82 FR 23935 - Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange's Pricing Schedule at Section XIV
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 99 (May 24, 2017)
Federal Register Volume 82, Issue 99 (May 24, 2017)
| Page Range | 23935-23953 | |
| FR Document | 2017-10594 |
[Federal Register Volume 82, Number 99 (Wednesday, May 24, 2017)] [Notices] [Pages 23935-23953] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-10594] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80725; File No. SR-PHLX-2017-37] Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange's Pricing Schedule at Section XIV May 18, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on May 12, 2017, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed with the Securities and Exchange Commission (``SEC'' or ``Commission'') the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange.\3\ 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. \3\ The Exchange originally filed the proposed rule change on May 3, 2017 under File No. SR-PHLX-2017-35. The Exchange subsequently withdrew that filing on May 12, 2017 and filed this proposed rule change. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to adopt a fee schedule to establish the fees for Industry Members related to the National Market System Plan Governing the Consolidated Audit Trail (the ``CAT NMS Plan'' or ``Plan'') at Section XIV of the Phlx Pricing Schedule. The text of the proposed rule change is available on the Exchange's Web site at http://nasdaqphlx.cchwallstreet.com/, at the principal office of the Exchange, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. [[Page 23936]] A. Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of the proposed rule change is to adopt a fee schedule to establish the fees for Industry Members related to the CAT NMS Plan. Bats BYX Exchange, Inc., Bats BZX Exchange, Inc., Bats EDGA Exchange, Inc., Bats EDGX Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., Financial Industry Regulatory Authority, Inc. (``FINRA''), Investors' Exchange LLC, Miami International Securities Exchange, LLC, MIAX PEARL, LLC, NASDAQ BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC,\4\ NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, NYSE Arca, Inc. and NYSE National, Inc.\5\ (collectively, the ``Participants'') filed with the Commission, pursuant to Section 11A of the Exchange Act \6\ and Rule 608 of Regulation NMS thereunder,\7\ the CAT NMS Plan.\8\ The Participants filed the Plan to comply with Rule 613 of Regulation NMS under the Exchange Act. The Plan was published for comment in the Federal Register on May 17, 2016,\9\ and approved by the Commission, as modified, on November 15, 2016.\10\ The Plan is designed to create, implement and maintain a consolidated audit trail (``CAT'') that would capture customer and order event information for orders in NMS Securities and OTC Equity Securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution in a single consolidated data source. The Plan accomplishes this by creating CAT NMS, LLC (the ``Company''), of which each Participant is a member, to operate the CAT.\11\ Under the CAT NMS Plan, the Operating Committee of the Company (``Operating Committee'') has discretion to establish funding for the Company to operate the CAT, including establishing fees that the Participants will pay, and establishing fees for Industry Members that will be implemented by the Participants (``CAT Fees'').\12\ The Participants are required to file with the SEC under Section 19(b) of the Exchange Act any such CAT Fees applicable to Industry Members that the Operating Committee approves.\13\ Accordingly, Phlx submits this fee filing to propose the Consolidated Audit Trail Funding Fees, which will require Industry Members that are SRO members to pay the CAT Fees determined by the Operating Committee. --------------------------------------------------------------------------- \4\ ISE Gemini, LLC, ISE Mercury, LLC and International Securities Exchange, LLC have been renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC, and Nasdaq ISE, LLC, respectively. See Securities Exchange Act Release No. 80248 (March 15, 2017), 82 FR 14547 (March 21, 2017); Securities Exchange Act Release No. 80326 (March 29, 2017), 82 FR 16460 (April 4, 2017); and Securities Exchange Act Release No. 80325 (March 29, 2017), 82 FR 16445 (April 4, 2017). \5\ National Stock Exchange, Inc. has been renamed NYSE National, Inc. See Securities Exchange Act Release No. 79902 (Jan. 30, 2017), 82 FR 9258 (February 3, 2017). \6\ 15 U.S.C. 78k-1. \7\ 17 CFR 242.608. \8\ See Letter from the Participants to Brent J. Fields, Secretary, Commission, dated September 30, 2014; and Letter from Participants to Brent J. Fields, Secretary, Commission, dated February 27, 2015. On December 24, 2015, the Participants submitted an amendment to the CAT NMS Plan. See Letter from Participants to Brent J. Fields, Secretary, Commission, dated December 23, 2015. \9\ Securities Exchange Act Release No. 77724 (April 27, 2016), 81 FR 30614 (May 17, 2016). \10\ Securities Exchange Act Release No. 79318 (November 15, 2016), 81 FR 84696 (November 23, 2016) (``Approval Order''). \11\ The Plan also serves as the limited liability company agreement for the Company. \12\ Section 11.1(b) of the CAT NMS Plan. \13\ Id. --------------------------------------------------------------------------- (1) Executive Summary The following provides an executive summary of the CAT funding model approved by the Operating Committee, as well as Industry Members' rights and obligations related to the payment of CAT Fees calculated pursuant to the CAT funding model. A detailed description of the CAT funding model and the CAT Fees follows this executive summary. (A) CAT Funding ModelCAT Costs. The CAT funding model is designed to establish CAT-specific fees to collectively recover the costs of building and operating the CAT from all CAT Reporters, including Industry Members and Participants. The overall CAT costs for the calculation of the CAT Fees in this fee filing are comprised of Plan Processor CAT costs and non-Plan Processor CAT costs incurred, and estimated to be incurred, from November 21, 2016 through November 21, 2017. (See Section 3(a)(2)(E) [sic] below \14\) --------------------------------------------------------------------------- \14\ The Commission notes that references to Sections 3(a)(2) and 3(a)(3) in this Executive Summary should be instead to Sections II.A.1.(2) and II.A.1.(3), respectively. --------------------------------------------------------------------------- Bifurcated Funding Model. The CAT NMS Plan requires a bifurcated funding model, where costs associated with building and operating the CAT would be borne by (1) Participants and Industry Members that are Execution Venues for Eligible Securities through fixed tier fees based on market share, and (2) Industry Members (other than alternative trading systems (``ATSs'') that execute transactions in Eligible Securities (``Execution Venue ATSs'')) through fixed tier fees based on message traffic for Eligible Securities. (See Section 3(a)(2) [sic] below) Industry Member Fees. Each Industry Member (other than Execution Venue ATSs) will be placed into one of nine tiers of fixed fees, based on ``message traffic'' in Eligible Securities for a defined period (as discussed below). Prior to the start of CAT reporting, ``message traffic'' will be comprised of historical equity and equity options orders, cancels and quotes provided by each exchange and FINRA over the previous three months. After an Industry Member begins reporting to the CAT, ``message traffic'' will be calculated based on the Industry Member's Reportable Events reported to the CAT. Industry Members with lower levels of message traffic will pay a lower fee and Industry Members with higher levels of message traffic will pay a higher fee. (See Section 3(a)(2)(B) [sic] below) Execution Venue Fees. Each Equity Execution Venue will be placed in one of two tiers of fixed fees based on market share, and each Options Execution Venue will be placed in one of two tiers of fixed fees based on market share. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period. Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period. Equity Execution Venues with a larger market share will pay a larger CAT Fee than Equity Execution Venues with a smaller market share. Similarly, Options Execution Venues with a larger market share will pay a larger CAT Fee than Options Execution Venues with a smaller market share. (See Section 3(a)(2)(C) [sic] below) Cost Allocation. For the reasons discussed below, in designing the model, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. In [[Page 23937]] addition, the Operating Committee determined to allocate 75 percent of Execution Venue costs recovered to Equity Execution Venues and 25 percent to Options Execution Venues. (See Section 3(a)(2)(D) [sic] below) Comparability of Fees. The CAT funding model requires that the CAT Fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members). (See Section 3(a)(2)(F) [sic] below) (B) CAT Fees for Industry Members Fee Schedule. The quarterly CAT Fees for each tier for Industry Members are set forth in the two fee schedules in the Consolidated Audit Trail Funding Fees, one for Equity ATSs and one for Industry Members other than Equity ATSs. (See Section 3(a)(3)(B) [sic] below) Quarterly Invoices. Industry Members will be billed quarterly for CAT Fees, with the invoices payable within 30 days. The quarterly invoices will identify within which tier the Industry Member falls. (See Section 3(a)(3)(C) [sic] below) Centralized Payment. Each Industry Member will receive from the Company one invoice for its applicable CAT Fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay its CAT Fees to the Company via the centralized system for the collection of CAT Fees established by the Operating Committee. (See Section 3(a)(3)(C) [sic] below) Billing Commencement. Industry Members will begin to receive invoices for CAT Fees as promptly as possible following the establishment of a billing mechanism. Phlx will issue an information circular (``Circular'') to its members when the billing mechanism is established, specifying the date when such invoicing of Industry Members will commence. (See Section 3(a)(2)(G) [sic] below) (2) Description of the CAT Funding Model Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. As set forth in Article XI of the CAT NMS Plan, the CAT NMS Plan requires a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Participants and Industry Members that are Execution Venues through fixed tier fees based on market share, and (2) Industry Members (other than Execution Venue ATSs) through fixed tier fees based on message traffic. In its order approving the CAT NMS Plan, the Commission determined that the proposed funding model was ``reasonable'' \15\ and ``reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT.'' \16\ --------------------------------------------------------------------------- \15\ Approval Order at 84796. \16\ Id. at 84794. --------------------------------------------------------------------------- More specifically, the Commission stated in approving the CAT NMS Plan that ``[t]he Commission believes that the proposed funding model is reasonably designed to allocate the costs of the CAT between the Participants and Industry Members.'' \17\ The Commission further noted the following: --------------------------------------------------------------------------- \17\ Id. at 84795. --------------------------------------------------------------------------- The Commission believes that the proposed funding model reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and . . . the Exchange Act specifically permits the Participants to charge their members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.\18\ --------------------------------------------------------------------------- \18\ Id. at 84794. --------------------------------------------------------------------------- Accordingly, the funding model imposes fees on both Participants and Industry Members. In addition, as discussed in Appendix C of the CAT NMS Plan, the Operating Committee considered the advantages and disadvantages of a variety of alternative funding and cost allocation models before selecting the proposed model.\19\ After analyzing the various alternatives, the Operating Committee determined that the proposed tiered, fixed fee funding model provides a variety of advantages in comparison to the alternatives. First, the fixed fee model, as opposed to a variable fee model, provides transparency, ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes.\20\ Additionally, a strictly variable or metered funding model based on message volume would be far more likely to affect market behavior and place an inappropriate burden on competition. Moreover, as the SEC noted in approving the CAT NMS Plan, ``[t]he Participants also have offered a reasonable basis for establishing a funding model based on broad tiers, in that it be may be easier to implement.'' \21\ --------------------------------------------------------------------------- \19\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85006. \20\ In choosing a tiered fee structure, the 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 [[Page 23938]] tiers, and therefore be charged a higher fee. Industry Members with lower levels of message traffic will be in lower tiers and will be assessed a smaller fee for the CAT.\24\ Correspondingly, Execution Venues with the highest market share will be in the top tier, and therefore will be charged a higher fee. Execution Venues with a lower market share will be in the lower tier and will be assessed a smaller fee for the CAT.\25\ --------------------------------------------------------------------------- \23\ Approval Order at 85005. \24\ Id. \25\ Id. --------------------------------------------------------------------------- The Commission also noted in approving the CAT NMS Plan that ``[t]he Participants have offered a credible justification for using different criteria to charge Execution Venues (market share) and Industry Members (message traffic)'' \26\ in the CAT funding model. While there are multiple factors that contribute to the cost of building, maintaining and using the CAT, processing and storage of incoming message traffic is one of the most significant cost drivers for the CAT.\27\ Thus, the CAT NMS Plan provides that the fees payable by Industry Members (other than Execution Venue ATSs) will be based on the message traffic generated by such Industry Member.\28\ --------------------------------------------------------------------------- \26\ Id. at 84796. \27\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85005. \28\ Section 11.3(b) of the CAT NMS Plan. --------------------------------------------------------------------------- The CAT NMS Plan provides that the Operating Committee will use different criteria to establish fees for Execution Venues and non- Execution Venues due to the fundamental differences between the two types of entities. In particular, the CAT NMS Plan provides that fees charged to CAT Reporters that are Execution Venues will be based on the level of market share and that costs charged to Industry Members (other than Execution Venue ATSs) will be based upon message traffic.\29\ Because most Participant message traffic consists of quotations, and Participants usually disseminate quotations in all instruments they trade, regardless of execution volume, Execution Venues that are Participants generally disseminate similar amounts of message traffic. Accordingly, basing fees for Execution Venues on message traffic would not provide the same degree of differentiation among Execution Venues that it does among Industry Members (other than Execution Venue ATSs). In contrast, execution volume more accurately delineates the different levels of trading activity of Execution Venues.\30\ --------------------------------------------------------------------------- \29\ Section 11.2(c) of the CAT NMS Plan. \30\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85005. --------------------------------------------------------------------------- The CAT NMS Plan's funding model also is structured to avoid a ``reduction in market quality.'' \31\ The tiered, fixed fee funding model is designed to limit the disincentives to providing liquidity to the market. For example, the Participants expect that a firm that had a large volume of quotes would likely be categorized in one of the upper tiers, and would not be assessed a fee for this traffic directly as they would under a more directly metered model. In contrast, strictly variable or metered funding models based on message volume were far more likely to affect market behavior. In approving the CAT NMS Plan, the SEC stated that ``[t]he Participants also offered a reasonable basis for establishing a funding model based on broad tiers, in that it may be . . . less likely to have an incremental deterrent effect on liquidity provision.'' \32\ --------------------------------------------------------------------------- \31\ Section 11.2(e) of the CAT NMS Plan. \32\ Approval Order at 84796. --------------------------------------------------------------------------- The CAT NMS Plan is structured to avoid potential conflicts raised by the Operating Committee determining fees applicable to its own members--the Participants. First, the Company will be operated on a ``break-even'' basis, with fees imposed to cover costs and an appropriate reserve. Any surpluses will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits.\33\ To ensure that the Participants' operation of the CAT will not contribute to the funding of their other operations, Section 11.1(c) of the CAT NMS Plan specifically states that ``[a]ny surplus of the Company's revenues over its expenses shall be treated as an operational reserve to offset future fees.'' In addition, as set forth in Article VIII of the CAT NMS Plan, the Company ``intends to operate in a manner such that it qualifies as a `business league' within the meaning of Section 501(c)(6) of the [Internal Revenue] Code.'' To qualify as a business league, an organization must ``not [be] organized for profit and no part of the net earnings of [the organization can] inure[] to the benefit of any private shareholder or individual.'' \34\ As the SEC stated when approving the CAT NMS Plan, ``the Commission believes that the Company's application for Section 501(c)(6) business league status addresses issues raised by commenters about the Plan's proposed allocation of profit and loss by mitigating concerns that the Company's earnings could be used to benefit individual Participants.'' \35\ --------------------------------------------------------------------------- \33\ Id. at 84792. \34\ 26 U.S.C. 501(c)(6). \35\ Approval Order at 84793. --------------------------------------------------------------------------- Finally, by adopting a CAT-specific fee, the Participants will be fully transparent regarding the costs of the CAT. Charging a general regulatory fee, which would be used to cover CAT costs as well as other regulatory costs, would be less transparent than the selected approach of charging a fee designated to cover CAT costs only. A full description of the funding model is set forth below. This description includes the framework for the funding model as set forth in the CAT NMS Plan, as well as the details as to how the funding model will be applied in practice, including the number of fee tiers and the applicable fees for each tier. Phlx notes that the complete funding model is described below, including those fees that are to be paid by the Participants. The proposed Consolidated Audit Trail Funding Fees, however, do not apply to the Participants; the proposed Consolidated Audit Trail Funding Fees only apply to Industry Members. The CAT fees for Participants will be imposed separately by the Operating Committee pursuant to the CAT NMS Plan. (A) Funding Principles Section 11.2 of the CAT NMS Plan sets forth the principles that the Operating Committee applied in establishing the funding for the Company. The Operating Committee has considered these funding principles as well as the other funding requirements set forth in the CAT NMS Plan and in Rule 613 in developing the proposed funding model. The following are the funding principles in Section 11.2 of the CAT NMS Plan: To create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and other costs of the Company; To establish an allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company's resources and operations; To establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry [[Page 23939]] 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 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 [[Page 23940]] periodically, as described below in Section 3(a)(1)(H) [sic]. [GRAPHIC] [TIFF OMITTED] TN24MY17.012 ------------------------------------------------------------------------ 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 [[Page 23941]] for the period after the start of CAT reporting. The different definition for message traffic is necessary as there will be no Reportable Events as defined in the Plan, prior to the commencement of CAT reporting. Accordingly, prior to the start of CAT reporting, ``message traffic'' will be comprised of historical equity and equity options orders, cancels and quotes provided by each exchange and FINRA over the previous three months.\36\ Prior to the start of CAT reporting, orders would be comprised of the total number of equity and equity options orders received and originated by a member of an exchange or FINRA over the previous three-month period, including principal orders, cancel/replace orders, market maker orders originated by a member of an exchange, and reserve (iceberg) orders as well as order routes and executions originated by a member of FINRA, and excluding order rejects and implied orders.\37\ In addition, prior to the start of CAT reporting, cancels would be comprised of the total number of equity and equity option cancels received and originated by a member of an exchange or FINRA over a three-month period, excluding order modifications (e.g., order updates, order splits, partial cancels). Furthermore, prior to the start of CAT reporting, quotes would be comprised of information readily available to the exchanges and FINRA, such as the total number of historical equity and equity options quotes received and originated by a member of an exchange or FINRA over the prior three-month period. --------------------------------------------------------------------------- \36\ The SEC approved exemptive relief permitting Options Market Maker quotes to be reported to the Central Repository by the relevant Options Exchange in lieu of requiring that such reporting be done by both the Options Exchange and the Options Market Maker, as required by Rule 613 of Regulation NMS. See Securities Exchange Act Release No. 77265 (Mar. 1, 2017 [sic], 81 FR 11856 (March 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 Participant or an alternative trading system (``ATS'') (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).'' \39\ --------------------------------------------------------------------------- \39\ Although FINRA does not operate an execution venue, because it is a Participant, it is considered an ``Execution Venue'' under the Plan for purposes of determining fees. --------------------------------------------------------------------------- The Participants determined that ATSs should be included within the definition of Execution Venue. Given the similarity between the activity of exchanges and ATSs, both of which meet the definition of an ``exchange'' as set forth in the Exchange Act and the fact that the similar trading models would have similar anticipated burdens on the CAT, the Participants determined that ATSs should be treated in the same manner as the exchanges for the purposes of determining the level of fees associated with the CAT.\40\ --------------------------------------------------------------------------- \40\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85005. --------------------------------------------------------------------------- Given the differences between Execution Venues that trade NMS Stocks and/or OTC Equity Securities and Execution Venues that trade Listed Options, Section 11.3(a) addresses Execution Venues that trade NMS Stocks and/or OTC Equity Securities separately from Execution Venues that trade Listed Options. Equity and Options Execution Venues are treated separately for two reasons. First, the differing quoting behavior of Equity and Options Execution Venues makes comparison of activity between Execution Venues difficult. Second, Execution Venue tiers are calculated based on market share of share volume, and it is therefore difficult to compare market share between asset classes (i.e., equity shares versus options contracts). Discussed below is how the funding model treats the two types of Execution Venues. (I) NMS Stocks and OTC Equity Securities Section 11.3(a)(i) of the CAT NMS Plan states that each Execution Venue that (i) executes transactions or, (ii) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and not more than five tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association's market share. In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Equity Execution Venues and Option Execution Venues. In determining the Equity Execution Venue Tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Equity Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Equity Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's NMS Stocks and OTC Equity [[Page 23942]] Securities market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to the non-Execution Venue Industry Members to determine the number of tiers for Equity Execution Venues. The Operating Committee determined to establish two tiers for Equity Execution Venues, rather than a larger number of tiers as established for non-Execution Venue Industry Members, because the two tiers were sufficient to distinguish between the smaller number of Equity Execution Venues based on market share. Furthermore, the incorporation of additional Equity Execution Venue tiers would result in significantly higher fees for Tier 1 Equity Execution Venues and diminish comparability between Execution Venues and Industry Members. Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the ``Equity Execution Venue Percentages''). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee looked at historical market share of share volume for execution venues. Equities Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats Global Markets, Inc. (``Bats''). ATS market share of share volume was sourced from market statistics made publicly-available by FINRA. FINRA trading [sic] reporting facility (``TRF'') market share of share volume was sourced from market statistics made publicly available by Bats. As indicated by FINRA, ATSs accounted for 37.80% of the share volume across the TRFs during the recent tiering period. A 37.80/62.20 split was applied to the ATS and non-ATS breakdown of FINRA market share, with FINRA tiered based only on the non-ATS portion of its TRF market share of share volume. Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share of share volume. In doing so, the Participants considered that, as previously noted, Execution Venues in many cases have similar levels of message traffic due to quoting activity, and determined that it was simpler and more appropriate to have fewer, rather than more, Execution Venue tiers to distinguish between Execution Venues. The percentage of costs recovered by each Equity Execution Venue tier will be determined by predefined percentage allocations (the ``Equity Execution Venue Recovery Allocation''). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Equity Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Execution Venues in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical market share upon which Execution Venues had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of costs recovered for each tier were assigned, allocating higher percentages of recovery to the tier with a higher level of market share while avoiding any inappropriate burden on competition. Furthermore, due to the similar levels of impact on the CAT System across Execution Venues, there is less variation in CAT Fees between the highest and lowest of tiers for Execution Venues. Furthermore, by using percentages of Equity Execution Venues and costs recovered per tier, the Operating Committee sought to include stability and elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Equity Execution Venues or changes in market share. Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations: ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of Equity Execution Percentage of Equity Execution Venue tier Execution Venue total 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 share of Equity Execution Venue tier share volume (%) ------------------------------------------------------------------------ Tier 1.................................................. >=1 Tier 2.................................................. <1 ------------------------------------------------------------------------ (II) Listed Options Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue's Listed Options market share. For these purposes, market share will be calculated by contract volume. In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Options Execution Venues. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of [[Page 23943]] 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 Venues Recovery recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 75.00 20.00 5.00 Tier 2.......................................................... 25.00 5.00 1.25 ----------------------------------------------- Total....................................................... 100 25 6.25 ---------------------------------------------------------------------------------------------------------------- The following table exhibits the relative separation of market share of share volume between Tier 1 and Tier 2 Options Execution Venues. In reviewing the table, note that while this division was referenced as a data point to help differentiate between Options Execution Venue tiers, the proposed funding model is directly driven, not by market share thresholds, but rather by fixed percentages of Options Execution Venues across tiers to account for fluctuating levels of market share across time. Actual market share in any tier will vary based on the actual market activity in a given measurement period, as well as the number of Options Execution Venues included in the measurement period. The Options Execution Venue Percentages and Equity Execution Venue Recovery Allocation for each tier will remain fixed with each Options Execution Venue tier to be reassigned periodically, as described below in Section 3(a)(1)(I) [sic]. ------------------------------------------------------------------------ Options market share Options Execution Venue tier of share volume (%) ------------------------------------------------------------------------ Tier 1.................................................. >=1 Tier 2.................................................. <1 ------------------------------------------------------------------------ (III) Market Share/Tier Assignments The Operating Committee determined that, prior to the start of CAT reporting, market share for Execution Venues would be sourced from publicly-available market data. Options and equity volumes for Participants will be sourced from market data made publicly available by Bats while Execution Venue ATS volumes will be sourced from market data made publicly available by FINRA. Set forth in the Appendix are two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier. After the commencement of CAT reporting, market share for Execution Venues will be sourced from data reported to the CAT. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period. Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period. The Operating Committee has determined to calculate fee tiers for Execution Venues every three months based on market share from the prior three months. Based on its analysis of historical data, the Operating Committee believes calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Execution Venues while still providing predictability in the tiering for Execution Venues. (D) Allocation of Costs In addition to the funding principles discussed above, including comparability of fees, Section 11.1(c) of the CAT NMS Plan also requires [[Page 23944]] expenses to be fairly and reasonably shared among the Participants and Industry Members. Accordingly, in developing the proposed fee schedules pursuant to the funding model, the Operating Committee calculated how the CAT costs would be allocated between Industry Members and Execution Venues, and how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. These determinations are described below. (I) Allocation Between Industry Members and Execution Venues In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovered from such Industry Members and Execution Venues. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75/25 division maintained the greatest level of comparability across the funding model, keeping in view that comparability should consider affiliations among or between CAT Reporters (e.g., firms with multiple Industry Members and/or exchange licenses). For example, the cost allocation establishes fees for the largest Industry Members (i.e., those Industry Members in Tiers 1, 2 and 3) that are comparable to the largest Equity Execution Venues and Options Execution Venues (i.e., those Execution Venues in Tier 1). In addition, the cost allocation establishes fees for Execution Venue complexes that are comparable to those of Industry Member complexes. For example, when analyzing alternative allocations, other possible allocations led to much higher fees for larger Industry Members than for larger Execution Venues or vice versa, and/or led to much higher fees for Industry Member complexes than Execution Venue complexes or vice versa. Furthermore, the allocation of total CAT costs recovered recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 25 times more Industry Members expected to report to the CAT than Execution Venues (e.g., an estimated 1,630 Industry Members versus 70 Execution Venues as of January 2017). (II) Allocation Between Equity Execution Venues and Options Execution Venues The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity and Options Execution Venues, including a 70/30, 67/33, 65/35, 50/50 and 25/75 split. Based on this analysis, the Operating Committee determined to allocate 75 percent of Execution Venue costs recovered to Equity Execution Venues and 25 percent to Options Execution Venues. The Operating Committee determined that a 75/25 division between Equity and Options Execution Venues maintained elasticity across the funding model as well the greatest level of fee equitability and comparability based on the current number of Equity and Options Execution Venues. For example, the allocation establishes fees for the larger Equity Execution Venues that are comparable to the larger Options Execution Venues, and fees for the smaller Equity Execution Venues that are comparable to the smaller Options Execution Venues. In addition to fee comparability between Equity Execution Venues and Options Execution Venues, the allocation also establishes equitability between larger (Tier 1) and smaller (Tier 2) Execution Venues based upon the level of market share. Furthermore, the allocation is intended to reflect the relative levels of current equity and options order events. (E) Fee Levels The Operating Committee determined to establish a CAT-specific fee to collectively recover the costs of building and operating the CAT. Accordingly, under the funding model, the sum of the CAT Fees is designed to recover the total cost of the CAT. The Operating Committee has determined overall CAT costs to be comprised of Plan Processor costs and non-Plan Processor costs, which are estimated to be $50,700,000 in total for the year beginning November 21, 2016.\41\ --------------------------------------------------------------------------- \41\ It is anticipated that CAT-related costs incurred prior to November 21, 2016 will be addressed via a separate fee filing. --------------------------------------------------------------------------- The Plan Processor costs relate to costs incurred by the Plan Processor and consist of the Plan Processor's current estimates of average yearly ongoing costs, including development cost, which total $37,500,000. This amount is based upon the fees due to the Plan Processor pursuant to the agreement with the Plan Processor. The non-Plan Processor estimated costs incurred and to be incurred by the Company through November 21, 2017 consist of three categories of costs. The first category of such costs are third party support costs, which include historic legal fees, consulting fees and audit fees from November 21, 2016 until the date of filing as well as estimated third party support costs for the rest of the year. These amount to an estimated $5,200,000. The second category of non-Plan Processor costs are estimated insurance costs for the year. Based on discussions with potential insurance providers, assuming $2-5 million insurance premium on $100 million in coverage, the Company has received an estimate of $3,000,000 for the annual cost. The final cost figures will be determined following receipt of final underwriter quotes. The third category of non-Plan Processor costs is the operational reserve, which is comprised of three months of ongoing Plan Processor costs ($9,375,000), third party support costs ($1,300,000) and insurance costs ($750,000). The Operating Committee aims to accumulate the necessary funds for the establishment of the three-month operating reserve for the Company through the CAT Fees charged to CAT Reporters for the year. On an ongoing basis, the Operating Committee will account for any potential need for the replenishment of the operating reserve or other changes to total cost during its annual budgeting process. The following table summarizes the Plan Processor and non-Plan Processor cost components which comprise the total CAT costs of $50,700,000. ------------------------------------------------------------------------ Cost category Cost component Amount ------------------------------------------------------------------------ Plan Processor................. Operational Costs...... $37,500,000 [[Page 23945]] 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 ------------------------------------------------------------------------ --------------------------------------------------------------------------- \42\ This $5,000,000 represents the gradual accumulation of the funds for a target operating reserve of $11,425,000. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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: ---------------------------------------------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). \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. [[Page 23946]] ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of Industry Percentage of Industry member tier Industry Member total Members Recovery recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 0.500 8.50 6.38 Tier 2.......................................................... 2.500 35.00 26.25 Tier 3.......................................................... 2.125 21.25 15.94 Tier 4.......................................................... 4.625 15.75 11.81 Tier 5.......................................................... 3.625 7.75 5.81 Tier 6.......................................................... 4.000 5.25 3.94 Tier 7.......................................................... 17.500 4.50 3.38 Tier 8.......................................................... 20.125 1.50 1.13 Tier 9.......................................................... 45.000 0.50 0.38 ----------------------------------------------- Total....................................................... 100 100 75 ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ Estimated number Industry Member tier of Industry Members ------------------------------------------------------------------------ Tier 1............................................... 8 Tier 2............................................... 41 Tier 3............................................... 35 Tier 4............................................... 75 Tier 5............................................... 59 Tier 6............................................... 65 Tier 7............................................... 285 Tier 8............................................... 328 Tier 9............................................... 735 ------------------ Total............................................ 1,631 ------------------------------------------------------------------------ [[Page 23947]] [GRAPHIC] [TIFF OMITTED] TN24MY17.013 Calculation of Annual Tier Fees for Equity Execution Venus (``EV'') ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of Equity Execution Percentage of Equity Execution Venue tier Execution Venue total Venues Recovery recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 25.00 26.00 6.50 Tier 2.......................................................... 75.00 49.00 12.25 ----------------------------------------------- Total....................................................... 100 75 18.75 ---------------------------------------------------------------------------------------------------------------- [[Page 23948]] ------------------------------------------------------------------------ Estimated number Equity execution venue tier of Equity Execution Venues ------------------------------------------------------------------------ Tier 1............................................... 13 Tier 2............................................... 40 ------------------ Total............................................ 53 ------------------------------------------------------------------------ [GRAPHIC] [TIFF OMITTED] TN24MY17.014 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 Venues Recovery recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 75.00 20.00 5.00 Tier 2.......................................................... 25.00 5.00 1.25 ----------------------------------------------- Total....................................................... 100 25 6.25 ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ Estimated number Options Execution Venue tier of Options Execution Venues ------------------------------------------------------------------------ Tier 1............................................... 11 Tier 2............................................... 4 ------------------ Total............................................ 15 ------------------------------------------------------------------------ [GRAPHIC] [TIFF OMITTED] TN24MY17.015 Traceability of Total CAT Fees ---------------------------------------------------------------------------------------------------------------- Estimated Type Industry Member tier number of CAT fees paid Total Members annually recovery ---------------------------------------------------------------------------------------------------------------- Industry Members.................... Tier 1.................... 8 $404,016 $3,232,128 Tier 2.................... 41 324,612 13,309,092 Tier 3.................... 35 230,868 8,080,380 Tier 4.................... 75 79,860 5,989,500 Tier 5.................... 59 49,956 2,947,404 Tier 6.................... 65 30,720 1,996,800 Tier 7.................... 285 6,012 1,713,420 Tier 8.................... 328 1,740 570,720 Tier 9.................... 735 264 194,040 ----------------------------------------------- Total........................... .......................... 1,631 .............. 38,033,484 ---------------------------------------------------------------------------------------------------------------- [[Page 23949]] 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 The funding principles require a funding model in which the fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). Accordingly, in creating the model, the Operating Committee sought to take account of the affiliations between or among CAT Reporters--that is, where affiliated entities may have multiple Industry Member and/or Execution Venue licenses, by maintaining relative comparability of fees among such affiliations with the most expected CAT-related activity. To do this, the Participants identified representative affiliations in the largest tier of both Execution Venues and Industry Members and compared the aggregate fees that would be paid by such firms. While the proposed fees for Tier 1 and Tier 2 Industry Members are relatively higher than those of Tier 1 and Tier 2 Execution Venues, Execution Venue complex fees are relatively higher than those of Industry Member complexes largely due to affiliations between Execution Venues. The tables set forth below describe the largest Execution Venue and Industry Member complexes and their associated fees: \48\ --------------------------------------------------------------------------- \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. \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 Listing of Equity Execution Options Total fees by Execution Venue complex Venue tiers Execution EV complex Venue tier ---------------------------------------------------------------------------------------------------------------- Execution Venue Complex 1..................... Tier 1 (x2)............ Tier $1,900,962 Tier 2 (x1)............ 1 (x4) Tier 2 (x2) Execution Venue Complex 2..................... Tier 1 (x2)............ Tier 1,863,801 1 (x2) Tier 2 (x1) Execution Venue Complex 3..................... Tier 1 (x2)............ Tier 1,278,447 Tier 2 (x2)............ 1 (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 23950]] (G) Billing Onset Under Section 11.1(c) of the CAT NMS Plan, to fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such development and implementation costs. The Company is currently incurring such development and implementation costs and will continue to do so prior to the commencement of CAT reporting and thereafter. For example, the Plan Processor has required up-front payments to begin building the CAT. In addition, the Company continues to incur consultant and legal expenses on an on-going basis to implement the CAT. Accordingly, the Operating Committee determined that all CAT Reporters, including both Industry Members and Execution Venues (including Participants), would begin to be invoiced as promptly as possible following the establishment of a billing mechanism. Phlx will issue a Circular to its members when the billing mechanism is established, specifying the date when such invoicing of Industry Members will commence. (H) Changes to Fee Levels and Tiers Section 11.3(d) of the CAT NMS Plan states that ``[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.'' With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary. In addition, the reviews will evaluate the estimated ongoing CAT costs and the level of the operating reserve. To the extent that the total CAT costs decrease, the fees would be adjusted downward, and, to the extent that the total CAT costs increase, the fees would be adjusted upward.\49\ Furthermore, any surplus of the Company's revenues over its expenses is to be included within the operational reserve to offset future fees. The limitations on more frequent changes to the fee, however, are intended to provide budgeting certainty for the CAT Reporters and the Company.\50\ To the extent that the Operating Committee approves changes to the number of tiers in the funding model or the fees assigned to each tier, then Phlx 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. Phlx 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, Phlx 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 23951]] 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 Phlx proposes the Consolidated Audit Trail Funding Fees to implement the CAT Fees determined by the Operating Committee on Phlx's Industry Members. The proposed fee schedule has three sections, covering definitions, the fee schedule for CAT Fees, and the timing and manner of payments. Each of these sections is discussed in detail below. (A) Definitions Paragraph (a) of the proposed fee schedule sets forth the definitions for the proposed fee schedule. Paragraph (a)(1) states that, for purposes of the Consolidated Audit Trail Funding Fees, the terms ``CAT NMS Plan,'' ``Industry Member,'' ``NMS Stock,'' ``OTC Equity Security'', and ``Participant'' are defined as set forth in Rule 910A (Consolidated Audit Trail--Definitions). The proposed fee schedule imposes different fees on Equity ATSs and Industry Members that are not Equity ATSs. Accordingly, the proposed fee schedule defines the term ``Equity ATS.'' First, paragraph (a)(2) defines an ``ATS'' to mean an alternative trading system as defined in Rule 300(a) of Regulation ATS under the Securities Exchange Act of 1934, as amended, that operates pursuant to Rule 301 of Regulation ATS. This is the same definition of an ATS as set forth in Section 1.1 of the CAT NMS Plan in the definition of an ``Execution Venue.'' Then, paragraph (a)(4) defines an ``Equity ATS'' as an ATS that executes transactions in NMS Stocks and/or OTC Equity Securities. Paragraph (a)(3) of the proposed fee schedule defines the term ``CAT Fee'' to mean the Consolidated Audit Trail Funding Fee(s) to be paid by Industry Members as set forth in paragraph (b) in the proposed fee schedule. Finally, Paragraph (a)(6) defines an ``Execution Venue'' as a Participant or an ATS (excluding any such ATS that does not execute orders). This definition is the same substantive definition as set forth in Section 1.1 of the CAT NMS Plan. Paragraph (a)(5) defines an ``Equity Execution Venue'' as an Execution Venue that trades NMS Stocks and/or OTC Equity Securities. (B) Fee Schedule Phlx 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 Tier of Industry Quarterly Members CAT 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 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 Tier Execution CAT 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. Phlx will provide Industry Members with details regarding the manner of payment of CAT Fees by Circular. Although the exact fee collection system and processes for CAT fees has [[Page 23952]] not yet been established, all CAT fees will be billed and collected centrally through the Company, via the Plan Processor or otherwise. Although each Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay the CAT Fees to the Company via the centralized system for the collection of CAT fees established by the Company.\52\ --------------------------------------------------------------------------- \52\ Section 11.4 of the CAT NMS Plan. --------------------------------------------------------------------------- Section 11.4 of the CAT NMS Plan also states that Participants shall require each Industry Member to pay all applicable authorized CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). Section 11.4 further states that, if an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) the Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. Therefore, in accordance with Section 11.4 of the CAT NMS Plan, Phlx 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 its proposal is consistent with Section 6(b) of the Act,\53\ in general, and furthers the objectives of Sections 6(b)(4) and 6(b)(5) of the Act,\54\ in particular, in that it provides for the equitable allocation of reasonable dues, fees and other charges among members and issuers and other persons using any facility, is not designed to permit unfair discrimination between customers, issuers, brokers, or dealers, and is 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. --------------------------------------------------------------------------- \53\ 15 U.S.C. 78f(b). \54\ 15 U.S.C. 78f(b)(4) and (5). --------------------------------------------------------------------------- As discussed above, the SEC approved the bifurcated, tiered, fixed fee funding model in the CAT NMS Plan, finding it was reasonable and that it equitably allocated fees among Participants and Industry Members. The Exchange believes that the proposed tiered fees adopted pursuant to the funding model approved by the SEC in the CAT NMS Plan are reasonable, equitably allocated and not unfairly discriminatory. Phlx 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, Phlx 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. --------------------------------------------------------------------------- Phlx believes that the proposed tiered fees are reasonable. First, the total CAT Fees to be collected would be directly associated with the costs of establishing and maintaining the CAT, where such costs include Plan Processor costs and costs related to insurance, third party services and the operational reserve. The CAT Fees would not cover Participant services unrelated to the CAT. In addition, any surplus CAT Fees cannot be distributed to the individual Participants; such surpluses must be used as a reserve to offset future fees. Given the direct relationship between the fees and the CAT costs, Phlx believes that the total level of the CAT Fees is reasonable. In addition, the Exchange believes that the proposed CAT Fees are reasonably designed to allocate the total costs of the CAT equitably between and among the Participants and Industry Members, and are therefore not unfairly discriminatory. As discussed in detail above, the proposed tiered fees impose comparable fees on similarly situated CAT Reporters. For example, those with a larger impact on the CAT (measured via message traffic or market share) pay higher fees, whereas CAT Reporters with a smaller impact pay lower fees. Correspondingly, the tiered structure lessens the impact on smaller CAT Reporters by imposing smaller fees on those CAT Reporters with less market share or message traffic. In addition, the funding model takes into consideration affiliations between CAT Reporters, imposing comparable fees on such affiliated entities. Moreover, Phlx 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, Phlx 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 on Burden on Competition Section 6(b)(8) of the Act \56\ requires that SRO rules not impose any burden on competition that is not necessary or appropriate. Phlx does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. Phlx notes that the proposed rule change implements provisions of the CAT NMS Plan approved by the Commission, and is designed to assist Phlx in meeting its regulatory obligations pursuant to the Plan. Similarly, all national securities [[Page 23953]] 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, Phlx 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, Phlx does not believe that the fees will impose any burden on the competition between ATSs and exchanges. Accordingly, Phlx believes that the proposed fees will minimize the potential for adverse effects on competition between CAT Reporters in the market. Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act.\57\ 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 (i) necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) 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. --------------------------------------------------------------------------- \57\ 15 U.S.C. 78s(b)(3)(A)(ii). --------------------------------------------------------------------------- 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-PHLX-2017-37 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-PHLX-2017-37. 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-PHLX-2017-37, and should be submitted on or before June 14, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\58\ --------------------------------------------------------------------------- \58\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-10594 Filed 5-23-17; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices 23935
SECURITIES AND EXCHANGE Exchange filed Amendment No. 2 to the SECURITIES AND EXCHANGE
COMMISSION proposed rule change, which replaced COMMISSION
and superseded the original filing, as
[Release No. 34–80719; File No. SR–BOX– [Release No. 34–80725; File No. SR–PHLX–
2016–48] modified by Amendment No. 1, in its
entirety.9 2017–37]
Self-Regulatory Organizations; BOX Section 19(b)(2) of the Act 10 provides Self-Regulatory Organizations;
Options Exchange LLC; Notice of that, after initiating proceedings, the NASDAQ PHLX LLC; Notice of Filing
Designation of Longer Period for Commission shall issue an order and Immediate Effectiveness of
Commission Action on Proceedings To approving or disapproving the proposed Proposed Rule Change To Amend the
Determine Whether To Approve or rule change not later than 180 days after Exchange’s Pricing Schedule at
Disapprove a Proposed Rule Change, the date of publication of notice of filing Section XIV
as Modified by Amendment Nos. 1 and
of the proposed rule change. The
2 Thereto, To Adopt Rules for an Open- May 18, 2017.
Commission may extend the period for
Outcry Trading Floor Pursuant to Section 19(b)(1) of the
issuing an order approving or
May 18, 2017. disapproving the proposed rule change, Securities Exchange Act of 1934 (‘‘Act’’
On November 16, 2016, BOX Options however, by not more than 60 days if or ‘‘Exchange Act’’),1 and Rule 19b–4
Exchange LLC (the ‘‘Exchange’’) filed thereunder,2 notice is hereby given that
the Commission determines that a
with the Securities and Exchange on May 12, 2017, NASDAQ PHLX LLC
longer period is appropriate and
Commission (‘‘Commission’’), pursuant (‘‘Phlx’’ or ‘‘Exchange’’) filed with the
publishes the reasons for such
to Section 19(b)(1) of the Securities Securities and Exchange Commission
determination. The proposed rule (‘‘SEC’’ or ‘‘Commission’’) the proposed
Exchange Act of 1934 (‘‘Act’’) 1 and Rule change was published for notice and
19b–4 thereunder,2 a proposed rule rule change as described in Items I, II,
comment in the Federal Register on and III below, which Items have been
change to adopt rules for an open-outcry December 05, 2016.11 June 3, 2017 is
trading floor. The proposed rule change prepared by the Exchange.3 The
180 days from that date, and August 2, Commission is publishing this notice to
was published for comment in the 2017 is 240 days from that date.
Federal Register on December 05, solicit comments on the proposed rule
2016.3 The Commission received three The Commission finds it appropriate change from interested persons.
comment letters in response to the to designate a longer period within I. Self-Regulatory Organization’s
publication of the Notice.4 On January which to issue an order approving or Statement of the Terms of Substance of
10, 2017, the Commission extended the disapproving the proposed rule change the Proposed Rule Change
time period within which to approve so that it has sufficient time to consider
the proposed rule change, disapprove the proposed rule change, as modified The Exchange proposes to adopt a fee
the proposed rule change, or institute by Amendment Nos. 1 and 2, the issues schedule to establish the fees for
proceedings to determine whether to raised in the comment letters that have Industry Members related to the
approve or disapprove the proposed been submitted in connection therewith, National Market System Plan Governing
rule change to March 05, 2017.5 On and the Exchange’s Response to the Consolidated Audit Trail (the ‘‘CAT
February 21, 2017, the Commission comments. Accordingly, the NMS Plan’’ or ‘‘Plan’’) at Section XIV of
received a response letter from the the Phlx Pricing Schedule.
Commission, pursuant to Section
Exchange, as well as Amendment No. 1 The text of the proposed rule change
19(b)(2) of the Act,12 designates August
to the proposed rule change.6 On March is available on the Exchange’s Web site
2, 2017 as the date by which the
1, 2017, the Commission instituted at http://nasdaqphlx.cchwallstreet
Commission should either approve or
proceedings to determine whether to .com/, at the principal office of the
disapprove the proposed rule change, as Exchange, and at the Commission’s
approve or disapprove the proposed modified by Amendment Nos. 1 and 2
rule change, as modified by Amendment Public Reference Room.
(File No SR–BOX–2016–48).
No. 1.7 In response to the OIP, the II. Self-Regulatory Organization’s
Commission received five additional For the Commission, by the Division of
Statement of the Purpose of, and
comment letters.8 On May 17, 2017, the Trading and Markets, pursuant to delegated
Statutory Basis for, the Proposed Rule
authority.13
Change
1 15 U.S.C. 78s(b)(1). Eduardo A. Aleman,
2 17 CFR 240.19b–4. Assistant Secretary.
In its filing with the Commission, the
3 See Securities Exchange Act Release No. 79421 Exchange included statements
(November 29, 2016), 81 FR 87607 (‘‘Notice’’). [FR Doc. 2017–10587 Filed 5–23–17; 8:45 am]
concerning the purpose of and basis for
4 See letters to Brent J. Fields, Secretary, BILLING CODE 8011–01–P the proposed rule change and discussed
Commission, from Angelo Evangelou, Deputy
General Counsel, The Chicago Board Options any comments it received on the
Exchange, Inc. (‘‘CBOE’’), dated January 10, 2017; General Counsel, CBOE, dated April 21, 2017; Steve proposed rule change. The text of these
Steve Crutchfield, Head of Market Structure, CTC Crutchfield, Head of Market Structure, CTC
Trading, dated April 13, 2017; John Kinahan, CEO,
statements may be examined at the
Trading Group, LLC (‘‘CTC Trading’’), dated
December 31, 2016; and Joan C. Conley, Senior Vice Group One Trading, LP, dated April 11, 2017; places specified in Item IV below. The
President and Corporate Secretary, The Nasdaq Elizabeth King, General Counsel and Corporate Exchange has prepared summaries, set
Stock Market LLC (‘‘Nasdaq’’), dated December 22, Secretary, New York Stock Exchange, dated March forth in sections A, B, and C below, of
2016. 28, 2017; and Joan C. Conley, Senior Vice President
the most significant aspects of such
asabaliauskas on DSK3SPTVN1PROD with NOTICES
5 See Securities Exchange Act Release No. 79768, and Corporate Secretary, Nasdaq, dated March 27,
2017. statements.
82 FR 4956 (January 17, 2017).
9 See Amendment No. 2, dated May 17, 2017,
6 See letter to Brent J. Fields, Secretary,
Commission, from Lisa J. Fall, President, Exchange, which is being published for notice and comment. 1 15 U.S.C. 78s(b)(1).
received February 21, 2017, and Amendment No. 1, See Securities Exchange Act Release No. 80720 2 17 CFR 240.19b–4.
dated February 21, 2017. (May 18, 2017). 3 The Exchange originally filed the proposed rule
10 15 U.S.C. 78s(b)(2).
7 See Securities Exchange Act Release No. 80134,
change on May 3, 2017 under File No. SR–PHLX–
11 See Notice, supra note 3.
82 FR 12864 (March 7, 2017) (‘‘OIP’’). 2017–35. The Exchange subsequently withdrew that
12 15 U.S.C. 78s(b)(2).
8 See letters to Brent J. Fields, Secretary, filing on May 12, 2017 and filed this proposed rule
Commission, from Angelo Evangelou, Deputy 13 17 CFR 200.30–3(a)(57). change.
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![23936 Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices
A. Self-Regulatory Organization’s Securities, across all markets, from the Industry Members that are Execution
Statement of the Purpose of, and the time of order inception through routing, Venues for Eligible Securities through
Statutory Basis for, the Proposed Rule cancellation, modification, or execution fixed tier fees based on market share,
Change in a single consolidated data source. and (2) Industry Members (other than
The Plan accomplishes this by creating alternative trading systems (‘‘ATSs’’)
1. Purpose
CAT NMS, LLC (the ‘‘Company’’), of that execute transactions in Eligible
The purpose of the proposed rule which each Participant is a member, to Securities (‘‘Execution Venue ATSs’’))
change is to adopt a fee schedule to operate the CAT.11 Under the CAT NMS through fixed tier fees based on message
establish the fees for Industry Members Plan, the Operating Committee of the traffic for Eligible Securities. (See
related to the CAT NMS Plan. Company (‘‘Operating Committee’’) has Section 3(a)(2) [sic] below)
Bats BYX Exchange, Inc., Bats BZX discretion to establish funding for the • Industry Member Fees. Each
Exchange, Inc., Bats EDGA Exchange, Company to operate the CAT, including Industry Member (other than Execution
Inc., Bats EDGX Exchange, Inc., BOX establishing fees that the Participants Venue ATSs) will be placed into one of
Options Exchange LLC, C2 Options will pay, and establishing fees for nine tiers of fixed fees, based on
Exchange, Incorporated, Chicago Board Industry Members that will be ‘‘message traffic’’ in Eligible Securities
Options Exchange, Incorporated, implemented by the Participants (‘‘CAT for a defined period (as discussed
Chicago Stock Exchange, Inc., Financial Fees’’).12 The Participants are required below). Prior to the start of CAT
Industry Regulatory Authority, Inc. to file with the SEC under Section 19(b) reporting, ‘‘message traffic’’ will be
(‘‘FINRA’’), Investors’ Exchange LLC, of the Exchange Act any such CAT Fees comprised of historical equity and
Miami International Securities applicable to Industry Members that the equity options orders, cancels and
Exchange, LLC, MIAX PEARL, LLC, Operating Committee approves.13 quotes provided by each exchange and
NASDAQ BX, Inc., Nasdaq GEMX, LLC, Accordingly, Phlx submits this fee filing FINRA over the previous three months.
Nasdaq ISE, LLC, Nasdaq MRX, LLC,4 to propose the Consolidated Audit Trail After an Industry Member begins
NASDAQ PHLX LLC, The NASDAQ Funding Fees, which will require reporting to the CAT, ‘‘message traffic’’
Stock Market LLC, New York Stock Industry Members that are SRO will be calculated based on the Industry
Exchange LLC, NYSE MKT LLC, NYSE members to pay the CAT Fees Member’s Reportable Events reported to
Arca, Inc. and NYSE National, Inc.5 determined by the Operating the CAT. Industry Members with lower
(collectively, the ‘‘Participants’’) filed Committee. levels of message traffic will pay a lower
with the Commission, pursuant to fee and Industry Members with higher
Section 11A of the Exchange Act 6 and (1) Executive Summary levels of message traffic will pay a
Rule 608 of Regulation NMS The following provides an executive higher fee. (See Section 3(a)(2)(B) [sic]
thereunder,7 the CAT NMS Plan.8 The summary of the CAT funding model below)
Participants filed the Plan to comply approved by the Operating Committee, • Execution Venue Fees. Each Equity
with Rule 613 of Regulation NMS under as well as Industry Members’ rights and Execution Venue will be placed in one
the Exchange Act. The Plan was obligations related to the payment of of two tiers of fixed fees based on
published for comment in the Federal CAT Fees calculated pursuant to the market share, and each Options
Register on May 17, 2016,9 and CAT funding model. A detailed Execution Venue will be placed in one
approved by the Commission, as description of the CAT funding model of two tiers of fixed fees based on
modified, on November 15, 2016.10 The and the CAT Fees follows this executive market share. Equity Execution Venue
Plan is designed to create, implement summary. market share will be determined by
and maintain a consolidated audit trail calculating each Equity Execution
(‘‘CAT’’) that would capture customer (A) CAT Funding Model Venue’s proportion of the total volume
and order event information for orders • CAT Costs. The CAT funding model of NMS Stock and OTC Equity shares
in NMS Securities and OTC Equity is designed to establish CAT-specific reported by all Equity Execution Venues
fees to collectively recover the costs of during the relevant time period.
4 ISE Gemini, LLC, ISE Mercury, LLC and
building and operating the CAT from all Similarly, market share for Options
International Securities Exchange, LLC have been Execution Venues will be determined by
renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC,
CAT Reporters, including Industry
and Nasdaq ISE, LLC, respectively. See Securities Members and Participants. The overall calculating each Options Execution
Exchange Act Release No. 80248 (March 15, 2017), CAT costs for the calculation of the CAT Venue’s proportion of the total volume
82 FR 14547 (March 21, 2017); Securities Exchange Fees in this fee filing are comprised of of Listed Options contracts reported by
Act Release No. 80326 (March 29, 2017), 82 FR all Options Execution Venues during
16460 (April 4, 2017); and Securities Exchange Act
Plan Processor CAT costs and non-Plan
Release No. 80325 (March 29, 2017), 82 FR 16445 Processor CAT costs incurred, and the relevant time period. Equity
(April 4, 2017). estimated to be incurred, from Execution Venues with a larger market
5 National Stock Exchange, Inc. has been renamed
November 21, 2016 through November share will pay a larger CAT Fee than
NYSE National, Inc. See Securities Exchange Act 21, 2017. (See Section 3(a)(2)(E) [sic] Equity Execution Venues with a smaller
Release No. 79902 (Jan. 30, 2017), 82 FR 9258
(February 3, 2017). below 14) market share. Similarly, Options
6 15 U.S.C. 78k–1. • Bifurcated Funding Model. The Execution Venues with a larger market
7 17 CFR 242.608. CAT NMS Plan requires a bifurcated share will pay a larger CAT Fee than
8 See Letter from the Participants to Brent J. funding model, where costs associated Options Execution Venues with a
Fields, Secretary, Commission, dated September 30, with building and operating the CAT smaller market share. (See Section
2014; and Letter from Participants to Brent J. Fields, 3(a)(2)(C) [sic] below)
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Secretary, Commission, dated February 27, 2015.
would be borne by (1) Participants and
On December 24, 2015, the Participants submitted
• Cost Allocation. For the reasons
an amendment to the CAT NMS Plan. See Letter 11 The Plan also serves as the limited liability discussed below, in designing the
from Participants to Brent J. Fields, Secretary, company agreement for the Company. model, the Operating Committee
Commission, dated December 23, 2015. 12 Section 11.1(b) of the CAT NMS Plan.
determined that 75 percent of total costs
9 Securities Exchange Act Release No. 77724 13 Id.
recovered would be allocated to
(April 27, 2016), 81 FR 30614 (May 17, 2016). 14 The Commission notes that references to
10 Securities Exchange Act Release No. 79318 Sections 3(a)(2) and 3(a)(3) in this Executive
Industry Members (other than Execution
(November 15, 2016), 81 FR 84696 (November 23, Summary should be instead to Sections II.A.1.(2) Venue ATSs) and 25 percent would be
2016) (‘‘Approval Order’’). and II.A.1.(3), respectively. allocated to Execution Venues. In
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![Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices 23937
addition, the Operating Committee and operating the Central Repository are crucial to estimating a reliable
determined to allocate 75 percent of would be borne by (1) Participants and revenue stream for the Company and for
Execution Venue costs recovered to Industry Members that are Execution permitting CAT Reporters to reasonably
Equity Execution Venues and 25 percent Venues through fixed tier fees based on predict their payment obligations for
to Options Execution Venues. (See market share, and (2) Industry Members budgeting purposes.20 Additionally, a
Section 3(a)(2)(D) [sic] below) (other than Execution Venue ATSs) strictly variable or metered funding
• Comparability of Fees. The CAT through fixed tier fees based on message model based on message volume would
funding model requires that the CAT traffic. In its order approving the CAT be far more likely to affect market
Fees charged to the CAT Reporters with NMS Plan, the Commission determined behavior and place an inappropriate
the most CAT-related activity (measured that the proposed funding model was burden on competition. Moreover, as
by market share and/or message traffic, ‘‘reasonable’’ 15 and ‘‘reflects a the SEC noted in approving the CAT
as applicable) are generally comparable reasonable exercise of the Participants’ NMS Plan, ‘‘[t]he Participants also have
(where, for these comparability funding authority to recover the offered a reasonable basis for
purposes, the tiered fee structure takes Participants’ costs related to the establishing a funding model based on
into consideration affiliations between CAT.’’ 16 broad tiers, in that it be may be easier
or among CAT Reporters, whether More specifically, the Commission to implement.’’ 21
Execution Venues and/or Industry stated in approving the CAT NMS Plan In addition, multiple reviews of
Members). (See Section 3(a)(2)(F) [sic] that ‘‘[t]he Commission believes that the current broker-dealer order and trading
below) proposed funding model is reasonably data submitted under existing reporting
designed to allocate the costs of the CAT requirements showed a wide range in
(B) CAT Fees for Industry Members
between the Participants and Industry activity among broker-dealers, with a
• Fee Schedule. The quarterly CAT Members.’’ 17 The Commission further number of broker-dealers submitting
Fees for each tier for Industry Members noted the following: fewer than 1,000 orders per month and
are set forth in the two fee schedules in The Commission believes that the other broker-dealers submitting millions
the Consolidated Audit Trail Funding proposed funding model reflects a and even billions of orders in the same
Fees, one for Equity ATSs and one for reasonable exercise of the Participants’ period. Accordingly, the CAT NMS Plan
Industry Members other than Equity funding authority to recover the includes a tiered approach to fees. The
ATSs. (See Section 3(a)(3)(B) [sic] Participants’ costs related to the CAT. tiered approach helps ensure that fees
below) The CAT is a regulatory facility jointly are equitably allocated among similarly
• Quarterly Invoices. Industry owned by the Participants and . . . the situated CAT Reporters and furthers the
Members will be billed quarterly for Exchange Act specifically permits the goal of lessening the impact on smaller
CAT Fees, with the invoices payable Participants to charge their members firms.22 The self-regulatory
within 30 days. The quarterly invoices fees to fund their self-regulatory organizations considered several
will identify within which tier the obligations. The Commission further approaches to developing a tiered
Industry Member falls. (See Section believes that the proposed funding model, including defining fee tiers
3(a)(3)(C) [sic] below) model is designed to impose fees based on such factors as size of firm,
• Centralized Payment. Each Industry reasonably related to the Participants’ message traffic or trading dollar volume.
Member will receive from the Company self-regulatory obligations because the After analyzing the alternatives, it was
one invoice for its applicable CAT Fees, fees would be directly associated with concluded that the tiering should be
not separate invoices from each the costs of establishing and based on the relative impact of CAT
Participant of which it is a member. The maintaining the CAT, and not unrelated Reporters on the CAT System.
Industry Members will pay its CAT Fees SRO services.18 Accordingly, the CAT NMS Plan
to the Company via the centralized Accordingly, the funding model contemplates that costs will be allocated
system for the collection of CAT Fees imposes fees on both Participants and across the CAT Reporters on a tiered
established by the Operating Committee. Industry Members. basis to allocate costs to those CAT
(See Section 3(a)(3)(C) [sic] below) In addition, as discussed in Appendix Reporters that contribute more to the
• Billing Commencement. Industry costs of creating, implementing and
C of the CAT NMS Plan, the Operating
Members will begin to receive invoices maintaining the CAT.23 The fees to be
Committee considered the advantages
for CAT Fees as promptly as possible assessed at each tier are calculated so as
and disadvantages of a variety of
following the establishment of a billing to recoup a proportion of costs
alternative funding and cost allocation
mechanism. Phlx will issue an appropriate to the message traffic or
models before selecting the proposed
information circular (‘‘Circular’’) to its market share (as applicable) from CAT
model.19 After analyzing the various
members when the billing mechanism is Reporters in each tier. Therefore,
alternatives, the Operating Committee
established, specifying the date when Industry Members generating the most
determined that the proposed tiered,
such invoicing of Industry Members message traffic will be in the higher
fixed fee funding model provides a
will commence. (See Section 3(a)(2)(G)
variety of advantages in comparison to
[sic] below) 20 In choosing a tiered fee structure, the SROs
the alternatives. First, the fixed fee
concluded that the variety of benefits offered by a
(2) Description of the CAT Funding model, as opposed to a variable fee tiered fee structure, discussed above, outweighed
Model model, provides transparency, ease of the fact that Industry Members in any particular tier
Article XI of the CAT NMS Plan calculation, ease of billing and other would pay different rates per message traffic order
asabaliauskas on DSK3SPTVN1PROD with NOTICES
administrative functions, and event (e.g., an Industry Member with the largest
requires the Operating Committee to amount of message traffic in one tier would pay a
approve the operating budget, including predictability of a fixed fee. Such factors smaller amount per order event than an Industry
projected costs of developing and 15 Approval
Member in the same tier with the least amount of
Order at 84796. message traffic). Such variation is the natural result
operating the CAT for the upcoming 16 Id.at 84794. of a tiered fee structure.
year. As set forth in Article XI of the 17 Id. at 84795. 21 Approval Order at 84796.
CAT NMS Plan, the CAT NMS Plan 18 Id. at 84794. 22 Section B.7, Appendix C of the CAT NMS Plan,
requires a bifurcated funding model, 19 Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85006.
where costs associated with building Approval Order at 85006. 23 Approval Order at 85005.
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![23938 Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices
tiers, and therefore be charged a higher The CAT NMS Plan’s funding model used to benefit individual
fee. Industry Members with lower levels also is structured to avoid a ‘‘reduction Participants.’’ 35
of message traffic will be in lower tiers in market quality.’’ 31 The tiered, fixed Finally, by adopting a CAT-specific
and will be assessed a smaller fee for the fee funding model is designed to limit fee, the Participants will be fully
CAT.24 Correspondingly, Execution the disincentives to providing liquidity transparent regarding the costs of the
Venues with the highest market share to the market. For example, the CAT. Charging a general regulatory fee,
will be in the top tier, and therefore will Participants expect that a firm that had which would be used to cover CAT
be charged a higher fee. Execution a large volume of quotes would likely be costs as well as other regulatory costs,
Venues with a lower market share will categorized in one of the upper tiers, would be less transparent than the
be in the lower tier and will be assessed and would not be assessed a fee for this selected approach of charging a fee
a smaller fee for the CAT.25 traffic directly as they would under a designated to cover CAT costs only.
The Commission also noted in more directly metered model. In A full description of the funding
approving the CAT NMS Plan that contrast, strictly variable or metered model is set forth below. This
‘‘[t]he Participants have offered a funding models based on message description includes the framework for
credible justification for using different volume were far more likely to affect the funding model as set forth in the
criteria to charge Execution Venues market behavior. In approving the CAT CAT NMS Plan, as well as the details as
(market share) and Industry Members NMS Plan, the SEC stated that ‘‘[t]he to how the funding model will be
(message traffic)’’ 26 in the CAT funding Participants also offered a reasonable applied in practice, including the
model. While there are multiple factors basis for establishing a funding model number of fee tiers and the applicable
that contribute to the cost of building, based on broad tiers, in that it may be fees for each tier. Phlx notes that the
maintaining and using the CAT, . . . less likely to have an incremental complete funding model is described
processing and storage of incoming deterrent effect on liquidity below, including those fees that are to
message traffic is one of the most provision.’’ 32 be paid by the Participants. The
significant cost drivers for the CAT.27 proposed Consolidated Audit Trail
The CAT NMS Plan is structured to Funding Fees, however, do not apply to
Thus, the CAT NMS Plan provides that avoid potential conflicts raised by the
the fees payable by Industry Members the Participants; the proposed
Operating Committee determining fees Consolidated Audit Trail Funding Fees
(other than Execution Venue ATSs) will applicable to its own members—the
be based on the message traffic only apply to Industry Members. The
Participants. First, the Company will be CAT fees for Participants will be
generated by such Industry Member.28 operated on a ‘‘break-even’’ basis, with
The CAT NMS Plan provides that the imposed separately by the Operating
fees imposed to cover costs and an Committee pursuant to the CAT NMS
Operating Committee will use different appropriate reserve. Any surpluses will
criteria to establish fees for Execution Plan.
be treated as an operational reserve to
Venues and non-Execution Venues due offset future fees and will not be (A) Funding Principles
to the fundamental differences between distributed to the Participants as Section 11.2 of the CAT NMS Plan
the two types of entities. In particular, profits.33 To ensure that the sets forth the principles that the
the CAT NMS Plan provides that fees Participants’ operation of the CAT will Operating Committee applied in
charged to CAT Reporters that are not contribute to the funding of their establishing the funding for the
Execution Venues will be based on the other operations, Section 11.1(c) of the Company. The Operating Committee has
level of market share and that costs CAT NMS Plan specifically states that considered these funding principles as
charged to Industry Members (other ‘‘[a]ny surplus of the Company’s well as the other funding requirements
than Execution Venue ATSs) will be revenues over its expenses shall be set forth in the CAT NMS Plan and in
based upon message traffic.29 Because treated as an operational reserve to Rule 613 in developing the proposed
most Participant message traffic consists offset future fees.’’ In addition, as set funding model. The following are the
of quotations, and Participants usually forth in Article VIII of the CAT NMS funding principles in Section 11.2 of the
disseminate quotations in all Plan, the Company ‘‘intends to operate CAT NMS Plan:
instruments they trade, regardless of in a manner such that it qualifies as a • To create transparent, predictable
execution volume, Execution Venues ‘business league’ within the meaning of revenue streams for the Company that
that are Participants generally Section 501(c)(6) of the [Internal are aligned with the anticipated costs to
disseminate similar amounts of message Revenue] Code.’’ To qualify as a build, operate and administer the CAT
traffic. Accordingly, basing fees for business league, an organization must and other costs of the Company;
Execution Venues on message traffic ‘‘not [be] organized for profit and no • To establish an allocation of the
would not provide the same degree of part of the net earnings of [the Company’s related costs among
differentiation among Execution Venues organization can] inure[] to the benefit Participants and Industry Members that
that it does among Industry Members of any private shareholder or is consistent with the Exchange Act,
(other than Execution Venue ATSs). In individual.’’ 34 As the SEC stated when taking into account the timeline for
contrast, execution volume more approving the CAT NMS Plan, ‘‘the implementation of the CAT and
accurately delineates the different levels Commission believes that the distinctions in the securities trading
of trading activity of Execution Company’s application for Section operations of Participants and Industry
Venues.30 501(c)(6) business league status Members and their relative impact upon
asabaliauskas on DSK3SPTVN1PROD with NOTICES
addresses issues raised by commenters the Company’s resources and
24 Id.
about the Plan’s proposed allocation of operations;
25 Id.
profit and loss by mitigating concerns • To establish a tiered fee structure in
26 Id.
at 84796.
that the Company’s earnings could be which the fees charged to: (i) CAT
27 SectionB.7, Appendix C of the CAT NMS Plan,
Approval Order at 85005.
Reporters that are Execution Venues,
28 Section 11.3(b) of the CAT NMS Plan. 31 Section 11.2(e) of the CAT NMS Plan. including ATSs, are based upon the
29 Section 11.2(c) of the CAT NMS Plan. 32 Approval Order at 84796. level of market share; (ii) Industry
30 Section B.7, Appendix C of the CAT NMS Plan, 33 Id. at 84792.
Approval Order at 85005. 34 26 U.S.C. 501(c)(6). 35 Approval Order at 84793.
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![Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices 23941
for the period after the start of CAT The Operating Committee has separately for two reasons. First, the
reporting. The different definition for determined to calculate fee tiers every differing quoting behavior of Equity and
message traffic is necessary as there will three months, on a calendar quarter Options Execution Venues makes
be no Reportable Events as defined in basis, based on message traffic from the comparison of activity between
the Plan, prior to the commencement of prior three months. Based on its Execution Venues difficult. Second,
CAT reporting. Accordingly, prior to the analysis of historical data, the Operating Execution Venue tiers are calculated
start of CAT reporting, ‘‘message traffic’’ Committee believes that calculating tiers based on market share of share volume,
will be comprised of historical equity based on three months of data will and it is therefore difficult to compare
and equity options orders, cancels and provide the best balance between market share between asset classes (i.e.,
quotes provided by each exchange and reflecting changes in activity by equity shares versus options contracts).
FINRA over the previous three Industry Members while still providing Discussed below is how the funding
months.36 Prior to the start of CAT predictability in the tiering for Industry model treats the two types of Execution
reporting, orders would be comprised of Members. Because fee tiers will be Venues.
the total number of equity and equity calculated based on message traffic from
(I) NMS Stocks and OTC Equity
options orders received and originated the prior three months, the Operating
Securities
by a member of an exchange or FINRA Committee will begin calculating
over the previous three-month period, message traffic based on an Industry Section 11.3(a)(i) of the CAT NMS
including principal orders, cancel/ Member’s Reportable Events reported to Plan states that each Execution Venue
replace orders, market maker orders the CAT once the Industry Member has that (i) executes transactions or, (ii) in
originated by a member of an exchange, been reporting to the CAT for three the case of a national securities
and reserve (iceberg) orders as well as months. Prior to that, fee tiers will be association, has trades reported by its
order routes and executions originated calculated as discussed above with members to its trade reporting facility or
by a member of FINRA, and excluding regard to the period prior to CAT facilities for reporting transactions
order rejects and implied orders.37 In reporting. effected otherwise than on an exchange,
addition, prior to the start of CAT in NMS Stocks or OTC Equity Securities
(C) Execution Venue Tiering will pay a fixed fee depending on the
reporting, cancels would be comprised
of the total number of equity and equity Under Section 11.3(a) of the CAT market share of that Execution Venue in
option cancels received and originated NMS Plan, the Operating Committee is NMS Stocks and OTC Equity Securities,
by a member of an exchange or FINRA required to establish fixed fees payable with the Operating Committee
by Execution Venues. Section 1.1 of the establishing at least two and not more
over a three-month period, excluding
CAT NMS Plan defines an Execution than five tiers of fixed fees, based on an
order modifications (e.g., order updates,
Venue as ‘‘a Participant or an alternative Execution Venue’s NMS Stocks and
order splits, partial cancels).
trading system (‘‘ATS’’) (as defined in OTC Equity Securities market share. For
Furthermore, prior to the start of CAT
Rule 300 of Regulation ATS) that these purposes, market share for
reporting, quotes would be comprised of
operates pursuant to Rule 301 of Execution Venues that execute
information readily available to the
Regulation ATS (excluding any such transactions will be calculated by share
exchanges and FINRA, such as the total
ATS that does not execute orders).’’ 39 volume, and market share for a national
number of historical equity and equity
The Participants determined that securities association that has trades
options quotes received and originated
ATSs should be included within the reported by its members to its trade
by a member of an exchange or FINRA reporting facility or facilities for
definition of Execution Venue. Given
over the prior three-month period. reporting transactions effected
the similarity between the activity of
After an Industry Member begins exchanges and ATSs, both of which otherwise than on an exchange in NMS
reporting to the CAT, ‘‘message traffic’’ meet the definition of an ‘‘exchange’’ as Stocks or OTC Equity Securities will be
will be calculated based on the Industry set forth in the Exchange Act and the calculated based on share volume of
Member’s Reportable Events reported to fact that the similar trading models trades reported, provided, however, that
the CAT as will be defined in the would have similar anticipated burdens the share volume reported to such
Technical Specifications.38 on the CAT, the Participants determined national securities association by an
36 The SEC approved exemptive relief permitting
that ATSs should be treated in the same Execution Venue shall not be included
Options Market Maker quotes to be reported to the manner as the exchanges for the in the calculation of such national
Central Repository by the relevant Options purposes of determining the level of fees security association’s market share.
Exchange in lieu of requiring that such reporting be associated with the CAT.40 In accordance with Section 11.3(a)(i)
done by both the Options Exchange and the Options Given the differences between of the CAT NMS Plan, the Operating
Market Maker, as required by Rule 613 of Committee approved a tiered fee
Regulation NMS. See Securities Exchange Act Execution Venues that trade NMS
Release No. 77265 (Mar. 1, 2017 [sic], 81 FR 11856 Stocks and/or OTC Equity Securities structure for Equity Execution Venues
(March 7, 2016). This exemption applies to Options and Execution Venues that trade Listed and Option Execution Venues. In
Market Maker quotes for CAT reporting purposes Options, Section 11.3(a) addresses determining the Equity Execution
only. Therefore, notwithstanding the reporting Venue Tiers, the Operating Committee
exemption provided for Options Market Maker Execution Venues that trade NMS
quotes, Options Market Maker quotes will be Stocks and/or OTC Equity Securities considered the funding principles set
included in the calculation of total message traffic separately from Execution Venues that forth in Section 11.2 of the CAT NMS
for Options Market Makers for purposes of tiering trade Listed Options. Equity and Plan, seeking to create funding tiers that
under the CAT funding model both prior to CAT take into account the relative impact on
asabaliauskas on DSK3SPTVN1PROD with NOTICES
reporting and once CAT reporting commences. Options Execution Venues are treated
37 Consequently, firms that do not have ‘‘message
system resources of different Equity
traffic’’ reported to an exchange or OATS before then the Industry Member would not have a CAT Execution Venues, and that establish
they are reporting to the CAT would not be subject fee obligation. comparable fees among the CAT
to a fee until they begin to report information to 39 Although FINRA does not operate an execution
Reporters with the most Reportable
CAT. venue, because it is a Participant, it is considered Events. Each Equity Execution Venue
38 If an Industry Member (other than an Execution an ‘‘Execution Venue’’ under the Plan for purposes
Venue ATS) has no orders, cancels or quotes prior of determining fees. will be placed into one of two tiers of
to the commencement of CAT Reporting, or no 40 Section B.7, Appendix C of the CAT NMS Plan, fixed fees, based on the Execution
Reportable Events after CAT reporting commences, Approval Order at 85005. Venue’s NMS Stocks and OTC Equity
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![23942 Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices
Securities market share. In choosing two available by FINRA. FINRA trading [sic] total market volume across Equity
tiers, the Operating Committee reporting facility (‘‘TRF’’) market share Execution Venues while seeking to
performed an analysis similar to that of share volume was sourced from maintain comparable fees among the
discussed above with regard to the non- market statistics made publicly largest CAT Reporters. Accordingly,
Execution Venue Industry Members to available by Bats. As indicated by following the determination of the
determine the number of tiers for Equity FINRA, ATSs accounted for 37.80% of percentage of Execution Venues in each
Execution Venues. The Operating the share volume across the TRFs tier, the Operating Committee identified
Committee determined to establish two during the recent tiering period. A the percentage of total market volume
tiers for Equity Execution Venues, rather 37.80/62.20 split was applied to the for each tier based on the historical
than a larger number of tiers as ATS and non-ATS breakdown of FINRA market share upon which Execution
established for non-Execution Venue market share, with FINRA tiered based Venues had been initially ranked.
Industry Members, because the two tiers only on the non-ATS portion of its TRF Taking this into account along with the
were sufficient to distinguish between market share of share volume. resulting percentage of total recovery,
the smaller number of Equity Execution Based on this, the Operating the percentage allocation of costs
Venues based on market share. Committee considered the distribution recovered for each tier were assigned,
Furthermore, the incorporation of of Execution Venues, and grouped allocating higher percentages of
additional Equity Execution Venue tiers together Execution Venues with similar recovery to the tier with a higher level
would result in significantly higher fees levels of market share of share volume. of market share while avoiding any
for Tier 1 Equity Execution Venues and In doing so, the Participants considered inappropriate burden on competition.
diminish comparability between that, as previously noted, Execution Furthermore, due to the similar levels of
Execution Venues and Industry Venues in many cases have similar impact on the CAT System across
Members. levels of message traffic due to quoting
Execution Venues, there is less variation
Each Equity Execution Venue will be activity, and determined that it was
in CAT Fees between the highest and
ranked by market share and tiered by simpler and more appropriate to have
predefined Execution Venue lowest of tiers for Execution Venues.
fewer, rather than more, Execution
percentages, (the ‘‘Equity Execution Furthermore, by using percentages of
Venue tiers to distinguish between
Venue Percentages’’). In determining the Equity Execution Venues and costs
Execution Venues.
fixed percentage of Equity Execution The percentage of costs recovered by recovered per tier, the Operating
Venues in each tier, the Operating each Equity Execution Venue tier will Committee sought to include stability
Committee looked at historical market be determined by predefined percentage and elasticity within the funding model,
share of share volume for execution allocations (the ‘‘Equity Execution allowing the funding model to respond
venues. Equities Execution Venue Venue Recovery Allocation’’). In to changes in either the total number of
market share of share volume were determining the fixed percentage Equity Execution Venues or changes in
sourced from market statistics made allocation of costs recovered for each market share.
publicly-available by Bats Global tier, the Operating Committee Based on this analysis, the Operating
Markets, Inc. (‘‘Bats’’). ATS market considered the impact of CAT Reporter Committee approved the following
share of share volume was sourced from market share activity on the CAT Equity Execution Venue Percentages
market statistics made publicly- System as well as the distribution of and Recovery Allocations:
Percentage Percentage Percentage
of Equity of Execution
Equity Execution Venue tier of total
Execution Venue 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 Execution Venue Percentages and Options will pay a fixed fee depending
relative separation of market share of Equity Execution Venue Recovery on the Listed Options market share of
share volume between Tier 1 and Tier Allocation for each tier will remain that Execution Venue, with the
2 Equity Execution Venues. In fixed with each Equity Execution Venue Operating Committee establishing at
reviewing the table, note that while this tier to be reassigned periodically, as least two and no more than five tiers of
division was referenced as a data point described below in Section 3(a)(1)(I) fixed fees, based on an Execution
to help differentiate between Equity [sic]. Venue’s Listed Options market share.
Execution Venue tiers, the proposed For these purposes, market share will be
funding model is directly driven not by Equity market calculated by contract volume.
Equity share of
market share thresholds, but rather by Execution Venue tier share volume In accordance with Section 11.3(a)(ii)
fixed percentages of Equity Execution (%) of the CAT NMS Plan, the Operating
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Venues across tiers to account for Committee approved a tiered fee
fluctuating levels of market share across Tier 1 .................................... ≥1
Tier 2 .................................... <1
structure for Options Execution Venues.
time. Actual market share in any tier In determining the tiers, the Operating
will vary based on the actual market Committee considered the funding
(II) Listed Options
activity in a given measurement period, principles set forth in Section 11.2 of
as well as the number of Equity Section 11.3(a)(ii) of the CAT NMS the CAT NMS Plan, seeking to create
Execution Venues included in the Plan states that each Execution Venue funding tiers that take into account the
measurement period. The Equity that executes transactions in Listed relative impact on system resources of
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![Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices 23943
different Options Execution Venues, significantly higher fees for Tier 1 Venue Recovery Allocation’’). In
and that establish comparable fees Options Execution Venues and reduce determining the fixed percentage
among the CAT Reporters with the most comparability between Execution allocation of costs recovered for each
Reportable Events. Each Options Venues and Industry Members. tier, the Operating Committee
Execution Venue will be placed into one Each Options Execution Venue will considered the impact of CAT Reporter
of two tiers of fixed fees, based on the be ranked by market share and tiered by market share activity on the CAT
Execution Venue’s Listed Options predefined Execution Venue System as well as the distribution of
market share. In choosing two tiers, the percentages, (the ‘‘Options Execution total market volume across Options
Operating Committee performed an Venue Percentages’’). To determine the Execution Venues while seeking to
analysis similar to that discussed above fixed percentage of Options Execution maintain comparable fees among the
with regard to Industry Members (other Venues in each tier, the Operating largest CAT Reporters. Furthermore, by
than Execution Venue ATSs) to Committee analyzed the historical and using percentages of Options Execution
determine the number of tiers for publicly available market share of Venues and costs recovered per tier, the
Options Execution Venues. The Options Execution Venues to group Operating Committee sought to include
Operating Committee determined to Options Execution Venues with similar stability and elasticity within the
establish two tiers for Options market shares across the tiers. Options funding model, allowing the funding
Execution Venues, rather than a larger Execution Venue market share of share model to respond to changes in either
number of tiers as established for volume were sourced from market the total number of Options Execution
Industry Members (other than Execution statistics made publicly-available by Venues or changes in market share. The
Venue ATSs), because the two tiers Bats. The process for developing the process for developing the Options
were sufficient to distinguish between Options Execution Venue Percentages Execution Venue Recovery Allocation
the smaller number of Options was the same as discussed above with was the same as discussed above with
Execution Venues based on market regard to Equity Execution Venues. regard to Equity Execution Venues.
share. Furthermore, due to the smaller The percentage of costs recovered by Based on this analysis, the Operating
number of Options Execution Venues, each Options Execution Venue tier will Committee approved the following
the incorporation of additional Options be determined by predefined percentage Options Execution Venue Percentages
Execution Venue tiers would result in allocations (the ‘‘Options Execution and Recovery Allocations:
Percentage Percentage Percentage
of Options of Execution
Options Execution Venue tier of total
Execution Venue recovery
Venues Recovery
Tier 1 ............................................................................................................................................ 75.00 20.00 5.00
Tier 2 ............................................................................................................................................ 25.00 5.00 1.25
Total ...................................................................................................................................... 100 25 6.25
The following table exhibits the by calculating each Equity Execution
Options
relative separation of market share of Venue’s proportion of the total volume
market
share volume between Tier 1 and Tier Options Execution Venue tier share of
of NMS Stock and OTC Equity shares
share volume
2 Options Execution Venues. In reported by all Equity Execution Venues
(%)
reviewing the table, note that while this during the relevant time period.
division was referenced as a data point Tier 1 .................................... ≥1 Similarly, market share for Options
to help differentiate between Options Tier 2 .................................... <1 Execution Venues will be determined by
Execution Venue tiers, the proposed calculating each Options Execution
funding model is directly driven, not by (III) Market Share/Tier Assignments Venue’s proportion of the total volume
market share thresholds, but rather by The Operating Committee determined of Listed Options contracts reported by
fixed percentages of Options Execution that, prior to the start of CAT reporting, all Options Execution Venues during
Venues across tiers to account for market share for Execution Venues the relevant time period.
fluctuating levels of market share across would be sourced from publicly- The Operating Committee has
time. Actual market share in any tier available market data. Options and determined to calculate fee tiers for
will vary based on the actual market equity volumes for Participants will be Execution Venues every three months
activity in a given measurement period, sourced from market data made publicly based on market share from the prior
available by Bats while Execution three months. Based on its analysis of
as well as the number of Options
Venue ATS volumes will be sourced historical data, the Operating Committee
Execution Venues included in the
from market data made publicly believes calculating tiers based on three
measurement period. The Options months of data will provide the best
available by FINRA. Set forth in the
Execution Venue Percentages and
Appendix are two charts, one listing the balance between reflecting changes in
Equity Execution Venue Recovery activity by Execution Venues while still
current Equity Execution Venues, each
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Allocation for each tier will remain with its rank and tier, and one listing providing predictability in the tiering
fixed with each Options Execution the current Options Execution Venues, for Execution Venues.
Venue tier to be reassigned periodically, each with its rank and tier.
as described below in Section 3(a)(1)(I) (D) Allocation of Costs
After the commencement of CAT
[sic]. reporting, market share for Execution In addition to the funding principles
Venues will be sourced from data discussed above, including
reported to the CAT. Equity Execution comparability of fees, Section 11.1(c) of
Venue market share will be determined the CAT NMS Plan also requires
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![23950 Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices
(G) Billing Onset Committee will review the distribution criteria for each tier or the fee amount
Under Section 11.1(c) of the CAT of Industry Members and Execution corresponding to each tier.
NMS Plan, to fund the development and Venues across tiers, and make any In performing the tri-monthly
implementation of the CAT, the updates to the percentage of CAT reassignments, Phlx notes that the
Company shall time the imposition and Reporters allocated to each tier as may percentage of CAT Reporters in each
collection of all fees on Participants and be necessary. In addition, the reviews assigned tier is relative. Therefore, a
Industry Members in a manner will evaluate the estimated ongoing CAT Reporter’s assigned tier will
reasonably related to the timing when CAT costs and the level of the operating depend, not only on its own message
the Company expects to incur such reserve. To the extent that the total CAT
traffic or market share, but it also will
development and implementation costs. costs decrease, the fees would be
depend on the message traffic/market
The Company is currently incurring adjusted downward, and, to the extent
share across all CAT Reporters. For
such development and implementation that the total CAT costs increase, the
example, the percentage of Industry
costs and will continue to do so prior fees would be adjusted upward.49
Members (other than Execution Venue
to the commencement of CAT reporting Furthermore, any surplus of the
ATSs) in each tier is relative such that
and thereafter. For example, the Plan Company’s revenues over its expenses is
such Industry Member’s assigned tier
Processor has required up-front to be included within the operational
will depend on message traffic
payments to begin building the CAT. In reserve to offset future fees. The
generated across all CAT Reporters as
addition, the Company continues to limitations on more frequent changes to
well as the total number of CAT
incur consultant and legal expenses on the fee, however, are intended to
Reporters. The Operating Committee
an on-going basis to implement the provide budgeting certainty for the CAT
will inform CAT Reporters of their
CAT. Accordingly, the Operating Reporters and the Company.50 To the
assigned tier every three months
Committee determined that all CAT extent that the Operating Committee
following the periodic tiering process,
Reporters, including both Industry approves changes to the number of tiers
as the funding model will compare an
Members and Execution Venues in the funding model or the fees
individual CAT Reporter’s activity to
(including Participants), would begin to assigned to each tier, then Phlx will file
that of other CAT Reporters in the
be invoiced as promptly as possible such changes with the SEC pursuant to
marketplace.
following the establishment of a billing Section 19(b) of the Exchange Act, and
mechanism. Phlx will issue a Circular to any such changes will become effective The following demonstrates a tier
its members when the billing in accordance with the requirements of reassignment. In accordance with the
mechanism is established, specifying Section 19(b). funding model, the top 75% of Options
the date when such invoicing of Execution Venues in market share are
(I) Initial and Periodic Tier categorized as Tier 1 while the bottom
Industry Members will commence. Reassignments 25% of Options Execution Venues in
(H) Changes to Fee Levels and Tiers The Operating Committee has market share are categorized as Tier 2.
Section 11.3(d) of the CAT NMS Plan determined to calculate fee tiers every In the sample scenario below, Options
states that ‘‘[t]he Operating Committee three months based on market share or Execution Venue L is initially
shall review such fee schedule on at message traffic, as applicable, from the categorized as a Tier 2 Options
least an annual basis and shall make any prior three months. For the initial tier Execution Venue in Period A due to its
changes to such fee schedule that it assignments, the Company will market share. When market share is
deems appropriate. The Operating calculate the relevant tier for each CAT recalculated for Period B, the market
Committee is authorized to review such Reporter using the three months of data share of Execution Venue L increases,
fee schedule on a more regular basis, but prior to the commencement date. As and it is therefore subsequently
shall not make any changes on more with the initial tier assignment, for the reranked and reassigned to Tier 1 in
than a semi-annual basis unless, tri-monthly reassignments, the Period B. Correspondingly, Options
pursuant to a Supermajority Vote, the Company will calculate the relevant tier Execution Venue K, initially a Tier 1
Operating Committee concludes that using the three months of data prior to Options Execution Venue in Period A,
such change is necessary for the the relevant tri-monthly date. Phlx notes is reassigned to Tier 2 in Period B due
adequate funding of the Company.’’ that any movement of CAT Reporters to decreases in its market share of share
With such reviews, the Operating between tiers will not change the volume.
Period A Period B
Market Market share
Options Execution Venue Tier Options Execution Venue Tier
share 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
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Options Execution Venue G .............. 7 1 Options Execution Venue I .............. 7 1
Options Execution Venue H .............. 8 1 Options Execution Venue H ............ 8 1
Options Execution Venue I ............... 9 1 Options Execution Venue G ............ 9 1
Options Execution Venue J ............... 10 1 Options Execution Venue J ............. 10 1
Options Execution Venue K .............. 11 1 Options Execution Venue L ............. 11 1
49 The CAT Fees are designed to recover the costs 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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![Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices 23953
exchanges and FINRA are proposing within 60 days of the filing of the submissions. You should submit only
this proposed fee schedule to proposed rule change, the Commission information that you wish to make
implement the requirements of the CAT summarily may temporarily suspend available publicly. All submissions
NMS Plan. Therefore, this is not a such rule change if it appears to the should refer to File Number SR–PHLX–
competitive fee filing and, therefore, it Commission that such action is (i) 2017–37, and should be submitted on or
does not raise competition issues necessary or appropriate in the public before June 14, 2017.
between and among the exchanges and interest; (ii) for the protection of For the Commission, by the Division of
FINRA. investors; or (iii) otherwise in Trading and Markets, pursuant to delegated
Moreover, as previously described, furtherance of the purposes of the Act. authority.58
Phlx believes that the proposed rule If the Commission takes such action, the Eduardo A. Aleman,
change fairly and equitably allocates Commission shall institute proceedings Assistant Secretary.
costs among CAT Reporters. In to determine whether the proposed rule
[FR Doc. 2017–10594 Filed 5–23–17; 8:45 am]
particular, the proposed fee schedule is should be approved or disapproved.
structured to impose comparable fees on BILLING CODE 8011–01–P
similarly situated CAT Reporters, and IV. Solicitation of Comments
lessen the impact on smaller CAT Interested persons are invited to
Reporters. CAT Reporters with similar submit written data, views, and SECURITIES AND EXCHANGE
levels of CAT activity will pay similar arguments concerning the foregoing, COMMISSION
fees. For example, Industry Members including whether the proposed rule
[Release No. 34–80727; File No. SR–FINRA–
(other than Execution Venue ATSs) with change is consistent with the Act. 2017–014]
higher levels of message traffic will pay Comments may be submitted by any of
higher fees, and those with lower levels the following methods: Self-Regulatory Organizations;
of message traffic will pay lower fees. Electronic Comments Financial Industry Regulatory
Similarly, Execution Venue ATSs and Authority, Inc.; Notice of Filing and
other Execution Venues with larger • Use the Commission’s Internet Immediate Effectiveness of a Proposed
market share will pay higher fees, and comment form (http://www.sec.gov/ Rule Change To Extend the Tier Size
those with lower levels of market share rules/sro.shtml); or Pilot of Rule 6433 (Minimum Quotation
will pay lower fees. Therefore, given • Send an email to rule-comments@
Size Requirements for OTC Equity
that there is generally a relationship sec.gov. Please include File Number SR–
Securities)
between message traffic and market PHLX–2017–37 on the subject line.
share to the CAT Reporter’s size, smaller Paper Comments May 18, 2017.
CAT Reporters generally pay less than Pursuant to Section 19(b)(1) of the
• Send paper comments in triplicate Securities Exchange Act of 1934
larger CAT Reporters. Accordingly, the to Secretary, Securities and Exchange
Exchange does not believe that the CAT (‘‘Act’’) 1 and Rule 19b–4 thereunder,2
Commission, 100 F Street NE., notice is hereby given that on May 16,
Fees would have a disproportionate Washington, DC 20549–1090.
effect on smaller or larger CAT 2017, Financial Industry Regulatory
All submissions should refer to File Authority, Inc. (‘‘FINRA’’) filed with the
Reporters. In addition, ATSs and
Number SR–PHLX–2017–37. This file Securities and Exchange Commission
exchanges will pay the same fees based
number should be included on the (‘‘SEC’’ or ‘‘Commission’’) the proposed
on market share. Therefore, Phlx does
subject line if email is used. To help the rule change as described in Items I and
not believe that the fees will impose any
Commission process and review your II below, which Items have been
burden on the competition between
comments more efficiently, please use prepared by FINRA. FINRA has
ATSs and exchanges. Accordingly, Phlx
only one method. The Commission will designated the proposed rule change as
believes that the proposed fees will
post all comments on the Commission’s constituting a ‘‘non-controversial’’ rule
minimize the potential for adverse
Internet Web site (http://www.sec.gov/ change under paragraph (f)(6) of Rule
effects on competition between CAT
rules/sro.shtml). Copies of the 19b–4 under the Act,3 which renders
Reporters in the market.
Furthermore, the tiered, fixed fee submission, all subsequent the proposal effective upon receipt of
funding model limits the disincentives amendments, all written statements this filing by the Commission. The
to providing liquidity to the market. with respect to the proposed rule Commission is publishing this notice to
Therefore, the proposed fees are change that are filed with the solicit comments on the proposed rule
structured to limit burdens on Commission, and all written change from interested persons.
competitive quoting and other liquidity communications relating to the
proposed rule change between the I. Self-Regulatory Organization’s
provision in the market. Statement of the Terms of Substance of
Commission and any person, other than
C. Self-Regulatory Organization’s those that may be withheld from the the Proposed Rule Change
Statement on Comments on the public in accordance with the FINRA is proposing to amend FINRA
Proposed Rule Change Received From provisions of 5 U.S.C. 552, will be Rule 6433 (Minimum Quotation Size
Members, Participants, or Others available for Web site viewing and Requirements for OTC Equity
No written comments were either printing in the Commission’s Public Securities) to extend the Tier Size Pilot,
solicited or received. Reference Room, 100 F Street NE., which currently is scheduled to expire
Washington, DC 20549, on official
asabaliauskas on DSK3SPTVN1PROD with NOTICES
on June 9, 2017, until December 8, 2017.
III. Date of Effectiveness of the business days between the hours of The text of the proposed rule change
Proposed Rule Change and Timing for 10:00 a.m. and 3:00 p.m. Copies of the is available on FINRA’s Web site at
Commission Action filing also will be available for http://www.finra.org, at the principal
The foregoing rule change has become inspection and copying at the principal
effective pursuant to Section office of the Exchange. All comments 58 17 CFR 200.30–3(a)(12).
19(b)(3)(A)(ii) of the Act.57 At any time received will be posted without change; 1 15 U.S.C. 78s(b)(1).
the Commission does not edit personal 2 17 CFR 240.19b–4.
57 15 U.S.C. 78s(b)(3)(A)(ii). identifying information from 3 17 CFR 240.19b–4(f)(6).
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Document Created: 2017-05-24 01:02:49
Document Modified: 2017-05-24 01:02:49
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
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| Section | Notices | |
| FR Citation | 82 FR 23935 |
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