or back office IT staff at broker-dealers expend to understand and
access broker-dealer data collected and provided in a particular way.
---------------------------------------------------------------------------

    \656\ See Section IV.D.2.b(2), supra, for discussion of ad hoc
data requests.
---------------------------------------------------------------------------

    The Plan would also permit regulators to directly access customer
information, which could improve the ability of SROs to conduct
surveillance. Rule 613(e)(3) requires that the CAT provide the
capability to run searches and generate reports.\657\ The CAT NMS Plan
indicates that regulators would be able to run searches on many
variables, including Customer-IDs.\658\ Appendix D further clarifies
that both the online targeted query tool and the user-defined query/
bulk extract process would produce records that provide Customer-IDs,
but that do not themselves provide Customer PII data.\659\ Data
containing PII, however, could be obtained by regulatory personnel
specifically authorized to obtain PII access, through a process to be
documented by the Plan Processor.\660\ Currently, most regulatory data
sources do not directly link to specific customers.\661\ Instead,
regulators can use an ad-hoc data request to identify the customer and
follow up with an EBS request to identify the customer's other activity
across market participants. In this regard, CAT would provide SROs with
direct access to the data that is necessary to conduct surveillance of
the trading behavior of individual market participants in a more timely
fashion.\662\
---------------------------------------------------------------------------

    \657\ 17 CFR 242.613(e)(3).
    \658\ See CAT NMS Plan, supra note 3, at Appendix D, Section
8.2; See also supra note 632.
    \659\ See id. at Appendix D, Section 4.1.6, Appendix D, Section
8.1.1-8.1.3.
    \660\ See id. at Appendix D, Section 4.1.6.
    \661\ The EBS system, trade blotters, order tickets, and trade
confirmations are the existing data sources that contain customer
information. See Section IV.D.2.b(1)A, supra; Adopting Release,
supra note 9, at 45727. Also a recent FINRA rule change would
require FINRA members to report to OATS non-FINRA member customers
who are broker-dealers. See supra note 407.
    \662\ Currently, FINRA receives exchange data from SROs at the
end of the trading day. It takes approximately three days for FINRA
to process and translate this data to a common format before
surveillance programs can run. As noted in Section IV.D.1.c, this
economic analysis considers surveillance to be SROs running
automated processes on routinely collected or in-house data to
identify potential violations of rules or regulations.
---------------------------------------------------------------------------

(2) Consolidation of Data
    The Commission also preliminarily believes that, if approved, the
Plan would improve accessibility by consolidating various data elements
into one combined source, reducing data fragmentation. First, Rule 613
requires that the Central Repository collect data that includes the
trading and routing of a given security from all CAT Reporters.\663\
Currently, audit trail data for securities that are traded on multiple
venues (multiple exchanges or off-exchange venues) is fragmented across
multiple data sources, with each regulator generally having direct
access only to data generated on the trading venues it regulates.\664\
If approved, the Plan would bring audit trail data related to trading
on all venues into the Central Repository where it could be accessed by
all regulators. Second, Rule 613 requires that the Plan include both
equity and options data.\665\ Currently no existing regulatory audit
trail data source includes both options and equities data, so
collecting this data and providing access would allow regulators to
monitor and run surveillance on the activity of market participants in
related instruments, such as when a market participant has activity in
both options and the options' underlying assets.
---------------------------------------------------------------------------

    \663\ See 17 CFR 242.613(c).
    \664\ The Commission recognizes that FINRA collects data from
exchanges for which it provides regulatory services. However, this
data is sent to FINRA by the exchanges with a delay, and the data
formats are not standardized prior to receipt at FINRA.
    \665\ See 17 CFR 242.613(c)(5), (c)(6).
---------------------------------------------------------------------------

    The Plan would also marginally increase the accessibility of
historical exchange data. In particular, Section 6.5(b)(i) of the Plan
requires that the Central Repository make historical data available for
not less than six years, in

a manner that is directly accessible and searchable electronically
without manual intervention by the Plan Processor.\666\
---------------------------------------------------------------------------

    \666\ See CAT NMS Plan, supra note 3, at Section 6.5(b)(i).
Currently, broker-dealers retain data for six years, but exchanges
are only required to retain data for five years. In practice, the
Commission understands that most exchanges generally retain data for
at least six years, but at least one exchange does not retain data
for six or more years. Therefore, the CAT NMS Plan would improve the
historical data available from at least one exchange.
---------------------------------------------------------------------------

    In some dimensions of accessibility, the Commission notes that
uncertainties exist that could affect the degree of expected
improvement to accessibility. In particular, while the Plan provides
detail on the method of access and the types of queries that regulators
could run, many of the decisions regarding access have been deferred
until after the Plan Processor is selected and finalizes the Technical
Specifications; the Plan does not specify how regulators would access
the data beyond providing for both an online query tool and user-
defined direct queries that could do bulk extractions.\667\ For
example, while the Plan indicates that regulators would have an on-line
targeted query tool and a tool for user-defined direct queries or bulk
extraction,\668\ 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.
---------------------------------------------------------------------------

    \667\ See, e.g., CAT NMS Plan, supra note 3, at Appendix D,
Section 8.2.
    \668\ See CAT NMS Plan, supra note 3 at Appendix D, Sections
8.1.1, 8.1.2.
---------------------------------------------------------------------------

    In addition, it is not known whether the Plan Processor would host
a server workspace that regulators could use for more complex analyses,
what software tools would be available to regulators within such a
workspace, and whether complex analyses would be able to be performed
without extracting significant data from the Central Repository's
database.
    While all Bidders included certain baseline functionality, such as
some means for regulators to perform dynamic searches, data extraction,
and ``off-line analysis,'' \669\ Bidders proposed using a variety of
tools to provide regulators with access to and reports from the Central
Repository, including direct access portals, web-based applications,
and a number of different options for formatting the data provided to
regulators in response to their queries.\670\ While all of these
proposed solutions would presumably be compatible with achieving the
accessibility benefits sought to be achieved through the Plan--i.e.,
they would all involve the aggregation of data from various sources and
the provision of ready access to that data for regulators--the precise
degree of functionality of the final system is still to be determined.
Similarly, the details of system performance would depend on Service
Level Agreements to be established between the Plan Participants and
the eventual Plan Processor, which means that the details would not be
known until after the Plan Processor is selected.\671\ These
functionality and performance uncertainties create some uncertainty
regarding the degree of improvement in regulatory access that would
result from the Plan.
---------------------------------------------------------------------------

    \669\ See id. at Appendix C, Section A.2(b). ``Offline-
analysis'' refers to a regulator's analysis of data extracted from
the Central Repository using the regulator's own analytical tools,
software, and hardware to perform the analysis. See id. at Appendix
C, Section A.2(b) n.77.
    \670\ See id. at Appendix C, Section A.2(b).
    \671\ See id. at Appendix D, Section 8.5.
---------------------------------------------------------------------------

    Nonetheless, the requirements included in the Plan describe a
system that, once implemented, would result in the ability to query
consolidated data sources that represents a significant improvement
over the currently available systems. This substantial reduction in
data delays and costly data investments would permit regulators to
complete market reconstructions, analyses, and research projects, as
well as investigations and examinations, more effectively and
efficiently and would lead to improved productivity in the array of
regulatory matters that rely on data, which should lead to improved
investor protection.
d. Timeliness
    The Commission believes that, if approved, the CAT NMS Plan would
significantly improve the timeliness of the reporting, compiling, and
access of regulatory data, which would benefit a wide array of
regulatory activities that use or could use audit trail data.\672\ The
Commission preliminarily believes that the timeline for compiling and
reporting data pursuant to the Plan constitutes an improvement over the
processes currently in place for many existing data sources, and
relative to some data sources the improvement is dramatic.
Specifically, under the Plan, CAT Data would be compiled and made ready
for access faster than is the case today for some data, both in raw and
in corrected form; regulators would be able to query and manipulate the
CAT Data without going through a lengthy data request process; and the
data would be in a format to make it more immediately useful for
regulatory purposes.
---------------------------------------------------------------------------

    \672\ 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.
---------------------------------------------------------------------------

(1) Timing of Initial Access to Data
    The Plan would require CAT Reporters to report data to the Central
Repository at times that are on par with current audit trails that
require reporting, but the Central Repository would compile the data
for initial access sooner than some other such data.\673\ Sections
6.3(b)(ii) and 6.4(b)(ii) of the Plan require that the data required to
be collected by CAT Reporters must be reported to the Central
Repository by 8:00 a.m. Eastern Time on day T+1.\674\ These provisions
also make clear that CAT Reporters could voluntarily report the
required data prior to the deadline.\675\ As described in Table 4, the
time at which data is reported often differs significantly from the
time at which data is made available to various regulators.\676\ The
CAT Data would be made available to regulators in raw form after it is
received from reporters and passes basic formatting validations; the
Plan does not specify exactly when these validations would be complete,
but the requirement to link records by 12:00 p.m. (noon) Eastern Time
on day T+1 gives a practical upper bound on this timeline for initial
access to the data.\677\ Thus, to the extent that access to the raw
(i.e., uncorrected and unlinked) data would be useful for regulatory
purposes, the CAT NMS Plan provides a way for SROs and the Commission
to access the uncorrected and unlinked data on day T+1 by 12:00 p.m. at
the latest.
---------------------------------------------------------------------------

    \673\ Compiling data refers to a process that aggregates
individual data records into a data set. This could occur when
regulators request data and when the regulators receive data from
multiple providers. This is different from the act of reporting
data.
    \674\ See Rules 613(c)(3), (c)(4), 17 CFR 242.613(c)(3), (c)(4).
    \675\ See CAT NMS Plan, supra note 3, at Appendix D, Section
3.1.
    \676\ See Table 4, supra.
    \677\ See CAT NMS Plan supra note 3, at Appendix C, Section
A.2(a); Appendix C, Section A.3(e); Appendix D, Section 6.1.
---------------------------------------------------------------------------

    As noted in the Baseline, some current data sources compile and
report the data with delays. For example, equity and option clearing
data are not compiled and reported to the NSCC and OCC until day T+3,
and thus access to this data by the Commission cannot occur until day
T+3 at the very soonest. Under the Plan, raw data would be available
two days sooner to all regulators. In other cases such as EBS reports,
the data are not compiled and reported to a centralized database until

a request is received.\678\ OATS data is initially reported to FINRA by
8 a.m. on the calendar day following the reportable event, and it takes
approximately 24 hours for FINRA to run validation checks on the
file.\679\ However, SROs do not currently access OATS information for
regulatory purposes until after the error correction process is
complete, which imposes a further delay of several business days for
non-FINRA SRO regulators' use.\680\ Uncorrected OATS data is, however,
available at 8 a.m. on the calendar day following the reportable event
to FINRA (several hours more timely than CAT Data would be)--and is
available to other regulators upon request several weeks later.\681\
Uncorrected CAT Data would be available to all regulators at 12:00 p.m.
on day T+1, which is at least several days sooner than OATS is
available to non-FINRA regulators; however, the Commission notes that
because OATS is reportable on the calendar day following the OATS-
reportable event while CAT would be reported on T+1 following a
Reportable Event, regulators' access to CAT Data from a day preceding a
non-trading day (Fridays or days before market holidays) is likely to
be less timely than it is currently, if that data would be covered by
OATS. However, to the extent that the CAT would generally make CAT
Data, which would include substantially more information than OATS
data, available to all regulators, as opposed to just FINRA, in raw
form by at least 12:00 p.m. Eastern Time on day T+1, the CAT would
generally represent a significant improvement in timeliness for SROs
other than FINRA compared to OATS.
---------------------------------------------------------------------------

    \678\ The Commission notes, however, that broker-dealers could
compile some data sources discussed in the baseline on the day of an
event. For example, broker-dealers can compile trade blotters on the
same day as the trade. Further, regulators can compile data received
in real-time on the event day. For example, regulators can compile
direct data feeds same day. The Commission does not believe the CAT
NMS Plan would affect the timing of the compilation of such data,
nor would it reduce the number of requests for data on the day of an
event.
    \679\ See Adopting Release, supra note 9, at 45729.
    \680\ Id.
    \681\ See OATS Reporting Technical Specifications Section 8.1,
available at https://www.finra.org/sites/default/files/OATSTechSpec_01112016.pdf.
---------------------------------------------------------------------------

    It is true that the Plan would not necessarily improve the
timeliness of audit trail data in every case or for every regulator, as
some kinds of audit trail data are currently timely for some
regulators. For example, exchange SROs already have real-time access to
their own audit trail data.\682\ However, regulators at other SROs or
the Commission do not have real-time access to that exchange's audit
trail, and therefore CAT Data could be more timely for these other
regulators to access and use than obtaining that exchange's audit trail
data through any means.\683\
---------------------------------------------------------------------------

    \682\ Under the Plan, SROs that are exchanges would still have
the same real-time access to their own audit trail data as they
currently do. The Commission does not expect that all SRO audit
trails will be retired on implementation of the Plan because
exchanges may use such audit trails to implement their CAT reporting
responsibilities. CAT reporting requirements would require that
exchanges collect and report audit trail information from their
systems even if they elect to replace their current audit trails.
However, CAT requirements may improve the completeness of real-time
exchange audit trail data if the information that exchanges collect
under the Plan is more complete than what they currently collect.
    \683\ As noted, the SROs are generally currently able to access
their own audit trail data on the same day of an event and the
Commission is currently able to access some public data, like SIP
and MIDAS, on the same day as an event. Further, OATS is available
to FINRA at 8am on the day following an event. The Commission
preliminarily does not expect the CAT NMS Plan would affect these
regulators' access to most of these respective data sources.
---------------------------------------------------------------------------

(2) Timeliness of Access to Error-Corrected Data
    Further, the Commission preliminarily believes that the error
correction process required by the CAT NMS Plan is reasonably designed
to provide additional improvements in timeliness for corrected data.
The CAT NMS Plan specifies that the initial data validation and
communication of errors to CAT Reporters must occur by noon on day T+1,
corrections of these errors must be submitted by the CAT Reporters to
the Central Repository by 8:00 a.m. Eastern Time on day T+3, and the
corrected data made available to regulators by 8:00 a.m. Eastern Time
on day T+5.\684\ During this interim time period between initial
processing and corrected data availability, ``all iterations'' of
processed data must be available for regulatory use.\685\ The Central
Repository must be able to receive error corrections at any time, even
if late; \686\ if corrections are received after day T+5, the Plan
Processor must notify the SEC and SROs of this fact and how re-
processing of the data (to be determined in conjunction with the
Operating Committee) would be completed.\687\ Customer information
(i.e., information containing PII) is processed along a slightly
different timeline, but the outcome--corrected data available by 8:00
a.m. Eastern Time on day T+5--is the same.\688\ One exception to this
timeline is if the Plan Processor has not received a significant
portion of the data, as determined according to the Plan Processor's
monitoring, in which case the Plan Processor could determine to halt
processing pending submission of that data.\689\
---------------------------------------------------------------------------

    \684\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.2(a), Appendix D, Section 6.1.
    \685\ Id. at Appendix D, Section 6.2.
    \686\ See id. at Appendix C, Section A.3.(b), Appendix D,
Section 7.4.
    \687\ See id. at Appendix D, Section 6.2.
    \688\ Id.
    \689\ See id. at Appendix D, Section 6.1.
---------------------------------------------------------------------------

    As discussed in the Baseline Section, the error resolution process
for OATS is limited to five business days from the date a rejection
becomes available.\690\ The CAT NMS Plan requires a three-day repair
window for the Central Repository.\691\ Accordingly, if the Plan is
approved, regulators would generally be able to access partially and
fully corrected data earlier than they would for OATS.\692\
---------------------------------------------------------------------------

    \690\ See Section IV.D.2.b(4) and supra note 465.
    \691\ Id. at Appendix C, Section A.2(a).
    \692\ CAT Data being available on day T+5 may be later than for
other current SRO audit trails.
---------------------------------------------------------------------------

(3) Timeliness of direct access
    Improvements to timeliness would also result from the ability of
regulators to directly access CAT Data.\693\ As noted in the Baseline
Section and throughout this Section, most current data sources do not
provide direct access to most regulators, and data requests can take as
long as weeks or even months to process. Other data sources provide
direct access with queries that can sometimes generate results in
minutes--for example, running a search on all MIDAS message traffic in
one day can take up to 30 minutes \694\--but only for a limited subset
of the data to be available in CAT, and generally only for a limited
number of regulators. Accordingly, the Commission preliminarily
believes that the ability of regulators to directly access and analyze
the scope of audit trail data that would be stored in the Central
Repository should reduce the delays that are currently associated with
requesting and receiving data. For many purposes, therefore, CAT Data
could be up to many weeks more timely than current data sources.
Furthermore, direct access to CAT Data should reduce the costs of
making ad hoc data requests, including extensive interactions with data
liaisons and IT staff at broker-dealers, SROs, and vendors, developing
specialized knowledge of varied formats, data structures, and systems,
and reconciling data.
---------------------------------------------------------------------------

    \693\ See CAT NMS Plan, supra note 3, Section 6.5(c).
    \694\ See Section IV.D.2.b(4) and supra note 468.
---------------------------------------------------------------------------

    As discussed above, Rule 613 generally requires that the Central

Repository would receive, consolidate, and retain CAT Data in a linked
uniform electronic format and the regulators would be able to directly
access the data stored in the Central Repository.\695\ Queries take
time to return data because they need to look up information across a
range of data records, process that data, and compile it into an output
dataset. Therefore, the improvements to timeliness depend on how long
the queries take to return data. The CAT NMS Plan specifies that
regulators would be able to query the Central Repository using an
online targeted query tool with response times ``measured in time
increments of less than a minute'' for targeted queries and within 24
hours for large or complex queries that either scan large amounts of
data or return large result sets (i.e., sets of over 1 million
records).\696\ That said, if the data request is limited to one
business date, and that business date is within the last 12-month
period, the query must not take more than 3 hours to run, regardless of
complexity.\697\ Specifically, searches including only equities and
options trade data must be returned within either 1 minute (events for
a specific Customer or CAT Reporter with filterable other fields); 30
minutes (events for a specific Customer or CAT Reporter in a specified
date range of less than 1 month); or 6 hours (events for a single
Customer or CAT Reporter in a specified date range of up to 12 months
within the last 24 months).\698\ Searches including equities and
options trade data, along with NBBO data, must return within 5 minutes
for all orders for a specific security from a specific Participant; and
for all orders, cancellations, and NBBO (or the protected best bid and
offer) for a specific security, and with several similar types of
searches, within a specified window not to exceed 10 minutes for a
single date.\699\
---------------------------------------------------------------------------

    \695\ See Section IV.E.1.c, supra.
    \696\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.2(c); Appendix D, Section 8.1.2.
    \697\ Id. at Appendix D, Section 8.1.2.
    \698\ Id.
    \699\ Id.
---------------------------------------------------------------------------

    Furthermore, the search tool must include a resource management
component, which could manage query requests to balance the workload,
and categorize and prioritize query requests based on the input
parameters, complexity of the query, and the volume of data to be
parsed in the query, with the details on the prioritization plan to be
provided at a later date.\700\ The database must support the estimated
600 concurrent users to ensure that there is not an unacceptable
decline in system performance.\701\ The direct query and bulk extract
features are also designed to ensure timely regulatory access to
critical data. For example, the bulk extract of an entire day's worth
of data should be able to be transferred in less than four hours
(assuming the regulator's network could support the required data
transfer speeds).\702\ The Plan Processor must have an automated
mechanism to monitor user-defined direct queries and bulk data
extracts, including automated alerts of issues with bottlenecks and
excessively long queues for queries or data extractions.\703\ Monthly
reporting on the delivery and timeliness of these tools to the
Operating Committee and regulators is required.\704\
---------------------------------------------------------------------------

    \700\ See id. at Appendix D, Section 8.1.2.
    \701\ See id. at Appendix D, Section 8.1.
    \702\ See id. at Appendix D, Section 8.2.2.
    \703\ Id.
    \704\ Id.
---------------------------------------------------------------------------

(4) Timeliness of use of Data
    The Commission also preliminarily expects the CAT NMS Plan to
reduce the time required to process data before analysis. Currently
regulators can spend days and up to months processing data they receive
into a useful format.\705\ Part of this delay is due to the need to
combine data across sources that could have non-uniform formats and to
link data about the same event both within and across data sources. As
discussed above, these kinds of linking processes can require
sophisticated data techniques and substantial assumptions, and can
result in imperfectly linked data. The Plan addresses this issue by
stating that the Plan Processor must store the data in a linked uniform
format.\706\ Specifically, the Central Repository will use a ``daisy
chain'' approach to link and reconstruct the complete lifecycle of each
Reportable Event, including all related order events from all CAT
Reporters involved in that lifecycle.\707\ Therefore, regulators
accessing the data in a linked uniform format would no longer need to
take additional time to process the data into a uniform format or to
link the data.\708\ Accordingly, the Commission preliminarily believes
that the Plan would reduce or eliminate the delays associated with
merging and linking order events within the same lifecycle. Further,
the Plan would improve the timeliness of FINRA's access to the data it
uses for much of its surveillance by several days because the corrected
and linked CAT Data would be accessible on T+5 compared to FINRA's T+8
access to its corrected and linked data combining OATS with exchange
audit trails.
---------------------------------------------------------------------------

    \705\ See Section IV.D.2.b(4), supra.
    \706\ See CAT NMS Plan, supra note 3, at Section 6.5(b)(i). The
CAT NMS Plan does not link allocations to order events; see also 17
CFR 242.613(e)(1).
    \707\ See CAT NMS Plan, supra note 3, at Appendix D, Section 3.
    \708\ This does not apply if regulators choose to access raw
data before the Central Repository processed them.
---------------------------------------------------------------------------

    The expected improvements to data accuracy discussed above could
also result in an increase in the timeliness of data that is ready for
analysis, although uncertainty exists regarding the extent of this
benefit.\709\ As noted in the Baseline, regulators currently take
significant time to ensure data is accurate beyond the time that it
takes data sources to validate data. In some cases, data users may
engage in a lengthy iterative process involving a back and forth with
the staff of a data provider in order to obtain accurate data necessary
for a regulatory inquiry. Accordingly, to the extent that the Central
Repository's validation process is sufficiently reliable and complete,
the duration of the error resolution process regulators would perform
with CAT Data may be shorter than for current data. Further, to the
extent that the Central Repository's linking and reformatting processes
are sufficiently successful, the SROs and Commission may not need a
lengthy process to ensure the receipt of accurate data. However, as
discussed above, the Commission lacks sufficient information on the
validations, linking, and reformatting processes needed to draw a
strong conclusion as to whether users would take less time to validate
CAT Data than they take on current data.\710\ Nonetheless, the
Commission preliminarily believes that the linking and reformatting
processes at the Central Repository would be more accurate than the
current decentralized processes such that it would reduce the time that
regulators spend linking and reformatting data prior to use.
---------------------------------------------------------------------------

    \709\ See Section IV.E.1.b, supra.
    \710\ As discussed above, Rule 613 requires a validation process
but leaves significant flexibility on the specific validations to be
performed and the timeline for validation. The details regarding
required validations do not appear in the CAT NMS Plan and instead
would appear in the Technical Specifications, which would not be
finalized until after approval of the CAT NMS Plan. See Section
IV.E.1.b, supra.
---------------------------------------------------------------------------

2. Improvements to Regulatory Activities
    The Commission preliminarily believes that improvements in the
quality of available data have the potential to result in improvements
in the analysis and reconstruction of market events; market analysis
and research in support of regulatory

decisions; and market surveillance, examinations, investigations, and
other enforcement functions.
    Regulators' abilities to perform analyses and reconstructions of
market events would likely improve, allowing regulators to more quickly
and thoroughly investigate these events. This would allow regulators to
provide investors and other market participants with more timely and
accurate explanations of market events, and to develop more effective
responses to such events. The availability of the CAT Data would
benefit market analysis and research in support of regulatory
decisions, facilitating an improved understanding of markets and
informing potential policy decisions. Regulatory initiatives that are
based on an accurate understanding of underlying events and are
narrowly tailored to address any market deficiency should improve
market quality and benefit investors.
    In the Commission's preliminary view, CAT Data would substantially
improve both the efficiency and effectiveness of SRO broad market
surveillance programs, which could benefit investors and market
participants by allowing regulators to more quickly and precisely
identify and address a higher proportion of market violations that
occur, as well as prevent violative behavior through deterrence.
    The Commission also preliminarily believes that CAT Data would
enhance the SROs' and the Commission's abilities to effectively target
risk-based examinations of market participants who are at elevated risk
of violating market rules, as well as their abilities to conduct those
examinations efficiently and effectively, which could also contribute
to the identification and resolution of a higher proportion of
violative behavior in the markets. The reduction of violative behaviors
in the markets should benefit investors by providing investors with a
safer environment for allocating their capital and making financial
decisions. A reduction in violative behaviors could also benefit market
participants whose business activities are harmed by the violative
behavior of other market participants. The Commission further believes
that more targeted examinations could also benefit market participants
by resulting in proportionately fewer burdensome examinations of
compliant market participants. A significant percentage of Commission
enforcement actions involve trade and order data,\711\ and the
Commission also preliminarily believes that CAT Data would
significantly improve the efficiency and efficacy of enforcement
investigations, including insider trading and manipulation
investigations.
---------------------------------------------------------------------------

    \711\ 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. See Year-by-Year SEC
Enforcement Statistics, available at https://www.sec.gov/news/newsroom/images/enfstats.pdf. The total number of actions filed is
not necessarily the same as the number of investigations. An
investigation may result in no filings, one filing, or multiple
filings. Additionally, trade and order data may be utilized in
enforcement investigations that do not lead to any filings. Based on
these numbers, the Commission estimates that 30-50% of its
enforcement actions incorporate trading or order data. A portion of
FINRA's 1,397 disciplinary actions in 2014 and 1,512 in 2015 also
involved trading or order data. See http://www.finra.org/newsroom/statistics.
---------------------------------------------------------------------------

    The Commission further anticipates additional benefits associated
with enhanced abilities to handle tips, complaints and referrals, and
improvements in the speed with which they could be addressed,
particularly in connection with the significant number of tips,
complaints, and referrals that relate to manipulation, insider trading,
or other trading and pricing issues.\712\ The benefits to investor
protection of an improved tips, complaints, and referrals system would
largely mirror the benefits to investor protection that would accrue
through improved surveillance and examinations efficiency.
---------------------------------------------------------------------------

    \712\ In fiscal years 2014 and 2015, the Commission received
around 15,000 entries in its TCR system, approximately one third of
which related to manipulation, insider trading, market events, or
other trading and pricing issues.
---------------------------------------------------------------------------

a. Analysis and Reconstruction of Market Events
    The Commission preliminarily believes that, if approved, the Plan
would improve regulators' ability to perform analysis and
reconstruction of market events. As noted in the Adopting Release, the
sooner regulators can complete a market reconstruction, the sooner
regulators can begin reviewing an event to determine what happened, who
was affected and how, if any regulatory responses might be required to
address the event, and what shape such responses should take.\713\
Furthermore, 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.
---------------------------------------------------------------------------

    \713\ See Adopting Release, supra note 9, at 45732.
---------------------------------------------------------------------------

    The fragmented nature of current audit trail data and the lack of
direct access to such data renders market reconstructions cumbersome
and time-consuming. Currently, the information needed to perform these
analyses is spread across multiple audit trails, with some residing in
broker-dealer order systems and trade blotters. Requesting the data
necessary for a reconstruction of a market event often takes weeks or
months and, once received, regulators then need weeks to reconcile
disparate data formats used in different data sources. For example, on
the afternoon of May 6, 2010, the U.S. equity and equity futures
markets experienced a sudden breakdown of orderly trading when indices,
such as the Dow Jones Industrial Average Index and the S&P 500 Index,
fell about 5% in five minutes, only to rebound soon after (the ``Flash
Crash'').\714\
---------------------------------------------------------------------------

    \714\ See CFTC and SEC, 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), available at http://www.sec.gov/news/studies/2010/marketevents-report.pdf.
---------------------------------------------------------------------------

    The lack of readily available trade and order data resulted in
delays and gaps in the Commission's analysis of the events of the Flash
Crash. Ultimately, it took Commission Staff nearly five months to
complete an accurate representation of the order books of the equity
markets for May 6, 2010.\715\ Even then, the reconstruction only
contained an estimated 90% of trade and order activity for that day.
---------------------------------------------------------------------------

    \715\ For a further explanation of the limitations data
deficiencies imposed on the Commission's investigation into the
Flash Crash, see Adopting Release, supra note 9, at 45732-33.
---------------------------------------------------------------------------

    Regulators, such as the Commission and SROs on whose exchanges
events took place, faced similar challenges when reconstructing events
around the May 2012 Facebook IPO, the August 2012 Knight Securities
``glitch,'' and the August 2013 NASDAQ SIP outage.\716\ In addition,
during the financial crisis in 2008, the lack of direct access to audit
trail data resulted in the Commission being unable to quickly and
efficiently conduct analysis and reconstruction of

market events. The state of OATS data in 2008 also limited FINRA's
ability to analyze and reconstruct the market during the financial
crisis because FINRA could not yet augment its OATS data with exchange
data and OATS did not include market maker quotations. As a result,
regulators had little information about the role of short sellers in
market events and the identity of short sellers during the financial
crisis, for example.\717\ Some of these shortcomings in regulatory data
still apply today.\718\
---------------------------------------------------------------------------

    \716\ For background information on these events, see SEC Press
Release, SEC Charges NASDAQ for Failures During Facebook IPO (May
29, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171575032; In the Matter of Knight Capital Americas
LLC, Securities Exchange Release Nos. 70694 (October 16, 2013);
73639 (November 19, 2014), 79 FR 72252, 72255, n.32 (December 5,
2014) (discussing NASDAQ SIP outage); see also Adopting Release,
supra note 9, at 45732-33 (discussing difficulty of analyzing and
reconstructing market events in absence of a consolidated audit
trail).
    \717\ See Short Sale Reporting Study, supra note 413. To resolve
this lack of information, the Commission issued an emergency order
creating a new filing requirement for 13f filers to report their
short positions and short sales to the Commission weekly on Form SH.
See former Rule 10a-3T; available at http://www.sec.gov/rules/other/2008/34-58591.pdf; http://www.sec.gov/rules/other/2008/34-58591a.pdf; http://www.sec.gov/rules/other/2008/34-58724.pdf; http://www.sec.gov/rules/final/2008/34-58785.pdf; http://www.sec.gov/news/press/2008/2008-209.htm; http://www.sec.gov/divisions/marketreg/shortsaledisclosurefaq.htm. This data was kept confidential. After
evaluating whether the benefits from the data justified the costs,
the Commission let this requirement expire, replacing it with
additional public data. See SEC Press Release, SEC Takes Steps to
Curtail Abusive Short Sales and Increase Market Transparency (July
27, 2009), available at http://www.sec.gov/news/press/2009/2009-172.htm. This public data did not identify the short sellers as the
Form SH data did. In addition, using data requested from SROs, the
Commission conducted two studies on short selling during September
2008. These studies required data requests to select exchanges, took
two months to complete and did not have information identifying
short sellers. See ``Analysis of a Short Sale Price Test Using
Intraday Quote and Trade Data'' available at http://www.sec.gov/comments/s7-08-09/s70809-368.pdf and ``Analysis of Short Selling
Activity during the First Weeks of September 2008'' available at
http://www.sec.gov/comments/s7-08-09/s70809-369.pdf.
    \718\ For example, OATS still does not include all principal
orders or option data. See Section IV.D.2.b(1)A, supra. Because
FINRA collects some exchange data, FINRA is able to merge exchange
quotes with OATS.
    And although there is a proposed FINRA rule that will require
FINRA members to report to OATS identification for their non-FINRA
member customers who are broker-dealers, even after approval of this
rule OATS will lack identification for customers who are not broker-
dealers. See Section IV.D.2.b(1)B, supra.
---------------------------------------------------------------------------

    More generally, regulators face significant difficulties in using
some current data sources for a thorough market reconstruction. Some of
the most detailed data sources, including sources like EBS and trade
blotters that identify customers, are impractical for broad-based
reconstructions of market events. In particular, including EBS data for
a reconstruction of trading in the market for even one security on one
day could involve many, perhaps hundreds, of requests, and would
require linking that to SRO audit trail data or public data.\719\
Further, because EBS data lacks time stamps for certain trades,\720\
use of EBS data in market reconstructions requires supplementation with
data from other sources, such as trade blotters.
---------------------------------------------------------------------------

    \719\ See Section IV.D.2.b(3), supra (noting that in 2014, the
SEC made 3,722 EBS requests which generated 194,696 letters to
broker-dealers requesting EBS data). The Commission understands that
FINRA makes about half this number of requests.
    \720\ Large traders who file Form 13H with the Commission are
assigned a ``large trader identification number'' by the Commission
and must provide that number to their brokers for inclusion in the
EBS records that are maintained by the clearing brokers. Rule 13h-1,
subject to relief granted by the Commission, requires that execution
time be captured (to the second) for certain categories of large
traders. See Sections IV.D.2.a.(3) and IV.D.2.b, supra (discussing
the EBS system and large trader reports and the limitations of these
data sources in performing market reconstructions).
---------------------------------------------------------------------------

    The Commission therefore expects that improvements in data
completeness and accuracy from the Plan would enhance regulators'
ability to perform analyses and to reach conclusions faster in the wake
of a market event by reducing the time needed to collect, consolidate
and link the data. The inclusion of Customer-IDs and consistent CAT-
Reporter-IDs in CAT would allow regulators to more effectively and
efficiently identify market participants that submit orders through
several broker-dealers and execute on multiple exchanges and whose
activity may warrant further analysis. This would be useful if
regulators were interested in determining if a particular trader or
category of traders had some role in causing the market event, or how
they might have adjusted their behavior in response to the event, which
could amplify the effects of the root cause or causes. Furthermore, the
clock synchronization requirements of the Plan would improve the
ability of regulators to sequence some events that happened in
different market centers to better identify the causes of market
events. Overall, the Commission preliminarily believes that, if the
Plan is approved, regulators would have dramatically improved ability
to identify the market participants involved in market events.
    The Commission further believes that better data accessibility
would significantly improve the ability of regulators to analyze and
reconstruct market events. As noted above, CAT Data would improve data
accessibility relative to every other data source because all SROs and
the Commission would have direct access to CAT Data. If the Plan is
approved, much of this information would be housed in the Central
Repository with query capabilities that would allow regulators to
access raw data beginning the day after an event.\721\ Further, as
mentioned below in the SRO Surveillance Section, the CAT Data would
link Reportable Events, which could allow regulators to respond to
market events more rapidly because they would not need to process
corrected and linked data before starting their analyses.\722\
---------------------------------------------------------------------------

    \721\ While the Commission recognizes that some data sources are
currently available earlier, those data sources are so fragmented as
to make collecting them for a broad-based market reconstruction
infeasible.
    \722\ Such benefits could be limited for market events that
require linked data within five days of an event or if the linking
algorithm in the Central Repository introduces data errors.
---------------------------------------------------------------------------

b. Market Analysis and Research
    The Commission preliminarily believes that the CAT NMS Plan would
benefit the quality of market analysis and research that is produced to
increase regulatory knowledge and support policy decisions and would
lead to a more thorough understanding of current markets and emerging
issues. These expected benefits would stem from improvements in
accessibility, accuracy, and completeness of regulatory data.
Improvements in regulatory market analysis and research aimed at
informing regulatory decisions would benefit investors and market
participants by improving regulators' understanding of the intricacies
of dynamic modern markets and how different market participants behave
in response to policies and information. These more nuanced and more
thorough insights would help regulators to identify the need for
regulation that specifically tailors policies and interventions to the
diverse landscape of market participants and conditions that
characterize current financial markets, as well as assist them in
conducting retrospective analysis of their rules and pilots.
    A lack of direct access to necessary data, along with inaccuracies
in the data that are available, currently limits the types of analyses
that regulators can conduct. These data limitations constrain the
information available to regulators when they are considering the
potential effects of regulatory decisions. For example, in January 2010
the Commission published a concept release on equity market structure
that discusses how the markets have rapidly evolved from trading by
floor-based specialists to trading by high-speed computers.\723\ The
concept release poses a number of questions about the role and impact
of high-frequency trading

strategies and the movement of trading volume from the public national
securities exchanges to over-the-counter trading venues such as dark
pools. Over the past five years there has been considerable discussion
about these topics by regulators, market participants, the media, and
the general public. Nevertheless, limitations in the completeness and
accessibility of the available data have limited the research that
followed the concept release.
---------------------------------------------------------------------------

    \723\ See Concept Release on Equity Market Structure, supra note
733; see also Adopting Release, supra note 9, at 45733 (discussing
the Concept Release on Equity Market Structure).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the CAT NMS Plan
improves this situation, benefiting market analysis and research in
support of SRO and Commission rulemaking. It would provide direct
access to data that currently requires an often lengthy and labor-
intensive effort to request, compile, and process. Additionally, the
expected improvements in accuracy and completeness could benefit
efforts to analyze the activities of particular categories of market
participants, understand order routing behavior, identify short selling
and short covering trades, issuer repurchases, and related topics. The
requirement to store the data in a uniform format in the Central
Repository is particularly important, as linking and normalizing data
from disparate sources in different formats is a major component of
completing many types of analyses and currently requires a significant
amount of time. The Plan would provide direct access to data that
regulators could use to more directly study issues such as high
frequency trading, maker-taker pricing structures, short selling,
issuer repurchases, and ETF trading.
    The CAT NMS Plan could improve market analysis and research
concerning HFT by providing regulators with direct access to more
uniform and comprehensive data that identifies HFT activity more
precisely compared to existing academic research that regulators
currently utilize. Existing academic research on high frequency trading
cannot precisely identify high frequency traders or their trading
activity and more comprehensive regulatory analysis on high frequency
trading currently relies on fragmented data that is cumbersome to
collect and process.\724\ For both academics and regulators, studying
high frequency traders is currently difficult because these traders
typically trade across many exchanges, and often off-exchange as well.
NASDAQ distributes a trade and quote dataset to researchers for the
purposes of performing academic studies on high frequency trading. This
dataset identifies the trading and quoting activity of a group of high
frequency traders identified by NASDAQ, but only includes activity from
the NASDAQ exchange. Other exchanges and market centers currently do
not provide such data to academics or the public.\725\ As a result,
studies of high frequency trading have been limited in their ability to
examine thoroughly such strategies and their impact on the market.
Because data on high-frequency trading tends to be fragmented across
many data sources, it is difficult even for regulators to thoroughly
analyze their aggregate activity level, study how their activity on one
exchange affects their activity on another, and study the effect of
particular high frequency strategies on market quality.\726\
---------------------------------------------------------------------------

    \724\ See High Frequency Trading, literature review, available
at https://www.sec.gov/marketstructure/research/hft_lit_review_march_2014.pdf.
    \725\ Even if other exchanges did provide such data, the NASDAQ
data fields do not include the identities of the high frequency
traders. As a result researchers would not be able to study the
activity of the same high frequency trader across exchanges.
    \726\ See infra note 724.
---------------------------------------------------------------------------

    The Plan also would provide information on how various broker-
dealers route their customer orders and would allow regulators to study
whether access fees and rebates drive routing decisions as much as
execution quality considerations. This could inform debates about
effects of conflicts of interest created by such maker-taker pricing.
Studies of maker-taker pricing require information on routing decisions
and how routing affects execution quality. Current academic studies of
maker-taker pricing rely on data that provide imprecise information
that cannot directly link routing and execution quality, and current
similar research carried out by some regulators is often hindered by
the significant amount of time it takes to obtain the relevant data
from all market centers. However, the Plan would provide regulators
with direct access to a data source that would link order lifecycle
events together in a way that would allow regulators to more thoroughly
analyze how and where broker-dealers route various order types. This
could assist regulators in analyzing the importance of fees to the
routing decisions and the ultimate impact on investors of any conflicts
of interest in broker-dealer routing decisions. Such analysis could
inform debates regarding whether maker/taker pricing structures are
harmful to market structure.
    Similarly, the Plan would provide regulators with data to better
understand the nature of short selling. Existing studies of the effects
of short selling lack the ability to associate short selling activity
with customer-level data, and also lack the ability to distinguish
buying activity that covers short positions from buying activity that
establishes new long positions. The Plan would allow regulators to
examine, for example, how long particular types of traders hold a short
position and what types of traders short around corporate events.
    The Plan, in requiring information about a Customer, would also
facilitate studies of how certain entities other than natural persons
trade and the market impact of their trading. For example, existing
information on repurchases is aggregated at the monthly and quarterly
level while the CAT Data on issuer repurchases would be much more
granular. CAT Data would provide information that could determine the
size and timing of issuer repurchases, for example. In addition, CAT
Data would provide information that could help identify open market
repurchases whereas existing data does not distinguish the type of
repurchase. As such, the Plan would facilitate research that addresses
the timing of issuer repurchases around corporate events or stock
option grants and exercises, the extent to which issuers use the safe
harbor in Rule 10b-18, and how aggressively issuers trade in the
market. In addition, CAT Data on the trading of leveraged ETFs,
particularly the end of day rebalancing, could shed light on how the
leveraged ETFs relate to market volatility. In addition, Customer
information should facilitate analyses of the secondary market trading
of ETF Authorized Participants in their ETFs.\727\ This could help
regulators better understand the arbitrage process between an ETF and
its underlying securities and the limitations of that arbitrage.
---------------------------------------------------------------------------

    \727\ The CAT NMS Plan does not include requirements to record
or report information on the creation or redemption of ETF shares.
---------------------------------------------------------------------------

    The Commission preliminarily believes that CAT Data would also
better inform SROs and the Commission in rulemakings and assist them in
conducting retrospective analysis of their rules and pilots. In
particular, SROs would be able to use order data that is currently not
available to examine whether rule changes are in the interest of
investors. For example, direct access to consolidated audit trail data
that identifies trader types could help an SRO examine whether a new
rule improved market quality across the entire market and whether it
benefitted retail and institutional investors specifically. Further,
CAT Data would allow SROs to examine whether a rule

change on another exchange was in the interest of investors and whether
to propose a similar rule on their own exchange.
c. Surveillance and Investigations
    The Commission preliminarily believes that the enhanced
surveillance and investigations made possible by the implementation of
the CAT NMS Plan could allow regulators to more efficiently identify
and investigate violative behavior in the markets and could also lead
to market participants that currently engage in violative behavior
reducing or ceasing such behavior, to the extent that such behavior is
not already deterred by current systems. The current markets are
characterized by surveillance systems that identify violators so that
regulators may address these violations. Given that violative behavior
is identifiable in current markets, and potential violators know that
there is a positive probability that they would be caught by
surveillance should they commit a violation, fewer potential violators
commit violations than would do so in markets that had no surveillance.
Potential violators' expected probability of being caught influences
their likelihood of committing a violation.\728\ It then follows that
any system change that increases the likelihood of violative behavior
detection would increase potential violators' expected probability of
being caught and thus reduce the likelihood that potential violators
would commit a violation.
---------------------------------------------------------------------------

    \728\ It is well established in the economics and political
science literature that common knowledge among market actors can
lead to the deterrence of behaviors; see, e.g., Schelling, Thomas,
``The Strategy of Conflict: Prospectus for a Reorientation of Game
Theory,'' Journal of Conflict Resolution, Vol. 2 No. 3 (1958) and
Ellsberg, Daniel, ``The Crude Analysis of Strategic Choices,''
American Economic Review, Vol. 51, No. 2 (1961). Therefore, market
participants with knowledge of improvements in the efficiency of
market surveillance, investigations, and enforcements, and
consequently the increased probability of incurring a costly
penalty, could be deterred from participating in violative behavior.
---------------------------------------------------------------------------

    Specifically, if market participants believe that the existence of
CAT, and the improved regulatory activities that result from
improvements in data and data processes, increase the likelihood of
regulators detecting violative behavior, they could reduce or eliminate
the violative activity in which they engage to avoid incurring the
costs associated with detection, such as fines, legal expenses, and
loss of reputation. Such a reduction in violative behavior would
benefit investor protection and the market as investors would no longer
bear the costs of the violative behavior that would otherwise exist in
the current system. Many of the improvements that would result from CAT
could also allow regulators to identify violative activity, such as
market manipulation, more quickly and reliably, which could improve
market efficiency by deterring market manipulation and identifying and
addressing it more quickly and more often when it occurs.\729\
---------------------------------------------------------------------------

    \729\ For example, as discussed in Section IV.E.2.c(1), the Plan
would allow regulators to more efficiently conduct cross-market and
cross-product surveillance relative to surveillance using current
data sources, and the requirement that data be consolidated in a
single database would assist regulators in detecting violative (but
not obvious) activity. To the extent that market participants are
aware of the current challenges to regulators in performing cross-
market surveillance and aggregating data across venues, and to the
extent that they believe that their violative behavior is more
likely to be detected if regulators' ability to perform those
activities improves, they may reduce or eliminate violative behavior
if the CAT Plan is approved.
---------------------------------------------------------------------------

(1) SRO Surveillance
    The Commission preliminarily believes that the CAT NMS Plan would
result in improvements in SROs' surveillance capabilities and that many
of the benefits to SRO surveillance stem from improvements to data
completeness. These benefits encompass a number of improvements to
surveillance, including: detection of insider trading; surveillance of
principal orders; cross-market and cross-product surveillance, and
other market surveillance activities.
    Rule 613(f) requires SROs to implement surveillances reasonably
designed to make use of the CAT Data.\730\ Further, data improvements
resulting from the Plan would improve regulators' ability to perform
comprehensive and efficient surveillance. As a result, the market
surveillances required by Rule 613(f) could identify a broader and more
nuanced set of market participant behaviors. As such, the CAT would
also provide the opportunity for development of more effective and
efficient surveillance system. It is also possible that the CAT Data
and tools would enable further innovations in market surveillance
beyond those currently contemplated. These innovations could be in
response to new developments in the market over the next few years or
to the new capabilities for regulators.
---------------------------------------------------------------------------

    \730\ 17 CFR 242.613(f).
---------------------------------------------------------------------------

    CAT Data would include additional fields not currently available in
data used for surveillance.\731\ The inclusion of Customer-IDs in the
CAT would significantly improve surveillance capabilities, including
surveillance designed to detect market manipulation and insider
trading. Because currently available data do not include customer
identifiers, SROs performing insider trading and manipulation
surveillance could be unable to identify some suspicious trading \732\
and must undertake multiple steps to request additional information
after identifying suspect trades. The ability to link uniquely
identified customers with suspicious trading behavior would provide
regulators with better opportunity to identify the distribution of
suspicious trading instances by a customer as well as improving
regulators' ability to utilize customer-based risk assessment. This
enhanced ability to link customers with behaviors would enable
detection of market abuses that are perpetrated by customers trading or
quoting through multiple accounts or on multiple trading venues.
---------------------------------------------------------------------------

    \731\ As noted in Section IV.D.1.c, this economic analysis
considers surveillance to be SROs running processing on routinely
collected or in-house data to identify potential violations of rules
or regulations.
    \732\ The Commission understands that SRO surveillances on
topics such as insider trading and market manipulation do not
incorporate data that identifies customers. Based on alerts from
their surveillances, SROs may open a review that runs through
several stages of data requests before identifying a customer. As
discussed above, the Commission notes that SRO audit trails
typically do not provide customer information but a recent FINRA
rule change would require its members to report to OATS non-FINRA
member customers who are broker-dealers. See supra note 407.
---------------------------------------------------------------------------

    Furthermore, having direct access to data could assist an SRO in
its surveillance activities by potentially facilitating quicker
responses to suspicious trading activity. Additionally, the inclusion
of the principal orders of members would enable regulators to better
identify rule violations by broker-dealers that have not previously had
to provide audit trail data on their unexecuted principal orders. The
evolution of the market has increased the importance of surveillance on
principal orders. Many of these principal orders originate from
algorithmic or high frequency trading firms who have been the recent
subject of regulatory interest.\733\ Further, some rules and
regulations provide for differential treatment of the principal orders
of broker-dealer market makers. Yet, some current data sources used for
SRO surveillance exclude unexecuted principal orders,\734\ limiting the

surveillance for issues such as wash sales. As a result, many
surveillance patterns are unable to detect certain rule violations
involving principal orders.
---------------------------------------------------------------------------

    \733\ See Securities Exchange Act Release No. 61358 (January 14,
2010), 75 FR 3594 (January 21, 2010) (``Concept Release on Equity
Market Structure''); Exemption for Certain Exchange Members, supra
note 394.
    \734\ See Section IV.D.2.b(1), supra.
---------------------------------------------------------------------------

    The Plan would also improve regulators' efficiency in conducting
cross-market and cross-product surveillance. The Plan would
particularly enhance regulators' ability to perform cross-market
surveillance, across equity and options markets, by enabling any
regulator to surveil the trading activity of market participants in
both equity and options markets and across multiple trading venues
without data requests. Regulators would also have access to
substantially more information about market participants'
activity,\735\ and the requirement that the data be consolidated in a
single database would assist regulators in detecting activity that may
appear permissible without evaluating data from multiple venues.\736\
Likewise, it would assist regulators in detecting activity that may not
appear violative without evaluating data from multiple venues.
---------------------------------------------------------------------------

    \735\ For example CAT Data would include Customer information,
subaccount allocation information, exchange quotes, trade and order
activity that occurs on exchanges, trade and order activity that
occurs at broker-dealers that are not FINRA members, and trade and
order activity that occurs at FINRA members who are not currently
required to report to OATS. In addition CAT Data would require
reporters to report data in milliseconds and would be directly
available to non-FINRA regulators much faster than OATS is currently
available to them. See Section IV.E.1.a, supra.
    \736\ See Section IV.E.1.c(2), infra. The Commission notes that
while this is a benefit allowed by consolidation of data in the
Central Repository, linked data would not be available in the
Central Repository until T+5, which may delay the completion of
surveillance activities.
---------------------------------------------------------------------------

    Increasing market complexity and fragmentation has increased the
importance of cross-market surveillance. The Commission noted in its
Regulation of NMS Stock Alternative Trading Systems proposing release
that, ``[i]n the seventeen years since the Commission adopted
Regulation ATS, the equity markets have evolved significantly,
resulting in an increased number of trading centers and a reduced
concentration of trading activity in NMS stocks.'' \737\ However,
because market data are fragmented across many data sources and because
audit trail data lacks consistent customer identifiers, regulators
cannot run cross-market surveillance tracking particular
customers.\738\ Furthermore, routine cross-product surveillance is
generally not possible with current data. The potential enhancements in
market surveillance enabled by the CAT NMS Plan are likely to result in
more capable and efficient surveillance which could reduce violative
behavior and protect investors from harm.
---------------------------------------------------------------------------

    \737\ See Securities Exchange Act Release No. 76474 (November
18, 2015), 80 FR 80998 (December 28, 2015), at 81000.
    \738\ As noted in the above, SROs currently do not conduct
routine surveillance that tracks particular customers because data
currently used for surveillance does not include customer
information.
---------------------------------------------------------------------------

(2) Examinations
    The Commission preliminarily believes that availability of the CAT
would also improve examinations and that these improvements would
benefit investor protection, and the market in general, by resulting in
more effective supervision of market participants. The Commission
conducted 493 broker-dealer examinations in 2014 and 484 in 2015, 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. Currently some data that would be useful to
conduct risk-based selection for examinations, such as trade blotters,
are not available in data sources available for pre-exam analysis.\739\
Further, data available during exams often require regulatory Staff to
link multiple data sources to analyze customer trading. For example,
some customer identities are present in EBS data, but time stamps are
not. To evaluate the execution price a customer received, it is
necessary to know the time of the trade to compare the price of the
customer's execution with the prevailing market prices at that time.
This requires linking the EBS data with another data source that
contains trades with time stamps (such as the trade blotter). These
linking processes can be labor-intensive and require the use of
algorithms that may not link with 100% accuracy. Finally, for
investment adviser examinations, examiners sometimes use non-trading
data such as Form PF, Form 13-F, Form ADV, and clearing broker reports
as a proxy for trading data when selecting investment advisers for
examinations. The CAT would improve examinations in the following
specific ways.
---------------------------------------------------------------------------

    \739\ Regulators can obtain detailed equity transaction data by
requesting a trade blotter from a particular firm; however, the data
would only show the activity of that firm.
---------------------------------------------------------------------------

    First, the Commission preliminarily believes that the expected
improvements in the data qualities discussed above would enhance the
ability of regulators to select market participants for focused
examinations on the basis of risk. The direct access to consolidated
data in a single location would dramatically improve regulators'
ability to efficiently conduct analyses in an attempt to select broker-
dealers and investment advisers for more intensive examinations based
on identified risk. Having CAT Data stored in the Central Repository in
a linked format would allow examiners to access much more data directly
through a query and without performing the linking process on an ad-hoc
basis than is currently available before an exam. The ability to use
Customer Account Information in the process for selecting investment
advisers for exams, for example, could allow those selection models to
incorporate trading data directly instead of imperfect proxies for
trading data. This could lead to improved outcomes for risk-based
examinations, such as more regulatory resources invested in examining
market participants who are at an elevated risk of violating federal
securities laws, rules, and regulations, and SRO rules, and a reduction
in the proportion of examinations that might not have been necessary if
a more complete view of the market participant's activity had been
available. Compliant market participants could benefit from a reduction
in the relative frequency of burdensome examinations. Improvements in
the breadth and effectiveness of risk-based examination would help
protect investors by increasing the likelihood of identifying market
participants who are violating laws, rules and regulations.
    Second, the Commission preliminarily believes that with the CAT,
regulators would be able to examine market participants more
effectively. In particular, regulators would be able to conduct certain
types of exams more efficiently because of the inclusion of Customer-
IDs in CAT. In addition, direct access to CAT Data would provide
examination Staff with the ability to conduct more analysis prior to
opening an examination because data would be available without the need
to make a formal data request. In addition, the clock synchronization
provisions of the Plan could aid regulators in sequencing some events
more accurately, thereby facilitating more informed exams.\740\ In sum,
the Plan would allow the data collection portion of examinations to be
completed more quickly with fewer formal data requests. More efficient
examinations would help regulators better protect

investors from the violative behavior of some market participants and
could reduce examination costs for market participants who would have
otherwise faced examinations that are less focused and more lengthy.
---------------------------------------------------------------------------

    \740\ See Sections IV.D.2.b(2), supra and IV.H.2.a(1), infra.
---------------------------------------------------------------------------

(3) Enforcement Investigations
    Many Commission enforcement actions involve trade and order
data.\741\ The Commission preliminarily believes that the improvements
in data qualities that would result from the CAT NMS Plan \742\ would
significantly improve the efficiency and efficacy of enforcement
investigations, including insider trading and manipulation
investigations. The Commission believes that more efficient and
effective enforcement activity is beneficial to both investors and
market participants because it deters violative behavior that degrades
market quality and that imposes costs on investors and market
participants.
---------------------------------------------------------------------------

    \741\ See supra note 711 and accompanying text.
    \742\ See Section IV.E.1, supra.
---------------------------------------------------------------------------

    Dramatic expected benefits come from improvements to the accuracy,
accessibility, timeliness, and completeness of the data. As noted
above,\743\ compiling the data to support an investigation often
requires a tremendous amount of time and resources and requires
multiple requests to multiple data sources and significant data
processing efforts, for both SROs and the Commission. While individual
SROs have direct access to the data from their own markets, their
investigations often require access to the data of other SROs because
firms trade across multiple venues. Some enforcement investigations,
including those on insider trading and manipulation, require narrow
market reconstructions that allow investigators to view actions and
reactions across the market. Currently, the data fragmentation and the
time it takes to receive requested data, makes these market
reconstructions cumbersome and time-consuming. Further, new data fields
related to Customer information and the Allocation Reports should
improve the completeness of the data available to investigators.
---------------------------------------------------------------------------

    \743\ See Sections IV.D.2.b(3) and IV.D.2.b(4), supra.
---------------------------------------------------------------------------

    Under the CAT NMS Plan, the data for an enforcement investigation
initiated at least five days after an event would be processed, linked,
and available for analysis within 24 hours of a query, instead of the
current timeline of weeks or longer. Further, some of the data
processing steps that are now performed on an ad-hoc basis during an
investigation would be systematically performed by the Plan Processor
in advance.\744\ The availability of uncorrected data by noon on T+1
could improve the Commission's chances of preventing asset transfers
from manipulation schemes because regulators could use the uncorrected
data to detect the manipulation and identify the suspected
manipulators.\745\ These improvements could shorten the times required
to collect the data for investigations.
---------------------------------------------------------------------------

    \744\ See Section IV.E.1.d(4), supra.
    \745\ See Section IV.D.2.b(4), supra.
---------------------------------------------------------------------------

    Other expected benefits stem from improvements in the accuracy and
completeness of the data. The inclusion and expected improvement in the
accuracy of customer identifying data could allow regulators to review
the activity of specific market participants more efficiently;
currently, identifying the activity of a single market participant
across the market is cumbersome and prone to error.\746\ This
information would be particularly helpful in identifying insider
trading, manipulation and other potentially violative activity that
depends on the identity of market participants. Customer information
could also be helpful to regulators in more efficiently identifying
investors who qualify for disgorgement proceeds and in estimating such
disgorgement proceeds.
---------------------------------------------------------------------------

    \746\ See Section IV.D.2.b(2)D, supra.
---------------------------------------------------------------------------

    The Commission also believes that increasing the proportion of
market events that could be sequenced under the CAT NMS Plan could
yield some benefits in enforcement investigations, improving
investigations of insider trading, manipulation, and compliance with
Rule 201 of Regulation SHO and Rule 611 of Regulation NMS.\747\ The
expected improvements in completeness could also benefit investigations
by allowing regulators to observe in a consolidated data source
relevant data that are not available in some or all current data
sources, including time stamps, principal orders, non-member activity,
allocations, and the identification of whether a trade increases or
decreases an existing position. This data could be important, for
example, when investigating allegations of market manipulation or
cherry-picking in subaccount allocations. Having disaggregated
information about allocations and issuer repurchases also could
facilitate new ways to investigate allegations of unfair allocations
and new ways to investigate and monitor manipulation through issuer
repurchases.
---------------------------------------------------------------------------

    \747\ Again, benefits associated with the ability to sequence
events may be limited in some cases because many order events would
not be able to be sequenced completely with the standards
established in the CAT NMS Plan. See Section IV.D.2.b(2)B.i, supra.
---------------------------------------------------------------------------

(4) Tips and Complaints
    The Commission preliminarily believes that the CAT NMS Plan would
improve the process for evaluating tips and complaints by allowing
regulators to more effectively triage tips and complaints, which could
focus resources on behavior that is most likely to be violative.\748\
The SROs and Commission evaluate thousands of tips and complaints
regarding trading behavior each year. In fiscal years 2014 and 2015,
the Commission received around 15,000 entries in its TCR system,
approximately one third of which related to manipulation, insider
trading, market events, or other trading and pricing issues. As stated
in the Baseline Section, the analysis of tips and complaints follows
three general stages. The Commission expects that the Plan would
improve the second and third stages, the third in ways described in the
Examinations and Enforcement Investigations Sections.\749\ The second
stage in the evaluations of tips, which help regulators determine the
credibility of a tip or complaint, is limited by a lack of direct
access to the most useful data; specifically, customer information and
cross-market data.\750\ The availability of the CAT Data would
drastically increase the detail of data available to regulators for the
purposes of tip assessment. This access would assist the SROs and
Commission in identifying which tips and complaints are credible, would
help ensure that regulators open investigations or examinations on
credible tips and complaints, and would limit regulatory resources
spent on unreliable tips and complaints. Likewise, regulated market
participants would likely benefit from a reduction in unnecessary
burdens placed upon them by inquiries that are related to tips that the
CAT Data could show are not credible.
---------------------------------------------------------------------------

    \748\ See SEC Office of the Whistleblower, What Happens to Tips,
https://www.sec.gov/about/offices/owb/owb-what-happens-to-tips.shtml.
    \749\ See Sections IV.D.2.a(4), supra.
    \750\ Cross-market data is especially key to market manipulation
complaints, because regulators may need to examine a broad range
data to see if a complaint is valid.
---------------------------------------------------------------------------

3. Other Provisions of the CAT NMS Plan
    The Commission notes that there are a number of provisions of the
CAT NMS Plan that provide for features that are uniquely applicable to
a consolidated audit trail or otherwise lack a direct analog in
existing data systems.

Therefore, rather than analyze the benefits of these provisions as
compared to existing NMS Plans or data systems, the Commission has
analyzed these provisions in comparison to a CAT NMS Plan without these
features. The Commission preliminarily believes that these provisions
of the CAT NMS Plan increase the likelihood that the potential benefits
of the CAT NMS Plan described above would be realized.
a. Future Upgrades
    Several provisions in the Plan seek to ensure that the CAT Data
would continually be updated to keep pace with technological and
regulatory developments. For example, the Plan would require that the
Chief Compliance Officer review the completeness of CAT Data
periodically,\751\ that the Central Repository be scalable to
efficiently adjust for new requirements and changes in
regulations,\752\ and that Participants provide the SEC with a document
outlining how the Participants could incorporate information on select
additional products and related Reportable Events.\753\ The Commission
preliminarily believes that these provisions would allow the CAT to be
updated if and when the applicable technologies and regulations change.
---------------------------------------------------------------------------

    \751\ See CAT NMS Plan supra note 3, at Sections 4.12(b)(ii),
6.2(a)(v)(E). The Chief Compliance Officer would be required to
perform reviews on matters including the completeness of information
submitted to the Plan Processor or Central Repository and report
findings periodically to the Operating Committee.
    \752\ See id. at Appendix D, Section 1.1.
    \753\ See id. at Section 6.11. This document is due within six
months of the Effective Date of the CAT NMS Plan.
---------------------------------------------------------------------------

    Specifically, Rule 613(b)(6)(ii) and (iii) require that the Plan
include a provision requiring a report at least every two years that
details potential improvements in the CAT, such as incorporating new
technology to improve system performance. Such a report would also
include the costs of any such improvements. The CAT NMS Plan delegates
responsibility for the report to the Chief Compliance Officer.
    Section 6.1(d)(iv) of the Plan, with respect to new functionality,
requires the Plan Processor to ``design and implement appropriate
policies and procedures governing the determination to develop new
functionality for the CAT including, among other requirements, a
mechanism by which changes can be suggested by Advisory Committee
members, Participants, or the SEC,'' as well as providing for the
escalation of reviews of proposed technological changes and upgrades to
the Operating Committee, and for addressing the handling of
surveillance.
    With respect to upgrades to maintain existing functionality, the
Plan Processor could evaluate and implement potential system changes
and upgrades to maintain and improve the normal day-to-day operating
function of the CAT System; material system changes and upgrades are to
be performed by the Plan Processor in consultation with the Operating
Committee.\754\ The Plan Processor may on its own discretion initiate
changes or upgrades to ensure compliance with applicable legal
requirements.\755\ Regular reports on the operations and maintenance of
the CAT System are to be provided by the Plan Processor to the
Operating Committee, including reports on system improvements
contemplated in Appendix D, Upgrade Process and Development of New
Functionality.\756\
---------------------------------------------------------------------------

    \754\ See id. at Section 6.1(j).
    \755\ See id. at Section 6.1(k).
    \756\ See id. at Section 6.1(o).
---------------------------------------------------------------------------

    Section 11 of Appendix D sets out the obligations of the Plan
Processor with respect to the requirements discussed above (e.g., to
develop a process to add functionality to CAT, including reviewing
suggestions submitted by the SEC). The Plan Processor must create a
defined process for developing impact assessments, including
implementation timelines for proposed changes, and a mechanism by which
functional changes that the Plan Processor wishes to undertake could be
reviewed and approved by the Operating Committee. The Plan Processor
``shall not unreasonably withhold, condition, or delay implementation
of any changes or modifications reasonably requested by the Operating
Committee.'' \757\ There must be a similar process to govern the
changes to the Central Repository discussed above--i.e., business-as-
usual changes that could be performed by the Plan Processor with only a
summary report to the Operating Committee, versus infrastructure
changes that would require approval by the Operating Committee.\758\
Finally, a process for user testing of new changes must be developed by
the Plan Processor.\759\
---------------------------------------------------------------------------

    \757\ See id. at Appendix D, Section 11.1.
    \758\ See id at Appendix D, Section 11.2.
    \759\ See id. at Appendix D, Section 11.3.
---------------------------------------------------------------------------

    Appendix C notes that the Plan Processor must ensure that the
Central Repository's technical infrastructure is scalable (to increase
capacity to handle increased reporting volumes); adaptable (to support
future technology developments so that new requirements could be
incorporated); and current (to ensure, through maintenance and
upgrades, that technology is kept current, supported, and
operational).\760\
---------------------------------------------------------------------------

    \760\ See id. at Appendix C, Section A.5(a).
---------------------------------------------------------------------------

    These provisions are designed to ensure that the Participants
consider enhancing and expanding CAT Data shortly after initial
implementation of the CAT NMS Plan and that the Participants consider
improvements regularly continuing forward. The Commission preliminarily
expects that, in addition to these provisions, the CCO review would
further facilitate proactive expansion of CAT to account for a
regulatory change or change in how the market operates, or should there
be a need for regulators to have access to new order events or new
information about particular order events. To the extent that the
Participants determine that an expansion is necessary and it is
approved by the Commission, the Plan's scalability provision promotes
the efficiency of the implementation of that expansion such that it
could be completed at lower cost and/or in a timely manner.
    Taken together, these provisions could also provide a means for the
Commission to ensure that improvements to CAT functionality are
considered so as to preserve its existing benefits, or that expansion
of CAT functionality is undertaken in order to create new benefits.
These methods are not certain, but the Commission does retain the
ability to modify the Plan, if such a step becomes necessary to ensure
that future upgrades are undertaken as necessary.\761\ Moreover, the
focus on scalability, adaptability, and timely maintenance and upgrades
promotes a system that could be readily adapted over time, versus one
that is difficult or costly to expand or modify. The Commission
preliminarily believes that the provisions outlined above would allow
the CAT Data to be continually updated to keep pace with technological
and regulatory developments.
---------------------------------------------------------------------------

    \761\ See 17 CFR 242.608.
---------------------------------------------------------------------------

b. Promotion of Accuracy
    The Commission notes that the Plan contains specific provisions
designed to generally promote the accuracy of information contained in
the Central Repository. The CCO is required, among other
responsibilities, to perform reviews related to the accuracy of
information submitted to the Central Repository and report to the
Operating Committee with regard thereto,\762\ and there is a special
Compliance Subcommittee of the Operating

Committee, which is established to aid the CCO with regard to, among
other things, issues involving the accuracy of information.\763\ The
Plan also contains certain other provisions intended to monitor and
address Error Rates.\764\
---------------------------------------------------------------------------

    \762\ See CAT NMS Plan, supra note 3, at Section 6.2(a)(v)(E).
    \763\ See id. at Section 4.12(b).
    \764\ See id. at Appendix C, Section A.3(b).
---------------------------------------------------------------------------

    The Operating Committee is responsible for adopting policies and
procedures regarding the accuracy of CAT Data, which the Plan Processor
shall be responsible to implement.\765\ The Plan Processor in turn must
provide regular reports regarding accuracy issues to the Operating
Committee, specifically Error Rates relating to the Central Repository,
including (to the extent the Operating Committee deems necessary or
advisable) Error Rates by day, changes in the Error Rates over time,
and Compliance Thresholds by CAT Reporter, by Reportable Event, by age
before resolution, by symbol, by symbol type, and by event time. The
Plan documents an initial Error Rate tolerance of 5%, but requires
that, at least annually, the Plan Processor review the Error Rates and
make recommendations to the Operating Committee for proposed changes to
the maximum Error Rate; and requires that the Operating Committee set
and periodically review the maximum Error Rate.\766\
---------------------------------------------------------------------------

    \765\ See id. at Section 6.5(d).
    \766\ See id. at Section 6.5(d)(i).
---------------------------------------------------------------------------

    Under the Plan, the Plan Processor would also provide details to
each CAT Reporter on the number of rejected records and the reasons for
their rejection on a daily basis. And on a monthly basis, the Plan
Processor would publish report cards that would allow CAT Reporters to
compare their Error Rates with those of industry peers; this is similar
to the process used by FINRA for OATS reporting. The Plan Processor
would notify each CAT Reporter that exceeds the maximum Error Rate, and
provide the specific reporting requirements that they did not fully
meet. Participants and the SEC could request reports on Error Rates
from the Plan Processor. The Plan Processor would also provide
statistics on each CAT Reporter's Compliance Thresholds--the CAT
Reporter's specific Error Rate, which could serve as the basis for a
review or investigation into the CAT Reporter's performance by the
Participants or the SEC for failure to comply with CAT reporting
obligations--to the Participants or the SEC.
    In addition to providing CAT Reporters data on their Error Rates,
the Plan states that the Participants believe that in order to meet
Error Rate targets, industry would require certain resources, including
a stand-alone testing environment, and time to test their reporting
systems and infrastructure. The Technical Specifications must also be
well-written and effectively communicated to CAT Reporters with
sufficient time to allow proper systems updates.\767\ Finally, the Plan
notes that reporters may be subject to penalties or fines for excessive
Error Rates, to be defined by the Operating Committee.\768\
---------------------------------------------------------------------------

    \767\ See id. at Appendix C, Section A.3(b).
    \768\ See id. at Appendix C, Section A.3(b), n.101.
---------------------------------------------------------------------------

    The Commission preliminarily believes that these provisions to
document Error Rates and promote data accuracy are reasonably designed
to improve the overall accuracy of CAT Data relative to the exclusion
of such provisions; however, the Commission also preliminarily believes
that certain procedures outlined in the Plan may not incentivize all
firms to further improve the quality of the data they report. The
Commission recognizes that providing feedback to individual CAT
Reporters on their individual Error Rates and information that compares
Error Rates to industry peers could motivate firms with high Error
Rates to reduce those rates, to avoid accruing penalties and fines
associated with being a high Error Rate CAT Reporter.\769\ However, it
is not clear what incentive, if any, would be provided to firms with
median Error Rates to improve their regulatory data reporting
processes; this could collectively limit industry's incentives to
reduce Error Rates. Furthermore, the Commission notes that, under the
Plan, proposals to adjust the maximum allowable Error Rate are to
originate from the Plan Processor. The Commission preliminarily
believes that the Participants (as data users) have incentives to
pursue lower Error Rates as data errors could complicate their efforts
to perform their regulatory responsibilities. However, the Commission
preliminarily believes that the Plan Processor would also have to
allocate resources to error resolution, so could be incentivized to
pursue Error Rate reduction.
---------------------------------------------------------------------------

    \769\ The Commission understands that OATS has an analogous
feedback system, but not all current data sources have such a
system.
---------------------------------------------------------------------------

    The Commission notes that the Plan includes provisions requiring
the establishment of a symbology database that will also foster
accuracy. The Plan requires the Central Repository to create and
maintain a symbol history and mapping table, as well as provide a tool
to regulators and CAT Reporters showing the security's complete symbol
history, along with a start of day and end of day list of reportable
securities for use by CAT Reporters, in .csv format, by 6:00 a.m. on
each trading day.\770\ This resource will assist regulators in
accurately identifying all trading activity of securities across
venues, many of which do not natively follow listing exchange
symbology.
---------------------------------------------------------------------------

    \770\ See CAT NMS Plan, supra note 3, at Appendix D, Section 2.
---------------------------------------------------------------------------

    Regarding the Plan's business clock synchronization requirements,
the Plan also discusses the expectation that Participants and their
Industry Members will each be required to maintain a five-year running
log, or comparable procedure, documenting the time of each clock
synchronization performed and the result of such synchronization. These
practices would reveal the parameters of any discrepancies, between
Business Clocks and NIST, that exceed 50 milliseconds.\771\ As
mentioned above, there is currently uncertainty regarding clock
offsets, clock drift, and synchronization practices of Participants and
Industry Members and the required practice of systematically
maintaining five-year logs regarding these details should improve
regulatory and industry understanding of these dynamics, which should
provide a clearer foundation for evaluating the standards set in the
Plan upon which future improvements could be considered.
---------------------------------------------------------------------------

    \771\ Id. at Appendix C, Section A.3(c).
---------------------------------------------------------------------------

c. Promotion of Timeliness
    In addition to the specific timeliness benefits discussed in the
foregoing Sections, the Plan contains some provisions that promote
performance of the Central Repository, and that therefore could
indirectly improve the timeliness of regulator access to or use of the
CAT Data. These are found in capacity requirements for the Plan
Processor, disaster recovery requirements to ensure the availability of
the system, and in supervision and reporting of timeliness issues.
    Specifically, first, the Plan Processor must measure and monitor
Latency within the Central Repository's systems, must establish
acceptable levels of Latency with the approval of the Operating
Committee, and must establish policies and procedures to ensure that
data feed delays are communicated to CAT Reporters, the Commission, and
Participants' regulatory Staff.\772\ The Plan further provides that
``[a]ny delays will be

posted for public consumption, so that CAT Reporters may choose to
adjust the submission of their data appropriately. . . .'' \773\ The
Plan Processor must also provide relevant parties, as well as to the
public, with approximate timelines provided for system
restoration.\774\ Moreover, the Central Repository is required to be
designed to meet certain capacity standards, including handling above-
peak submission volumes, storing data for a sliding 6 year window (more
than 29 petabytes of raw, uncompressed data), and the ability to add
capacity quickly and seamlessly if needed.\775\
---------------------------------------------------------------------------

    \772\ See CAT NMS Plan, supra note 3, at Appendix D, Section
8.3.
    \773\ Id.
    \774\ Id.
    \775\ See id. at Appendix D, Section 1.3.
---------------------------------------------------------------------------

    Second, the Plan Processor must develop disaster recovery and
business continuity plans to support the continuation of CAT business
operations.\776\ Business continuity planning must include a secondary
site for critical staff, capable of recovery and restoration of
services within 48 hours, with the goal of next day recovery.\777\ The
secondary site must have the same level of availability, capacity,
throughput and security (physical and logical) as the primary site--
i.e., it must be fully redundant.\778\ Thus, in the event of a
widespread disruption, delays to CAT processing and regulator access to
CAT of greater than a day or two could likely be prevented.
---------------------------------------------------------------------------

    \776\ See id. at Appendix D, Sections 5.3-5.4.
    \777\ Id.
    \778\ Id.
---------------------------------------------------------------------------

    Third, the Chief Compliance Officer of the Plan Processor must
conduct regular monitoring of the CAT System for compliance, including
with respect to the reporting and linkage requirements in Appendix
D.\779\ Moreover, the Plan Processor must provide the Operating
Committee with regular reports on the CAT System's operations and
maintenance, including its capacity and performance, as set out in
Appendix D.\780\
---------------------------------------------------------------------------

    \779\ See id. at Section 6.2(a)(v)(J).
    \780\ See id. at Section 6.1(o)(i).
---------------------------------------------------------------------------

    Finally, one caveat on the foregoing discussion is that system
performance would in part be dependent on a series of SLAs to be
negotiated between the Plan Participants and the eventual Plan
Processor, including with respect to linkage and order event processing
performance, query performance and response times, and system
availability.\781\ As these have not yet actually been negotiated, some
of the key timeliness benefits anticipated to accrue from
implementation of the Plan could be subject to the successful
negotiation on an acceptable basis of the terms of the SLAs.
---------------------------------------------------------------------------

    \781\ See id. at Appendix D, Section 8.5.
---------------------------------------------------------------------------

d. Operation and Administration of the CAT NMS Plan
    There are certain elements of the CAT NMS Plan's governance that,
like the other factors discussed in this subsection, are uniquely
applicable to a consolidated audit trail, and that the Commission
therefore analyzed in comparison to a CAT NMS Plan without these
features (or that implements those features in a different way). The
Commission preliminarily believes that these provisions of the CAT NMS
Plan increase the likelihood that the potential benefits of the CAT NMS
Plan described above would be realized.
(1) Introduction
    In adopting Rule 613, the Commission established certain
requirements for the governance of the CAT NMS Plan, stating that those
``requirements are important to the efficient operation and practical
evolution of the [CAT], and are responsive to many commenters' concerns
about governance structure, cost allocations, and the inclusion of SRO
members as part of the planning process.'' \782\ The Commission did
not, in Rule 613, establish detailed parameters for the governance of
the CAT NMS Plan, but rather allowed the SROs to develop specific
governance provisions, subject to a small number of requirements.
Recognizing that Rule 613 left Plan Participants with wide latitude to
determine how to structure the Plan's governance, the Commission in the
Adopting Release also stated that ``[a]fter the SROs submit the NMS
plan, the Commission and the public will have more detailed information
in evaluating the NMS plan.'' \783\
---------------------------------------------------------------------------

    \782\ See Adopting Release, supra note 9, at 45787.
    \783\ Id. at 45787-45788.
---------------------------------------------------------------------------

    The Plan's governance is described in greater detail in Section
III.A.3. above, but generally consists of a Delaware LLC, which is to
``create, implement, and maintain the CAT and the Central Repository,''
and which is to be managed by the Operating Committee, consisting of
one voting representative of each SRO Participant. The Operating
Committee acts by majority or Supermajority Vote, depending on the
issue. An Advisory Committee that includes a mix of broker-dealers, as
required by Rule 613, is to ``advise the [Operating Committee] on the
implementation, operation and administration of the central
repository.'' \784\ These features are analyzed in greater detail
below.
---------------------------------------------------------------------------

    \784\ See Rule 613(b)(7). Whereas Section 4.13(b) requires that
the Operating Committee select representatives of different types of
broker-dealers, it specifies that Advisory Committee representatives
would ``serve on the Advisory Committee on behalf of himself or
herself individually and not on behalf of the entity for which the
individual is then currently employed.'' See CAT NMS Plan, supra
note 3, at Section 4.13(b).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the governance
provisions identified in the Adopting Release continue to be important
to the efficient operation and practical evolution of the Plan,
particularly given that there are a range of possible outcomes with
respect to both the costs and benefits of the Plan that depend on
future decisions. The way in which the identified governance provisions
have been incorporated into the Plan, as discussed in greater detail
below, could help facilitate better decision-making by the relevant
parties. This, in turn, means that the Commission could have greater
confidence that the benefits resulting from implementation of the Plan
would be achieved in an efficient manner and that costs resulting from
inefficiencies would be avoided.
    The Commission notes that it can monitor whether the benefits of
CAT are being achieved. For example, certain Operating Committee
actions are subject to Commission approval.\785\ The Commission also
retains the ability to modify the Plan as it may deem necessary or
appropriate.\786\ To enable the Commission to exercise its oversight
authority in an informed manner and to make its views known,
representatives of the Commission are permitted to attend meetings of
the Operating Committee, although the Commission representatives may be
excluded from Operating Committee Executive Sessions.\787\ Moreover,
the Commission is entitled to receive information regarding the
performance of the Central Repository, including a Regular Written
Assessment of the operation of the Central Repository at least every
two years, or more frequently in connection with any review of the Plan
Processor's performance. The assessment would cover the performance
metrics specified in Rule 613(b)(6)(i).\788\ The Commission

is also entitled to receive any reports prepared in connection with the
Operating Committee's annual performance review of the Plan
Processor.\789\
---------------------------------------------------------------------------

    \785\ See CAT NMS Plan, supra note 3, at Section 4.3 (stating
that actions authorized by Majority and Supermajority Vote of the
Operating Committee are subject to approval by the Commission
whenever such approval is required under the Exchange Act and the
rules thereunder).
    \786\ See 17 CFR 242.608(b)(2).
    \787\ See CAT NMS Plan, supra note 3, at Section 4.4(a).
    \788\ See 17 CFR 242.613(b)(6)(i). Rule 613(b)(6) requires the
Participants to provide the Commission with a written assessment of
operation of the CAT at least every two years, along with a detailed
plan, based on the assessment, that indicates any potential
improvements to the performance of the CAT and includes an estimate
of the costs and potential impacts of such improvements on
competition, efficiency and capital formation, as well as an
estimated implementation timeline for such potential improvements.
    \789\ See CAT NMS Plan, supra note 3, at Section 6.1(n). The
review may be more frequent than annually if at the request of two
non-affiliated Participants. The Commission also has other means of
accessing information (e.g., through books & records requirements).
---------------------------------------------------------------------------

(2) Key Factors Relating to Governance
    Two factors identified by the Commission in the Adopting Release as
``important to the efficient operation and practical evolution of the
[CAT]'' are voting within the Operating Committee and the role and
composition of the Advisory Committee. Voting thresholds that result in
Operating Committee decision-making that balances the ability of
minority members to have alternative views considered with the need to
move forward when appropriate to implement needed policies can promote
achievement of the Plan's benefits in an efficient manner. Similarly,
an Advisory Committee that is balanced in terms of membership size and
composition, as well as in its ability to present views to the
Operating Committee, can result in better performance of its
informational role, and thus more efficient achievement of the benefits
of the Plan.
A. Voting
    In adopting Rule 613, the Commission found that one Commenter's
concerns about unanimous voting in the context of the CAT NMS Plan
``have merit.'' Specifically, the Commission stated that ``an alternate
approach'' to voting involving ``the possibility of a governance
requirement other than unanimity, or even super-majority approval, for
all but the most important decisions'' should be considered, as it
``may be appropriate to avoid a situation where a significant majority
of plan sponsors--or even all but one plan sponsor--supports an
initiative but, due to a unanimous voting requirement, action cannot be
undertaken.'' \790\ The Commission ``urge[d] the SROs to take into
account the need for efficient and fair operation of the NMS Plan
governing the consolidated audit trail'' in setting voting
thresholds.\791\
---------------------------------------------------------------------------

    \790\ See Adopting Release, supra note 9, at 45787.
    \791\ Id.
---------------------------------------------------------------------------

    The Plan sets forth two voting thresholds for most matters to be
decided by the Operating Committee.\792\ Majority approval of the
Operating Committee is sufficient to approve routine matters, arising
in the ordinary course of business, while non-routine matters, outside
the ordinary course of business, would require a supermajority (two-
thirds) vote of the Operating Committee to be approved.\793\
---------------------------------------------------------------------------

    \792\ As noted in Section IV.G.4, infra, the Plan requires
unanimous voting in only three circumstances: A decision to obligate
Participants to make a loan or capital contribution, a decision to
dissolve the Company, and a decision to take an action by written
consent instead of a meeting.
    \793\ See CAT NMS Plan, supra note 3, at Section 4.3; Appendix
C, Section B.8(d). (specifying actions of the Operating Committee
that require a Supermajority Vote); see also id. at Appendix C,
Section D.11(b).
---------------------------------------------------------------------------

    The Plan generally eschews a unanimous voting threshold, except for
the three clearly-defined circumstances noted above. Unanimity as a
voting threshold may confer greater influence on holders of minority
views, but it may also give a small faction the ability to extract
private benefits inconsistent with Plan objectives by acting as
holdouts.\794\ In a hold-out dynamic, one member may be able to block
action that all the other members agree should move forward. While this
dynamic may occasionally be used productively, to produce better
decision-making through fostering discussion and compromise, it also
may give one member the power to stand in the way of needed change.
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    \794\ There are other governance-related trade-offs for majority
voting versus supermajority voting; these are discussed in greater
detail in the Plan. See CAT NMS Plan, supra note 3, at Appendix C,
Sections B.8(d) and D.11(b).
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    The ability of a single member to prevent action with regard to the
Plan could be particularly troublesome if that member were motivated by
a conflict of interest.\795\ The Plan requires recusal of the member
representing such a Participant from voting in the Operating Committee
on matters that raise a conflict of interest, defined as any matter
subject to a vote that interferes, or is reasonably likely to
interfere, with the member's objective consideration of the matter, or
that is, or would reasonably likely be, inconsistent with the
regulatory purpose and objectives of CAT.\796\ Recusal of a member
could also be compelled by a supermajority of the Operating
Committee.\797\ If conflicts of interest were the cause of all
unproductive holding-out (i.e., holding out that does not contribute to
better decision-making), then a robust conflict of interest provision
could mitigate some of the negative features of unanimous voting.
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    \795\ That there are potential conflicts of interest between
Participants acting in their self-regulatory capacities and
Participants acting in the other capacities in which they serve is
well-documented; see, e.g., Peter M. DeMarzo, Michael J. Fishman,
and Kathleen M. Hagerty, ``Self-Regulation and Government
Oversight,'' 72 Review of Economic Studies 687 (2005); see also
David Reiffen and Michel Robe, ``Demutualization and Customer
Protection at Self-Regulatory Financial Exchanges,'' Journal of
Futures Markets (2011) and Securities Exchange Act Release No. 50700
(November 18, 2004), 69 FR 71256 (December 8, 2004) (Concept Release
Concerning Self-Regulation); John W. Carson, Conflicts of Interest
in Self-Regulation: Can Demutualized Exchanges Successfully Manage
Them? (World Bank Policy Research Working Paper 3183, December
2003). These conflicts could be further complicated if the
individual employee of the Participant SRO who represents the
Participant SRO on the Operating Committee sought to advance a
private gain for the individual employee that is inconsistent with
the Plan's regulatory objective or the objective of the Participant
SRO. Indeed, the idea that an agency conflict between a natural
person and the entity that the person represents has been discussed
extensively in the academic literature on the governance of
corporations; see, e.g., Jonathan Berk and Peter DeMarzo, 2011,
Corporate Finance, Second Edition, Prentice Hall (Section 2.1:
Corporate Governance and Agency Costs).
    \796\ See CAT NMS Plan, supra note 3, at Section 4.3(d) (recusal
requirement) and Section 1.1 (definition of Conflict of Interest).
Section 4.3(d) also automatically recuses a member from voting with
respect to matters relating to the selection or removal of the Plan
Processor if they or their affiliates are, or are bidding to be, the
Plan Processor. Id.
    \797\ See CAT NMS Plan, supra note 3, at Section 4.3(d).
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    Majority voting as a voting threshold strikes a different balance
between the rights of members than does unanimous voting. Majority
voting avoids the hold-out problem of unanimity, but can result in
decisions that bear less concern for the interests of the minority
members. Whether it does so or not may depend at least in part on
voting dynamics on the Operating Committee. Under the Plan, each member
has only one vote within the Operating Committee, and so an individual
member--and represented Participant--could not unilaterally advance a
position that benefits only the Participant under the Plan. That said,
however, some individual members could exercise more influence than
others over the outcome of the voting process. Participant SROs that
are affiliated with one another could vote as a bloc by designating a
single individual to represent them on the Committee.\798\ Individuals
who represent more than one SRO would then in principle

exercise more influence than other individuals on the Operating
Committee.\799\ The Chair of the Operating Committee also could
exercise more influence than other members on the Committee, even
though the Chair only has one vote, through influence over Committee
processes.\800\ Ultimately, however, no individual would have
unilateral control over vote outcomes, even at a majority voting
threshold. Whether the threshold results in adequate attention to the
rights of minority members could therefore depend on the ease with
which a majority coalition can be formed, whether those coalitions are
fluid or static, and whether in practice decision-making is collegial
or contentious. While majority voting could pose a risk of disregard
for minority positions, that risk here is mitigated in that majority
voting only applies to the less important matters that could arise in
the operations of the Plan.
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    \798\ See CAT NMS Plan supra note 3, at Section 4.2(a) (``One
individual may serve as the voting member of the Operating Committee
for multiple Affiliated Participants, and such individual shall have
the right to vote on behalf of each such Affiliated Participant.'')
Even if separate representatives were appointed for each voting
member, such individuals could agree to vote in a bloc; see also
Section IV.G.1, infra, (discussing how many affiliated groups would
need to vote together to reach a majority or supermajority).
    \799\ By enabling a single individual (i.e., natural person) to
vote on behalf of groups of Affiliated Participant SROs, the Plan
reduces the share and number of individuals needed to approve a
committee action below the share and number of votes required for
approval. For example, as few as two individuals (who would possess
more than one-third of member votes) may be sufficient to block an
action that requires a two-thirds (a supermajority) vote for
approval of an action of the Operating Committee under the Plan.
This casting of multiple votes by a single group is limited for some
decisions under the Plan, however. See CAT NMS Plan, supra note 3,
at Section 4.4(a) (Meetings of the Operating Committee: special and
emergency meetings); see also Section IV.G.1, infra (discussing, in
n.1077, the various affiliated exchanges among the 20 members of the
Operating Committee, which could appoint a single individual to
represent them).
    \800\ Specifically, see CAT NMS Plan, supra note 3, Section
4.2(b) which establishes that there shall be elected a Chair from
among the members of the Operating Committee, and states that the
Chair's powers are those that the Operating Committee may from time
to time prescribe. For example, the Chair may be granted the power
to set the agenda of Operating Committee meetings, and thereby
advance agenda items favorable to the Chair. Id. Section 4.2(b) also
specifies that the Chair is not entitled to a tie-breaking vote and
that the Chair may be removed by Supermajority Vote of the Operating
Committee.
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    The Plan's supermajority voting requirement for more important
matters represents an intermediate ground between majority and
unanimous voting, requiring more than a bare majority of members to
agree to support a position, which therefore enhances the ability of
members of the minority to seek to have their views reflected in the
ultimate decision, while limiting the ability of minority members to
act as holdouts. That said, the supermajority voting requirement may
also have some disadvantages: To the extent that rules and practices
already in place require correction, a supermajority voting requirement
may make it more difficult to assemble the votes necessary to make
needed changes. For example, supermajority voting could have the
indirect effect of locking in the preferred business practices of the
inaugural members of the Operating Committee. For decisions later in
the Plan implementation, this lock-in effect of supermajority voting
could make it more difficult for the Operating Committee to take non-
routine actions, such as replacing the Plan Processor after the initial
selection decision.\801\
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    \801\ See id. at Section 4.3(i). Supermajority voting as a
governance mechanism in the CAT NMS plan is distinct from an
analysis of supermajority voting rules in other settings.
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B. Advisory Committee
    Rule 613(b)(7) requires that the Plan designate an Advisory
Committee.\802\ Specifically, Rule 613(b)(7) calls for the formation of
an Advisory Committee to advise the plan sponsors on the
implementation, operation, and administration of the Central
Repository, as detailed above in Section III.A.3 of this Notice.\803\
Under Rule 613(b)(7)(i), the Advisory Committee must include
representatives of member firms of the plan sponsors (broker-dealers),
acting in their own capacities as individuals on the Committee. Under
Rule 613(b)(7)(ii), plan sponsors must give members of the Committee
access to information and permit them to express their views and attend
meetings of the Operating Committee. Also under Rule 613(b)(7)(ii), the
Operating Committee has the right to exclude members of the Advisory
Committee from its deliberations by meeting in Executive Session by a
Majority Vote of its members.
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    \802\ 17 CFR 242.613(b)(7).
    \803\ See Section III.A.3 (Requirements Pursuant to Rule
608(a)), supra; see also Section IV.G.4.a, infra, for a discussion
of the effects of the Advisory Committee on the efficiency of the
Plan.
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    The Adopting Release states that the ``provision requiring the
creation of an Advisory Committee, composed at least in part by
representatives of the plan sponsors,'' was ``[i]n response to the
comment requesting that the broker-dealer industry receive a `seat at
the table' regarding governance of the NMS plan.'' \804\ In addition,
the Commission ``encourage[d] the plan sponsors to, in the NMS plan,
provide for an Advisory Committee whose composition includes SRO
members from a cross-section of the industry, including representatives
of small-, medium-and large-sized broker-dealers.'' Rule 613 does not
give broker-dealers a vote on the Operating Committee itself. In the
Adopting Release, the Commission stated that the structure of Rule 613
as adopted ``appropriately balances the need to provide a mechanism for
industry input into the operation of the central repository, against
the regulatory imperative that the operations and decisions regarding
the [CAT] be made by SROs who have a statutory obligation to regulate
the securities markets, rather than by members of the SROs, who have no
corresponding statutory obligation to oversee the securities markets.''
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    \804\ See Adopting Release, supra note 9, at 45786.
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    In implementing these provisions of Rule 613, the Plan requires the
Advisory Committee to have diverse membership.\805\ Section 4.13 of the
Plan requires an Advisory Committee with a minimum of six broker-
dealers of diverse types and six representatives of entities that are
not broker-dealers.\806\ That is, five of twelve seats on the initial
Advisory Committee would be filled by representatives, respectively, of
the client of a registered broker or dealer, two types of institutional
investors, and two others with academic and regulatory expertise. Terms
of Advisory Committee members would not exceed three years, and
memberships would be staggered so that a third of the Committee would
be replaced each year.\807\
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    \805\ See CAT NMS Plan, supra note 3, Section 4.13(b).
    \806\ See id. at Section 4.13(b)(i) through (xii).
    \807\ See id. at Section 4.13(c).
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    The Commission believes that the Plan's provisions regarding the
Advisory Committee advance the goals of the Advisory Committee
articulated in the Adopting Release: To allow the Operating Committee
to receive the benefit of members' expertise with respect to ``expected
or unexpected operational or technical issues'' and ``help assure the
Commission and market participants that any requirements imposed on SRO
members will be accomplished in a manner that takes into account the
burdens on SRO members.''
    Given the primary purpose of the Advisory Committee as a forum to
communicate important information to the Operating Committee, which the
Operating Committee could then use to ensure its decisions are fully-
informed, the Plan's choices in implementing Rule 613 do reflect some
trade-offs. One factor in the ability of the Advisory Committee to
collect relevant information for the Operating Committee is the quality