---------------------------------------------------------------------------

    Two commenters offered alternative funding models.\1795\ One
commenter suggested that CAT fees be set by an independent advisory
committee, rather than by the Operating Committee.\1796\ The other
commenter recommended a centralized funding mechanism for the CAT, with
the Participants collectively charging Industry Members a single CAT
fee instead of each creating their own independent fees, believing it
to be the most efficient and consistent way to collect CAT fees.\1797\
The commenter also suggested that, before the Participants impose any
CAT fees on Industry Members, they should provide a public accounting
of their current revenues and how that money is spent.\1798\
---------------------------------------------------------------------------

    \1795\ Data Boiler Letter; SIFMA Letter.
    \1796\ Data Boiler Letter at 15.
    \1797\ SIFMA Letter at 18.
    \1798\ Id.
---------------------------------------------------------------------------

    Four commenters recommended imposing certain specific fees to fund
the CAT.\1799\ Three of the commenters suggested that the Participants
and the Commission pay a user fee for the CAT, since they are direct
beneficiaries of the system.\1800\ Another commenter suggested that the
costs of building and maintaining the CAT should be borne by CAT
Reporters through a filing or technology fee,\1801\ and recommended
charging CAT Reporters with high cancellation rates and those that add
``noise'' to the CAT system a special usage fee.\1802\
---------------------------------------------------------------------------

    \1799\ SIFMA Letter; Better Markets Letter; FSR Letter; DAG
Letter; see also STA Letter at 1 (supporting the DAG Letter's cost
and funding recommendations).
    \1800\ SIFMA Letter at 18, 30 (stating that if Industry Members
must pay a user fee to access their own CAT data, then there should
be also be a user fee for the Participants); FSR Letter at 10; DAG
Letter at 5; see also STA Letter at 1 (supporting the DAG Letter's
cost and funding recommendations).
    \1801\ Better Markets Letter at 5.
    \1802\ Id. at 6.
---------------------------------------------------------------------------

    In response, the Participants stated that they did not believe that
an independent third party should be hired to evaluate CAT fees, noting
that all CAT fees would be filed with the Commission pursuant to the
Exchange Act, so that Industry Members and other interested persons
would have an opportunity to comment, and the Commission would evaluate
whether they are consistent with the statutory standards.\1803\ The
Participants also noted that the funding model is intended to operate
the CAT on a break-even basis, without creating profits for individual
Participants.\1804\ In addition, the Participants stressed that they
are prohibited from using regulatory fees for commercial
purposes.\1805\ The Participants concluded that employing an
independent third party would be unnecessary in light of these
provisions.\1806\
---------------------------------------------------------------------------

    \1803\ Response Letter II at 17.
    \1804\ Id.
    \1805\ Id. at 17 n.60.
    \1806\ Id. at 17.
---------------------------------------------------------------------------

    In response to the commenter that recommended a centralized funding
mechanism,\1807\ the Participants indicated that they intend for fees
to be billed and collected centrally through the CAT LLC, so that each
Industry Member will receive one invoice instead of separate invoices
from each Participant.\1808\ In response to the suggestion that the
Participants charge a regulatory usage fee, the Participants noted that
the CAT NMS Plan authorizes the imposition of such a fee, and stated
that they plan to evaluate the implementation of usage fees within a
year after the Participants begin using the CAT.\1809\
---------------------------------------------------------------------------

    \1807\ SIFMA Letter at 15.
    \1808\ Response Letter II at 15.
    \1809\ Id.
---------------------------------------------------------------------------

    The Commission believes that the funding model proposed by the
Participants, as amended by the Commission, is consistent with Rule
613(a)(1)(vii)(D) and is reasonable. Rule 613(a)(1)(vii)(D) requires
the Participants to discuss in the CAT NMS Plan how they propose to
fund the creation, implementation and maintenance of the CAT, including
the proposed allocation of estimated costs among the Participants, and
between the Participants and Industry Members.\1810\ In the CAT NMS
Plan, the Participants set forth a funding model that establishes a
framework for the allocation of CAT costs across Participants and
Industry Members. At this time, the Commission believes that the
Exchange Act rule filing process, described above, will provide
sufficient transparency into the fees charged by the Participants that
are associated with CAT.\1811\
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    \1810\ See 17 CFR 242.613(a)(1)(vii)(D).
    \1811\ See 17 CFR 240.19b-4(f)(2); see also 15 U.S.C.
78s(b)(3)(A); 17 CFR 242.608; supra note 1756.
---------------------------------------------------------------------------

    With respect to the suggested imposition of a regulatory user
fee,\1812\ a fee for high cancellation rates and ``noise,'' \1813\ or a
specific technology fee, \1814\ the Commission notes that nothing in
the Plan prohibits such fees from being charged and, if the
Participants determine such fees to be appropriate, they may file a
proposed rule change that would be subject to public comment and
Commission review.\1815\
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    \1812\ SIFMA Letter at 18; FSR Letter at 10, DAG Letter at 5;
see also STA Letter at 1 (supporting the DAG Letter's cost and
funding recommendations).
    \1813\ Better Markets Letter at 6.
    \1814\ Id. at 5.
    \1815\ See Section V.F.3.b, infra, for additional discussion of
these comments. As it relates to fees that the Operating Committee
may impose for access to and use of the CAT for regulatory and
oversight purposes, the Commission interprets the provisions in the
Plan relating to the collection of fees as applying only to
Participants and Industry Members, and thus the Commission would not
be subject to such fees.

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5. Miscellaneous
    The Commission notes that it is amending Section 11.1(d) of the CAT
NMS Plan, which currently states that the Operating Committee shall
adopt policies, procedures, and practices regarding, among other
matters, the assignment of fee tiers, and that, as part of its regular
review of fees for the CAT, the Operating Committee shall have the
right to change the tier assigned to any particular Person in
accordance with Article XI, and such changes will be effective upon
reasonable notice to such Person. The Commission is amending this
section to provide that the Operating Committee shall have the right to
change the tier assigned to any particular Person in accordance with
fee schedules previously filed with the Commission by the Operating
Committee that are reasonable, equitable and not unfairly
discriminatory and subject to notice and comment. The Commission
believes this amendment to Section 11.1(d) is appropriate because it
limits the discretion of the Operating Committee to change the tier
assigned to a particular Person to objective standards previously filed
with the Commission that are consistent with Exchange Act standards,
and provides notice of any changes to the objective standards and the
opportunity for public comment.

G. Dispute Resolution

    As noted above, the Plan does not include a general provision
addressing the method by which disputes arising in connection with the
operation of the Plan will be resolved.\1816\ The Plan does, however,
provide the means for resolving disputes regarding the Participation
Fee in Articles III and XI of the Plan.\1817\ The Commission did not
receive any comments regarding these general dispute resolution
provisions. However, the Commission is amending Article III to make it
consistent with Article XI.
---------------------------------------------------------------------------

    \1816\ See Notice, supra note 5, at 30635.
    \1817\ CAT NMS Plan, supra note 5, at Section 3.3.
---------------------------------------------------------------------------

    Specifically, Article III, Section 3.3(b) of the Plan states that,
in the event that the Company and a prospective Participant do not
agree on the amount of the Participation Fee, such amount will be
subject to the review by the Commission. The Plan currently cites to
Section 11A(b)(5) of the Exchange Act \1818\ as the authority by which
the Commission can review such disputes. However, Section 11A(b)(5) of
the Exchange Act is not the appropriate authority for Commission review
under these circumstances because the CAT is not a ``registered
securities information processor.'' Accordingly, the Commission is
making a technical amendment to the Plan (consistent with Article XI,
Section 11.5) to provide that in the event that the Company and a
prospective Participant do not agree on the amount of the Participation
Fee, such amount will be subject to review by the Commission pursuant
to SEC Rule 608 \1819\ or in any other appropriate forum.
---------------------------------------------------------------------------

    \1818\ See id. at Section 3.3(b); see also, Exchange Act Section
11A(b)(5), 15 U.S.C. 78k-l(b)(5) (which provides that a prohibition
or limitation on access to services by a registered securities
information processor must be reviewed by the Commission upon
application by an aggrieved person).
    \1819\ 17 CFR 242.608(d).
---------------------------------------------------------------------------

H. Written Assessments, Audits and Reports

    Section 6.6 of the Plan as filed, pursuant to Rule 613(b)(6),
requires the Participants to provide the Commission with a written
assessment of the operation of the CAT at least every two years or more
frequently in connection with any review of the Plan Processor's
performance.\1820\ The Plan requires that such written assessment
include, at a minimum: (i) An evaluation of the Plan Processor's
performance; (ii) a detailed plan for any potential improvements to its
performance; (iii) an estimate of the costs associated with any such
potential improvements; and (iv) an estimated implementation timeline
for any such potential improvements.\1821\
---------------------------------------------------------------------------

    \1820\ See CAT NMS Plan, supra note 5, at Section 6.6.
    \1821\ Id.
---------------------------------------------------------------------------

    The Commission believes that it is important that the CAT keep pace
with technological developments and changes to industry business
practices, which can occur very rapidly. As such, the Commission
believes that assessments more frequent than biannually of the CAT's
standards and processes could ensure that the Plan Processor and the
Participants remain current in their knowledge of technological and
business developments and facilitate enhancements to the CAT as
appropriate. The Commission believes that the preparation of reports
and assessments on an annual basis, rather than a biannual basis, will
help ensure that CAT technology and operations continue to provide
timely, accurate, complete and accessible data, and that it is
collected in a cost-effective manner. Accordingly, the Commission is
amending Section 6.6 of the Plan to change the frequency of the
assessment contemplated by Rule 613(b)(6) from biannual to annual.
    The Commission is also amending Section 6.6 of the Plan to provide
further detail regarding elements of the written assessment to be
conducted by the Participants. Specifically, as amended, the
Participants' annual written assessment must also include: (1) An
evaluation of the information security program of the CAT to ensure
that the program is consistent with the highest industry standards for
protection of data; \1822\ (2) an evaluation of potential technological
upgrades based upon a review of technological developments over the
preceding year, drawing on necessary technological expertise, whether
internal or external; \1823\ (3) an assessment of efforts to reduce the
time to restore and recover CAT Data at a back-up site; \1824\ (4) an
assessment of how the Plan Processor and SROs are monitoring Error
Rates and addresses the application of Error Rates based on product,
data element or other criteria; \1825\ (5) a copy of the evaluation
required by Section 6.8(c) of the Plan as to whether industry standards
have evolved such that: (i) The clock synchronization standard in
Section 6.8(a) should be shortened; or (ii) the required timestamp in
Section 6.8(b) should be in finer increments; and (6) an assessment of
whether any data elements should be added, deleted or changed.\1826\
The Commission believes that requiring these specific issues to be
addressed in the Participants' annual assessment will focus the Plan
Processor and Participants on critical technological and other
developments, and should help ensure that CAT technology is up-to-date,
resilient and secure, and provides accurate CAT Data.
---------------------------------------------------------------------------

    \1822\ See Section IV.D.6.a, supra.
    \1823\ See Section IV.D.14, supra.
    \1824\ See Section IV.D.12, supra.
    \1825\ See Section IV.D.11, supra.
    \1826\ See Section IV.D.13, supra.
---------------------------------------------------------------------------

    Section 6.6 of the Plan as filed also requires the Participants to
provide an estimate of the costs associated with any potential
improvements to the performance of the CAT, including an assessment of
the potential impact on competition, efficiency and capital formation.
The Commission believes, however, that it is important that the
Participants consider not just the costs but also the potential
benefits associated with any improvements to the performance of the
CAT, including the impact on investor protection. Accordingly, the
Commission is also amending Section 6.6 of the Plan to

require the annual assessment to consider the benefits of potential
improvements to the CAT, including to investor protection.
    The Commission is further amending Section 6.6 of the Plan to
require that the Participants provide the Commission with certain
written reports on a one-time basis. First, the Participants must
provide the Commission, and make public, at least one month prior to
submitting any rule filing to establish initial fees for CAT Reporters,
an independent audit of the fees, costs, and expenses incurred by the
Participants on behalf of the Company prior to the Effective Date of
the Plan.\1827\ The Commission notes that any such filing will be
published for public notice and comment. As the Commission understands
that the Participants intend to recover through CAT fees the amounts
spent on the development of the CAT to date, to facilitate public
comment and Commission review of such fee filings,\1828\ the Commission
believes it is appropriate for the Participants to obtain an audit of
the fees, costs and expenses incurred by the Participants on behalf of
the Company prior to the Effective Date.
---------------------------------------------------------------------------

    \1827\ See Section III.6., supra.
    \1828\ See supra note 1709.
---------------------------------------------------------------------------

    Second, the Commission is amending the Plan to require the
Participants to provide the Commission with a written assessment of the
clock synchronization standards in the Plan \1829\ within six months of
effectiveness of the Plan. As noted above, the Commission believes that
the Participants should consider the type of CAT Reporter, the type of
Industry Member, and type of system when determining industry
standards, and is amending the Plan to clarify this more granular
approach. The Commission believes the Participants should consider the
Plan's clock synchronization standards in light of this clarification
promptly, and propose any appropriate amendments, and that a six-month
timeframe to do so is reasonable.
---------------------------------------------------------------------------

    \1829\ See Section IV.D.13, supra.
---------------------------------------------------------------------------

    Third, the Commission is amending the Plan to require the
Participants to provide the Commission with a written report that
discusses the Participants' assessment of implementing coordinated
surveillance, whether through 17d-2 agreements, RSAs, or some other
approach, within 12 months of effectiveness of the Plan.\1830\ The
Commission notes that the CAT is designed to facilitate the ability of
regulators to conduct cross-market surveillances and to review conduct
that occurs across the market. As a result, the Commission believes
that it may be efficient for the Participants to coordinate to conduct
cross-market surveillances.
---------------------------------------------------------------------------

    \1830\ See Section IV.B.4., supra. This assessment can be
provided in conjunction with an annual written assessment required
by Rule 6.6 of the Plan.
---------------------------------------------------------------------------

    Fourth, the Commission is amending the Plan to require the
Participants to submit to the Commission a written report, within 24
months of effectiveness of the Plan, discussing the feasibility,
benefits, and risks of allowing an Industry Member to bulk download the
Raw Data that it has submitted to the Central Repository.\1831\
Commenters expressed a desire to have bulk access to their own data for
surveillance and internal compliance purposes, as well as to facilitate
the error correction process. While, the Participants did not permit
such access in the Plan, citing security and cost concerns, they did
represent that they would consider allowing bulk access to the audit
trail data reported by Industry Members once CAT is operational. The
Commission believes it is important to consider the potential
efficiencies of allowing Industry Members bulk access to their own CAT
data, so long as such access does not impact the security of the CAT
Data, and accordingly believes that requiring a report discussing this
issue by the date Industry Members first begin reporting to the CAT, is
appropriate.
---------------------------------------------------------------------------

    \1831\ See Section IV.D.6.m, supra. This report may be provided
in conjunction with an annual written assessment required by Rule
6.6 of the Plan.
---------------------------------------------------------------------------

    Fifth, the Commission is amending the Plan to require the
Participants to provide the Commission with a written assessment,
within 36 months of effectiveness of the Plan, of the nature and extent
of errors in the Customer information submitted to the Central
Repository and whether the correction of certain data fields over
others should be prioritized.\1832\ The Commission believes that
requiring such an assessment, which will coincide with the date all
Industry Members are reporting to the CAT, could help ensure that the
accuracy of CAT Data is achieved in the most prompt and efficient
manner.
---------------------------------------------------------------------------

    \1832\ See Section IV.D.4.a, supra. This assessment may be
provided in conjunction with an annual written assessment required
by Rule 6.6 of the Plan.
---------------------------------------------------------------------------

    Sixth, the Commission is amending the Plan to require the
Participants to provide the Commission with a written report, 36 months
after effectiveness of the Plan, on the impact of tiered fees on market
liquidity, including an analysis of the impact of the tiered-fee
structure on Industry Members' provision of liquidity.\1833\ One
commenter expressed concern that use of a tiered fee structure could
discourage displayed quotes and, in response, the Participants
explained that one of the reasons they chose to use a tiered-fee
funding model was to limit disincentives to provide liquidity. To help
determine whether the Plan's funding model actually achieves the
Participants' stated objective, the Commission believes it appropriate
to require them to prepare such an assessment of the impact of tiered
fees once the CAT becomes fully operational.
---------------------------------------------------------------------------

    \1833\ See Section IV.F.3., supra.
---------------------------------------------------------------------------

    Finally, the Commission is amending the Plan to require the
Participants to provide the Commission a written assessment of the
projected impact of any Material Systems Change on the Maximum Error
Rate, prior to the implementation of any Material Systems Change.\1834\
The Commission believes that Material Systems Changes either could
result in new challenges for CAT Reporters or simplify the means for
reporting data. In either case, the appropriateness of the Maximum
Error Rate could be impacted, and thus warrant a change. Accordingly,
the Commission believes it appropriate to require the Participants to
provide the Commission an assessment of the projected impact on the
Maximum Error Rate, including any recommended changes thereto, prior to
the implementation of any Material Systems Change.
---------------------------------------------------------------------------

    \1834\ See Section IV.D.11.b., supra.
---------------------------------------------------------------------------

V. Economic Analysis

A. Introduction

    The Commission is sensitive to the economic effects of the CAT NMS
Plan,\1835\ including its costs and benefits and its impact on
efficiency, competition and capital formation. In accordance with the
approach articulated by the Commission in the Adopting Release, the
Commission published its preliminary economic analysis of the CAT NMS
Plan in the Notice, and solicited comment on its analysis and on all
aspects of the proposed Plan. The Commission has considered the
comments received, along with the Participants' responses, and has
modified certain aspects of the Plan, as discussed above.
---------------------------------------------------------------------------

    \1835\ See CAT NMS Plan, supra note 5.
---------------------------------------------------------------------------

    This Section reflects the Commission's analysis and conclusions
regarding the economic effects of the creation, implementation and
maintenance of the CAT pursuant to the details in the CAT NMS Plan, as
amended and hereby approved by the

Commission. The analysis is divided into seven topics: (1) A summary of
the expected economic effects of approving the CAT NMS Plan; (2) a
description of the economic framework for analyzing the economic
effects of approving the CAT NMS Plan; (3) a discussion of the current,
or ``Baseline,'' audit trail data available to regulators, and the
sources of such data; (4) a discussion of the potential benefits of
approving the CAT NMS Plan; (5) a discussion of the potential costs of
approving the CAT NMS Plan; (6) a discussion of the CAT NMS Plan's
potential impact on efficiency, competition, and capital formation; and
(7) a discussion of alternatives to various features of the CAT NMS
Plan and to the CAT NMS Plan itself.

B. Summary of Expected Economic Effects

    The Commission has analyzed the expected economic effects of the
CAT NMS Plan in light of the existing shortcomings in the regulatory
data infrastructure and the goal of improving the ability of SROs and
the Commission to perform their regulatory activities to the benefit of
investors and the markets.\1836\ In general, the Commission believes
that the CAT NMS Plan will result in benefits by improving the quality
of the data available to regulators in four areas that affect the
ultimate effectiveness of core regulatory efforts--completeness,
accuracy, accessibility and timeliness.\1837\ The Commission believes
that the improvements in these data qualities that will be realized
from approval of the CAT NMS Plan will substantially improve
regulators' ability to perform analysis and reconstruction of market
events, market analysis and research to inform policy decisions, and
other regulatory activities including market surveillance,
examinations, investigations, and other enforcement functions.
Regulators depend on data for many of these activities and the
improvements in the data qualities will thus improve the efficiency and
effectiveness of such regulatory activities. As explained further
below, these improvements could benefit investors by giving regulators
more and better regulatory tools to provide investors with a more
effectively regulated trading environment,\1838\ which could increase
capital formation, liquidity, and price efficiency. Data improvements
could enhance regulators' ability to provide investors and the public
with more timely and accurate analysis and reconstruction of market
events, and to develop more effective responses to such events.
Improved understanding of emerging market issues resulting from
enhanced market analysis and research could inform regulatory policies
that improve investor protection through better market quality, more
transparency, and more efficient prices. Improvements in quality and
quantity of order events could lead to improvements in developing and
targeting policy approaches to ensure a fair and orderly market.
---------------------------------------------------------------------------

    \1836\ The Commission noted current SRO audit trail limitations
in the Proposing Release and the Adopting Release. See Proposing
Release, supra note 14, at 32563-68; Adopting Release, supra note
14, at 45726-30. Rule 613 is designed to address these limitations.
    \1837\ See Adopting Release, supra note 14, at 45727 (discussing
four ``qualities'' of trade and order data that impact the
effectiveness of core SRO and Commission regulatory efforts:
Accuracy, completeness, accessibility, and timeliness); see also
Section V.E. infra, for a detailed discussion of the expected
benefits of the CAT NMS Plan.
    \1838\ See Section V.E.2, infra.
---------------------------------------------------------------------------

    In terms of completeness, the Plan requires the reporting of
certain additional data fields, events, and products.\1839\ More
importantly, the CAT NMS Plan requires data elements useful for
regulatory analysis to be available from a single data source. Having
relevant data elements available from a single source will simplify and
expedite regulators' data collection process and facilitate more
efficient analyses and surveillances that incorporate cross-market and
cross-product data.
---------------------------------------------------------------------------

    \1839\ See CAT NMS Plan, supra note 5, at Sections 6.3, 6.4; see
also 17 CFR 242.613(c)(7).
---------------------------------------------------------------------------

    With respect to the accuracy of available data, the Commission
believes that the requirements in the Plan will improve data accuracy
significantly. For example, the Commission expects that the
requirements to store the CAT Data in a uniform linked format and the
use of consistent identifiers for customers and market participants
will result in fewer inaccuracies as compared to current data sources.
These accuracy improvements should significantly reduce the time
regulators spend processing the data and finding solutions when faced
with inaccurate data. The Commission believes that the requirements in
the Plan for clock synchronization and timestamp granularity will
improve the accuracy of data with respect to the timing of market
events. The Commission believes that the Plan will improve regulators'
ability to determine the sequence of some market events relative to all
surrounding events.\1840\
---------------------------------------------------------------------------

    \1840\ The CAT NMS Plan requires that CAT Reporters who are
Industry Members synchronize their business clocks to within 50
milliseconds of the time maintained by the NIST, which will increase
the precision of the timestamps provided by the 39% of broker-
dealers who currently synchronize their clocks with less precision
than what is called for by the Plan. See FIF Clock Offset Survey,
supra note 247. Further, the Commission has amended the Plan to
require exchanges to synchronize their business clocks to within 100
microseconds. While this is similar to current practice, this
requirement should still provide the greater ability for regulators
to sequence unrelated events in a market reconstruction by anchoring
lifecycles to events at exchanges. Independent of the potential time
clock synchronization benefits, the order linking data that will be
captured in CAT should increase the proportion of events that could
be sequenced accurately. This reflects the fact that some records
pertaining to the same order could be sequenced by their placement
in an order lifecycle (e.g., an order submission must have occurred
before its execution) without relying on timestamps. This
information may also be used to partially sequence surrounding
events, particularly with the Plan modifications.
---------------------------------------------------------------------------

    The Commission also believes that the Plan will increase the
accessibility of data for SROs and the Commission, because regulators
will be able to access the CAT Data directly.\1841\ This, coupled with
the improvements in completeness, will vastly increase the scope of
information readily available to regulators and significantly reduce
the number of data requests from the several hundred thousand requests
regulators make each year. The increased scope of readily available
information should facilitate more data-driven regulatory policy
decisions, broaden the potential surveillances, expand the
opportunities for SRO and Commission analysis to help target broker-
dealers and investment advisers for examinations and help to perform
those examinations.
---------------------------------------------------------------------------

    \1841\ See CAT NMS Plan, supra note 5, at Appendix C, Section
A.2, Appendix D, Section 8.1; see also 17 CFR 242.613(e)(2).
---------------------------------------------------------------------------

    Finally, the Commission believes that the CAT NMS Plan will improve
the timeliness of available data. Because regulators will be able to
access uncorrected data the day after an order event and will be able
to access corrected and linked data five days after an order
event,\1842\ many data elements will be available to regulators more
quickly than they are currently. Accordingly, the amount of time
regulators would need to acquire and process data before running
analyses would be reduced. For example, the corrected and linked data
available on T+5 will identify the customer account

associated with all order events, information that currently takes ten
days or longer for regulators to obtain and then need to link to other
data sources for use. These improvements in timeliness, combined with
improvements in completeness, accessibility, and accuracy discussed
above, will improve the efficiency of regulatory analysis and
reconstruction of market events, as well as market analysis and
research that informs policy decisions, and make market surveillance,
examinations, investigations, and other enforcement functions more
efficient, allowing, for example, the SROs and the Commission to review
tips and complaints more effectively.
---------------------------------------------------------------------------

    \1842\ CAT Data will be reported by 8:00 a.m. ET on T+1 and made
available to regulators in raw form after it is received and passes
basic formatting validations with an error correction process
completed by 8:00 a.m. ET on T+5. While the Plan does not specify
exactly when these validations would be complete, the requirement to
link records by 12:00 p.m. ET on T+1 gives a practical upper bound
on this timeline. See CAT NMS Plan, supra note 5, at Appendix C,
Sections A.2(a), A.3(a), Appendix D, Section 6.2.
---------------------------------------------------------------------------

    The Commission notes that the Plan lacks information regarding the
details of certain elements of the Plan likely to affect the costs and
benefits associated with it, primarily because those details have not
yet been determined, and this lack of information creates some
uncertainty about the expected economic effects. As discussed further
below, lack of specificity surrounding the processes for converting
data formats and linking related order events creates uncertainty as to
the anticipated improvements in accuracy because such processes have
the potential to create new data inaccuracies. Lack of specificity
surrounding the process for regulators to access the CAT Data also
creates uncertainty around the expected improvements in accessibility.
For example, while the Plan indicates that regulators would have an
online targeted query tool and a tool for user-defined direct queries
or bulk extraction,\1843\ the Plan itself does not provide an
indication for how user-friendly the tools would be or the particular
skill set needed to use the tools for user-defined direct queries.
However, the Commission has analyzed the expected economic effects of
the Plan to the extent possible with the information available, noting
areas of uncertainty in its analysis where applicable. The Commission
has also considered whether certain provisions related to the operation
and administration of the Plan could mitigate some of the
uncertainties.\1844\
---------------------------------------------------------------------------

    \1843\ Id. at Appendix D, Sections 8.1.1, 8.1.2.
    \1844\ See Section V.E.3.d, infra.
---------------------------------------------------------------------------

    The Commission also believes that more effective and efficient
regulation of securities markets and market participants resulting from
implementation of the CAT NMS Plan could significantly benefit
investors and the integrity of the market. For example, the Commission
believes that more effective and efficient surveillance and enforcement
should detect a higher proportion of violative market activity. This
additional detection could not only reduce violative behavior through
potential enforcement actions, but through deterrence if market
participants believe violative activities are more likely to be
detected. Because violative activity degrades market quality and
imposes costs on investors and market participants, reductions in
violative activity would benefit investors and market integrity.
Likewise, more effective and efficient risk assessment and risk-based
examinations should facilitate the selection of market participants for
examination who have characteristics that elevate their risk of
violating the rules. Decreasing the amount of violative activity by
targeting exams in this way should provide investors with a more
effectively regulated trading environment and hence better market
quality. Further, access to audit trail data that is comprehensive,
accurate, and timely should improve regulatory reconstruction of market
events, market analysis, and research, resulting in an improved
understanding of emerging market issues and regulatory policies that
better encourage industry competition, thus improving investor
protection through better transparency and more efficient prices.\1845\
Regulatory initiatives that are based on a more thorough understanding
of underlying events and their causes, and that are narrowly tailored
to address any market deficiency, should improve market quality and
benefit investors. Access to more complete and linked audit trail data
will improve regulators' ability to analyze and reconstruct market
events, allowing regulators to provide investors and the public with
more accurate explanations of market events, to develop more effective
responses to such events, and to use the information to assist in
retrospective analyses of their rules and pilots.
---------------------------------------------------------------------------

    \1845\ See Section V.E.2, infra.
---------------------------------------------------------------------------

    The Commission has also evaluated the potential costs that will
result from the approval of the CAT NMS Plan. The Commission's cost
analysis is based on the preliminary analysis in the Notice, which
analyzed information included in the Plan, information gathered from
market participants through discussions, surveys of market
participants, and other relevant information to estimate the potential
costs associated with building and maintaining the Central Repository
as well as the costs to report data to the Central Repository. The
Commission has considered the comments received on its preliminary
analysis, the Participants' response to the comments, and the impact of
the Commission's modifications to the Plan and has revised its analysis
and estimates accordingly.\1846\ Currently, the 21 Participants spend
$170.3 million annually on reporting regulatory data and performing
surveillance, while the approximately 1,800 broker-dealers anticipated
to have CAT reporting responsibilities spend $1.6 billion annually on
regulatory data reporting, for total current industry costs of $1.7
billion annually for regulatory data reporting and surveillance by
SROs. Having considered the comments, the Participants' response and
the Commission's modifications to the Plan, the Commission now
estimates the cost of the Plan as approximately $2.4 billion in initial
aggregate implementation costs and recurring annual costs of $1.7
billion.\1847\ Furthermore, the Commission acknowledges that during the
period of duplicative reporting, during which CAT Reporters will report
to both current regulatory data reporting systems and CAT, industry
will face duplicative reporting costs that the Commission estimates at
$1.7 billion per year, the cost of industry's current data reporting.
---------------------------------------------------------------------------

    \1846\ See Section V.F.1 and Section V.F.2, infra for discussion
of comments received on cost estimates, and revisions the Commission
made to those estimates in response.
    \1847\ See Section V.F.2, infra.
---------------------------------------------------------------------------

    Commenters had numerous comments on individual estimates of costs,
particularly as they related to requirements to report allocation
timestamps in milliseconds, the costs of duplicative reporting, and
generally about the uncertainty surrounding cost estimates. The primary
driver of the annual costs is the data reporting cost for broker-
dealers, which is estimated to be $1.5 billion per year. For both large
and small broker-dealers, the primary driver of both the current $1.6
billion reporting costs and projected $1.5 billion CAT reporting costs
is costs associated with staffing. Bidder estimates of the costs to
build the Central Repository vary from $37.5 million to $65 million and
annual operating costs range from $36.5 to $55 million. The eventual
magnitude of Central Repository costs depends on the Participants'
selection of the Plan Processor, and may ultimately differ from
estimates discussed above if Bids are revised as the bidding process
progresses. Furthermore, the Plan anticipates a period of duplicative
reporting responsibilities preceding the

retirement of potentially duplicative regulatory data reporting
systems; these duplicative reporting costs are likely to be
significant.\1848\
---------------------------------------------------------------------------

    \1848\ The economic analysis discusses duplicative reporting
costs in Section V.F.2, infra.
---------------------------------------------------------------------------

    Drawing from the discussion in the CAT NMS Plan, the comments
received, and the Participants' response to the comments,\1849\ the
Commission expects that the Plan will have a number of additional
economic effects, including effects on efficiency, competition, and
capital formation. The Commission believes that the Plan generally
promotes competition. However, the Commission recognizes that the Plan
could increase barriers to entry because of the costs to comply with
the Plan. Further, the Commission's analysis identifies several
limiting factors to competition; however, Plan provisions and
Commission oversight could mitigate such limiting factors. The
Commission believes that the Plan will result in significant
improvements in efficiency related to how regulatory data is collected
and used. Specifically, the approval of the Plan will result in
improved data becoming available to regulators, which will increase the
efficiency of regulatory activities such as market surveillance,
examinations, investigations, and other enforcement functions that
could enhance market efficiency by reducing violative activity that
harms market efficiency. In addition, the availability of this data
should improve regulatory analysis and reconstruction of market events,
as well as market analysis and research that informs policy decisions.
Finally, the Commission believes that the Plan could have positive
effects on capital formation and allocative efficiency and that the
threat of a security breach at the Central Repository is unlikely to
significantly harm capital formation. The Commission recognizes that
the Plan's likely effects on competition, efficiency and capital
formation are dependent to some extent on the performance and decisions
of the Plan Processor and the Operating Committee in implementing the
Plan, and thus there is necessarily some uncertainty in the
Commission's analysis. Nonetheless, the Commission believes that the
Plan contains certain governance provisions, as well as provisions
relating to the selection and removal of the Plan Processor, that
mitigate this uncertainty by promoting decision-making that could, on
balance, have positive effects on competition, efficiency, and capital
formation.
---------------------------------------------------------------------------

    \1849\ See CAT NMS Plan, supra note 5, at Appendix C, Section
B.8; see also Section V.G, infra.
---------------------------------------------------------------------------

    As part of its economic analysis, the Commission has also
considered the likely economic effects of a number of alternatives to
the approaches taken in the CAT NMS Plan. The Commission has analyzed
certain alternatives that could have a direct and significant impact on
costs or benefits deriving from at least one of the four data qualities
discussed above: Accuracy, completeness, accessibility, and timeliness.
This analysis includes alternatives proposed by commenters.

C. Framework for Economic Analysis

    As discussed above, the Commission has conducted an economic
analysis of the CAT NMS Plan, including the modifications made by the
Commission, as anticipated in the Adopting Release for Rule 613.\1850\
In particular, the Commission has carefully evaluated the information
in the CAT NMS Plan, including the twelve considerations required by
Rule 613 \1851\ and the details of the decisions left to the discretion
of the SROs. The Commission has also considered information drawn from
outside the Plan, but that was included in its preliminary economic
analysis in the Notice and subject to public comment,\1852\ in order to
assess potential economic effects not addressed therein. Finally, the
Commission considered comments submitted in response to its Notice. To
provide context for this analysis, this Section describes the economic
framework for the analysis and seeks to identify uncertainties within
that framework.
---------------------------------------------------------------------------

    \1850\ See Adopting Release, supra note 14, at 45789.
    \1851\ 17 CFR 242.613(a)(1).
    \1852\ See Notice, supra note 5, at 30651-30797.
---------------------------------------------------------------------------

    The framework for the Commission's final economic analysis is
largely the same as the framework set out in the economic analysis of
the Notice,\1853\ though the Commission has revised its discussion of
uncertainty to recognize comments.\1854\ This Section includes a high-
level summary of those comments, which are addressed in the economic
analysis to follow.
---------------------------------------------------------------------------

    \1853\ Id. at 30654-30656.
    \1854\ See Data Boiler Letter at 9, 30; SIFMA Letter at 6, 13,
15-16, 23-24,32, 39, 40, 42, 44-45; FSR Letter at 9-10; Fidelity
Letter at 6; TR Letter at 4; FSI Letter at 5-6; DAG Letter at 5;
UnaVista Letter at 2.
---------------------------------------------------------------------------

1. Economic Framework
a. Benefits
    The CAT NMS Plan will create a new data source that should
modernize and eventually replace the use of some disparate current data
sources for many regulatory activities. As such, the economic benefits
of the CAT NMS Plan will come from any expanded and more efficient
regulatory activities facilitated by improvements to the data
regulators use. Therefore, the framework for examining benefits in this
economic analysis involves first considering whether and to what degree
the CAT Data will improve on the Baseline of current trading and order
data in terms of the four qualities of accuracy, completeness,
accessibility, and timeliness.\1855\
---------------------------------------------------------------------------

    \1855\ See Adopting Release, supra note 14, at 45727.
---------------------------------------------------------------------------

    Through these improvements in the data, the economic analysis then
considers the degree to which the Plan will result in improvements to
regulatory activities such as the analysis and reconstruction of market
events, in addition to market analysis and research conducted by SROs
and Commission Staff, as well as market surveillance, examinations,
investigations, and other enforcement functions. These potential
improvements, based on the regulatory objectives of the CAT NMS Plan
described in the Adopting Release,\1856\ relate to the overall goal of
substantially enhancing the ability of the SROs and the Commission to
oversee securities markets and fulfill their regulatory
responsibilities under the securities laws. The economic framework
explores how the improvements to these regulatory activities provide
economic benefits to investors and the market. Among other things,
potential benefits that could result from the CAT NMS Plan include
benefits rooted in changes in the behavior of market participants. For
example, requirements to report certain data elements or events to the
CAT could have the beneficial effect of detecting and deterring rule
violations because the inclusion of certain data fields and
improvements in the ability to surveil for violations could increase
the perceived costs of violating rules and regulations. Potential
benefits could also stem from improved investor protection, such as
from more effective surveillance and more informed, data-driven
rulemaking. In addition, potential benefits could stem from future
reduced costs due to more targeted, data-driven policy choices.
---------------------------------------------------------------------------

    \1856\ Id. at 45730.
---------------------------------------------------------------------------

(1) Data Qualities
    In assessing the potential benefits of the CAT NMS Plan, the
Commission's economic analysis compares the data that will be available
under the Plan to the trading and order data currently

available to regulators to determine whether and to what degree the
Plan will improve the available data with respect to the four qualities
of accuracy, completeness, accessibility, and timeliness.\1857\
---------------------------------------------------------------------------

    \1857\ Id. at 45727. Accuracy refers to whether the data about a
particular order or trade is correct and reliable. Completeness
refers to whether a data source represents all market activity of
interest to regulators, and whether the data is sufficiently
detailed to provide the information regulators require. While
current data sources provide the trade and order data required by
existing rules and regulations, those sources generally do not
provide all of the information of interest to regulators in one
consolidated audit trail. Accessibility refers to how the data is
stored, how practical it is to assemble, aggregate, and process the
data, and whether all appropriate regulators could acquire the data
they need. Timeliness refers to when the data is available to
regulators and how long it would take to process before it could be
used for regulatory analysis. As explained in the Baseline, Section
V.D.2, infra, the trading and order data currently available to
regulators suffers from deficiencies in all four dimensions.
---------------------------------------------------------------------------

(2) Regulatory Activities
    Any economic benefits will derive from how such improved data will
affect regulatory activities. Therefore, to analyze the potential
benefits of the CAT NMS Plan, the economic analysis also evaluates the
potential of the CAT NMS Plan to meet the regulatory objectives set out
in the Adopting Release for Rule 613. The objectives are: Improvements
in the analysis and reconstruction of broad-based market events;
improvements in market analysis in support of regulatory decisions; and
improvements in market surveillance, investigations, and other
enforcement activities.\1858\
---------------------------------------------------------------------------

    \1858\ See Adopting Release, supra note 14, at 45730.
---------------------------------------------------------------------------

A. Analysis and Reconstruction of Broad-Based Market Events
    The economic analysis considers whether and to what extent the CAT
NMS Plan will facilitate regulators' performance of analysis and
reconstruction of market events, potentially helping to better inform
both regulators and investors about such market events and speeding the
regulatory response following market events. Regulators perform
reconstructions of market events so that they and the public can be
informed by an accurate accounting of what happened (and, possibly, why
it happened). As discussed in the Benefits Section,\1859\ market
reconstructions currently can take a significant amount of time, in
large measure due to various deficiencies in the currently available
trading and order data.\1860\ The sooner regulators complete a
reconstruction and analysis of a market event, the sooner investors can
be informed and the sooner regulators can begin reviewing the event to
determine what happened, who was affected and how, and whether the
analysis supports potential regulatory responses.\1861\ In addition,
the improved ability for regulators to generate prompt and complete
market reconstructions could provide improved market knowledge, which
could assist regulators in conducting retrospective analysis of their
rules and pilots.
---------------------------------------------------------------------------

    \1859\ See Section V.E.2.a, infra.
    \1860\ See Section V.D.2.b, infra.
    \1861\ See Adopting Release, supra note 14, at 45732.
---------------------------------------------------------------------------

B. Market Analysis in Support of Regulatory Decisions
    The economic analysis considers whether and to what extent the CAT
NMS Plan will enhance the ability of the SROs and the Commission to
conduct market analysis and research, including analysis of market
structure, and the degree to which it will improve regulators' market
knowledge and facilitate consideration of policy questions of interest.
The SROs and Commission Staff conduct data-driven analysis on market
structure, in direct support of both rulemaking and other regulatory
decisions such as SRO rule approvals. The Commission also relies on
such analysis to improve understanding of market structure in ways that
could inform policy. Finally, SROs conduct market analysis and research
on their own regulatory initiatives. Improvements in the ability to
conduct market analysis could further improve analysis related to
regulatory decisions and potentially influence those regulatory
decisions to the benefit of investors and the markets more generally.
C. Market Surveillance and Investigations
    The economic analysis examines whether the CAT NMS Plan will
improve market surveillance and investigations, potentially resulting
in more effective oversight of trading, better investor protection, and
deterrence of violative behavior. As described in more detail in the
Baseline Section,\1862\ both SROs and the Commission conduct market
surveillance, examinations, investigations, and other enforcement
functions targeting illegal activities such as insider trading, wash
sales, or manipulative practices. Improvements in market surveillance
and investigations could come in the form of ``facilitating risk-based
examinations, allowing more accurate and faster surveillance for
manipulation, improving the process for evaluating tips, complaints,
and referrals . . . , and promoting innovation in cross-market and
principal order surveillance.'' \1863\
---------------------------------------------------------------------------

    \1862\ See Section V.D.1.c.(1) and Section V.D.1.c.(3), infra.
    \1863\ See Adopting Release, supra note 14, at 45730.
---------------------------------------------------------------------------

b. Costs
    The economic analysis evaluates the costs of building and operating
the Central Repository; the costs of CAT reporting for Participants,
broker-dealers, and service bureaus; and other CAT-related costs. Where
the CAT NMS Plan provides estimates of these costs, the economic
analysis evaluates those estimates and re-estimates them when
necessary. The economic analysis also discusses the drivers of these
costs, and whether broker-dealers may or may not pass these costs down
to their customers. As a part of its consideration of the costs of the
CAT NMS Plan, the economic analysis considers costs from duplicative
reporting for some period of time as well as potential cost savings
from the retirement of duplicative regulatory reporting systems.\1864\
---------------------------------------------------------------------------

    \1864\ Rule 613 requires the Plan to discuss ``[a] plan to
eliminate existing rules and systems (or components thereof) that
would be rendered duplicative by the consolidated audit trail.'' 17
CFR 242.613(a)(1)(ix); see also CAT NMS Plan, supra note 5, at
Appendix C Section C.9.
---------------------------------------------------------------------------

    The economic analysis also considers whether the CAT NMS Plan could
result in second order effects, such as changes to the behavior of
market participants, that impose certain costs. For example, the CAT
NMS Plan's tiered funding model could lead to efforts by market
participants to try to control their tiers in order to affect their fee
payments, such as reducing activity levels near the end of an activity
level measuring period to avoid being classified as a higher activity
level firm. In addition, Participants, their members, and investors
could incur costs if their private information were accessed in the
event of a security breach of the Central Repository. The economic
analysis considers these and other elements of the Plan that could lead
to distortions in behavior by market participants.
2. Existing Uncertainties
    In the Notice, the Commission described how it analyzed the
information in the CAT NMS Plan, as well as other relevant data,\1865\
in order

to assess the economic effects of the Plan. As discussed throughout the
analysis in the Notice, in certain cases the Commission lacked
information needed to evaluate all of the potential economic effects of
the CAT NMS Plan, creating uncertainty in some potential benefits and
costs. The primary drivers of uncertainty included the fee schedule
applicable to funding the Central Repository (the ``Funding Model''),
which has not yet been finalized, the deferral of decisions on certain
discretionary elements including the Technical Specifications
applicable to the CAT, and a lack of detailed information that would
enable the Commission to assess certain economic effects with greater
precision.\1866\ The Notice discussed implications of each primary area
of uncertainty.\1867\
---------------------------------------------------------------------------

    \1865\ In addition to the CAT NMS Plan, the economic analysis in
the Notice analyzed, for example, the Exemptive Relief Letter (see
supra note 21), a survey of clock synchronization practices and
costs (see supra note 247), discussions with members of the industry
and service bureaus (see Section V.F.1.c and Section V.F.1.d,
infra), data from FINRA (see Section V.F.1.c.(2).B., infra), and
academic literature. See Notice, supra note 5, at 30655-56.
    \1866\ As discussed below, the Commission notes that many of the
uncertainties that existed at the time of the Notice will continue
upon approval of the Plan. For example, the Funding Model and
Technical Specifications will be determined after a Plan Processor
is selected.
    \1867\ See Notice, supra note 5, at 30655-56.
---------------------------------------------------------------------------

    First, the economic analysis in the Notice evaluated information
provided in the CAT NMS Plan on the economic effects of the Plan, as
well as information drawn from outside of the Plan. However, the
Commission lacked detailed information regarding some of the individual
costs and discretionary decisions in the Plan, including the Funding
Model. Specifically, the Plan does not outline the proportion of CAT
costs that will be allocated to Participants versus broker-dealers.
This uncertainty limited the Commission's ability to evaluate the
economic effects of the Plan in some cases. However, the Commission
analyzed the expected economic effects of the Plan to the extent
possible with the information available, and where the Commission
identified such areas of uncertainty, the economic analysis addressed
this uncertainty.
    Second, the Commission pointed out that certain elements of the CAT
NMS Plan will not be finalized until after the selection of a ``Plan
Processor.'' \1868\ Among these are the security and confidentiality
procedures of the Central Repository,\1869\ the precise methods by
which regulators will access data in the Central Repository,\1870\ and
the complete Technical Specifications.\1871\ The Plan also provides the
Plan Processor the ``sole discretion'' to publish interpretations of
the Technical Specifications, including interpretations of permitted
values in data elements.\1872\
---------------------------------------------------------------------------

    \1868\ See CAT NMS Plan, supra note 5, at Article VI. The Plan
Participants have engaged in a bidding process to select a Plan
Processor, and the leading candidate bidders have proposed different
solutions. In certain instances, the Plan Participants have decided
to adopt the solutions proposed by whichever bidder they select.
    \1869\ See Section V.F.4.b, infra, for additional discussion of
risks and uncertainties related to data security.
    \1870\ Rule 613(e)(1) requires the CAT NMS Plan to create a
Central Repository to collect, link, and store CAT Data and to make
that data available to regulators. See 17 CFR 242.613(e)(1).
    \1871\ The CAT NMS Plan contains minimum standards and
principles for setting many of Technical Specifications, see CAT NMS
Plan, supra note 5, at Section 6.9, and the Commission's economic
analysis reflects those minimum standards and principles. However,
because the detailed Technical Specifications are not yet finalized
by the Participants, the Commission cannot fully assess any
corresponding costs and benefits.
    \1872\ Id. at Section 6.9.
---------------------------------------------------------------------------

    Because these and other elements of the Plan had not yet been
finalized, the Commission could not assess how and to what extent the
elements could affect the overall economic effects of the Plan. The
Commission's economic analysis was therefore limited to the extent that
the economic effects of the Plan depend on decisions that will be made
after approval of the Plan. However, the Commission identified these
areas of uncertainty and assessed the economic effects of the Plan to
the best of its ability in light of these existing uncertainties.
    Given the range of possible outcomes with respect to both the costs
and benefits of the CAT NMS Plan that depend on future decisions, the
Commission also recognized in the Notice the importance of provisions
of the Plan related to the operation and administration of the CAT. In
particular, the Commission stated that governance provisions of the
Plan related to voting by the Operating Committee and the involvement
of the Advisory Committee may help promote better decision-making by
the relevant parties. Such provisions could mitigate concerns about
potential uncertainty in the economic effects of the Plan by giving the
Commission greater confidence that its expected benefits would be
achieved in an efficient manner and that costs resulting from
inefficiencies will be avoided. Nevertheless, commenters rightly
observed that uncertainties remain, and will continue to remain until
selection of the Plan Processor, the publication of Technical
Specifications, and/or the implementation of CAT reporting.\1873\
---------------------------------------------------------------------------

    \1873\ Many commenters identified uncertainties related to the
economic effects of the Plan that were consistent with those
mentioned in the Notice. See SIFMA Letter at 6, 13, 15-16, 23, 32,
39, 40, 42, 44, 45; FIF Letter at 36, 50, 84-85, 86-90; FSI Letter
at 5-6; FSR Letter at 9-10; DAG Letter at 5; UnaVista Letter at 2;
TR Letter at 4; Fidelity Letter at 6; Data Boiler Letter at 9, 26,
30. Commenters also discussed several implications of the
uncertainty in the Plan that were consistent with the Commission's
statement in the Notice that it cannot assess how and to what extent
these elements of the Plan could affect the overall economic effects
of the Plan. See FSR Letter at 9; FSI Letter at 5-6; TR at 4. Others
highlighted implications for the Commission to consider. See, e.g.,
Fidelity Letter at 6; SIFMA Letter at 23-24, 44.
---------------------------------------------------------------------------

    The Commission has considered the comments it received relevant to
the potential uncertainties in its analysis of the economic effects of
the CAT NMS Plan, the Participants' response, and the effect of Plan
modifications on such uncertainties and has revised its economic
analysis accordingly. Throughout this economic analysis, the Commission
recognizes these uncertainties, including the ones raised by
commenters. In particular, the economic analysis described below
recognizes uncertainties as they relate to the baseline, benefits, and
costs and as they relate to the analysis of alternatives, efficiency,
competition, and capital formation. In some cases, the Plan
modifications and the Participants' response letters reduce the
uncertainty in the Commission's analysis. However, the Commission
continues to believe that governance provisions of the Plan could
mitigate concerns about many of the sources of potential uncertainty in
the economic effects of the Plan.\1874\
---------------------------------------------------------------------------

    \1874\ For a full discussion of the governance provisions and
how they may mitigate concerns about many of the sources of
potential uncertainty in the economic effects of the Plan, see
Section V.E.3.d, infra.
---------------------------------------------------------------------------

D. Baseline

    To assess the overall economic impact of the CAT NMS Plan, the
economic analysis in the Notice used as the Baseline the current state
of regulatory activity and the current state of trade and order
data.\1875\ The Baseline discussed the currently available sources of
data, limitations in available data that could impact regulatory
activity, how regulators currently use the available data, and the
burden that producing that data imposes on SROs and broker-dealers. As
discussed in more detail below, the Commission has revised certain
aspects of its Baseline to incorporate new information from commenters,
but the Baseline remains

largely the same as that described in the Notice.
---------------------------------------------------------------------------

    \1875\ See Notice, supra note 5, at 30656-59.
---------------------------------------------------------------------------

1. Current State of Regulatory Activities
    As addressed in detail in the Notice, SROs and the Commission use
data to analyze and reconstruct market events, conduct market analysis
and research in support of regulatory decision-making, and conduct
market surveillance, examinations, investigations, and other
enforcement functions.\1876\ The trend in this area is to use more
automated and data-intensive methods as regulators' activities adjust
to the data and technology available. The Notice described these
regulatory activities and how regulators currently use data. While the
Commission did not receive any comments on its description of the
current state of regulatory activities, the Participants did confirm
the use of real-time surveillance and monitoring tools by SROs. The
Commission continues to believe that the current state of regulatory
activity, as described in detail in the Notice and as summarized below,
reflects the Baseline for the CAT NMS Plan.
---------------------------------------------------------------------------

    \1876\ Id.
---------------------------------------------------------------------------

a. Analysis and Reconstruction of Market Events
    In the Notice, the Commission discussed how regulators currently
analyze and reconstruct market events.\1877\ In terms of market
reconstructions, currently, regulators aim to provide an accurate and
factual accounting of what transpired during a market event of interest
by conducting a thorough analysis of the available market data.\1878\
Market events often encompass activity in many securities across
multiple trading venues, and analysis and reconstruction of these
market events requires linking data from multiple sources.\1879\
Examples of recent market reconstructions include the Commodity Futures
Trading Commission (``CFTC'') and SEC's analysis of the May 6, 2010
``Flash Crash,'' \1880\ analysis of equity market volatility on August
24, 2015,\1881\ and the multi-agency report on the U.S. Treasuries
market on October 15, 2014.\1882\
---------------------------------------------------------------------------

    \1877\ Id. at 30656-57.
    \1878\ Id.
    \1879\ Id. Examples of recent market reconstructions include the
Commodity Futures Trading Commission (``CFTC'') and SEC's analysis
of the May 6, 2010 ``Flash Crash,'' analysis of equity market
volatility on August 24, 2015, and the multi-agency report on the
U.S. Treasuries market on October 15, 2014.
    \1880\ See Findings Regarding the Market Events of May 6, 2010:
Report of the Staffs of the CFTC and SEC to the Joint Advisory
Committee on Emerging Regulatory Issues (September 30, 2010)
(``Flash Crash Analysis''), available at http://www.sec.gov/news/studies/2010/marketevents-report.pdf.
    \1881\ See Staff of the Office of Analytics and Research,
Division of Trading and Markets, Research Note: Equity Market
Volatility on August 24, 2015 (Dec. 2015), available at http://www.sec.gov/marketstructure/research/equity_market_volatility.pdf;
see also Austin Gerig and Keegan Murphy, The Determinants of ETF
Trading Pauses on August 24th, 2015, White Paper (February 2016),
available at http://www.sec.gov/marketstructure/research/determinants_eft_trading_pauses.pdf.
    \1882\ See U.S. Department of the Treasury, Board of Governors
of the Federal Reserve System, Federal Reserve Bank of New York,
U.S. Securities and Exchange Commission, and U.S. Commodity Futures
Trading Commission, Joint Staff Report: The U.S. Treasury Market on
October 15, 2014 (July 13, 2015), available at http://www.sec.gov/reportspubs/special-studies/treasury-market-volatility-10-14-2014-joint-report.pdf.
---------------------------------------------------------------------------

b. Market Analysis and Research
    In the Notice, the Commission discussed how regulators currently
perform market analysis and research.\1883\ In terms of market analysis
and research, as addressed in detail in the Notice, the Commission and
SRO Staffs currently conduct data-driven analysis on market structure,
in direct support of both rulemaking and other regulatory decisions
such as SRO rule approvals as well as retrospective analyses of rules
and pilots.\1884\ The Commission relies on data analysis to inform its
market structure policy, and SROs also conduct market analysis and
research on their own regulatory initiatives. Examples of data-driven
market analysis include reports on OTC trading,\1885\ small
capitalization stock trading,\1886\ the Limit Up-Limit Down
Pilot,\1887\ short selling,\1888\ and high frequency trading.\1889\
---------------------------------------------------------------------------

    \1883\ See Notice, supra note 5, at 30657.
    \1884\ Id.
    \1885\ See Laura Tuttle, Alternative Trading Systems:
Description of ATS Trading in National Market System Stocks (October
2013) available at http://www.sec.gov/divisions/riskfin/whitepapers/alternative-trading-systems-10-2013.pdf; Laura Tuttle, OTC Trading:
Description of Non-ATS OTC Trading in National Market System Stocks
(March 2014), available at http://www.sec.gov/dera/staff-papers/white-papers/otc-trading-white-paper-03-2014.pdf.
    \1886\ See Securities Exchange Act Release No. 74892, Order
Approving the National Market System Plan to Implement a Tick Size
Pilot Program (May 6, 2015), 80 FR 27514, 27534, 27541 (May 13,
2015); see also Charles Collver, A Characterization of Market
Quality for Small Capitalization US Equities (September 2014),
available at http://www.sec.gov/marketstructure/research/small_cap_liquidity.pdf.
    \1887\ See SRO Supplemental Joint Assessment, available at
http://www.sec.gov/comments/4-631/4-631.shtml; Memo to File from the
Division of Economic and Risk Analysis regarding the Cornerstone
Analysis of the Impact of Straddle States on Options Market Quality
(February 8, 2016), available at http://www.sec.gov/comments/4-631/4631-42.pdf; see also Gerig and Murphy, supra note 1881.
    \1888\ See Memo to Chairman Christopher Cox from Daniel Aromi
and Cecilia Caglio regarding an Analysis of Short Selling Activity
during the First Weeks of September 2008, (December 16, 2008),
available at http://www.sec.gov/comments/s7-08-09/s70809-369.pdf;
Memo to Chairman Christopher Cox from Daniel Aromi and Cecilia
Caglio regarding an Analysis of a Short Sale Price Test Using
Intraday Quote and Trade Data (December 17, 2008), available at
http://www.sec.gov/comments/s7-08-09/s70809-368.pdf; Memo from the
Office of Economic Analysis regarding an Analysis of the July
Emergency Order Requiring a Pre-borrow on Short Sales (January 14,
2009) available at http://www.sec.gov/spotlight/shortsales/oeamemo011409.pdf.
    \1889\ See Austin Gerig, High-Frequency Trading Synchronizes
Prices in Financial Markets, (January 2015), available at http://www.sec.gov/dera/staff-papers/working-papers/dera-wp-hft-synchronizes.pdf; see also Staff of the Office of Analytics and
Research, Division of Trading and Markets, Research Note: Equity
Market Volatility on August 24, 2015 (December 2015), available at
http://www.sec.gov/marketstructure/research/equity_market_volatility.pdf.
---------------------------------------------------------------------------

c. Market Surveillance and Investigations
    As explained in detail in the Notice, regulators perform market
surveillance and investigation functions that rely on access to
multiple types of market data.\1890\ The following Sections summarize
the discussion from the Notice describing the current state of SRO
surveillance and SRO and Commission examinations and enforcement
investigations.
---------------------------------------------------------------------------

    \1890\ See Notice, supra note 5, at 30657-59.
---------------------------------------------------------------------------

(1) Current SRO Surveillance
    Rule 613(f) requires the SROs to develop and implement a
surveillance system, or enhance existing surveillance systems,
reasonably designed to make use of the CAT Data.\1891\ For the purposes
of the economic analysis in the Notice, the Commission considered
surveillance to involve SROs running automated processes on routinely
collected or in-house data to identify potential violations of rules or
regulations.\1892\ For instance, SROs use surveillance systems,
developed internally or by a third party, to detect violations of
trading rules, market abuse, or unusual behavior, in real time, within
one day, or within a few weeks of the activity in question. As
discussed in the Notice, SRO surveillance can help

protect investors by detecting fraudulent behavior and anomalous
trading.
---------------------------------------------------------------------------

    \1891\ 17 CFR 242.613(f).
    \1892\ See Notice, supra note 5, at 30657-58.
---------------------------------------------------------------------------

    Currently, exchange-operating SROs use surveillance systems and are
responsible for surveillance of their own market. As discussed in the
Notice, FINRA conducts off-exchange and cross-market surveillance
\1893\ and oversees and regulates OTC trading of exchange-listed and
non-exchange-listed securities, as well as trading in corporate and
municipal debt instruments and other fixed income instruments. FINRA
also provides surveillance services to U.S. equity and options
exchanges through regulatory services agreements with nearly every
equity market and all options exchanges. Additional surveillance is
conducted by exchange-operating SROs and some of this additional
surveillance is conducted as trading activity occurs. This surveillance
can include detection of market manipulation, violations of trading
rules, and other unusual behavior.
---------------------------------------------------------------------------

    \1893\ FINRA conducts cross-market surveillance for
approximately 99% of the listed equity market and approximately 70%
of the listed options market. See Notice, supra note 5, at 30657.
---------------------------------------------------------------------------

    While there were no explicit comments pertaining to the current
practices regarding SRO surveillance, the Participants' responses
confirm that they have real-time surveillance and monitoring tools in
place for their respective markets.\1894\
---------------------------------------------------------------------------

    \1894\ Response Letter I at 31.
---------------------------------------------------------------------------

(2) Examinations
    In the Notice, the Commission discussed how regulators currently
perform examinations.\1895\ As addressed in detail in the Notice, SROs
currently conduct exams of broker-dealers for violations of trading-
related federal laws, rules, and regulations and for violations of SRO
rules and regulations.\1896\ In 2015, FINRA's Member Regulation
Department conducted approximately 2,400 broker-dealer
examinations.\1897\ Currently, the Commission conducts exams of broker-
dealers, transfer agents, investment advisers, investment companies,
municipal advisers, clearing agencies, the national securities
exchanges, other SROs such as FINRA and the Municipal Securities
Rulemaking Board, and the Public Company Accounting Oversight Board
(``PCAOB'').\1898\ For example, the Commission conducted 493 broker-
dealer examinations in 2014 and 484 in 2015, and 70 exams of the
national securities exchanges and FINRA in 2014 and 21 in 2015. In
addition, the Commission conducted 1,237 investment adviser and
investment company examinations in 2014 and 1,358 in 2015. Virtually
all investment adviser examinations and a significant proportion of the
Commission's other examinations involve analysis of trading and order
data. Examinations of broker-dealers and investment advisers involve
intensive analysis of trading data. Examinations seek to determine
whether the entity being examined is: Conducting its activities in
accordance with the federal securities laws, rules adopted under these
laws, and SRO rules; adhering to the disclosures it has made to its
clients, customers, the general public, SROs and/or the Commission; and
implementing supervisory systems and/or compliance policies and
procedures that are reasonably designed to ensure that the entity's
operations are in compliance with the applicable legal
requirements.\1899\ In order to select candidates for examination, the
Commission and certain SROs, including FINRA,\1900\ use a risk-based
approach. ``Risk-based examinations'' seek to increase regulatory
efficiency by using preliminary data analysis to direct examination
resources towards entities and activities where risks of violative or
illegal activity are the highest. The Commission uses risk and data
analysis before opening an exam to identify broker-dealers and
investment advisers for areas of focus such as suspicious trading, as
well as during an exam to identify the particular activities of a
broker-dealer or investment adviser that could trigger certain
compliance and supervisory risks.
---------------------------------------------------------------------------

    \1895\ See Notice, supra note 5, at 30658.
    \1896\ Id.
    \1897\ Id. This estimate was based on Staff discussions with
FINRA. See also FINRA Overview of Member Regulation, available at
http://www.finra.org/industry/member-regulation.
    \1898\ Id.
    \1899\ See SEC, Examination Information for Entities Subject to
Examination or Inspection by the Commission (June, 2014), available
at http://www.sec.gov/about/offices/ocie/ocie_exambrochure.pdf.
    \1900\ FINRA conducts regulatory examinations by contract on
behalf of all the options and equities exchanges, except for the
Chicago Stock Exchange, Inc. (``CHX'') and the National Stock
Exchange, Inc. (``NSX''). Accordingly most exchanges also employ a
risk-based approach to examination selection and scope. CHX examines
members on a cycle basis. NSX recently resumed operations in
December 2015. See Securities Exchange Act Release No. 76640
(December 14, 2015), 80 FR 79122 (December 18, 2015).
---------------------------------------------------------------------------

(3) Enforcement Investigations
    In the Notice, the Commission discussed how regulators currently
approach enforcement investigations.\1901\ As explained in detail in
the Notice, the Commission and SROs undertake numerous investigations
to enforce the securities laws and related rules and regulations,
including investigations of market manipulation, insider trading, and
issuer repurchase violations.\1902\ The Commission estimates that 30-
50% of enforcement investigations use trade and order data. In 2015,
the Commission filed 807 enforcement actions, including 39 related to
insider trading, 43 related to market manipulation, 124 related to
broker-dealers, 126 related to investment advisers/investment
companies, and one related to exchange or SRO duties. In 2014, the
Commission filed 755 enforcement actions, including 52 related to
insider trading, 63 related to market manipulation, 166 related to
broker-dealers, and 130 related to investment advisers/investment
companies, many of which involved trade and order data.
---------------------------------------------------------------------------

    \1901\ See Notice, supra note 5, at 30658.
    \1902\ Id. Examples of investigations of market manipulations
include marking the close, order layering and spoofing, wash sales,
and trading ahead. Layering and spoofing are manipulations where
orders are placed close to the best buy or sell price with no
intention to trade in an effort to falsely overstate the liquidity
in a security.
---------------------------------------------------------------------------

    The Commission initiates enforcement investigations when SROs or
others submit reliable tips, complaints, or referrals, or when the
Commission becomes aware of anomalies indicative of manipulation. After
the detection of potential anomalies, a tremendous amount of time and
resources are expended in gathering and interpreting trade and order
data to construct an accurate picture of when trades were actually
executed, what market conditions were in effect at the time of the
trade, which traders participated in the trade, and which beneficial
owners were affected by the trade. The Commission also explained in the
Notice that SROs rely primarily on surveillance to initiate
investigations based on anomalies in the trading of securities. FINRA
brought 1,397 disciplinary actions in 2014 and 1,512 in 2015.
(4) Tips and Complaints
    In the Notice, the Commission discussed how regulators currently
analyze and investigate tips and complaints.\1903\ Market participants
or those with experience in analyzing market data sometimes notice
atypical trading or quoting patterns in publicly available market data,
and these observations sometimes result in a tip or complaint to a
regulator. As the Commission discussed in the Notice, regulators
investigate thousands of tips and complaints each year.\1904\ In fiscal

years 2014 and 2015, the Commission received around 15,000 entries in
its Tips, Complaints and Referrals (``TCR'') system, approximately one
third of which related to manipulation, insider trading, market events,
or other trading and pricing issues. Analysis of tips and complaints
generally follow three stages. First, regulators ensure that the tip or
complaint contains sufficient information to facilitate analysis.
Second, regulators use directly accessible data or make phone calls and
other informal queries to determine if the tip or complaint is
credible. Third, for tips and complaints that seem credible, regulators
then perform a more in-depth investigation or examination, which
follows the processes described above for examinations and enforcement
investigations.
---------------------------------------------------------------------------

    \1903\ See Notice, supra note 5, at 30659.
    \1904\ Id.
---------------------------------------------------------------------------

2. Current State of Trade and Order Data
    To assess how and to what degree the CAT NMS Plan would affect the
trade and order data available to regulators, the economic analysis in
the Notice considered what data regulators use currently and the
limitations in that data. The Commission did not receive any comments
on its description of the current sources of trade and order data. The
Commission received some comments on its description of the current
limitations on trade and order data, which are discussed below.
However, the Commission continues to believe that the current state of
trade and order data, as described in detail in the Notice and as
summarized below, reflects the relevant baseline for its economic
analysis of the CAT NMS Plan.
a. Current Sources of Trade and Order Data
    In the Notice, the Commission stated that SROs and the Commission
currently use a range of trading and order data sources \1905\ for
their regulatory activities. The types of data and ease of use of these
sources of data can vary widely. The Notice reviewed the primary
sources of data currently available to regulators, describing the
content of the data provided and examples of their specialized uses.
---------------------------------------------------------------------------

    \1905\ Id. at 30659-62.
---------------------------------------------------------------------------

(1) SRO Data
    As discussed in detail in the Notice, SROs maintain audit trails
that contain trade and order data that they obtain from their members.
Currently, regulators have access to at least three sources of audit
trail data. First, the National Association of Securities Dealers
(``NASD'') established its OATS in 1998, which required NASD (n/k/a
FINRA) members to report certain trade and order data regarding NASDAQ-
listed equity securities. OATS was later expanded to include OTC Equity
Securities and all NMS stocks. Second, beginning in 2000, several of
the current options exchanges implemented the Consolidated Options
Audit Trail System (``COATS''). Finally, each equities and options
exchange keeps an audit trail of orders and trades that occur on its
market.\1906\
---------------------------------------------------------------------------

    \1906\ Id. at 30659.
---------------------------------------------------------------------------

    The Commission explained that for each of these stages in the life
of an order, FINRA Rule 7440 requires the recording and reporting of
the following information, as applicable, including but not limited to:
For the receipt or origination of the order, the date and time the
order was first originated or received by the reporting member, a
unique order identifier, the market participant symbol of the receiving
reporting member, and the material terms of the order; for the internal
or external routing of an order, the unique order identifier, the
market participant symbol of the member to which the order was
transmitted, the identification and nature of the department to which
the order was transmitted if transmitted internally, the date and time
the order was received by the market participant or department to which
the order was transmitted, the material terms of the order as
transmitted, the date and time the order was transmitted, and the
market participant symbol of the member who transmitted the order; for
the modification or cancellation of an order, a new unique order
identifier, original unique order identifier, the date and time a
modification or cancellation was originated or received, and the date
and time the order was first received or originated; and for the
execution of an order, in whole or in part, the unique order
identifier, the designation of the order as fully or partially
executed, the number of shares to which a partial execution applies and
the number of unexecuted shares remaining, the date and time of
execution, the execution price, the capacity in which the member
executed the transaction, the identification of the market where the
trade was reported, and the date and time the order was originally
received. FINRA Rule 7440 also requires reporting of the account type,
the identification of the department or terminal where an order is
received from a customer, the identification of the department or
terminal where an order is originated by a reporting member, and the
identification of a reporting agent if the agent has agreed to take on
the responsibilities of a reporting member under Rule 7450.\1907\
---------------------------------------------------------------------------

    \1907\ Id. at 30659-60. The Notice provided further details on
the reporting requirements of FINRA Rule 7440. Id. at 30659-60
nn.354-57.
---------------------------------------------------------------------------

    The Commission also explained that a majority of options exchanges
require their members to provide the following information with respect
to orders entered onto their exchange: (1) The material terms of the
order; (2) order receipt time; (3) account type; (4) the time a
modification is received; (5) the time a cancellation is received; (6)
execution time; and (7) the clearing member identifier of the parties
to the transaction.\1908\
---------------------------------------------------------------------------

    \1908\ Id. at 30660. The Notice provided further details on the
reporting requirements of options exchanges. Id. at 30660 nn.358-59.
The Notice also outlined the reporting requirements of other SRO
audit trails. Id. at 30660 n.364.
---------------------------------------------------------------------------

    As discussed in the Notice, SRO audit trail data is used for market
reconstructions and market analyses, and to inform policy decisions,
both by the Commission and by SROs. Regulators also use SRO audit trail
data extensively for surveillance, examinations, investigations, and
other enforcement functions. Current SRO market surveillance relies
primarily on data from the SRO audit trails, generated directly from
the exchange servers and from OATS. Likewise, SRO examinations and
investigations pull information from their own audit trails before
seeking data from others. Commission examinations and investigations
also rely heavily on SRO audit trails to start the process of tracing a
particular trade from its execution to the order initiation and
customer information, and the audit trails can be useful for
manipulation investigations or other regulatory activities that require
analyses of microcap securities trading activity.\1909\
---------------------------------------------------------------------------

    \1909\ Id. at 30660.
---------------------------------------------------------------------------

(2) Equity and Option Cleared Reports
    The SROs and the Commission also have access to equity and option
cleared reports. In the Notice, the Commission noted that clearing
broker-dealers report their equity and option cleared data on a daily
basis and the NSCC and the OCC aggregate the data across the market and
generate the reports.\1910\ Equity and

option cleared reports provide a way for regulators to directly access
a dataset to see how much trading volume is accounted for by a
particular clearing broker. As such, these data are often used at the
beginning of an examination or investigation to start identifying the
market participants that may have additional data needed to pinpoint a
particular activity.
---------------------------------------------------------------------------

    \1910\ Equity and option cleared reports show ``the number of
trades and daily cleared trade and share volume, by clearing member,
for each equity and listed option security in which transactions
took place. Regulators can query these reports directly through an
internal online system that interfaces with the Depository Trust and
Clearing Corporation (``DTCC'') data by security name and CUSIP
number.'' A CUSIP number is a ``unique alphanumeric identifier
assigned to a security and facilitates the clearance and settlement
of trades in the security.'' Id.
---------------------------------------------------------------------------

(3) Electronic Blue Sheets
    As the Commission discussed in the Notice, broker-dealers also
provide detailed data to regulators in the form of Electronic Blue
Sheets (``EBS''). The EBS data, provided pursuant to Rule 17a-25 under
the Act, facilitate investigations by the SROs and Commission Staff,
particularly in the areas of insider trading and market manipulations.
The EBS system provides certain detailed execution information in its
electronic format upon request by SRO or Commission Staff. This
information often includes the employer of the beneficial owner of an
account, which can be important to insider trading investigations, and
in some cases, a tax identification number.\1911\
---------------------------------------------------------------------------

    \1911\ Id. at 30661. The Notice provided further details on Rule
17a-25 and its reporting requirements. Id. at 30661, notes 368-369.
---------------------------------------------------------------------------

    The EBS system also provides additional information on market
participants who meet the definition of ``large traders'' and have
self-identified to the Commission as required by Rule 13h-1. Large
trader data provide the Commission with a way to acquire information
about the activities of large traders and allow the activities of large
traders to be more readily aggregated across or partitioned by multiple
broker-dealers.\1912\
---------------------------------------------------------------------------

    \1912\ Id. The Notice provided the definition of a ``large
trader'' and further details on the reporting requirements of Rule
13h-1. Id.
---------------------------------------------------------------------------

(4) Trade Blotters and Order Tickets
    As the Commission addressed in detail in the Notice, investment
advisers and broker-dealers also maintain data in the form of order
tickets and trade blotters that regulators can obtain on request. Order
tickets are in-house records maintained by investment advisers and
broker-dealers that provide order details, including timestamps of
order initiation and placement, special order types, any special
instructions for the order, and plans for the allocation of shares and
prices across accounts and subaccounts. Order tickets also identify
account owners. Commission Staff collects order tickets regularly for
examinations, and occasionally also for market manipulation
investigations.\1913\
---------------------------------------------------------------------------

    \1913\ Id.
---------------------------------------------------------------------------

    The Commission discussed the fact that broker-dealers maintain data
in trade blotters that are similar to EBS. However, the trade blotters
also contain more information, including the commissions paid in
executing each order, timestamps of when an order is received and when
it is executed (and the number of fills), and the pricing information
for all executions in the order. SROs use trade blotters in
examinations of their members. Commission Staff uses trade blotters
frequently for examinations, including in almost every broker-dealer,
investment adviser, and hedge fund examination, as well as for insider
trading and market manipulation investigations. Regulators use trade
blotter data to determine the order entry time and execution time for
trades by a particular customer in examinations and enforcement
investigations. Trade blotters are also the primary data source used in
regulatory investigations for which subaccount allocation information
is important for determining violative behavior, such as cherry-picking
and front-running cases.\1914\
---------------------------------------------------------------------------

    \1914\ Id.
---------------------------------------------------------------------------

    As the Commission discussed in the Notice, broker-dealers and
exchanges collect and maintain records of activity in their order
handling systems and internal matching systems.\1915\ Some of the data
that is collected and maintained in these systems exceeds the scope of
information captured in EBS, SRO audit trail, trade blotter, or order
ticket data and may include data on order receipt, modification or
routing information not otherwise reported to SROs. Regulators use
these trading and order handling system data in investigations and
examinations to further analyze issues discovered during their analysis
of data from other sources.\1916\
---------------------------------------------------------------------------

    \1915\ ``Internal matching systems of broker-dealers may include
Alternative Trading Systems (``ATSs'') or automated trading systems
that provide liquidity to received orders without interacting on a
registered exchange. The Commission understands that some broker-
dealers rely on their clearing firms to collect and maintain records
relating to routed orders on their behalf. Broker-dealers that
operate their own internal matching systems are more likely to
collect and maintain their own records.'' Id. at 30662.
    \1916\ Id.
---------------------------------------------------------------------------

(5) Public Data
    As discussed in detail in the Notice, exchanges and SROs make some
data available to the public and regulators can access these data for
their regulatory activities. One type of public data is
``consolidated'' data feeds that are disseminated by registered
Securities Information Processors (``SIPs'') pursuant to joint SRO
plans. For a fee, the SIPs distribute consolidated market data on
recent equity and option transactions and the prevailing best quotes at
each exchange to market data subscribers. Additionally, all exchanges
also make data available through direct data feeds. These feeds contain
all data included in the SIP feed, but also include depth of book
information and, depending on the exchange, may include additional
data, such as the submission, cancellation and execution of all
displayed orders and auction imbalance information on the exchange,
among other things. Furthermore, at the request of Commission Staff,
most equities exchanges also produce and make public two datasets with
information on short sales: A file of short selling volume by stock,
which contains the short selling and total volume on that exchange by
symbol, and a file of short selling transactions, which contains trade
information such as time, volume, and price for each transaction
involving a short sale.\1917\
---------------------------------------------------------------------------

    \1917\ Id.
---------------------------------------------------------------------------

    The Commission and SROs use these publicly available trade and
order data to conduct market analyses, market reconstructions,
examinations, and investigations. Due to the accessibility and ease of
use of the public data, regulators often use it as a starting point or
a basis of comparison to other data sources. For example, real-time
surveillance can rely on SIP data, and some insider trading
surveillance relies on information from other publicly available
sources such as news sources. Further, investigations into short sale
market manipulation sometimes start with an analysis of the short
selling data.\1918\
---------------------------------------------------------------------------

    \1918\ Id.
---------------------------------------------------------------------------

b. Current Limitations of Trade and Order Data
    As the Commission addressed in detail in the Notice, while
regulators have access to trade and order data from the sources
described above,\1919\ the available data are, for various reasons,
limited in terms of the four qualities discussed above.\1920\ In terms
of completeness, current sources do not represent all of the market
activity of interest in sufficient detail in one consolidated audit
trail. In terms of accuracy, current sources may reflect data errors,
insufficiently granular clock

synchronization and timestamps, errors introduced in the process of
combining data from different sources, a lack of consistent customer
and broker-dealer identifiers, and data that is too aggregated at the
record level to provide the information regulators need. In terms of
accessibility, the SROs and Commission lack direct access to most of
the data sources described above, and with respect to timeliness,
obtaining trade and order data from current sources and converting the
data into a form in which they can be analyzed can involve a
significant delay from the time of a particular event of interest. Due
to these limitations on current data sources, as the Commission
addressed in detail in the Notice, regulators are limited in their
ability to perform the activities outlined in Section V.D.1, above.
Table 1 summarizes the key characteristics of the currently available
data sources, the limitations of which are discussed in more detail
below.
---------------------------------------------------------------------------

    \1919\ See Section V.D.2(a), supra.
    \1920\ See Notice, supra note 5, at 30662-74.

                                                                                Table 1
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Routing/
                                  Customer      Broker-dealer      TimeStamp        Allocation     Order  display    Buy-to-cover       Special       modification/        Entire       Direct access    Off- exchange    Timeliness of
                                 identifier       identifier         \1921\        information      information       indicator         handling       cancellation      lifecycle      for regulators  activity \1922\  data  compiling
                                                                                instructions     information                                                            \1923\
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OATS........................  No.............  Yes............  Yes (majority    No.............  Yes (for limit   No.............  Yes              Yes............  Yes ( before     No (except       Yes............  Raw Data: T+1.
                                                                 in                                orders).                          (conditional).                    order reaches    FINRA). Access                   Corrected Data:
                                                                 milliseconds                                                                                exchange).       can take                          T+6.
                                                                 but some in                                                                                No (once order    several weeks.
                                                                 seconds).                                                                                reaches
                                                                                exchange).
COATS.......................  No.............  Yes............  Yes............  No.............  No.............  No.............  No.............  Yes............  No.............  No (except SROs  No.............  Reported same-
                                                                                w/r/t their                       day, but
                                                                                own members).                     separate file
                                                                                transmitted at
                                                                                latest T+1.
SRO Audit Trails............  No.............  Yes............  Yes (majority    No.............  No.............  No.............  No.............  Yes............  No (only once    No (except SROs  No.............  As soon as a
                                                                 in                                                                                order reaches    w/r/t their                       trade is
                                                                 milliseconds                                                                                exchange).       own trails).                      executed.
                                                                 but some in                                                                                Access can
                                                                 seconds).                                                                                take several
                                                                                weeks.
Equity and Option Cleared     No.............  No.............  No.............  No.............  No.............  No.............  No.............  No.............  No.............  Yes............  Yes............  Equity: T+3.
 Reports.                                                                                Option: T+1.
Electronic Blue Sheets......  Yes (but not     Yes (but not     Yes............  No.............  No.............  No.............  No.............  No (except for   No.............  No. Access can   Yes............  10 business
                               always           always                                                                                certain                           take several                      days after
                               consistent       consistent                                                                                cancellation                      weeks or                          request is
                               across broker-   across broker-                                                                                information).                     months.                           submitted.
                               dealers)         dealers).
                               \1924\.
Trade Blotters/Order Tickets  Yes (but not     Yes (but not     Yes (can be      No.............  No.............  No.............  No.............  No.............  No.............  No. Access can   Yes............  Same-day.
                               always           always           requested,                                                                                take several
                               consistent       consistent       although not                                                                                days.
                               across broker-   across broker-   always
                               dealers).        dealers).        reliable).
Trading and Order Handling    Depends on the   Yes............  Yes............  No.............  No.............  No.............  No.............  Yes............  Yes (except      No. Regulators   Yes............  Same-day.
 System Data.                  trader.                                                                                allocations).    must request
                                                                                this data (SEC
                                                                                asks for the
                                                                                data within 10
                                                                                days).
Public/Proprietary Data.....  No.............  No.............  Yes (varied      No.............  No.............  No.............  No.............  Yes (except non- No.............  Yes............  Yes............  Same-day.
                                                                 between                                                                              displayed
                                                                 seconds and                                                                          orders).
                                                                 microseconds).
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(1) Completeness
---------------------------------------------------------------------------

    \1921\ As proposed, the CAT NMS Plan also requires CAT Reporters
to synchronize their time clocks to the time maintained by the NIST
with an allowable drift of 50 milliseconds. See CAT NMS Plan, supra
note 5, at Section 6.8. According to a survey conducted by the FIF,
39% of responding broker-dealers currently synchronize their clocks
with less precision than what is called for by the CAT NMS Plan.
Thus, the CAT NMS Plan would also increase the accuracy of the
timestamps used by certain broker-dealers. See FIF Clock Offset
Survey, supra note 247.
    \1922\ Off-exchange activity includes currently reportable
events that are not handled by a registered securities exchange.
    \1923\ In this instance, ``timeliness'' refers to when the data
are compiled at the source in question (e.g., when OATS receives
data from reporting broker-dealers), not when they become available
to regulators because that timeline can vary depending on the
regulator in question. As shown in the ``Direct Access for
Regulators'' column, it may still take several days, weeks, or
months for regulators to be able to access the data. For example,
while OATS reporters provide the data at T+1, the SEC must request
OATS data in order to access it, which may take several days or
weeks. This narrower definition of timeliness is not used throughout
this economic analysis.
    \1924\ Guidance from FINRA indicates that broker-dealers must
``identify the party to the trade'' through EBS fields such as
``Primary Party Identifier,'' but that party may be another broker-
dealer rather than the ultimate customer. See FINRA, Electronic Blue
Sheet Submissions, FINRA and ISG Extend Effective Date for Certain
Electronic Blue Sheet Data Elements, Regulatory Notice 12-47 (Oct.
2012), available at https://www.finra.org/sites/default/files/NoticeDocument/p194655.pdf. Similarly, under the large trader rule,
persons exercising ``investment discretion'' are reported through
EBS, but in some cases such persons are investment advisers rather
than their customers. See Notice, supra note 5, at note 372 and
accompanying text (discussing the large trader rule).
---------------------------------------------------------------------------

    ``Completeness'' refers to whether the data represents all market
activity of interest or just a subset, and whether the data is
sufficiently detailed to provide the required information.\1925\ As
addressed in detail in the Notice, while current data sources provide
trade and order data specified by existing rules and regulations, those
sources do not contain all market activity that might be required for
certain market inquiries, in sufficient detail, within one consolidated
audit trail. The Commission explained in the Notice that, to obtain
information regarding a particular market event, regulators may have to
piece together information from different data sources and that some
data is not required to be reported at all under existing regulations.
Therefore, as described below, current data sources either cover only a
limited number of events and products, or lack some data fields that
would be useful to regulators, each of which impedes effective market
surveillance.\1926\
---------------------------------------------------------------------------

    \1925\ Id. at 30664.
    \1926\ Id.
---------------------------------------------------------------------------

    One commenter agreed with the Commission's analysis by stating that
``[t]he fragmented nature of current data sources does pose significant
challenges to regulators seeking complete data.'' \1927\
---------------------------------------------------------------------------

    \1927\ Data Boiler Letter at 30.
---------------------------------------------------------------------------

A. Events and Products
    As the Commission addressed in detail in the Notice, there is
currently no single data source that covers all market activities. EBS
data contains executed trades but does not contain information on
orders or quotes (and thus does not provide information on routes,
modifications, or cancellations). Similarly, trade blotters and order
tickets contain only information recorded by the particular broker-
dealer or investment adviser that generated them and may contain
limited information about full order lifecycles. SRO audit trail data
are limited to identifying the activity of their members, can have
incomplete information concerning their members, lack order lifecycle
information occurring prior to receipt by an exchange, and may not
contain information regarding principal trading. Furthermore, although
public consolidated and direct data feeds provide data about the entire
market, they lack information regarding non-displayed orders and do not
provide sufficient information to identify the different lifecycle
events of a single order.\1928\
---------------------------------------------------------------------------

    \1928\ See Notice, supra note 5, at 30664.
---------------------------------------------------------------------------

    The Commission also discussed individual SRO audit trails. While
extensive, they contain only activity of their own members, and many
SRO audit trails are incomplete in their coverage of the activities of
those members. For example, FINRA's OATS data does not include
proprietary orders originated by a trading desk in the ordinary course
of a member's market making activities, or options data. And while OATS
collects data from FINRA members with respect to orders and trades
involving NMS and OTC stocks, OATS does not include trade or order
activity that occurs on exchanges or at broker-dealers that are not
FINRA members. In addition, while broker-dealers who are not members of
FINRA must be members of an exchange SRO, an individual exchange SRO's
audit trail data is generally limited to activity taking place on that
exchange. The Commission noted that because broker-dealers who are not
members of FINRA may engage in trading activity in off-exchange
markets, a substantial portion of the trading activity that an exchange
SRO supervises is not reported to the supervising SRO.\1929\ The
Commission also discussed the fact that not all FINRA members are
obligated to report to OATS. FINRA's rules exclude from reporting
certain members that engage in a non-discretionary order routing
process. Additionally, FINRA has the authority to exempt the manual
orders of other members who meet specific criteria from the OATS
recording and reporting requirements.\1930\
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    \1929\ Id.
    \1930\ Id. (citing FINRA Rule 7470). At the time of the Notice,
FINRA had granted approximately 50 such exemptions.
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    The Commission also explained that some SRO audit trails do not
include and are not required to include activity associated with
principal trading, such as market-making activity. This may result in
the exclusion of a significant amount of activity, particularly for
firms with substantial market-making business activities.\1931\
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    \1931\ Id. at 30665.
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    Finally, the Commission discussed the fact that no single current
data source integrates both equities and options, and that the lack of
any combined equity and options audit trail data is a significant
impediment to regulators performing cross-product surveillance.\1932\
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    \1932\ Id.
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B. Data Fields
    As addressed in detail in the Notice, each of the currently
available data sources discussed above is missing certain data fields
that are useful for conducting a variety of regulatory activities.
Furthermore, certain valuable data fields are not contained in any of
the data sources discussed above.\1933\
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    \1933\ Id.
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    Most notably, as the Commission explained in detail in the Notice,
the identity of the customer is not available from any of the current
data sources that are reported to regulators on a routine basis. As
discussed in the Notice, a unique customer identifier could be useful
for many types of investigations and examinations such as market
manipulation investigations and examinations of investment advisers.
The Commission also explained that although some data sources--
specifically large trader reports, EBS, trade blotters, and order
tickets--identify customers, these data sources are not reported on a
routine basis, provide only one part of the order lifecycle, and have
other inherent limitations.\1934\
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    \1934\ Id.
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    The Commission explained that because there is currently no data
source that includes customer identities

across multiple parts of an order lifecycle, regulators must seek and
link multiple sources of data, which can be a burdensome and imperfect
process. For example, trade blotter and order ticket data that identify
customers from one broker-dealer may only include customer names and
thus may not be readily matched to similar data from another broker-
dealer, or may require substantial time, effort, and uncertainty to
reconcile across firms. Further, EBS data's limited coverage of trading
activity and lack of some detailed trade information raises costs and
reduces the timeliness of insider trading investigations.\1935\
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    \1935\ Id. for a full discussion of the impact on insider
trading investigations.
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    As the Commission addressed in detail in the Notice, some valuable
data fields, such as modifications that make an order non-displayed and
other special handling instructions are consistently available on only
a few data sources or require linking different data sources.\1936\ The
Commission explained that the lack of direct, consistent access to
order display information and special handling instructions creates
inefficiencies in surveillances, examinations, and investigations that
examine hidden liquidity and the treatment of customer orders.\1937\
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    \1936\ In the Notice, the Commission provided further details on
the reporting of order display information (i.e., whether the size
of the order is displayed or non-displayed) and special handling
instructions in OATS data. The Commission also noted that this data
is not directly available to all regulators, and that the Commission
must request this data from FINRA. Id. at 30666 n.412.
    \1937\ Id. at 30666.
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    The Commission noted that data that are not directly accessible by
regulators at all include buy-to-cover information and subaccount
allocation information, including the allocation time. The Commission
explained that regulators could use buy-to-cover information to better
understand short selling and for investigations of short sale
manipulation. However, no current data source allows regulators to
directly identify when someone is buying to cover a short sale.\1938\
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    \1938\ Id.
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    As the Commission discussed in the Notice, subaccount allocation
information needed for regulatory activities can be difficult for
regulators to collect and compile because SRO audit trails currently do
not require allocation reports and broker-dealers may not have records
of the time of a subaccount allocation. The Commission explained that
when regulators require an understanding of subaccount allocations for
a regulatory task, they generally request and sift through trade
blotter or EBS data in an attempt to identify allocations and the
details of those allocations. However, current trade blotter data
contains limited customer information on allocations and is not
required to contain allocation time information at the subaccount
level.\1939\
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    \1939\ While the Commission is sometimes able to acquire
allocation time on trade blotters, not all broker-dealers keep
records in a manner that facilitates efficient regulatory requests
for allocation time information. Id.
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    The Commission explained that the difficulty in obtaining
allocation information and the difficulty in reconstructing allocations
with data from broker-dealers limits the efficiency of certain
surveillances and examinations. In particular, allocation time at the
subaccount level is critical for determining whether some customers are
systematically given more favorable allocation treatment than others.
For example, when a broker-dealer places an order or series of orders
for multiple customer accounts that generates multiple executions at
multiple prices, it is possible that different customers receive
different prices in the allocation process. However, if some customers
systematically receive less favorable prices than others when they
should be receiving the same prices for their executions, this could
indicate that the broker-dealer is handling allocations
improperly.\1940\
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    \1940\ Id.
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    Three commenters noted that the open/close indicator is currently
not captured for equities.\1941\ In their response, the Participants
agreed with this assessment.\1942\ In addition, the Participants
indicated that, pursuant to current industry practice, the open/close
indicator is also not captured for some options transactions.\1943\
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    \1941\ TR Letter at 9; SIFMA Letter at 35; FIF Letter at 83.
    \1942\ Response Letter I at 22.
    \1943\ Response Letter I at 22.
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    The Commission has considered the comments it received regarding
the current limitations of trade and order data in terms of
completeness. The open/close indicator would provide information about
whether a transaction is undertaken to open or increase a position in
the security, or to close or reduce a position in the security, such as
a buy-to-cover a short sale, which the Commission in the Notice stated
was information not directly accessible to regulators today. Therefore,
the commenters expressing that the open/close indicator is not
currently captured for equities are consistent with the baseline
discussed in the Notice; the open/close indicator is one type of a
broader category of information that the Commission recognized is
lacking from current audit trails.\1944\ In addition, although the