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4. Related Considerations Affecting Competition, Efficiency and Capital
Formation
    The Commission recognizes that the Plan's likely effects on
competition, efficiency and capital formation are dependent to some
extent on the performance and decisions of the Plan Processor and the
Operating Committee in implementing the Plan, and thus there is
necessarily some uncertainty in the Commission's analysis. Nonetheless,
the Commission believes that the Plan contains certain governance
provisions, as well as provisions relating to the selection and removal
of the Plan Processor, that mitigate this uncertainty by promoting
decision-making that could, on balance, have positive effects on
competition, efficiency, and capital formation.
a. The Efficiency of Plan Decision-Making
    As noted in several places above,\1129\ future decisions of the
Operating Committee could significantly alter the economic effects of
the Plan. As a result, this economic analysis also considered whether
the process by which the Operating Committee would make such decisions
promotes efficiency. According to the Plan, the inability of the
Operating Committee to act in a timely manner could create consequences
for efficiency, competition, and capital formation.\1130\ On the other
hand, the Commission notes that consequences also could arise if the
Operating Committee makes decisions so quickly that it does not
consider all relevant information. This Section analyzes whether the
decision-making processes in the Plan promote timely decisions that
consider all relevant information of value. While the Plan considers
the potential for inefficiencies in the decision-making process, the
Commission preliminarily believes that certain governance provisions in
the Plan could create some inefficiencies in the decision-making
process, but that these inefficiencies are limited or exist to promote
better decision-making. The Plan discusses two areas where the proposed
governance structure impacts the efficiency of the decision-making
process: (1) Voting protocols and (2) the role of industry
advisers.\1131\ The Commission also considered the efficiency
implications of the level of detail included in the Plan and the
scalability of the Plan.
---------------------------------------------------------------------------

    \1129\ See, e.g., Section IV.C.2, supra.
    \1130\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(d).
    \1131\ See id.
---------------------------------------------------------------------------

    The Plan specified three types of voting protocols and determines
when each protocol applies.\1132\ The Plan requires unanimous voting in
only three circumstances: A decision to obligate Participants to make a
loan or capital contribution, a decision to dissolve the Company, and a
decision to take an action by written consent instead of a
meeting.\1133\ Further, the Plan requires supermajority voting in
instances considered by the Participants to have a direct and
significant impact on the functioning, management, and financing of the
CAT System,\1134\ such as selection and removal of the Plan Processor
and key officers, approving the initial Technical Specifications,
approving Material Amendments to the Technical Specifications proposed
by the Plan Processor, and approving direct amendments to the Technical
Specifications proposed by the Operating Committee.\1135\ The Plan
considers other matters as routine matters that arise in the ordinary
course of business and would be subject to majority voting. As a
practical matter, Majority Vote is the default standard for decisions
other than those requiring supermajority or unanimous voting.
---------------------------------------------------------------------------

    \1132\ See Section III.A.3.a(3), supra, for a discussion of the
management of the Company, including the definitions of the voting
protocols and details on their application.
    \1133\ See CAT NMS Plan, supra note 3, at Appendix C, Section
D.11(b), Voting Criteria of the Operating Committee.
    \1134\ See id. at Appendix C, Section D.11(b).
    \1135\ See id. at Appendix C, Section D.11(b). The Plan also
requires supermajority voting on matters outside the ordinary course
of business, such as modifications to a Material Contract, incurring
debt, making distributions or tax elections, or changing the fee
schedules.
---------------------------------------------------------------------------

    The Plan balanced the efficiency of the decision-making process
against the value of considering minority and dissenting opinions in
proposing these voting protocols.\1136\ In particular, the Plan
recognizes that some voting protocols might impede the effective
administration of the CAT System.\1137\ From a mechanical perspective,
voting protocols determine a threshold for a passing vote. Unanimity
requires a threshold of 100% yes votes while majority voting requires a
threshold of more than 50% yes votes and Supermajority requires two-
thirds or more. The Plan explains that too-high a threshold for
decision-making, such as may be the case in applying unanimity to all
voting matters, could limit the ability of the Operating Committee to
adopt broadly agreed upon provisions.\1138\ For example, in the
extreme, requiring unanimity in voting could result in one dissenting
opinion holding up the entire decision-making process. Conversely, the
Plan explains that a threshold that is set too low might limit the
opportunities for the consideration of dissenting or minority opinions
and alternative approaches.\1139\ For example, if voting thresholds
were too low, a set of Participants could potentially adopt provisions
that might provide them a competitive advantage over other
Participants.
---------------------------------------------------------------------------

    \1136\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(d).
    \1137\ See id.
    \1138\ See id.
    \1139\ See id.
---------------------------------------------------------------------------

    The Commission preliminarily agrees with the discussion on the need
to balance efficiency in the voting protocols in the Plan. The
Commission notes that the speed and ability to make a decision are key
components of whether the Plan promotes efficiency in its operations.
High-vote thresholds may result in an increase in the effort needed to
obtain enough votes to make a decision. Further, in addition to the
drawn out discussions necessary to obtain a unanimous vote, a unanimous

vote might also require compromises that reduce the efficiency of the
decision-making process. This could be particularly costly in
situations in which the Operating Committee must make a decision by a
particular date. It could also result in inaction for decisions related
to making discretionary changes that could improve data qualities, such
as updates, if the Participants disagree among the various
alternatives.
    Furthermore, while the decision-making processes with a very low
voting threshold would be faster, the resulting decisions might not
consider all relevant information.\1140\ As a result, the Commission
preliminarily agrees that the inefficiencies in the voting protocols in
the Plan are limited enough to strike a balance between the
inefficiencies of the decision-making process and the quality of the
decisions.
---------------------------------------------------------------------------

    \1140\ See Section IV.E.3.d, supra, for a discussion of how
certain governance provisions could help promote better decision-
making by the relevant parties.
---------------------------------------------------------------------------

    The Plan also discusses the role of industry representation as part
of the governance structure.\1141\ Section 4.13 of the Plan requires an
Advisory Committee that contains twelve members, including
representatives from 7 types of broker-dealers, 2 institutional
investors, and 3 individuals.\1142\ In addition, the Plan says that the
Advisory Committee is ``intended to support the Operating Committee and
to promote continuing efficiency in meeting the objective of the CAT.''
\1143\ The Plan also indicates that it is important to include industry
representation to assure that all affected parties have representation.
---------------------------------------------------------------------------

    \1141\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.8(d).
    \1142\ See id. at Section 4.13 (Advisory Committee).
    \1143\ See id. at Appendix C, Section B.8(d).
---------------------------------------------------------------------------

    The Commission preliminarily agrees with the discussion in the Plan
that including industry representation might result in a more
efficiently designed CAT, but adds that an Advisory Committee also adds
operational inefficiencies. As discussed above, the Commission
preliminarily believes that an Advisory Committee could add more
diverse viewpoints to the debates surrounding Operating Committee
decisions and thus reduce the risk that members of the Operating
Committee could make decisions without first obtaining a full
understanding of the underlying facts or the likely impact of its
decisions.\1144\ The Commission also recognizes, however, that
including an Advisory Committee in the decision-making process might
add complexity to the process and decisions might require more time
relative to allowing the Operating Committee to make decisions without
the input of an Advisory Committee. The inclusion of an Advisory
Committee could thereby potentially adversely affect the efficiency of
the Plan's operation. In general, the Commission preliminarily believes
that as long as the Advisory Committee adds sufficiently useful
information, the benefits from the Advisory Committee would justify any
operational inefficiencies from the inclusion of the Advisory
Committee.
---------------------------------------------------------------------------

    \1144\ See Section IV.E.3.d(2)B, supra.
---------------------------------------------------------------------------

    The Commission considered an additional source of potential
efficiencies in the decision-making process. The Plan specifies minimum
standards for particular provisions or solutions in Appendix D of the
Plan instead of specifying the solutions themselves in the Plan.\1145\
While this creates uncertainty in the costs and benefits of the Plan
and reduces the transparency for the bidders, the Commission recognizes
that decisions to not specify certain solutions in the Plan could
promote efficiency in the decision-making process of the Operating
Committee. The Operating Committee and/or Selection Committee would
effectively decide upon the unspecified details when selecting the Plan
Processor and when approving the Technical Specifications.\1146\ As
such, certain technical details may not appear in the Plan and may not
be subject to Commission approval or, potentially, to public comment.
Instead, the Operating Committee could implement such decisions much
more quickly and at a potentially lower cost. The Commission believes
that the Commission and public review process could add value to the
decision-making process, particularly in assuring that the decisions
consider costs and benefits. However, a notice and comment process for
certain technical changes could be cumbersome and time-consuming, and
may not therefore be justified in the context of certain technical
issues. The Plan therefore may be more agile and efficient in its
ability to upgrade and improve systems quickly. On the other hand, the
cost of this efficiency comes in the form of the significant
uncertainties surrounding the economic effects of the Plan during the
approval process.
---------------------------------------------------------------------------

    \1145\ For example, the Plan provides minimum standards for
regulator access to CAT Data but does not propose any particular
method for regulatory access. Nor does the Plan specify whether the
regulators would have work space on servers at the Central
Repository or whether regulators would have to download the results
of every query before being able to process such results.
    \1146\ For example, the Selection Committee would decide on the
details of regulator access in conjunction with selecting the Plan
Processor or in subsequent negotiations with the selected Plan
Processor.
---------------------------------------------------------------------------

    Provisions of the Plan should also promote efficiently implementing
expansions to the CAT Data. Appendix C of the Plan notes that the Plan
Processor must ensure that the Central Repository's technical
infrastructure is scalable and adaptable.\1147\ These provisions should
reduce the costs and time needed for expansions to the Central
Repository.
---------------------------------------------------------------------------

    \1147\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.5(a).
---------------------------------------------------------------------------

b. Selection and Removal of the Plan Processor
    The CAT NMS Plan uses a request for proposal (``RFP'') to select
the Plan Processor that would design, build, and operate the Central
Repository. The winning bidder becomes the sole supplier of the
operation of the Central Repository. The Commission preliminarily
believes this is necessary to achieve the benefits of a single
consolidated source of regulatory data.
    The competitiveness of the selection process influences the
ultimate economic effect of the Plan because those effects depend in
large part on the efficiency and effectiveness of the Plan Processor.
In particular, many of the details of the Plan would be determined
either by the winning bid or in negotiations with the Plan Processor
after selection. The Plan Processor exercises control over the future
costs of operating and maintaining the Central Repository in this
context and the Plan Processor chooses its performance level, subject
to the minimum standards in the Plan and with oversight from the
Operating Committee.
    Given the effects associated with the selection process for the
Plan Processor, the Commission considered whether the Plan promotes a
competitive process and whether the Plan contains provisions that would
create incentives for the chosen Plan Processor to set costs and
performance competitively. As explained below, the Commission
preliminarily believes that the selection process generally promotes
competition but that there are also a few potential limitations on
competition. Moreover, the Commission recognizes that a competitive
bidding process does not necessarily mean that the selected bidder
would behave competitively after being selected as the Plan
Processor.\1148\

But the Commission preliminarily believes that the Plan could control
the costs of the Central Repository and the performance of the Plan
Processor if the Plan included sufficient competitive incentives for
the selected Plan Processor. While the Commission preliminarily
believes that threat of replacement of the Plan Processor could
incentivize them to set costs and performance competitively, the high
cost of replacement could limit these incentives.\1149\
---------------------------------------------------------------------------

    \1148\ See Goldfine and Vorrasi, ``The Fall of the Kodak
Aftermarket Doctrine: Dying A Slow Death in the Lower Courts,'' 74
Antitrust Law Journal No. 1 (2004), p. 209 (stating that
``competition in the primary market, as a matter of law, does not
necessarily preclude the possibility of market power (and
anticompetitive conduct) in the aftermarkets for parts and
services,'' and citing Eastman Kodak Co. v. Image Technical
Services, Inc., 504 U.S. 451 (1992)). Economic theories of the
relation between primary markets and aftermarket are the focus of
other literature as well; see infra note 1149. (In the context of
the Plan, the ``primary market'' would be the initial selection of
the Plan Processor while in the ``aftermarket,'' the selected Plan
Processor would supply a performance level for the given revenues
received from the Company.)
    \1149\ Under the theory of contestable markets, it is possible
for the sole supplier of a service to behave as if there multiple
suppliers, and thus not exercise monopoly power. Necessary
conditions include the absence of entry and exit costs. William J.
Baumol, John C. Panzar, Robert D. Willig (1982), Contestable Markets
and the Theory of Industry Structure. When the conditions needed to
support contestable markets are not met, the presence of alternative
suppliers may not be sufficient to prevent the costly exercise of
monopoly power, post-selection. For example, if the supplier cannot
make complete and binding commitments to the price and quality of
its post-selection services, and the buyer becomes locked into the
sole supplier (e.g., due to switching costs or other sources of
friction), a competitive selection process may lead to monopoly
outcomes, post-selection; see, e.g., Carl Shapiro, 1995,
``Aftermarkets and Consumer Welfare: Making Sense of Kodak,''
Antitrust Law Journal, and Borenstein, Severin, Jeffrey K. Mackie-
Mason, and Janet S. Netz, 1995, Antitrust Policy in Aftermarkets,
Antitrust Law Journal 63: 455-82. For a recent survey of alternative
theories, see section 3.1, Dennis W. Carlton and Michael Waldman,
2014. ``Robert Bork's Contributions to Antitrust Perspectives on
Tying Behavior,'' Journal of Law & Economics.
---------------------------------------------------------------------------

(1) Competitiveness of the Plan Processor Selection Process
    The Commission believes that two elements determine the
competitiveness of the bidding process. The first relates to the voting
process and the second relates to the degree of transparency in the
bidding process. The Commission preliminarily believes that the Plan
provisions relevant to these two factors could promote competition in
the bidding process and limit the risk that selection of the Plan
Processor would be affected by a conflict of interest, thereby
promoting better decision-making.
    The CAT NMS Plan outlines a bidding process whereby a Selection
Committee votes on bidders during several rounds of voting that each
narrow the potential bidders until one bidder is selected.\1150\
Pursuant to the Plan, the bidders compete to be selected by proposing
solutions to comply with Rule 613 and documenting the anticipated costs
of doing so. The Plan also contains provisions for revising Bids if the
Commission approves the Plan.\1151\
---------------------------------------------------------------------------

    \1150\ See CAT NMS Plan, supra note 3, at Section 5.2 (Bid
Evaluation and Initial Plan Processor Selection).
    \1151\ Id. at Section 5.2(e).
---------------------------------------------------------------------------

    The Participants received 31 Intent to Bid forms during the RFP
process; 13 of the potential bidders withdrew before January 30, 2014;
the Participants reported receiving 10 Bids by April 2, 2014.\1152\ Six
of these Bidders were shortlisted through the selection process in July
2014, including one SRO that is also a Bidder. In November 2015, the
shortlist was further narrowed to three Bidders.\1153\
---------------------------------------------------------------------------

    \1152\ For details on the progression of the CAT RFP process,
see RFP Process, SEC Rule 613: Consolidated Audit Trail (CAT),
available at http://catnmsplan.com/process/ (last visited November
19, 2015).
    \1153\ See supra note 35.
---------------------------------------------------------------------------

    In considering how competitive the voting process is, the
Commission has considered whether conflicts of interest could limit
competition in the bidding process through the proposed participation
of a bidder representative on the Selection Committee. The Plan
includes provisions that mitigate this conflict but that have not
eliminated it completely. In particular, the Plan requires recusal of
an SRO from any selection round if that SRO or its affiliate has
submitted a bid--or is included as a material subcontractor as part of
a bid--that is still under consideration in such round.\1154\
Similarly, the Plan creates information barriers between the Staff at
the SRO selecting the bidder and the Staff undertaking the
bidding.\1155\ These provisions promote a level playing field for all
bidders because the SRO bidder does not know any more than a non-SRO
bidder and so has no informational advantage in submitting a bid that
the Selection Committee may find favorable. Further, the information
barriers prevent those working on the bid from attempting to persuade
members of the Selection Committee toward their bid in a way that other
bidders cannot. The Commission recognizes, however, that there is a
residual risk in having an SRO among the bidders; it is possible that
voting Participants would be biased for or against that SRO either
because they compete with that SRO in another market (and could gain a
competitive advantage in that market by acting as Plan Processor) or
because of repeated interactions with that SRO.
---------------------------------------------------------------------------

    \1154\ See CAT NMS Plan, supra note 3, at Section 4.3(d), at
Section 5.1(b).
    \1155\ See id. at Section 5.1(d).
---------------------------------------------------------------------------

    The Commission also recognizes that, to the extent the Operating
Committee has specific preferred solutions as to how the Plan should be
implemented, the degree to which the Committee is transparent about
those preferences in the bidding process would affect the
competitiveness of that process. For example, if the Commission were to
approve the Plan and bidders were thereafter given the opportunity to
revise their bids, the Operating Committee could promote
competitiveness in the bidding process by outlining its preferences.
Transparency into the Operating Committee's views regarding potential
optimal solutions could assist a bidder in revising its bid to inform
how that bidder could supply those optimal solutions, and the Selection
Committee could then compare all bidders on those particular solutions.
To the extent that the Operating Committee has strong preferences
toward particular solutions but did not specify those preferences
directly in the Plan, the bidder may not know that it could improve its
chances of winning the bid by proposing a different solution and the
Selection Committee would not know whether the bidder is capable of
delivering the preferred solution more efficiently than the other
bidders. On the other hand, the Commission notes that specifying a
preferred solution also has the potential to discourage bidders from
competing on innovation by proposing novel approaches that may deliver
superior outcomes.
    The Commission has no reason to believe that the Operating
Committee has preferred solutions beyond what is in the Plan that would
significantly impact the competitiveness of the Plan Processor
selection process. Indeed, Appendix D of the Plan details numerous
minimum standards not included in the RFP. In addition, the Plan also
provides details on the range of solutions proposed by bidders and why
the Operating Committee may not have a preference and therefore did not
select a particular solution. This provides transparency to the bidders
on the criteria the Selection Committee may use to compare bidders.
(2) Competitive Incentives of the Selected Plan Processor
    The Plan could create competitive incentives for the selected Plan
Processor by detailing strong requirements for the Plan Processor and
providing an efficient mechanism to

remove the selected Plan Processor and introducing an alternative Plan
Processor in the event of underperformance. As described below, the
Commission preliminarily believes that the Plan provides the selected
Plan Processor with competitive incentives because the Plan contains
defined procedures for monitoring and removing the Plan Processor for
failure to perform functions adequately or otherwise. However, the ease
with which the Operating Committee could remove the Plan Processor and
the costs of switching to another Plan Processor could limit these
competitive incentives.
    The Plan contains several provisions that would allow the Operating
Committee to remove the Plan Processor.\1156\ By Supermajority Vote,
the Operating Committee could remove the Plan Processor for any reason.
The Operating Committee may, by Majority Vote, remove the Plan
Processor if it determines that the Plan Processor has failed to
perform its functions ``in a reasonably acceptable manner'' or if the
Plan Processor's expenses ``have become excessive or are not
justified.'' The consideration of such poor performance or excessive
expenses would include (1) responsiveness to requests for technological
changes or enhancements, (2) results of assessments performed pursuant
to Section 6.6 of the Plan, (3) staying up-to-date on reliability and
security of operations, (4) compliance with the requirements of
Appendix D, and (5) other factors the Operating Committee may determine
to be appropriate.
---------------------------------------------------------------------------

    \1156\ See CAT NMS Plan, supra note 3, at Section 6.1(q), (r),
(s).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the ability of the
Operating Committee to remove the Plan Processor for poor performance
with only a Majority Vote incentivizes the Plan Processor to perform
well enough to avoid being removed. The Commission further
preliminarily believes that the performance of the Plan Processor would
depend significantly on strong oversight by the Operating
Committee.\1157\
---------------------------------------------------------------------------

    \1157\ See Section IV.E.3.d, supra, for a discussion of the
incentives of the Operating Committee in overseeing the Plan
Processor.
---------------------------------------------------------------------------

    The Commission recognizes that the effort required to remove a Plan
Processor could be significant, which would limit the incentives of the
Plan Processor to perform well. To subject a removal to a Majority
Vote, the Operating Committee would presumably need to demonstrate the
Plan Processor's performance and determine that it was not ``reasonably
acceptable.'' If not, the removal would be subject to Supermajority
Vote, which could also take significant effort and a removal would be
less likely to pass.
    In addition, significant switching costs could influence whether
removing a Plan Processor despite poor performance makes economic
sense. In other words, the Operating Committee could wait for
significant performance issues before initiating a vote to remove the
Plan Processor. Additionally, before removing a Plan Processor, the
Operating Committee would need to select a new Plan Processor. This
would likely be a lengthy process taking significant time and effort by
the Operating Committee. Moreover, switching Plan Processors could
entail a complete rebuild of the Central Repository and significant
implementation costs for CAT Reporters and Participants, potentially
amounting to the initial implementation costs of the Plan. These costs
would be higher if the Plan Processor's solutions include proprietary
technologies that no other potential replacement (competitor) could
supply. The costs would be lower if the new Plan Processor could
implement the existing Technical Specifications. The benefits of
switching could also depend on the benefits from technological
advancements that these competitors could supply. In light of these
costs, the competitive incentives of the Plan Processor to maintain top
performance could be limited. Specifically, the Plan Processor may only
need to perform well enough to keep the inefficiencies associated with
their performance from exceeding the cost to switch to another Plan
Processor. Despite the limitations on competitive incentives due to
switching costs, however, the Commission preliminarily believes that
the threat of replacement still provides an incentive to stay
relatively current on technology advancements to avoid falling
significantly behind potential competitors.
5. Request for Comment on Efficiency, Competition, and Capital
Formation
    The Commission requests comment on all aspects of the discussion of
the effects of the CAT NMS Plan on efficiency, competition, and capital
formation. In particular, the Commission seeks responses to the
following questions:
    347. The Participants state in the Plan that they believe the Plan
would avoid disincentives such as placing an inappropriate burden on
competition in the U.S. securities markets. In its analysis, the
Commission concludes that competition is unlikely to be harmed to a
degree that would affect investors. Do Commenters agree with the
conclusions discussed in the Plan? Why or why not? Do Commenters agree
with the Commission's conclusion regarding the Plan's impact on
competition? Why or why not?
    348. Do Commenters agree with the Commission's characterization of
the relevant markets that the CAT NMS Plan affect? Why or why not? Do
Commenters agree with the identified level of competition in each of
the relevant markets in the Commission's analysis? Why or why not?
    349. Do Commenters agree with the Commission's discussion of the
Baseline for the market for trading services? Why or why not?
    350. Do Commenters agree with the Commission's analysis of
competition in the market for trading services under the Plan? Why or
why not?
    351. Do Commenters agree with the Commission's analysis of effects
of the Plan's funding model on competition? Why or why not? Would the
funding model as outlined in the Plan affect competition in the market
for trading services between exchanges and ATSs? If so, how? Do
Commenters agree with the Commission's analysis of the effects on
competition of the Plan's allocation of CAT fees across market
participants? Why or why not? Would the Participation Fee outlined in
the Plan serve as a barrier to entry for ATSs that might otherwise
register as exchanges? Why or why not?
    352. Do Commenters believe that the allocation of voting rights
among the Participants may serve to affect competition between
Participants that operate options exchanges and those that do not? Why?
Do governance provisions outlined in the Plan provide controls that
could prevent burdens on competition due to the allocation of voting
rights among Participants? If not, are there controls that could
achieve this?
    353. Do Commenters believe that the allocation of voting rights
among the Participants may serve to affect competition between
exchanges and ATSs in the market for trading services? Why or why not?
    354. Do Commenters agree with the Commission's analysis of the
effects on competition of costs of compliance with the Plan? Why or why
not?
    355. Do Commenters agree with the Commission's analysis of the
effects on competition of the Plan's enhanced surveillance and
deterrence? Why or why not?
    356. Do Commenters agree with the Commission's analysis of the
Baseline

for competition in the market for broker-dealer services? Why or why
not?
    357. Do Commenters agree with the Commission's analysis of the
effects on competition in the market for broker-dealer services of the
Plan? Why or why not? Are these effects different for smaller broker-
dealers? How? How significant are these impacts?
    358. Do Commenters agree with the Commission's analysis of the
competition to be Plan Processor? Why or why not?
    359. Do Commenters believe that any elements of the CAT NMS Plan
may affect competition among the bidders? Do Commenters believe that
any decisions by the Operating Committee that are allowable or likely
under the proposed Plan may affect competition among the bidders in the
market to be Plan Processor? If so, how would these competitive
dynamics affect CAT as outlined in the Plan?
    360. Do Commenters agree with the Commission's analysis of
competition in the market to be Plan Processor post-selection? Why or
why not?
    361. Do Commenters agree with the Commission's analysis of the
Baseline for competition in the market for regulatory services? Why or
why not?
    362. Do Commenters agree with the Commission's analysis of
competition in the market for regulatory services of the Plan? Why or
why not?
    363. Do Commenters agree with the Commission's analysis of the
Baseline for competition in the market for data reporting services? Why
or why not? Do Commenters believe that capacity constraints in this
market may affect broker-dealers' ability to comply with data reporting
requirements under the Plan?
    364. Do Commenters agree with the Commission's analysis of
competition in the market for data reporting services under the Plan?
Why or why not?
    365. If some or all of the Participants decide to share the Raw
Data they collect pursuant to the CAT NMS Plan and use the combined
data for commercial purposes, how do Commenters believe that might
affect competition in the markets described above?
    366. In the Plan, the Participants state that they believe the Plan
would have a net positive effect on efficiency. The Commission's
analysis states that the Commission preliminarily believes the Plan
would have a significant positive effect on efficiency. Do Commenters
agree with the conclusions stated in the Plan? Why or why not? Do
Commenters agree with the Commission's analysis? Why or why not?
    367. Do Commenters agree that costs related to the Plan's
requirements for data mapping, data dictionary creation, and encryption
associated with the transmission of PII would not significantly affect
efficiency? Why or why not?
    368. Do Commenters agree with the Commission's analysis of the
Plan's effects on the efficiency of market regulation and oversight?
Why or why not?
    369. Do Commenters agree with the Commission's analysis of the
Plan's effects on market efficiency due to reductions in violative
behavior? Why or why not?
    370. Do Commenters agree with the Commission's analysis of the
Plan's effect on efficiency related to reductions in ad hoc data
requests from regulators? Why or why not?
    371. Do Commenters agree with the Commission's analysis of the
Plan's effect on efficiency due to reductions in duplicative reporting
systems? Why or why not?
    372. Do Commenters believe that the period of duplicative reporting
that would precede the retirement of certain current, anticipated to be
retired, regulatory reporting systems would significantly affect
efficiency? Why or why not?
    373. Do Commenters agree with the Commission's analysis of
inefficiencies related to the funding model? Why or why not?
    374. Do Commenters agree with the Commission's analysis of the
likelihood of CAT fees being passed on to investors under the Plan? Why
or why not?
    375. Do Commenters agree with the Commission's analysis of the
efficiency of Plan operations? Why or why not?
    376. Do Commenters agree with the Commission's analysis of the
effects of voting thresholds for Operating Committee decisions on
efficiency? Why or why not?
    377. Do Commenters agree with the Commission's analysis of the
Advisory Committee's effect on efficiency under the Plan? Why or why
not?
    378. Do Commenters agree with the Commission's analysis of the
effects on efficiency of the Participants' decision to specify or not
specify certain aspects of CAT in the RFP? Why or why not?
    379. Do Commenters believe that the CAT NMS Plan would impact
investor confidence? If so, how? Do investors currently lack confidence
because of the current state of regulatory data? Would the expected
improvements to investor protection result in increased investor
confidence? Please explain. What would be the expected effects of
changes in investor confidence on allocative efficiency and capital
formation? What would be the magnitude of the economic effects from
expected changes to investor confidence? Please provide analysis.
    380. The Plan states that the Participants believe that the Plan
would have no deleterious effect on capital formation. Do Commenters
agree with the Participants' conclusions stated in the Plan? Do
Commenters agree with the Commission's preliminary belief that the Plan
would not have a deleterious effect on capital formation? Why or why
not?
    381. Do Commenters agree with the Commission's analysis of the
Plan's effects on capital formation due to enhanced market surveillance
and regulatory activities? Why or why not?
    382. Do Commenters agree with the Commission's analysis of effects
on capital formation due to data security provisions of the Plan? Why
or why not?

H. Alternatives

    As a part of its economic analysis, the Commission is considering
and soliciting comment on alternatives to certain approaches or
elements of the CAT NMS Plan. The Commission analyzes alternatives that
could have a direct and significant impact on costs or benefits
deriving from at least one of the four data qualities discussed above:
accuracy, completeness, accessibility, and timeliness. While the
discussed alternatives are not the only alternatives that could
significantly impact costs, benefits, or data quality, they are an
attempt to identify reasonable options. Each has the potential to alter
the Commission's preliminary conclusions regarding the economic effects
of the CAT NMS Plan.
    The analysis of alternatives is divided into three categories.
First, the Commission analyzes alternatives to the approaches the
Exemption Order permitted the Participants to include in the
Plan.\1158\ As noted in the Exemption Order, the Commission was
persuaded to grant exemptive relief to provide flexibility such that
the proposed approaches described in the Exemption Request can be
included in the CAT NMS Plan and subject to notice and comment.\1159\
Second, the Commission analyzes alternatives to certain specific
approaches in the CAT NMS Plan, including alternative approaches to
clock synchronization, time stamps, Error Rates, error correction
timelines, the funding model, listing exchange symbology, data
accessibility standards, and the intake capacity levels. Third,

the Commission analyzes alternatives to the scope of certain specific
elements of the Plan. Specifically, the Commission analyzes the impact
of changing the scope of the CAT to exclude certain data fields. The
Commission also analyzes alternatives to exclude OTC Equity Securities
and the requirement to periodically refresh all customer information.
Finally, the Commission solicits comment on the broad alternative of
modifying OATS and/or another existing system to meet the requirements
of Rule 613 instead of approving the Plan.
---------------------------------------------------------------------------

    \1158\ See Exemption Order, supra note 18.
    \1159\ Id.
---------------------------------------------------------------------------

1. Alternatives to the Approaches the Exemption Order Permitted To Be
Included in the Plan
    The Commission is soliciting additional comment on alternatives to
the approaches the Exemption Order permitted the SROs to include in the
CAT NMS Plan.\1160\ Specifically, the Commission is soliciting comment
on how the following alternatives (the ``Rule 613 approach''),
described in further detail below, would affect the costs and benefits
of the CAT: (a) Requiring both Options Market Makers and Options
Exchanges to report Options Market Maker quotations to the Central
Repository, (b) requiring CAT Reporters to report a Customer-ID for
each Customer upon the original receipt or origination of an order, (c)
requiring CAT Reporters to report a universal CAT-Reporter-ID to the
Central Repository for orders and certain Reportable Events, (d)
requiring the reporting of the account number for any subaccount to
which an execution is allocated, and (e) requiring that Manual Order
Events be reported with a time stamp granularity of one millisecond.
---------------------------------------------------------------------------

    \1160\ Id.
---------------------------------------------------------------------------

a. Options Market Maker Quotes
    The Commission is soliciting comment on how an alternative
approach--the Rule 613 approach--to the reporting of Options Market
Maker quotations might impact the costs and benefits of the Plan. Rule
613(c)(7) provides that the CAT NMS Plan must require each national
securities exchange, national securities association, and any member of
such exchange or association to record and electronically report to the
Central Repository details for each order and each Reportable Event,
including the routing and modification or cancellation of an
order.\1161\ Rule 613(j)(8) defines ``order'' to include ``any bid or
offer'' so that the details for each Options Market Maker quotation
must be reported to the Central Repository by both the Options Market
Maker and the exchange to which it routes its quote.\1162\ The SROs
requested an exemption from Rules 613(c)(7)(ii) and (iv) and proposed
an approach whereby only Options Exchanges--but not Options Market
Makers--would be required to report information to the Central
Repository regarding Options Market Maker quotations.\1163\ The
Commission granted exemptive relief to the SROs to allow the approach
to collecting Options Market Maker quotations described in the
Exemption Request to be included in the CAT NMS Plan and subject to
notice and comment.\1164\
---------------------------------------------------------------------------

    \1161\ See 17 CFR 242.613(c)(7).
    \1162\ See 17 CFR 242.613(j)(8).
    \1163\ See Exemptive Request Letter, supra note 16, at 2-5.
    \1164\ See Exemption Order, supra note 18.
---------------------------------------------------------------------------

    Pursuant to the exemptive relief granted by the Commission, the CAT
NMS Plan provides that only Options Exchanges--but not Options Market
Makers--would be required to report information to the Central
Repository regarding Options Market Maker quotations.\1165\ On the
other hand, the Rule 613 approach would require that each Options
Market Maker quotation be reported to the Central Repository by both
the Options Market Maker and the exchange to which it routes its quote.
The Commission preliminarily believes that the Rule 613 approach would
increase certain costs associated with the implementation and operation
of CAT as compared to the Plan as filed without providing any
additional material information.
---------------------------------------------------------------------------

    \1165\ See CAT NMS Plan, supra note 3, at Appendix C, Background
Section.
---------------------------------------------------------------------------

    Under the Rule 613 approach, the reports from the Options Exchanges
would be virtually identical to the reports coming from the Options
Market Makers, with the exception that reports from the Options Market
Makers would indicate the time that the Options Market Maker routes its
quote, or any modification or cancellation thereof, to the exchange
(``Quote Sent Time''). However, to ensure that regulators would receive
all of the information contemplated by Rule 613(c)(7), the CAT NMS Plan
requires that (1) Options Market Makers report to the relevant Options
Exchange the Quote Sent Time along with any quotation, or any
modification or cancellation thereof; and (2) Options Exchanges submit
the quotation data received from Options Market Makers, including the
Quote Sent Time, to the Central Repository without change.\1166\ Under
the CAT NMS Plan, therefore, regulators would have access to all the
material information in CAT that would be provided under the Rule 613
approach. As such, the Commission preliminarily does not believe that
there would be any additional benefits to using the Rule 613 approach.
---------------------------------------------------------------------------

    \1166\ Id. at Section 6.4(d)(iii).
---------------------------------------------------------------------------

    Furthermore, the CAT NMS Plan estimates that the Rule 613 approach
would increase the amount of records that must be handled by the
Central Repository by 18 billion records per day, at an additional cost
of between $2 million and $16 million for data storage and technical
infrastructure over a five year period.\1167\ A cost survey estimates
the Rule 613 approach would cost all Options Market Makers between
$307.6 million and $382 million over five years.\1168\ Under the
approach taken in the CAT NMS Plan, these costs would be avoided but
the Options Market Makers surveyed would spend approximately $8.5
million to send Quote Sent Times to the exchanges and all Options
Market Makers would spend $36.9M to $76.8M.\1169\ In aggregate, the
estimates provided suggest that the Rule 613 approach would add between
$230.80 million and $345.10 million to industry costs over five
years.\1170\ The Exemption Request also notes that the additional costs
would be disproportionately borne by smaller broker-dealers relative to
their market share.\1171\
---------------------------------------------------------------------------

    \1167\ Id. at Appendix C, Section B.7(b)(iv)(B).
    \1168\ See FIF, SIFMA, and Security Traders Association, Cost
Survey Report on CAT Reporting of Options Quotes by Market Makers
(November 5, 2013), available at http://www.catnmsplan.com/industryfeedback/p601771.pdf; see also CAT NMS Plan, supra note 3,
at Appendix C, Section B.7(b)(iv)(B).
    \1169\ See FIF, SIFMA, and Security Traders Association, Cost
Survey Report on CAT Reporting of Options Quotes by Market Makers 3-
4 (November 5, 2013), available at http://www.catnmsplan.com/industryfeedback/p601771.pdf.
    \1170\ To be conservative, the Commission estimates the lower
end of the range to be the lower cost to comply with a CAT NMS Plan
without the exemption minus the higher cost to comply with a CAT NMS
Plan with the exemption ($230.8M = $307.6 - $76.8M). Likewise, the
higher end of the range is the higher cost to comply with a CAT NMS
Plan without the exemption minus the lower cost to comply with a CAT
NMS Plan with the exemption ($345.1M = $382M - $36.9M).
    \1171\ See Exemptive Request Letter, supra note 16, at 7.
---------------------------------------------------------------------------

    The Commission notes that there are limitations to the cost
estimation methodology presented in the Exemption Request. These
limitations include the lack of quantified cost estimates for
additional indirect cost savings associated with the exemption.
However, the Commission preliminarily believes that the Rule 613
approach would increase certain costs associated with the
implementation and operation of CAT as compared to the Plan as filed

without providing any additional material information.
b. Customer-ID
    The Commission is soliciting comment on how an alternative
approach--the Rule 613 approach--to the reporting of customer
information might impact the costs and benefits of the Plan. Rule
613(c)(7)(i)(A) requires that for the original receipt or origination
of an order, a CAT Reporter report the ``Customer-ID(s) for each
Customer.'' \1172\ ``Customer-ID'' is defined in Rule 613(j)(5) to mean
``with respect to a customer, a code that uniquely and consistently
identifies such customer for purposes of providing data to the central
repository.'' \1173\ Rule 613(c)(8) further requires that ``[a]ll plan
sponsors and their members shall use the same Customer-ID and CAT-
Reporter-ID for each customer and broker-dealer.'' \1174\ The SROs
requested an exemption from the requirements in Rule 613(c)(7)(i)(A)
and Rule 613(c)(8), and proposed an approach whereby each broker-dealer
would assign a unique Firm Designated ID to each trading account, which
would be linked to a set of identifying information (the ``Customer
Information Approach'').\1175\ Using the Firm Designated ID and the
other information identifying the Customer that would be reported to
the Central Repository, the Plan Processor would then assign a unique
Customer-ID to each Customer. Upon original receipt or origination of
an order, broker-dealers would only be required to report the Firm
Designated ID on each new order, rather than using the Customer-ID. The
Commission granted exemptive relief to the SROs to allow the
alternative approach to Customer-IDs described in the Exemption Request
to be included in the CAT NMS Plan and subject to notice and
comment.\1176\
---------------------------------------------------------------------------

    \1172\ See 17 CFR 242.613(c)(7)(i)(A).
    \1173\ See 17 CFR 242.613(j)(5).
    \1174\ See 17 CFR 242.613(c)(8).
    \1175\ See Exemptive Request Letter, supra note 16, at 9.
Because the Plan Processor would still assign a Customer-ID to each
Customer under the Customer Information Approach, the SROs did not
request an exemption from Rule 613(j)(5).
    \1176\ See Exemption Order, supra note 18, at 11863.
---------------------------------------------------------------------------

    Pursuant to the exemptive relief granted by the Commission, the CAT
NMS Plan provides for the use of the Customer Information
Approach.\1177\ The Commission is soliciting comment on the Rule 613
approach, which would require that broker-dealers report Customer
information using a consistent, unique Customer-ID, as set out in in
Rule 613(c)(7)(i)(A) and Rule 613(c)(8). The Commission preliminarily
believes that the Rule 613 approach would increase certain costs
associated with the implementation and operation of CAT as compared to
the Customer Information Approach while providing substantially
identical data.
---------------------------------------------------------------------------

    \1177\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.1(a)(iii).
---------------------------------------------------------------------------

    The Commission also preliminarily believes that the Rule 613
approach would have no significant impact on the benefits of the CAT
NMS Plan. The Participants maintain that, under the Rule 613 approach,
there would be no gains in terms of accuracy or reliability, no effect
on the ability to link records, and no effect on the time the data
would be made available to regulators, as compared to the Customer
Information Approach.\1178\ The Participants also believe that there
may be accuracy gains under the Customer Information Approach if it
reduces errors that may otherwise occur if broker-dealers must adapt
their systems and business processes to manage Customer-IDs.\1179\
---------------------------------------------------------------------------

    \1178\ See Exemptive Request Letter, supra note 16, at 15-18.
    \1179\ Id.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that the Rule 613
approach would increase the costs of the CAT NMS Plan. In their
Exemption Request, the Participants discussed a number of reasons why
the Customer Information Approach is less burdensome than the Rule 613
approach. First, it reduces the CAT implementation burden on market
participants by eliminating the need for changes to their current
customer identification systems.\1180\ Currently, market participants
have individual formats for their customer identifiers; under the
Customer Information Approach, no standardization of form would be
required. Second, the Customer Information Approach eliminates the need
for centrally-assigned Customer-IDs to be assigned at the Central
Repository and communicated back to market participants.\1181\ Third,
it allows the Plan Processor to implement modifications and technical
upgrades to the Customer-ID generation process and infrastructure
without the involvement of CAT Reporters.\1182\ Fourth, the Customer
Information Approach eliminates the need to train CAT Reporters on the
Customer-ID management process and provide related technical support.
Fifth, it potentially reduces delays faced by investors opening new
accounts, who might not be able to transact until the Central
Repository has assigned a Customer-ID and communicated it to the
broker-dealer representing the Customer.\1183\
---------------------------------------------------------------------------

    \1180\ See id. at 17.
    \1181\ See id.
    \1182\ See id.
    \1183\ See id. at 16-17.
---------------------------------------------------------------------------

    Based on cost survey data provided by the Participants, the Rule
613 approach would increase quantifiable costs to the top three tiers
of CAT Reporters by at least $195 million.\1184\ The Commission notes
that this likely underestimates the increased costs to all CAT
Reporters because the Rule 613 approach would likely increase costs to
CAT Reporters outside the top three tiers also. Furthermore, the
Bidders have indicated that the costs of building and operating the
Central Repository under the Rule 613 approach would not be lower than
the costs of the Customer Information Approach.\1185\ The Commission
therefore preliminarily believes that the Rule 613 approach would
increase the costs of the CAT NMS Plan relative to the Plan's Customer
Information Approach, while providing substantially identical data.
---------------------------------------------------------------------------

    \1184\ Id. at 17-18.
    \1185\ Id. at 17.
---------------------------------------------------------------------------

c. CAT-Reporter-ID
    The Commission is soliciting comment on how an alternative
approach--the Rule 613 approach--to the reporting of CAT Reporter
information might impact the costs and benefits of the Plan. A CAT-
Reporter-ID is ``a code that uniquely and consistently identifies [a
CAT Reporter] for purposes of providing data to the central
repository.'' \1186\ Subparagraphs (c)(7)(i)(C), (ii)(D), (ii)(E),
(iii)(D), (iii)(E), (iv)(F), (v)(F), (vi)(B), and (c)(8) of Rule 613
provide that the CAT NMS Plan must require CAT Reporters to report CAT-
Reporter-IDs to the Central Repository for orders and certain
Reportable Events.\1187\ Additionally, Rule 613(c)(8) requires that CAT
Reporters use the same CAT-Reporter-ID for each broker-dealer.\1188\ To
leverage existing infrastructure and business processes, the
Participants requested an exemption from Rule 613(c)(7) and (c)(8) to
allow a different approach to be included in the Plan; CAT Reporters
would report existing SRO-assigned market participant identifiers when
submitting data to the Central Repository (``SRO-Assigned Market
Participant Identifiers'').\1189\ The Central Repository would then
generate a corresponding CAT-Reporter-ID for internal use to identify
CAT Reporters.

This approach--called the ``Existing Identifier Approach''--allows the
CAT-Reporter-IDs to be managed at the Central Repository by the Plan
Processor without the involvement of the Reporters.\1190\ The
Commission granted exemptive relief to the SROs to allow the Existing
Identifier Approach to be included in the CAT NMS Plan and subject to
notice and comment.\1191\
---------------------------------------------------------------------------

    \1186\ 17 CFR 242.613(j)(2).
    \1187\ 17 CFR 242.613(c)(7)(i)(C), (ii)(D), (ii)(E), (iii)(D),
(iii)(E), (iv)(F), (v)(F), (vi)(B), and (c)(8).
    \1188\ 17 CFR 242.613(c)(8).
    \1189\ See Exemptive Request Letter, supra note 16, at 19.
    \1190\ Id.
    \1191\ See Exemption Order, supra note 18, at 11866.
---------------------------------------------------------------------------

    Pursuant to the exemptive relief granted by the Commission, the CAT
NMS Plan provides for the use of the Existing Identifier
Approach.\1192\ The Commission is soliciting additional comment on the
Rule 613 approach, which would require that CAT Reporters use a
consistent, unique CAT-Reporter-ID, as set out in in Rule 613(c)(7) and
Rule 613(c)(8). The Commission preliminarily believes that the Rule 613
approach would increase certain costs associated with the
implementation and operation of CAT as compared to the Existing
Identifier Approach while providing substantially identical data.
---------------------------------------------------------------------------

    \1192\ See, e.g., CAT NMS Plan, supra note 3, at Sections 6.3(d)
and (e), 6.4(d).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the Rule 613 approach
would not result in more reliable or accurate data as compared to the
Existing Identifier Approach. The Exemption Request states that ``the
proposed approach would not compromise the goal of Rule 613 to record
and link Reportable Events to the CAT Reporter associated with the
event.'' \1193\ The processed CAT Data would contain the CAT-Reporter-
ID fields, and the Participants maintain that there would be no loss of
accuracy or reliability, no effect on the ability to link records, and
no effect on the time the data would be made available to
regulators.\1194\
---------------------------------------------------------------------------

    \1193\ See Exemptive Request Letter, supra note 16, at 21.
    \1194\ Id. at 22-23.
---------------------------------------------------------------------------

    In fact, the Commission preliminarily believes that the Rule 613
approach would reduce the quality of data obtained as compared to the
Existing Identifier Approach. Specifically, the Rule 613 approach would
reduce the granularity of information on departments, trading desks,
and other business units within CAT Reporters, which would be captured
under the Existing Identifier Approach. This additional granularity
would be possible under the Existing Identifier Approach because
identifiers currently in use are often assigned to entities that are
defined more granularly than the CAT-Reporter-ID level. The Commission
also preliminarily believes that the ability to leverage existing
infrastructure and business processes may reduce the potential for
delays and errors that could be associated with requiring CAT Reporters
to modify their systems and workflows to handle the CAT-Reporter-IDs.
    The Commission preliminarily believes that the Rule 613 approach
would increase the costs of the CAT NMS Plan relative to the Existing
Identifier Approach. The Participants estimate implementation costs for
the top three tiers of CAT Reporters for the Rule 613 approach of $78
to $244 million, depending on how report types have to use the CAT-
Reporter-IDs.\1195\ The Exemption Request does not compare these costs
to the Existing Identifier Approach allowed by the exemption and
included in the Plan.\1196\ The Participants note that these estimates
are conservative because they are based on only 11% of broker-
dealers.\1197\ The Participants indicated that they have consulted with
the bidders and the industry in compiling this analysis.\1198\
---------------------------------------------------------------------------

    \1195\ Id. at 24.
    \1196\ Id. at 24.
    \1197\ Id. at 25.
    \1198\ Id. at 22.
---------------------------------------------------------------------------

    While the Commission preliminarily believes that the Rule 613
approach would increase certain costs associated with the
implementation and operation of CAT as compared to the Existing
Identifier Approach, the Commission notes that there are limitations
associated with the cost estimation methodology presented in the
Exemption Request. These limitations include the exclusion of SROs and
smaller CAT Reporters from the survey, no apparent differentiation
between initial, deferred, and recurring costs, and lack of support for
the method used to extrapolate the estimates for large broker-dealers
to the industry. Nor do the cost estimates address the broker-dealers
who would be CAT Reporters but are currently not OATS reporters,
including those that are currently not registered with FINRA, which may
have a very different cost structure. However, it is likely that the
dominant effect would be the exclusion of many CAT Reporters from the
cost estimates, which would tend to underestimate the cost increases.
The Commission currently has no data from which it can independently
estimate the cost differential because it depends on information
internal to each of a heterogeneous group of CAT Reporters, which is
not compiled or stored anywhere and to which the Commission therefore
does not have ready access. The Commission believes that these effects
are not likely to alter its preliminary conclusion that the Rule 613
approach would significantly increase the costs of the CAT NMS Plan as
compared to the Plan's Existing Identifier Approach. The Commission is
requesting comment on this preliminary conclusion and any additional
data Commenters believe should be considered.
d. Linking Order Executions to Allocations
    The Commission is soliciting comment on how an alternative approach
to the reporting of allocation information--the Rule 613 approach--
might impact the costs and benefits of the Plan. Rule 613(c)(7)(vi)(A)
requires each CAT Reporter to record and report to the Central
Repository ``the account number for any subaccounts to which the
execution is allocated (in whole or part).'' \1199\ This information
would allow regulators to link the subaccount to which an allocation
was made to the original order placed and its execution. In the
Exemptive Request Letter and April 2015 Supplement, the SROs requested
an exemption from Rule 613(c)(7)(vi)(A) to include in the Plan an
approach whereby CAT Reporters would instead submit information to the
Central Repository that would allow regulators to link subaccount
information to the Customer that submitted the original order.\1200\
The Commission granted exemptive relief to the SROs to allow this
approach to be included in the CAT NMS Plan and subject to notice and
comment.\1201\
---------------------------------------------------------------------------

    \1199\ See 17 CFR 242.613(c)(7)(vi)(A).
    \1200\ See Exemptive Request Letter, supra note 16, at 28-29;
April 2015 Supplement, supra note 16, at 2.
    \1201\ See Exemption Order, supra note 18, at 11868.
---------------------------------------------------------------------------

    Pursuant to the exemptive relief granted by the Commission, the CAT
NMS Plan provides that, rather than providing the account number for
any subaccounts to which the execution is allocated, CAT Reporters
would submit information to the Central Repository in the form of an
Allocation Report, in order to allow regulators to link subaccount
information to the Customer that submitted the original order.\1202\
The Allocation Report would include the Firm Designated ID for any
account(s), including subaccount(s), to which executed shares are
allocated, and provide the security that has been allocated, the
identifier of the firm

reporting the allocation, the price per share of shares allocated, the
side of shares allocated, the number of shares allocated to each
account, and the time of the allocation, which is information that is
not currently required to be reported and/or retained by broker-
dealers.\1203\ There would not be a direct link in the Central
Repository between the subaccounts to which an execution is allocated
and the execution itself. However, CAT Reporters would be required to
report each allocation to the Central Repository on an Allocation
Report, and the Firm Designated ID of the relevant subaccount provided
to the Central Repository as part of the Allocation Report could be
used by the Central Repository to link the subaccount holder to those
with authority to trade on behalf of the account.\1204\ Further, the
Allocation Reports used in conjunction with order lifecycle information
in CAT would assist regulators in identifying, through additional
investigation, the probable group of orders that led to
allocations.\1205\
---------------------------------------------------------------------------

    \1202\ See CAT NMS Plan, supra note 3, at Section
6.4(d)(ii)(A)(1).
    \1203\ See id. at Section 1.1; see also Exemption Order, supra
note 18, at 44-45.
    \1204\ See Exemption Order, supra note 18, at 45.
    \1205\ Id.
---------------------------------------------------------------------------

    The Commission is soliciting comment on the Rule 613 approach,
which would require CAT Reporters to record and report the account
number for any subaccounts to which the execution is allocated, as
described above. The Commission preliminarily believes that that the
Rule 613 approach could provide the Central Repository with a way to
link allocations to order lifecycles.\1206\ This linkage would not be
available under the current approach. However, based on estimates
provided by the Participants, the Commission preliminarily believes
that the Rule 613 approach would increase certain costs associated with
the implementation and operation of CAT as compared to the Plan as
filed by roughly $525 million.\1207\
---------------------------------------------------------------------------

    \1206\ In the Exemption Request, the SROs explained that under
the Rule 613 approach allocations made from an average price account
would not reflect a true one-to-one relationship between an
execution and an allocation, and therefore the information provided
would not directly link a single order execution and the subaccount
to which an allocation was made. See Exemptive Request Letter, supra
note 16, at 28. However, the Commission believes that under the Rule
613 approach, regulators would receive information that would
identify each execution resulting from the original order placed, as
well as the identity of all the subaccounts to which those
executions were allocated. This information would provide regulators
a finite list of executions from which the subaccount allocations
could have been made.
    \1207\ The Participants estimate that the Plan's approach to
allocation information would result in a reduction in implementation
cost for the top three tiers of CAT Reporters of $525 million as
compared to the Rule 613 approach. See Exemptive Request Letter,
supra note 16, at 31.
---------------------------------------------------------------------------

    The Commission preliminarily believes that either approach would
allow regulators to link specific allocations, and the prices received
on those allocations, with the aggregated executions that resulted in
the allocations and their execution prices. Industry feedback received
by the Participants indicates that existing business practices
typically involve aggregating executions in an average price account
before making allocations, and forcing a precise matching between
orders and executions ex-post would be misleading.\1208\ The Exemption
Request maintains that, under the approach in the Plan, there would be
no loss of accuracy or reliability, no effect on the ability to link
order records, and no effect on the time the data would be made
available to regulators as compared to the Rule 613 approach.\1209\ The
Exemption Request also states that there may be accuracy and
reliability gains if the exemption reduces errors that may otherwise
occur if broker-dealers were required to re-engineer their allocation
handling systems and business processes to meet the requirements of
Rule 613.\1210\
---------------------------------------------------------------------------

    \1208\ See Exemptive Request Letter, supra note 16, at 28
(``[T]his approach . . . introduces an artificial relationship
between any one execution and one allocation. . . . Although, . . .
the ultimate allocation of the shares executed that result from [an]
aggregated order may be useful for regulatory surveillance purposes,
tying these allocations to multiple different executions is of
little regulatory benefit.'').
    \1209\ Id. at 30.
    \1210\ Id.
---------------------------------------------------------------------------

    However, the Rule 613 approach would provide regulators access to
allocations linked to specific disaggregated orders, which is not
possible under the approach in the Plan. The Exemption Request notes
that linking particular allocations to particular order lifecycles
would be inaccurate in some circumstances, such as when many orders are
allocated to many customers.\1211\ The Commission is soliciting comment
on whether such information would necessarily be inaccurate, and
whether requiring the linking of allocations to order lifecycles would
reduce accuracy for several reasons. First, in cases in which one order
is allocated to one customer, the Rule 613 approach would provide an
improvement in accuracy over the approach proposed in the CAT NMS Plan
because the Rule 613 approach would allow the Central Repository to
accurately link such allocations to order lifecycles whereas the
approach proposed in the CAT NMS Plan might not. Under the CAT NMS
Plan, for regulators to link the allocations to the order lifecycles,
they would need to construct an algorithm that would rely on less
information than the Central Repository would have under the Rule 613
approach. As a result, these regulator linkages would likely be less
accurate than a Central Repository linkage. The Commission
preliminarily believes that this is true for cases in which one order
is allocated to many customers and when many orders are linked to one
customer. For the many-to-many allocations, in which many customer
orders are grouped and worked by the market participant using many
orders to acquire the aggregate position ultimately used to fill the
customer orders, the Commission notes that broker-dealers likely
already maintain records that allow them to ensure that the allocations
receive fair prices based on market executions. The Commission is
soliciting comment on whether such information might be sufficient to
link the many allocations to the many orders executed in an accurate
manner. Such information would greatly aid investigations of fair
allocations because it would allow regulators to reconstruct the manner
in which allocations occur.
---------------------------------------------------------------------------

    \1211\ See id. at 28-30.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the Rule 613 approach
would increase the costs of compliance with the CAT NMS Plan. According
to industry feedback collected by the Participants, the Rule 613
approach would require broker-dealers to undertake a major re-
engineering of their middle and back office systems and
processes.\1212\ The Participants estimate a reduction in
implementation cost over the Rule 613(c)(7)(vi) Baseline for the top
three tiers of CAT Reporters of $525 million; consequently, the
Commission preliminarily believes that this alternative would cost at
least $525 million more than the estimated costs of the CAT NMS Plan to
implement.\1213\ The Participants indicated that they have consulted
with the bidders and the industry in compiling this analysis.\1214\
---------------------------------------------------------------------------

    \1212\ Id. at 27.
    \1213\ Id. at 31.
    \1214\ See id. at 30-31.
---------------------------------------------------------------------------

e. Time Stamp Granularity
    The Commission is soliciting comment on how an alternative
approach--the Rule 613 approach--to time stamps on ``Manual Order
Events'' might impact the costs and benefits of

the Plan.\1215\ Rule 613(c)(7) and Rule 613(d)(3) require time stamps
with a minimum granularity of one millisecond on all order
events.\1216\ The Participants requested an exemption from the
requirement in Rule 613(d)(3) that for Manual Order Events each CAT
Reporter record and report details for Reportable Events with time
stamps that ``reflect current industry standards and [are] at least to
the millisecond.'' \1217\ The Commission granted exemptive relief to
the SROs to allow the approach to recording and reporting time stamps
for Manual Order Events described in the Exemption Request to be
included in the CAT NMS Plan and subject to notice and comment.\1218\
---------------------------------------------------------------------------

    \1215\ ``Manual Order Events'' are defined to mean ``non-
electronic communication[s] of order-related information for which
CAT Reporters must record and report the time of the event.'' See
CAT NMS Plan, supra note 3, at Section 1.1.
    \1216\ See 17 CFR 242.613(c)(7) (requiring use of time stamps
pursuant to 17 CFR 242.613(d)(3)); 17 CFR 242.613(d)(3) (requiring
time stamp granularity be ``at least to the millisecond'').
    \1217\ See 17 CFR 242.613(d)(3); Exemptive Request Letter, supra
note 16, at 32.
    \1218\ See Exemption Order, supra note 18, at 11869.
---------------------------------------------------------------------------

    Pursuant to the exemptive relief granted by the Commission, the CAT
NMS Plan provides that: (1) Each CAT Reporter would record and report
Manual Order Event time stamps to the second; (2) Manual Order Events
would be identified as such when reported to the CAT; and (3) CAT
Reporters would report in millisecond time stamp increments when a
Manual Order Event is captured electronically in the relevant order
handling and execution system of the CAT Reporter (``Electronic Capture
Time'').\1219\ On the other hand, the Rule 613 approach would require
that CAT Reporters record and report details for Manual Order Events
with time stamps that are at least to the millisecond, as required by
Rule 613(c)(7) and Rule 613(d)(3). The Commission preliminarily
believes that the Rule 613 approach would increase the costs of
implementing the CAT NMS Plan while providing little regulatory benefit
relative to the current approach.
---------------------------------------------------------------------------

    \1219\ See CAT NMS Plan, supra note 3, at Section 6.8.
---------------------------------------------------------------------------

    The Participants maintain in the Exemption Request that there would
be little benefit, and possibly some adverse consequences, of capturing
Manual Order Event time stamps in milliseconds.\1220\ They note that
determining the time of a manual event is inherently imprecise, due to
the limits of human reaction time in completing a transaction and the
time required to manually record the event.\1221\ They claim human
reaction time to visual stimulus is on the order of 400-500
milliseconds, making millisecond time stamps imprecise.\1222\ The
Commission preliminarily agrees that attempting to record the precise
millisecond in which a manual event occurred would necessarily be
imprecise. The Commission also preliminarily agrees that potential
adverse consequences could arise from relying on time stamps with a
misleading level of precision.\1223\
---------------------------------------------------------------------------

    \1220\ See Exemptive Request Letter, supra note 16, at 33.
    \1221\ Id. at 37.
    \1222\ Id.
    \1223\ The Commission notes that Manual Order Events are not
clearly and exhaustively defined, and the definitions may not be
available until the Technical Specifications are published. It may
be possible for the Plan Processor to classify some types of order
events as Manual Order Events that were not considered to be a
Manual Order Event for the purposes of this analysis. This creates a
degree of uncertainty as to whether the Rule 613 approach might
yield some regulatory benefit.
---------------------------------------------------------------------------

    The Participants discussed the costs and benefits of the proposed
exemption in their Exemption Request. They estimated a minimum total
cost to the industry of $10.5 million based on the cost of advanced
OATS-compliant clocks with granularity of one second, and noted that
clocks with millisecond granularity would likely be more expensive if
available.\1224\ The Participants also noted that the industry was
consulted through the DAG and an unsuccessful attempt was made to find
a commercially available time stamping device with millisecond
granularity.\1225\ Based on this information, the Commission
preliminarily believes the Rule 613 approach to Manual Order Events
would increase certain costs associated with the implementation and
operation of CAT as compared to the Plan as filed without providing any
significant additional benefit.
---------------------------------------------------------------------------

    \1224\ See Exemptive Request Letter, supra note 16, at 36-37.
    \1225\ Id. at 35.
---------------------------------------------------------------------------

2. Alternatives to Certain Specific Approaches in the CAT NMS Plan
    The Commission has analyzed alternatives to specific approaches in
the CAT NMS Plan with respect to clock synchronization, time stamps,
error rates, the time within which errors must be corrected, the
funding model, requirements regarding listing exchange symbology, data
accessibility standards, and intake capacity levels.
a. Clock Synchronization
    The Commission is soliciting comments on alternate approaches to
clock synchronization as compared to those proposed in the CAT NMS
Plan. First, the Commission is soliciting comment on alternatives to
the Plan's one-size-fits-all definition of ``industry standard.'' Under
these alternatives, ``industry standard'' would be defined in terms of
the standard practices of different segments of the CAT Reporters, or
by looking at information other than current industry practices. These
alternative approaches could result in clock offset tolerances shorter
than the CAT NMS Plan's proposed 50 millisecond standard for some or
all CAT Reporters. The Commission preliminarily believes that these
alternatives could substantially increase the benefits of CAT in
regulatory activities that require event sequencing, such as analysis
and reconstruction of market events, as well as market analysis and
research in support of policy decisions, and cross-market surveillance,
examinations, investigations, and other enforcement functions.\1226\
---------------------------------------------------------------------------

    \1226\ See Section IV.E.1.b(2), supra.
---------------------------------------------------------------------------

    Second, the Commission is soliciting comment on two additional
alternatives that could allow for more cost-effective clock
synchronization standards. In particular, the Commission is soliciting
comment on modifying the requirement to document clock synchronization
activities such that only events that require clock adjustment would be
required to be documented, and modifying the clock synchronization
requirement such that clocks would not have to be synchronized at times
when systems are not recording time-sensitive CAT Reportable Events,
such as orders originated outside of market hours when they are not
immediately actionable. The Commission preliminarily believes that
reduced clock synchronization logging requirements might significantly
reduce ongoing costs associated with clock synchronization compliance
as compared to the Plan as filed, without losing any additional
material information. In addition, the Commission preliminarily
believes that more flexible clock synchronization standards outside of
regular and extended trading hours may also reduce costs without a
material loss to the ability of regulators to sequence order events as
compared to the Plan as filed, without losing any additional material
information. Each of these alternatives is outlined below.
(1) Alternative Clock Synchronization Standards
    Rule 613(d)(1) requires synchronization of business clocks for the
purposes of recording the date and time of Reportable Events consistent

with industry standards.\1227\ The CAT NMS Plan describes the
``industry standard'' in terms of the technology adopted by the
majority in the industry.\1228\ The Plan therefore bases its clock
synchronization standard on current practices of the broker-dealer
industry generally, and provides that one standard would apply to all
CAT Reporters. The Commission is soliciting comment on an alternative
interpretation of ``industry standard'' that would consider the
standard practices of different segments of the CAT Reporters for the
purposes of setting the clock synchronization requirements. The
Commission is also soliciting comment on an alternative that would
define industry standard by looking at information other than current
industry practice; for example, the most accurate technology currently
available in the industry, or the standard recommended by a particular
authority or industry group.
---------------------------------------------------------------------------

    \1227\ The Commission did not define the term ``industry
standard'' in Rule 613. In the Adopting Release, the Commission
noted that it expected the Plan to ``specify the time increment
within which clock synchronization must be maintained, and the
reasons the plan sponsors believe this represents the industry
standard.'' See Adopting Release, supra note 9, at 45774.
     The benefits of alternative clock offset tolerances discussed
in this Section may be dependent on time stamp granularity
requirements. Related alternatives are discussed in Section
IV.H.2.b, infra.
    \1228\ See CAT NMS Plan, supra note 3, at Appendix C, Section
12(p).
---------------------------------------------------------------------------

    First, the Commission is soliciting comment on an alternative
definition of industry standard that would consider the standard
practices of different segments of CAT Reporters. Under this
alternative, all systems within market participants that process CAT-
Reportable Events would be required to comply with a clock
synchronization requirement reflecting an industry standard particular
to that market participant's segment of the industry. Currently, the
Commission lacks the information necessary to reach a preliminary
conclusion regarding the appropriate industry standards for all subsets
of the industry. Specifically, neither the FIF Clock Offset Survey nor
the Plan provides comprehensive data on the clock synchronization
practices of firms within each of the relevant subsets of the industry,
and the Commission has no data from which it can independently estimate
the cost differential because the Commission is not aware of any such
data available to it at this time. However, the Commission is
soliciting comment on this approach, which it believes would result in
a clock offset tolerance of less than 50 milliseconds for some market
participants. The Commission seeks comment on the current practices for
clock synchronization in various segments of the industry, including
but not limited to broker-dealers that are introducing firms,
institutional firms, retail firms that accept customer orders
electronically, registered market makers and principal trading firms,
as well as service bureaus hosting order management systems, exchanges
and ATSs, and branches of broker-dealers that predominantly handle
manual orders. The Commission also seeks comment on the costs and
benefits of requiring varying clock offset tolerances within the
industry.
    The Commission notes that the current practices for exchanges and
Execution Venues may differ from the industry standard for broker-
dealers as defined by the Plan, and current practices for certain
systems within broker-dealers may vary by the system within the broker-
dealers. For example, a small clock offset tolerance may be nearly
universally adopted for systems like ATSs that operate a matching
engine, while systems involved in manual entry of orders may typically
have larger clock offset tolerances. By defining industry standard
based on practices of the broker-dealer industry generally, the Plan
does not account for these differences.
    Other information now available for the Commission and the public
to study, particularly information from the FIF Clock Offset Survey,
shows that several of the survey respondents that have a current clock
offset tolerance of one second are clearing firms or service
bureaus.\1229\ According to the same survey, current clock offset
tolerances vary from one second to five microseconds among the broker-
dealers surveyed with 22% of respondents having multiple clock offset
tolerances across their systems.\1230\ Further, the FIF Clock Offset
Survey shows that the firms with multiple clock offset tolerances
typically engage in multiple lines of business. The fact that some
broker-dealers maintain clock offset tolerances at different levels
within the firm suggests that these broker-dealers believe that clock
precision is more important for some systems; furthermore, based on
conversations with market participants,\1231\ the Commission
preliminarily believes that market participants strategically upgrade
certain systems and reallocate older technology within the firm to
applications where up-to-date technology is less critical.\1232\
---------------------------------------------------------------------------

    \1229\ See FIF Clock Offset Survey, supra note 127.
    \1230\ See Section IV.D.2.b(2)B.i, supra for more information
regarding the distribution of broker-dealer clock offset tolerances.
    \1231\ Based on FIF-organized conversations with broker-dealers
and service bureaus. See supra note 880.
    \1232\ Systems that have greater clock offset tolerances may
have technology that is too old to support smaller clock offset
tolerances. The Commission preliminarily believes that if a shorter
clock offset tolerance is important to these broker-dealers, they
would update their systems to support newer technology capable of
smaller clock offset tolerances.
---------------------------------------------------------------------------

    Finally, exchanges and ATSs, as well as the SIPs, may have current
clock offset tolerances that are significantly different from the clock
offset tolerances at broker-dealers and could therefore achieve finer
clock offset tolerances at lower cost than broker-dealers.\1233\
According to FIF, all exchange matching engines meet a clock offset
tolerance of 50 milliseconds or less while NASDAQ states that all
exchanges that trade NASDAQ securities have clock offset tolerances of
100 microseconds or less.\1234\ In conversations with Commission Staff,
the Participants stated that absolute clock offset on exchanges
averages 36 microseconds, further suggesting that certain business
activities warrant smaller clock synchronization tolerances.\1235\
---------------------------------------------------------------------------

    \1233\ See supra notes 441 and 442. Specifically, the NASDAQ SIP
Web site implies that exchanges reporting to the NASDAQ SIP
synchronize their systems to 100 microseconds.
    \1234\ See Section IV.D.2.b(2)B.i, supra for more information on
clock offset tolerances of exchanges and the SIPs.
    \1235\ See supra note 436.
---------------------------------------------------------------------------

    Given this information, the Commission recognizes the possibility
that some business systems and some CAT Reporter types would rarely be
responsible for recording the date and time of reportable events and
also recognizes that the time stamp precision of such rare events might
not be as critical as for other events. For example, a system that
routes customer orders to market centers may be considered critical for
sequencing market events, while a system that facilitates manual input
of orders received by telephone may not. Conversely, the clock
synchronization practices of some CAT Reporters may be more critical to
the overall benefits of CAT or could be less costly to implement. For
example, a service bureau that provides an order-handling system hosted
on its own servers is likely to route orders for many market
participants and its clock synchronization practices would, thus, be
critical to event sequencing. On the other hand, the precision of time
stamps from systems of an isolated broker-dealer that routes customer
orders to its service bureau or another broker-dealer for market access
and conducts no

proprietary trading may be less critical to event sequencing,
especially if the receiving system at the service bureau would record a
high-precision time stamp when the order is received. Furthermore,
instituting higher clock precision at a single service bureau would be
less costly than instituting that same level of clock precision at the
service bureau and all of its broker-dealer customers as is required by
the Plan as filed.
    Relative to the proposed clock synchronization standard, the
Commission preliminarily believes that an alternative approach that
would consider the standard practices of different segments of the
industry for the purposes of setting the clock synchronization
requirements, and would require a smaller clock offset tolerance than
in the Plan for certain business systems that are more critical to
being able to accurately sequence order events, could have significant
benefits. In other words, the Commission preliminarily believes that
some business systems may be responsible for time stamping more time-
sensitive order events than others, where more time-sensitive orders
are those for which precise time stamps are more critical for event
sequencing.
    The Commission does not currently have the information necessary to
specify which particular types of business system handle more time-
sensitive orders because neither the FIF Clock Offset Survey nor the
Plan provides this data. The Commission has no data from which it can
independently estimate this because the Commission is not aware of any
such data available to it. However, the Commission recognizes the
potential for such an approach. For example, it is possible that almost
all of the order origination events, routing events, modification
events, and execution events, which are likely to be more time-
sensitive than other CAT Reportable Events, occur on systems at broker-
dealers that conduct certain types of businesses. The businesses that
seem most likely to record these time-sensitive events include:
Introducing broker-dealers; institutional broker-dealers; retail
broker-dealers that accept customer orders electronically; registered
market makers; principal trading firms; service bureaus that host order
management systems; exchanges; and ATSs.
    Further, some systems collect order events that either do not
require a granular time stamp; other systems would not be required to
record order events in real time. An example would be regional branches
of broker-dealers that only handle manual orders which require a time
stamp to the second until the broker enters the order into an
electronic system. If the order entry hits a centralized system
quickly, then perhaps the clock precision of the centralized system may
be sufficient for sequencing.
    The Commission is also soliciting comment on an alternative
approach that would define industry standard by looking at information
other than current industry practices; for example, by considering the
most accurate technology currently available in the industry, or the
standard recommended by a particular industry group or authority.
Defining industry standards by majority practices may have the
unintended effect of setting a standard that delays adopting advances
in technology. The Commission preliminarily believes that this
alternative approach could result in defining an industry standard for
clock synchronization that would require a clock offset tolerance for
all CAT Reporters that is lower than the 50 millisecond standard
required by the Plan. The Commission seeks comment on any appropriate
definitions of ``industry standard'' with respect to clock
synchronization, including the costs and benefits of using any
alternative definitions of ``industry standard'' for the purposes of
setting clock synchronization requirements. The Commission also seeks
comment on whether a definition of ``industry standard'' could set a
maximum clock offset tolerance with an expectation that each CAT
Reporter would be responsible for smaller clock offsets if the CAT
Reporter is technically capable of such clock offsets.
    The Commission conducted an analysis to assess the benefits of
alternative approaches to defining industry standard that would result
in smaller clock offset tolerances for some or all segments of CAT
Reporters. The Commission evaluated the percentage of unrelated events
that can potentially be sequenced under various clock offset
tolerances, including the 50 millisecond tolerance outlined in the CAT
NMS Plan. The Commission estimates that approximately 7.84% of
unrelated orders for listed equities and 18.83% of unrelated orders for
listed options can be accurately sequenced using a clock offset
tolerance of 50 milliseconds.\1236\ The Commission augmented this
analysis by conducting a clock synchronization analysis to examine
certain alternative clock offset tolerances from those examined in the
FIF Clock Offset Survey.\1237\ Table 10 shows the results of the
Commission's analysis as a percentage of unrelated order events for
equities that could be sequenced under various alternative clock offset
tolerance.
---------------------------------------------------------------------------

    \1236\ See Section IV.E.1.b(2)A, supra. In general, events occur
with such frequency that a 50 millisecond clock synchronization
standard would not be sufficient to sequence all orders; see also
CAT NMS Plan, supra note 3, at Appendix C, Section A.3(c) n.110
(``Events occurring within a single system that uses the same clock
to time stamp those events should be able to be accurately sequenced
based on the time stamp. For unrelated events, e.g., multiple
unrelated orders from different broker-dealers, there would be no
way to definitively sequence order events within the allowable clock
drift as defined in Article 6.8 [of the CAT NMS Plan].'').
    \1237\ See Section IV.D.2.b(2)B, supra, for information on the
Commission's clock offset tolerance analysis. Specifically, the
analysis says that an order event can be sequenced if its time stamp
is at least twice the clock offset tolerance from any other event on
another venue.

    Table 10--Sequencing Accuracy of Unrelated Events by Clock Offset
                                Tolerance
------------------------------------------------------------------------
                                        Percentage of unrelated  events
                                             that can be sequenced
       Clock offset tolerance        -----------------------------------
                                        Equities (%)       Options (%)
------------------------------------------------------------------------
50 milliseconds.....................              7.84             18.83
5 milliseconds......................             16.51             35.54
1 millisecond.......................             22.08             50.70
100 microseconds....................             42.47             78.42
------------------------------------------------------------------------

    The Commission's analysis suggests that approximately 16.51% of
unrelated order events for equities and 35.54% of unrelated order
events for options could be sequenced under a clock offset tolerance of
5 milliseconds, 22.08% of orders events for equities and 50.70% of
order events for options could be sequenced under a clock offset
tolerance of 1 millisecond, and 42.47% of order events for equities and
78.42% of orders events for options could be sequenced under a clock
offset tolerance of 100 microseconds. Given these results, the
Commission believes that requiring a smaller clock offset tolerance
than the Plan's proposed 50 milliseconds for some segments of the
industry could improve the accuracy of event sequencing.
    Relative to the Plan's proposed universal 50 millisecond clock
offset tolerance, the Commission preliminarily believes that requiring
a smaller clock offset tolerance for some segments of the industry
would likely increase the costs of the CAT NMS Plan. Table 11 is from
page C-126 of the CAT NMS Plan, and it provides the costs of the Plan's
proposed clock offset tolerance (50 milliseconds) and alternative
tolerances (100 microseconds, 5 milliseconds, and 1 millisecond).\1238\
These costs assume that each clock offset tolerance is applied to all
business systems. However, as noted above, the alternative the
Commission is soliciting comment on is to require smaller clock offset
tolerance for certain segments of the industry. So, the estimates below
provide an upper bound on the potential cost if the Commission requires
smaller clock offset tolerances in some cases.
---------------------------------------------------------------------------

    \1238\ Table 11 is from the CAT NMS Plan, supra note 3, at
Appendix C, Section D.12(p) and it draws its numbers from the FIF
Clock Offset Survey. See supra note 127.

 Table 11--Implementation and Annual Ongoing Cost Estimates per Firm by
                         Clock Offset Tolerance
------------------------------------------------------------------------
                                          Estimated     Estimated annual
       Clock offset tolerance          implementation      ongoing cost
                                       cost (per firm)     (per firm)
------------------------------------------------------------------------
50 milliseconds.....................          $554,348          $313,043
5 milliseconds......................           887,500           482,609
1 millisecond.......................         1,141,667           534,783
100 microseconds....................         1,550,000           783,333
------------------------------------------------------------------------

    The Commission understands that the cost figures in Table 11 do not
net out the current ongoing costs of clock synchronization, which are
$203,846.\1239\ Table 12 shows the preliminary estimated annual ongoing
cost increase (ongoing costs minus current costs) to comply with
various alternative clock offset tolerances as well as the clock offset
tolerance specified in the Plan.
---------------------------------------------------------------------------

    \1239\ See FIF Clock Offset Survey, supra note 127, at 16. This
is based on current practice of the broker-dealers who responded to
the survey.

    Table 12--Annual Ongoing Cost Increases per Firm by Clock Offset
                                Tolerance
------------------------------------------------------------------------
                                                            Estimated
                                                         annual  ongoing
                Clock offset tolerance                   cost  increases
                                                           (per firm)
------------------------------------------------------------------------
50 milliseconds.......................................          $109,197
5 milliseconds........................................           278,763
1 millisecond.........................................           330,937
100 microseconds......................................           579,487
------------------------------------------------------------------------

    Based on these estimates, the Commission estimated aggregate clock
synchronization costs for broker-dealers consistent with the estimation
of their total CAT compliance costs as detailed in the Costs Section
above.\1240\ The Commission assumed that 171 broker-dealers would incur
the full ongoing costs and full implementation costs indicated in the
FIF Clock Offset Survey.\1241\ Conversely, the remaining 1,629 broker-
dealers that are already assumed to use service bureaus would rely on
the 13 service bureaus to facilitate their clock synchronization, and
therefore would pay lower implementation and ongoing costs than those
in the FIF Clock Offset Survey. The Commission understands that broker-
dealers that rely on service bureaus for order management systems and
regulatory reporting usually use servers operated by their service
bureaus and most would therefore not directly bear the costs to
implement and comply with clock synchronization standards.\1242\ For
the implementation costs for those relying on service bureaus for clock
synchronization, the Commission assumes \1/4\ FTE for 50 milliseconds,
\1/2\ FTE for 5 milliseconds, \3/4\ FTE for 1 millisecond, and 1 FTE
for 100 microseconds. Under these assumptions, broker-dealers that
outsource their order management and regulatory reporting obligations
would incur costs (shown in Table 13) that are significant relative to
the estimated implementation costs for broker-dealers that handle order
management and reporting obligations in-house.\1243\
---------------------------------------------------------------------------

    \1240\ See Section IV.F.3.a, supra.
    \1241\ The 171 broker-dealers comes from the total of
Insourcers, ELPs, and Options Market Makers.
    \1242\ See Section IV.F.1.d, supra for a discussion of service
bureaus passing costs on to clients.
    \1243\ As in the Costs Section above (see Section IV.F.1.c(2)C),
monetizing the FTE costs involves multiplying the number of FTEs by
$424,350. See infra note 1487.

 Table 13--Implementation Cost Estimates per Firm for Outsourcing Firms
                        by Clock Offset Tolerance
------------------------------------------------------------------------
                                                            Estimated
                                                         implementation
                Clock offset tolerance                  costs (per firm)
                                                         for outsourcing
                                                              firms
------------------------------------------------------------------------
50 milliseconds.......................................          $106,000
5 milliseconds........................................           212,000
1 millisecond.........................................           318,000
100 microseconds......................................           424,000
------------------------------------------------------------------------

    With these implementation costs, the Commission aggregated
implementation and ongoing costs as indicated in Table 14.

Table 14--Aggregated Implementation and Annual Ongoing Cost Estimates by
                         Clock Offset Tolerance
------------------------------------------------------------------------
                                          Estimated         Estimated
                                          aggregate     aggregate annual
       Clock offset tolerance          implementation      ongoing cost
                                         cost \1244\         \1245\
------------------------------------------------------------------------
50 milliseconds.....................      $268 million      $25 million.
5 milliseconds......................       497 million       63 million.
1 millisecond.......................       714 million       75 million.
100 microseconds....................       956 million      131 million.
------------------------------------------------------------------------

    Table 14 suggests that the Plan's clock synchronization costs for
the approximately 1,800 expected CAT Reporters would be approximately
$268 million in estimated implementation costs and about $25 million in
ongoing costs. To estimate the relative costs of each alternative
compared to the Plan, the Commission subtracted the costs of the Plan
from the costs of each alternative.
---------------------------------------------------------------------------

    \1244\ $268 million [ap] 171*$554,348 + 1,629*0.25*$424,350.
$497 million [ap] 171*$887,500 + 1,629*0.5*$424,350. $714 million
[ap] 171*$1,141,667 + 1,629*0.75*$424,350. $956 million [ap]
171*$1,550,000 + 1,629*$424,350.
    \1245\ $25 million [ap] 171*$109,197 + 13*4.2*$109,197. $63
million [ap] 171*$278,763 + 13*4.2*$278,763. $75 million [ap]
171*$330,937 + 13*4.2*$330,937. $131 million [ap] 171*$579,487 +
13*4.2*$579,487. 13 is the number of service bureaus and 4.2 is the
ratio between the total incremental ongoing charges to broker-
dealers and the total incremental ongoing costs to service bureaus
derived from the cost estimates above. See Section IV.F.2, supra.
---------------------------------------------------------------------------

    Table 15 provides estimates for how the costs of alternative clock
offset tolerances applied to all business systems would be greater than
those of the CAT NMS Plan if a different clock offset tolerance applied
to all CAT Reporters.

Table 15--Aggregated Implementation and Annual Ongoing Cost Increases by
                         Clock Offset Tolerance
------------------------------------------------------------------------
                                          Estimated         Estimated
                                         increase in       increase in
       Clock offset tolerance          implementation    annual  ongoing
                                            cost              cost
                                         (aggregate)       (aggregate)
------------------------------------------------------------------------
5 milliseconds......................      $229 million      $38 million.
1 millisecond.......................       446 million       50 million.
100 microseconds \1246\.............       688 million      106 million.
------------------------------------------------------------------------

    The Commission does not have information on the implementation and
ongoing costs to exchanges or ATSs of various alternative clock offset
tolerances because trading venues were not included in the FIF Clock
Offset Survey. The Plan does not provide this data, and the Commission
has no other data from which it can independently estimate this,
because the Commission is not aware of any such data available to it.
However, exchanges may currently synchronize their clocks to within 100
microseconds.\1247\ Consequently, the Commission preliminarily believes
that any of the alternative clock offset tolerances discussed above
would not materially increase costs to Participants relative to the
costs they would incur under the Plan because their current clock
synchronization procedures seem to satisfy any of the proposed clock
offset tolerances. In the case of ATSs, these systems tend to be
operated by large and complex broker-dealers that are unlikely to rely
upon service bureaus to perform their clock synchronization
responsibilities. Consequently, the Commission preliminarily believes
that cost estimates for the broker-dealers surveyed by FIF are likely
to include broker-dealers that operate ATSs and already reflect any
additional clock synchronization costs attributable to operating ATSs.
However, if Execution Venues (including ATSs) were to have smaller
clock offset tolerances than other broker-dealer systems, broker-
dealers operating ATSs would be expected to incur higher clock
synchronization costs than other broker-dealers.
---------------------------------------------------------------------------

    \1246\ The Commission recognizes that the benefits of clock
synchronization of less than one millisecond are limited unless the
time stamps are also more granular. Requiring more granular time
stamps than the 1 millisecond in the Plan would increase the costs
relative to those in Table 15.
    \1247\ See Section IV.D.2.b(2)B.i, supra; see also supra notes
435 and 436.
---------------------------------------------------------------------------

    As noted above, the Commission is soliciting comment on both an
alternative that would consider the standard practices of different
segments of the CAT Reporters for the purposes of setting the clock
synchronization requirements, and an alternative that would define
industry standard by looking at information other than current industry
practice. The Commission preliminarily believes that if the CAT NMS
Plan used an alternative interpretation of ``industry standard'' that
considered the standard practices of different segments of the CAT
Reporters for the purposes of setting the clock synchronization
requirements, the cost increases associated with smaller clock offset
tolerances might be lower than estimates presented in the tables above.
In particular, if the clock synchronization requirements were only
applied to the most time-sensitive systems, the costs increases would
be lower than those presented.\1248\ In addition, if the only broker-
dealers required to comply with clock synchronization requirements were
the ones accepting, routing, and executing orders, the costs could be
lower than those presented above. The Commission does not have the
information necessary to quantify how much lower the costs would be
under an alternative that applied different clock offset tolerances to
different segments of the CAT Reporters, because neither the Plan nor

the FIF Clock Offset Survey break the cost estimates for changes in
clock synchronization requirements down by business system types, and
the Commission has no data from which it can independently estimate
this, because the Commission is not aware of any such data available to
it.
---------------------------------------------------------------------------

    \1248\ This belief is also consistent with information in the
FIF Clock Offset Survey. See supra note 127, at 20. Specifically,
the survey found that respondents would save on costs if the
alternative clock offset tolerance were applied only to ``server-
side trading systems.''
---------------------------------------------------------------------------

    The Commission recognizes that a clock offset tolerance smaller
than 50 milliseconds would have differential cost across market
participants. An alternate approach to defining ``industry standard''
that took into account the standard practices of different segments of
CAT Reporters could mitigate those costs. All FIF Clock Offset Survey
respondents that provided technology information use technology capable
of 50 millisecond clock offset tolerances, but 36% of those respondents
do not employ a technology capable of clock offset tolerances smaller
than 50 milliseconds. Some survey respondents indicated that they
employ software that is not capable of clock offset tolerances of less
than 50 milliseconds or that desktop PCs would be a challenge with such
clock offset tolerances. An alternative definition of ``industry
standard'' that considered the practices of various segments of the
industry could apply smaller clock offset tolerances to a subset of
business systems; the Commission expects that applying smaller clock
offset tolerances to a subset of systems would cost less than applying
such clock offset tolerances to all systems. However, the benefits
could also be limited in terms of the percentage of unrelated events
that could potentially be sequenced, as compared to a definition of
``industry standard'' that a set a lower clock offset tolerance for all
CAT Reporters.
(2) Alternative Logging Procedures
    Rule 613(d)(1) requires synchronizing business clocks that are used
for the purposes of recording the date and time of any Reportable
Event. The CAT NMS Plan further requires that Participants and other
CAT Reporters maintain a log recording the time of each clock
synchronization that is performed and the result of such
synchronization, specifically identifying any synchronization initiated
in response to an observed discrepancy between the CAT Reporter's
business clock and the time maintained by the NIST exceeding 50
milliseconds.\1249\ According to the FIF Clock Offset Survey, costs in
logging the synchronization events is a significant driver of overall
clock synchronization costs.\1250\
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    \1249\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(c).
    \1250\ Other cost drivers include hardware and software costs
and costs in ensuring reliability.
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    A few survey respondents indicated that the number of logged events
would go up significantly with a shorter clock offset, which requires a
costly logging system.\1251\ Therefore, the Commission is soliciting
comment on an alternative that would require logging only exceptions to
the clock offset (i.e., events in which a market participant checks the
clock offset and applies changes to the clock).\1252\ While logging
every event, including clock offset checks, may be cost effective with
longer clock synchronization tolerances, the Commission questions
whether logging each event is cost efficient with finer clock offset
tolerances, given the large number of events expected for the proposed
and alternative clock synchronization standards. For example, if an
investigation is relying on properly sequenced events, the
investigation only would need to examine exception files to ensure the
precision of the time stamps. The FIF Clock Offset Survey suggests that
relaxing the logging requirement could reduce the burdens associated
with clock synchronization.
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    \1251\ See FIF Clock Offset Survey, supra note 127, at 19. One
survey respondent noted that a log file for a one second clock
offset would require 1 gigabyte of compressed storage each day but
clock offset log files for 50 millisecond clock offset would
increase the daily data storage 10 fold. Another survey respondent
noted that its current system logs 86,000 events per day and that
the proposed clock offset would require logging 35 million events
per day; see also CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(c).
    \1252\ This is one of the alternatives suggested in the FIF
Clock Offset Survey. See supra note 127.
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    The Commission cannot quantify the reduction in costs from this
alternative because it lacks data on the proportion of clock
synchronization costs that are associated with event logging and the
proportion of those costs that could be avoided by alternative event
logging requirements. The Commission preliminarily believes that any
reduction in benefits from this alternative, as compared to the CAT NMS
Plan's approach for clock synchronization, would be minor because the
inclusion of clock synchronization checks that required no clock
adjustment would not improve regulators' ability to sequence events.
The Commission notes, however, that enforcement of clock
synchronization requirements may be more difficult without
comprehensive logging requirements that document firms' actions to
comply with requirements; consequently, relaxing the logging
requirement may also reduce incentives to comply with the clock
synchronization requirements.
(3) Alternative Clock Synchronization Hours
    The Commission is soliciting comment on alternative requirements
for the times during which clock synchronization is required that would
provide more flexibility than the requirements of the Plan. The clock
synchronization requirement presented in the CAT NMS Plan makes no
provision for reduced clock synchronization requirements at times
during which systems are not performing tasks that produce time-
sensitive CAT Reportable Events; in the FIF Clock Offset Survey,
respondents identified that there were certain times during which
maintaining clock synchronization is more costly. Survey respondents
noted they would incur additional costs in maintaining clock offset
``99.9% of the time'' or with ``100% reliability'' and costs associated
with managing ``clock synch instability . . . after server reboot.''
The Commission notes that maintaining 99.9% or 100% reliability may be
unnecessary during times when the system does not record Reportable
Events. Further, the Commission understands that generally a system
does not record Reportable Events during server reboots. Therefore, the
Commission preliminarily believes that an alternative that does not
require synchronizing clocks when servers are not recording Reportable
Events or when precise time stamps are not as important to sequencing,
such as outside of normal trading hours, would not materially reduce
benefits. Given the responses to the FIF Clock Offset Survey, the
Commission preliminarily believes that this alternative could reduce
costs because synchronization activities and log entries related to
those events would not be as beneficial outside of normal trading
hours. The Commission does not have information necessary to quantify
the cost reduction because cost information available to the Commission
is not broken down by time of day or server status.
b. Time Stamp Granularity
    The Commission is soliciting comment on the benefits and costs of
an alternative time stamp granularity requirement of less than one
millisecond. Rule 613(d)(3) requires time stamp granularity consistent
with industry standards and, as discussed above, the Plan requires time
stamps that reflect industry standards and are at

least to the millisecond.\1253\ Furthermore, the Plan requires
Participants to adopt rules requiring that CAT Reporters that use time
stamps in increments finer than milliseconds use those finer increments
when reporting to the Central Repository.\1254\ As discussed in the
Commission's analysis of alternative clock offset tolerance
requirements, millisecond time stamps may be inadequate to allow
sequencing of the majority of unrelated Reportable Events across
markets.\1255\ In addition, as discussed below, the Commission
recognizes that the benefits of more granular time stamps would be
limited unless the Plan were to require a clock offset tolerance far
lower than is proposed in the Plan.
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    \1253\ See Section IV.H.1.e, supra.
    \1254\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(c).
    \1255\ See Section IV.E.1.b(2)B, supra.
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    The Commission recognizes that regulators' ability to sequence
events is dependent on both clock offset tolerance and time stamp
granularity. If the Plan requires any or all CAT Reporters to implement
clock offset tolerances of less than a millisecond, time stamps
reported at the millisecond level would not capture the additional
precision of the smaller clock offset tolerance and much of the
benefits of this smaller clock offset requirement would be lost if time
stamps were rounded or truncated due to a millisecond time stamp
granularity requirement. The Commission notes that provisions in the
Plan require that any Participant that utilizes time stamps in
increments finer than the minimum required to be reported under the
Plan utilize such increments in reporting data to the Central
Repository. Also, the Commission notes that a sub-millisecond clock
offset tolerance would not in itself require the reporting of sub-
millisecond time stamps to the Central Repository.\1256\
---------------------------------------------------------------------------

    \1256\ See CAT NMS Plan, supra note 3, at Section 6.8(b).
---------------------------------------------------------------------------

    A requirement for time stamps at resolutions finer than 1
millisecond would entail certain costs. Because some market
participants already use time stamps at the sub-millisecond level and
will be required to report this information under the Plan, such a
requirement is unlikely to create significant additional costs for CAT
Reporters. Furthermore, while some exchanges and broker-dealers are
already required to report time stamps at the sub-millisecond level,
implementation costs are likely to vary across CAT Reporters. The Plan
does not provide data on the cost of requiring sub-millisecond time
stamps, and the Commission has no other data from which it can
independently estimate this, because the Commission is not aware of any
such data currently available to it.
    Requiring sub-millisecond time stamp reporting would bring certain
benefits. However, the Commission preliminarily believes these benefits
may be limited without requiring clock offset tolerances of less than
one millisecond as well. For example, with a 50 millisecond clock
offset tolerance, a time stamp can only pinpoint the time of an event
to a 100 millisecond range.\1257\ In this case, sub-millisecond time
stamps provide little benefit to regulators attempting to determine the
order of events occurring in venues with separate clocks. However, even
with a 1 millisecond clock offset tolerance, a sub-millisecond time
stamp granularity requirement could provide some benefit for regulators
attempting to sequence events. For example, two events recorded at
times 12:00:00.0001 and 12:00:00.0021 on different venues can be
sequenced with a 1 millisecond clock offset, while if these time stamps
were rounded or truncated to 12:00:00.000 and 12:00:00.002, they could
not be sequenced with certainty, because it would be possible that both
events occurred at 12:00:00.001. If the Plan were to require sub-
millisecond clock offset tolerances, the additional benefits of this
sub-millisecond clock offset tolerance would be significantly limited
without time stamps that were similarly granular.
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    \1257\ See Section IV.H.2.a(1), supra.
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c. Error Rate
    The Commission is soliciting comment on the benefits and costs of
alternative maximum Error Rates. The Commission does not possess
sufficient data to quantitatively assess the costs and benefits of an
alternative to the maximum Error Rates specified in the CAT NMS Plan.
However, the Commission is using information provided in the CAT NMS
Plan to perform a qualitative assessment of the proposed maximum Error
Rates.\1258\
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    \1258\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(b).
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    The potential benefits from a lower maximum Error Rate than
proposed in the CAT NMS Plan could be improved accuracy in the data,
and a quicker retirement of OATS and other regulatory data reporting
systems.\1259\ However, the CAT NMS Plan states that errors would be de
minimis by the morning of day T+5, therefore the improvement in
accuracy does not seem to affect the data available to regulators
starting on day T+5.\1260\ Accordingly, the benefit of improved
accuracy as a result of a lower maximum Error Rate comes primarily from
regulatory use of the data prior to day T+5. While the Commission
believes that most regulatory uses would involve data after day T+5,
regulators also have essential needs for uncorrected data prior to day
T+5. For example, as discussed in the Benefits Section, the
availability of unprocessed data within three days of an event could
improve the Commission's chances of preventing asset transfers from
manipulation schemes.\1261\ Therefore, a lower Error Rate in data
available before day T+5 could, in certain regulatory contexts, be
meaningful.
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    \1259\ The Commission recognizes that a lower Error Rate could
also lead to the same accuracy level as the proposed Error Rate, but
more violations and consequences from those violations. This is
likely to occur if the Error Rates in the Plan are lower than what
every broker-dealer could reasonably obtain on the timeline; as a
consequence, because broker-dealers are reporting the most accurate
data they are currently able to report, a lower Error Rate cannot
improve data quality, but it can produce additional costs in the
form of penalties levied by the Plan Processor. However, as long as
at least one broker dealer can reasonably obtain lower Error Rates
than those in the Plan, a lower Error Rate would improve accuracy
because the lower Error Rate would incentivize that broker-dealer to
reduce its initial errors.
    \1260\ See id. at Appendix C, Section A.3(b), n.102.
    \1261\ See Section IV.E.3.d(3), supra.
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    Second, because OATS currently has a lower observed error rate than
the CAT NMS Plan, a reduction in CAT Error Rates may accelerate the
retirement of OATS because the SROs may find it advantageous to retain
OATS until CAT Data is at least as accurate as OATS data. However, the
CAT NMS Plan does not require a particular target Error Rate before
OATS can be retired and the Plan does not estimate any cost savings
associated with the retirement of OATS or other systems, beyond those
resulting from the end of a period of costly duplicative reporting.
Therefore, any acceleration in the retirement of OATS would not provide