operating Committee for the larger Equity Execution Venues
with its rank and tier, and one listing determined that this 75/25 division that are comparable to the larger
the current Options Execution Venues, maintained the greatest level of Options Execution Venues, and fees for
each with its rank and tier. comparability across the funding model, the smaller Equity Execution Venues
After the commencement of CAT keeping in view that comparability that are comparable to the smaller
reporting, market share for Execution should consider affiliations among or Options Execution Venues. In addition
Venues will be sourced from data between CAT Reporters (e.g., firms with to fee comparability between Equity
reported to the CAT. Equity Execution multiple Industry Members and/or Execution Venues and Options
Venue market share will be determined exchange licenses). For example, the Execution Venues, the allocation also
by calculating each Equity Execution cost allocation establishes fees for the establishes equitability between larger
Venue’s proportion of the total volume largest Industry Members (i.e., those (Tier 1) and smaller (Tier 2) Execution
of NMS Stock and OTC Equity shares Industry Members in Tiers 1, 2 and 3) Venues based upon the level of market
reported by all Equity Execution Venues that are comparable to the largest Equity share. Furthermore, the allocation is
during the relevant time period. Execution Venues and Options intended to reflect the relative levels of
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Similarly, market share for Options Execution Venues (i.e., those Execution current equity and options order events.
Execution Venues will be determined by Venues in Tier 1). In addition, the cost
calculating each Options Execution allocation establishes fees for Execution (E) Fee Levels
Venue’s proportion of the total volume Venue complexes that are comparable to The Operating Committee determined
of Listed Options contracts reported by those of Industry Member complexes. to establish a CAT-specific fee to
all Options Execution Venues during For example, when analyzing collectively recover the costs of building
the relevant time period. alternative allocations, other possible and operating the CAT. Accordingly,
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![23354 Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices
Monthly Quarterly CAT fees paid
Tier CAT fee CAT fee annually 46
1 ................................................................................................................................................... $19,205 $57,615 $230,460
2 ................................................................................................................................................... 13,204 39,612 158,448
As noted above, the fees set forth in Operating Committee also determined Execution Venue ATSs) and Execution
the tables reflect the Operating that the fees for Execution Venue Venues in the following manner. Note
Committee’s decision to ensure complexes should be comparable to that the calculation of CAT Reporter
comparable fees between Execution those of Industry Member complexes. fees assumes 53 Equity Execution
Venues and Industry Members. The fees The difference in the fees reflects this Venues, 15 Options Execution Venues
of the top tiers for Industry Members decision to recognize affiliations. and 1,631 Industry Members (other than
(other than Execution Venue ATSs) are The Operating Committee has Execution Venue ATSs) as of January
not identical to the top tier for calculated the schedule of effective fees 2017.
Execution Venues, however, because the for Industry Members (other than
CALCULATION OF ANNUAL TIER FEES FOR INDUSTRY MEMBERS
[‘‘IM’’]
Percentage of
Percentage of industry Percentage of
industry
Industry member tier 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 of
Industry member tier 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
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46 This column represents the approximate total for Listed Options (i.e., ‘‘CAT Fees Paid Annually’’
CAT Fees paid each year by each Execution Venue = ‘‘Monthly CAT Fee’’ × 12 months).
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![23358 Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices
(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 Plan Reporters allocated to each tier as may the percentage of CAT Reporters in each
Participants and Industry Members in a be necessary. In addition, the reviews assigned tier is relative. Therefore, a
manner reasonably related to the timing will evaluate the estimated ongoing CAT Reporter’s assigned tier will
when the Company expects to incur CAT costs and the level of the operating depend, not only on its own message
such development and implementation reserve. To the extent that the total CAT traffic or market share, but it also will
costs. The Company is currently costs decrease, the fees would be depend on the message traffic/market
incurring such development and adjusted downward, and, to the extent share across all CAT Reporters. For
implementation costs and will continue that the total CAT costs increase, the example, the percentage of Industry
to do so prior to the commencement of fees would be adjusted upward.49 Members (other than Execution Venue
CAT reporting and thereafter. For Furthermore, any surplus of the ATSs) in each tier is relative such that
example, the Plan Processor has Company’s revenues over its expenses is such Industry Member’s assigned tier
required up-front payments to begin to be included within the operational will depend on message traffic
building the CAT. In addition, the reserve to offset future fees. The generated across all CAT Reporters as
Company continues to incur consultant limitations on more frequent changes to well as the total number of CAT
and legal expenses on an on-going basis the fee, however, are intended to Reporters. The Operating Committee
to implement the CAT. Accordingly, the provide budgeting certainty for the CAT will inform CAT Reporters of their
Operating Committee determined that Reporters and the Company.50 To the assigned tier every three months
all CAT Reporters, including both extent that the Operating Committee following the periodic tiering process,
Industry Members and Execution approves changes to the number of tiers as the funding model will compare an
Venues (including Plan Participants), in the funding model or the fees individual CAT Reporter’s activity to
would begin to be invoiced as promptly assigned to each tier, then the Exchange that of other CAT Reporters in the
as possible following the establishment will file such changes with the SEC marketplace.
of a billing mechanism. The Exchange pursuant to Section 19(b) of the The following demonstrates a tier
will issue an Information Memorandum Exchange Act, and any such changes reassignment. In accordance with the
to its members when the billing will become effective in accordance funding model, the top 75% of Options
mechanism is established, specifying with the requirements of Section 19(b). Execution Venues in market share are
the date when such invoicing of (I) Initial and Periodic Tier categorized as Tier 1 while the bottom
Industry Members 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 share Market share
Options execution venue Tier Options execution venue Tier
rank 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
Options Execution Venue G ............. 7 1 Options Execution Venue I .............. 7 1
Options Execution Venue H ............. 8 1 Options Execution Venue H ............ 8 1
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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 such as any changes in costs related to the 50 Section B.7, Appendix C of the CAT NMS Plan,
associated with the CAT. Accordingly, CAT Fees retirement of existing regulatory systems, such as Approval Order at 85006.
would not be affected by increases or decreases in OATS.
other non-CAT expenses incurred by the SROs,
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![23360 Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices
Although the exact fee collection investors and the public interest, and reasonably designed to allocate the total
system and processes for CAT fees has not designed to permit unfair costs of the CAT equitably between and
not yet been established, all CAT fees discrimination between customers, among the Plan Participants and
will be billed and collected centrally issuers, brokers and dealer [sic], and Industry Members, and are therefore not
through the Company, via the Plan Section 6(b)(4) of the Act,54 which unfairly discriminatory. As discussed in
Processor or otherwise. Although each requires that the rules of the exchange detail above, the proposed tiered fees
Plan Participant will adopt its own fee provide for the equitable allocation of impose comparable fees on similarly
schedule regarding CAT Fees, no CAT reasonable dues, fees, and other charges situated CAT Reporters. For example,
Fees or portion thereof will be collected among members and issuers and other those with a larger impact on the CAT
by the individual Plan Participants. persons using its facilities. As discussed (measured via message traffic or market
Each Industry Member will receive from above, the SEC approved the bifurcated, share) pay higher fees, whereas CAT
the Company one invoice for its tiered, fixed fee funding model in the Reporters with a smaller impact pay
applicable CAT fees, not separate CAT NMS Plan, finding it was lower fees. Correspondingly, the tiered
invoices from each Plan Participant of reasonable and that it equitably structure lessens the impact on smaller
which it is a member. The Industry allocated fees among Plan Participants CAT Reporters by imposing smaller fees
Members will pay the CAT Fees to the and Industry Members. The Exchange on those CAT Reporters with less
Company via the centralized system for believes that the proposed tiered fees market share or message traffic. In
the collection of CAT fees established adopted pursuant to the funding model addition, the funding model takes into
by the Company.52 approved by the SEC in the CAT NMS consideration affiliations between CAT
Section 11.4 of the CAT NMS Plan Plan are reasonable, equitably allocated Reporters, imposing comparable fees on
also states that Plan Participants shall and not unfairly discriminatory. such affiliated entities.
require each Industry Member to pay all The Exchange believes that this Moreover, the Exchange believes that
applicable authorized CAT Fees within proposal is consistent with the Act the division of the total CAT costs
thirty days after receipt of an invoice or because it implements, interprets or between Industry Members and
other notice indicating payment is due clarifies the provisions of the Plan, and Execution Venues, and the division of
(unless a longer payment period is is designed to assist the Exchange and the Execution Venue portion of total
otherwise indicated). Section 11.4 its Industry Members in meeting costs between Equity and Options
further states that, if an Industry regulatory obligations pursuant to the Execution Venues, is reasonably
Member fails to pay any such fee when Plan. In approving the Plan, the SEC designed to allocate CAT costs among
due, such Industry Member shall pay noted that the Plan ‘‘is necessary and CAT Reporters. The 75/25 division
interest on the outstanding balance from appropriate in the public interest, for between Industry Members and
such due date until such fee is paid at the protection of investors and the Execution Venues maintains the greatest
a per annum rate equal to the lesser of: maintenance of fair and orderly markets, level of comparability across the
(i) The Prime Rate plus 300 basis points; to remove impediments to, and perfect funding model, keeping in view that
or (ii) the maximum rate permitted by the mechanism of a national market comparability should consider
applicable law. Therefore, in accordance system, or is otherwise in furtherance of affiliations among or between CAT
with Section 11.4 of the CAT NMS Plan, the purposes of the Act.’’ 55 To the Reporters (e.g., firms with multiple
the Exchange proposed to adopt extent that this proposal implements, Industry Members or exchange
paragraph (c)(2) of the proposed fee interprets or clarifies the Plan and licenses). Similarly, the 75/25 division
schedule. Paragraph (c)(2) of the applies specific requirements to between Equity and Options Execution
proposed fee schedule states that each Industry Members, the Exchange Venues maintains elasticity across the
Industry Member shall pay CAT Fees believes that this proposal furthers the funding model as well as the greatest
within thirty days after receipt of an objectives of the Plan, as identified by level of fee equitability and
invoice or other notice indicating the SEC, and is therefore consistent with comparability based on the current
payment is due (unless a longer the Act. number of Equity and Options
payment period is otherwise indicated). The Exchange believes that the Execution Venues.
If an Industry Member fails to pay any proposed tiered fees are reasonable. Finally, the Exchange believes that
such fee when due, such Industry First, the total CAT Fees to be collected the proposed fees are reasonable
Member shall pay interest on the would be directly associated with the because they would provide ease of
outstanding balance from such due date costs of establishing and maintaining calculation, ease of billing and other
until such fee is paid at a per annum the CAT, where such costs include Plan administrative functions, and
rate equal to the lesser of: (i) The Prime Processor costs and costs related to predictability of a fixed fee. Such factors
Rate plus 300 basis points; or (ii) the insurance, third party services and the are crucial to estimating a reliable
maximum rate permitted by applicable operational reserve. The CAT Fees revenue stream for the Company and for
law. would not cover Plan Participant permitting CAT Reporters to reasonably
services unrelated to the CAT. In predict their payment obligations for
2. Statutory Basis addition, any surplus CAT Fees cannot budgeting purposes.
The Exchange believes that the be distributed to the individual Plan
proposed rule change is consistent with B. Self-Regulatory Organization’s
Participants; such surpluses must be
the provisions of Section 6(b)(5) of the Statement of Burden on Competition
used as a reserve to offset future fees.
Act,53 which require, among other Given the direct relationship between Section 6(b)(8) of the Act 56 require
things, that rules of the exchange must [sic] that the rules of the Exchange not
mstockstill on DSK30JT082PROD with NOTICES
the fees and the CAT costs, the
be designed to prevent fraudulent and Exchange believes that the total level of impose any burden on competition that
manipulative acts and practices, to the CAT Fees is reasonable. is not necessary or appropriate. The
promote just and equitable principles of In addition, the Exchange believes Exchange does not believe that the
trade, and, in general, to protect that the proposed CAT Fees are proposed rule change will result in any
burden on competition that is not
52 Section 11.4 of the CAT NMS Plan. 54 15 U.S.C. 78f(b)(4).
53 15 U.S.C. 78f(b)(5). 55 Approval Order at 84697. 56 15 U.S.C. 78f(b)(8).
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![Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices 23361
necessary or appropriate in furtherance C. Self-Regulatory Organization’s with respect to the proposed rule
of the purposes of the Act. The Statement on Comments Regarding the change that are filed with the
Exchange notes that the proposed rule Proposed Rule Changes Received From Commission, and all written
change implements provisions of the Members, Participants or Others communications relating to the
CAT NMS Plan approved by the No written comments were either proposed rule change between the
Commission, and is designed to assist solicited or received. Commission and any person, other than
the Exchange in meeting its regulatory those that may be withheld from the
III. Date of Effectiveness of the public in accordance with the
obligations pursuant to the Plan.
Proposed Rule Changes and Timing for provisions of 5 U.S.C. 552, will be
Similarly, all national securities Commission Action
exchanges and FINRA are proposing available for Web site viewing and
this proposed fee schedule to The foregoing rule change is effective printing in the Commission’s Public
upon filing pursuant to Section Reference Room, 100 F Street NE.,
implement the requirements of the CAT
19(b)(3)(A)(ii) of the Act 57 and Washington, DC 20549, on official
NMS Plan. Therefore, this is not a
subparagraph(f)(2) of Rule 19b–4 business days between the hours of
competitive fee filing and, therefore, it
thereunder 58 because it establishes or 10:00 a.m. and 3:00 p.m. Copies of the
does not raise competition issues changes a due, fee or other charge filing also will be available for
between and among the exchanges and imposed by the Exchange. inspection and copying at the principal
FINRA. At any time within 60 days of the office of the Exchange. All comments
Moreover, as previously described, filing of the proposed rule change, the received will be posted without change;
the Exchange believes that the proposed Commission summarily may the Commission does not edit personal
rule change fairly and equitably temporarily suspend such rule change if identifying information from
allocates costs among CAT Reporters. In it appears to the Commission that such submissions. You should submit only
particular, the proposed fee schedule is action is necessary or appropriate in the information that you wish to make
structured to impose comparable fees on public interest, for the protection of available publicly. All submissions
similarly situated CAT Reporters, and investors, or otherwise in furtherance of should refer to File Number SR–CHX–
lessen the impact on smaller CAT the purposes of the Act. If the 2017–08, and should be submitted on or
Reporters. CAT Reporters with similar Commission takes such action, the before June 12, 2017.
levels of CAT activity will pay similar Commission shall institute proceedings For the Commission, by the Division of
to determine whether the proposed rule Trading and Markets, pursuant to delegated
fees. For example, Industry Members
should be approved or disapproved. authority.59
(other than Execution Venue ATSs) with
higher levels of message traffic will pay IV. Solicitation of Comments Eduardo A. Aleman,
higher fees, and those with lower levels Interested persons are invited to Assistant Secretary.
of message traffic will pay lower fees. submit written data, views, and [FR Doc. 2017–10295 Filed 5–19–17; 8:45 am]
Similarly, Execution Venue ATSs and arguments concerning the foregoing, BILLING CODE 8011–01–P
other Execution Venues with larger including whether the proposed rule
market share will pay higher fees, and change is consistent with the Act.
those with lower levels of market share Comments may be submitted by any of SECURITIES AND EXCHANGE
will pay lower fees. Therefore, given the following methods: COMMISSION
that there is generally a relationship Electronic Comments
between message traffic and market [Release No. 34–80695; File No. SR–
share to the CAT Reporter’s size, smaller • Use the Commission’s Internet NYSEMKT–2017–28]
CAT Reporters generally pay less than comment form (http://www.sec.gov/
rules/sro.shtml); or Self-Regulatory Organizations; NYSE
larger CAT Reporters. Accordingly, the
• Send an email to rule- MKT LLC; Notice of Filing and
Exchange does not believe that the CAT Immediate Effectiveness of Proposed
comments@sec.gov. Please include File
Fees would have a disproportionate Number SR–CHX–2017–08 on the Rule Change to Rule 994NY, Broadcast
effect on smaller or larger CAT subject line. Order Liquidity Delivery Mechanism
Reporters. In addition, ATSs and
exchanges will pay the same fees based Paper Comments May 16, 2017.
on market share. Therefore, the • Send paper comments in triplicate Pursuant to Section 19(b)(1) 1 of the
Exchange does not believe that the fees to Secretary, Securities and Exchange Securities Exchange Act of 1934 (the
will impose any burden on the Commission, 100 F Street NE., ‘‘Act’’),2 and Rule 19b–4 thereunder,3
competition between ATSs and Washington, DC 20549–1090. notice is hereby given that on May 10,
exchanges. Accordingly, the Exchange All submissions should refer to File 2017, NYSE MKT LLC (the ‘‘Exchange’’
believes that the proposed fees will Number SR–CHX–2017–08. This file or ‘‘NYSE MKT’’) filed with the
minimize the potential for adverse number should be included on the Securities and Exchange Commission
effects on competition between CAT subject line if email is used. To help the (the ‘‘Commission’’) the proposed rule
Reporters in the market. Commission process and review your change as described in Items I and II
comments more efficiently, please use below, which Items have been prepared
Furthermore, the tiered, fixed fee
only one method. The Commission will by the self-regulatory organization. The
funding model limits the disincentives
post all comments on the Commission’s Commission is publishing this notice to
mstockstill on DSK30JT082PROD with NOTICES
to providing liquidity to the market. Internet Web site (http://www.sec.gov/ solicit comments on the proposed rule
Therefore, the proposed fees are rules/sro.shtml). Copies of the change from interested persons.
structured to limit burdens on submission, all subsequent
competitive quoting and other liquidity amendments, all written statements 59 17 CFR 200.30–3(a)(12).
provision in the market. 1 15 U.S.C. 78s(b)(1).
57 15 U.S.C. 78s(b)(3)(A)(ii). 2 15 U.S.C. 78a.
58 17 CFR 240.19b–4(f)(2). 3 17 CFR 240.19b–4.
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Document Created: 2018-11-08 08:50:04
Document Modified: 2018-11-08 08:50:04
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| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
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