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

    With regards to the commenter who noted the challenges in linking
allocation and sub-account information with executions using the Plan's
approach, the Commission agrees that this approach may result in
certain drawbacks, such as having access to less accurate allocation
linkages compared to the approach under Rule 613, which required a link
between allocations and executions.\2140\ However, the Commission
continues to believe, as set out in the Notice, that the Plan's
Allocation approach will provide regulators with the necessary
information to detect abuses in the allocation process without placing
undue burdens on broker-dealers.
---------------------------------------------------------------------------

    \2140\ In the Notice, the Commission discussed an alternative
that would require the Rule 613 approach to allocation reporting
linking. The Commission stated that linking allocations to order
lifecycles would improve accuracy for many situations, particularly
in one-to-one, one-to-many, and many-to-one allocations. Further,
the Commission explained that broker-dealers likely already maintain
records that allow them to ensure that the allocations receive fair
prices based on market executions, and requested comment on whether
those systems could provide a key to accurately link allocations to
lifecycles in many-to-many allocations. See Notice, supra note 5, at
30757-58. One commenter, however, stated that the ``many-to-many
relationships [between executions and allocations] do not allow
unique linkages for all situations.'' See FIF Letter at 90. This
commenter did not refute the accuracy improvements that could come
from linking allocations to order lifecycles. Another commenter
opined that broker-dealers should and can track order allocation
information, including in the many-to-many situation. See Data
Boiler at 40. Therefore, the Commission continues to believe that
such linking would be beneficial relative to the Plan. However, the
Commission also believes that allocation linking would be costly to
implement, a belief supported by the commenter who provided
additional information on the source of such costs. See FIF Letter
at 90.
---------------------------------------------------------------------------

(5) Customer and Reporter IDs
    In the Notice, the Commission discussed its preliminary belief that
the inclusion of the unique Customer and CAT Reporter Identifiers
described in the CAT NMS Plan would increase the accuracy of customer
and broker-dealer information in data regulators use and provide
benefits to a broad range of regulatory activities that involve audit
trail data.\2141\ The Commission explained that it is currently
difficult for regulators to identify the trading of a single customer
across multiple market participants because many existing data sources
use inconsistent definitions and mappings across market centers.\2142\
In addition, the Commission discussed how the Customer Information
Approach specified in the CAT NMS Plan requires the Plan Processor to
create a unique Customer-ID that would be consistent across that
Customer's activity regardless of the originating broker-dealer.\2143\
The Commission discussed its preliminary belief that the Customer-ID
approach constitutes a significant improvement relative to the Baseline
because it would consistently identify the Customer responsible for
market activity, obviating the need for regulators to collect and
reconcile Customer Identifying Information from multiple broker-
dealers.
---------------------------------------------------------------------------

    \2141\ See Notice, supra note 5, at 30686-88.
    \2142\ Id.
    \2143\ Id.
---------------------------------------------------------------------------

    Also, in the Notice, the Commission discussed the challenges that
regulators face in tracking broker-dealers' activities across markets
due to inconsistent identifiers and a lack of a centralized
database.\2144\ The CAT NMS Plan calls for the use of CAT-Reporter-IDs,
which would be assigned to each CAT Reporter by the Plan Processor in
the CAT Data.\2145\ In the Notice, the Commission stated that it
preliminarily believed that the existing identifier approach specified
in the CAT NMS Plan would improve the accuracy of tracking information
regarding entities with reporting obligations, namely broker-dealers
and SROs.
---------------------------------------------------------------------------

    \2144\ Id.
    \2145\ Id.
---------------------------------------------------------------------------

    One commenter stated that there are ``flaws to the approaches of
CAT Customer and Reporter Identifiers, thus it has little benefit to
improve the accuracy of information.'' \2146\ The commenter, however,
did not list these flaws and did not provide specific reasons why the
identifiers would not improve data accuracy. Another commenter stated
that assigning a unique ID to ``every person that ever trades a
security'' could render the data difficult to use, and that greater
difficulties could arise from allowing broker-dealers to assign their
own unique customer IDs.\2147\ However, the commenter did not specify
in detail what difficulties would arise or why the data would be
difficult to use. That commenter noted that unique IDs for every client
might be unnecessary, and suggested applying them only to those with a
certain threshold of trading activity.\2148\ Two commenters suggested
that the use of the LEI would improve the accuracy of Customer
Identifying Information. One commenter suggested that using LEIs would
allow market participants to be ``easily identified,'' and also
suggested that the LEI should be used to identify customers in
conjunction with other recognized personal identifiers, to promote
accurate identification.\2149\ Another stated that using the LEI would
allow for ``unambiguous identification'' of entities submitting
information to the CAT system and would allow the SEC ``to be clear
about the identity of entities it is monitoring.'' \2150\
---------------------------------------------------------------------------

    \2146\ Data Boiler Letter at 31.
    \2147\ Anonymous Letter I at 3.
    \2148\ Anonymous Letter I at 3.
    \2149\ UnaVista Letter at 3.
    \2150\ SIFMA Letter at 37.
---------------------------------------------------------------------------

    In their response, the Participants stated that, based on
discussions with the DAG, they agreed with the commenters that it would
be reasonable to require an Industry Member to provide its own LEI and
the LEIs of its customers to the CAT if the Industry Member has or
acquires such LEIs.\2151\

As discussed above, the Commission agrees with the commenters and the
Participants and has modified the Plan to require the reporting of LEIs
for Customers and Industry Members in certain circumstances.\2152\
---------------------------------------------------------------------------

    \2151\ Response Letter II at 5.
    \2152\ See Sections IV.D.4.a.(4) and IV.D.4.b.(2), supra, for a
description of the LEI reporting requirements in the Plan.
---------------------------------------------------------------------------

    The Commission has considered the comment letters received, the
Participants' response, and modifications to the Plan. The Commission
believes that limiting unique customer IDs to clients meeting a certain
threshold of trading activity would significantly limit the benefits of
the Plan in terms of accuracy.\2153\ As discussed in more detail below,
the Commission expects consistent Customer IDs to improve the ability
of regulators to identify insider trading, manipulation and other
potentially violative activity.\2154\ The commenter that stated that
assigning a unique ID to ``every person that ever trades a security''
could render the data difficult to use \2155\ did not explain in detail
what difficulties might arise. Similarly, the commenter that suggested
that the accuracy benefits of the Plan would be limited due to ``flaws
to the approaches of CAT Customer and Reporter Identifiers'' \2156\
likewise did not provide any details as to these flaws or how they
would affect the accuracy of the CAT Data. In light of the lack of
specificity in these comment letters, the Commission continues to
believe that the inclusion of unique Customer and Reporter Identifiers
as described in the CAT NMS Plan would increase the accuracy of
customer and broker-dealer information in data used by regulators.
---------------------------------------------------------------------------

    \2153\ Anonymous Letter I at 3.
    \2154\ See Section IV.E.2.c., infra.
    \2155\ Anonymous Letter I at 3.
    \2156\ Data Boiler Letter at 31.
---------------------------------------------------------------------------

    The Commission is, however, updating its economic analysis to
recognize modifications to the Plan to require the reporting of LEI as
part of the Customer Identifying Information if the Customer has an LEI
and the Industry Member has collected it, and as a part of identifying
information for Industry Members in addition to the CRD number, if the
Industry Member has an LEI.\2157\ Currently, none of the sources of
trade and order data discussed above in the Baseline include LEIs for
Customers or Industry Members. Based on information provided by
commenters who suggested the inclusion of LEI,\2158\ supplemented by
Commission Staff experience, the Commission believes that the inclusion
of an LEI in CAT Data will improve the accuracy of CAT Data by enabling
the linking of the data to other data sources such as foreign
jurisdictions and domestic data not included in CAT at this time (e.g.,
futures and security-based swaps), as LEIs become more widely used by
regulators and the financial industry. In addition, the Commission
expects the modification to improve the accuracy of the data by
providing more information about the identities of Industry Members and
Customers, including--as the LEI system starts to collect parent and
subsidiary information--their relationships with other entities.\2159\
The Commission notes, however, that the benefits of the LEI information
will be limited insofar as the reporting of an LEI is required for
Industry Members only where the Members already have an LEI, and for
Customers only where the Customer has an LEI and the Industry Member
has or acquires the LEI.\2160\
---------------------------------------------------------------------------

    \2157\ See Sections IV.D.4.a and IV.D.4.b, supra.
    \2158\ SIFMA Letter at 36-37; DTCC Letter at 1-6; UnaVista
Letter at 3; Better Markets Letter at 8; Data Boiler Letter at 22.
    \2159\ SIFMA Letter at 37.
    \2160\ See Sections IV.D.4.a.(4) and IV.D.4.b.(2), supra.
---------------------------------------------------------------------------

(6) Aggregation
    In the Notice, the Commission discussed its belief that most CAT
Data would be disaggregated data and that therefore the CAT Data would
not suffer from the limitations of the aggregated data sources that
regulators must currently use.\2161\ Currently, subaccount allocation
data and issuer repurchase data exist in forms that are aggregated and
thus these data sources are limited for use in certain regulatory
activities and interests.\2162\ In particular, neither data type may
necessarily indicate the individual executions. The Commission
discussed its preliminary belief that the CAT NMS Plan would improve
the accuracy of allocation data compared to existing data available to
regulators, because it would provide disaggregated information on the
identity of the security, the number of shares and price allocated to
each subaccount, when the allocation took place, and how each Customer
subaccount is associated with the master account. This would more
accurately reflect which Customer ultimately received the shares that
were purchased in a particular trade. The Commission anticipated that
regulators may use CAT Data for some purposes that they use cleared
data for now because the CAT Data would be significantly less
aggregated. Finally, the Commission discussed its belief that because
the Plan would require that the Plan Processor link Customer
information to the order lifecycle and the report would identify as
Customers those issuers that are repurchasing their stock in the open
market,\2163\ CAT Data would be more accurate and more granular and
there would be more data than what is available currently for open
market issuer repurchases, which consists of monthly aggregations of
those issuer repurchases.
---------------------------------------------------------------------------

    \2161\ See Notice, supra note 5, at 30688-89.
    \2162\ Id. at Section IV.D.2.b.(2)E. Item 703 of Regulation S-K
requires issuers to report aggregated issuer repurchase data to the
Commission on an annual and quarterly basis in Forms 10-K and 10-Q.
17 CFR 229.703.
    \2163\ See CAT NMS Plan, supra note 5, at Section 6.4(d)(iv).
---------------------------------------------------------------------------

    The Commission did not receive any comments regarding its analysis
of data aggregation in the Notice, the Participants' response did not
specifically address its analysis of data aggregation, and the
Commission does not believe that modifications to the Plan warrant
changes to this aspect of the economic analysis. The Commission
continues to believe that CAT Data would constitute an improvement over
current data sources because it would be disaggregated data that would
not suffer from the limitations that characterize some of the
aggregated data sources that regulators must currently use.
Specifically, the Commission continues to believe that the Plan would
promote more effective and efficient investigation by regulators of
subaccount allocation issues and issuer repurchase activity.
c. Accessibility
    In the Notice, the Commission discussed its belief that the Plan,
if approved, would substantially improve the accessibility \2164\ of
regulatory data by providing regulators with direct access to the
consolidated CAT Data, including some data elements that currently take
weeks or months to obtain. However, the Commission also explained that
there is some uncertainty regarding the process for regulatory access
under the Plan, which creates uncertainty as to the degree of the
expected improvement.\2165\
---------------------------------------------------------------------------

    \2164\ Accessibility refers to ``how the data is stored, how
practical it is to assemble, aggregate, and process the data, and
whether all appropriate regulators could acquire the data they
need.'' See Notice, supra note 5, at 30689.
    \2165\ Id. at 30689-91.
---------------------------------------------------------------------------

(1) Direct Access to Data
    The Commission recognized in the Notice that improving
accessibility of regulatory data relative to the Baseline requires
ensuring that enough SRO and Commission Staff members are able to

use the direct access system supplied by the Central Repository when
they need it. The Commission discussed its belief that the ability to
use the direct access system depends, among other things, on how user-
friendly the system is, whether it has enough capacity for the expected
use of the system, and whether it contains the functionality that the
SRO and Commission Staff require. However, the Commission preliminarily
believed that ``the minimum requirements for the direct access system
ensure that the Plan will improve on the Baseline of access to current
data, including the process of requesting data.\2166\
---------------------------------------------------------------------------

    \2166\ Id. at 30689.
---------------------------------------------------------------------------

    In the Notice, the Commission discussed in detail the minimum
functional and technical requirements, as set out in Appendix D of the
Plan.\2167\ In terms of capacity, the Commission noted, among other
things, that the Central Repository must be able to support a minimum
of 3,000 regulatory users within the system, 600 of which might be
accessing the system concurrently (which must be possible without an
unacceptable decline in system performance). In terms of functionality,
the Commission noted that two types of query interfacing must be
supported--an online targeting query tool and a user-defined direct
query tool that allows for bulk extraction.\2168\ The Commission
further noted that all queries must be able to be run against raw
(i.e., unlinked) or processed data, or both, and that a variety of
minimum performance metrics apply to those queries.
---------------------------------------------------------------------------

    \2167\ Id. at 30689-90, citing CAT NMS Plan, supra note 5, at
Appendix D, Section 8.
    \2168\ The Commission further explained that the online
targeting query tool must include a date or time range, or both, and
allow users to choose from a broad menu of 26 pre-defined selection
criteria (e.g., data type, listing market, size, price, CAT-
Reporter-ID, Customer-ID, or CAT-Order-ID), with more to be defined
at a later date. Results must be viewable in the tool or
downloadable in a variety of formats and support at least a result
size of 5,000 or 10,000 records, respectively, with a maximum result
size to be determined by the Plan Processor. With the user-defined
direct query or bulk extraction, CAT must be able to support at
least 3,000 daily queries, including 1,800 concurrently, and up to
300 simultaneous query requests, with no performance degradation.
See Notice, supra note 5, at 30689-90.
---------------------------------------------------------------------------

    The Commission noted that the direct access facilitated by
provisions of the CAT NMS Plan is reasonably designed to substantially
reduce the number of ad hoc data requests and provide access to
substantial data without the delays and costly time and knowledge
investments associated with the need to create and respond to data
requests.\2169\ The Commission believed that this would dramatically
reduce the hundreds of thousands of requests that regulators must make
each year in order to obtain data, thus reducing the burden on the
industry. For example, the Commission noted that regulators do not have
direct access to EBS or trade blotter data and therefore they must
request such data when needed for regulatory tasks. As a result, in
2014 the Commission made 3,722 EBS requests that generated 194,696
letters to broker-dealers for EBS data. Likewise, the Commission
understood that FINRA requests generate about half this number of
letters. In addition, the Commission noted that for examinations of
investment advisers and investment companies, it makes approximately
1,200 data requests per year. The Commission also discussed its belief
that, in addition to decreasing the amount of time currently required
for regulators to access data sources, direct access to the CAT Data
should decrease the costs that many regulators and market participants
incur in either requesting data or fulfilling requests for data.
Furthermore, the Commission discussed its belief that the Plan would
also permit regulators to directly access customer information, which
could improve the ability of SROs to conduct surveillance.\2170\
---------------------------------------------------------------------------

    \2169\ Id. at 30690.
    \2170\ Id.
---------------------------------------------------------------------------

    The Commission also discussed its belief that in some dimensions of
accessibility, uncertainties exist that could affect the degree of the
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.\2171\ For instance, decisions regarding
exactly how regulators would access the data beyond providing them with
query tools; how user-friendly these tools will be; whether the Plan
Processor would host a server workspace that regulators could use; and
whether regulators can perform dynamic searches, data extraction, and
offline analysis have not yet been decided. Nonetheless, the Commission
stated that the requirements included in the Plan describe a system
that, once implemented, would result in the ability to query
consolidated data sources, which 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.\2172\
---------------------------------------------------------------------------

    \2171\ Id. at 30691.
    \2172\ Id.
---------------------------------------------------------------------------

    One commenter argued that ``the online targeted query tool and
user-defined direct queries and bulk extracts methods will not enable
regulatory staff to use the data.'' \2173\ This is because these
methods do not embed real-time analytics that would allow the system to
automatically red-flag suspicious trade activities.\2174\ The same
commenter agreed that the direct access regulators will have to CAT
Data ``would help reduce the number of ad-hoc data requests.'' \2175\
The commenter estimated that such a reduction in the number of data
requests would result in cost savings of ``about 5%, but definitely not
over 10%.'' \2176\ However, the commenter did not provide any
additional information or details to support that estimate.
---------------------------------------------------------------------------

    \2173\ Data Boiler Letter at 26.
    \2174\ Data Boiler Letter at 10-13.
    \2175\ Data Boiler Letter at 31.
    \2176\ Data Boiler Letter at 38.
---------------------------------------------------------------------------

    A second commenter also agreed that the reduction in ad hoc data
requests would result in cost savings, stating that the costs
associated with responding to EBS requests ``will be reduced over time
as regulators would no longer need to make EBS inquiries for data that
already resides in CAT.'' \2177\ However, that commenter did not
provide any specific estimates of these savings.
---------------------------------------------------------------------------

    \2177\ FIF Letter at 34-35.
---------------------------------------------------------------------------

    Two commenters agreed with the Commission that there is some
uncertainty regarding the process for regulatory access to CAT
Data.\2178\ In particular, one commenter stated that the Plan does not
provide details of the technical or procedural mechanisms on how the
regulators will access the online targeted query tool or submit user-
defined direct queries.\2179\ The commenter noted that the Plan does
not provide any specifics on the types of technologies or systems that
would be required for regulators to download the data or connect to the
API to be made available by the Plan Processor.\2180\ Furthermore, the
commenter pointed out that although the Plan Processor is required to
support a minimum of 300 simultaneous query requests with no
performance degradation, the Plan does

not define a baseline performance for dynamic search against which the
performance degradation could be compared.\2181\ The commenter noted
that the Plan requires the Plan Processor to provide such details at
least six months before the Participants begin reporting data to the
Central Repository.\2182\ The commenter stated that there is a risk
that six months will be insufficient for regulators to implement any
changes necessary in order to be able to use the tools offered by the
Plan Processor, and that this could delay regulators' ability to access
the CAT Data.\2183\ The other commenter noted generally that there are
insufficient details regarding how regulators would access, use and
analyze CAT Data, and how regulators' end-use requirements would be
addressed.\2184\
---------------------------------------------------------------------------

    \2178\ SIFMA Letter at 32, 39-41; Data Boiler Letter at 26.
    \2179\ SIFMA Letter at 39.
    \2180\ SIFMA Letter at 41.
    \2181\ SIFMA Letter at 40.
    \2182\ SIFMA Letter at 39.
    \2183\ Id.
    \2184\ Data Boiler Letter at 26.
---------------------------------------------------------------------------

    In their response, the Participants argued that the Plan does
provide sufficient detail regarding regulatory access to CAT
Data.\2185\ In particular, the Participants noted that Section 8 of
Appendix D of the Plan describes various tools that will be used for
surveillance and analytics. In addition, the Participants noted that
the Plan states that the Plan Processor will provide an open API that
allows regulators to use analytic tools and will permit regulators to
use ODBC/JDBC drivers to access the CAT Data.\2186\
---------------------------------------------------------------------------

    \2185\ Response Letter I at 42.
    \2186\ Response Letter I at 42, citing CAT NMS Plan, supra note
5, at Appendix D, Section 8.2. A discussion of the types of data
tools that Bidders proposed to support can be found in Appendix C,
Section A.2(b) of the Plan. ODBC (Open Database Connectivity) is an
open standard API (Application Programming Interface) for accessing
a database. JDBC (Java Database Connectivity) is an API for the
programming language Java, which defines how a client may access a
database.
---------------------------------------------------------------------------

    The Commission has considered the comments it received regarding
the potential benefits of the CAT NMS Plan in terms of the
accessibility of regulatory data, as well as the Participants'
response. Commenters did not provide any additional information or
analysis that changes the Commission's conclusions as set out in the
Notice, and there have been no modifications to the Plan that would
warrant changes.
    With respect to the comment that an online targeted query tool and
a user-defined direct query tool will not enable regulatory Staff to
use CAT Data,\2187\ the Commission disagrees with the commenter's
assertion that regulators cannot benefit from direct access to CAT Data
unless CAT embeds real-time analytics. In the Notice, the Commission
discussed two ways in which regulators could benefit from having direct
access to CAT Data facilitated by the availability of an online
targeted query tool and a user-defined direct query tool.\2188\ First,
direct access to CAT Data could substantially reduce the number of ad
hoc data requests and decrease the costs that many regulators currently
incur in requesting data. Second, the Plan would permit regulators to
directly access customer information, which could improve the ability
of SROs to conduct surveillance, among other benefits discussed
below.\2189\ Because these benefits of direct access do not depend on
the ability of CAT to embed real-time analytics, the Commission
continues to believe that the methods of direct access specified in the
Plan will improve the accessibility of regulatory data relative to the
Baseline.
---------------------------------------------------------------------------

    \2187\ Data Boiler Letter at 10-13, 26.
    \2188\ See Notice, supra note 5, at 30690.
    \2189\ See Section V.E.2, infra, for a discussion of various
regulatory activities that direct access to data will improve.
---------------------------------------------------------------------------

    With respect to the comment that the reduction in the number of
data requests would result in cost savings to SROs of ``about 5%,'' but
``definitely not more than 10%,'' \2190\ the Commission notes that the
commenter did not explain the basis for its estimate. The Commission
acknowledged in the Notice that it lacks the necessary information to
estimate the magnitude of these cost savings, and this continues to be
the case, as the Commission has not received any additional information
it can use to estimate the savings. However, the Commission continues
to believe that direct access to CAT Data should decrease the costs
that many regulators and market participants incur in either requesting
data or fulfilling requests for data.
---------------------------------------------------------------------------

    \2190\ Data Boiler Letter at 38.
---------------------------------------------------------------------------

    With respect to the comments about uncertainties regarding the
process for regulatory access to CAT Data,\2191\ the Commission agrees
with the commenter that, as discussed in the Notice, there is some
uncertainty regarding the process for regulatory access under the Plan.
The Commission notes that while the Plan provides detail on the method
of access and the type 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. In
particular, as discussed in the Notice, the details of functionality
and performance of the final CAT System are still to be
determined.\2192\ The Commission continues to believe that these
functionality and performance uncertainties create some uncertainty
regarding the degree of improvement in regulatory access that will
result from the Plan. The Commission agrees that is possible that, as
one commenter noted,\2193\ the deferral of these decisions could result
in a delay in regulators' ability to access the CAT Data. However, the
Commission continues to believe that the Plan will substantially
improve the accessibility \2194\ of regulatory data relative to the
Baseline by providing regulators with direct access to the CAT Data.
---------------------------------------------------------------------------

    \2191\ SIFMA Letter at 32, 39-41.
    \2192\ See Notice, supra note 5, at 30691.
    \2193\ SIFMA Letter at 39.
    \2194\ Accessibility refers to ``how the data is stored, how
practical it is to assemble, aggregate, and process the data, and
whether all appropriate regulators could acquire the data they
need.'' See Notice, supra note 5, at 30689.
---------------------------------------------------------------------------

(2) Consolidation of Data
    In the Notice, the Commission stated that it preliminarily believed
that the Plan would improve accessibility by consolidating various data
elements into one combined source, reducing data fragmentation.\2195\
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.\2196\
The Commission explained that 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. Additionally, the Commission noted
that Rule 613 requires that the Plan include both equity and options
data.\2197\ Because no existing regulatory audit trail data source
includes both options and equities data, the Notice discussed the fact
that 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. The Commission
noted that 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.\2198\
---------------------------------------------------------------------------

    \2195\ Id. at 30690.
    \2196\ 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.
    \2197\ 17 CFR 242.613(c)(5), (c)(6).
    \2198\ See CAT NMS Plan, supra note 5, 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.
---------------------------------------------------------------------------

    The Commission did not receive any comments on this aspect of
accessibility, and there have not been any modifications to the Plan
related to this aspect of the Commission's analysis. The Commission
therefore continues to believe that the Plan will improve accessibility
relative to the Baseline by consolidating various data elements into
one combined source, reducing data fragmentation.
d. Timeliness
    In the Notice, the Commission discussed its belief that, if
approved, the CAT NMS Plan would significantly improve the timeliness
\2199\ of reporting, compiling, and accessing regulatory data, which
would benefit a wide array of regulatory activities that use or could
use audit trail data. The Commission discussed its belief that the
timeline for compiling and reporting data pursuant to the Plan would
constitute an improvement over the processes currently in place for
many existing data sources and that, relative to some data sources, the
improvement would be 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.\2200\
---------------------------------------------------------------------------

    \2199\ 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. See Notice, supra note 5, at 30691.
    \2200\ Id.
---------------------------------------------------------------------------

    In terms of initial access to the data, the Commission discussed
its belief that 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
\2201\ the data for initial access sooner than some other such
data.\2202\ For example, equity and option clearing data currently are
not compiled and reported to the NSCC and the OCC until T+3, and data
in EBS reports are not compiled and reported to a centralized database
until a request is received.\2203\ OATS data is initially reported to
FINRA by 8:00 a.m. ET on the calendar day following the reportable
event, and it takes approximately 24 hours for FINRA to run validation
checks on the file, though SROs do not currently access OATS
information for regulatory purposes until after the error correction
process is complete.\2204\
---------------------------------------------------------------------------

    \2201\ 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.'' Id.
    \2202\ Id. at 30691-92.
    \2203\ Id.
    \2204\ Id.
---------------------------------------------------------------------------

    Furthermore, the Commission discussed the fact that, 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
T+1 by 12:00 p.m. ET at the latest.\2205\ Under the Plan, this access
would be at least several days sooner than OATS is available to non-
FINRA regulators. In the Notice, the Commission acknowledged that the
Plan would not necessarily improve the timeliness of audit trail data
in every case or for every regulator. For example, exchange SROs
already have real-time access to their own audit trail data.\2206\
However, regulators at other SROs or the Commission do not have real-
time access to that audit trail data, and therefore the Commission
stated that it preliminarily believed that CAT Data could be more
timely for these other regulators to access and use than obtaining that
exchange's audit trail data through other means.\2207\
---------------------------------------------------------------------------

    \2205\ Id. at 30691.
    \2206\ 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.
    \2207\ 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 8 a.m. 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.
---------------------------------------------------------------------------

    In terms of timeliness of access to error-corrected data, the
Commission stated in the Notice that it preliminarily believed that the
error correction process required by the CAT NMS Plan is reasonably
designed to provide additional improvements in timeliness for corrected
data. The Plan specifies that the initial data validation and
communication of errors to CAT Reporters must occur by noon on T+1 and
that corrections of these errors must be submitted by the CAT Reporters
to the Central Repository by 8:00 a.m. ET on T+3, with the corrected
data made available to the regulators by 8:00 a.m. ET on T+5.\2208\
During this interim time period between initial processing and
corrected data availability, ``all iterations'' of processed data must
be available for regulatory use.\2209\ The Central Repository must be
able to receive error corrections at any time, even if late; \2210\ if
corrections are received after T+5, the Plan Processor must notify the
SEC and SROs of this fact and describe how re-processing of the data
(to be determined in conjunction with the Operating Committee) would be
completed.\2211\ 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. ET on T+5--is the
same.\2212\ 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.\2213\ The Commission noted that the error resolution process for
OATS is limited to five business days from the date a rejection becomes
available.\2214\ The CAT NMS Plan requires a three-day repair window
for the Central Repository.\2215\ Accordingly, the Commission stated
that if the Plan were approved, regulators would generally be able to
access partially and fully corrected data earlier than they would for
OATS.\2216\
---------------------------------------------------------------------------

    \2208\ See CAT NMS Plan, supra note 5, at Appendix C, Section
A.2(a), Appendix D, Section 6.1.
    \2209\ Id. at Appendix D, Section 6.2.
    \2210\ Id. at Appendix C, Section A.3.(b), Appendix D, Section
7.4.
    \2211\ Id. at Appendix D, Section 6.2.
    \2212\ Id.
    \2213\ Id. at Appendix D, Section 6.1.
    \2214\ See Notice, supra note 5, at Section IV.D.2.b.(4) and
n.465.
    \2215\ Id. at Appendix C, Section A.2(a).
    \2216\ CAT Data being available on T+5 may be later than for
other current SRO audit trails.
---------------------------------------------------------------------------

    In the Notice, the Commission discussed its belief that
improvements

to timeliness would also result from the ability of regulators to
directly access CAT Data.\2217\ The Commission discussed the fact that
most current data sources do not provide direct access to most
regulators and explained that 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 \2218\--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 stated that it preliminarily
believed 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. Furthermore, the Commission discussed
its belief that direct access to CAT Data should reduce the costs of
making ad hoc data requests, including costs arising from 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.
---------------------------------------------------------------------------

    \2217\ See Notice, supra note 5, at 30692 (citing CAT NMS Plan,
supra note 5, Section 6.5(c)).
    \2218\ See Notice, supra note 5, at Section IV.D.2.b.(4) and
n.468.
---------------------------------------------------------------------------

    The Commission also stated that it preliminarily expected that the
CAT NMS Plan would reduce the time required to process data before
analysis.\2219\ The Commission explained that currently, regulators can
spend days and up to months processing data they receive into a useful
format.\2220\ 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. These kinds
of linking processes can require sophisticated data techniques and
substantial assumptions and can result in imperfectly linked data. The
Commission noted that the Plan addresses this issue by stating that the
Plan Processor must store the data in a linked uniform format.\2221\
Specifically, the Commission discussed how 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. 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.\2222\ Accordingly, the Commission stated
that it preliminarily believed that the Plan would reduce or eliminate
the delays associated with merging and linking order events within the
same lifecycle and that 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.\2223\
---------------------------------------------------------------------------

    \2219\ See Notice, supra note 5, at 30693.
    \2220\ See Table 1, Section V.D.2.b, supra.
    \2221\ See CAT NMS Plan, supra note 5, 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).
    \2222\ The daisy chain approach is used to link and reconstruct
the complete lifecycle of each Reportable Event in CAT. According to
this approach, CAT Reporters assign their own identifiers to each
order event that the Plan Processor later replaces with a single
identifier (the CAT Order-ID) for all order events pertaining to the
same order. See Notice, supra note 5, at 30691.
    \2223\ Id. at 30693.
---------------------------------------------------------------------------

    The Commission also discussed its belief that the expected
improvements to data accuracy could result in an increase in the
timeliness of data that is ready for analysis, although uncertainty
exists regarding the extent of this benefit. The Commission explained
that regulators currently take significant time to ensure data is
accurate beyond the time that it takes data sources to validate data
and that, 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, the Commission stated that, 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, the
Commission noted that it lacked 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. Nonetheless, the Commission
preliminarily believed 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.
    The Commission received comments on the improvements in timeliness
from the Plan. Two commenters suggested that CAT Data would not be
timely enough because it is reported too late.\2224\ One commenter
called the reporting deadline (8:00 a.m. ET on T+1) an
``extraordinarily lax reporting time frame.'' \2225\ Another commenter
argued that the T+5 schedule for regulatory access to corrected CAT
Data is ``useless in terms of effective market surveillance in
prevention of threats to the U.S. financial stability'' because a
``huge loss can be accumulated within [a] split-second'' and ``market
collapse does not take more than one day.'' \2226\ Furthermore,
although the commenter agreed that ``CAT offers the regulators on-
demand query of delayed data that saves them multiple trips to request
data from the financial institutions,'' he opined that this ``does not
necessarily mean timeliness improvement.'' \2227\
---------------------------------------------------------------------------

    \2224\ Data Boiler Letter at 18; Better Markets Letter at 6.
    \2225\ Better Markets Letter at 6.
    \2226\ Data Boiler Letter at 26.
    \2227\ Data Boiler Letter at 32.
---------------------------------------------------------------------------

    The Participants' response provided additional information on error
correction timelines for customer information and PII. Specifically,
the Participants' response identified an errant discussion of these
error correction timelines in the Plan, and clarified that the Plan
Processor must validate customer data and generate error reports no
later than 5:00 p.m. ET on T+1, and stated that they believe the two
day period for error correction is sufficient for CAT Reporters to
correct errors in customer data.\2228\
---------------------------------------------------------------------------

    \2228\ Response Letter I at 30.
---------------------------------------------------------------------------

    The Commission has considered the comments it received regarding
the potential of the Plan to improve timeliness. As discussed below,
the commenters did not provide any additional information or analysis
that the Commission believes would warrant changes to its analysis or
conclusions as set out in the Notice.
    The Commission disagrees with the commenter that characterized the
next day reporting of CAT Data as an ``extraordinarily lax reporting
time frame,'' and with the commenter that argued that the T+5 schedule
for regulatory access to corrected CAT Data is insufficient.\2229\ As
discussed further above,\2230\ the Commission considered whether CAT
Reporters should be

required to report data in real-time when it adopted Rule 613 under
Regulation NMS.\2231\ While the Commission acknowledged that there
might be advantages to receiving data intraday, the Commission stated
that the greater majority of benefits that may be realized from
development of the CAT do not require real-time reporting.\2232\
Furthermore, many SROs have real-time access to data generated on
exchanges they operate, and can and do use this data for real-time
surveillance of activity occurring on those exchanges As discussed in
the Notice, the T+5 schedule improves the timeliness of regulatory
access to corrected data relative to the Baseline in two ways.\2233\
First, corrected OATS data is currently available to FINRA at
T+8.\2234\ Under the Plan, regulators will be able to access corrected
CAT Data three days earlier than that (i.e., T+5). Second, the ability
of regulators to directly access CAT Data will improve
timeliness.\2235\ 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. Therefore, for many purposes, the T+5
schedule for regulatory access to corrected CAT Data will be up to many
weeks more timely relative to the Baseline.
---------------------------------------------------------------------------

    \2229\ Data Boiler Letter at 26.
    \2230\ See Section IV.D.3, supra.
    \2231\ See Adopting Release, supra note 13, at 45765. Indeed,
Rule 613 stated that the CAT NMS Plan may not impose a reporting
deadline earlier than 8:00 a.m. ET. 17 CFR 242.613(c)(3).
    \2232\ Id.
    \2233\ See Notice, supra note 5, at Section IV.E.1.d(2) and
Section IV.E.1.d(3).
    \2234\ Id. at 30673.
    \2235\ Id. at 30692.
---------------------------------------------------------------------------

    The Commission also disagrees with the comment that the ability of
regulators to directly access CAT Data will not result in improvement
in timeliness.\2236\ The comment does not dispute that data requests
can take time to process and it does not provide any specificity in
arguing that direct access would not improve timeliness that undermines
the Commission's belief that direct access will make CAT Data up to
many weeks more timely. This represents an important improvement in
timeliness over the Baseline.
---------------------------------------------------------------------------

    \2236\ Data Boiler Letter at 32.
---------------------------------------------------------------------------

    Regarding the Participants' response, the Commission does not
believe the clarification regarding the timeline for communication of
errors for customer and account information would warrant changes to
its analysis or conclusions regarding timeliness. The Commission notes
that the Plan states that 5:00 p.m. ET on T+1 is the deadline for
communication of errors for customer and account information, including
PII.\2237\ In separate exposition, the Plan mistakenly discussed 12:00
p.m. ET on T+3 as the deadline for validation of data and generation of
error reports for CAT PII data.\2238\ These two statements are in
conflict because they describe different reporting deadlines for the
same types of errors. However, the Commission is amending the Plan to
correct that error.\2239\ In the Notice, the Commission states that
customer information has a separate error correction timeline with the
same outcome in terms of the availability of corrected data to
regulators; this analysis was not dependent on the time at which error
messages were sent to CAT Reporters.\2240\ Consequently, the
clarification of this timeline does not affect the Commission's
analysis. Furthermore, the Commission notes that commenters did not
raise questions on the mistake and seem to have understood that the
deadline for error reports on PII was 5:00 p.m. ET on T+1.
---------------------------------------------------------------------------

    \2237\ See CAT NMS Plan, supra note 5, at Appendix D, Section
6.2.
    \2238\ Id.
    \2239\ See note 1555, supra.
    \2240\ See Notice, supra note 5, at 30692.
---------------------------------------------------------------------------

2. Improvements to Regulatory Activities
    In the Notice, the Commission discussed its preliminary belief 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.\2241\ The Commission discussed its belief
that the ability of regulators to perform analyses and reconstruction
of market events would likely improve if the CAT NMS Plan were
approved, because it 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.
Furthermore, availability of CAT Data would benefit market analysis and
research in support of regulatory decisions, by facilitating an
improved understanding of markets that will inform potential policy
decisions. The Commission also discussed how 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.
---------------------------------------------------------------------------

    \2241\ Id. at 30693-99.
---------------------------------------------------------------------------

    The Commission also explained that, in its preliminary view, the
Plan would substantially improve both the efficiency and effectiveness
of SRO broad market surveillance, which could benefit investors and
market participants by allowing SROs 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 discussed in the Notice its expectation 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. Accordingly,
the reduction of violative behavior in the market should benefit
investors by providing them with a safer environment for allocating
their capital and making financial decisions, and it could also benefit
market participants whose business activities are harmed by the
violative behavior of other market participants. The Commission further
discussed how more targeted examinations could benefit market
participants by resulting in proportionately fewer burdensome
examinations of compliant market participants.
    The Commission also explained that a significant percentage of
Commission enforcement actions involve trade and order data,\2242\ and
that it preliminarily believed CAT Data would significantly improve the
efficiency and efficacy of enforcement investigations by the Commission
and SROs, including

insider trading and manipulation investigations.
---------------------------------------------------------------------------

    \2242\ 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, many of which involved trade and order data.
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 also 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 also stated that it as well as the SROs anticipated
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.\2243\ The
Commission explained that 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.
---------------------------------------------------------------------------

    \2243\ 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 discussed more fully below, the Commission has considered the
comments it received regarding the likely benefits to regulatory
activities, the Participants' response, and modifications to the Plan,
and continues to believe that the CAT NMS Plan would generate
improvements to regulatory activities, particularly 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 activities.
a. Analysis and Reconstruction of Market Events
    In the Notice, the Commission discussed the reasons for its
preliminary belief that the Plan would improve regulators' ability to
perform analysis and reconstruction of market events.\2244\ 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.\2245\ 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.
---------------------------------------------------------------------------

    \2244\ See Notice, supra note 5, at 30694-95.
    \2245\ See Adopting Release, supra note 14, at 45732.
---------------------------------------------------------------------------

    The Commission discussed how the fragmented nature of current audit
trail data and the lack of direct access to such data renders market
reconstructions cumbersome and time-consuming.\2246\ 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. 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.\2247\ Further, because EBS data lacks timestamps for
certain trades,\2248\ the Commission discussed how the use of EBS data
in market reconstructions requires supplementation with data from other
sources, such as trade blotters.
---------------------------------------------------------------------------

    \2246\ 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 reconstruct 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. See Notice, supra note 5, at 30694-95.
    \2247\ Id. at Section IV.E.2.a (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.
    \2248\ 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. Id. at Section IV.D.2.a(3) and Section IV.D.2.b (discussing
the EBS system and large trader reports and the limitations of these
data sources in performing market reconstructions).
---------------------------------------------------------------------------

    The Commission stated that it expected 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.\2249\ Specifically, the inclusion of Customer-IDs
and consistent CAT-Reporter-IDs in the CAT Data 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. The
Commission discussed its belief that 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
Commission discussed how 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 stated that it preliminarily
believed that the CAT NMS Plan would dramatically improve the ability
of regulators to identify the market participants involved in market
events.
---------------------------------------------------------------------------

    \2249\ The Commission stated that 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. It was also unable to
quickly and efficiently conduct analysis and reconstruction of
markets events, particularly around the financial crisis.
Furthermore, the Commission and SROs have 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. Id. at 30694-95.
---------------------------------------------------------------------------

    The Commission also preliminarily believed that better data
accessibility from the Plan would significantly improve the ability of
regulators to analyze and reconstruct market events. Because CAT Data
would link Reportable Events, the Plan 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.
    The Commission received one comment on the fragmented nature of
current audit trail data and the potential benefits of CAT Data to
improve the ability of regulators to perform analysis and
reconstructions of market events. That commenter agreed with the
Commission that the fragmented nature of current data sources poses
challenges to regulators seeking complete data,\2250\ however, the
commenter also stated that the potential benefits that CAT Data would
provide regulators in terms of conducting analysis and market
reconstructions are minimal.\2251\ The Participants did not provide
responses to these concerns.
---------------------------------------------------------------------------

    \2250\ Data Boiler Letter at 30.
    \2251\ Data Boiler Letter at 33.
---------------------------------------------------------------------------

    In the Commission's view, this comment did not provide any
additional information or analysis that warrants

changes to the analysis or conclusions in the Notice. The commenter
stated that ``the plan is majoring in the minors (i.e., overemphasis on
storage, and not enough coverage of pattern recognition).'' \2252\ The
Commission disagrees. While the Commission has emphasized aspects of
storage as in the Notice,\2253\ the Commission has also emphasized that
improvements in data completeness and accuracy would greatly assist
regulators in performing analyses and reconstructing market events. The
inclusion of Customer-IDs and CAT-Reporter-IDs would assist regulators
in determining if particular traders had some role in causing a market
event, and further, inclusion of these IDs could help regulators study
patterns in customer-specific trading behavior. Further, enhanced clock
synchronization requirements would assist regulators in sequencing
events that happened in different market centers and help them to
better identify the causes of market events. As such, the Commission
continues to believe that the CAT NMS Plan would provide benefits in
terms of performing analysis and reconstructing market events.
---------------------------------------------------------------------------

    \2252\ Id.
    \2253\ See Notice, supra note 5, at Sections III.B.3, III.B.12.
---------------------------------------------------------------------------

    Changes to the Plan do affect data completeness and accuracy, as
well as regulators' ability to analyze and reconstruct market events.
First, the Commission has modified the Plan to require the reporting of
LEIs for Customers and Industry Members in certain circumstances.\2254\
These requirements will result in a greater ability of regulators to
accurately identify traders that cause market events.\2255\ Second,
removing the open/close indicator for equities and Options Market
Makers may reduce the completeness of CAT Data and may reduce the
benefits that this potentially provides in terms of analysis and market
reconstructions. Third, requiring exchanges to synchronize their clocks
within 100 microseconds of NIST should enhance regulators' abilities to
sequence events and reconstruct market events to a greater degree than
initially stated in the Notice, though as discussed above in Section
V.E.1.b.(3), the Commission does not expect a large improvement
relative to what was described in the Notice.
---------------------------------------------------------------------------

    \2254\ See Section IV.D.4.a.(4) and Section IV.D.4.b.(2), supra,
for a description of the LEI reporting requirements in the Plan.
    \2255\ See Section V.E.1.b(5), supra for a discussion of how
LEIs can increase the accuracy of identifications; see also SIFMA
Letter at 37.
---------------------------------------------------------------------------

b. Market Analysis and Research
    In the Notice, the Commission discussed the reasons for its
preliminary belief 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.\2256\
The Commission discussed how 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 policy 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.
---------------------------------------------------------------------------

    \2256\ For example, this includes understanding the role and
impact of high-frequency trading strategies; understanding how
broker-dealers route their customer orders and studying ``whether
access fees and rebates drive routing decisions as much as execution
quality considerations;'' understanding the nature of short selling;
and more generally, understanding how entities trade and the market
impact of their trading. See Notice, supra note 5, at 30695-97.
---------------------------------------------------------------------------

    As described in the Notice, the 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. The CAT
NMS Plan would provide direct access to data that currently requires an
often lengthy and labor-intensive effort to request, compile, and
process, including 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.
Furthermore, the Commission discussed how CAT Data would better inform
SROs and the Commission in rulemakings and assist them in conducting
retrospective analysis of their rules and pilots, and how it 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.
    The Commission received two comments regarding the potential
benefits of the CAT NMS Plan to help the Commission perform market
analyses and conduct research. One commenter misinterpreted what
accessibility to CAT Data means for the Commission, stating that access
to the CAT system and data is limited to its regulatory functions and
could exclude analytical or academic needs.\2257\ Another commenter
disagreed with the Commission's findings and stated that the CAT Plan
would provide little benefit to facilitating market analysis and
research absent real-time access to intra-day feeds.\2258\
---------------------------------------------------------------------------

    \2257\ Better Markets Letter at 4.
    \2258\ Data Boiler Letter at 33.
---------------------------------------------------------------------------

    Commenters did not provide any additional information or analysis,
however, and the Participants did not provide responses providing
information relevant to this issue. The Commission is not changing its
analysis and conclusions in light of the aforementioned comments for
several reasons. First, one of the commenters assumes a narrow
definition of ``regulatory functions'' but that CAT Data would serve
the Commission and SROs in their analytical needs to conduct market
analysis and academic research.\2259\ Second, the Commission believes
that even without real-time access to intra-day feeds, access to CAT
Data would nonetheless benefit regulators since the quality of market
analysis and research that is produced to increase regulatory knowledge
would improve relative to the Baseline. Furthermore, the Commission
continues to believe its statement in the Adopting Release that the
majority regulatory benefits gained from the creation of a consolidated
audit trail, as described in the Proposing Release,\2260\ do not
require real-time reporting.\2261\ Specifically, the Commission notes
that market analysis and research does not require contemporaneous
access to CAT Data, and therefore, it is not necessarily the case that
real-time access to CAT Data, as opposed to the Plan requirement of
access to corrected data at T+5, would provide more benefit to market
analysis and research by regulators. As such, the Commission continues
to believe that CAT Data would provide significant

improvements to market analysis and research conducted by regulators.
---------------------------------------------------------------------------

    \2259\ See Notice, supra note 5, at 30695-97 for a list of
examples of market analysis and research that could be conducted by
SROs and the Commission with access to CAT Data.
    \2260\ See Proposing Release, supra note 14, at 45768.
    \2261\ Id.
---------------------------------------------------------------------------

    The Commission notes, however, that changes to the CAT NMS Plan do
alter the analysis regarding the benefits for regulators in terms of
conducting market analysis and research. In our view, the modifications
to the Plan to require the reporting of LEIs for Customers and Industry
Members in certain circumstances \2262\ should result in a greater
ability of regulators to conduct analysis and research involving
individual market participants.\2263\ Specifically, the reporting of
LEI would also make it possible to merge CAT Data with other data
sources that are currently not part of CAT (e.g., futures and security-
based swaps), and this could potentially help with market
reconstructions involving these products. Furthermore, more granular
clock synchronization requirements for exchanges would mean that
regulators could sequence events with greater granularity, which could
potentially benefit analysis that requires sequencing events and
research surrounding high frequency traders. However, because the Plan
no longer contains an open/close indicator for equities, regulators
will not be able to distinguish buying activity that covers short
positions from buying activity that establishes or increases long
positions and, therefore, regulators would not be able to examine, for
example, how long particular types of traders hold a short position, as
indicated in the Notice.\2264\
---------------------------------------------------------------------------

    \2262\ See Sections IV.D.4.a.(4) and IV.D.4.b.(2), supra, for a
description of the LEI reporting requirements in the Plan.
    \2263\ See Section V.E.1.b(5), supra for a discussion of how
LEIs can increase the accuracy of identifications; see also SIFMA
Letter at 37.
    \2264\ See Notice, supra note 5, at 30696.
---------------------------------------------------------------------------

c. Surveillance and Investigations
    In the Notice, the Commission explained the reasons for its
preliminary belief 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.\2265\ The Commission discussed how potential
violators' expected probability of being caught influences their
likelihood of committing a violation.\2266\ 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.\2267\
---------------------------------------------------------------------------

    \2265\ Id. at 30697-99.
    \2266\ 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 enforcement, and
consequently the increased probability of incurring a costly
penalty, could be deterred from participating in violative behavior.
    \2267\ 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. See
Notice, supra note 5, at Section IV.E.2.c(1).
---------------------------------------------------------------------------

    The Commission received several comments on the potential benefits
of the CAT NMS Plan to improve SRO surveillance, risk-based
examinations, enforcement activity, and the process for evaluating tips
and complaints; and the Participants also responded to some of the
comments raised in the comment letters. As discussed below, the
Commission is not changing its analysis and conclusions in light of
these comments and the Participants' responses; however, changes to the
Plan affect the analysis that the Commission laid out in the Notice.
(1) SRO Surveillance
    Rule 613(f) requires SROs to implement surveillances reasonably
designed to make use of the CAT Data.\2268\ Further, data improvements
resulting from the Plan would improve regulators' ability to perform
comprehensive and efficient surveillance. As the Commission explained
in detail in the Notice, these benefits would encompass a number of
improvements including: detection of insider trading; surveillance of
principal orders; and cross-market and cross-product surveillance; and
other market surveillance activities, which are each described in more
detail below.
---------------------------------------------------------------------------

    \2268\ 17 CFR 242.613(f).
---------------------------------------------------------------------------

    First, the Commission noted that CAT Data would include additional
fields not currently available in data used for surveillance. Since
currently available data does not include customer identifiers, SROs
performing insider trading and manipulation surveillance are unable to
identify some suspicious trading \2269\ and must undertake multiple
steps to request additional information after identifying suspect
trades. The inclusion of Customer-IDs in the CAT would significantly
improve these surveillance capabilities. The ability to link uniquely
identified customers with suspicious trading behavior would provide
regulators with a better opportunity to identify the distribution of
suspicious trading instances by a customer as well as improve
regulators' ability to utilize customer-based risk assessment.
---------------------------------------------------------------------------

    \2269\ 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. 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 Notice, supra note 5, at 30697.
---------------------------------------------------------------------------

    Second, the Commission noted that some current data sources used
for SRO surveillance exclude unexecuted principal orders, 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. The inclusion of principal orders of
Industry Members in the CAT would therefore enable regulators to better
identify rule violations by broker-dealers that have not previously had
to provide audit trail data on unexecuted principal orders.
    Third, the Commission noted that the Plan would improve regulators'
efficiency in conducting cross-market and cross-product surveillance,
and enable 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,\2270\ 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.\2271\ The Commission explained that because market
data are fragmented across many data sources and because audit trail
data lacks consistent customer identifiers, regulators currently cannot
run cross-market surveillance tracking particular customers.\2272\
Furthermore, routine cross-product surveillance is generally not
possible with current data. The Commission concluded that 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.
---------------------------------------------------------------------------

    \2270\ 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. Id. at 30698.
    \2271\ See Section V.E.2.c(3), 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.
    \2272\ As noted above, SROs currently do not conduct routine
surveillance that tracks particular customers because data currently
used for surveillance does not include customer information.
---------------------------------------------------------------------------

    Two commenters stated that the Commission is overly optimistic as
to the benefits that the Plan would provide to SRO surveillance
activities,\2273\ with one of the commenters also mentioning that the
Commission is overly optimistic with respects to the benefits to
surveillance.\2274\ One of the commenters argued that benefits are
exaggerated because the Plan lacks an analytical framework embedded in
its design.\2275\ The same commenter mentioned that the lack of an
analytical framework embedded in the design of CAT reduces the ability
to identify false positives (i.e., detection of behaviors that are not
violative), and false negatives (i.e., not detecting behaviors that are
violative).\2276\ The commenter also specifically raised concerns that
the current accessibility and functionality requirements of CAT Data
would be rendered unusable for regulators because the methods for
querying data and performing bulk extracts are ``generic'' and not fit
for financial market surveillance.\2277\
---------------------------------------------------------------------------

    \2273\ Anonymous Letter I at 3; Data Boiler Letter at 33.
    \2274\ Data Boiler Letter at 33.
    \2275\ Data Boiler Letter at 33.
    \2276\ Data Boiler Letter at 33.
    \2277\ Data Boiler Letter at 13, 27.
---------------------------------------------------------------------------

    Two commenters stated that CAT should encompass real-time reporting
functionality, because without it, it is hard to conduct meaningful
surveillance.\2278\ Additionally, one commenter mentioned that the Plan
does not provide details on how regulators would use CAT Data.\2279\
---------------------------------------------------------------------------

    \2278\ Data Boiler Letter at 30; Better Markets Letter at 6-7.
    \2279\ SIFMA Letter at 32.
---------------------------------------------------------------------------

    The Participants responded to these comments and noted that they
already have real-time surveillance and monitoring tools in place for
the respective markets that will not be affected by CAT.\2280\
Furthermore, the Participants noted that the Plan Processor will
provide sufficient data access tools as well as analytical tools in the
CAT for the Participants to satisfy their obligations as set forth in
Rule 613(f).\2281\ But the Participants did note that surveillance
methods and techniques could vary over time and across
Participants,\2282\ potentially yielding some degree of uncertainty in
how benefits to surveillance activities would accrue to SROs, investors
and market participants. The Participants also noted that CAT is not
intended to be the sole source of surveillance for each Participant,
and therefore, would not cover all surveillance methods currently
employed by the Participants.\2283\
---------------------------------------------------------------------------

    \2280\ Response Letter I at 31, 43.
    \2281\ Response Letter I at 42.
    \2282\ Response Letter I at 42.
    \2283\ Response Letter II at 27.
---------------------------------------------------------------------------

    The Commission considered these comments and the Participants'
responses and believes that they would not warrant changes to the
Commission's preliminary conclusions of the benefits that the Plan
would provide to SRO surveillance. But the Commission does acknowledge
that there is some uncertainty particularly regarding how exactly the
SROs will incorporate CAT into their surveillance activities. First,
while the Commission agrees that surveillance methods differ across
Participants and this could generate uncertainty in the benefits, the
Commission disagrees with the commenters that stated that the
Commission is overly optimistic as to the benefits. Access to CAT Data
would result in substantial benefits to SRO surveillance for the
reasons mentioned earlier in this Section, none of which are undermined
by the comments. Second, the Commission disagrees with the commenter
that stated that the benefits that would accrue to surveillance are
exaggerated due to the Plan's lack of an analytical framework embedded
in its design. The commenter assumes that if the Plan had an analytical
framework, the benefits of CAT would be more realistic. The Commission
notes that the Plan does have an analytical framework embedded in its
design. The Plan states specifically that the Plan Processor will
provide the following analytical framework--namely an API that allows
regulators to use analytical tools (e.g., R, SAS, Python, Tableau) and
permit regulators to use ODBC/JDBC drivers to access CAT Data.\2284\
This analytical framework would benefit SROs in conducting
surveillance, which would 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. Third, this analytical framework
could allow regulators to code computer programs using CAT Data to
detect trading patterns indicative of violative behavior. While there
might be potential errors in detecting violative behavior using these
programs, that is, false positives (detecting non-violative behavior)
and false negatives (not detecting violative behavior), having access
to more detailed CAT Data in a consolidated source including
timestamps, principal orders, non-member activity, and subaccount
allocations could minimize those errors. Fourth, the Commission
disagrees with the commenter that the methods for querying data and
performing bulk extracts are ``generic'' and not fit for financial
market surveillance. The Commission expects these query methods,
generic or not, will facilitate the direct access necessary for SROs to
build improved surveillances. For instance, the Plan states that CAT
will support two types of query interfacing,\2285\ and specifies that
all queries must be able to be run against raw (i.e., unlinked) or
processed data, or both.\2286\ Furthermore, by using the query
interfacing supported by CAT, regulators would be able to directly
query Customer-IDs, which could

improve the ability for SROs to conduct surveillance, contrary to what
the commenter stated.
---------------------------------------------------------------------------

    \2284\ See CAT NMS Plan, supra note 5, at Appendix D, Section
8.2.
    \2285\ Id. at Appendix D, Section 8.1.1.
    \2286\ See Section V.E.1.d(3), supra for additional information.
---------------------------------------------------------------------------

    The Commission considered the comments on real-time surveillance,
and understands that from the Participants' response, some SROs already
have real-time surveillance. Further, the Commission expects the Plan
to improve on SROs' real-time surveillances because the Plan will
result in exchanges receiving, even at a later date, additional fields
in the Material Terms of the Order, such as special order handling
instructions, and additional order events, such as principal orders,
that some SROs currently do not have available for any surveillance,
real-time or otherwise.\2287\
---------------------------------------------------------------------------

    \2287\ As noted in Section V.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.
---------------------------------------------------------------------------

    Finally, in response to the commenter that claimed the Plan did not
provide enough details on how regulators would use CAT Data, the
Commission acknowledges that there is uncertainty as to how the SROs
will incorporate CAT Data into their surveillance activities. The
Commission believes that even if there is uncertainty in this regard,
the SROs nonetheless would still be able to conduct ``meaningful''
surveillance with the opportunity to improve on their current
surveillances. In this regard, the Commission notes that Rule 613(f)
states that national securities exchanges should create surveillances
that are ``reasonably designed to make use of consolidated information
in the consolidated audit trail.'' \2288\ In addition, the Plan will
improve the ability of regulators to perform cross-market and cross-
product surveillance because regulators will have direct access to
consistent data that includes comprehensive trade and order data in
markets for multiple products.
---------------------------------------------------------------------------

    \2288\ 17 CFR 242.613(f).
---------------------------------------------------------------------------

    The Commission also notes that the changes to the Plan to require
the reporting of LEIs for Customers and Industry Members in certain
circumstances \2289\ should facilitate improved SRO surveillance by
enabling SROs to identify traders and their clients with more
accuracy.\2290\ The reporting of LEIs would also make it possible to
merge CAT Data with markets not included in CAT at this time (e.g.,
futures and security-based swaps), which could potentially assist with
surveillance activities involving these products. Therefore, the
inclusion of LEI for Customers and Industry Members could result in
greater benefits to SRO surveillance than those described in the
Notice.
---------------------------------------------------------------------------

    \2289\ See Section IV.D.4.a.(4) and Section IV.D.4.b.(2), supra,
for a description of the LEI reporting requirements in the Plan.
    \2290\ See Section V.E.1.b(5), supra, for a discussion of how
LEIs can increase the accuracy of identifications; see also SIFMA
Letter at 37.
---------------------------------------------------------------------------

(2) Examinations
    In the Notice, the Commission discussed its preliminary belief that
the availability of CAT Data would also improve examinations by the
Commission and SROs and that these improvements would benefit investor
protection, and the market in general, by resulting in more effective
supervision of market participants.\2291\ 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 involved 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.\2292\ Further, the
Commission explained that 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 timestamps 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, which requires linking the EBS data with another data source
that contains trades with timestamps (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.
---------------------------------------------------------------------------

    \2291\ See Notice, supra note 5, at 30698-99.
    \2292\ 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.
---------------------------------------------------------------------------

    The Commission explained in the Notice 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. Having direct access to consolidated
data in the Central Repository would 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. Additionally, the Commission discussed its belief that regulators
would be able to conduct certain types of exams more efficiently
because of the inclusion of Customer-IDs in CAT. Moreover, the clock
synchronization provisions of the Plan could aid regulators in
sequencing some events more accurately, thereby facilitating more
informed exams. The Commission believed that the Plan would allow the
data collection portion of examinations to be completed more quickly
with fewer formal data requests, and that 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.
    One commenter suggested that without ``red-flagging'' suspicious
activities using the commenter's recommended approach (using real-time
analytics),\2293\ it would not be possible to facilitate the ability of
regulators to conduct risk-based examinations.\2294\ The same commenter
stated that the Commission has an overly optimistic assessment of the
economic effects to examinations, mainly due to the Plan lacking an
analytical framework embedded in its design.\2295\ The Participants did
not provide a response to this comment.
---------------------------------------------------------------------------

    \2293\ Part of the commenter's recommended approach to
conducting surveillance involves using sensors to perform real-time
analytics over streamed data. See Data Boiler Letter at 10-13.
    \2294\ Data Boiler Letter at 32.
    \2295\ Data Boiler Letter at 33.
---------------------------------------------------------------------------

    The Commission considered these comments, but believes that they do
not warrant changes to the Commission's preliminary conclusions of the
benefits that the Plan would provide to performing risk-based
examinations. First, the Commission disagrees with the commenter that
stated ``red-flagging'' suspicious activity using their recommended
approach (using real-time analytics) is the only way to facilitate
risk-based examinations. As discussed above, having access to Customer-
IDs would assist the Commission in flagging suspicious activity for
their risk-based examinations, and assist the Commission in effectively
targeting risk-based examinations of market participants who are at
elevated risk of violating market rules. Furthermore, the Commission
could also conduct more informed risk-based exams under the Plan
because enhanced clock synchronization provisions could aid the
Commission in sequencing some

events more accurately. Second, regarding the commenter who stated that
the Commission's assessment of the effects to examinations are
optimistic because the Plan lacks an analytical framework, the
Commission disagrees with this commenter for similar reasons to those
stated above.\2296\
---------------------------------------------------------------------------

    \2296\ See Section V.E.2.c(1), supra; supra n.2284.
---------------------------------------------------------------------------

    While the commenters did not provide any additional information
that would warrant changes to the Commission's analysis or conclusions
as set out in the Notice, changes in the Plan do alter the Commission's
preliminary analysis. Requiring CAT Reporters to report their LEI for
Customers and Industry Members in certain circumstances \2297\ should
result in a greater ability for regulators to identify traders for the
purposes of risk-based examinations.\2298\ Additionally, more stringent
clock synchronization requirements for exchanges should enhance
regulators' abilities to sequence events, thereby facilitating more
informed risk-based exams. As such, the Commission believes that
changes to the Plan could generate additional benefits over and above
those stated in the Notice.
---------------------------------------------------------------------------

    \2297\ See Sections IV.D.4.a.(4) and IV.D.4.b.(2), supra, for a
description of the LEI reporting requirements in the Plan.
    \2298\ See Section V.E.1.b(5), supra, for a discussion of how
LEIs can increase the accuracy of identifications; see also SIFMA
Letter at 37.
---------------------------------------------------------------------------

(3) Enforcement Investigations
    In the Notice, the Commission explained that the improvements in
data qualities that would result from the CAT NMS Plan would
significantly improve the efficiency and efficacy of enforcement
investigations, including insider trading and manipulation
investigations.\2299\ The Commission discussed how 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.
---------------------------------------------------------------------------

    \2299\ See Notice, supra note 5, at 30699.
---------------------------------------------------------------------------

    The Commission discussed its expectation that dramatic benefits
would come from improvements to the accessibility, timeliness,
accuracy, and completeness of the data. First, compiling the data to
support an investigation often requires a tremendous amount of time and
resources, multiple requests to multiple data sources and significant
data processing efforts, for both SROs and the Commission. While SROs
have direct access to the data from their own markets, their
investigations and investigations by the Commission 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.
Data fragmentation and the time it takes to receive requested data
currently make these market reconstructions cumbersome and time-
consuming. The Commission discussed its view that having access to CAT
Data would help regulators analyze and reconstruct market events, and
could in turn help them detect violative behavior during enforcement
investigations.
    Second, the Commission explained that it currently takes weeks or
longer to process, link and make data available for analysis in an
enforcement investigation. Under the CAT NMS Plan, data for an
enforcement investigation initiated five days or more after an event
would be processed, linked, and available for analysis within 24 hours
of a query. The Commission discussed how the enhanced timeliness of
data can improve the Commission's chances of preventing asset transfers
from manipulation schemes, because regulators could use even
uncorrected data (between T+1 and T+5) to detect the manipulation and
identify the suspected manipulators.
    Third, the Commission explained in the Notice that currently,
identifying the activity of a single market participant across the
market is cumbersome and prone to error. The inclusion and expected
improvement in the accuracy of Customer Identifying Information in the
CAT NMS Plan could allow regulators to review the activity of specific
market participants more effectively. The Commission also explained
that this information would be helpful in identifying insider trading,
manipulation and other potentially violative activity that depends on
the identity of market participants. Additionally, the Commission
explained that improved accuracy with respect to timestamp granularity
could increase the proportion of market events that could be sequenced
under the CAT NMS Plan. This could yield some benefits in enforcement
investigations, including investigations of insider trading,
manipulation, and compliance with Rule 201 of Regulation SHO and Rule
611 of Regulation NMS.\2300\
---------------------------------------------------------------------------

    \2300\ 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 V.D.2.b(2)B.i, supra.
---------------------------------------------------------------------------

    Finally, the Commission explained that 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 timestamps,
principal orders, non-member activity, customer information,
allocations, and an open/close indicator, which would identify 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 subaccounts.
    One commenter agreed that the CAT Plan would slightly improve the
efficiency of regulators' enforcement activities because CAT will save
them multiple trips to request data from financial institutions; \2301\
however, this commenter argued that such benefits would be minimal
because they do not help to identify misconduct and/or recognize
patterns of market manipulation in real-time.\2302\ The commenter
mentioned that the CAT Plan would not effectively and efficiently deter
violative behavior, thereby only resulting in marginal improvements to
enforcement.\2303\ The Commission also received a comment stating that
the Plan is overly-focused on best execution, which requires parsing
bid and offer information on a minute scale, and that this may
overwhelm the system and thereby prevent the capture of relevant
information and frustrate the generally stated goals of CAT.\2304\ One
commenter also stated that the Commission is overly optimistic with
respect to the benefits of CAT to enforcement activity, mainly due to
the Plan lacking an analytical framework embedded in its design.\2305\
The Participants did not specifically provide a response to the
commenters' concerns.
---------------------------------------------------------------------------

    \2301\ Data Boiler Letter at 32.
    \2302\ Id.
    \2303\ Id. at 33.
    \2304\ Anonymous Letter I at 3.
    \2305\ Data Boiler Letter at 33.
---------------------------------------------------------------------------

    The Commission considered these comments and believes that they do
not warrant changes to the Commission's preliminary conclusions of the
benefits that the Plan would provide to enforcement investigations.
First, while the Commission acknowledges that CAT Data will not assist
the Commission in recognizing patterns of market manipulation in real-
time, the Commission nonetheless believes that

the benefits of CAT Data to performing enforcement activities relative
to the Baseline are significant. For instance, Customer Identifying
Information in CAT Data would be particularly helpful in identifying a
single market participant across the market, which would be useful in
identifying insider trading, manipulation and other potentially
violative activity that depends on the identity of market participants.
Second, in light of the comment on best execution, the Commission
believes that while the Plan will facilitate enforcement of best
execution, including on Rule 611, this will not prevent the Plan from
improving regulators' ability to investigate other types of violations,
including market manipulation and insider trading. Furthermore, by
parsing information on a granular scale, the Commission believes that
the CAT Plan would increase the proportion of events that can be
sequenced, yielding benefits in enforcement investigations. Third,
regarding the commenter who stated that the Commission's assessment of
the effects to enforcement investigations are optimistic because the
Plan lacks an analysis framework, the Commission disagrees with this
commenter for similar reasons to those stated above.\2306\
---------------------------------------------------------------------------

    \2306\ See Section V.E.2.c(1), supra; supra n.2284.
---------------------------------------------------------------------------

    While the Commission is not altering its analysis of the benefits
in response to the comments it received, the Commission is updating its
analysis to recognize modifications to the Plan. Requiring CAT
Reporters to report LEIs for Customers and Industry Members in certain
circumstances \2307\ should result in a greater ability for regulators
to identify traders for the purposes of enforcement activity.\2308\
This potentially improved data completeness could result in greater
benefits to enforcement than stated in the Notice. Benefits to data
completeness could also be potentially diminished by Plan modifications
that remove the open-close indicator for equities and Options Market
Makers. Such information would have been useful in detecting certain
market manipulations and violations of rules such as Rule 105, short
sale marking rules, and Rule 204 in equities and in identifying whether
options market makers engage in aggressive risk-taking trading. The
Commission now notes that due to the elimination of the requirement to
report an open/close indicator for equities and Options Market Makers
as part of CAT, these benefits will no longer be realized. However, the
Commission is approving the Plan with this modification for the reasons
discussed in Section IV.D.4.c, above. With regards to modifications to
the timestamps on Allocation Reports, the Commission now understands
that allocations are conducted after a trade and that the allocation
time can aid regulators in ways that do not require millisecond-level
timestamps. Therefore, modifications to the Plan that now require
second-level timestamps would not result in a significant loss of
benefits to the Commission. In spite of these modifications to the
Plan, the Commission nonetheless believes that the efficiency and
efficacy of enforcement investigations will be improved to a greater
degree than anticipated in the Notice.
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    \2307\ See Sections IV.D.4.a.(4) and IV.D.4.b.(2), supra, for a
description of the LEI reporting requirements in the Plan.
    \2308\ See Section V.E.1.b(5), supra, for a discussion of how
LEIs can increase the accuracy of identifications; see also SIFMA
Letter at 37.
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(4) Tips and Complaints
    In the Notice, the Commission explained why it believed 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.\2309\ Specifically, the availability of CAT Data would
drastically increase the detail of data available to regulators for the
purposes of tip assessment. This 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.
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    \2309\ See Notice, supra note 5, at 30699; see also SEC Office
of the Whistleblower, What Happens to Tips, available at https://www.sec.gov/about/offices/owb/owb-what-happens-to-tips.shtml.
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    The Commission did not receive any comments regarding the benefits
that would accrue to investors with regards to how regulators respond
to tips and complaints. However, changes to the Plan affect the
Commission's analysis from the Notice; namely, requiring LEI reporting;
enhanced clock synchronization requirements for exchanges; less
granular timestamps for allocation reports; and removing the open/close
indicator for equities and for Options Market Makers. As discussed
above in Sections V.E.2.c.(2) and (3), these changes could affect risk
based examinations and enforcement investigations, and could thereby
affect the ability of regulators to effectively triage tips and
complaints. In light of these modifications to the CAT NMS Plan, the
Commission continues to believe that benefits would accrue to
regulators allowing them to more effectively triage tips and complaints
by focusing resources on behavior that is most likely to be violative,
thereby resulting in benefits that would also accrue to investors and
market participants.

3. Other Provisions of the CAT NMS Plan

    In the Notice, the Commission noted 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.\2310\ Therefore, rather than
analyze the benefits of these provisions as compared to existing NMS
Plans or data systems, the Commission analyzed these provisions in
comparison to a CAT NMS Plan without these features. The Commission
preliminarily believed that these provisions of the CAT NMS Plan would
increase the likelihood that the potential benefits of the CAT NMS Plan
described above would be realized.
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    \2310\ Id. at 30699-30708.
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    As discussed below, the Commission has revised its analysis in
response to comments, the Participants' response, and the Commission's
modifications to the Plan.
a. Future Upgrades
    In the Notice, the Commission discussed several Plan provisions
that seek to ensure that the CAT Data would continually be updated to
keep pace with technological and regulatory developments.\2311\ For
example, the Plan would require that the CCO review the completeness of
CAT Data periodically,\2312\ that the Central Repository be scalable to
efficiently adjust for new requirements and changes in
regulations,\2313\ and that Participants provide the Commission with a
document outlining how the Participants could incorporate information
on select additional products and related Reportable

Events.\2314\ The Commission preliminarily believed these provisions
would allow the CAT to be updated if and when the applicable
technologies and regulations change.
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    \2311\ Id. at 30700. Examples of these provisions include,
requiring ``the Chief Compliance Officer to review completeness of
CAT Data periodically;'' requiring that ``the Central Repository be
scalable to efficiently adjust for new requirements and changes in
regulations;'' and requiring Participants ``to provide the
Commission with a document outlining how Participants could
incorporate information on selecting additional products and related
Reportable Events.'' Id.
    \2312\ See CAT NMS Plan, supra note 5, at Sections 4.12(b)(ii),
6.2(a)(v)(E). The CCO 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.
    \2313\ Id. at Appendix D, Section 1.1.
    \2314\ Id. at Section 6.11. This document is due within six
months of the Effective Date of the CAT NMS Plan.
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    The Commission noted that 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 expected that, in addition to these
provisions, the CCO review would further facilitate proactive expansion
of CAT to account for regulatory changes or changes in how the market
operates, or in response to a regulatory need for 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 efficient implementation of that expansion such that it
could be completed at lower cost and/or in a timely manner.
    Taken together, the Commission believed that 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 the expansion of CAT functionality is undertaken in
order to create new benefits. The Commission recognized some
uncertainty with respect to how effectively these provisions would
operate to ensure that improvements to CAT functionality are considered
in a way that would maximize the benefits of the Plan, but noted that
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.\2315\ Moreover, the focus on scalability, adaptability, and
timely maintenance and upgrades promotes a system that could be readily
adapted over time. The Commission preliminarily believed that the
provisions outlined above would allow the CAT Data to be continually
updated to keep pace with technological and regulatory developments.
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    \2315\ 17 CFR 242.608.
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    The Commission received one comment disagreeing that future
upgrades would increase the likelihood that potential future benefits
would be realized. The commenter stated that the provisions about
future upgrades are infrastructure related, rather than quality
improvements in the sense of timely insights to regulators.\2316\
Another commenter stated that the proposal for the CCO to be an officer
of the CAT LLC as well as an employee of the Plan Processor creates a
conflict of interest that would undermine the ability of this officer
to carry out his or her responsibilities effectively under the Plan
because he or she would owe a fiduciary duty to the Plan Processor
rather than the CAT LLC.\2317\ The Commission notes that the Plan
accords the CCO certain responsibilities related to future upgrades;
for example, as noted above, the CCO is responsible for reviewing the
completeness of CAT Data periodically and providing the SEC with a
document outlining how the Participants could incorporate information
on select additional products and related Reportable Events.\2318\
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    \2316\ Data Boiler Letter at 34.
    \2317\ FSI Letter at 3.
    \2318\ The Plan delegates these tasks to the CCO. See CAT NMS
Plan, supra note 5, at Sections 4.12(b)(ii), 6.11, 6.2(a)(v)(E).
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    In response to that comment, the Participants recommended a change
to the Plan that would require that the CCO have fiduciary duties to
the CAT LLC in the same manner and extent as an officer of a Delaware
corporation, and that, to the extent those duties conflict with duties
the CCO has to the Plan Processor, the duties to the CAT LLC should
control.\2319\ As discussed in more detail in the Discussion Section,
the Commission agrees with this suggestion and has modified the Plan to
incorporate this change.
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    \2319\ Response Letter I at 17-18.
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    The Commission has considered the comments received, the
Participants' response, and the modifications the Commission has made
to the Plan. The Commission disagrees with the commenter that stated
that the future upgrades would not help to provide ``timely insights to
regulators'' because the provisions are ``infrastructure related.''
\2320\ As discussed above, the upgrades should improve the completeness
of the CAT Data by potentially allowing for its expansion to include
information on select additional products and related Reportable
Events, and access to more complete data should improve regulatory
activities.\2321\ Additionally, the required scalability of the Central
Repository infrastructure and the mechanism to accept suggested changes
from the Advisory Committee and regulators will permit the CAT to meet
the needs of the regulators--such as enhancements benefiting their
oversight of the markets--and be modifiable and adaptable to future
technology changes.\2322\
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    \2320\ Data Boiler Letter at 34.
    \2321\ See Sections V.E.1.a and V.E.2, supra, for a discussion
of how more complete data is expected to improve 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.
    \2322\ See Section IV.D.15, supra.
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    In response to the comment noting that the proposal for the CCO to
be an officer of the CAT LLC as well as an employee of the Plan
Processor creates a conflict of interest,\2323\ the Commission notes
that the potential for a conflict of interest would create additional
uncertainty as to whether the provisions of the Plan requiring the CCO
to review the completeness of CAT Data periodically and to provide the
Commission with a document outlining how the Participants could
incorporate information on select additional products and related
Reportable Events will be carried out in a way that will maximize the
benefits of the Plan. However, the modification to the Plan requiring
the CCO to have fiduciary duties to the CAT LLC in the same manner and
extent as an officer of a Delaware corporation should reduce that
uncertainty. Therefore, the Commission continues to believe that those
provisions will allow the CAT to be updated efficiently if and when the
applicable technologies and regulations change.
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    \2323\ FSI Letter at 3.
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    Furthermore, the Plan has been modified to require an annual
evaluation of potential technological upgrades based upon a review of
technological advancements over the preceding year, drawing on
Participants' technology expertise, whether internal or external.\2324\
The Plan has also been modified to require an annual assessment of