82 FR 26148 - Organizations; Bats BZX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to Fees for Use on Bats BZX Exchange, Inc.
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 107 (June 6, 2017)
Federal Register Volume 82, Issue 107 (June 6, 2017)
| Page Range | 26148-26168 | |
| FR Document | 2017-11606 |
[Federal Register Volume 82, Number 107 (Tuesday, June 6, 2017)] [Notices] [Pages 26148-26168] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-11606] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80822; File No. SR-BatsBZX-2017-38] Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to Fees for Use on Bats BZX Exchange, Inc. May 31, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on May 23, 2017, Bats BZX Exchange, Inc. (the ``Exchange'' or ``Bats'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I, II and III below, which Items have been prepared by the Exchange. The Exchange has designated the proposed rule change as one establishing or changing a member due, fee, or other charge imposed by the Exchange under Section 19(b)(3)(A)(ii) of the Act \3\ and Rule 19b-4(f)(2) thereunder,\4\ which renders the proposed rule change effective upon filing with the Commission. The Commission is publishing this notice to [[Page 26149]] 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\ 15 U.S.C. 78s(b)(3)(A)(ii). \4\ 17 CFR 240.19b-4(f)(2). --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange filed a proposal to amend fees for its Equities Platform (``BZX Fee Schedule'') and to amend fees for its Options Platform (``BZX Options 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'').\5\ --------------------------------------------------------------------------- \5\ Unless otherwise specified, capitalized terms used in this fee filing are defined as set forth herein, the CAT Compliance Rule Series or in the CAT NMS Plan. --------------------------------------------------------------------------- The text of the proposed rule change is available at the Exchange's Web site at www.bats.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 parts of such statements. (A) Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Bats BYX Exchange, Inc., Bats BZX Exchange, Inc., Bats EDGA Exchange, Inc., Bats EDGX Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., Financial Industry Regulatory Authority, Inc. (``FINRA''), Investors' Exchange LLC, Miami International Securities Exchange, LLC, MIAX PEARL, LLC, NASDAQ BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC,\6\ NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, NYSE Arca, Inc. and NYSE National, Inc.\7\ (collectively, the ``Participants'') filed with the Commission, pursuant to Section 11A of the Exchange Act \8\ and Rule 608 of Regulation NMS thereunder,\9\ the CAT NMS Plan.\10\ 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,\11\ and approved by the Commission, as modified, on November 15, 2016.\12\ 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.\13\ 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'').\14\ 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.\15\ Accordingly, Bats submits this fee filing to propose the Consolidated Audit Trail Funding Fees, which will require Industry Members that are Bats members to pay the CAT Fees determined by the Operating Committee. --------------------------------------------------------------------------- \6\ ISE Gemini, LLC, ISE Mercury, LLC and International Securities Exchange, LLC have been renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC, and Nasdaq ISE, LLC, respectively. See Securities Exchange Act Rel. No. 80248 (Mar. 15, 2017), 82 FR 14547 (Mar. 21, 2017); Securities Exchange Act Rel. No. 80326 (Mar. 29, 2017), 82 FR 16460 (Apr. 4, 2017); and Securities Exchange Act Rel. No. 80325 (Mar. 29, 2017), 82 FR 16445 (Apr. 4, 2017). \7\ National Stock Exchange, Inc. has been renamed NYSE National, Inc. See Securities Exchange Act Rel. No. 79902 (Jan. 30, 2017), 82 FR 9258 (Feb. 3, 2017). \8\ 15 U.S.C. 78k-1. \9\ 17 CFR 242.608. \10\ 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. \11\ Securities Exchange Act Rel. No. 77724 (Apr. 27, 2016), 81 FR 30614 (May 17, 2016). \12\ Securities Exchange Act Rel. No. 79318 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016) (``Approval Order''). \13\ The Plan also serves as the limited liability company agreement for the Company. \14\ Section 11.1(b) of the CAT NMS Plan. \15\ 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 \16\) --------------------------------------------------------------------------- \16\ 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 [[Page 26150]] higher fee. (See Section 3(a)(2)(B) [sic] below) Execution Venue Fees. Each Equity Execution Venue will be placed in one of two tiers of fixed fees based on market share, and each Options Execution Venue will be placed in one of two tiers of fixed fees based on market share. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period. Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period. Equity Execution Venues with a larger market share will pay a larger CAT Fee than Equity Execution Venues with a smaller market share. Similarly, Options Execution Venues with a larger market share will pay a larger CAT Fee than Options Execution Venues with a smaller market share. (See Section 3(a)(2)(C) [sic] below) Cost Allocation. For the reasons discussed below, in designing the model, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. In addition, the Operating Committee determined to allocate 75 percent of Execution Venue costs recovered to Equity Execution Venues and 25 percent to Options Execution Venues. (See Section 3(a)(2)(D) [sic] below) Comparability of Fees. The CAT funding model requires that the CAT Fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members). (See Section 3(a)(2)(F) [sic] below) (B) CAT Fees for Industry Members Fee Schedule. The quarterly CAT Fees for each tier for Industry Members are set forth in the two fee schedules in the Consolidated Audit Trail Funding Fees, one for Equity ATSs and one for Industry Members other than Equity ATSs. (See Section 3(a)(3)(B) [sic] below) Quarterly Invoices. Industry Members will be billed quarterly for CAT Fees, with the invoices payable within 30 days. The quarterly invoices will identify within which tier the Industry Member falls. (See Section 3(a)(3)(C) [sic] below) Centralized Payment. Each Industry Member will receive from the Company one invoice for its applicable CAT Fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay its CAT Fees to the Company via the centralized system for the collection of CAT Fees established by the Operating Committee. (See Section 3(a)(3)(C) [sic] below) Billing Commencement. Industry Members will begin to receive invoices for CAT Fees as promptly as possible following the establishment of a billing mechanism. Bats will issue a Regulatory Circular to its members when the billing mechanism is established, specifying the date when such invoicing of Industry Members will commence. (See Section 3(a)(2)(G) [sic] below) (2) Description of the CAT Funding Model Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. As set forth in Article XI of the CAT NMS Plan, the CAT NMS Plan requires a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Participants and Industry Members that are Execution Venues through fixed tier fees based on market share, and (2) Industry Members (other than Execution Venue ATSs) through fixed tier fees based on message traffic. In its order approving the CAT NMS Plan, the Commission determined that the proposed funding model was ``reasonable'' \17\ and ``reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT.'' \18\ --------------------------------------------------------------------------- \17\ Approval Order at 84796. \18\ 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.'' \19\ The Commission further noted the following: --------------------------------------------------------------------------- \19\ 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.\20\ --------------------------------------------------------------------------- \20\ 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.\21\ 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.\22\ 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.'' \23\ --------------------------------------------------------------------------- \21\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85006. \22\ 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. \23\ 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 [[Page 26151]] 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.\24\ 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. --------------------------------------------------------------------------- \24\ 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.\25\ The fees to be assessed at each tier are calculated so as to recoup a proportion of costs appropriate to the message traffic or market share (as applicable) from CAT Reporters in each tier. Therefore, Industry Members generating the most message traffic will be in the higher tiers, and therefore be charged a higher fee. Industry Members with lower levels of message traffic will be in lower tiers and will be assessed a smaller fee for the CAT.\26\ 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.\27\ --------------------------------------------------------------------------- \25\ Approval Order at 85005. \26\ Id. \27\ 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)'' \28\ 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.\29\ 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.\30\ --------------------------------------------------------------------------- \28\ Id. at 84796. \29\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85005. \30\ 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.\31\ 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.\32\ --------------------------------------------------------------------------- \31\ Section 11.2(c) of the CAT NMS Plan. \32\ 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.'' \33\ 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.'' \34\ --------------------------------------------------------------------------- \33\ Section 11.2(e) of the CAT NMS Plan. \34\ 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.\35\ 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.'' \36\ 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.'' \37\ --------------------------------------------------------------------------- \35\ Id. at 84792. \36\ 26 U.S.C. 501(c)(6). \37\ 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. Bats 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. [[Page 26152]] (A) Funding Principles Section 11.2 of the CAT NMS Plan sets forth the principles that the Operating Committee applied in establishing the funding for the Company. The Operating Committee has considered these funding principles as well as the other funding requirements set forth in the CAT NMS Plan and in Rule 613 in developing the proposed funding model. The following are the funding principles in Section 11.2 of the CAT NMS Plan: To create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and other costs of the Company; To establish an allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company's resources and operations; To establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members' non-ATS activities are based upon message traffic; (iii) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members); To provide for ease of billing and other administrative functions; To avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and To build financial stability to support the Company as a going concern. (B) Industry Member Tiering Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees to be payable by Industry Members, based on message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers. The CAT NMS Plan clarifies that the fixed fees payable by Industry Members pursuant to Section 11.3(b) shall, in addition to any other applicable message traffic, include message traffic generated by: (i) An ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. In addition, the Industry Member fees will apply to Industry Members that act as routing broker-dealers for exchanges. The Industry Member fees will not be applicable, however, to an ATS that qualifies as an Execution Venue, as discussed in more detail in the section on Execution Venue tiering. In accordance with Section 11.3(b), the Operating Committee approved a tiered fee structure for Industry Members (other than Execution Venue ATSs) as described in this section. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on CAT System resources of different Industry Members, and that establish comparable fees among the CAT Reporters with the most Reportable Events. The Operating Committee has determined that establishing nine tiers results in the fairest allocation of fees, best distinguishing between Industry Members with differing levels of message traffic. Thus, each such Industry Member will be placed into one of nine tiers of fixed fees, based on ``message traffic'' for a defined period (as discussed below). A nine tier structure was selected to provide the widest range of levels for tiering Industry Members such that Industry Members submitting significantly less message traffic to the CAT would be adequately differentiated from Industry Members submitting substantially more message traffic. The Operating Committee considered historical message traffic generated by Industry Members across all exchanges and as submitted to FINRA's Order Audit Trail System (``OATS''), and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that nine tiers would best group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden of Industry Members that have less CAT-related activity. Each Industry Member (other than Execution Venue ATSs) will be ranked 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 [[Page 26153]] Industry Member message traffic gaps. The Operating Committee referenced similar distribution illustrations to determine the appropriate division of Industry Member percentages in each tier by considering the grouping of firms with similar levels of message traffic and seeking to identify relative breakpoints in the message traffic between such groupings. In reviewing the chart and its corresponding table, note that while these distribution illustrations were referenced to help differentiate between Industry Member tiers, the proposed funding model is directly driven, not by fixed message traffic thresholds, but rather by fixed percentages of Industry Members across tiers to account for fluctuating levels of message traffic across time and to provide for the financial stability of the CAT by ensuring that the funding model will recover the required amounts regardless of changes in the number of Industry Members or the amount of message traffic. Actual messages in any tier will vary based on the actual traffic in a given measurement period, as well as the number of firms included in the measurement period. The Industry Member Percentages and Industry Member Recovery Allocation for each tier will remain fixed with each Industry Member's tier to be reassigned periodically, as described below in Section 3(a)(1)(H) [sic]. [GRAPHIC] [TIFF OMITTED] TN06JN17.010 ------------------------------------------------------------------------ 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 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 [[Page 26154]] Tier 6.......................................................... 4.000 5.25 3.94 Tier 7.......................................................... 17.500 4.50 3.38 Tier 8.......................................................... 20.125 1.50 1.13 Tier 9.......................................................... 45.000 0.50 0.38 ----------------------------------------------- Total....................................................... 100 100 75 ---------------------------------------------------------------------------------------------------------------- For the purposes of creating these tiers based on message traffic, the Operating Committee determined to define the term ``message traffic'' separately for the period before the commencement of CAT reporting and for the period after the start of CAT reporting. The different definition for message traffic is necessary as there will be no Reportable Events as defined in the Plan, prior to the commencement of CAT reporting. Accordingly, prior to the start of CAT reporting, ``message traffic'' will be comprised of historical equity and equity options orders, cancels and quotes provided by each exchange and FINRA over the previous three months.\38\ 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.\39\ 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. --------------------------------------------------------------------------- \38\ The SEC approved exemptive relief permitting Options Market Maker quotes to be reported to the Central Repository by the relevant Options Exchange in lieu of requiring that such reporting be done by both the Options Exchange and the Options Market Maker, as required by Rule 613 of Regulation NMS. See Securities Exchange Act Release No. 77265 (Mar. 1, 2017 [sic], 81 FR 11856 (Mar. 7, 2016). This exemption applies to Options Market Maker quotes for CAT reporting purposes only. Therefore, notwithstanding the reporting exemption provided for Options Market Maker quotes, Options Market Maker quotes will be included in the calculation of total message traffic for Options Market Makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences. \39\ 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.\40\ --------------------------------------------------------------------------- \40\ 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).'' \41\ --------------------------------------------------------------------------- \41\ 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.\42\ --------------------------------------------------------------------------- \42\ 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 [[Page 26155]] will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and not more than five tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association's market share. In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Equity Execution Venues and Option Execution Venues. In determining the Equity Execution Venue Tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Equity Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Equity Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's NMS Stocks and OTC Equity Securities market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to the non-Execution Venue Industry Members to determine the number of tiers for Equity Execution Venues. The Operating Committee determined to establish two tiers for Equity Execution Venues, rather than a larger number of tiers as established for non-Execution Venue Industry Members, because the two tiers were sufficient to distinguish between the smaller number of Equity Execution Venues based on market share. Furthermore, the incorporation of additional Equity Execution Venue tiers would result in significantly higher fees for Tier 1 Equity Execution Venues and diminish comparability between Execution Venues and Industry Members. Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the ``Equity Execution Venue Percentages''). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee looked at historical market share of share volume for execution venues. Equities Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats Global Markets, Inc. (``Bats''). ATS market share of share volume was sourced from market statistics made publicly-available by FINRA. FINRA trading [sic] reporting facility (``TRF'') market share of share volume was sourced from market statistics made publicly available by Bats. As indicated by FINRA, ATSs accounted for 37.80% of the share volume across the TRFs during the recent tiering period. A 37.80/62.20 split was applied to the ATS and non-ATS breakdown of FINRA market share, with FINRA tiered based only on the non-ATS portion of its TRF market share of share volume. Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share of share volume. In doing so, the Participants considered that, as previously noted, Execution Venues in many cases have similar levels of message traffic due to quoting activity, and determined that it was simpler and more appropriate to have fewer, rather than more, Execution Venue tiers to distinguish between Execution Venues. The percentage of costs recovered by each Equity Execution Venue tier will be determined by predefined percentage allocations (the ``Equity Execution Venue Recovery Allocation''). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Equity Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Execution Venues in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical market share upon which Execution Venues had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of costs recovered for each tier were assigned, allocating higher percentages of recovery to the tier with a higher level of market share while avoiding any inappropriate burden on competition. Furthermore, due to the similar levels of impact on the CAT System across Execution Venues, there is less variation in CAT Fees between the highest and lowest of tiers for Execution Venues. Furthermore, by using percentages of Equity Execution Venues and costs recovered per tier, the Operating Committee sought to include stability and elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Equity Execution Venues or changes in market share. Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations: ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of Equity Execution Percentage of Equity Execution Venue tier Execution Venue total Venues Recovery recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 25.00 26.00 6.50 Tier 2.......................................................... 75.00 49.00 12.25 ----------------------------------------------- Total....................................................... 100 75 18.75 ---------------------------------------------------------------------------------------------------------------- The following table exhibits the relative separation of market share of share volume between Tier 1 and Tier 2 Equity Execution Venues. In reviewing the table, note that while this division was referenced as a data point to help differentiate between Equity Execution Venue tiers, the proposed funding model is directly driven not by market share thresholds, but rather by fixed percentages of Equity Execution Venues across tiers to account for [[Page 26156]] fluctuating levels of market share across time. Actual market share in any tier will vary based on the actual market activity in a given measurement period, as well as the number of Equity Execution Venues included in the measurement period. The Equity Execution Venue Percentages and Equity Execution Venue Recovery Allocation for each tier will remain fixed with each Equity Execution Venue tier to be reassigned periodically, as described below in Section 3(a)(1)(I) [sic]. ------------------------------------------------------------------------ Equity market share of Equity Execution Venue tier share volume (%) ------------------------------------------------------------------------ Tier 1.................................................. >=1 Tier 2.................................................. <1 ------------------------------------------------------------------------ (II) Listed Options Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue's Listed Options market share. For these purposes, market share will be calculated by contract volume. In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Options Execution Venues. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Options Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Options Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's Listed Options market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to Industry Members (other than Execution Venue ATSs) to determine the number of tiers for Options Execution Venues. The Operating Committee determined to establish two tiers for Options Execution Venues, rather than a larger number of tiers as established for Industry Members (other than Execution Venue ATSs), because the two tiers were sufficient to distinguish between the smaller number of Options Execution Venues based on market share. Furthermore, due to the smaller number of Options Execution Venues, the incorporation of additional Options Execution Venue tiers would result in significantly higher fees for Tier 1 Options Execution Venues and reduce comparability between Execution Venues and Industry Members. Each Options Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the ``Options Execution Venue Percentages''). To determine the fixed percentage of Options Execution Venues in each tier, the Operating Committee analyzed the historical and publicly available market share of Options Execution Venues to group Options Execution Venues with similar market shares across the tiers. Options Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats. The process for developing the Options Execution Venue Percentages was the same as discussed above with regard to Equity Execution Venues. The percentage of costs recovered by each Options Execution Venue tier will be determined by predefined percentage allocations (the ``Options Execution Venue Recovery Allocation''). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Options Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Furthermore, by using percentages of Options Execution Venues and costs recovered per tier, the Operating Committee sought to include stability and elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Options Execution Venues or changes in market share. The process for developing the Options Execution Venue Recovery Allocation was the same as discussed above with regard to Equity Execution Venues. Based on this analysis, the Operating Committee approved the following Options Execution Venue Percentages and Recovery Allocations: ---------------------------------------------------------------------------------------------------------------- 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 [[Page 26157]] equity volumes for Participants will be sourced from market data made publicly available by Bats while Execution Venue ATS volumes will be sourced from market data made publicly available by FINRA. Set forth in the Appendix are two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier. After the commencement of CAT reporting, market share for Execution Venues will be sourced from data reported to the CAT. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period. Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period. The Operating Committee has determined to calculate fee tiers for Execution Venues every three months based on market share from the prior three months. Based on its analysis of historical data, the Operating Committee believes calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Execution Venues while still providing predictability in the tiering for Execution Venues. (D) Allocation of Costs In addition to the funding principles discussed above, including comparability of fees, Section 11.1(c) of the CAT NMS Plan also requires expenses to be fairly and reasonably shared among the Participants and Industry Members. Accordingly, in developing the proposed fee schedules pursuant to the funding model, the Operating Committee calculated how the CAT costs would be allocated between Industry Members and Execution Venues, and how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. These determinations are described below. (I) Allocation Between Industry Members and Execution Venues In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovered from such Industry Members and Execution Venues. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75/25 division maintained the greatest level of comparability across the funding model, keeping in view that comparability should consider affiliations among or between CAT Reporters (e.g., firms with multiple Industry Members and/or exchange licenses). For example, the cost allocation establishes fees for the largest Industry Members (i.e., those Industry Members in Tiers 1, 2 and 3) that are comparable to the largest Equity Execution Venues and Options Execution Venues (i.e., those Execution Venues in Tier 1). In addition, the cost allocation establishes fees for Execution Venue complexes that are comparable to those of Industry Member complexes. For example, when analyzing alternative allocations, other possible allocations led to much higher fees for larger Industry Members than for larger Execution Venues or vice versa, and/or led to much higher fees for Industry Member complexes than Execution Venue complexes or vice versa. Furthermore, the allocation of total CAT costs recovered recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 25 times more Industry Members expected to report to the CAT than Execution Venues (e.g., an estimated 1,630 Industry Members versus 70 Execution Venues as of January 2017). (II) Allocation Between Equity Execution Venues and Options Execution Venues The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity and Options Execution Venues, including a 70/30, 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.\43\ --------------------------------------------------------------------------- \43\ 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 [[Page 26158]] 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. --------------------------------------------------------------------------- \44\ This $5,000,000 represents the gradual accumulation of the funds for a target operating reserve of $11,425,000. ------------------------------------------------------------------------ Cost category Cost component Amount ------------------------------------------------------------------------ Plan Processor................. Operational Costs...... $37,500,000 Non-Plan Processor............. Third Party Support 5,200,000 Costs. Operational Reserve.... \44\ 5,000,000 Insurance Costs........ 3,000,000 Estimated Total............ ....................... 50,700,000 ------------------------------------------------------------------------ Based on the estimated costs and the calculations for the funding model described above, the Operating Committee determined to impose the following fees: \45\ --------------------------------------------------------------------------- \45\ Note that all monthly, quarterly and annual CAT Fees have been rounded to the nearest dollar. --------------------------------------------------------------------------- For Industry Members (other than Execution Venue ATSs): --------------------------------------------------------------------------- \46\ 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). ---------------------------------------------------------------------------------------------------------------- Monthly CAT Quarterly CAT CAT fees paid Tier fee fee annually \46\ ---------------------------------------------------------------------------------------------------------------- 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: --------------------------------------------------------------------------- \47\ 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). ---------------------------------------------------------------------------------------------------------------- Monthly CAT Quarterly CAT CAT fees paid Tier fee fee annually \47\ ---------------------------------------------------------------------------------------------------------------- 1............................................................... $21,125 $63,375 $253,500 2............................................................... 12,940 38,820 155,280 ---------------------------------------------------------------------------------------------------------------- For Execution Venues for Listed Options: --------------------------------------------------------------------------- \48\ 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). ---------------------------------------------------------------------------------------------------------------- Monthly CAT Quarterly CAT CAT fees paid Tier fee fee annually \48\ ---------------------------------------------------------------------------------------------------------------- 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. [[Page 26159]] The Operating Committee has calculated the schedule of effective fees for Industry Members (other than Execution Venue ATSs) and Execution Venues in the following manner. Note that the calculation of CAT Reporter fees assumes 53 Equity Execution Venues, 15 Options Execution Venues and 1,631 Industry Members (other than Execution Venue ATSs) as of January 2017. Calculation of Annual Tier Fees for Industry Members (``IM'') ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of Industry Percentage of Industry Member tier Industry Member total recovery Members recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 0.500 8.50 6.38 Tier 2.......................................................... 2.500 35.00 26.25 Tier 3.......................................................... 2.125 21.25 15.94 Tier 4.......................................................... 4.625 15.75 11.81 Tier 5.......................................................... 3.625 7.75 5.81 Tier 6.......................................................... 4.000 5.25 3.94 Tier 7.......................................................... 17.500 4.50 3.38 Tier 8.......................................................... 20.125 1.50 1.13 Tier 9.......................................................... 45.000 0.50 0.38 ----------------------------------------------- Total....................................................... 100 100 75 ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ Estimated number Industry Member tier of Industry Members ------------------------------------------------------------------------ Tier 1............................................... 8 Tier 2............................................... 41 Tier 3............................................... 35 Tier 4............................................... 75 Tier 5............................................... 59 Tier 6............................................... 65 Tier 7............................................... 285 Tier 8............................................... 328 Tier 9............................................... 735 ------------------ Total............................................ 1,631 ------------------------------------------------------------------------ [[Page 26160]] [GRAPHIC] [TIFF OMITTED] TN06JN17.011 [[Page 26161]] [GRAPHIC] [TIFF OMITTED] TN06JN17.012 [[Page 26162]] Calculation of Annual Tier Fees for Equity Execution Venues (``EV'') ---------------------------------------------------------------------------------------------------------------- Percentage of Equity Percentage of Percentage of Equity Execution Venue tier Execution Execution total recovery Venues Venue Recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 25.00 26.00 6.50 Tier 2.......................................................... 75.00 49.00 12.25 ----------------------------------------------- Total....................................................... 100 75 18.75 ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ Estimated number Equity Execution Venue tier of Equity Execution Venues ------------------------------------------------------------------------ Tier 1............................................... 13 Tier 2............................................... 40 ------------------ Total............................................ 53 ------------------------------------------------------------------------ [GRAPHIC] [TIFF OMITTED] TN06JN17.013 Calculation of Annual Tier Fees for Options Execution Venues (``EV'') ---------------------------------------------------------------------------------------------------------------- Percentage of Options Percentage of Percentage of Options Execution Venue tier Execution Execution total recovery Venues Venue 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 [[Page 26163]] Tier 2............................................... 4 ------------------ Total............................................ 15 ------------------------------------------------------------------------ [GRAPHIC] [TIFF OMITTED] TN06JN17.014 --------------------------------------------------------------------------- \49\ The amount in excess of the total CAT costs will contribute to the gradual accumulation of the target operating reserve of $11.425 million. Traceability of Total CAT Fees ---------------------------------------------------------------------------------------------------------------- Estimated Type Industry Member tier number of CAT fees paid Total recovery members annually ---------------------------------------------------------------------------------------------------------------- Industry Members.................... Tier 1.................... 8 $404,016 $3,232,128 Tier 2.................... 41 324,612 13,309,092 Tier 3.................... 35 230,868 8,080,380 Tier 4.................... 75 79,860 5,989,500 Tier 5.................... 59 49,956 2,947,404 Tier 6.................... 65 30,720 1,996,800 Tier 7.................... 285 6,012 1,713,420 Tier 8.................... 328 1,740 570,720 Tier 9.................... 735 264 194,040 ----------------------------------------------- Total........................... .......................... 1,631 .............. 38,033,484 ---------------------------------------------------------------------------------------------------------------- Equity Execution Venues............. Tier 1.................... 13 253,500 3,295,500 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 \49\................. .......................... .............. .............. 9,036 ---------------------------------------------------------------------------------------------------------------- [[Page 26164]] (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: \50\ --------------------------------------------------------------------------- \50\ Note that the analysis of the complexes was performed on a best efforts basis, as all affiliations between the 1631 Industry Members may not be included. Execution Venue Complexes ---------------------------------------------------------------------------------------------------------------- Listing of Equity Listing of Options Total fees by Execution Venue complex Execution Venue tiers Execution Venue tier EV Complex ---------------------------------------------------------------------------------------------------------------- Execution Venue Complex 1............... Tier 1 (x2)...... Tier 1 (x4)...... $1,900,962 Tier 2 (x1)...... Tier 2 (x2)...... Execution Venue Complex 2............... Tier 1 (x2)...... Tier 1 (x2)...... $1,863,801 Tier 2 (x1)...... Execution Venue Complex 3............... Tier 1 (x2)...... Tier 1 (x2)...... $1,278,447 Tier 2 (x2)...... ---------------------------------------------------------------------------------------------------------------- Industry Member Complexes ---------------------------------------------------------------------------------------------------------------- Listing of Industry Member Total fees by Industry Member Complex tiers Listing of ATS tiers IM complex ---------------------------------------------------------------------------------------------------------------- Industry Member Complex 1............... Tier 1 (x2)...... Tier 2 (x1)...... $963,300 Industry Member Complex 2............... Tier 1 (x1)...... Tier 2 (x3)...... 949,674 Tier 4 (x1)...... Industry Member Complex 3............... Tier 1 (x1)...... Tier 2 (x1)...... 883,888 Tier 2 (x1)...... Industry Member Complex 4............... Tier 1 (x1)...... N/A.............. 808,472 Tier 2 (x1)...... Tier 4 (x1)...... Industry Member Complex 5............... Tier 2 (x1)...... Tier 2 (x1)...... 796,595 Tier 3 (x1)...... Tier 4 (x1)...... Tier 7 (x1)...... ---------------------------------------------------------------------------------------------------------------- (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. Bats will issue a Regulatory Circular to its members when the billing mechanism is established, specifying the date when such invoicing of Industry Members will commence. (H) Changes to Fee Levels and Tiers Section 11.3(d) of the CAT NMS Plan states that ``[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.'' With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary. In addition, the reviews will evaluate the estimated ongoing CAT costs and the level of the operating reserve. To the extent that the total CAT costs decrease, the fees would be adjusted downward, and, to the extent that the total CAT costs increase, the fees would be adjusted upward.\51\ --------------------------------------------------------------------------- \51\ 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. --------------------------------------------------------------------------- [[Page 26165]] 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.\52\ 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 Bats 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). --------------------------------------------------------------------------- \52\ 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. Bats 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, Bats 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 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 Bats proposes the Consolidated Audit Trail Funding Fees to implement the CAT Fees determined by the Operating Committee on SRO'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 4.5 (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. [[Page 26166]] 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 Bats proposes to impose the CAT Fees applicable to its Industry Members through paragraph (b) of the proposed fee schedule. Paragraph (b)(1) of the proposed fee schedule sets forth the CAT Fees applicable to Industry Members other than Equity ATSs. Specifically, paragraph (b)(1) states that the Company will assign each Industry Member (other than an Equity ATS) to a fee tier once every quarter, where such tier assignment is calculated by ranking each Industry Member based on its total message traffic for the three months prior to the quarterly tier calculation day and assigning each Industry Member to a tier based on that ranking and predefined Industry Member percentages. The Industry Members with the highest total quarterly message traffic will be ranked in Tier 1, and the Industry Members with lowest quarterly message traffic will be ranked in Tier 9. Each quarter, each Industry Member (other than an Equity ATS) shall pay the following CAT Fee corresponding to the tier assigned by the Company for such Industry Member for that quarter: ------------------------------------------------------------------------ Percentage of Tier Industry Quarterly CAT Members fee ------------------------------------------------------------------------ 1....................................... 0.500 $101,004 2....................................... 2.500 81,153 3....................................... 2.125 57,717 4....................................... 4.625 19,965 5....................................... 3.625 12,489 6....................................... 4.000 7,680 7....................................... 17.500 1,503 8....................................... 20.125 435 9....................................... 45.000 66 ------------------------------------------------------------------------ Paragraph (b)(2) of the proposed fee schedule sets forth the CAT Fees applicable to Equity ATSs.\53\ 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: --------------------------------------------------------------------------- \53\ Note that no fee schedule is provided for Execution Venue ATSs that execute transactions in Listed Options, as no such Execution Venue ATSs currently exist due trading restrictions related to Listed Options. ------------------------------------------------------------------------ Percentage of Equity Quarterly CAT Tier Execution fee Venues ------------------------------------------------------------------------ 1....................................... 25.00 $63,375 2....................................... 75.00 38,820 ------------------------------------------------------------------------ (C) Timing and Manner of Payment Section 11.4 of the CAT NMS Plan states that the Operating Committee shall establish a system for the collection of fees authorized under the CAT NMS Plan. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. To implement the payment process to be adopted by the Operating Committee, paragraph (c)(1) of the proposed fee schedule states that the Company will provide each Industry Member with one invoice each quarter for its CAT Fees as determined pursuant to paragraph (b) of the proposed fee schedule, regardless of whether the Industry Member is a member of multiple self-regulatory organizations. Paragraph (c)(1) further states that each Industry Member will pay its CAT Fees to the Company via the centralized system for the collection of CAT Fees established by the Company in the manner prescribed by the Company. Bats will provide Industry Members with details regarding the manner of payment of CAT Fees by Regulatory Circular. Although the exact fee collection system and processes for CAT fees has not yet been established, all CAT fees will be billed and collected centrally through the Company, via the Plan Processor or otherwise. Although each Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay the CAT Fees to the Company via the centralized system for the collection of CAT fees established by the Company.\54\ --------------------------------------------------------------------------- \54\ 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, Bats proposes to adopt paragraph (c)(2) of the proposed fee schedule. Paragraph (c)(2) of the proposed fee schedule states that each Industry Member shall pay CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. 2. Statutory Basis Bats believes that the proposed rule change is consistent with the provisions of Section 6(b)(5) of the Act,\55\ which require, among other things, that the SRO rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest, and not designed to permit unfair discrimination between customers, issuers, brokers and dealers, and Section 6(b)(4) of the Act,\56\ which requires that SRO rules provide for the equitable allocation of reasonable dues, fees, and [[Page 26167]] other charges among members and issuers and other persons using its facilities. As discussed above, the SEC approved the bifurcated, tiered, fixed fee funding model in the CAT NMS Plan, finding it was reasonable and that it equitably allocated fees among Participants and Industry Members. Bats 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. --------------------------------------------------------------------------- \55\ 15 U.S.C. 78f(b)(5). \56\ 15 U.S.C. 78f(b)(4). --------------------------------------------------------------------------- Bats 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 Bats 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.'' \57\ To the extent that this proposal implements, interprets or clarifies the Plan and applies specific requirements to Industry Members, Bats believes that this proposal furthers the objectives of the Plan, as identified by the SEC, and is therefore consistent with the Act. --------------------------------------------------------------------------- \57\ Approval Order at 84697. --------------------------------------------------------------------------- Bats 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, Bats believes that the total level of the CAT Fees is reasonable. In addition, Bats 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, Bats 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, Bats 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 \58\ require that SRO rules not impose any burden on competition that is not necessary or appropriate. Bats 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. Bats notes that the proposed rule change implements provisions of the CAT NMS Plan approved by the Commission, and is designed to assist Bats in meeting its regulatory obligations pursuant to the Plan. Similarly, all national securities exchanges and FINRA are proposing this proposed fee schedule to implement the requirements of the CAT NMS Plan. Therefore, this is not a competitive fee filing and, therefore, it does not raise competition issues between and among the exchanges and FINRA. --------------------------------------------------------------------------- \58\ 15 U.S.C. 78f(b)(8). --------------------------------------------------------------------------- Moreover, as previously described, Bats 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, Bats 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, Bats does not believe that the fees will impose any burden on the competition between ATSs and exchanges. Accordingly, Bats believes that the proposed fees will minimize the potential for adverse effects on competition between CAT Reporters in the market. Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market. (C) Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act \59\ and paragraph (f) of Rule 19b-4 thereunder.\60\ 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 [[Page 26168]] action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. --------------------------------------------------------------------------- \59\ 15 U.S.C. 78s(b)(3)(A). \60\ 17 CFR 240.19b-4(f). --------------------------------------------------------------------------- IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposal 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-BatsBZX-2017-38 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-BatsBZX-2017-38. 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 such filing will also 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-BatsBZX-2017-38 and should be submitted on or before June 27, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\61\ --------------------------------------------------------------------------- \61\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-11606 Filed 6-5-17; 8:45 am] BILLING CODE 8011-01-P
![26148 Federal Register / Vol. 82, No. 107 / Tuesday, June 6, 2017 / Notices
II. Description of the Proposal ‘‘business day’’ under Rule 7(b) and the correspond to the compliance date of
The Exchange proposes to amend ‘‘third full business day’’ time period to the amendment to Rule 15c6–1(a) under
Article 1, Rule 2(e) and Article 9, Rule ‘‘second full business day’’ under Rule the Act.
7 to conform to the Commission’s 7(b)(1). For the reasons noted above, the
amendment to Rule 15c6–1(a) under the Commission finds that the proposal is
III. Discussion and Commission’s
Act 7 which shortens the standard consistent with the requirements of the
Findings
Act and would foster cooperation and
settlement cycle from T+3 to T+2 for After careful review of the proposed coordination with persons engaged in
most broker-dealer transactions. rule change, the Commission finds that
Current Article 1, Rule 2(e)(1) relating regulating, clearing, settling, processing
the proposal is consistent with the information with respect to, and
to order settlement terms defines requirements of the Act and the rules
‘‘Regular Way Settlement’’ as ‘‘a facilitating transactions in securities,
and regulations thereunder that are remove impediments to and perfect the
transaction for delivery on the third full applicable to a national securities
business day following the day of the mechanism of a free and open market
exchange.8 Specifically, the and a national market system, and
contract.’’ The Exchange proposes to Commission finds that the proposed
shorten the ‘‘third full business day’’ protect investors and the public interest.
rule change is consistent with Section
time period to ‘‘second full business 6(b)(5) of the Act,9 which requires that IV. Conclusion
day.’’ the rules of a national securities It is therefore ordered, pursuant to
Current Article 1, Rule 2(e)(2)(C) exchange be designed, among other Section 19(b)(2) of the Act,14 that the
defines ‘‘Seller’s Option’’ as ‘‘a things, to prevent fraudulent and proposed rule change, (SR–CHX–2017–
transaction for delivery within the time manipulative acts and practices, to 06), be and hereby is, approved.
specified in the option, which time shall promote just and equitable principles of
not be less than four (4) full business For the Commission, by the Division of
trade, to foster cooperation and Trading and Markets, pursuant to delegated
days nor more than 60 days following coordination with persons engaged in authority.15
the day of the contract; except that the regulating, clearing, settling, processing Eduardo A. Aleman,
Exchange may provide otherwise in information with respect to, and
specific issues of stocks or classes of Assistant Secretary.
facilitating transactions in securities, to
stocks.’’ The Exchange proposes to [FR Doc. 2017–11609 Filed 6–5–17; 8:45 am]
remove impediments to and perfect the
shorten the ‘‘four (4) full business days’’ mechanism of a free and open market BILLING CODE 8011–01–P
time period to ‘‘three (3) full business and a national market system, and to
days.’’ protect investors and the public interest.
Current Article 9, Rule 7(a) governing SECURITIES AND EXCHANGE
The Commission notes that the
ex-dividend transactions provides in proposed rule change would amend COMMISSION
part that transactions in stocks shall be Exchange rules to conform to the [Release No. 34–80822; File No. SR–
ex-dividend or ex-rights two full amendment that the Commission has BatsBZX–2017–38] Self-Regulatory
business days immediately preceding adopted to Rule 15c6–1(a) under the
the date of record fixed by the Act 10 and support a move to a T+2 Organizations; Bats BZX Exchange,
corporation for the determination of standard settlement cycle. In the SEC Inc.; Notice of Filing and Immediate
stockholders entitled to receive such Adopting Release, the Commission Effectiveness of a Proposed Rule
dividends or rights, except when such stated its belief that shortening the Change Related to Fees for Use on
record date occurs upon a holiday or standard settlement cycle from T+3 to Bats BZX Exchange, Inc.
half-holiday, transactions in the stock T+2 will result in a reduction of credit, May 31, 2017.
shall be ex-dividend or ex-rights three market, and liquidity risk,11 and as a Pursuant to Section 19(b)(1) of the
full business days immediately result, a reduction in systemic risk for Securities Exchange Act of 1934 (the
preceding the record date. The U.S. market participants.12 The ‘‘Act’’),1 and Rule 19b–4 thereunder,2
Exchange proposes amendments to compliance date for the amendment to notice is hereby given that on May 23,
shorten the ‘‘two full business days’’ Rule 15c6–1(a) under the Act is 2017, Bats BZX Exchange, Inc. (the
time period to a ‘‘business day’’ under September 5, 2017.13 The Exchange has
‘‘Exchange’’ or ‘‘Bats’’) filed with the
Rule 7(a) and the ‘‘three full business represented that the operative date of
Securities and Exchange Commission
days’’ time period to ‘‘two full business the proposed rule change would
(‘‘Commission’’) the proposed rule
days’’ under Rule 7(a)(1).
change as described in Items I, II and III
The Exchange proposes similar 8 In approving this proposed rule change the
Commission has considered the proposed rule’s below, which Items have been prepared
changes to current Article 9, Rule 7(b)
impact on efficiency, competition, and capital by the Exchange. The Exchange has
pertaining to ex-warrants that provides, formation. See 15 U.S.C. 78c(f). designated the proposed rule change as
in pertinent part, that transactions in 9 15 U.S.C. 78f(b)(5).
one establishing or changing a member
securities which have subscription 10 See SEC Adopting Release, supra note 4.
due, fee, or other charge imposed by the
warrants attached (except those made 11 Credit risk refers to the risk that the credit
quality of one party to a transaction will deteriorate Exchange under Section 19(b)(3)(A)(ii)
for ‘‘cash’’) shall be ex-warrants on the
to the extent that it is unable to fulfill its obligations of the Act 3 and Rule 19b–4(f)(2)
second full business day preceding the to its counterparty on settlement date. Market risk thereunder,4 which renders the
date of expiration of the warrants, refers to the risk that the value of securities bought
and sold will change between trade execution and proposed rule change effective upon
except when the day of expiration
settlement such that the completion of the trade filing with the Commission. The
occurs on a holiday or Sunday, the
mstockstill on DSK30JT082PROD with NOTICES
would result in a financial loss. Liquidity risk Commission is publishing this notice to
transactions shall be ex-warrants on the describes the risk that an entity will be unable to
third full business day preceding the meet financial obligations on time due to an 14 15 U.S.C. 78s(b)(2).
day of expiration. The Exchange inability to deliver funds or securities in the form
15 17 CFR 200.30–3(a)(12).
required though it may possess sufficient financial
proposes to shorten the ‘‘second full resources in other forms. See id., 82 FR at 15564 1 15 U.S.C. 78s(b)(1).
business day’’ time period to a n. 3. 2 17 CFR 240.19b–4.
12 See id., 82 FR at 15564. 3 15 U.S.C. 78s(b)(3)(A)(ii).
7 See id; see also supra note 4. 13 See id. 4 17 CFR 240.19b–4(f)(2).
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![Federal Register / Vol. 82, No. 107 / Tuesday, June 6, 2017 / Notices 26149
solicit comments on the proposed rule Stock Market LLC, New York Stock determined by the Operating
change from interested persons. Exchange LLC, NYSE MKT LLC, NYSE Committee.
I. Self-Regulatory Organization’s Arca, Inc. and NYSE National, Inc.7 (1) Executive Summary
Statement of the Terms of Substance of (collectively, the ‘‘Participants’’) filed
with the Commission, pursuant to The following provides an executive
the Proposed Rule Change summary of the CAT funding model
Section 11A of the Exchange Act 8 and
The Exchange filed a proposal to approved by the Operating Committee,
Rule 608 of Regulation NMS
amend fees for its Equities Platform as well as Industry Members’ rights and
thereunder,9 the CAT NMS Plan.10 The
(‘‘BZX Fee Schedule’’) and to amend obligations related to the payment of
fees for its Options Platform (‘‘BZX Participants filed the Plan to comply CAT Fees calculated pursuant to the
Options Fee Schedule’’) to establish the with Rule 613 of Regulation NMS under CAT funding model. A detailed
fees for Industry Members related to the the Exchange Act. The Plan was description of the CAT funding model
National Market System Plan Governing published for comment in the Federal and the CAT Fees follows this executive
the Consolidated Audit Trail (the ‘‘CAT Register on May 17, 2016,11 and summary.
NMS Plan’’ or ‘‘Plan’’).5 approved by the Commission, as
The text of the proposed rule change modified, on November 15, 2016.12 The (A) CAT Funding Model
is available at the Exchange’s Web site Plan is designed to create, implement • CAT Costs. The CAT funding model
at www.bats.com, at the principal office and maintain a consolidated audit trail is designed to establish CAT-specific
of the Exchange, and at the (‘‘CAT’’) that would capture customer fees to collectively recover the costs of
Commission’s Public Reference Room. and order event information for orders building and operating the CAT from all
in NMS Securities and OTC Equity CAT Reporters, including Industry
II. Self-Regulatory Organization’s Members and Participants. The overall
Statement of the Purpose of, and Securities, across all markets, from the
time of order inception through routing, CAT costs for the calculation of the CAT
Statutory Basis for, the Proposed Rule Fees in this fee filing are comprised of
Change cancellation, modification, or execution
Plan Processor CAT costs and non-Plan
In its filing with the Commission, the in a single consolidated data source.
Processor CAT costs incurred, and
Exchange included statements The Plan accomplishes this by creating estimated to be incurred, from
concerning the purpose of and basis for CAT NMS, LLC (the ‘‘Company’’), of November 21, 2016 through November
the proposed rule change and discussed which each Participant is a member, to 21, 2017. (See Section 3(a)(2)(E) [sic]
any comments it received on the operate the CAT.13 Under the CAT NMS below 16)
proposed rule change. The text of these Plan, the Operating Committee of the • Bifurcated Funding Model. The
statements may be examined at the Company (‘‘Operating Committee’’) has CAT NMS Plan requires a bifurcated
places specified in Item IV below. The discretion to establish funding for the funding model, where costs associated
Exchange has prepared summaries, set Company to operate the CAT, including with building and operating the CAT
forth in Sections A, B, and C below, of establishing fees that the Participants would be borne by (1) Participants and
the most significant parts of such will pay, and establishing fees for Industry Members that are Execution
statements. Industry Members that will be Venues for Eligible Securities through
implemented by the Participants (‘‘CAT fixed tier fees based on market share,
(A) Self-Regulatory Organization’s
Fees’’).14 The Participants are required and (2) Industry Members (other than
Statement of the Purpose of, and
to file with the SEC under Section 19(b) alternative trading systems (‘‘ATSs’’)
Statutory Basis for, the Proposed Rule that execute transactions in Eligible
Change of the Exchange Act any such CAT Fees
applicable to Industry Members that the Securities (‘‘Execution Venue ATSs’’))
1. Purpose Operating Committee approves.15 through fixed tier fees based on message
Bats BYX Exchange, Inc., Bats BZX Accordingly, Bats submits this fee filing traffic for Eligible Securities. (See
Exchange, Inc., Bats EDGA Exchange, Section 3(a)(2) [sic] below)
to propose the Consolidated Audit Trail
• Industry Member Fees. Each
Inc., Bats EDGX Exchange, Inc., BOX Funding Fees, which will require Industry Member (other than Execution
Options Exchange LLC, C2 Options Industry Members that are Bats Venue ATSs) will be placed into one of
Exchange, Incorporated, Chicago Board members to pay the CAT Fees nine tiers of fixed fees, based on
Options Exchange, Incorporated,
‘‘message traffic’’ in Eligible Securities
Chicago Stock Exchange, Inc., Financial 7 National Stock Exchange, Inc. has been renamed
for a defined period (as discussed
Industry Regulatory Authority, Inc. NYSE National, Inc. See Securities Exchange Act
Rel. No. 79902 (Jan. 30, 2017), 82 FR 9258 (Feb. 3,
below). Prior to the start of CAT
(‘‘FINRA’’), Investors’ Exchange LLC,
2017). reporting, ‘‘message traffic’’ will be
Miami International Securities 8 15 U.S.C. 78k–1. comprised of historical equity and
Exchange, LLC, MIAX PEARL, LLC, 9 17 CFR 242.608. equity options orders, cancels and
NASDAQ BX, Inc., Nasdaq GEMX, LLC, 10 See Letter from the Participants to Brent J.
quotes provided by each exchange and
Nasdaq ISE, LLC, Nasdaq MRX, LLC,6 Fields, Secretary, Commission, dated September 30, FINRA over the previous three months.
NASDAQ PHLX LLC, The NASDAQ 2014; and Letter from Participants to Brent J. Fields,
After an Industry Member begins
Secretary, Commission, dated February 27, 2015.
5 Unless otherwise specified, capitalized terms On December 24, 2015, the Participants submitted reporting to the CAT, ‘‘message traffic’’
used in this fee filing are defined as set forth herein,
an amendment to the CAT NMS Plan. See Letter will be calculated based on the Industry
from Participants to Brent J. Fields, Secretary, Member’s Reportable Events reported to
the CAT Compliance Rule Series or in the CAT
Commission, dated December 23, 2015.
NMS Plan. the CAT. Industry Members with lower
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11 Securities Exchange Act Rel. No. 77724 (Apr.
6 ISE Gemini, LLC, ISE Mercury, LLC and
27, 2016), 81 FR 30614 (May 17, 2016). levels of message traffic will pay a lower
International Securities Exchange, LLC have been 12 Securities Exchange Act Rel. No. 79318 (Nov. fee and Industry Members with higher
renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC,
and Nasdaq ISE, LLC, respectively. See Securities 15, 2016), 81 FR 84696 (Nov. 23, 2016) (‘‘Approval levels of message traffic will pay a
Exchange Act Rel. No. 80248 (Mar. 15, 2017), 82 FR Order’’).
13 The Plan also serves as the limited liability
14547 (Mar. 21, 2017); Securities Exchange Act Rel. 16 The Commission notes that references to
No. 80326 (Mar. 29, 2017), 82 FR 16460 (Apr. 4, company agreement for the Company. Sections 3(a)(2) and 3(a)(3) in this Executive
14 Section 11.1(b) of the CAT NMS Plan.
2017); and Securities Exchange Act Rel. No. 80325 Summary should be instead to Sections II.A.1.(2)
(Mar. 29, 2017), 82 FR 16445 (Apr. 4, 2017). 15 Id. and II.A.1.(3), respectively.
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![26150 Federal Register / Vol. 82, No. 107 / Tuesday, June 6, 2017 / Notices
higher fee. (See Section 3(a)(2)(B) [sic] • Quarterly Invoices. Industry authority to recover the Participants’ costs
below) Members will be billed quarterly for related to the CAT. The CAT is a regulatory
• Execution Venue Fees. Each Equity CAT Fees, with the invoices payable facility jointly owned by the Participants and
within 30 days. The quarterly invoices . . . the Exchange Act specifically permits
Execution Venue will be placed in one the Participants to charge their members fees
of two tiers of fixed fees based on will identify within which tier the to fund their self-regulatory obligations. The
market share, and each Options Industry Member falls. (See Section Commission further believes that the
Execution Venue will be placed in one 3(a)(3)(C) [sic] below) proposed funding model is designed to
of two tiers of fixed fees based on • Centralized Payment. Each Industry impose fees reasonably related to the
market share. Equity Execution Venue Member will receive from the Company Participants’ self-regulatory obligations
market share will be determined by one invoice for its applicable CAT Fees, because the fees would be directly associated
calculating each Equity Execution not separate invoices from each with the costs of establishing and
Venue’s proportion of the total volume Participant of which it is a member. The maintaining the CAT, and not unrelated SRO
Industry Members will pay its CAT Fees services.20
of NMS Stock and OTC Equity shares
reported by all Equity Execution Venues to the Company via the centralized Accordingly, the funding model
during the relevant time period. system for the collection of CAT Fees imposes fees on both Participants and
Similarly, market share for Options established by the Operating Committee. Industry Members.
Execution Venues will be determined by (See Section 3(a)(3)(C) [sic] below) In addition, as discussed in Appendix
calculating each Options Execution • Billing Commencement. Industry C of the CAT NMS Plan, the Operating
Venue’s proportion of the total volume Members will begin to receive invoices Committee considered the advantages
of Listed Options contracts reported by for CAT Fees as promptly as possible and disadvantages of a variety of
all Options Execution Venues during following the establishment of a billing alternative funding and cost allocation
the relevant time period. Equity mechanism. Bats will issue a Regulatory models before selecting the proposed
Execution Venues with a larger market Circular to its members when the billing model.21 After analyzing the various
share will pay a larger CAT Fee than mechanism is established, specifying alternatives, the Operating Committee
Equity Execution Venues with a smaller the date when such invoicing of determined that the proposed tiered,
market share. Similarly, Options Industry Members will commence. (See fixed fee funding model provides a
Execution Venues with a larger market Section 3(a)(2)(G) [sic] below) variety of advantages in comparison to
share will pay a larger CAT Fee than (2) Description of the CAT Funding the alternatives. First, the fixed fee
Options Execution Venues with a Model model, as opposed to a variable fee
smaller market share. (See Section model, provides transparency, ease of
Article XI of the CAT NMS Plan calculation, ease of billing and other
3(a)(2)(C) [sic] below) requires the Operating Committee to
• Cost Allocation. For the reasons administrative functions, and
approve the operating budget, including predictability of a fixed fee. Such factors
discussed below, in designing the projected costs of developing and
model, the Operating Committee are crucial to estimating a reliable
operating the CAT for the upcoming revenue stream for the Company and for
determined that 75 percent of total costs year. As set forth in Article XI of the
recovered would be allocated to permitting CAT Reporters to reasonably
CAT NMS Plan, the CAT NMS Plan predict their payment obligations for
Industry Members (other than Execution requires a bifurcated funding model,
Venue ATSs) and 25 percent would be budgeting purposes.22 Additionally, a
where costs associated with building strictly variable or metered funding
allocated to Execution Venues. In and operating the Central Repository
addition, the Operating Committee model based on message volume would
would be borne by (1) Participants and be far more likely to affect market
determined to allocate 75 percent of Industry Members that are Execution
Execution Venue costs recovered to behavior and place an inappropriate
Venues through fixed tier fees based on burden on competition. Moreover, as
Equity Execution Venues and 25 percent market share, and (2) Industry Members
to Options Execution Venues. (See the SEC noted in approving the CAT
(other than Execution Venue ATSs) NMS Plan, ‘‘[t]he Participants also have
Section 3(a)(2)(D) [sic] below) through fixed tier fees based on message
• Comparability of Fees. The CAT offered a reasonable basis for
traffic. In its order approving the CAT establishing a funding model based on
funding model requires that the CAT NMS Plan, the Commission determined
Fees charged to the CAT Reporters with broad tiers, in that it be may be easier
that the proposed funding model was to implement.’’ 23
the most CAT-related activity (measured ‘‘reasonable’’ 17 and ‘‘reflects a In addition, multiple reviews of
by market share and/or message traffic, reasonable exercise of the Participants’ current broker-dealer order and trading
as applicable) are generally comparable funding authority to recover the data submitted under existing reporting
(where, for these comparability Participants’ costs related to the requirements showed a wide range in
purposes, the tiered fee structure takes CAT.’’ 18 activity among broker-dealers, with a
into consideration affiliations between More specifically, the Commission number of broker-dealers submitting
or among CAT Reporters, whether stated in approving the CAT NMS Plan
Execution Venues and/or Industry that ‘‘[t]he Commission believes that the 20 Id. at 84794.
Members). (See Section 3(a)(2)(F) [sic] proposed funding model is reasonably 21 Section B.7, Appendix C of the CAT NMS Plan,
below) designed to allocate the costs of the CAT Approval Order at 85006.
(B) CAT Fees for Industry Members between the Participants and Industry 22 In choosing a tiered fee structure, the SROs
Members.’’ 19 The Commission further concluded that the variety of benefits offered by a
• Fee Schedule. The quarterly CAT noted the following:
tiered fee structure, discussed above, outweighed
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the fact that Industry Members in any particular tier
Fees for each tier for Industry Members would pay different rates per message traffic order
The Commission believes that the
are set forth in the two fee schedules in proposed funding model reflects a reasonable event (e.g., an Industry Member with the largest
the Consolidated Audit Trail Funding exercise of the Participants’ funding amount of message traffic in one tier would pay a
Fees, one for Equity ATSs and one for smaller amount per order event than an Industry
Member in the same tier with the least amount of
Industry Members other than Equity 17 Approval Order at 84796. message traffic). Such variation is the natural result
ATSs. (See Section 3(a)(3)(B) [sic] 18 Id. at 84794. of a tiered fee structure.
below) 19 Id. at 84795. 23 Approval Order at 84796.
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![Federal Register / Vol. 82, No. 107 / Tuesday, June 6, 2017 / Notices 26151
fewer than 1,000 orders per month and be based on the message traffic appropriate reserve. Any surpluses will
other broker-dealers submitting millions generated by such Industry Member.30 be treated as an operational reserve to
and even billions of orders in the same The CAT NMS Plan provides that the offset future fees and will not be
period. Accordingly, the CAT NMS Plan Operating Committee will use different distributed to the Participants as
includes a tiered approach to fees. The criteria to establish fees for Execution profits.35 To ensure that the
tiered approach helps ensure that fees Venues and non-Execution Venues due Participants’ operation of the CAT will
are equitably allocated among similarly to the fundamental differences between not contribute to the funding of their
situated CAT Reporters and furthers the the two types of entities. In particular, other operations, Section 11.1(c) of the
goal of lessening the impact on smaller the CAT NMS Plan provides that fees CAT NMS Plan specifically states that
firms.24 The self-regulatory charged to CAT Reporters that are ‘‘[a]ny surplus of the Company’s
organizations considered several Execution Venues will be based on the revenues over its expenses shall be
approaches to developing a tiered level of market share and that costs treated as an operational reserve to
model, including defining fee tiers charged to Industry Members (other offset future fees.’’ In addition, as set
based on such factors as size of firm, than Execution Venue ATSs) will be forth in Article VIII of the CAT NMS
message traffic or trading dollar volume. based upon message traffic.31 Because Plan, the Company ‘‘intends to operate
After analyzing the alternatives, it was most Participant message traffic consists in a manner such that it qualifies as a
concluded that the tiering should be of quotations, and Participants usually ‘business league’ within the meaning of
based on the relative impact of CAT disseminate quotations in all Section 501(c)(6) of the [Internal
Reporters on the CAT System. instruments they trade, regardless of Revenue] Code.’’ To qualify as a
Accordingly, the CAT NMS Plan execution volume, Execution Venues business league, an organization must
contemplates that costs will be allocated that are Participants generally ‘‘not [be] organized for profit and no
across the CAT Reporters on a tiered disseminate similar amounts of message part of the net earnings of [the
basis to allocate costs to those CAT traffic. Accordingly, basing fees for organization can] inure[] to the benefit
Reporters that contribute more to the Execution Venues on message traffic of any private shareholder or
costs of creating, implementing and would not provide the same degree of individual.’’ 36 As the SEC stated when
maintaining the CAT.25 The fees to be differentiation among Execution Venues approving the CAT NMS Plan, ‘‘the
assessed at each tier are calculated so as that it does among Industry Members Commission believes that the
to recoup a proportion of costs (other than Execution Venue ATSs). In Company’s application for Section
appropriate to the message traffic or contrast, execution volume more 501(c)(6) business league status
market share (as applicable) from CAT accurately delineates the different levels addresses issues raised by commenters
Reporters in each tier. Therefore, of trading activity of Execution about the Plan’s proposed allocation of
Industry Members generating the most Venues.32 profit and loss by mitigating concerns
message traffic will be in the higher The CAT NMS Plan’s funding model that the Company’s earnings could be
tiers, and therefore be charged a higher also is structured to avoid a ‘‘reduction used to benefit individual
fee. Industry Members with lower levels in market quality.’’ 33 The tiered, fixed Participants.’’ 37
of message traffic will be in lower tiers fee funding model is designed to limit Finally, by adopting a CAT-specific
and will be assessed a smaller fee for the the disincentives to providing liquidity fee, the Participants will be fully
CAT.26 Correspondingly, Execution to the market. For example, the transparent regarding the costs of the
Participants expect that a firm that had CAT. Charging a general regulatory fee,
Venues with the highest market share
a large volume of quotes would likely be which would be used to cover CAT
will be in the top tier, and therefore will
categorized in one of the upper tiers, costs as well as other regulatory costs,
be charged a higher fee. Execution
and would not be assessed a fee for this would be less transparent than the
Venues with a lower market share will
traffic directly as they would under a selected approach of charging a fee
be in the lower tier and will be assessed
more directly metered model. In designated to cover CAT costs only.
a smaller fee for the CAT.27 A full description of the funding
The Commission also noted in contrast, strictly variable or metered
funding models based on message model is set forth below. This
approving the CAT NMS Plan that description includes the framework for
‘‘[t]he Participants have offered a volume were far more likely to affect
market behavior. In approving the CAT the funding model as set forth in the
credible justification for using different CAT NMS Plan, as well as the details as
criteria to charge Execution Venues NMS Plan, the SEC stated that ‘‘[t]he
Participants also offered a reasonable to how the funding model will be
(market share) and Industry Members applied in practice, including the
(message traffic)’’ 28 in the CAT funding basis for establishing a funding model
based on broad tiers, in that it may be number of fee tiers and the applicable
model. While there are multiple factors fees for each tier. Bats notes that the
that contribute to the cost of building, . . . less likely to have an incremental
deterrent effect on liquidity complete funding model is described
maintaining and using the CAT, below, including those fees that are to
processing and storage of incoming provision.’’ 34
The CAT NMS Plan is structured to be paid by the Participants. The
message traffic is one of the most proposed Consolidated Audit Trail
significant cost drivers for the CAT.29 avoid potential conflicts raised by the
Operating Committee determining fees Funding Fees, however, do not apply to
Thus, the CAT NMS Plan provides that the Participants; the proposed
the fees payable by Industry Members applicable to its own members—the
Participants. First, the Company will be Consolidated Audit Trail Funding Fees
(other than Execution Venue ATSs) will only apply to Industry Members. The
operated on a ‘‘break-even’’ basis, with
mstockstill on DSK30JT082PROD with NOTICES
fees imposed to cover costs and an CAT fees for Participants will be
24 Section B.7, Appendix C of the CAT NMS Plan,
Approval Order at 85006.
imposed separately by the Operating
25 Approval Order at 85005. 30 Section11.3(b) of the CAT NMS Plan. Committee pursuant to the CAT NMS
26 Id. 31 Section11.2(c) of the CAT NMS Plan. Plan.
27 Id. 32 Section B.7, Appendix C of the CAT NMS Plan,
28 Id. at 84796. Approval Order at 85005. 35 Id.
at 84792.
29 Section B.7, Appendix C of the CAT NMS Plan, 33 Section 11.2(e) of the CAT NMS Plan. 36 26U.S.C. 501(c)(6).
Approval Order at 85005. 34 Approval Order at 84796. 37 Approval Order at 84793.
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![26154 Federal Register / Vol. 82, No. 107 / Tuesday, June 6, 2017 / Notices
Percentage
Percentage Percentage
of Industry
Industry Member tier of Industry of total
Member
Members recovery
Recovery
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 Furthermore, prior to the start of CAT Regulation ATS (excluding any such
tiers based on message traffic, the reporting, quotes would be comprised of ATS that does not execute orders).’’ 41
Operating Committee determined to information readily available to the The Participants determined that
define the term ‘‘message traffic’’ exchanges and FINRA, such as the total ATSs should be included within the
separately for the period before the number of historical equity and equity definition of Execution Venue. Given
commencement of CAT reporting and options quotes received and originated the similarity between the activity of
for the period after the start of CAT by a member of an exchange or FINRA exchanges and ATSs, both of which
reporting. The different definition for over the prior three-month period. meet the definition of an ‘‘exchange’’ as
message traffic is necessary as there will set forth in the Exchange Act and the
After an Industry Member begins
be no Reportable Events as defined in fact that the similar trading models
reporting to the CAT, ‘‘message traffic’’ would have similar anticipated burdens
the Plan, prior to the commencement of
will be calculated based on the Industry on the CAT, the Participants determined
CAT reporting. Accordingly, prior to the
Member’s Reportable Events reported to that ATSs should be treated in the same
start of CAT reporting, ‘‘message traffic’’
the CAT as will be defined in the manner as the exchanges for the
will be comprised of historical equity
and equity options orders, cancels and Technical Specifications.40 purposes of determining the level of fees
quotes provided by each exchange and The Operating Committee has associated with the CAT.42
FINRA over the previous three determined to calculate fee tiers every Given the differences between
months.38 Prior to the start of CAT three months, on a calendar quarter Execution Venues that trade NMS
reporting, orders would be comprised of basis, based on message traffic from the Stocks and/or OTC Equity Securities
the total number of equity and equity prior three months. Based on its and Execution Venues that trade Listed
options orders received and originated analysis of historical data, the Operating Options, Section 11.3(a) addresses
by a member of an exchange or FINRA Committee believes that calculating tiers Execution Venues that trade NMS
over the previous three-month period, based on three months of data will Stocks and/or OTC Equity Securities
including principal orders, cancel/ provide the best balance between separately from Execution Venues that
replace orders, market maker orders reflecting changes in activity by trade Listed Options. Equity and
originated by a member of an exchange, Industry Members while still providing Options Execution Venues are treated
and reserve (iceberg) orders as well as predictability in the tiering for Industry separately for two reasons. First, the
order routes and executions originated Members. Because fee tiers will be differing quoting behavior of Equity and
by a member of FINRA, and excluding calculated based on message traffic from Options Execution Venues makes
order rejects and implied orders.39 In the prior three months, the Operating comparison of activity between
addition, prior to the start of CAT Committee will begin calculating Execution Venues difficult. Second,
reporting, cancels would be comprised message traffic based on an Industry Execution Venue tiers are calculated
of the total number of equity and equity Member’s Reportable Events reported to based on market share of share volume,
option cancels received and originated the CAT once the Industry Member has and it is therefore difficult to compare
by a member of an exchange or FINRA been reporting to the CAT for three market share between asset classes (i.e.,
over a three-month period, excluding months. Prior to that, fee tiers will be equity shares versus options contracts).
order modifications (e.g., order updates, calculated as discussed above with Discussed below is how the funding
order splits, partial cancels). regard to the period prior to CAT model treats the two types of Execution
reporting. Venues.
38 The SEC approved exemptive relief permitting
Options Market Maker quotes to be reported to the (C) Execution Venue Tiering (I) NMS Stocks and OTC Equity
Central Repository by the relevant Options Securities
Exchange in lieu of requiring that such reporting be Under Section 11.3(a) of the CAT Section 11.3(a)(i) of the CAT NMS
done by both the Options Exchange and the Options NMS Plan, the Operating Committee is
Market Maker, as required by Rule 613 of Plan states that each Execution Venue
Regulation NMS. See Securities Exchange Act required to establish fixed fees payable that (i) executes transactions or, (ii) in
Release No. 77265 (Mar. 1, 2017 [sic], 81 FR 11856 by Execution Venues. Section 1.1 of the the case of a national securities
(Mar. 7, 2016). This exemption applies to Options CAT NMS Plan defines an Execution
Market Maker quotes for CAT reporting purposes
association, has trades reported by its
only. Therefore, notwithstanding the reporting Venue as ‘‘a Participant or an alternative members to its trade reporting facility or
exemption provided for Options Market Maker trading system (‘‘ATS’’) (as defined in facilities for reporting transactions
quotes, Options Market Maker quotes will be Rule 300 of Regulation ATS) that effected otherwise than on an exchange,
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included in the calculation of total message traffic operates pursuant to Rule 301 of
for Options Market Makers for purposes of tiering in NMS Stocks or OTC Equity Securities
under the CAT funding model both prior to CAT
reporting and once CAT reporting commences. 40 If an Industry Member (other than an Execution 41 Although FINRA does not operate an execution
39 Consequently, firms that do not have ‘‘message Venue ATS) has no orders, cancels or quotes prior venue, because it is a Participant, it is considered
traffic’’ reported to an exchange or OATS before to the commencement of CAT Reporting, or no an ‘‘Execution Venue’’ under the Plan for purposes
they are reporting to the CAT would not be subject Reportable Events after CAT reporting commences, of determining fees.
to a fee until they begin to report information to then the Industry Member would not have a CAT 42 Section B.7, Appendix C of the CAT NMS Plan,
CAT. fee obligation. Approval Order at 85005.
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will pay a fixed fee depending on the than a larger number of tiers as fewer, rather than more, Execution
market share of that Execution Venue in established for non-Execution Venue Venue tiers to distinguish between
NMS Stocks and OTC Equity Securities, Industry Members, because the two tiers Execution Venues.
with the Operating Committee were sufficient to distinguish between The percentage of costs recovered by
establishing at least two and not more the smaller number of Equity Execution each Equity Execution Venue tier will
than five tiers of fixed fees, based on an Venues based on market share. be determined by predefined percentage
Execution Venue’s NMS Stocks and Furthermore, the incorporation of
allocations (the ‘‘Equity Execution
OTC Equity Securities market share. For additional Equity Execution Venue tiers
Venue Recovery Allocation’’). In
these purposes, market share for would result in significantly higher fees
determining the fixed percentage
Execution Venues that execute for Tier 1 Equity Execution Venues and
transactions will be calculated by share diminish comparability between allocation of costs recovered for each
volume, and market share for a national Execution Venues and Industry tier, the Operating Committee
securities association that has trades Members. considered the impact of CAT Reporter
reported by its members to its trade Each Equity Execution Venue will be market share activity on the CAT
reporting facility or facilities for ranked by market share and tiered by System as well as the distribution of
reporting transactions effected predefined Execution Venue total market volume across Equity
otherwise than on an exchange in NMS percentages, (the ‘‘Equity Execution Execution Venues while seeking to
Stocks or OTC Equity Securities will be Venue Percentages’’). In determining the maintain comparable fees among the
calculated based on share volume of fixed percentage of Equity Execution largest CAT Reporters. Accordingly,
trades reported, provided, however, that Venues in each tier, the Operating following the determination of the
the share volume reported to such Committee looked at historical market percentage of Execution Venues in each
national securities association by an share of share volume for execution tier, the Operating Committee identified
Execution Venue shall not be included venues. Equities Execution Venue the percentage of total market volume
in the calculation of such national market share of share volume were for each tier based on the historical
security association’s market share. sourced from market statistics made market share upon which Execution
In accordance with Section 11.3(a)(i) publicly-available by Bats Global Venues had been initially ranked.
of the CAT NMS Plan, the Operating Markets, Inc. (‘‘Bats’’). ATS market Taking this into account along with the
Committee approved a tiered fee share of share volume was sourced from resulting percentage of total recovery,
structure for Equity Execution Venues market statistics made publicly- the percentage allocation of costs
and Option Execution Venues. In available by FINRA. FINRA trading [sic] recovered for each tier were assigned,
determining the Equity Execution reporting facility (‘‘TRF’’) market share allocating higher percentages of
Venue Tiers, the Operating Committee of share volume was sourced from recovery to the tier with a higher level
considered the funding principles set market statistics made publicly of market share while avoiding any
forth in Section 11.2 of the CAT NMS available by Bats. As indicated by inappropriate burden on competition.
Plan, seeking to create funding tiers that FINRA, ATSs accounted for 37.80% of Furthermore, due to the similar levels of
take into account the relative impact on the share volume across the TRFs impact on the CAT System across
system resources of different Equity during the recent tiering period. A Execution Venues, there is less variation
Execution Venues, and that establish 37.80/62.20 split was applied to the in CAT Fees between the highest and
comparable fees among the CAT ATS and non-ATS breakdown of FINRA lowest of tiers for Execution Venues.
Reporters with the most Reportable market share, with FINRA tiered based Furthermore, by using percentages of
Events. Each Equity Execution Venue only on the non-ATS portion of its TRF
Equity Execution Venues and costs
will be placed into one of two tiers of market share of share volume.
Based on this, the Operating recovered per tier, the Operating
fixed fees, based on the Execution
Committee considered the distribution Committee sought to include stability
Venue’s NMS Stocks and OTC Equity
of Execution Venues, and grouped and elasticity within the funding model,
Securities market share. In choosing two
tiers, the Operating Committee together Execution Venues with similar allowing the funding model to respond
performed an analysis similar to that levels of market share of share volume. to changes in either the total number of
discussed above with regard to the non- In doing so, the Participants considered Equity Execution Venues or changes in
Execution Venue Industry Members to that, as previously noted, Execution market share.
determine the number of tiers for Equity Venues in many cases have similar Based on this analysis, the Operating
Execution Venues. The Operating levels of message traffic due to quoting Committee approved the following
Committee determined to establish two activity, and determined that it was Equity Execution Venue Percentages
tiers for Equity Execution Venues, rather simpler and more appropriate to have 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
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The following table exhibits the reviewing the table, note that while this funding model is directly driven not by
relative separation of market share of division was referenced as a data point market share thresholds, but rather by
share volume between Tier 1 and Tier to help differentiate between Equity fixed percentages of Equity Execution
2 Equity Execution Venues. In Execution Venue tiers, the proposed Venues across tiers to account for
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fluctuating levels of market share across the CAT NMS Plan, seeking to create publicly available market share of
time. Actual market share in any tier funding tiers that take into account the Options Execution Venues to group
will vary based on the actual market relative impact on system resources of Options Execution Venues with similar
activity in a given measurement period, different Options Execution Venues, market shares across the tiers. Options
as well as the number of Equity and that establish comparable fees Execution Venue market share of share
Execution Venues included in the among the CAT Reporters with the most volume were sourced from market
measurement period. The Equity Reportable Events. Each Options statistics made publicly-available by
Execution Venue Percentages and Execution Venue will be placed into one Bats. The process for developing the
Equity Execution Venue Recovery of two tiers of fixed fees, based on the Options Execution Venue Percentages
Allocation for each tier will remain Execution Venue’s Listed Options was the same as discussed above with
fixed with each Equity Execution Venue market share. In choosing two tiers, the regard to Equity Execution Venues.
tier to be reassigned periodically, as Operating Committee performed an The percentage of costs recovered by
described below in Section 3(a)(1)(I) analysis similar to that discussed above each Options Execution Venue tier will
[sic]. with regard to Industry Members (other be determined by predefined percentage
than Execution Venue ATSs) to allocations (the ‘‘Options Execution
Equity market determine the number of tiers for Venue Recovery Allocation’’). In
share of
share volume Options Execution Venues. The determining the fixed percentage
Equity Execution Venue tier
(%) Operating Committee determined to allocation of costs recovered for each
establish two tiers for Options tier, the Operating Committee
Tier 1 .................................... ≥1 Execution Venues, rather than a larger considered the impact of CAT Reporter
Tier 2 .................................... <1 number of tiers as established for market share activity on the CAT
Industry Members (other than Execution System as well as the distribution of
(II) Listed Options Venue ATSs), because the two tiers total market volume across Options
Section 11.3(a)(ii) of the CAT NMS were sufficient to distinguish between Execution Venues while seeking to
Plan states that each Execution Venue the smaller number of Options maintain comparable fees among the
that executes transactions in Listed Execution Venues based on market largest CAT Reporters. Furthermore, by
Options will pay a fixed fee depending share. Furthermore, due to the smaller using percentages of Options Execution
on the Listed Options market share of number of Options Execution Venues, Venues and costs recovered per tier, the
that Execution Venue, with the the incorporation of additional Options Operating Committee sought to include
Operating Committee establishing at Execution Venue tiers would result in stability and elasticity within the
least two and no more than five tiers of significantly higher fees for Tier 1 funding model, allowing the funding
fixed fees, based on an Execution Options Execution Venues and reduce model to respond to changes in either
Venue’s Listed Options market share. comparability between Execution the total number of Options Execution
For these purposes, market share will be Venues and Industry Members. Venues or changes in market share. The
calculated by contract volume. Each Options Execution Venue will process for developing the Options
In accordance with Section 11.3(a)(ii) be ranked by market share and tiered by Execution Venue Recovery Allocation
of the CAT NMS Plan, the Operating predefined Execution Venue was the same as discussed above with
Committee approved a tiered fee percentages, (the ‘‘Options Execution regard to Equity Execution Venues.
structure for Options Execution Venues. Venue Percentages’’). To determine the Based on this analysis, the Operating
In determining the tiers, the Operating fixed percentage of Options Execution Committee approved the following
Committee considered the funding Venues in each tier, the Operating Options Execution Venue Percentages
principles set forth in Section 11.2 of Committee analyzed the historical and 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 activity in a given measurement period, Options
relative separation of market share of as well as the number of Options market
share volume between Tier 1 and Tier Execution Venues included in the share
Options Execution Venue tier of share
2 Options Execution Venues. In measurement period. The Options volume
reviewing the table, note that while this Execution Venue Percentages and (%)
division was referenced as a data point Equity Execution Venue Recovery
to help differentiate between Options Allocation for each tier will remain Tier 1 .................................... ≥1
Execution Venue tiers, the proposed Tier 2 .................................... <1
fixed with each Options Execution
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funding model is directly driven, not by Venue tier to be reassigned periodically,
market share thresholds, but rather by (III) Market Share/Tier Assignments
as described below in Section 3(a)(1)(I)
fixed percentages of Options Execution [sic]. The Operating Committee determined
Venues across tiers to account for that, prior to the start of CAT reporting,
fluctuating levels of market share across market share for Execution Venues
time. Actual market share in any tier would be sourced from publicly-
will vary based on the actual market available market data. Options and
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(F) Comparability of Fees model, the Operating Committee sought aggregate fees that would be paid by
The funding principles require a to take account of the affiliations such firms.
funding model in which the fees between or among CAT Reporters—that While the proposed fees for Tier 1 and
charged to the CAT Reporters with the is, where affiliated entities may have Tier 2 Industry Members are relatively
most CAT-related activity (measured by multiple Industry Member and/or higher than those of Tier 1 and Tier 2
market share and/or message traffic, as Execution Venue licenses, by Execution Venues, Execution Venue
applicable) are generally comparable maintaining relative comparability of complex fees are relatively higher than
(where, for these comparability fees among such affiliations with the those of Industry Member complexes
purposes, the tiered fee structure takes most expected CAT-related activity. To largely due to affiliations between
into consideration affiliations between do this, the Participants identified Execution Venues. The tables set forth
or among CAT Reporters, whether representative affiliations in the largest below describe the largest Execution
Execution Venue and/or Industry tier of both Execution Venues and Venue and Industry Member complexes
Members). Accordingly, in creating the Industry Members and compared the and their associated fees: 50
EXECUTION VENUE COMPLEXES
Listing of Equity Execution Listing of Options Execution Total fees by
Execution Venue complex Venue tiers Venue tier EV Complex
Execution Venue Complex 1 .................................................... • Tier 1 (x2) ............................ • Tier 1 (x4) ............................ $1,900,962
• Tier 2 (x1) ............................ • Tier 2 (x2)
Execution Venue Complex 2 .................................................... • Tier 1 (x2) ............................ • Tier 1 (x2) ............................ $1,863,801
• Tier 2 (x1)
Execution Venue Complex 3 .................................................... • Tier 1 (x2) ............................ • Tier 1 (x2) ............................ $1,278,447
• Tier 2 (x2)
INDUSTRY MEMBER COMPLEXES
Listing of Industry Member Total fees by
Industry Member Complex Listing of ATS tiers
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)
(G) Billing Onset Committee determined that all CAT shall not make any changes on more
Under Section 11.1(c) of the CAT Reporters, including both Industry than a semi-annual basis unless,
NMS Plan, to fund the development and Members and Execution Venues pursuant to a Supermajority Vote, the
implementation of the CAT, the (including Participants), would begin to Operating Committee concludes that
Company shall time the imposition and be invoiced as promptly as possible such change is necessary for the
collection of all fees on Participants and following the establishment of a billing adequate funding of the Company.’’
Industry Members in a manner mechanism. Bats will issue a Regulatory With such reviews, the Operating
reasonably related to the timing when Circular to its members when the billing Committee will review the distribution
the Company expects to incur such mechanism is established, specifying of Industry Members and Execution
development and implementation costs. the date when such invoicing of Venues across tiers, and make any
The Company is currently incurring Industry Members will commence. updates to the percentage of CAT
such development and implementation (H) Changes to Fee Levels and Tiers Reporters allocated to each tier as may
costs and will continue to do so prior be necessary. In addition, the reviews
to the commencement of CAT reporting Section 11.3(d) of the CAT NMS Plan will evaluate the estimated ongoing
and thereafter. For example, the Plan states that ‘‘[t]he Operating Committee CAT costs and the level of the operating
Processor has required up-front shall review such fee schedule on at reserve. To the extent that the total CAT
payments to begin building the CAT. In least an annual basis and shall make any costs decrease, the fees would be
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addition, the Company continues to changes to such fee schedule that it adjusted downward, and, to the extent
incur consultant and legal expenses on deems appropriate. The Operating that the total CAT costs increase, the
an on-going basis to implement the Committee is authorized to review such fees would be adjusted upward.51
CAT. Accordingly, the Operating fee schedule on a more regular basis, but
50 Note that the analysis of the complexes was between the 1631 Industry Members may not be 51 The CAT Fees are designed to recover the costs
performed on a best efforts basis, as all affiliations included. associated with the CAT. Accordingly, CAT Fees
would not be affected by increases or decreases in
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![26168 Federal Register / Vol. 82, No. 107 / Tuesday, June 6, 2017 / Notices
action is necessary or appropriate in the For the Commission, by the Division of the most significant aspects of such
public interest, for the protection of Trading and Markets, pursuant to delegated statements.
investors, or otherwise in furtherance of authority.61
Eduardo A. Aleman, A. Self-Regulatory Organization’s
the purposes of the Act. Statement of the Purpose of, and
Assistant Secretary.
IV. Solicitation of Comments Statutory Basis for, the Proposed Rule
[FR Doc. 2017–11606 Filed 6–5–17; 8:45 am]
Change
Interested persons are invited to BILLING CODE 8011–01–P
submit written data, views and 1. Purpose
arguments concerning the foregoing, Under the Penny Pilot Program, the
including whether the proposal is SECURITIES AND EXCHANGE minimum price variation for all
consistent with the Act. Comments may COMMISSION participating options classes, except for
be submitted by any of the following [Release No. 34–80827; File No. SR–ISE– the Nasdaq-100 Index Tracking Stock
methods: 2017–48] (‘‘QQQQ’’), the SPDR S&P 500 Exchange
Traded Fund (‘‘SPY’’) and the iShares
Electronic Comments Self-Regulatory Organizations; Nasdaq Russell 2000 Index Fund (‘‘IWM’’), is
ISE, LLC; Notice of Filing and $0.01 for all quotations in options series
• Use the Commission’s Internet Immediate Effectiveness of Proposed that are quoted at less than $3 per
comment form (http://www.sec.gov/ Rule Change To Extend a Pilot contract and $0.05 for all quotations in
rules/sro.shtml); or Program To Quote and To Trade options series that are quoted at $3 per
• Send an email to rule-comments@ Certain Options Classes in Penny contract or greater. QQQQ, SPY and
sec.gov. Please include File Number SR– Increments IWM are quoted in $0.01 increments for
BatsBZX–2017–38 on the subject line. all options series. The Penny Pilot
May 31, 2017.
Program is currently scheduled to
Paper Comments Pursuant to Section 19(b)(1) of the expire on June 30, 2017.3 The Exchange
Securities Exchange Act of 1934 proposes to extend the Penny Pilot
• Send paper comments in triplicate (‘‘Act’’),1 and Rule 19b–4 thereunder,2
to Secretary, Securities and Exchange Program through December 31, 2017,
notice is hereby given that on May 25, and to provide a revised date for adding
Commission, 100 F Street NE., 2017, Nasdaq ISE, LLC (‘‘ISE’’ or
Washington, DC 20549–1090. replacement issues to the Penny Pilot
‘‘Exchange’’) filed with the Securities Program. The Exchange proposes that
All submissions should refer to File and Exchange Commission (‘‘SEC’’ or any Penny Pilot Program issues that
Number SR–BatsBZX–2017–38. This file ‘‘Commission’’) the proposed rule have been delisted may be replaced on
number should be included on the change as described in Items I, II, and the second trading day following July 1,
subject line if email is used. To help the III, below, which Items have been 2017. The replacement issues will be
Commission process and review your prepared by the Exchange. The selected based on trading activity for the
comments more efficiently, please use Commission is publishing this notice to most recent six month period excluding
only one method. The Commission will solicit comments on the proposed rule the month immediately preceding the
post all comments on the Commission’s change from interested persons. replacement (i.e., beginning December
Internet Web site (http://www.sec.gov/ I. Self-Regulatory Organization’s 1, 2016, and ending May 31, 2017). This
rules/sro.shtml). Copies of the Statement of the Terms of Substance of filing does not propose any substantive
submission, all subsequent the Proposed Rule Change changes to the Penny Pilot Program: All
amendments, all written statements classes currently participating will
with respect to the proposed rule The Exchange proposes to extend a remain the same and all minimum
change that are filed with the pilot program to quote and to trade increments will remain unchanged. The
Commission, and all written certain options classes in penny Exchange believes the benefits to public
communications relating to the increments (‘‘Penny Pilot Program’’). customers and other market participants
proposed rule change between the The text of the proposed rule change
who will be able to express their true
Commission and any person, other than is available on the Exchange’s Web site
prices to buy and sell options have been
those that may be withheld from the at www.ise.com, at the principal office
demonstrated to outweigh any increase
public in accordance with the of the Exchange, and at the
in quote traffic.
provisions of 5 U.S.C. 552, will be Commission’s Public Reference Room.
2. Statutory Basis
available for Web site viewing and II. Self-Regulatory Organization’s
printing in the Commission’s Public Statement of the Purpose of, and The Exchange believes that the
Reference Room, 100 F Street NE., Statutory Basis for, the Proposed Rule proposed rule change is consistent with
Washington, DC 20549, on official Change the requirements of the Act and the
business days between the hours of rules and regulations thereunder that
In its filing with the Commission, the are applicable to a national securities
10:00 a.m. and 3:00 p.m. Copies of such
Exchange included statements exchange, and, in particular, with the
filing will also be available for
concerning the purpose of and basis for requirements of Section 6(b) of the Act.4
inspection and copying at the principal
the proposed rule change and discussed Specifically, the proposed rule change is
office of the Exchange. All comments
any comments it received on the consistent with Section 6(b)(5) of the
received will be posted without change;
proposed rule change. The text of these Act,5 because it is designed to promote
the Commission does not edit personal
mstockstill on DSK30JT082PROD with NOTICES
statements may be examined at the just and equitable principles of trade,
identifying information from
places specified in Item IV below. The remove impediments to and perfect the
submissions. You should submit only
Exchange has prepared summaries, set
information that you wish to make
forth in sections A, B, and C below, of 3 See Exchange Act Release No. 79721 (January 3,
available publicly. All submissions
2017), 82 FR 2433 (January 9, 2017) (SR–ISE–2016–
should refer to File Number SR– 61 17 CFR 200.30–3(a)(12). 32).
BatsBZX–2017–38 and should be 1 15 U.S.C. 78s(b)(1). 4 15 U.S.C. 78f(b).
submitted on or before June 27, 2017. 2 17 CFR 240.19b–4. 5 15 U.S.C. 78f(b)(5).
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Document Created: 2017-06-06 06:21:27
Document Modified: 2017-06-06 06:21:27
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 82 FR 26148 |
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