hours annually. See Notice, supra note 5 at 30762 n.1243. $424,350/
1800 hours = $235.75.
---------------------------------------------------------------------------

    The Plan now also requires the Participants to provide a report
discussing the feasibility, benefits, and risks of allowing an Industry
Member to bulk download the Raw Data it submitted to the Central
Repository, within 24 months of effectiveness of the Plan. The
Commission estimates this requirement will entail a total one-time cost
of approximately $147,000.\2497\
---------------------------------------------------------------------------

    \2497\ See Section VI.G.1.d, infra.
---------------------------------------------------------------------------

    The Plan now also requires the Participants to submit an assessment
of errors in the customer information submitted to the Central
Repository that considers whether to prioritize the correction of
certain data fields over others, within 36 months of effectiveness of
the Plan. The Commission estimates this requirement will entail an
approximate one-time cost of $186,000.\2498\
---------------------------------------------------------------------------

    \2498\ See Section VI.G.1.e, infra.
---------------------------------------------------------------------------

    The Plan now requires the Participants to submit a report to study
the impact of tiered-fees on market liquidity, including an analysis of
the impact of the tiered-fee structure on Industry Members' provision
of liquidity, within 36 months of effectiveness of the Plan. The
Commission estimates this requirement will have a one-time external
cost of $110,000.\2499\
---------------------------------------------------------------------------

    \2499\ See Section VI.G.1.f, infra. The Commission assumes an
hourly labor rate of $235.75 that is based on the FTE annual cost
provided by the Participants in the Plan and an assumption of 1,800
hours annually. See Notice, supra note 5 at 30762 n.1243. $424,350/
1800 hours = $235.75.
---------------------------------------------------------------------------

    The Plan now requires an assessment of the impact on the maximum
Error Rate in connection with any Material Systems Change to the CAT;
the Commission assumes that the CAT may have four Material Systems
Changes per year. The Commission estimates this requirement will entail
an ongoing annual cost of $138,000.\2500\
---------------------------------------------------------------------------

    \2500\ See Section VI.G.1.g, infra.
---------------------------------------------------------------------------

    The Plan now requires that the Advisory Committee members receive
the same materials as the Operating Committee absent confidentiality
concerns with respect to such information. The Commission estimates
this will require an aggregate annual cost of $2,400.\2501\
---------------------------------------------------------------------------

    \2501\ See Section VI.G.1.h, infra.
---------------------------------------------------------------------------

    The Plan now requires that the CAT LLC financials (i) be in
compliance with GAAP, (ii) be audited by an independent public
accounting firm, and (iii) be made publicly available.\2502\ The
Commission estimates these requirements to entail costs of $65,000
annually.\2503\
---------------------------------------------------------------------------

    \2502\ See Section IV.B.4, supra; see also Participants' Letter
II.
    \2503\ To estimate this number, the Commission drew from a
recent Commission adopting release and an industry report.
Specifically, the Commission's Crowdfunding Adopting Release
estimated that the audit costs for affected issuers would be $2,500
to $30,000. See Securities Act Release No. 9974 (October 30, 2015),
80 FR 71499 (November 16, 2015). The Commission believes this
estimate could be reasonable if the Company's financials are of the
same level of complexity as the larger issuers affected by the
Crowdfunding rule, which is realistic because the Company is not
publicly traded, is organized as a ``business league'', and has a
limited and predictable revenue stream. As an alternative estimate,
the Commission estimated an audit cost of approximately $65,000
using an industry estimate of $479 in audit costs per $1 million in
revenue, using the assumption that Company revenue will just offset
expected costs of $139 million. See Audit Analytics report ``Audit
Fees and Non-Audit Fees: A Twelve Year Trend,'' October 9, 2014,
available at http://www.auditanalytics.com/blog/audit-fees-and-non-audit-fees-a-twelve-year-trend/. $479 x $139 = $64,665 ~ $65,000.
The Commission incorporates the higher estimate from the two
methodologies ($65,000) into its cost estimates.
---------------------------------------------------------------------------

    Finally, the Plan now requires that each Participant conduct
background checks of its employees and contractors that will use the
CAT System. The Commission estimates that this requirement would entail
an initial cost of $60,000, with ongoing annual costs of $14,000.\2504\
---------------------------------------------------------------------------

    \2504\ See Section VI.G.1.i, infra.
---------------------------------------------------------------------------

    The Commission is also revising its Participant cost estimates to
account for the addition of two additional Participants that were not
covered by the Participants Study.\2505\ The Commission assumes the new
Participants will have similar costs to the 19 Participants that
provided cost estimates summarized in the Plan. Consequently, the
Commission has increased its estimates of Participants costs by
10.53%.\2506\ The Commission now estimates that the 21 Participants
spend $8 million annually for data reporting, and $162.7 million for

surveillance. The Commission estimates that implementation of CAT Data
reporting will cost the Participants $19.8 million, and implementation
of surveillance using data in the Central Repository will cost the
Participants $25.6 million. The Commission estimates that Participants
will spend $16.2 million annually to maintain CAT Data reporting, and
$96.9 million annually on surveillance. The Commission is also
recognizing that the Participants will recoup $8.8 million in Plan
development costs, as discussed above. The Commission estimates that
Participants will spend approximately $1.1 million to produce one-time
reports required by amendments to the Plan, and $1.1 million annually
to produce additional periodic reports required by amendments to the
Plan. Furthermore, the Commission is recognizing $343,000 in system
retirement costs, as discussed below.\2507\ The Commission is unable to
update cost estimates to account for the modifications to the clock
synchronization standards for exchanges, but, as discussed below, the
Commission does not believe that the modifications will result in
substantial cost increases for exchanges.\2508\ The Commission
acknowledges that the addition of quote sent times to option market
maker quotes may increase costs to options exchanges. Based on comments
received, the Commission believes that Participant cost estimates from
the Participants Study are unlikely to include the additional expense
Participants will incur capturing and processing the Quote Sent Time
field. The Commission lacks information to estimate these costs for
Participants because the Plan does not include this information and
commenters did not offer estimates. Table 3 reflects the Commission's
estimates after taking these adjustments into consideration.
---------------------------------------------------------------------------

    \2505\ The Participants Study covered the 19 Participants that
were operating as Participants at the time the study was conducted.
The Notice acknowledged that ISE Mercury would likely become a
Participant before the Plan was implemented, but cost estimates
presented in the Notice did not account for costs that ISE Mercury
would incur due to the Plan. Since filing the Plan, ISE Mercury and
IEX have become Participants in the Plan.
    \2506\ 100 x (2/19) = 10.53%.
    \2507\ See Section V.F.2.b, infra.
    \2508\ See Section V.F.3.a(5), infra.

                                    Table 3--Estimates of Participants' Costs
----------------------------------------------------------------------------------------------------------------
                                                                        CAT           System
                                                      Current     implementation    retirement     CAT on-going
----------------------------------------------------------------------------------------------------------------
Data Reporting..................................      $7,626,570     $19,784,870  ..............     $16,247,910
Surveillance....................................     162,700,160      25,642,960  ..............      96,934,810
Development Recoup..............................  ..............     (8,800,000)  ..............  ..............
Additional Reporting Requirements...............  ..............       1,085,927  ..............       1,089,137
                                                 ---------------------------------------------------------------
    Total.......................................     170,326,730      37,713,757        $342,632     114,271,857
----------------------------------------------------------------------------------------------------------------

c. Costs to Broker-Dealers
(1) Summary of Notice and Comments and Commission's Response
    In the Notice, the Commission provided an analysis of the
compliance cost estimates for broker-dealers that included analyzing
whether estimates provided in the Plan and based on a Reporters Study
survey were reliable.\2509\ The Commission preliminarily believed that
the cost estimates for small broker-dealers were not reliable. The
Commission described the details of the analysis supporting that
conclusion. The Commission then developed and calibrated a model
(``Outsourcing Cost Model'') to estimate average current data reporting
costs and average Plan compliance costs for broker-dealers that the
Commission expects will rely on service bureaus to perform their CAT
Data reporting responsibilities (``Outsourcers''). For other broker-
dealers, the ``Insourcers,'' the Commission continued to rely on the
large broker-dealer estimates from the Plan. Using this framework, the
Commission estimated approximate one-time implementation costs for
broker-dealers of $2.1 billion, and annual ongoing costs of CAT
reporting of $1.5 billion.
---------------------------------------------------------------------------

    \2509\ See Notice, supra note 5, at 30712-26.
---------------------------------------------------------------------------

    The Commission received comments on the reliability of its
Outsourcing Cost Model and its re-estimation of costs. One commenter
stated that the Commission's estimates of service bureau charges for a
small firm ``sound reasonable.'' \2510\ Another commenter noted that
even when Outsourcers rely on their service providers (service bureaus
or clearing firms) to accomplish current data reporting, the
Outsourcers must expend internal resources as well.\2511\ A third
commenter stated that broker-dealers that clear for other broker-
dealers may face higher implementation costs because they may support
more broker-dealers than they did before implementation of the
Plan.\2512\ This commenter also stated that the Commission has not
analyzed the cost implications of the phased implementation of small
and large Industry Members.\2513\ The Commission did not receive
comments on its analysis or conclusion that the Reporters Study did not
provide reliable cost estimates for small broker-dealers.
---------------------------------------------------------------------------

    \2510\ Data Boiler Letter at 36.
    \2511\ Specifically, this commenter references EBS reporting,
but indicates that broker-dealers sometimes must also be involved in
preparing EBS request responses. See FIF Letter at 34.
    \2512\ TR Letter at 3-4.
    \2513\ TR Letter at 3.
---------------------------------------------------------------------------

    The Commission also received several comments on uncertainties in
broker-dealer cost estimates. Three of these comments related to the
selection of the Plan Processor. One commenter stated, ``not knowing
who the CAT Processor is introduces a significant amount of
uncertainty. . . . We believe the Commission discounts the importance
of the choice of Plan Processor as it relates to implementation costs.
While the bids to build the Processor may be within a sufficiently
narrow range so as to negate those costs, the choice of Processor may
have a significant impact on broker-dealer implementation costs.''
\2514\ A commenter stated that the differences in Bids prevented
broker-dealers from ``. . . provid[ing] more definitive cost estimates
and other projections related to CAT implementation.'' \2515\ Other
commenters noted that the Plan's lack of specific details creates
uncertainty around what costs broker-dealers will incur to implement
these provisions.\2516\ Other comment letters discussed the general
uncertainties that result from not having the technical
specifications.\2517\
---------------------------------------------------------------------------

    \2514\ TR Letter at 4; FSI Letter at 6.
    \2515\ FSI Letter at 6.
    \2516\ SIFMA Letter at 42; FSI Letter at 6.
    \2517\ See, e.g., FSR Letter at 10; SIFMA Letter at 23; UnaVista
Letter at 2; Fidelity Letter at 6.
---------------------------------------------------------------------------

    The Commission has considered these comments, the Participants'
response, and modifications to the Plan and is updating and revising
its cost estimates. As discussed below, the Commission

now acknowledges that its estimates exclude some additional costs that
would be faced by Outsourcers or new reporters that clear for other
broker-dealers, or that provide support for introducing broker-dealers.
The Commission further acknowledges that broker-dealer costs presented
in its analysis are subject to significant uncertainties and recognizes
additional sources of uncertainty. The Commission is also updating its
analysis of the costs to recognize the effects of modifications to the
requirement to report an open/close indicator and allocation time, and
is revising its analysis to indirectly account for the Participants'
development costs. However, the Commission is not revising the
structure of its Outsourcing Cost Model, its conclusions regarding the
reliability of the Reporters Study, or estimates of the broker-dealers'
current, implementation or ongoing costs.
    With respect to the comment that the Outsourcing Cost Model does
not account for internal expenses that support outsourced activities,
the Commission notes that its cost estimates explicitly assume that
Outsourcers have employee expenses that cover these activities.\2518\
With respect to the commenters concerned that the Commission's
estimates do not account for an increase in costs for broker-dealers
that clear for other broker-dealers or provide support to introducing
broker-dealers, the Commission continues to believe the analysis of
broker-dealer implementation costs presented in the Notice is generally
reliable, and notes that Reporters Study estimates for large broker-
dealers are likely to include these expenses because survey respondents
are likely to include broker-dealers that provide these services. The
Commission acknowledges, however, that there are some broker-dealers--
such as one of the commenters--that would be classified as Outsourcers
or new reporters for which the Commission's cost estimates rely on the
Outsourcing Cost Model, and the additional implementation costs that
these firms face due to clearing for other broker-dealers or supporting
introducing broker-dealers are not captured by the Outsourcing Cost
Model. Costs that Outsourcers and new reporters that continue to clear
for other broker-dealers will face include, but are likely not limited
to, additional costs associated with reporting customer information to
the Central Repository and costs associated with receiving customer
information from their broker-dealer clients. Outsourcers and new
reporters that currently clear for other broker-dealers or support
introducing broker-dealers that elect to outsource their clearing or
regulatory data reporting will face costs that include, but are not
limited to, costs associated with establishing service provider
relationships with other broker-dealers; and lost revenues from
providing services for other firms if those firms cease providing
clearing services or supporting introducing broker-dealers, although
the Commission believes that they might be able to establish
``piggyback'' arrangements that allow them to retain their
relationships with current customers.\2519\ The Commission, however,
cannot estimate the number of broker-dealers that would bear these
costs because the Commission lacks data on the number of broker-dealers
that clear for other broker-dealers that would be classified as new
reporters or Outsourcers. Furthermore, the Commission lacks data to
estimate the magnitude of these costs because the Plan does not provide
this data and the Commission is unaware of any data available to it
that it could use to estimate these costs.
---------------------------------------------------------------------------

    \2518\ See Notice, supra note 5, at 30723.
    \2519\ Costs related to outsourcing services such as clearing
are discussed in Section V.F.1.c, supra, and Section V.G.1.d, infra.
``Piggyback'' relationships are discussed in the Notice, supra note
5, at 30716 n.894.
---------------------------------------------------------------------------

    In response to comment letters that identified sources of
uncertainties related to the costs Industry Members will incur, the
Commission acknowledges that such costs depend on the Technical
Specifications, which will be published no later than one year before
Industry Member reporting begins. The Commission now believes that the
sources of uncertainty include both how Technical Specifications would
vary across Bids, and what costs of CAT are included in cost estimates
obtained from market participants and presented in the Plan and
included in the Commission's analysis.\2520\ However, the Commission
notes that final Bids will not be submitted until after the Plan is
approved, so the Commission is unable to quantify the degree of
variation in broker-dealer implementation costs across Bids.
---------------------------------------------------------------------------

    \2520\ For example, the analyses in the Plan and the
Commission's analysis assume that respondents to cost surveys are
representative of their respective groups. If broker-dealers that
clear for other broker-dealers or serve as introducing broker-
dealers did not respond to cost surveys, the costs such broker-
dealers are likely to face might not be represented by Plan
estimates, and the Commission's estimates where they rely on the
Plan's estimates.
---------------------------------------------------------------------------

    The Commission has also revised its analysis of its cost estimates
to account for the following things: The clarification that
Participants intend to recoup their development costs; modifications to
the Plan regarding reporting the open/close indicator for equities and
Options Market Makers; costs for Options Market Makers to provide Quote
Sent Time; and costs related to providing allocation times on
Allocation Reports. The Participants' response clarified that the
Participants intend to recoup some of the more than $8.8 million they
have already spent to develop the CAT NMS Plan by collecting fees from
broker-dealers.\2521\ In the Notice, the Commission treated such costs
as sunk costs incurred by the Participants and did not include them in
its analysis of the Plan, but is now recognizing that these costs will
be transferred to broker-dealers.\2522\ Therefore, the Commission adds
the development costs to the costs to broker-dealers.\2523\ The
Commission recognizes that the modification that removes the open/close
indicator for equities and Options Market Makers will reduce the
implementation and potentially ongoing costs for Industry Members.
However, as discussed in the further analysis of costs Section
below,\2524\ the Commission is not certain whether Industry Members
included these costs in their cost survey results, and the Commission
does not have sufficient information on these costs to remove them from
its estimates.\2525\ With regard to Quote Sent Time, the Commission is
incorporating estimates discussed in the Notice but not included
separately in cost estimates published in the Notice.\2526\

The Commission recognizes that the modifications related to including
allocation times will reduce costs to Industry Members, but also
recognizes that the Commission did not previously account for these
costs in estimates of their costs.\2527\ Therefore, the Commission is
adding the estimated costs of including allocation time as required
under the Plan as amended to its cost estimates. The Commission notes
that this increase in broker-dealer costs is small relative to the
other estimated costs of broker-dealers and therefore does not change
the rounded estimates.
---------------------------------------------------------------------------

    \2521\ See Section V.F.1.b, supra, for further discussion.
    \2522\ See Notice, supra note 5, at n 848. This clarification to
the Plan, and comments received on this clarification, which are
discussed in Section IV, imply disagreement with the Commission's
treatment of these costs as sunk costs in the Notice. The Commission
notes that these costs have already been incurred, so are not
attributable to the Approval of the Plan, but rather are costs
associated with and anticipated by Rule 613. Furthermore, the
recovery of these costs by the Participants does not change the cost
to industry of the Plan; rather the costs comprise a transfer from
one market participant type (Industry Members) to another
(Participants). Consequently, the cost of the Plan to industry is
unaffected. The Commission acknowledges that this transfer will
increase broker-dealer costs and decrease Participant costs.
    \2523\ This cost is also subtracted from costs to Participants.
See Section V.F.1.b, supra.
    \2524\ See Section V.F.3.a(2), infra, for a more detailed
discussion of the effect of this modification.
    \2525\ The Commission believes the estimates are conservative in
this dimension as they overestimate broker-dealer implementation
costs due to the removal of the open/close indicator from the
material terms of the order insofar as broker-dealers included that
indicator in their implementation cost estimates in the Reporters
Study survey.
    \2526\ The Notice discusses estimates of five year
implementation and ongoing costs of up to $76.8 million. The
Commission notes that for other broker-dealer costs, implementation
costs are 146.46% of ongoing costs and assumes that ratio of
implementation to ongoing costs for Quote Sent Time. (1.4646 ongoing
costs + 5 x ongoing costs = $76.8 million.) See Section V.F.3.a(6),
infra for discussion of these estimates and their treatment in the
Notice and this Order.
    \2527\ See Section V.F.3.a(4), infra, for a more detailed
discussion of the costs of including allocation times on Allocation
Reports.
---------------------------------------------------------------------------

    Therefore, in its final analysis, the Commission estimates
approximate one-time implementation costs for broker-dealers of $2.2
billion, and annual ongoing costs of CAT reporting of $1.5 billion.
(2) Commission's Final Analysis
    The discussion that follows provides a synopsis of the Commission's
final analysis of the compliance costs of broker-dealers. Because the
Commission is not revising the structure of its Outsourcing Cost Model
or its conclusions regarding the reliability of the Costs to CAT
Reporters Study (``Reporters Study''),\2528\ the final analysis
regarding these below provides a summary of the more detailed
discussions in the Notice.
---------------------------------------------------------------------------

    \2528\ See Notice, supra note 5, at 30712-14.
---------------------------------------------------------------------------

A. Estimates in the Plan
    The Plan, as amended on February 27, 2015, estimates total costs
for those broker-dealers expected to report to CAT. In particular, the
Plan relies on the Reporters Study. Based on the Reporters Study survey
data, the Plan estimates implementation costs of less than $740 million
for small firms \2529\ and approximately $2.6 billion for large firms,
for a total of $3.34 billion in implementation costs for broker-
dealers.\2530\ For annual ongoing costs, the Plan estimates costs of
$739 million for small firms and $2.3 billion for large firms, for a
total of $3.04 billion in annual ongoing costs for broker-
dealers.\2531\
---------------------------------------------------------------------------

    \2529\ Survey respondents were instructed to classify themselves
as ``small'' if their Total Capital (defined as net worth plus
subordinated liabilities) was less than $500,000. See CAT NMS Plan,
supra note 5, at Appendix C, Section B.7(b)(ii)(C) n.188. This is
consistent with the definition of ``small business'' or ``small
organization'' used with reference to a broker or dealer for
purposes of Commission rulemaking in accordance with provisions of
Chapter Six of the Administrative Procedure Act (5 U.S.C. 601 et
seq.). See 17 CFR 240.0-10(c).
    \2530\ See CAT NMS Plan, supra note 5, at Appendix C, Section
B.7(b)(iv)(A)(3).
    \2531\ Id.
---------------------------------------------------------------------------

    The Commission believes, however, that the cost estimates for small
broker-dealers provided in the Plan, which are based upon responses set
forth in the Reporters Study, do not provide reliable estimates of
smaller CAT Reporter costs for a number of reasons discussed in detail
in the Notice and summarized herein.\2532\ First, some respondents
classified as small in the Reporters Study appear to have responded
numerically with incorrect units, with such responses resulting in
annual estimated cost figures that would be 1,000 times too large.
Second, maximum responses in certain categories of costs suggest that
some large broker-dealers may have misclassified themselves as small
broker-dealers.\2533\ Third, methods used to remove outliers are likely
to have introduced significant biases. Finally, the response rate to
the Reporters Study survey was low and is likely to have oversampled
small broker-dealers who currently have no OATS reporting
obligations.\2534\
---------------------------------------------------------------------------

    \2532\ See Notice, supra note 5, at 30712-14.
    \2533\ The Plan presents summary statistics such as average,
median and maximum for each survey response. See CAT NMS Plan, supra
note 5, at Appendix C, Section B(7)(b)(ii)(C), Table 5. In the left
most column, $14 million is the maximum response for ``Hardware/
Software Current Cost.''
    \2534\ In reaching these conclusions, the Commission reviewed
the detailed discussions of the Reporters Study survey methodology
in the Plan and the survey form and instructions provided to
respondents. See 6/23/14 entry on CAT NMS Plan website, available at
http://www.catnmsplan.com/pastevents/index.html. The Commission
Staff also discussed with the Participants potential methodology
adjustments in aggregating the CAT Reporters Study data. After
Commission Staff discussions with the Participants, the Commission
concluded that no methodology could address these fundamental issues
with the survey data.
---------------------------------------------------------------------------

    Although the Commission concludes that the small broker-dealer cost
estimates presented in the Plan are unreliable, the Commission also
believes, for reasons discussed in detail in the Notice and summarized
herein, that the cost estimates in the Plan for large broker-dealers
are reliable.\2535\ The Plan estimates that an OATS-reporting large
broker-dealer has current data reporting costs of $8.7 million per
year.\2536\ A non-OATS reporting large broker-dealer is currently
estimated to spend approximately $1.4 million annually.\2537\ The Plan
estimates that OATS-reporting large broker-dealers would spend
approximately $7.2 million to implement CAT Data reporting, and $4.8
million annually for ongoing costs.\2538\ For non-OATS reporting large
broker-dealers, the Plan estimates $3.9 million in implementation costs
and $3.2 million in annual ongoing costs.\2539\
---------------------------------------------------------------------------

    \2535\ See Notice, supra note 5, at 30714.
    \2536\ See CAT NMS Plan, supra note 5, at Appendix C, Section
B.(7)(b)(ii)(C), Table 3. The $8.7 million figure was calculated by
summing the average hardware/software cost, third party/outsourcing
cost, and full-time employee costs using the Commission's estimated
cost per employee of $424,350.
    \2537\ Id. at Appendix C, Section B.(7)(b)(ii)(C), Table 4. The
$1.4 million figure was calculated by summing the average hardware/
software cost, third party/outsourcing cost, and full-time employee
costs using the Commission's estimated cost per employee of
$424,350.
    \2538\ Id. at Appendix C, Section B.(7)(b)(iii)(C)(2)a., Table
9; Appendix C, Section B.(7)(b)(iii)(C)(2)b., Table 15.
    \2539\ See CAT NMS Plan, supra note 5, at Appendix C, Section
B.(7)(b)(iii)(C)(2)a., Table 10; and at Appendix C, Section
B.(7)(b)(iii)(C)(2)b., Table 16.
---------------------------------------------------------------------------

B. Commission Cost Estimates
    As discussed in detail in the Notice, the Commission believes that
the small firm cost estimates presented in the Reporters Study are
unreliable. Therefore, the Commission has re-estimated the costs that
broker-dealers likely would incur for CAT implementation and ongoing
reporting.\2540\ The Commission's broker-dealer cost estimates
incorporate some broker-dealer data from the Plan, but to address
issues in the Plan's Reporters Study data, the Commission's cost
estimates also include other data sources described in the
Notice.\2541\ As with the Plan's cost estimates, the Commission's re-
estimation relies on classifying broker-dealers based on whether they
currently report OATS data. However, the re-estimation further
classifies broker-dealers based on whether the firm is likely to use a
service bureau to report its regulatory data, or, alternatively,
whether the firm may choose to self-report its regulatory data. In this
re-estimation, the Commission estimates that the 1,800 broker-dealers
expected to incur CAT reporting obligations spend approximately $1.6
billion annually to report regulatory data.\2542\ The

Commission believes that these broker-dealers will incur approximately
$2.2 billion in implementation costs and $1.5 billion in ongoing data
reporting costs.\2543\ As explained in more detail in the Notice, the
Commission believes classifying broker-dealers based on their manner of
reporting provides a more accurate estimate of the costs firms will
incur because costs differ based on whether the firm insources or
outsources reporting responsibilities and insourcing/outsourcing does
not necessarily correlate with firm size.\2544\ The Commission
maintains the Plan's approach of separating broker-dealer costs of OATS
reporting firms from those that have no OATS reporting obligations,
recognizing that the group of non-OATS reporting firms are diverse in
size and scope of activities. As discussed in detail in the Notice, the
Commission believes this is appropriate because firms that do not
currently report to OATS will face a different range of costs to
implement and maintain CAT reporting because firms that do not report
to OATS are likely to have little to no regulatory data infrastructure
in place.
---------------------------------------------------------------------------

    \2540\ See Notice, supra note 5, at 30717-24.
    \2541\ Discussions below present information included in the
Notice on data obtained from FINRA and gleaned from discussions with
broker-dealers and service bureaus arranged by FIF and staff. Id. at
30715.
    \2542\ To the extent that the CAT NMS Plan underestimates the
number of broker-dealers that would incur CAT reporting obligations,
the Commission's estimates presented in the Notice understate the
actual costs Reporters will face.
    \2543\ These figures cover only broker-dealer costs. Industry-
wide costs are summarized below.
    \2544\ See Notice, supra note 5, at 30715-17.
---------------------------------------------------------------------------

    The Commission's framework for estimation of broker-dealers costs,
as presented in the Notice and adopted here without alteration, is
based on analysis of data provided by FINRA and discussions with
broker-dealers and service providers that were detailed in the
Notice.\2545\ Analysis of data reported by FINRA confirms that there
are two primary methods by which broker-dealers accomplish data
reporting: insourcing, where the firm reports data to regulators
directly; and outsourcing, where a third-party service provider
performs the data reporting, usually as part of a service agreement
that includes other services. Based on data from FINRA and
conversations with market participants discussed in the Notice, the
Commission believes that the vast majority of broker-dealers outsource
most of their regulatory data reporting functions to third-party firms.
A broker-dealer's decision to insource/outsource these functions and
services can be complex, and different broker-dealers reach different
solutions based on their business characteristics. To illustrate, some
broker-dealers self-clear trades but outsource regulatory data
reporting functions; some broker-dealers have proprietary order
handling systems, self-clear trades, and outsource regulatory data
reporting functions. Other broker-dealers outsource order-handling,
outsource clearing trades, and self-report regulatory data. The most
common insource/outsource service configuration, however, for all but
the most active-in-the-market broker-dealers is to use one or more
service bureaus to handle all of these functions.
---------------------------------------------------------------------------

    \2545\ Id. at 30714 n.880.
---------------------------------------------------------------------------

    The framework for the Commission's re-estimation, which is
described in more detail in the Notice, is as follows.\2546\ First, the
Commission identifies those OATS-reporting firms that insource
(``Insourcers'') and those that outsource based on an analysis of the
number of OATS Reportable Order Events (``ROEs'') combined with
specific data provided by FINRA on how firms report OATS data.
Furthermore, the Commission separately identifies firms that do not
report to OATS but are likely to insource based on their expected
activity level by identifying Options Market Makers and Electronic
Liquidity Providers (``ELPs''). Based on that analysis, the Commission
estimates that there are 126 OATS-reporting Insourcers and 45 non-OATS
reporting Insourcers.\2547\ The Commission's re-estimation classifies
the remaining 1,629 broker-dealers that the Plan anticipates will have
CAT Data reporting obligations as ``Outsourcers,'' based on outsourcing
practices observed in data obtained from FINRA.\2548\ Next, to
determine costs for Insourcers, the Commission relies upon cost
estimates for firms classified as ``large'' in the Reporters Study.
---------------------------------------------------------------------------

    \2546\ Id. at 30715.
    \2547\ Id.
    \2548\ Id. at 30715-16.
---------------------------------------------------------------------------

    For Outsourcers, the Commission uses a model of ongoing outsourcing
costs (``Outsourcing Cost Model'') to estimate both current regulatory
data reporting costs and CAT-related data reporting costs Outsourcers
will incur if the CAT NMS Plan is approved. The Commission analyzed
data provided by FINRA to establish a count of CAT Reporters likely to
outsource their regulatory data reporting functions. The Commission's
analysis of FINRA reporting data, which is discussed in the Notice,
allowed the Commission to examine how broker-dealers' current
outsourcing activities varied with the number of ROEs reported to OATS.
Based on this analysis, the Commission believes that the 126 broker-
dealers that reported more than 350,000 OATS ROEs between June 15 and
July 10, 2015 made the insourcing-outsourcing decision strategically
based on the broker-dealer's characteristics and preferences, while the
remaining OATS reporters were likely to utilize a service bureau to
accomplish their regulatory data reporting.\2549\
---------------------------------------------------------------------------

    \2549\ The Commission believes this decision is strategic and
discretionary because FINRA data reveals that while many broker-
dealers at these activity levels self-report most or all of their
regulatory data, other broker-dealers outsource most or all of their
regulatory reporting at these activity levels. At lower activity
levels, most, but not all, broker-dealers outsource most if not all
of their regulatory data reporting. The Commission is cognizant that
some broker-dealers reporting fewer than 350,000 OATS ROEs per month
can and do opt to self-report their regulatory data. However, based
on conversations with broker-dealers, the Commission believes that
most broker-dealers at these activity levels do not have the
infrastructure and specialized staff that would be required to
report directly to the Central Repository, and electing to self-
report would be cost-prohibitive in most but not all cases.
---------------------------------------------------------------------------

    The Commission estimates ongoing costs for outsourcing firms using
a model which, as discussed in more detail in the Notice, was based on
data gleaned from discussions with service bureaus and broker-dealers
and implementation costs using information learned in conversations
with industry.\2550\ Based on discussions with market participants, the
Commission assumes that the cost function for outsourcing is concave
\2551\ and applies the same assumption to its final analysis. This type
of function is appropriate when costs increase as activity level
increases, but the cost per unit of activity (e.g., cost per report)
declines as activity increases. For reasons indicated in the Notice,
the Commission relies on a schedule of average charges to access
liquidity and rebates to provide liquidity from four non-inverted
exchanges to estimate the concavity of the exchange pricing function,
which the Commission uses to approximate the concavity of the
outsourcing cost model.\2552\ The model's output, which the Commission
relies on in its final analysis, is an estimate of a broker-dealer's
cost to outsource data reporting services as part of a bundle of
services from a service bureau; for smaller broker-dealers, it is
assumed to include provision of an order management system and market
connectivity.\2553\
---------------------------------------------------------------------------

    \2550\ See Notice, supra note 5, at 30718-24, for more
information on these discussions.
    \2551\ Id. at 30719, for more information on these discussions.
    \2552\ The Commission's estimate of concavity relies on data
from exchanges that do not feature inverted pricing. On ``inverted''
exchanges, the party with the resting order pays a fee while her
counterparty that receives immediate execution earns a rebate.
    \2553\ In conversations with Commission Staff, service bureaus
related that some very large clients provide their own order-
handling system and market connectivity.

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

    To estimate costs of CAT Data reporting by the service bureaus, the
Commission assumes that the pricing function used to estimate current
costs will apply for CAT Data reporting, but the costs in relation to
the number of ROEs will increase because some events that are excluded
from OATS (like proprietary orders originated by a trading desk in the
ordinary course of a member's market making activities), will be
included in CAT.\2554\
---------------------------------------------------------------------------

    \2554\ Although the pricing function is assumed constant, as
explained in the Notice, broker-dealer costs would increase because
the number of ROEs they report through their service bureaus would
increase under the Plan. See Notice, supra note 5, at 30721.
---------------------------------------------------------------------------

    As discussed in detail in the Notice, application of the model to
data provided by FINRA allows the Commission to estimate pre-CAT
outsourcing costs for broker-dealers, as well as projected costs under
the CAT NMS Plan. The Commission estimates that the 806 broker-dealers
that each report fewer than 350,000 OATS ROEs monthly spend an
aggregate $100.1 million on annual outsourcing costs. Under the CAT NMS
Plan, the Commission estimates that these 806 broker-dealers will spend
$100.2 million on annual outsourcing costs. As in the Notice, the
Commission recognizes that the magnitude of this increase is quite
small, but this is driven by the fact that the vast majority of firms
that are assumed to outsource had very low regulatory data reporting
levels at the time the estimates were made.\2555\
---------------------------------------------------------------------------

    \2555\ The average broker-dealer in this category reported
15,185 OATS ROEs from June 15-July 10, 2015; the median broker-
dealer reported 1,251 OATS ROEs. Of these broker-dealers, 39
reported more than 100,000 OATS ROEs during the sample period. Id.
at 30722.
---------------------------------------------------------------------------

    As discussed in the Notice, firms that outsource their regulatory
data reporting face additional internal staffing costs associated with
this activity. Based on conversations with market participants
described in the Notice, the Commission estimates that these firms
currently have 0.5 full-time employees devoted to regulatory data
reporting activities. The Commission further estimates that these firms
will need one full-time employee for one year to implement CAT
reporting requirements, and 0.75 full-time employees on an ongoing
basis to maintain CAT reporting.\2556\
---------------------------------------------------------------------------

    \2556\ Based on discussions with broker-dealers described in the
Notice, the Commission believes that very small broker-dealers are
unlikely to have employees entirely dedicated to regulatory data
reporting. Instead, other employees generally have duties that
include dealing with service bureau matters and answering regulatory
inquiries. The Commission assumes a full-time employee costs
$424,350 per year. Id. at 30714, n. 880.
---------------------------------------------------------------------------

    As discussed in the Notice, in addition to broker-dealers that
currently report to OATS, the Commission estimates that there are 799
broker-dealers that are excluded from OATS reporting rules due to firm
size, or exempt because all of their order flow was routed to a single
OATS reporter, such as a clearing broker, that will have CAT reporting
responsibilities.\2557\ The Commission assumes that these broker-
dealers will have low levels of CAT reporting, similar to those of the
typical Outsourcers that currently report to OATS.\2558\ For these
firms, the Commission assumes that under CAT they will incur the
average estimated outsourcing cost of firms that report fewer than
350,000 OATS ROEs per month, which is $124,373 annually. Furthermore,
because these firms have more limited data reporting requirements than
other firms, the Commission assumes these firms have only 0.1 full-time
employees dedicated to regulatory data reporting activities. The
Commission assumes that these firms will require 2 full-time employees
for one year to implement the CAT NMS Plan and 0.75 full-time employees
annually to maintain CAT Data reporting.\2559\
---------------------------------------------------------------------------

    \2557\ In discussions with Commission Staff, FINRA has stated
that there are currently 54 OATS-exempt broker-dealers and 691 OATS-
excluded firms.
    \2558\ Exemption or exclusion from OATS may be based on firm
size or type of activity. Broker-dealers with exemptions or
exclusions that relate to firm size are presumably relatively
inactive. However, some firms may be exempted or excluded because
they route only to a single OATS-reporting broker-dealer; this could
encompass large firms that would be more similar to Insourcers.
    \2559\ See supra note 2556.
---------------------------------------------------------------------------

    The Commission, however, believes for reasons described in more
detail in the Notice that there are three other categories of broker-
dealers not reflected in the above detailed cost estimates that do not
currently report OATS data but could be CAT Reporters. First, there are
at least 14 ELPs that did not carry customer accounts; these firms are
not FINRA members and thus have no regular OATS reporting
obligations.\2560\ The Commission believes that it is likely that these
broker-dealers already have self-reporting capabilities in place
because each is a member of an SRO that requires the ability to report
to OATS on request. The second group of broker-dealers that are not
encompassed by the cost estimates of FINRA member broker-dealers
discussed above are those that make markets in options and not
equities. Although not required by the CAT NMS Plan to report their
option quoting activity to the Central Repository,\2561\ these broker-
dealers may have customer orders and other activity that will cause
them to incur a CAT Data reporting obligation. As explained in the
Notice, based on CBOE membership data, the Commission believes that
there are 31 options market-making firms that are members of multiple
SROs but not FINRA.\2562\ The third group comprises 24 broker-dealers
that have SRO memberships only with CBOE; the Commission believes that
this group is comprised primarily of CBOE floor brokers and, further,
believes these firms will incur CAT implementation and ongoing
reporting costs similar in magnitude to small equity broker-dealers
that currently have no OATS reporting responsibilities because they
will face similar tasks to implement and maintain CAT reporting. As
explained in the Notice, the Commission assumes the 31 options market-
making firms and 14 ELPs are typical of the Reporters Study's large,
non-OATS reporting firms because this group encompasses large broker-
dealers that are not FINRA members, a category that excludes any
broker-dealer that carries customer accounts and trades in equities. As
in the Notice, for these 45 firms, the Commission relies on cost
estimates from the Reporters Study.\2563\
---------------------------------------------------------------------------

    \2560\ The category of Insourcers that do not currently report
OATS data includes firms that have multiple SRO memberships that
exclude FINRA. This category includes Options Market Makers and at
least 14 ELPs; these are firms that carry no customer accounts and
directly route proprietary orders to Alternative Trading Systems.
    \2561\ See Exemption Order, supra note 21, at 11857-58.
    \2562\ The Commission identified 39 CBOE-member broker-dealers
that were not FINRA members, but were members of multiple SROs; 8 of
these broker-dealers were previously identified as ELPs, leaving 31
firms with multiple SRO memberships that were unlikely to be CBOE
floor brokers.
    \2563\ The Commission recognizes that additional broker-dealers
may be members of neither FINRA nor CBOE, yet may incur CAT
reporting obligations if the Plan is approved. The Commission has
determined that categorizing additional broker-dealers that are
currently classified as exempt or excluded FINRA members as non-
FINRA members would not change the cost estimates because these
groups have identical estimated per-firm costs.
---------------------------------------------------------------------------

    As discussed in detail in the Notice, pre-CAT Data reporting cost
estimates range from $167,000 annually for floor brokers and firms that
are exempt from OATS reporting requirements to $8.7 million annually
for firms that report more than 350,000 OATS ROEs per month
(``Insourcers''). Estimates of one-time implementation costs range from
$424,000 for OATS reporters that are assumed to outsource (``OATS
Outsourcers'') to $7.2 million for Insourcers, and ongoing annual costs
range from $443,000 annually for firms that are assumed to outsource
(OATS Outsourcers, New Outsourcers and Floor Brokers) to $4.8 million
for Insourcers.

    Table 4 summarizes the Commission's updated estimates of costs to
broker-dealers expected from the approval of the CAT NMS Plan. The
Commission estimates that broker-dealers spend, in aggregate,
approximately $1.6 billion annually on current regulatory data
reporting activities. The Commission estimates approximate one-time
implementation costs of $2.2 billion, and annual ongoing costs of CAT
reporting of $1.5 billion.\2564\ The Commission notes that its estimate
of ongoing CAT reporting costs of $1.5 billion is slightly lower than
current data reporting costs of $1.6 billion. As explained in the
Notice, this differential is driven by expectations of reductions in
data reporting costs reported by large OATS-reporting broker-dealers in
the Reporters Study survey.\2565\ The Commission estimates that all
other categories of broker-dealers will face significant increases in
annual data reporting costs. Also, the Commission acknowledges that
there are some broker-dealers that would be classified as Outsourcers
or new reporters for which the Commission's cost estimates rely on the
Outsourcing Cost Model, and the additional implementation costs that
these firms face due to clearing for other broker-dealers or supporting
introducing broker-dealers are not captured by these estimates.
---------------------------------------------------------------------------

    \2564\ As noted in Section V.F.1.b, supra, the Plan as amended
in February 2016 states that the Participants will recover their
costs of developing the Plan (currently $8.8 million) from broker-
dealers. This constitutes a transfer from broker-dealers to
Participants, but does not change the aggregate cost of the Plan to
market participants.
    \2565\ In the Reporters Study, Large OATS Reporters cite average
current data reporting costs of $8.32 million and Approach 1
maintenance costs of $4.5 million annually. See CAT NMS Plan, supra
note 5, at Appendix C, Section B.7.(b)(ii)(C).
    \2566\ Additional Costs are discussed in Section V.F.1.c(1),
supra. See additional discussion in Section V.F.3.a(4), infra and
Section V.F.a(6), infra.

                         Table 4--Estimated Broker-Dealer Costs for CAT NMS Plan \2566\
----------------------------------------------------------------------------------------------------------------
                                                                                System
                                 Number     Current costs    Implementation      retirement          Ongoing
----------------------------------------------------------------------------------------------------------------
Broker-Dealers:
    Insourcers...............        126    $1,097,130,000      $911,144,052       $12,600,000      $599,285,000
    Outsourcers..............        806       271,113,000       342,026,100         8,060,000       356,764,000
    New Small Firms..........        799       133,137,000       678,111,300         7,990,000       353,666,000
    ELPs.....................         14        20,068,000        54,257,245         1,400,000        45,160,000
    Options Market Makers....         31        44,437,000       120,141,043         3,100,000        99,998,000
    Options Floor Brokers....         24         3,999,000        20,368,800           240,000        10,623,000
Additional Costs:
    NEW: Allocation time.....  .........  ................        44,050,000  ................         5,035,833
    NEW: Quote sent time.....  .........  ................        17,400,000  ................        11,880,000
    NEW: Development Cost      .........  ................         8,800,000  ................  ................
     Recoup..................
                              ----------------------------------------------------------------------------------
        Total BD.............       1800     1,569,884,000     2,196,298,540        33,390,000     1,482,411,833
----------------------------------------------------------------------------------------------------------------

    The Commission recognizes both that there is uncertainty in these
cost estimates and that these cost estimates do not include additional
costs that Outsourcers and new reporters that clear for other broker-
dealers or support introducing broker-dealers will incur. As explained
above, because the Commission's Outsourcing Cost Model does not and
cannot incorporate these costs, the cost estimates here could
underestimate the costs for these firms and, as a result, the total
broker-dealer costs. Because Bids are not yet final, the Commission
believes that its cost estimates, while reliable in light of available
data and information, could differ from actual costs the broker-dealers
will incur and that broker-dealers will not know the true magnitude of
their costs until they can analyze the Technical Specifications.
d. Costs to Service Bureaus
    In the Notice, the Commission considered whether to include the
implementation and ongoing costs to service bureaus in the aggregate
costs of the Plan.\2567\ The Commission preliminarily believed that
costs that service bureaus would face to implement CAT should be
included as part of the aggregate costs of CAT. While the CAT NMS Plan
does not require the use of service bureaus to report CAT Data, the
Commission recognized that the most cost effective manner to implement
the Plan likely will be for most market participants to continue their
current practice of outsourcing their regulatory data reporting to one
or more service bureaus. By doing so, the roughly 1,600 broker-dealers
predicted to outsource would avoid incurring a significant fraction of
CAT implementation costs; instead, service bureaus would incur
implementation costs on their behalf. Based on conversations with
market participants, the Commission believed that these implementation
costs are likely to pass-through to broker-dealers that outsource data
reporting, because service contracts between broker-dealers and service
bureaus are renegotiated periodically, and approval of the CAT NMS Plan
could trigger renegotiation as the bundle of services provided would
materially change.
---------------------------------------------------------------------------

    \2567\ See Notice, supra note 5, at 30726.
---------------------------------------------------------------------------

    The Commission, however, preliminarily believed that the ongoing
costs of CAT Data reporting by service bureaus would be duplicative of
costs incurred by broker-dealers. The aggregate fees paid by
Outsourcers to service bureaus cover the service bureaus' costs of
ongoing data reporting. To include ongoing service bureau costs as a
cost of CAT would double-count the costs that broker-dealers incur for
CAT Data reporting.
    The CAT NMS Plan estimates aggregate implementation costs of $51.6
million to $118.2 million for service bureaus, depending on the
particular data ingestion format.\2568\ Aggregate ongoing annual cost
estimates ranged from $38.6 million to $48.7 million. To provide a
conservative estimate of aggregate cost estimates for CAT, the
Commission included only the maximum implementation cost that vendors
would likely face of $118.2 million.
---------------------------------------------------------------------------

    \2568\ The Vendor Survey asked about the costs under two
different data ingestion formats, Approach 1 and Approach 2.
Approach 1 would allow broker-dealers to submit data to the Central
Repository using their choice of existing industry messaging
protocols, while Approach 2 would specify a pre-defined format. Id.
at Section 30726.
---------------------------------------------------------------------------

    One commenter provided additional information regarding service
bureau

implementation costs.\2569\ The commenter stated that these firms will
face $1.3 million in implementation costs related to providing
allocation timestamps, and that these costs were not covered by the
Vendors Study conducted by the Participants. The Commission believes
this estimate is reliable because the commenter is an industry trade
group with members that can provide cost estimates to the commenter.
Furthermore, the Commission believes it is possible that at the time
the Vendor's Study was conducted, industry members may not have been
aware that allocation timestamps would be required in CAT.
Consequently, the Commission is updating its analysis to account for
these costs.
---------------------------------------------------------------------------

    \2569\ FIF Letter at 87-88.
---------------------------------------------------------------------------

    The Commission continues to believe that the only relevant cost for
service bureaus to include in the aggregate costs of complying with the
Plan is the estimated implementation cost which as adjusted is $119.5
million.
2. Aggregate Costs to Industry
a. Estimated Costs of Compliance
    In the Notice, the Commission preliminarily estimated that industry
would spend $2.4 billion to implement CAT, and $1.7 billion per year in
ongoing annual costs.\2570\ The Commission calculated these numbers as
the sum of its estimates for the Central Repository, Participants,
broker-dealers, and service bureaus. These compare to Plan estimates of
initial aggregate costs to industry of $3.2 billion to $3.6 billion and
annual ongoing costs of $2.8 billion to $3.4 billion.\2571\
---------------------------------------------------------------------------

    \2570\ See Notice, supra note 5, at 30726-30.
    \2571\ See CAT NMS Plan, supra note 5, at Appendix C, Section
B.7(b)(iv)(A)(5).
---------------------------------------------------------------------------

    In terms of magnitudes of aggregate costs, the Notice discussed
that costs to the 126 largest broker-dealers that currently report OATS
data would be the largest driver of implementation costs, accounting
for 38.3% of CAT implementation costs. Although these broker-dealers
would face significant costs in implementing CAT, the Reporters Study
survey results suggest that they anticipate lower ongoing reporting
costs than they currently incur ($599 million annually in expected
aggregate costs versus $1.1 billion annually in current aggregate
regulatory data reporting costs). For all other categories of broker-
dealers, the Commission estimated ongoing annual costs to be higher
than current reporting costs. While broker-dealers are anticipated to
bear the greatest share of costs associated with CAT, the Commission
discussed the possibility that these costs would be passed on to
investors.
    The Commission received comments on its preliminary estimates of
aggregate costs to the industry. One commenter provided alternative
cost estimates, citing costs for financial institutions of $2 to 40
million during initial years of CAT, and ongoing costs for CAT
infrastructure of $28 to 36 million annually based on an analysis
released by the Office of Comptroller of the Currency related to the
Volcker Rule.\2572\ Another commenter noted that while aggregate costs
are not certain, they will be measured in billions of dollars.\2573\
The same commenter also noted that the costs of CAT would be passed on
to investors.\2574\
---------------------------------------------------------------------------

    \2572\ Data Boiler Letter at 14-15.
    \2573\ FSR Letter at 9-10.
    \2574\ FSR Letter at 9-10.
---------------------------------------------------------------------------

    The Commission does not believe, however, that these comments
require revision of its analysis of the aggregate costs of the Plan.
    With respect to the comment that suggested that the Commission use
Volcker Rule cost estimates to estimate the costs of the Plan, the
Commission believes that these estimates are not relevant to the
Plan.\2575\ The requirements of the Plan are significantly different
than the requirements of the Volcker Rule, which is primarily focused
on restricting certain trading activities and investments of banking
entities, rather than the centralization and standardization of
regulatory data reporting. Further, while the Commission acknowledges
that some market participants will be subject to both the Volcker Rule
and CAT, the Commission notes that market participants affected by the
Plan are not necessarily comparable to banking entities affected by the
Volcker Rule, and thus cost estimates for changes to their business
processes would not be applicable to typical CAT reporters, which tend
to be smaller institutions. The commenter's suggested estimate of $2
million per year for affected market participants that are not large
financial institutions does not seem reasonable because the majority of
data that must be collected under CAT is already hosted by many of
these firms' service providers, and much of this data is already
reported to a regulatory data reporting system (OATS) for a far lower
cost than the $2 million estimate.\2576\
---------------------------------------------------------------------------

    \2575\ Data Boiler Letter at 14-15.
    \2576\ See Notice, supra note 5, at 30722.
---------------------------------------------------------------------------

    The Commission agrees with the comment regarding the uncertainty of
the cost estimates,\2577\ and notes that it recognized in the Notice
the significant uncertainty surrounding the actual implementation costs
of CAT and the actual ongoing broker-dealer data reporting costs if the
Plan were approved and is cognizant of the magnitude of the aggregate
costs.\2578\ The Commission continues to recognize that the methodology
and data limitations used to develop these cost estimates could result
in imprecise estimates that may significantly differ from actual costs.
The Commission continues to believe, however, that it is using its best
judgment to assess available information and data to provide analysis
and estimates of the costs of the CAT NMS Plan. With regard to the
comment that CAT costs will be passed on to investors,\2579\ the
Commission acknowledged in the Notice and continues to believe that it
is possible that some or most of the costs of CAT will be passed on to
investors.
---------------------------------------------------------------------------

    \2577\ FSR Letter at 9-10.
    \2578\ See Notice, supra note 5, at 30708.
    \2579\ FSR Letter at 9-10.
---------------------------------------------------------------------------

    The Commission has, however, updated its aggregate cost estimates
to account for the updates to Central Repository, Broker-Dealer,
Participant and Service Bureau cost estimates which incorporate updates
due to modifications of the Plan. In aggregate, the Commission believes
that that industry will spend $2.4 billion to implement CAT, and $1.7
billion per year in ongoing annual costs. Table 5 below shows these new
cost estimates and aggregate costs to industry. Some individual
estimates have changed from estimates presented in the Notice for a
number of reasons. First, the Commission is now recognizing system
retirement costs of $55 million. Also, estimates for Participant costs
have increased to account for two additional Participants that were not
covered by the Participants Study, and to account for the cost of
additional reporting required by amendments to the Plan. Finally,
estimates for Central Repository implementation and ongoing costs have
been updated to reflect the Participants' current estimates. As Table 5
shows, however, the changes to the cost estimates do not affect the
rounded estimates of implementation and ongoing costs presented in the
Notice. The Commission recognizes that these cost estimates do not
specifically itemize the costs of certain modifications to the Plan or
respond to information provided by certain

Commenters related to the costs of individual elements of the Plan. The
Commission discusses these in detail in Section VI.F.3 below.

                                         Table 5--Commission's Estimate
----------------------------------------------------------------------------------------------------------------
                                                                                CAT
                                                           -----------------------------------------------------
                                 Number     Current costs                          System
                                                             Implementation      retirement          Ongoing
----------------------------------------------------------------------------------------------------------------
Central Repository...........  .........                $0       $65,000,000  ................       $55,000,000
Participants (all, 21).......  .........       170,326,730        37,713,757          $342,632       114,271,857
Service Bureaus (all, 13)....  .........           Unknown       119,500,000        21,300,000          Excluded
Broker Dealers:
Insourcers...................        126     1,097,130,000       911,144,052        12,600,000       599,285,000
Outsourcers..................        806       271,113,000       342,026,100         8,060,000       356,764,000
New Small Firms..............        799       133,137,000       678,111,300         7,990,000       353,666,000
ELPs.........................         14        20,068,000        54,257,245         1,400,000        45,160,000
Options Market Makers........         31        44,437,000       120,141,043         3,100,000        99,998,000
Options Floor Brokers........         24         3,999,000        20,368,800           240,000        10,623,000
Additional Costs:
    NEW: Allocation time.....  .........  ................        44,050,000  ................         5,035,833
    NEW: Quote sent time.....  .........  ................        17,400,000  ................        11,880,000
    NEW: Development Cost      .........  ................         8,800,000  ................  ................
     Recoup..................
                              ----------------------------------------------------------------------------------
        Total BD.............      1,800     1,569,884,000     2,196,298,540        33,390,000     1,482,411,833
                              ----------------------------------------------------------------------------------
        Total Industry.......  .........     1,740,210,730     2,418,512,297        55,032,632     1,651,683,690
----------------------------------------------------------------------------------------------------------------

b. System Retirement and Duplicative Reporting Costs
    In the Notice, the Commission considered whether to include in its
estimates of aggregate compliance costs the costs of system retirement
and the costs of duplicative reporting if Participants and broker-
dealers need to maintain and report to current systems after commencing
reporting to the Central Repository.
    The Commission considered the costs for system retirement provided
in the Plan, which discussed significant costs ($2.6 billion) for
retirement of current regulatory reporting systems.\2580\ The
Commission did not include those costs in its estimate of the aggregate
costs of the Plan, for several reasons. First, the Commission
preliminarily believed that the cost estimates provided in the Plan
were unlikely to accurately represent the actual costs industry would
face in retiring duplicative reporting systems.\2581\ In particular,
for the majority of broker-dealers that outsource, system retirement
would affect few in-house systems; these broker-dealers would likely
adapt the systems that interface with service bureaus for current
regulatory data reporting to interface for CAT Data reporting. Further,
for broker-dealers that self-report regulatory data, the Commission
could not determine the source of the costs of system retirement that
were estimated in the Plan and the magnitude of estimated costs led the
Commission to doubt that estimates included only costs of retiring
systems.\2582\ Second, the retirement of current regulatory reporting
systems was not a requirement of the Plan and the timeline and process
for their retirement was uncertain.
---------------------------------------------------------------------------

    \2580\ See CAT NMS Plan, supra note 5, at Appendix C, Section
B.7(b)(iv)(A)(5).
    \2581\ At its simplest level, ceasing reporting activities would
include scrapping IT hardware dedicated to the endeavor and
terminating the employees responsible for such regulatory data
reporting. The Commission recognized that there are costs associated
with those activities, but did not preliminarily believe their
magnitude (estimated in the Plan as $2.6 billion) should approach or
exceed the magnitude of costs of CAT implementation (estimated in
this analysis as $2.4 billion). See Notice, supra note 5, at 30726-
28.
    \2582\ Id.
---------------------------------------------------------------------------

    While the Commission's cost estimates did not recognize explicit
system retirement expenses, they also did not explicitly recognize
savings from elimination of these systems, though they were recognized
qualitatively. In the Notice, the Commission discussed its preliminary
belief that this approach was conservative in the sense that system
retirement costs would likely be mitigated by incorporation of current
reporting infrastructure into CAT reporting infrastructure, while cost
savings associated with industry's need to maintain fewer regulatory
data reporting systems were not explicitly recognized. While the
Commission did not include explicit system retirement costs, the
Commission did recognize that industry would experience a costly period
of duplicative reporting if the CAT NMS Plan were approved, and the
Commission stated that it believed it was possible that these costs
could be conflated with actual retirement costs estimated in the Plan.
    In the Notice, the Commission stated its preliminary belief that
the period of duplicative reporting would likely constitute a major
cost to industry for several reasons.\2583\ These reasons included the
length of the duplicative reporting period; constraints on the capacity
of industry to implement changes to regulatory reporting infrastructure
that might cause market participants to implement changes using less
cost-effective resources; \2584\ and the inability of some market
participants to implement duplicative reporting in house, necessitating
that they seek service bureau relationships to accomplish their CAT
reporting requirements.
---------------------------------------------------------------------------

    \2583\ Id. at 30728.
    \2584\ Id.
---------------------------------------------------------------------------

    Based on data provided in the Plan, the Commission preliminarily
believed that the period of duplicative reporting anticipated by the
Participants would likely last for 2 to 2.5 years.\2585\ This time
period involved four steps. Step 1, which could take 12 to 18 months,
involves the SROs identifying duplicative SRO Rules and systems and
Commission rulemaking. Step 2, which would last six months, involves
preparations by the SROs to file rule changes, followed by Step 3,
lasting three months, for the Commission to approve such rule changes.
The last

step, Step 4, involves implementation, and the Commission estimated it
could last from 90 days to six months, during which time the Plan
stated that the Participants could consider when the quality of CAT
Data would be sufficient to meet surveillance needs.
---------------------------------------------------------------------------

    \2585\ Id. at 30726-30.
---------------------------------------------------------------------------

    In the Notice, the Commission discussed its preliminary belief that
the current data reporting costs of $1.7 billion per year constituted
an estimate of the cost per year to industry of duplicative reporting
requirements, as it represents the cost of duplicative reporting to
industry if there are no efficiencies that arise when a market
participant has to report a subset of already centralized regulatory
data to other regulatory data reporting systems.\2586\ The Commission
did not believe that duplicative reporting costs should be added to the
estimated aggregate costs of the CAT NMS Plan. The Commission discussed
its belief that that the aggregate costs above represent the total
costs of the Plan, and do not account for the differential between
these costs and the costs the industry currently incurs for regulatory
data reporting and maintenance. During the period of duplicative
reporting, industry would incur the aggregate costs of accomplishing
CAT reporting described above, plus the costs of current data
reporting, which the Commission used as an estimate of duplicative
reporting costs. The Commission noted that market participants would
incur costs equal to current data reporting costs before system
retirement and CAT implementation (because current regulatory data
reporting would continue), or as duplicative reporting costs from Plan
implementation until system retirement. Consequently, the Commission
preliminarily believed these costs should not be considered as costs
attributable to approval of the Plan, because market participants would
bear these costs whether the Plan is approved or not.
---------------------------------------------------------------------------

    \2586\ Assuming that OATS, for example, is a subset of CAT,
producing OATS data from the same database that produces CAT data
might be less expensive than creating a separate infrastructure to
report OATS data during the period of duplicative reporting.
---------------------------------------------------------------------------

    The Commission received comments on the costs of duplicative
reporting. Several commenters agreed with the Notice that duplicative
reporting would constitute a major cost to industry,\2587\ with a few
of these commenters providing examples of the types of costs.\2588\
Examples of burdens provided by these commenters include dual reporting
complexities such as conflicting reporting requirements,\2589\ varied
corrections to the same errors across different systems,\2590\ legal
and compliance confusion,\2591\ costs of maintenance of duplicative
reporting systems such as infrastructure, storage, technical, and
staffing resources,\2592\ and costs associated with making changes to
redundant systems.\2593\ No commenters agreed with the Commission's
preliminary belief \2594\ that reporters might experience efficiencies
during duplicative reporting, with one commenter claiming that its
costs would double.\2595\
---------------------------------------------------------------------------

    \2587\ FIF Letter at 5; SIFMA Letter at 5; FSR Letter at 10;
Fidelity Letter at 4-5; TR Letter at 2; KCG Letter at 3; MFA Letter
at 9; DAG Letter at 2.
    \2588\ FIF Letter at 30; SIFMA Letter at 5; Fidelity Letter at
4-5; TR Letter at 2.
    \2589\ FIF Letter at 30.
    \2590\ FIF Letter at 30.
    \2591\ TR Letter at 2.
    \2592\ FIF Letter at 30; SIFMA Letter at 5.
    \2593\ Fidelity Letter at 5; KCG Letter at 3.
    \2594\ See Notice, supra note 5, at 30729.
    \2595\ TR Letter at 2.
---------------------------------------------------------------------------

    The Commission received comments on the measurement of the
duplicative reporting period as well as the necessity and impact of the
length of the duplicative reporting period. Some commenters indicated
that the lengthy expected duplicative reporting period was unnecessary,
redundant and/or avoidable \2596\ and two commenters indicated that the
length of the duplicative reporting period was a major factor in the
duplicative reporting costs.\2597\ A commenter suggested that it was
feasible for the Commission and SROs to complete Step 1 before the
milestone for the publication of Technical Specifications (one year
before Industry Members other than Small Industry Members are required
to begin reporting), which would speed up systems retirement by 18 to
24 months relative to the Commission's estimate.\2598\ The same
commenter also suggested that Step 4 was longer than necessary to
achieve acceptable data quality.\2599\ One commenter indicated that the
length of the duplicative reporting period was actually 3 to 3.5 years
instead of the Commission's estimate of 2 to 2.5 years for firms that
do not meet the definition of Small Industry Member.\2600\
---------------------------------------------------------------------------

    \2596\ SIFMA Letter at 5; Data Boiler Letter at 36; Fidelity
Letter at 4; DAG Letter at 2.
    \2597\ FIF Letter at 5; DAG Letter at 2.
    \2598\ FIF Letter at 6.
    \2599\ FIF Letter at 6.
    \2600\ TR Letter at 2.
---------------------------------------------------------------------------

    The Commission also received comments discussing the system
retirement costs presented in the Plan and discussed by the Commission
in the Notice. One Commenter disagreed with the Plan's estimate that it
should cost $2.6 billion to retire redundant systems.\2601\ Instead,
the commenter suggested that a more accurate cost estimate would range
from $10,000 to $100,000 per firm. This commenter did not provide an
explanation of the how the commenter derived this estimated range and
sought more information on the Plan's estimate.
---------------------------------------------------------------------------

    \2601\ SIFMA Letter at 7.
---------------------------------------------------------------------------

    The Participants' Response Letter II discussed comments related to
system retirement.\2602\ The Participants noted that Small Industry
Members can begin reporting earlier on a voluntary basis, and stated
that the Participants will consider a rule change that would accelerate
reporting for small Industry Members that are OATS reporters. The
Participants also discussed their commitment to eliminating duplicative
reporting systems as quickly as possible.\2603\ They stated that they
are incented to eliminate duplicative systems because maintaining the
systems is costly.
---------------------------------------------------------------------------

    \2602\ Response Letter II at 19-20.
    \2603\ Response Letter II at 20-21.
---------------------------------------------------------------------------

    The Participants also outlined a revised timetable for system
retirement that differs from the Plan as filed.\2604\ Under the
Participants' proposal, Step 1 would be completed within 9-12 months
after the Plan's approval. Step 2, in which Participants file rule
changes with the Commission, would end six months after the conclusion
of Step 1. The Participants also discussed an exemption for individual
CAT reporters from duplicative reporting.\2605\
---------------------------------------------------------------------------

    \2604\ Response Letter II at 21-25.
    \2605\ Response Letter II at 26; see also Section IV.D.9, supra.
---------------------------------------------------------------------------

    The Commission has considered the comments received, the
Participants' response, and the modifications to the Plan, and is
revising its analysis of the costs of duplicative reporting and system
retirement as described below. The Commission acknowledges additional
uncertainty regarding duplicative reporting due to its revised belief
that efficiencies in duplicative reporting are less likely than it
believed at the time of the Notice, but continues to believe that
duplicative reporting could cost up to $1.7 billion per year. However,
as discussed below, the Commission now believes that the period of
duplicative reporting is likely to be shorter than was anticipated in
the Notice, and that the cost will therefore be reduced. Based on
comments received, the Commission has revised its estimate of system
retirement costs and now believes the aggregate cost to

industry will be approximately $55 million.
    Consistent with its position in the Notice, the Commission agrees
with commenters that duplicative reporting will constitute a major cost
to industry, and recognizes that conflicting reporting requirements,
varied corrections to the same error across different systems, legal
and compliance confusion will all contribute to these costs. Further,
the Commission agrees that maintenance of duplicative reporting systems
will entail commitment of additional resources such as infrastructure,
storage, technical, and staffing resources, as well as costs associated
with making changes to redundant systems. However, the Commission notes
that modifications to the Plan that minimize changes to potentially
duplicative systems during the period of duplicative reporting may
mitigate some of these costs.\2606\ Regarding the comment that some
market participants will see their data reporting costs double during
the period of duplicative reporting, the Commission agrees and believes
that calculation is reflected in the estimates in the Notice, as its
estimate of duplicative reporting costs of $1.7 billion per year is in
line with the projected industry costs of ongoing CAT reporting of $1.7
billion per year.\2607\
---------------------------------------------------------------------------

    \2606\ See Section IV.D.9.a(2), supra (explaining that the
Commission is amending Section C.9 of Appendix C of the Plan to
state that between the Effective Date and the retirement of the
Participants' duplicative systems, each Participant, to the extent
practicable, will attempt to minimize changes to those duplicative
systems.
    \2607\ See Notice, supra note 5, at 30729. As discussed above,
the Commission estimates that market participants currently spend
$1.7 billion for regulatory data reporting, and estimates that
market participants will spend $1.7 billion to report regulatory
data under CAT. During years of duplicative reporting, the
Commission estimates market participants would spend $3.3 billion in
regulatory data reporting, which is approximately double the $1.7
billion they currently spend. See Section V.F.2, supra.
---------------------------------------------------------------------------

    In response to the comment that duplicative reporting does not
create efficiencies, the Commission, in the Notice, explained that it
expected some cost efficiencies, but expressed uncertainty about those
efficiencies. Because of that uncertainty and in light of the comment,
the Commission acknowledges that duplicative reporting may not result
in efficiencies.
    Based on the changes to the Plan, the Commission now believes that
the duplicative reporting period may be shorter than estimated in the
Notice. As discussed previously, the Commission has revised the
milestones for system retirement, which may decrease the duplicative
reporting period compared to the period anticipated at the time of the
Notice.\2608\ Specifically, the gap analyses for major duplicative
systems (Step 1) have been substantially completed 3-3.5 years sooner
\2609\ than was envisioned in the Notice.\2610\ Furthermore, the Plan
as amended now calls for the Participants to file with the Commission
within 6 months after Plan approval (Step 2) rule change
proposals.\2611\ Consequently, Step 3 (Commission review of rule
modification filings) is expected to commence six months after Plan
approval, and, as discussed in the Notice, is expected to take three
months to one year. As a result, Step 4 (Participant implementation of
rule changes) is the only system retirement step that the Commission
expects to extend past when Large Industry Members begin reporting to
the Central Repository.
---------------------------------------------------------------------------

    \2608\ See Section IV.D.9.a(1), supra.
    \2609\ The Plan states that Step 1 would end 1-1.5 years after
large Industry Members begin reporting to the Central Repository.
Large Industry Members will begin reporting 2 years after the Plan
is approved.
    \2610\ See Section IV.D.9, supra.
    \2611\ These proposals must consider at least three factors: (1)
Specific standards of data accuracy and reliability, including, but
not limited to, whether the attainment of a certain Error Rate is
reached, (2) whether the availability of Small Industry Member data
two years after Plan approval would facilitate more expeditious
systems retirement, and (3) whether individual Industry Members can
be exempted from reporting to duplicative systems once their CAT
reporting meets specified accuracy and reliability standards. See
Section IV.D.9.a, supra. The Commission analyzes these amendments
below.
---------------------------------------------------------------------------

    The Commission recognizes that there remains significant
uncertainty as to when system retirement will occur, because the actual
retirement of such rules and systems will depend upon several factors.
In particular, the Commission notes that the retirement of systems will
not occur until the CAT Data is of sufficient quality and when the CAT
system has been fully implemented for all reporters.\2612\
---------------------------------------------------------------------------

    \2612\ See Section IV.D.9, supra.
---------------------------------------------------------------------------

    With respect to the quality of the CAT Data, as discussed above, in
the Notice the Commission estimated that the period of duplicative
reporting was likely to last for 2 to 2.5 years. At the time of the
Notice, the Commission's estimate suggested that the length of the rule
modification steps within the four step process discussed above would
primarily determine the length of the overall duplicative reporting
period, although it recognized that data quality could delay the
retirement of duplicative systems.\2613\ The Commission recognized in
the Notice that Step 4 (implementation of system retirement plans)
required not only the completion of Steps 1 through 3 but also that
data quality within the Central Repository had to be adequate for the
SRO's regulatory needs.
---------------------------------------------------------------------------

    \2613\ See Notice, supra note 5, at 30729.
---------------------------------------------------------------------------

    The Commission now believes that, while the revision of the system
retirement milestones may decrease the length of the duplicative
reporting period, this change will also increase the probability that
Industry Member data quality might delay system retirement because
Industry Members will have less experience reporting CAT Data when the
four step process reaches the point where data quality could delay
system retirement.
    Additionally, the Commission believes it is possible that, as one
commenter suggested,\2614\ the phased implementation of CAT reporting
for Small Industry Members could result in up to one year of
duplicative reporting expense for Large Industry Members. Specifically,
Large Industry Member data quality may reach a level that is sufficient
for SRO regulatory needs prior to the commencement of reporting by
Small Industry Members to the Central Repository, but retirement of
systems might not occur until after those Small Industry Members begin
reporting.\2615\ Further, it is possible that, as a result of having
commenced reporting at a later date, Small Industry Members' data may
not reach an acceptable quality threshold for some period after Large
Industry Members' data has reached an acceptable quality threshold. The
phased implementation schedule may therefore limit the extent to which
the Plan amendments accelerating the timeframe for initial rule change
proposals shorten the duplicative reporting period and thereby reduce
the costs of duplicative reporting. Despite this caveat, for reasons
explained below, the Commission believes that the amendments could
significantly shorten this period and reduce costs.
---------------------------------------------------------------------------

    \2614\ TR Letter at 2.
    \2615\ The Commission's analysis of costs is not based on small
versus large Industry Members, but rather is based on Insourcers
versus Outsourcers. It is reasonable to assume that Insourcers, ELPs
and Option Market Makers are large Industry Members because these
market participants can be characterized as having high activity
levels that would require capital levels that exceed the upper
threshold for small Industry Members. For these three groups of CAT
reporters, one year of duplicative reporting is estimated to cost
$1.2 billion. See estimates of current data reporting costs in
Section V.F.1.c(2)B, supra.
---------------------------------------------------------------------------

    In particular, at least four amendments or other factors might
mitigate the impact of phased implementation on duplicative reporting
and costs. First, the Commission has amended the Plan to

require the Participants' to include, in their filings to retire
systems, specific standards of data accuracy and reliability,
including, but not limited to, whether the attainment of a certain
Error Rate is reached,\2616\ which should incentivize accurate data
reporting by both Large and Small Industry Members and reduce the
duplicative reporting period. Second, an amendment to the Plan requires
Participants' rule change proposals to consider whether individual
Industry Members can be exempted from reporting to duplicative systems
once their CAT reporting meets specified accuracy and reliability
standards.\2617\ If the Participants determine to grant such individual
exemptions to some Industry Members prior to all Industry Members' data
reaching an acceptable quality threshold, the economic impact of the
phased implementation schedule could be less. Third, the Participants
have indicated that OATS-reporting Small Industry Members can begin
voluntarily reporting at the same time as Large Industry Members, and
the Commission encourages the Participants and the Plan Processor to
work with these Small Industry Members to enable them to begin
reporting to CAT, on a voluntary basis, at the same time that Large
Industry Members are required to begin reporting or as soon as
practicable. The Commission recognizes, however, that incentives for
Small Industry Members to begin reporting voluntarily at an earlier
time are limited because accelerating CAT reporting imposes costs on
CAT reporters, while the benefits of earlier system retirement accrue
primarily to Large Industry Members that face a longer period of
duplicative reporting. As a result, the extent to which accelerating
commencement of voluntary reporting mitigates the economic impact of
the phased implementation schedule may be limited. Therefore, the
Commission believes that the amendment to require that the Participants
consider whether the availability of Small Industry Member data two
years after Plan approval would facilitate more expeditious systems
retirement \2618\ could help to avoid an extension of the duplicative
reporting period attributable to the phased implementation schedule.
---------------------------------------------------------------------------

    \2616\ See Section IV.D.9.a.(2), supra. Note that such proposals
are subject to Commission approval. In reviewing such a proposal,
the Commission would consider the appropriateness, and the
consistency with the Act, of the proposal.
    \2617\ Id.
    \2618\ Id.
---------------------------------------------------------------------------

    The Commission has also considered the comment that proposed
alternative estimates for system retirement costs \2619\ and has
revised its economic analysis accordingly. Specifically, the Commission
believes that this commenter has the expertise to provide reliable
estimates because this industry group's members can inform it of their
costs; furthermore, the Commission believes the estimates this
commenter provided seem more reasonable than estimates provided in the
Plan because estimates provided in the Plan exceeded the Commission's
estimate of costs of implementing the Plan.\2620\
---------------------------------------------------------------------------

    \2619\ SIFMA Letter at 7.
    \2620\ See Notice, supra note 5, at 30727-28.
---------------------------------------------------------------------------

    To estimate the aggregate costs of system retirement, the
Commission assumes that the $100,000 estimate would be appropriate for
Insourcers and the $10,000 estimate would be appropriate for
Outsourcers.\2621\ The Commission assumes that for firms that do not
currently report to OATS, firms that were considered large for cost
estimates (ELPs and Options Market Makers) will have similar system
retirement costs to Insourcers because they are more similar in size
and scope of operations to Insourcers than Outsourcers.\2622\ The
Commission further assumes that non-OATS reporting firms that were
considered small for cost estimates (new small firms and options floor
brokers) will face similar system retirement costs to Outsourcers
because they are more similar in size and scope of operations to
Outsourcers than Insourcers.\2623\ With these assumptions, the
Commission now estimates that broker-dealer system retirement costs
would be $33.4 million, as described in Table 6. The Commission draws
its estimates of system retirement costs for Participants and service
providers from the Plan, which estimates aggregate costs of $343,000
\2624\ across all Participants, and $21.3 million across all service
providers. The Commission now estimates total industry costs for system
retirement will be $55 million.
---------------------------------------------------------------------------

    \2621\ As discussed in the Notice, the Insourcing/Outsourcing
decision is correlated with firm size. Insourcers tend to be larger
firms, as do ELPs and Options Market Makers. These firms are likely
to have more internal systems and more complex internal systems that
will likely be more expensive to retire. On the other hand,
Outsourcers, new reporters and options floor brokers are likely to
be smaller firms with fewer internal systems that are less complex
for retirement. Furthermore, new reporters and options floor brokers
are likely to have fewer internal reporting systems than other
broker-dealers because they are unlikely to have current OATS
reporting obligations. Id. at 30718.
    \2622\ The Commission recognizes that there is uncertainty in
the system retirement costs that broker-dealers will face generally.
The estimates provided by the commenter are presented as a range,
and the Commission's assumptions of which firms would fall at the
top and the bottom of the range have significant uncertainty. If all
1,800 broker-dealers anticipated to incur CAT reporting obligations
bore $100,000 in system retirement costs, broker-dealer system
retirement costs would be $180 million. The Commission believes
system retirement costs will be far less than this because many
broker-dealers currently have limited regulatory data reporting
systems, and the majority of broker-dealers rely on service
providers to perform much of their data reporting responsibilities.
    \2623\ The Commission recognizes that some new reporters and
options floor brokers may choose to insource their CAT reporting
activities, and thus may be considered similar in size and scope of
operations to non-OATS reporting large firms. Because new reporters
and options floor brokers do not currently report to OATS, the
Commission believes that they will face lower system retirement
costs than ELPs and Options Market Makers because the Commission
believes many ELPs and Options Market Makers are members of an
exchange that requires them to be able to report to OATS on request,
while new small firms and options floor brokers are unlikely to be
members of an exchange with this requirement.
    \2624\ The Notice estimated $310,000 for system retirement costs
for Participants. The Commission is increasing this estimate by
10.53% to account for the addition of two Participants. See Section
V.F.1.b, supra.

              Table 6--Estimate of System Retirement Costs
------------------------------------------------------------------------
                                                            CAT system
                                                 Number     retirement
------------------------------------------------------------------------
Central Repository Participants (all)........  .........        $342,632
Service Bureaus (all, 13)....................  .........      21,300,000
Broker-Dealers:
    Insourcers...............................        126      12,600,000
    Outsourcers..............................        806       8,060,000
    New Small Firms..........................        799       7,990,000
    ELPs.....................................         14       1,400,000
    Options Market Makers....................         31       3,100,000

    Options Floor Brokers....................         24         240,000
                                              --------------------------
    Total BD.................................       1800      33,390,000
                                              --------------------------
    Total Industry...........................  .........      55,032,632
------------------------------------------------------------------------

3. Further Analysis of Costs
a. Costs Included in the Estimation
    In the Notice, the Commission noted that, in general, the CAT NMS
Plan does not break down its cost estimates as a function of particular
CAT NMS Plan requirements. However, the Commission considered which
elements of the CAT NMS Plan were likely to be among the most
significant contributors to the estimated CAT costs.\2625\ The
Commission discussed its preliminary belief that significant sources of
costs would include: The requirement to report customer information;
\2626\ the requirement to report certain information as part of the
Material Terms of the Order; the requirement to use listing exchange
symbology; and the inclusion of Allocation Reports.
---------------------------------------------------------------------------

    \2625\ See Notice, supra note 5, at 30730-32.
    \2626\ See CAT NMS Plan, supra note 5, at Appendix C, Section
A.1.a.iii.
---------------------------------------------------------------------------

    In addition, the Commission discussed its preliminary belief that
while certain costs could generally be quantifiably estimated, they
were unlikely to be significant contributors to the overall costs of
the Plan. These factors included: Clock synchronization requirements;
Plan requirements that include the requirement that Options Market
Makers send quote times to the exchanges; the requirement that the
Central Repository maintain six years of CAT Data; and the inclusion of
OTC Equity Securities in the initial phase of the implementation of the
CAT NMS Plan. Furthermore, the Commission also explained that there
were other sources of costs, namely costs associated with meeting
certain targets such as error rates and management of PII, that could
not be quantified by the Commission.
    The Commission noted that it believed that its estimates of the
implementation costs and ongoing costs to industry included each of the
costs discussed, because the provisions encapsulate major parts of the
Plan. The Commission explained that it lacked the necessary information
to estimate what portion of the costs of the Plan is attributable to
some of these aforementioned elements because the Plan does not provide
information on the costs attributable to reporting of this information,
and the Commission had no other data from which it can independently
estimate these costs.
    As discussed more fully below, the Commission has considered the
comments it received regarding its analysis of these aforementioned
costs, the Participants' response, and modifications to the Plan, and
is updating its analysis in three ways. First, the Commission's
analysis fully acknowledges the uncertainty in its cost estimates.
Second, several comments disagreed with the Commission's belief that
certain costs were included in the Commission's cost estimates. The
Commission has analyzed each of these instances below and now believes
that some costs, namely costs associated with Allocation Time and Quote
Sent Time, were not included in the estimated costs in the Notice. As
indicated in the Costs to Broker-Dealers, Costs to Participants, and
the Costs of Building and Operating the Central Repository Sections
above, the Commission has added these costs to the total costs for
broker-dealers where estimates are available or otherwise recognizes
them as additional to the existing estimates.\2627\ Third, several
commenters disagreed with which costs the Commission noted as
significant contributors to CAT costs. In response to comments, the
Commission no longer judges whether quantified costs represent a
significant contribution to total costs. Instead, it describes only the
costs it cannot quantify in terms of whether the Commission believes
such costs are a substantial proportion of costs of the CAT NMS Plan,
and addresses those individually below. The Commission is cognizant
that some of the costs for particular elements may be significant in
isolation even if they are not a large proportion of the aggregate
costs of the Plan. The following Sections expand on the analysis of the
estimated costs above by exploring individual components of the CAT NMS
Plan.
---------------------------------------------------------------------------

    \2627\ The Commission recognizes that Allocation Time may also
increase the costs of the Central Repository and that Quote Sent
Time may increase the costs of the Central Repository and to
Participants. However, the Commission lacks sufficient information
to add these costs to the existing estimates in these categories.
Consequently, the Commission discusses the modifications
qualitatively.
---------------------------------------------------------------------------

(1) Customer Information
    In the Notice, the Commission discussed its belief that the
requirement in the CAT NMS Plan to report customer information for each
transaction represents a significant source of costs.\2628\ The
Commission explained that adapting systems to report customer
information that is not included in current regulatory data on a
routine basis could require significant and potentially difficult
reprogramming because it could require gathering information from
separate systems within a broker-dealer's infrastructure and
consolidating it in one location, and redesigning an IT infrastructure
to satisfy this requirement could interrupt other workflows within the
broker-dealer, expanding the scope of systems that must be altered to
accomplish CAT reporting.
---------------------------------------------------------------------------

    \2628\ See Notice, supra note 5, at 30730.
---------------------------------------------------------------------------

    The Commission received comments regarding the costs associated
with reporting customer information. One commenter mentioned that the
costs for providing customer information to the Central Repository
represent a significant proportion of costs to the total
industry.\2629\ One commenter requested clarification that only active
accounts are reported as part of the customer definition process, and
as a result of such clarification, this could reduce costs incurred for
reporting customer information.\2630\ Two commenters stated that
including Customer Identifying Information on the Initial Order Report
would result in significant costs for the industry.\2631\
---------------------------------------------------------------------------

    \2629\ Data Boiler Letter at 37.
    \2630\ FIF Letter at 10.
    \2631\ TR Letter at 8-9; FIF Letter at 9-10, 86.
---------------------------------------------------------------------------

    The Participants responded to the comment regarding clarification
of reporting only active accounts, stating that they have proposed to
add a definition of ``Active Account'', defined as an account that has
had activity in Eligible Securities within the last six months.
Additionally, the Participants propose amending Section 6.4(d)(iv) of

the Plan to clarify that each Industry Member must submit an initial
set of customer information for Active Accounts at the commencement of
reporting to the Central Repository, as well as any updates, additions,
or other changes in customer information, including any such customer
information for any new Active Accounts.\2632\ In response to the
comments regarding the expense associated with reporting Customer
Identifying Information in the Initial Order Report, the Participants
recommended modifications to the Plan to clarify that Customer
Identifying Information and Customer Account Information does not need
to be included on the Initial Order Report.\2633\
---------------------------------------------------------------------------

    \2632\ Response Letter I at 35.
    \2633\ Response Letter I at 34.
---------------------------------------------------------------------------

    The Commission considered these comments, the Participants'
response and modifications to the Plan, and continues to believe that
the requirement in the CAT NMS Plan to report customer information
represents a significant proportion of total costs to the industry. No
commenter provided cost estimates that would allow the Commission to
estimate the costs, however. Further, the economic analysis did not
explicitly account for Customer Identifying Information and Customer
Account Information on the Initial Order Report, and the modification
clarifies that the Plan does not require this information on order
origination.
(2) Material Terms of the Order
    In the Notice, the Commission preliminarily explained that the
requirement to report Material Terms of the Order that include an open/
close indicator for equities, order display information, and special
handling instructions represent a significant source of cost. The
Commission observed that not all broker-dealers are required to report
these elements on every order and no market participants report an
open/close indicator on orders to buy or sell equities. Thus, adapting
some market participants' systems to report this information for each
transaction could require significant and potentially difficult
reprogramming that requires centralizing or copying information from
multiple IT systems within the broker-dealer, which could dramatically
increase the costs associated with implementing the changes required by
CAT.
    The Commission received comments on the costs of the open/close
indicator, but did not receive comments on other components of the
Material Terms of the Order. Three commenters agreed with the
Commission's analysis that an open/close indicator represents a
significant proportion of costs of the Plan.\2634\ Two commenters
indicated that it would require significant process changes across
multiple systems,\2635\ and one provided a list of the different types
of systems impacted by the open/close indicator.\2636\ Three commenters
mentioned that currently, the open/close indicator is not populated for
equities.\2637\ One of these commenters mentioned the inclusion of the
open/close indicator for equities represents a ``market structure
change.'' \2638\ Further, several commenters implied that the costs of
the open/close indicator were not included in the cost estimates in the
Notice.\2639\ The Participants did not directly address the costs of
the open/close indicator but did indicate that it is currently only
captured on certain options orders, implying that including this field
in the Plan would be costly.\2640\ In particular, the Participants'
response indicates that the open/close indicator is not captured on
equities or on certain options transactions such as Options' Market
Maker transactions.
---------------------------------------------------------------------------

    \2634\ TR Letter at 9; SIFMA Letter at 35-36; FIF Letter at 83-
86.
    \2635\ SIFMA Letter at 35; FIF Letter at 4, 84.
    \2636\ FIF Letter at 84.
    \2637\ TR Letter at 9, FIF Letter at 4, SIFMA Letter at 35.
    \2638\ FIF Letter at 85; TR Letter at 9.
    \2639\ Specifically, one commenter stated that the inclusion of
the open/close indicator for equities was a surprise (See FIF Letter
at 84) and two commenters wanted additional cost benefit analysis on
the open/close indicator (See FIF Letter at 84; SIFMA Letter at 36).
    \2640\ Response Letter I at 21, 22.
---------------------------------------------------------------------------

    The Commission considered these comments, the Participants'
response, and modifications to the Plan and is updating and revising
its economic analysis regarding the costs of the open/close indicator
for equities and certain options transactions below.
    The modifications to the Plan eliminating the requirement to report
an open/close indicator for equities will reduce the compliance costs
for broker-dealers, Participants, and the Central Repository, but the
Commission cannot quantify the savings. While several commenters
implied that the cost estimates in the Notice did not account for the
open/close indicator in equities, the Commission notes that this data
field was proposed in Rule 613 and discussed in the Proposing Release
and Notice. Nonetheless, the commenters represent many broker-dealers
and, therefore, the comments may indicate that a number of broker-
dealers indeed did not include these costs when responding to the cost
survey. This raises uncertainty regarding how many broker-dealers did
or did not account for these costs. Because of this uncertainty and the
absence of comments detailing the costs, the Commission cannot update
its cost estimates to recognize the Plan modifications. However, both
the Commission and commenters agree that, absent a modification, market
participants would have needed to adapt their systems to report open/
close information for each order because this indicator is not
populated for equities today.
    The Participants' statement in the response letter that open/close
indicators are not reported on some options orders is consistent with
Commission experience and the analysis in the Notice. While the
economic analysis in the Notice did not explicitly separate the costs
associated with an open/close indicator for equities and an open/close
indicator for options, the Commission continues to believe that the
costs of the open/close indicator for options are included in the cost
estimates above because the commenters who implied that the cost
estimates do not include estimates of the open/close indicator
specifically mentioned equities and not options. But because the Plan
will no longer require the reporting of the open/close indicator for
Options Market Maker transactions, the Commission now believes there
will be additional cost savings associated with not having to report
this indicator as part of CAT.
(3) Listing Exchange Symbology
    In the Notice, the Commission explained its preliminary belief that
the requirement to use listing exchange symbology could represent a
significant source of costs.\2641\ The Commission explained that
because broker-dealers do not necessarily use listing exchange
symbology when placing orders on other exchanges or off-exchange, this
requirement could require broker-dealers to perform a translation
process on their data before they submit CAT Data to the Central
Repository.\2642\ The translation process could be costly to design and
perform, and result in errors that would be costly for the broker-
dealers to correct. If other elements of the Plan were to necessitate a
translation, then the listing exchange

symbology could be fairly low cost because it would be just another
step in the translation. However, if the Plan has no other requirement
that would necessitate a translation, the Commission explained that the
costs of including listing exchange symbology on all CAT reports would
include the costs of designing and performing the translation as well
as the costs of correcting any errors caused by the translation.
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    \2641\ See Notice, supra note 5, at 30730-30731.
    \2642\ For example, class A shares of ABC Company might be
traded using ticker symbol ``ABC A'' on one exchange, ``ABC_A'' on
another exchange, and ``ABC.A'' on a third. As written, the Plan
would require all broker-dealers to use the listing exchange's
symbol for its Central Repository reporting, regardless of the
symbol in the order messages received or acted upon at the broker-
dealer or exchange.
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    The Commission received several comments regarding costs associated
with CAT Reporters using listing exchange symbology. One commenter
stated that they did not expect the use of listing exchange symbology
to be much more costly than the use of existing symbology.\2643\
Another commenter suggested that accepting only listing exchange
symbology is costly and invasive.\2644\ One other commenter stated that
listing exchange symbology would also be a significant source of costs
for options.\2645\
---------------------------------------------------------------------------

    \2643\ FIF Letter at 12, 95.
    \2644\ Data Boiler Letter at 37-38.
    \2645\ Bloomberg Letter at 5.
---------------------------------------------------------------------------

    The Participants' response provided information on current
practices relevant to the Commission's economic analysis. In
particular, the Participants stated that based on discussions with the
DAG, it was their understanding that all Industry Members subject to
OATS or EBS reporting requirements currently use the symbology of the
listing exchange when submitting such reports.\2646\ These Industry
Members may use proprietary symbols when recording events internally,
but the Participants stated that based on their understanding of
current practices, Industry Members currently employ technical
solutions and/or systems that allow them to translate symbology into
the correct format of the listing exchange when submitting data to
exchanges or when submitting to regulatory reporting systems such as
OATS or EBS.\2647\
---------------------------------------------------------------------------

    \2646\ Response Letter II at 7.
    \2647\ Response Letter III at 13.
---------------------------------------------------------------------------

    The Commission considered the comments and the Participants'
response and is revising its analysis and conclusion. Specifically, the
Commission is incorporating the information from the Participants'
response into its baseline of current broker-dealer practices. Because
the Commission believes that broker-dealers already translate their
order messages when routing orders, they should be able to apply those
translations to other types of messages before recording the events or
reporting them to CAT at a relatively low cost. Therefore, the
Commission now believes that the incremental cost for CAT Reporters to
translate from their existing symbology to listing exchange symbology
would be smaller than as discussed in the Notice and would not be a
substantial contributor to aggregate costs. This revised conclusion is
consistent with commenters who indicated there would be costs, but did
not indicate they would be large and did not provide cost estimates.
(4) Allocation Reports
    In the Notice, the Commission recognized that industry would bear
certain costs associated with Allocation Reports, particularly the
requirement that the reports include allocation times. The Commission
understood that currently some broker-dealers already record allocation
times, but that the broker-dealers that do not currently record these
times will face implementation costs associated with changing their
business processes to record them. The Commission explained that
implementation costs for allocation reporting may include significant
costs associated with incorporating additional systems into firms'
regulatory data reporting infrastructure to facilitate this reporting,
if such systems would not already be involved in recording or reporting
order events. Furthermore, the Commission explained that Outsourcers
could face significant implementation and ongoing costs associated with
reporting Allocation Reports if their service bureaus do not extend
their services to manage the servers that handle allocations.
    Three commenters noted that there would be costs associated with
reporting allocation timestamps.\2648\ One of these commenters
mentioned that the requirement to report allocation timestamps means
that industry members would need to incur unnecessary costs to acquire
additional resources, and that these resources could be better served
implementing other critical requirements of the CAT Plan.\2649\ One
commenter also provided cost estimates for reporting allocation
timestamps at a granularity of one millisecond, as would be required in
the Plan, and at a granularity of one second.\2650\ In particular, the
commenter reported that it conducted a survey of a set of broker-
dealers to estimate the additional costs of the CAT NMS Plan that would
be associated with the timestamp requirement on CAT Allocation Reports.
Based on the results of the survey, the commenter estimated that the
currently proposed allocation timestamp requirement, with a one
millisecond timestamp granularity and a 50 millisecond clock offset,
would cost the industry $88,775,000 in initial implementation costs and
$13,925,000 in ongoing annual costs. The commenter further estimated
that a modified allocation timestamp requirement, with a one second
timestamp granularity and a one second clock offset, would cost the
industry $44,050,000 in initial implementation costs and $5,035,833 in
ongoing annual costs.\2651\ The commenter also indicated that neither
the survey of broker-dealers used to estimate the cost estimates in the
Plan nor the survey used to estimate the costs of clock synchronization
requirements included the requirement of timestamps on Allocation
Reports.\2652\
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    \2648\ FSR Letter at 9; SIFMA Letter at 35; FIF Letter at 3-4,
11, 86-89.
    \2649\ FSR Letter at 11.
    \2650\ FIF Letter at 87-89.
    \2651\ FIF Letter at 88, Table 6.
    \2652\ FIF Letter at 86.
---------------------------------------------------------------------------

    The Participants' response recommended a modification to the Plan
that would specify a one-second timestamp for allocation time on
Allocation Reports,\2653\ and the Plan has been amended to reflect this
recommendation.
---------------------------------------------------------------------------

    \2653\ Response Letter I at 25.
---------------------------------------------------------------------------

    The Commission considered these comments, the Participants'
response, and modifications to the Plan and is updating its analysis
stated in the Notice. The comments that acknowledged that providing
allocation timestamps represents a significant proportion of costs of
the Plan are consistent with the Commission's analysis in the Notice.
The Commission has analyzed the cost estimates received and believes
them to be reliable because they are based on a survey of industry
participants who are informed of the Allocation Time requirement and
the changes that broker-dealers would need to make to comply with the
requirement. Further, the Commission has analyzed the public
information on the dates of the CAT Reporter survey and the release of
public information on the inclusion of Allocation Time. In recognition
of the modification to the timestamp granularity and the realization
that Allocation Time costs were not included in the cost estimates in
the Notice, the Commission is now adding the commenter's estimate of
$44,050,000 in implementation costs

and $5,035,833 in ongoing costs to the estimates of costs to broker-
dealers.\2654\
---------------------------------------------------------------------------

    \2654\ See Section V.F.3.a(4), supra. The total cost estimates
of the CAT Plan reflect these implementation and ongoing costs.
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(5) Clock Synchronization
    In the Notice, the Commission discussed its preliminary belief that
the clock synchronization requirements represented a less significant
source of costs. The CAT NMS Plan estimated industry costs associated
with the original 50 millisecond clock synchronization requirement,
based on the FIF Clock Offset Survey.\2655\ The FIF Clock Offset Survey
stated that broker-dealers currently spend $203,846 per year on clock
synchronization activities, including documenting clock synchronization
events.\2656\ The FIF Clock Offset Survey stated that firms expected
the proposed 50 millisecond requirement to increase those costs by
$109,197 per firm.\2657\ Based on discussions with industry, the
Commission preliminarily believed that the majority of broker-dealers
(Outsourcers) would not face significant direct costs for clock
synchronization because timestamps for CAT Data reporting would be
applied by service bureaus.\2658\ However, the Commission preliminarily
estimated there are 171 firms that make the insourcing-outsourcing
decision on a discretionary basis; \2659\ if these firms decided to
insource their data reporting under CAT, they would likely face costs
associated with complying with new clock synchronization requirements.
The Commission preliminarily estimated that industry-wide
implementation costs for the 50 millisecond clock synchronization
requirement would be $268 million, with $25 million annually in ongoing
costs.\2660\ The Commission preliminarily believed that approximately
$18.7 million in broker-dealer ongoing costs would be attributable to
clock synchronization requirements.\2661\ The Commission also
preliminarily believed that service bureaus would face similar clock
synchronization costs if the CAT NMS Plan is approved. Using 13 as an
estimate of the number of service bureaus, approximately $6 million in
service bureau ongoing costs would be attributable to clock
synchronization requirements in the Plan.\2662\
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    \2655\ See CAT NMS Plan, supra note 5, at Section D.12, and note
247. In the Notice, the Commission noted that the survey has two
limitations pertinent to specific cost estimates provided in the
summary of survey results. First, cost estimates are likely to be
significantly downward biased. Individual responses to cost data
were gathered within a range; for example, a firm would quantify its
expected costs as ``Between $500K and less than $1M'' or ``$2.5M and
over.'' When aggregating these responses, FIF generally used the
range midpoint as a point estimate; however, for the highest
response, the range minimum was used (i.e., ``$2.5M and over'' was
summarized as $2.5M.) This is likely to have produced a significant
downward bias in aggregate survey responses. Second, the survey
included only broker-dealers and service bureaus, thus the data
excludes exchanges. The Commission preliminarily believed this
limitation would not significantly impact industry costs because all
exchanges currently maintain clock synchronization standards finer
than those discussed as alternatives.
    \2656\ See FIF Clock Offset Survey, supra note 247. This is
based on the current practice of the broker-dealers who responded to
the survey.
    \2657\ See id. at 16. The $109,197 figure is obtained by
subtracting the cost of maintaining current clock offsets of
$203,846 annually from the estimated per-firm annual cost of
maintaining a 50-millisecond clock offset of $313,043. See id. at 7