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

    The Commission preliminarily agreed with the Plan's general
assessment of competition among broker-dealers, and also with the
Plan's assessment of differential effects on small versus large broker-
dealers. The Commission agreed that the Plan's funding model was an
explicit source of financial obligation for broker-dealers and
therefore an important feature to evaluate when considering potential
differential effects of the Plan on competition in the market for
broker-dealers. However, the Commission preliminarily believed that the
segments of the market most likely to experience higher barriers to
entry are those that currently have no data

reporting requirements of the type the Plan requires and those that
will involve more CAT Reporting obligations, such as the part of the
broker-dealer market that involves connecting to exchanges, because of
the technology infrastructure requirements and the potential to have to
report several types of order events. Nonetheless, the Commission
discussed its preliminary belief that any increases in the barriers to
entry are justified because they are necessary in order for the CAT
Data to include data from small broker-dealers. Specifically, the
Commission noted that excluding small broker-dealers from reporting
requirements would eliminate the collection of audit trail information
from a segment of the broker-dealer community and would thus result in
an audit trail that does not capture all orders by all participants in
the securities markets.\2836\
---------------------------------------------------------------------------

    \2836\ See Notice, supra note 5, at 30743 (citing Adopting
Release, supra note 14, at 45749).
---------------------------------------------------------------------------

    The Commission also recognized that the Plan could affect the
current relative competitive positions of broker-dealers in the market
for broker-dealer services because the economic impacts resulting from
the Plan could benefit some broker-dealers and adversely affect others.
However, the Commission stated that there is no clear reason to expect
these impacts, should they occur, to decrease the current state of
overall competition in the market for broker-dealer services so as to
materially burden the price or quality of services received by
investors on average.
    Regardless of the differential effects of the CAT NMS Plan on small
versus large broker-dealers, the Commission discussed in the Notice
that its preliminary view was that the CAT NMS Plan, in aggregate, will
likely not reduce competition and efficiency in the overall market for
broker-dealer services. The Commission explained that even if small
broker-dealers potentially face a burden, this may not necessarily have
an adverse effect on competition as a whole in the overall market for
broker-dealer services. Under the Plan, broker-dealers could face high
upfront costs to set up a processing environment to meet reporting
responsibilities. As upfront, fixed costs, the burden could be greater
for small broker-dealers. Instead of bearing these costs in-house,
small broker-dealers could contract with outside vendors, which could
lead to lower costs relative to not using a vendor for reporting
services. Thus, the Commission explained that even firms that currently
do not report to OATS, but will be CAT Reporters under the Plan, could
face manageable upfront costs that permit them to continue in their
line of business without a severe setback in their profitability.
    The Commission noted that a difficulty in assessing the likely
impacts of the CAT NMS Plan on competition among broker-dealers is that
competition in the markets for different broker-dealer services could
be affected in different ways. If CAT costs represent a significant
increase in overall business costs, the Plan could disadvantage broker-
dealers who are CAT Reporters in the market segments that do not
require CAT reporting. For example, broker-dealers that, in addition to
providing services related to market transactions that are reportable
to CAT, also compete to provide fixed-income order entry as a line of
business may be at a relative disadvantage to competitors in the fixed-
income market who do not provide broker-dealer services that are
related to market activity that is reportable to CAT.
    The Commission recognized that the CAT NMS Plan could result in
fewer broker-dealers providing specialized services that trigger CAT
reporting obligations. The Commission also recognized, however, that
fewer broker-dealers in a specialized segment of the market may not
necessarily harm competition in that segment. In particular, the CAT
compliance costs may be less of a relative burden for large broker-
dealers who may provide a larger portfolio of specialized services to
clients. This portfolio may buffer large broker-dealers from business
risk associated with specialization, and so large broker-dealers are
likely to maintain their presence in specialized market segments. If a
sufficient number of large broker-dealers maintain their presence in
specialized market segments, a net decrease in broker-dealers may not
affect the competition in such market segments to a level in which the
market segment offers fewer or lower quality services or higher
prices.\2837\ However, the Commission recognized that negative effects
on competition in specialized market segments could result if broker-
dealers achieve a level of market concentration necessary to adversely
affect prices for investors.
---------------------------------------------------------------------------

    \2837\ See Notice, supra note 5, at 30742-44.
---------------------------------------------------------------------------

    The Commission received a few comment letters regarding its
analysis of the effect of the Plan on the market for broker-dealer
services. As previously described,\2838\ the Commission received one
comment that noted that message traffic tiers could place a larger
burden on market makers of liquid securities and a lower burden on
liquidity takers.\2839\ In addition, one commenter noted that the
current phased implementation schedule poses risks to clearing firms
who will have to support both large and small broker-dealers during CAT
implementation, incurring more CAT implementation costs than broker-
dealers that do not have introducing broker-dealers.\2840\ Another
comment estimated that CAT reporting costs, even at a $5,000 per month
minimum, could reach 15% or more of revenue for a subset of small
broker-dealers that are currently OATS exempt.\2841\ The commenter
further stated that the Plan would have the greatest proportionate
burden for those firms, which have the smallest justification for
regulatory concern \2842\ and expressed concern regarding the ability
for certain firms to say in business, stating that the Plan would
``destroy the business model and profitability'' of such firms.
---------------------------------------------------------------------------

    \2838\ See Section V.F.5.d, supra.
    \2839\ SIFMA Letter at 16-17.
    \2840\ TR Letter at 3-4.
    \2841\ Wachtel Letter at 1-4.
    \2842\ Wachtel Letter at 2-4 (stating that customers of certain
small firms are unlikely to engage in violative behavior such as
market manipulation and insider trading).
---------------------------------------------------------------------------

    The Participants' response letter addressed comments related to the
market for broker-dealer services. With regards to the funding model
tiers placing a larger burden on market makers of liquid securities,
the Participants did not comment on the relative burden, but argued
that a fixed-fee funding model would reduce the disincentives to
provide liquidity to the market and would lead to fewer market
distortions than a strictly variable funding model.\2843\ With regards
to the phased implementation schedule, the Participants noted that
small broker-dealers may voluntarily begin reporting within two years
instead of the required three years,\2844\ but did not address whether
this poses risks for clearing firms supporting both large and small
broker-dealers. The Participants also did not address the relative
burden on OATS-exempt broker-dealers.
---------------------------------------------------------------------------

    \2843\ Response Letter II at 16.
    \2844\ Response Letter II at 20.
---------------------------------------------------------------------------

    In response to these comments, the Commission has revised its
economic analysis of the effect of the Plan on the market for broker-
dealer services. First, the Commission now recognizes the potential
differential effect on those broker-dealers that engage in market
making in liquid stocks versus illiquid stocks and on those broker-
dealers that engage in liquidity taking strategies versus those that
engage in other

strategies. The Commission believes that this differential effect could
result in broker-dealers altering their activities, which could have
the second order effects described above,\2845\ and could change the
level of competition in certain market segments, such as those that
specialize in providing services in more liquid securities. However,
the Commission believes that services in liquid securities is the most
competitive segment in the broker-dealer industry and therefore, does
not believe that effects on competition would be material. In
particular, based on Commission Staff experience, the Commission
understands that quote competition in liquid securities comes from
market makers on many exchanges, over-the-counter market makers, and
customers who post quotations. These securities trade on one penny
spreads and have deep order books. Further, consistent with the
Participants' Response Letter II, the tiered nature of the funding
model effectively fixes the fees. In highly competitive markets, fixed
fees should not affect prices. Therefore, the highly competitive liquid
securities markets should remain liquid and highly competitive under
the Plan, despite the fees related to message traffic.
---------------------------------------------------------------------------

    \2845\ See Section V.F.5.b., supra.
---------------------------------------------------------------------------

    The Commission also agrees with the comment that certain broker-
dealers could face a disproportionately large burden of costs from
reporting, even as high as 15% of revenue as the commenter noted, and
already recognized this possibility in the economic analysis in the
Notice. However, the Commission is not revising its conclusion that it
is necessary for even the smallest broker-dealers to report to CAT.
Specifically, the Commission believes that excluding certain broker-
dealers from reporting requirements would result in an audit trail that
does not capture all orders by all participants in the securities
markets, which could incentivize prospective wrongdoers to utilize
these firms to evade regulatory oversight.
    With regards to competition, the Commission continues to believe
that even if regulatory burdens from CAT reduce the number of small
broker-dealers in specialized segments, overall competition in those
segments may not be harmed.
    With regards to the comment on relative costs for clearing firms
supporting large and small brokers during CAT implementation, the
Commission acknowledges the costs of reporting to duplicative systems,
and the relatively high costs to introducing broker-dealers. However,
it is not clear why the additional costs to clearing firms servicing
other broker-dealers would not be passed along to small broker-
dealers--the impact of which has already been discussed. As such, the
Commission does not believe the impact on clearing firms due to the
phased implementation schedule is sufficiently large to affect
competition in this market, and is not changing the Economic Analysis
as it relates to costs for clearing services.
    The Commission does not believe that the modifications to the
funding model described above will affect the allocation of fees or the
relative compliance costs among broker-dealers.\2846\ Overall, the
Commission continues to believe that the CAT NMS Plan, in aggregate,
would likely not reduce competition and efficiency in the overall
market for broker-dealer services. Even if small broker-dealers,
broker-dealers of liquid securities, or clearing firms of large and
small broker-dealers potentially face a relatively high burden, this
may not necessarily have an adverse effect on competition as a whole in
the overall market for broker-dealer services, as the Commission
explained in the Notice.
---------------------------------------------------------------------------

    \2846\ Id.
---------------------------------------------------------------------------

c. Market for Regulatory Services
    In the Notice, the Commission discussed its preliminary conclusion
that the Plan could provide opportunities for increased competition in
the market to provide regulatory services.\2847\ The Commission noted
that SROs compete to provide regulatory services in at least two ways.
First, because SROs are responsible for regulating trading within
venues they operate, their regulatory services are bundled with their
operation of the venue. Consequently, for a broker-dealer, selecting a
trading venue also entails the selection of a provider of regulatory
services surrounding the trading activity. Second, SROs could provide
this supervision not only for their own trading venues, but for other
SROs' trading venues as well through the use of Regulatory Service
Agreements or a plan approved pursuant to Rule 17d-2 under the Exchange
Act.\2848\ Consequently, SROs compete to provide regulatory services to
trading venues they do not operate. The market for regulatory services
in the equity and options markets currently has one dominant
competitor, FINRA.
---------------------------------------------------------------------------

    \2847\ See Notice, supra note 5, at 30744-45.
    \2848\ 17 CFR 240.17d-2.
---------------------------------------------------------------------------

    In the Notice, the Commission noted that under the Plan, designated
regulatory Staff from all of the SROs would have access to CAT Data,
which would reduce the differences in data access across SROs.\2849\
This in turn could reduce barriers to entry in providing regulatory
services because data will be centralized and standardized, possibly
reducing economies of scale in performing surveillance activities.
Furthermore, because some types of previously infeasible surveillance
will become possible with the availability of additional data, the
Commission believes that SROs will have greater opportunities to
innovate in the type of surveillance that is performed, and the
efficiency with which it is performed. In addition, as Rule
613(a)(3)(iv) requires, SROs will implement new or updated surveillance
within 14 months after effectiveness of the CAT NMS Plan,\2850\ and
thus any SRO could reconsider its approach to outsourcing its
regulatory services and whether it wants to compete to provide
regulatory services to others.
---------------------------------------------------------------------------

    \2849\ Without a Central Repository, an SRO wishing to compete
as a regulatory services provider would need to invest in the IT
infrastructure and enter into the data access agreements necessary
to surveil broadly beyond its exchanges' data resources. By
providing access to consolidated trade and order data to all SROs,
CAT may reduce barriers to entry for this market. See Securities
Exchange Act Release No. 74581 (March 25, 2015), 80 FR 18035 (April
2, 2015) at 18057-58 (describing the barriers to entry of potential
new national securities associations).
    \2850\ 17 CFR 242.613(a)(3)(iv).
---------------------------------------------------------------------------

    While the Commission did not receive any comments addressing the
effects of the CAT NMS Plan on the market for regulatory services, nor
was the issue addressed in the Participants' response, the Commission
believes that certain EMSAC discussions are relevant to its analysis of
competition in the market for regulatory services. In particular, the
discussions regarding the EMSAC draft recommendation that the
Commission should formalize by Rule the centralization of common
regulatory functions across SROs into a single regulator reveal other
potential considerations.\2851\ In particular, the EMSAC subcommittee
on Trading Venues opined that some regulatory activities are
duplicative and needlessly complex because they are dispersed

across SROs.\2852\ Further, the subcommittee argued that CAT will
increase that duplicative regulatory oversight. In response to the
EMSAC discussions, one commenter pointed out benefits in having
competition between regulators.\2853\ This commenter explained that CAT
Data could open up new frontiers for regulation that competition
between multiple SROs could leverage off of.
---------------------------------------------------------------------------

    \2851\ See ``Recommendations Relating to Trading Venues
Regulation'', Equity Market Structure Advisory Committee (``EMSAC'')
Trading Venues Regulation Subcommittee, April 19, 2016, available at
https://www.sec.gov/spotlight/emsac/emsac-trading-venues-subcommittee-recommendations-041916.pdf (describing four
recommendations relating to the regulation of trading venues); see
also EMSAC April 26, 2016 Transcript, available at https://www.sec.gov/spotlight/emsac/emsac-042616-transcript.txt.
    \2852\ See EMSAC April 26, 2016 Transcript, available at https://www.sec.gov/spotlight/emsac/emsac-042616-transcript.txt, at 111.
    \2853\ See NASDAQ comment on EMSAC, May 24, 2016, available at
https://www.sec.gov/comments/265-29/26529-71.pdf.
---------------------------------------------------------------------------

    The Commission recognizes that increased competition in the market
for regulatory services could create duplication of regulations, as the
EMSAC discussed. But, ultimately, the Commission's conclusions related
to competition--namely, that the Plan will provide opportunities for
increased competition in the market to provide regulatory services--are
unchanged from the Notice. The Commission recognizes, however, the
uncertainty of whether EMSAC will make a formal recommendation to the
Commission and whether and how the Commission would act with respect to
such a recommendation.
d. Market for Regulatory Data Reporting Services
    In the Notice, the Commission analyzed the effect of the CAT NMS
Plan on competition in the market for data reporting services with a
focus on its impact on the costs incurred by broker-dealers to comply
with the Plan.\2854\ As discussed in the Costs section above, the
Commission preliminarily believed that many broker-dealers,
particularly smaller broker-dealers, would fulfill their CAT reporting
obligations by outsourcing to service bureaus and that the fees charged
by the service bureaus would be a major cost driver for these broker-
dealers. Further, these fees would factor into the increase in barriers
to entry in the market for broker-dealer services.\2855\ Therefore, the
Commission preliminarily believed that any effects on competition in
the market for regulatory data reporting services could have a
significant effect on the costs incurred by broker-dealers in complying
with the CAT NMS Plan.
---------------------------------------------------------------------------

    \2854\ See Notice, supra note 5, at 30745-46.
    \2855\ See Section V.G.1.b, supra.
---------------------------------------------------------------------------

    The Plan provided information on broker-dealers' use of third-party
service providers to accomplish current regulatory data reporting. The
Plan noted that while some broker-dealers perform their regulatory data
reporting in-house, others outsource this activity. As noted in the
Costs section of the Plan,\2856\ the Commission understands that most
firms outsource the bulk of their regulatory data reporting to third-
party firms. The Commission preliminarily believed that the competition
in the market to provide data reporting services is a product of firms
choosing to perform this activity in-house or to outsource it based on
a number of considerations including cost, with some firms choosing to
outsource this activity across multiple service providers.
---------------------------------------------------------------------------

    \2856\ See Section V.F.1.c.(2).A, supra.
---------------------------------------------------------------------------

    The market for regulatory data reporting services is currently
characterized by bundling, high switching costs, and barriers to entry.
First, service bureaus often bundle regulatory data reporting services
with an order-handling system service that provides broker-dealers with
market access and order routing capabilities.\2857\ Additionally, they
sometimes bundle regulatory data reporting services with trade clearing
services. Second, switching costs for service bureaus may be high and
involve complex onboarding processes and requirements. Furthermore,
systems between service bureaus may be disparate, and switching service
providers may require different or updated client documentation.
Difficulty switching between service providers could limit the
competition among service bureaus to provide data reporting services,
and impact the costs that Outsourcers incur to secure regulatory data
reporting services. Third, high information technology (``IT'')
infrastructure costs also give rise to barriers to entry, which could
slow the entry of new market participants into this market. Despite
this, the Commission explained that based on information from broker-
dealer discussions arranged by Financial Information Forum it
preliminarily believed that the market for regulatory data reporting
services is generally expanding and the trend is for more, not less,
outsourcing.\2858\
---------------------------------------------------------------------------

    \2857\ See Section V.F.1.c.(2).A, supra, for more information on
broker-dealer use of service bureaus.
    \2858\ See Notice, supra note 5, at n.920.
---------------------------------------------------------------------------

    In the Notice, the Commission discussed its preliminary belief that
the Plan could alter the competitive landscape in the market for data
reporting services in several ways. First, the Plan could increase the
demand for data reporting services by requiring reporting by broker-
dealers that may have previously been exempt due to size under
individual SRO rules.\2859\ Because more broker-dealers would be
required to report regulatory data under the Plan, the Commission
preliminarily believed there could be an opportunity for increased
competition in this market which might benefit all Outsourcers by
reducing costs or increasing innovation. However, the increase in
demand for data reporting services could serve to entrench existing
providers if they capture a large share of newly created demand; this
could lead to relatively higher costs for broker-dealers than they
would face in a more competitive market. The potential increase in
demand for data reporting services also could impact the capacity of
already existing service providers to meet this increase in demand, and
this in turn could have implications for competition and pricing in the
market for data reporting services. Considering the barriers to entry
that characterize the market for data reporting services and this
potential increase in demand, service bureaus could have less incentive
to compete for broker-dealer clients because these clients are no
longer scarce, and as such, the CAT NMS Plan could result in a decline
in the competition for data reporting services. It is possible that
broker-dealers seeking to establish relationships with service bureaus
could have trouble securing them because of the need to on-board many
broker-dealers at once, especially if the service bureaus have limited
on-boarding capacity. In the short-run these capacity constraints and
the high demand could increase the costs of reporting through a service
bureau. However, the two year implementation period for large broker-
dealers and three year period for small broker-dealers could alleviate
the reduction in competition due to the onboarding capacity strain
because current service bureaus have time to increase their on-boarding
capacity and new entrants have time to build the necessary IT
infrastructure and a client base.
---------------------------------------------------------------------------

    \2859\ See, e.g., FINRA Rule 7470.
---------------------------------------------------------------------------

    Second, the Commission discussed in the Notice how the CAT NMS Plan
could dramatically change the pool of firms demanding data reporting
services, which would be skewed toward firms that are smaller and on
average costlier to service, which could result in higher prices that
could eventually be passed onto investors. In addition to small and
medium sized broker-dealers that previously self-reported data to SROs,
who now would be required to report, the CAT NMS Plan would also result
in other broker-

dealers having data reporting responsibilities. The Commission
preliminarily believed that these broker-dealers would predominantly be
small. Because the Plan would require additional elements in regulatory
data, particularly customer data, some broker-dealers that currently
self-report could no longer find it economically feasible to do so.
    Third, in addition to possibly increasing demand for data reporting
services, the Commission discussed how the CAT NMS Plan may have a
mixed effect on the number of firms offering data reporting services.
This could impact the competitiveness of this market, and affect the
costs broker-dealers bear in securing these services. On one hand, the
number of firms offering data reporting services could decrease,
because the need to secure PII might increase the likelihood of
liability and litigation risks in the event of a security breach.\2860\
On the other hand, it is possible that the number of service bureaus
offering data reporting services would increase. New reporting
requirements for broker-dealers could create opportunities for new
entrants to meet this demand. This could increase capacity and result
in innovation in providing these services, which could benefit broker-
dealers needing data reporting services by potentially reducing
reporting costs, or at least reducing the potential for cost increases.
Lower reporting costs for broker-dealers could in turn benefit the
investors who are serviced by these broker-dealers, through reduced
costs.
---------------------------------------------------------------------------

    \2860\ See Section V.F.4.a(3), supra, for a discussion of the
potential exit of service bureaus from the market resulting from the
risk of a security breach.
---------------------------------------------------------------------------

    Fourth, the Commission discussed how the Plan could decrease the
demand for data reporting services. Many broker-dealers currently pay
service bureaus to fulfill their regulatory data reporting; this may be
because these broker-dealers find it would be more expensive to handle
the translation of their order management system data into fixed
formats, such as is required for OATS. If the Plan Processor allows
broker-dealers to send data to the Central Repository in the formats
that they use for normal operations, in drop copies for example, these
broker-dealers may no longer see a cost advantage in engaging the
services of a regulatory data reporting service provider because one of
the costs associated with regulatory data reporting--having to
translate data into a fixed format--will have been eliminated.\2861\
These broker-dealers may then choose to insource their regulatory data
reporting.
---------------------------------------------------------------------------

    \2861\ The Plan does not mandate the data ingestion format. See
CAT NMS Plan, supra note 5, at Appendix C, Section A.1(b). In the
Notice, the Commission recognized that the CAT Reporters Study found
no difference in expected costs for a fixed format, but requested
comment on why the costs may be similar when it would seem logical
that allowing flexible data reporting formats would reduce costs for
broker-dealers. See Notice, supra note 5, at Section IV.F.5.
---------------------------------------------------------------------------

    The Commission preliminarily believed that this reduction in demand
would not likely be realized and, if realized, would be unlikely to
offset the increase in demand that would come from CAT reporters not
currently subject to OATS reporting, who would now have reporting
obligations. As noted in the Costs section of the Plan, of the 1,800
expected CAT Reporters, 868 do not currently report to OATS.\2862\ This
meant that the Commission expected a large proportion of CAT Reporters
may be broker-dealers that currently do not have a service bureau for
regulatory data reporting but would choose to engage one to manage
their CAT reporting responsibilities. This is more than the
Commission's estimate of 806 current outsourcing broker-dealers.\2863\
The Commission therefore noted that it is unlikely that the number of
current Outsourcers that choose to become Insourcers would be larger
than the number of non-OATS reporters that would elect to outsource. As
a result, demand is more likely to increase. Further, the Commission
explained that the proposed requirement for CAT reports to use listing
exchange symbology could require pre-report data processing even if the
Plan Processor allows for the receipt of reports in the formats that
broker-dealers use for normal operations. As a result, the Commission
explained that the CAT NMS Plan is unlikely to eliminate the costs of
processing data prior to reporting that data to the Central Repository.
---------------------------------------------------------------------------

    \2862\ The Plan estimates that 1,800 broker-dealers are expected
to have CAT reporting obligations. Based on data from FINRA, 932
broker-dealers currently report OATS data. 1,800 - 932= 868. See
Section VI.F.1.c.(2)A, supra.
    \2863\ Id.
---------------------------------------------------------------------------

    The Commission continues to believe that it is possible that the
Plan would increase the demand for data reporting services by requiring
regulatory data reporting by broker-dealers that may have previously
been exempt due to size under individual SRO rules. Furthermore, the
Commission continues to believe that the CAT NMS Plan may have a mixed
effect on the number of firms offering data reporting services; this
could impact the competitiveness of this market, and affect the costs
broker-dealers bear in securing these services. Commenters did not
provide any additional information or analysis that the Commission
believes would warrant changes to its analysis or conclusions as set
out in the Notice, nor does the Commission believe that the
modifications to the Plan warrant changes to this aspect of the
economic analysis.
2. Efficiency
    In the Notice, the Commission analyzed the potential impact of the
Plan on efficiency.\2864\ The Plan included a discussion of certain
efficiency effects anticipated if the Plan is approved; as part of its
economic analysis, the Commission discussed these effects, as well as
additional effects anticipated by the Commission. The Commission
discussed its preliminary belief that the Plan would likely result in
significant improvements in efficiency related to how regulatory data
is collected and used. The Commission also explained that the Plan
could result in improvements in market efficiency by deterring
violative activity. However, the Commission noted that any potential
gains to efficiency from the retirement of duplicative and outdated
reporting systems would be delayed for up to two and a half years and
the interim period of increased duplicative reporting would impose
significant financial burden on Industry Members.
---------------------------------------------------------------------------

    \2864\ See Notice, supra note 5, at 30746-48.
---------------------------------------------------------------------------

    Overall, after considering comments, Participants' responses, and
modifications to the Plan, the Commission is updating and revising its
economic analysis on efficiency. However, the revisions in the analysis
do not impact the Commission's broad conclusions. The Commission
continues to believe that the Plan will generally improve the
efficiency of regulatory activities and promote market efficiency.
a. Effect of the Plan on Efficiency
    Building off the discussion in the Plan, in the Notice, the
Commission analyzed the effect of the Plan on the efficiency of
detecting violative behavior through examinations and enforcement, on
the efficiency of surveillance, on market efficiency through deterrence
of violative behavior, on operational efficiency of CAT Reporters, and
on efficiencies through reduced ad hoc data requests and quicker access
to data.\2865\
---------------------------------------------------------------------------

    \2865\ Id.

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

    The Commission explained that currently, regulators' ability to
efficiently supervise and surveil market participants and carry out
their enforcement responsibilities is hindered by limitations in
regulatory data.\2866\ Second, regulators' ability to efficiently
perform cross-market surveillance is also hindered by limitations in
regulatory data.\2867\ Finally, there are a number of other
inefficiencies associated with the current system of regulatory data
collection. These include: Delays in data availability to regulators;
lack of direct access to data collected by other regulators results in
numerous ad-hoc data requests; and the need for regulatory Staff to
invest significant time and resources to reconciling disparate data
sources.\2868\
---------------------------------------------------------------------------

    \2866\ See Section V.E.2.c, supra.
    \2867\ Id.
    \2868\ See Section V.D.2.b, supra. These other inefficiencies
are discussed above in the Baseline and Benefits Sections.
---------------------------------------------------------------------------

    The Plan discussed a number of expected effects on efficiency such
as: Monitoring for rule violations; performing surveillance; and
supporting fewer reporting systems. The Commission preliminarily agreed
with the Plan's assessments of the expected effects, and in addition,
the Commission discussed how the Plan could also reduce violative
behavior.
    First, the Plan concluded that SROs would experience improved
efficiency in the detection of rule violations, particularly for
violations that involve trading in multiple markets.\2869\ The Plan
stated an expectation that SROs would need to expend fewer resources to
detect violative cross-market activity, and such activity would be
detected more quickly.\2870\ The Commission preliminarily agreed that
the Plan would result in improvements in efficiency in the performance
of examinations of market participants by SROs and the Commission.
Improvements to data availability and access through the Central
Repository could allow SROs and the Commission to more efficiently
identify market participants for examination.\2871\ The Commission also
agreed that the Plan would improve the efficiency of enforcement
investigations. If regulatory data access improves, the quality and
quantity of enforcement investigations could increase through
improvements to the comprehensiveness and timeliness of data used to
support investigations.
---------------------------------------------------------------------------

    \2869\ See CAT NMS Plan, supra note 5, at Appendix C, Section
B.8(b); see also Section V.E.2, supra.
    \2870\ See CAT NMS Plan, supra note 5, at Appendix C, Section
B.8(b).
    \2871\ See Section V.E.2.c, supra.
---------------------------------------------------------------------------

    Second, the Plan stated that the Participants believe that the CAT
NMS Plan could improve the efficiency of surveillance.\2872\ This
improvement is due to a number of factors including: Increased
surveillance capacity; improved system speed, which would result in
more efficient data analysis; and a reduction in surveillance system
downtime.\2873\ The Plan also cited reduced monitoring costs,\2874\ but
the Commission noted that estimates in the Costs section of the Plan
predicted increased surveillance costs if the Plan is approved. The
increased surveillance costs predicted in the Plan could reflect more
effective surveillance. Although the Plan did not discuss the cost-
benefit tradeoff of increased surveillance directly, the Commission
noted that achieving the level of surveillance that would be possible
if the Plan is approved would likely be more expensive using currently
available data sources, if it is achievable at all, due to the
inefficiencies that currently exist in delivering regulatory
supervision, which are discussed previously.\2875\
---------------------------------------------------------------------------

    \2872\ See CAT NMS Plan, supra note 5, at Appendix C, Section
B.8(b) (stating that the CAT NMS Plan could reduce monitoring costs,
enable regulators to detect cross-market violative activity more
quickly, provide regulators more fulsome access to unprocessed data
and timely and accurate information on market activity, and provide
CAT Reporters with long term efficiencies resulting from the
increase in surveillance capabilities); see also Section V.E.2.c,
supra.
    \2873\ See CAT NMS Plan, supra note 5, at Appendix C, Section
B.8(b). The Participants surveyed the 10 exchange-operating SRO
groups on surveillance downtime. In conversations with Commission
staff, the Participants informed Staff that average surveillance
downtime was 0.03% from August 1, 2014 to August 31, 2015, and
ranged from 0 to 0.21% across SROs.
    \2874\ Id.
    \2875\ See Section VI.E.2, supra.
---------------------------------------------------------------------------

    Third, the Plan also discussed increased efficiency due to the
reduction in redundant reporting systems,\2876\ specifically increases
in system standardization, which would allow consolidation of
resources, including the sunsetting of legacy reporting systems and
processes, as well as consolidated data processing envisioned from the
Plan.\2877\ However, the Commission noted that it is aware that the
Plan calls for a period of years during which Industry Members would
face duplicative reporting systems before older regulatory data
reporting systems are retired.\2878\ This period of duplicative
reporting would impose a considerable financial burden on Industry
Members.\2879\
---------------------------------------------------------------------------

    \2876\ See CAT NMS Plan, supra note 5, at Appendix C, Section
B.7(b)(iii)(C) (discussing benefits of CAT to broker-dealers).
    \2877\ Id. at Appendix C, Section B.8(b).
    \2878\ Id. at Appendix C, Section B.9.
    \2879\ See Section VI.F.2, supra, for a discussion of
duplicative reporting and whether broker-dealers would pass costs on
to investors.
---------------------------------------------------------------------------

    The Plan also discussed two other possible efficiency improvements:
A reduction in ad-hoc data requests and more fulsome access to raw
data. While the Plan anticipated a decrease in ad-hoc data requests as
a result of Plan-related data improvements, the Commission noted some
types of ad-hoc data requests, such as, data requests for later-stage
investigations might increase.\2880\ The Commission recognized that
these increases in data requests would partially offset the efficiency
improvements from the reduction in data requests noted above, but the
Commission preliminarily believed that the Plan would reduce the total
number of data requests.\2881\ Furthermore, the Plan anticipated more
robust access to unprocessed regulatory data, which could improve the
efficiency with which SROs and the Commission could respond to market
events where they previously had to submit data requests and wait for
data validation procedures to be completed before accessing data
collected by other regulators.\2882\
---------------------------------------------------------------------------

    \2880\ Examples of data requests for later-stage investigations
could include commissions paid or locate identifiers.
    \2881\ The Commission acknowledged that this decrease in total
number of data requests may be partially offset by an increase in
the number of investigations in general, because enhanced
surveillance is likely to detect more potentially violative activity
that would need to be investigated.
    \2882\ See CAT NMS Plan, supra note 5, at Appendix C, Section
B.8(b).
---------------------------------------------------------------------------

    In addition to the potential benefits to efficiency discussed in
the Plan, the Commission also discussed that CAT may reduce violative
behavior. Improvements in the efficiency of market surveillance,
investigations, and enforcement could directly reduce the amount of
violative behavior by identifying and penalizing market participants
who violate rules and who would more easily go undetected in the
current regime. Furthermore, market participants' awareness regarding
improvements in the efficiency of market surveillance, investigations,
and enforcement (or perceptions thereof), and the resultant increase in
the probability of incurring a costly penalty for violative behavior,
could deter violative behavior.\2883\ Reductions in

violative behavior through both of these economic channels could
improve market efficiency.\2884\
---------------------------------------------------------------------------

    \2883\ See, e.g., Schelling, Thomas, ``The Strategy of Conflict:
Prospectus for a Reorientation of Game Theory,'' Journal of Conflict
Resolution, Vol. 2 No. 3 (1958); Ellsberg, Daniel, ``The Crude
Analysis of Strategic Choices,'' American Economic Review, Vol. 51,
No. 2 (1961).
    \2884\ The implicit assumption here is that violative behavior
receives diminishing marginal gains and generates increasing
marginal harm. See, e.g., Becker, Gary and William Landes, ``Essays
in the Economics of Crime and Punishment,'' Columbia University
Press (1974).
---------------------------------------------------------------------------

    The Commission received a comment on the cost estimates of the CAT
NMS Plan and its effects on increasing the efficiency of surveillance
activities. The commenter agreed with the Commission's findings that
the estimate of total implementation cost was accurate, however, the
commenter stated that it is implausible that CAT would reduce
surveillance costs by more than 40% while simultaneously improving the
effectiveness of surveillance.\2885\
---------------------------------------------------------------------------

    \2885\ Data Boiler Letter at 38.
---------------------------------------------------------------------------

    The Commission also received a comment on whether the CAT NMS Plan
would increase the efficiency in detecting rule violations and
subsequent gains to market efficiency due to the reduction in violative
behavior.\2886\ The commenter disagreed with the Commission's analysis
of the Plan's effect on market efficiency due to the reductions in
violative behavior, arguing that effectively and efficiently deterring
violative behavior should be done by using a system other than the CAT,
preferably the commenter's proposed system which involves the use of
real-time analytics.\2887\
---------------------------------------------------------------------------

    \2886\ Data Boiler Letter at 10, 35.
    \2887\ Data Boiler Letter at 10-13, 33, 38.
---------------------------------------------------------------------------

    The Commission also received numerous comments on whether the
retirement of duplicative reporting systems and the reduction in ad-hoc
data requests would generate gains to efficiency. One commenter
disagreed with the Commission's analysis of the effect of the Plan on
the reduction in duplicative reporting and ad-hoc requests.\2888\ Three
commenters indicated that the period of duplicative reporting could
also reduce the expected benefits of CAT.\2889\ One of these commenters
suggested that the Plan's timeline for the retirement of duplicative
reporting does not provide the SROs with sufficient incentives to
migrate surveillances to CAT, implying that there could be a reduction
in the efficiency of surveillance.\2890\ Another commenter emphasized
the inherent complexities of dual reporting, and the impact that this
would have on the efficiency and effectiveness of reporting during this
period.\2891\
---------------------------------------------------------------------------

    \2888\ Data Boiler Letter at 38-39.
    \2889\ FIF Letter at 29-30; SIFMA Letter at 5; DAG Letter at 2.
    \2890\ SIFMA Letter at 5.
    \2891\ FIF Letter at 30.
---------------------------------------------------------------------------

    While the Participants did not directly respond to comments
regarding efficiency, they did state that they expect cost savings as a
result of moving surveillance operations from existing systems to the
CAT.\2892\
---------------------------------------------------------------------------

    \2892\ Response Letter II at 16.
---------------------------------------------------------------------------

    The Commission considered these comments, the Participants'
response, and modifications to the Plan, and is revising its analysis
of the inefficiencies associated with duplicative reporting. The
Commission is not revising its analysis or conclusions with regard to
other aspects of efficiency.
    First, the Commission disagrees with the commenter who raised
concerns about the surveillance cost estimates. As discussed above, all
19 SROs \2893\ responded to the Participants Study regarding cost
estimates, and most SROs have experience collecting audit trail data as
well as expertise in their business practices. Furthermore, the
commenter provided no reasoning or estimates to indicate that the
Participants are unable to reasonably estimate their current data
reporting costs, and the Participants' Response Letter II confirms the
anticipated cost savings described in the Notice. Therefore, the
Commission continues to believe that the cost estimates in the Notice
are accurate, and that the CAT NMS Plan would improve the efficiency of
surveillance by fostering increased surveillance capacity; improved
system speed, which would result in more efficient data analysis; and a
reduction in surveillance downtime.\2894\
---------------------------------------------------------------------------

    \2893\ At the time of the Participants Study, there were 19
SROs. All responded to the study. See Section V.F.1.b, supra for
discussion of the Participants Study and changes to cost estimates
to account for additional Participants.
    \2894\ See supra note 2873.
---------------------------------------------------------------------------

    Second, the Commission disagrees with the commenter that stated
that the CAT Plan would not improve market efficiency due to reductions
in violative behavior, and that the Plan should adopt real-time
analytics. The Commission continues to believe that real-time analytics
are not necessarily required to reduce violative behavior. Analysis of
raw data on T+1 and corrected data after T+3 can reveal violative
activity nonetheless.
    Third, regarding the commenter who seems to imply that the
Commission attributes savings in surveillance costs solely to the
reduction in ad-hoc data requests, which is not the case. As discussed
in the Notice, the Commission believes that it is possible that
Participants and the Commission could realize efficiencies from having
data standardized and centrally hosted that could allow them to handle
fewer ad hoc data requests. In addition, the Plan could allow
Participants and the Commission to automate some surveillance processes
that may currently be labor intensive or processed on legacy systems,
which could reduce costs because the primary driver of these costs is
FTE costs.\2895\
---------------------------------------------------------------------------

    \2895\ See Notice, supra note 5, at 30711.
---------------------------------------------------------------------------

    The Commission agrees with the commenters that suggested that the
period of duplicative reporting could be associated with reduced
benefits from the Plan. In particular, the Commission now acknowledges
that in addition to involving significant costs, the period of
duplicative reporting would be associated with reduced benefits in the
form of potentially lower data quality and potential loss of efficiency
and effectiveness of reporting in the short-term. Examples of losses in
efficiency could include conflicting field definitions in CAT and OATS;
differences in required corrections to the same errors across two
different systems; and contention for the same reporting resources
applied across two or more systems.\2896\
---------------------------------------------------------------------------

    \2896\ FIF Letter at 30.
---------------------------------------------------------------------------

    Regarding the comment that SROs lack incentives to retire
duplicative reporting systems, the Commission notes that the
requirement that SROs implement surveillance using the Central
Repository within 14 months of the Effective Date limits the incentives
for the SROs to delay retiring duplicative systems because they will
gain the capability of performing surveillance within CAT. However, the
Commission acknowledges that small Industry Members will not yet be
reporting to the Central Repository when the SROs gain this capacity.
Consequently, SROs will by necessity be performing surveillance on data
other than CAT Data until small Industry Members are reporting to the
Central Repository and their CAT Data quality allows adequate
surveillance using CAT Data. As discussed in Participants' Response
Letter II, as the Participants face significant costs in running
duplicative systems, and to the extent that such systems are extraneous
for regulatory purposes, the Participants would desire to cease their
operation.\2897\ Consequently, the Commission believes the SROs are
incented to retire these duplicative systems and move surveillance
solely to

the Central Repository as quickly as feasible.
---------------------------------------------------------------------------

    \2897\ Response Letter II at 20.
---------------------------------------------------------------------------

    After considering these comments and responses from the
Participants, potential changes in the Plan, the Commission has updated
its analysis of the effects of duplicative reporting on efficiency.
First, the Commission has updated its estimate of the expected
duplicative reporting period and now believes that it is likely to be
shorter than estimated in the Notice.\2898\ This would potentially
result in the Commission and SROs realizing gains to efficiency earlier
than what was stated in the Notice. Second, as discussed previously,
the Commission now acknowledges that duplicative reporting may not
result in efficiencies with duplicative reporting costs of less than
$1.7 billion.\2899\ Furthermore, the Commission now believes that the
period of duplicative reporting may create inefficiencies, such as
contention for the same reporting resources to correct errors across
two different systems, and that might reduce the quality of data being
reporting to CAT during the period of duplicative reporting.\2900\
Regardless of the loss in efficiency due to duplicative reporting, the
Commission nonetheless believes that the Plan will result in long-term
gains to efficiency for the reasons stated earlier in this Section.
---------------------------------------------------------------------------

    \2898\ See Section V.F.2.b, supra.
    \2899\ Id.
    \2900\ See supra note 2896.
---------------------------------------------------------------------------

b. Effects of Certain Costs of the Plan on Efficiency
    In the Notice, the Commission discussed the fact that the Plan
anticipated that the implementation of CAT will introduce new costs
related to data mapping and data dictionary creation, and add new
expenditures, such as staff time for compliance with encryption
requirements associated with the transmission of PII.\2901\ While the
Commission recognized these are additional activities and costs that
the Plan would require, it viewed these as additional costs rather than
inefficiencies. While the Commission could not quantify the magnitude
of these costs, it viewed these as having a relatively minor
contribution to overall costs of the Plan because they impose technical
requirements on systems that the industry will need to significantly
alter to comply with other provisions in the Plan.\2902\ Commenters did
not provide any additional information or analysis that the Commission
believes would warrant changes to its analysis or conclusions regarding
these costs and therefore continues to view these as costs rather than
inefficiencies
---------------------------------------------------------------------------

    \2901\ See Notice, supra note 5, at 30748.
    \2902\ See Section VI.G.2.a, supra.
---------------------------------------------------------------------------

    Additionally, the Commission discussed the Plan's statement that
there could be a market inefficiency effect related to the funding
proposal for the Plan. The Plan indicated that the Funding Model for
the Plan could create disincentives for the provision of liquidity,
which could impair market quality and increase the costs to investors
to transact.\2903\ The Commission discussed in the Notice two ways that
the cost allocation methodology could negatively impact efficiency.
First, data reporters could respond to the Funding Model by taking
actions to limit their fee payments, such as exiting the market or
reducing their activity levels. Second, the funding proposal for the
CAT NMS Plan to align fees closely with the amounts that are required
to cover costs could create incentives for the Plan Processor or
Operating Committee to propose a cost schedule for the CAT that matches
a given fee schedule, but is not the most efficient cost schedule for
meeting CAT's regulatory objectives.
---------------------------------------------------------------------------

    \2903\ See CAT NMS Plan, supra note 5, at Appendix C, Section
B.8(b).
---------------------------------------------------------------------------

    The Commission received a comment about the concerns the funding
proposal in the Plan poses for liquidity provision.\2904\ This comment
echoed the concerns the Commission discussed in the Notice. The
Participants responded to this comment and noted that they actively
considered the market quality concerns in devising the proposed funding
model, and one of the reasons for proposing a tiered, fixed fee funding
model was to limit the disincentives to providing liquidity to the
market. In particular, the Participants believed that a funding model
based on message volume was far more likely to affect market
behavior.\2905\
---------------------------------------------------------------------------

    \2904\ SIFMA Letter at 16-17.
    \2905\ Response Letter II at 16.
---------------------------------------------------------------------------

    In response to this comment, the Commission notes that it is
amending the Plan to require the Participants to provide the Commission
with a report on the impact of tiered-fees on market liquidity,
including an analysis of the impact of the tiered-fee structure on
Industry Members' provision of liquidity 36 months after effectiveness
of the Plan.\2906\ While the Commission continues to recognize that
negative effects on efficiency could result from the Funding Model, for
the reasons discussed in Section IV.F above, the Commission is
approving the Funding Model as amended by the Commission.\2907\
---------------------------------------------------------------------------

    \2906\ See Section IV.F.3., supra.
    \2907\ See Section IV.F, supra.
---------------------------------------------------------------------------

3. Capital Formation
a. Enhanced Investor Protection
    In the Notice, the Commission examined the potential effects on
capital formation discussed in the Plan in addition to other potential
effects on capital formation that the Commission believed could result
if the Plan is approved.\2908\ The Plan's analysis regarding capital
formation concluded that the Plan would generally not have a
deleterious effect on capital formation and could bolster capital
formation that could lead to increased investor participation in
capital markets. The Commission agreed with the rationale of the Plan's
analysis, but addressed some additional considerations regarding the
scope of the Plan's effects on capital formation, as well as the
channels through which these effects could accrue. The Commission
preliminarily believed that the Plan would have a modest positive
effect on capital formation.\2909\
---------------------------------------------------------------------------

    \2908\ See Notice, supra note 5, at 30748-49.
    \2909\ Id. at 30748-50.
---------------------------------------------------------------------------

    The Plan's analysis stated that the Plan may improve capital
formation by improving investor confidence in the market due to
improvements in surveillance. As discussed previously,\2910\ in the
Notice the Commission discussed its preliminary belief that the Plan
would provide substantial enhancements to investor protection through
improvements to surveillance, particularly for cross-market
trading.\2911\ Improved surveillance, as well as other regulatory
activities, could decrease the rate of violative activity in the
market, reducing investor losses due to violative activity. If
investors expect fewer losses, this may increase capital formation by
facilitating a market where investors could be more likely to mobilize
capital into securities markets.
---------------------------------------------------------------------------

    \2910\ See Notice, supra note 5, at Section IV.E.2.c(1); see
also CAT NMS Plan, supra note 5, at Appendix C, Section
B.7(b)(ii)(B)(1)-(2), B.7(b)(iii)(C).
    \2911\ FINRA currently provides cross-market surveillance, but
limitations in the data (e.g., reliable cross-market linkages,
customer identification, parent order identification) limit the
scope and reliability of this surveillance.
---------------------------------------------------------------------------

    In the Notice, the Commission discussed its preliminary belief that
the CAT NMS Plan could provide additional increases to capital
formation in the form of improved allocative efficiency of existing
capital within the industry. If investors perceive an environment of
improved surveillance,

they could be willing to allocate additional capital to liquidity
provision or other activities that increase market efficiency. Further,
an environment of improved surveillance could result in the reduction
of capital allocated to violative activities that impose costs on other
market participants, because these market participants may no longer
find it desirable to engage in behavior that exposes them to regulatory
action.
    The Commission explained, however, that market participants
engaging in allowable activity that might be subject to additional
regulatory scrutiny under the Plan could allocate capital to other
activities to avoid this scrutiny, because even when activity is not
violative, interacting with regulators can be costly for market
participants.\2912\ This reallocation away from allowable activity to
avoid regulatory interactions could result in capital allocations that
are less efficient.
---------------------------------------------------------------------------

    \2912\ See Section V.E.2.c., supra, for a discussion of the
potential for the efficiencies in surveillance, examinations, and
investigations to increase the number of regulatory actions,
including investigations of conduct that turns out not to violate
laws or regulations.
---------------------------------------------------------------------------

    The Plan stated that the costs from CAT are unlikely to deter
investor participation in the capital markets.\2913\ The Commission
noted, however, that the final costs of the Plan and the Funding Model
for CAT are not wholly certain at this time; thus, it is the
Commission's view that there is uncertainty concerning the extent to
which investors will bear Plan costs and consequently to what extent
Plan costs could affect investors' allocation of capital. Despite these
potential costs to investors, the Commission noted that investors could
believe that any additional benefits they receive from the potential of
a market that is more effectively regulated justify any additional
costs they pay to access capital markets.
---------------------------------------------------------------------------

    \2913\ See CAT NMS Plan, supra note 5, at Appendix C, Section
B.8(c).
---------------------------------------------------------------------------

    The Commission received several comments on whether the Plan would
improve capital formation through investor protection against abusive
behavior, and by fostering investor participation. One commenter stated
that the Commission needs the CAT Plan not only to understand
breakdowns in trading markets, but also to rid the markets of
increasingly abusive trading practices. Doing this will protect
investors, and foster investor participation, thereby fueling capital
formation.\2914\ Another commenter disagreed with the Commission's
analysis and concluded that the Plan could adversely impact investors'
trust in the markets because the Plan lacks connection with real-world
problems (i.e., huge investment losses can be accumulated within a
split-second; market collapse does not take more than one day; abusive
use of financial engineering techniques to synthetically create trades/
derivatives to bypass controls).\2915\
---------------------------------------------------------------------------

    \2914\ Better Markets Letter at 3.
    \2915\ Data Boiler Letter at 39.
---------------------------------------------------------------------------

    In response to the commenter who mentioned that the Commission
needs the CAT Plan to not only understand breakdowns in trading
markets, but also rid the markets of abusive trading practices, the
Commission has noted previously that CAT Data would help regulators
with analysis and reconstruction of market events, and also help
regulators identify violative behavior and abusive trading through
their enforcement investigations.\2916\
---------------------------------------------------------------------------

    \2916\ See Section V.E.2.c(1), supra; Section V.E.2.c(3), supra.
---------------------------------------------------------------------------

    The Commission also disagrees with the commenter who concluded that
the Plan could adversely impact investors' trust in the markets because
the Plan lacks a connection with ``real-world problems.'' The
Commission believes the Plan has a connection with these ``real-world
problems'' because as stated above, CAT Data would help regulators
analyze and reconstruct markets,\2917\ thereby helping them understand
how split-second losses accumulate to investors and the underpinnings
of market collapses. CAT Data would also help regulators with
surveillance and investigation activities,\2918\ and potentially help
them to understand the abusive use of financial engineering techniques.
The Commission therefore believes that the benefits that CAT Data would
provide regulators would also provide benefits to investors of a safer
environment for allocating their capital and making financial
decisions.
---------------------------------------------------------------------------

    \2917\ See Section V.E.2.a., supra.
    \2918\ See Section V.E.2.c., supra.
---------------------------------------------------------------------------

    Moreover, the changes to the Plan further support the Commission's
preliminary conclusions. Requiring Industry Members to report their LEI
to the Central Repository if they have one should result in a greater
ability for regulators to identify traders based on their Customer-IDs
for the purposes of SRO surveillance. Potentially improved data
completeness in terms of Customer-IDs could result in greater benefits
to surveillance that would spillover to capital formation than stated
in the Notice.
b. Data Security
    In the Notice, the Commission agreed with the Plan's assessment
that data security concerns are unlikely to materially affect capital
formation.\2919\ In its discussion of capital formation, the Plan
recognized that data security concerns could potentially impact capital
formation through market participants' perception that sensitive
proprietary data might be vulnerable in case of a data breach at the
Central Repository. The Plan's analysis discussed the security measures
that are required by Rule 613 and the manner in which they have been
implemented in the Plan. It concluded that these security measures are
sufficient and that it is unlikely market participants would reduce
their participation in markets in a manner that would affect capital
formation. The Commission agreed that concerns regarding data security
are unlikely to substantially affect capital formation, but that some
uncertainty about the risks exist because of the variations in the
potential security solutions and their resulting effectiveness.\2920\
---------------------------------------------------------------------------

    \2919\ See Notice, supra note 5, at 30749-50.
    \2920\ Id. at 30749.
---------------------------------------------------------------------------

    In the Notice, the Commission discussed how the consequences of a
data breach, nonetheless, could be quite severe. A data breach could
substantially harm market participants by exposing proprietary
information, such as a proprietary trading strategy or the existence of
a significant business relationship with either a counterparty or
client. The Commission noted, however, that broker-dealers already bear
such risks in transmitting regulatory data to SROs and the Commission.
The Commission believed that the marginal increase in the risks to
broker-dealers associated with a data breach would be unlikely to deter
broker-dealers from participating in markets. Finally, the Commission
noted that a data breach could potentially reveal PII of investors. To
address the potential for harm to the investing public and the health
of capital markets through such a breach, the Plan has enhanced
requirements for security around PII. The Commission believed that the
risk of a breach of PII data would not materially affect investors'
willingness to participate in markets because they already face these
risks with PII shared with broker-dealers, though not in one
centralized location.
    Several commenters wrote about data security, and the comments are
summarized above in Section IV.D.6. Only one commenter discussed the

effects of data security on capital formation. That commenter asserted
that ``[i]f investors perceive that the CAT NMS plan leaves their
trading strategies and position information vulnerable to discovery and
predatory use, interest in equity investing may decrease to the
detriment of liquidity and, ultimately, capital formation.'' \2921\ The
Commission agrees that investors are sensitive to the protection of
their data. The Plan amendments and Participants' responses to comments
provide more details about the required security provisions and more
clarity on the applicability of Regulation SCI standards. The
Commission believes that these changes should increase the security of
CAT Data, and that concerns regarding data security are unlikely to
affect capital formation substantially even though there may still be
uncertainty regarding potential security solutions and their
effectiveness.\2922\
---------------------------------------------------------------------------

    \2921\ ICI Letter at 3.
    \2922\ See Notice, supra note 5, at 30749.
---------------------------------------------------------------------------

4. Related Considerations Affecting Competition, Efficiency and Capital
Formation
    The Commission in the Notice recognized that the Plan's likely
effects on competition, efficiency, and capital formation are dependent
to some extent on the performance and decisions of the Plan Processor
and the Operating Committee in implementing the Plan, and thus that
there is necessarily some uncertainty in the Commission's
analysis.\2923\ The Commission noted that nonetheless, it believed that
the Plan contains certain governance provisions, as well as provisions
relating to the selection and removal of the Plan Processor, that
mitigate this uncertainty by promoting decision-making that could, on
balance, have positive effects on competition, efficiency, and capital
formation.\2924\
---------------------------------------------------------------------------

    \2923\ See Notice, supra note 5, at 30750; see also the
discussion of the CAT governance structure in Notice, supra note 5,
at Section IV.E.4.d, supra.
    \2924\ See Notice, supra note 5, at 30750.
---------------------------------------------------------------------------

a. The Efficiency of the Plan
(1) Plan Decision-Making Process
    The Commission in the Notice stated its preliminary belief that
certain governance provisions in the Plan could create inefficiencies
in the decision-making process, but that these inefficiencies are
limited or exist to promote better decision-making.\2925\ Specifically,
the Notice stated that the Plan specified three types of voting
protocols and when each protocol applies: Unanimous voting (only in
three circumstances), supermajority voting (in instances considered by
the Participants to have a direct and significant impact on the
functioning, management, and financing of the CAT system), or majority
voting (other, routine matters that arise in the ordinary course of
business; as a practical matter the default standard).\2926\ The
Commission discussed how the Plan's voting protocols balanced the
efficiency of the decision-making process against the value of
considering minority and dissenting opinions. Furthermore, the
Commission stated its preliminary agreement with the Plan's discussion
of the need to balance efficiency in the voting protocols in the Plan
and the Participants' conclusion that the inefficiencies in the voting
protocols in the Plan are limited enough to strike a balance between
the inefficiencies of the decision-making process and the quality of
the decisions.\2927\
---------------------------------------------------------------------------

    \2925\ Id.
    \2926\ Id.
    \2927\ Id. at 30750-51.
---------------------------------------------------------------------------

    The Commission further noted that the Plan discusses the role of
industry representation as part of the governance structure.\2928\ The
Commission preliminarily agreed with the discussion in the Plan that
including industry representation might result in a more efficiently
designed CAT, but that an Advisory Committee also adds operational
inefficiencies.\2929\ The Commission further stated its preliminary
belief that as long as the Advisory Committee adds sufficiently useful
information, the benefits from the Advisory Committee would justify any
operational inefficiencies from the inclusion of the Advisory
Committee.\2930\
---------------------------------------------------------------------------

    \2928\ Id. at 30751.
    \2929\ Id.
    \2930\ Id.
---------------------------------------------------------------------------

    The Commission is not revising its analysis of the efficiency of
the Plan's decision-making process at this time. As discussed above,
commenters provided information on concerns about current NMS Plan
governance and made suggestions on how to more effectively include the
Advisory Committee in decisions.\2931\ However, these commenters did
not provide new insights into the efficiency of the decision-making
process itself. As noted above, changes to plan governance to provide
greater prominence to certain views could improve plan decision-making,
to the extent that better-informed decisions would be superior
decisions; on the other hand, larger or more diverse sets of voices
could result in deadlocked or delayed decisions, which would impede the
efficiency of the decision-making process under the CAT Plan. However,
as noted above, the Commission is considering changes more broadly to
NMS Plan governance, and any such changes may impact the CAT NMS
Plan.\2932\
---------------------------------------------------------------------------

    \2931\ See Section V.E.3.d(2)B, supra.
    \2932\ Id.
---------------------------------------------------------------------------

(2) Level of Detail in the Plan
    The Commission in the Notice also considered an additional source
of potential inefficiencies: Minimum standards for particular
provisions or solutions in Appendix D of the Plan, rather than a
specification of the solutions themselves in the Plan.\2933\ The
Commission stated that while this approach creates uncertainties
surrounding the economic effects of the Plan in the approval process,
it also means that the Operating Committee and/or Selection Committee
would effectively decide upon the unspecified details when selecting
the Plan Processor and when approving the Technical Specifications, and
as a result could act much more quickly and at a potentially lower cost
than if solutions were specified in the Plan.\2934\ In addition, the
Commission explained why specifying details in the Technical
Specifications instead of the Plan could make the Plan more agile and
efficient in its ability to upgrade and improve the CAT Systems
quickly.
---------------------------------------------------------------------------

    \2933\ See Notice, supra note 5, at 30751
    \2934\ Id.
---------------------------------------------------------------------------

    Several commenters sought to have certain definitions included in
the Plan.\2935\ Two commenters sought to have the Plan amended to
specify certain of the Technical Specifications.\2936\ Participants
commented that incorporating Technical Specifications in the Plan
itself would interfere with the development of these specifications by
the Plan Processor, and that these items are better suited for the
Technical Specifications than the Plan.\2937\ In a similar context,
Participants also stated that subjecting Technical Specifications to a
full filing process with the Commission would introduce significant
delays in the process of developing the Technical Specifications, but
that matters that are sufficiently significant to require a

change to the Plan would be subjected to Commission review.\2938\
---------------------------------------------------------------------------

    \2935\ TR Letter at 9-10; FIF Letter at 95-96; SIFMA Letter at
6.
    \2936\ TR Letter at 5; UnaVista Letter at 2; see also Bloomberg
Letter at 6-7 (recommending that Section 6.3 of the Plan be amended
to specify the use of a uniform, global, open, multi-asset
identifier; suggesting one such identifier developed by the
commenter).
    \2937\ Response Letter I at 40.
    \2938\ Id. at 42.
---------------------------------------------------------------------------

    The Commission believes that commenters' requests that certain
items be defined in the Plan are an implicit assertion that the Plan
strikes the wrong balance with respect to the tradeoff identified in
the Notice. In the Notice, the Commission was willing to accept the
uncertainty created through the lack of definitions, in exchange for
the benefits of permitting the relevant parties the flexibility to
adopt the definitions or technical specifications at a later date, when
the optimal approach to those issues might be more apparent, along with
the flexibility to readily make changes to those items if challenges
arise. By requesting that definitions or technical specifications be
moved to the Plan, commenters advocate the opposite position: That it
is acceptable to risk an inefficient definition in the Technical
Specifications now, or to encounter delay or difficulty in changing it
later, in exchange for added certainty in the definition or
specifications as a part of the Plan approval process. The Commission
disagrees. Given the technical nature of the technical specifications,
and that the Plan does specify certain minimum standards that provide a
floor and therefore certainty with respect to at least certain of the
definitions and specifications, the Commission continues to believe
that the existing process appropriately balances the need for certainty
with the benefits of a flexible process going forward.
(3) Implementation Efficiency
    In the Notice, the Commission recognized that provisions of the
Plan should also promote efficiently implementing expansions to the CAT
Data.\2939\ Appendix C of the Plan notes that the Plan Processor must
ensure that the Central Repository's technical infrastructure is
scalable and adaptable.\2940\ The Commission explained that these
provisions should reduce the costs and time needed for expansions to
the Central Repository.
---------------------------------------------------------------------------

    \2939\ See Notice, supra note 5, at 30751.
    \2940\ See CAT NMS Plan, supra note 5, at Appendix C, Section
A.5(a).
---------------------------------------------------------------------------

    Two commenters provided information relevant for the Commission's
analysis of the efficiency of the initial implementation of the Plan
more broadly.\2941\ In particular, the commenters expressed concerns
that the timeline for implementation, including the testing and
publication and iterative reviews of the Technical Specifications,
would not allow for efficient implementation, potentially affecting the
quality of the data coming to CAT from the beginning of its
operations.\2942\ One commenter stated that building in additional
capacity and flexibility to expand CAT further over time will increase
the scope of efficiencies and ancillary benefits, including long-term
cost reductions, even if that additional capacity and flexibility are
not absolutely necessary to meet minimum Plan requirements.\2943\ Other
commenters asserted that the Plan Processor selection should occur
before Commission approval of the Plan, because the selection could
negate a significant amount of uncertainty regarding the ultimate
effects of the Plan.\2944\
---------------------------------------------------------------------------

    \2941\ SIFMA Letter at 23-24; FIF Letter at 37 (requesting two
iterative reviews of order data and customer information
specifications before implementation; noting that the 5 months
allotted between the production of the customer information
specification and implementation for large industry members is
similarly insufficient to permit development and testing of a
complex new function).
    \2942\ Id. Per one commenter, an aggressive timeline that
results in ``[r]ushing to achieve artificial milestones established
without knowledge of the development effort involved, or even the
full functionality to be delivered, will only result in poorly built
systems, inferior quality of data reporting, missed and delayed
schedules and cost overruns, for the Plan Processor, the regulators
and the broker-dealer community.'' See also FIF Letter at 36.
    \2943\ SIFMA Letter at 5-6. The commenter mentioned that such
additional capacity and flexibility could be in the form of
information, products, or functionality.
    \2944\ TR Letter at 4; see also FSR Letter at 10 (recommending
``acceleration of the Plan Processor selection process'' in order to
begin moving forward with formulation of technical specifications;
``the release of final technical specifications should drive the
implementation timeline'').
---------------------------------------------------------------------------

    Participants responded to the technical specifications point by
stating that they recognize the benefit of iterative interactions
between broker-dealers and the Plan Processor in terms of developing
and executing final system specifications, which is why Appendix C of
the Plan calls for the publication of iterative drafts, as
necessary.\2945\ Participants responded to the comments regarding
acceleration of Plan Processor selection by indicating that it would be
infeasible to do so from a timing perspective; that the requirements of
the CAT could change up until the point the Plan is approved, which
could affect the selection process; and that selection is to be
performed within two months of Plan effectiveness in any event.\2946\
---------------------------------------------------------------------------

    \2945\ Response Letter I at 41.
    \2946\ Response Letter I at 52.
---------------------------------------------------------------------------

    The Commission considered the comments and the Participants'
responses and now recognizes that the timeline for implementation can
affect the efficiency of the initial implementation of the Plan. The
timeline for implementation in the Plan includes a requirement for the
Plan Processor to develop the Technical Specifications by publishing
iterative drafts, as needed, and to publish the Technical
Specifications one year before Industry Members are required to begin
reporting data to the Central Repository, and to commence testing of
connectivity and acceptance three months before Industry Members begin
reporting data to the Central Repository.\2947\ The Plan has also been
amended to require that the development of the Technical Specifications
will begin no later than fifteen months before Industry Member
reporting commences. Furthermore, the Plan has been amended to require
that the CAT testing environment will be made available to Industry
Members on a voluntary basis no later than six months prior to when
Industry Members are required to report and that more coordinated,
structured testing of the CAT system will begin no later than three
months prior to when Industry Members are required to report data to
CAT.\2948\
---------------------------------------------------------------------------

    \2947\ See CAT NMS Plan, supra note 5, at Appendix C, Section
C.10.
    \2948\ See Section IV.D.8.a, supra.
---------------------------------------------------------------------------

    The Commission believes that the modification to the Plan requiring
development of Technical Specifications at least 15 months before
reporting begins will ensure more advance notice to the Participants
about specific functionalities of CAT, and that this could potentially
mitigate inefficiency in the implementation of the Plan. Moreover,
modifications to the Plan requiring that the CAT testing environment be
made available to Industry Members before they begin reporting will
provide additional time for Industry Members to test their reporting
procedures for the CAT System prior to implementation. They will also
further mitigate inefficiencies related to the implementation of the
Plan.\2949\ Further, as explained below, the Commission understands
that the Bids of the three remaining Bidders propose accepting existing
messaging protocols (e.g., FIX), rather than requiring CAT Reporters to
use a new format.\2950\ This reduces some of the uncertainty regarding
implementation times because CAT Reporters may not

need to build new systems to report data to the Central Repository.
---------------------------------------------------------------------------

    \2949\ See Section IV.D.8, supra, for further discussion of the
comments regarding implementation and the Commission's response.
    \2950\ See Section V.H.12.b, supra.
---------------------------------------------------------------------------

    In response to the comment on building in additional capacity and
flexibilities to expand further over time, the Commission believes that
this comment is consistent with its analysis in the Notice that
ensuring that the Central Repository's technical infrastructure is
scalable and adaptable should reduce the costs and time needed for
future expansions. Further, the Commission believes that provisions in
the Plan already address this issue.\2951\
---------------------------------------------------------------------------

    \2951\ See Section IV.D.15, supra, for further discussion of
scalability of the Plan.
---------------------------------------------------------------------------

    With respect to accelerating the selection of the Plan Processor,
this could trade one potential inefficiency for another: Whereas there
could be greater certainty about the effects of the Plan by locking in
certain choices in advance, locking in those choices could result in
inefficiencies if modifications to the Plan in the approval process
change the Plan Processor selection. As inefficiencies in the choice of
the Plan Processor could persist for the length of the Plan Processor's
tenure, the Commission believes selecting the Plan Processor a short
number of months after the approval of the Plan balances the need for
expeditiously moving forward with implementation choices to provide
sufficient time for implementation with the need to select the Plan
Processor best positioned to achieve the regulatory benefits of the
Plan.
b. Selection and Removal of the Plan Processor
    In the Notice, the Commission discussed the CAT NMS Plan's use of
an ``RFP'' to select the Plan Processor that would design, build, and
operate the Central Repository.\2952\ The winning bidder becomes the
sole supplier of the operation of the Central Repository. The
Commission stated its preliminary belief that this structure is
necessary to achieve the benefits of a single consolidated source of
regulatory data, but that the competitiveness of the selection process
would thus influence the ultimate economic effect of the Plan.\2953\
The Commission further stated its preliminary belief that the selection
process generally promotes competition, but that there are also a few
potential limits on competition.\2954\ With respect to the Plan
Processor's behavior following selection, the Commission stated its
preliminary belief that the threat of replacement of the Plan Processor
could incentivize it to set costs and performance competitively, but
that the high cost of replacing the Plan Processor could limit these
incentives.\2955\ These are discussed further below.
---------------------------------------------------------------------------

    \2952\ See Notice, supra note 5, at 30751
    \2953\ Id. It would do so because the ``effects depend in large
part on the efficiency and effectiveness of the Plan Processor.''
Id.
    \2954\ Id.
    \2955\ Id. at 30752.
---------------------------------------------------------------------------

(1) Competitiveness of the Plan Processor Selection Process
    In the Notice, the Commission stated its belief that two elements
determine the competitiveness of the bidding process: The voting
process and the degree of transparency in the bidding process. The
Commission discussed its preliminary belief that the Plan provisions
relevant to these two factors could promote competition in the bidding
process and limit the risk that the selection of the Plan Processor
would be affected by a conflict of interest, thereby promoting better
decision-making.\2956\ Specifically, the Commission noted that, in the
voting process, there is ``a residual risk in having an SRO among the
bidders; it is possible that voting Participants would be biased for or
against that SRO because they compete with that SRO in another market
(and could gain a competitive advantage in that market by acting as
Plan Processor) or because of repeated interactions with that SRO.''
\2957\ Moreover, the Commission noted that ``to the extent the
Operating Committee has specific preferred solutions as to how the Plan
should be implemented, the degree to which the Committee is transparent
about those preferences in the bidding process would affect the
competitiveness of that process''--but that ``[t]he Commission has no
reason to believe that the Operating Committee has preferred solutions
beyond what is in the Plan that would significantly impact the
competitiveness of the Plan Processor selection process.'' \2958\
---------------------------------------------------------------------------

    \2956\ Id.
    \2957\ Id.
    \2958\ Id.
---------------------------------------------------------------------------

    One commenter stated that, rather than a competitive process for
selection of the Plan Processor, the selection of FINRA would best
promote efficiencies, as it appears to have the required technology
mostly in place, or can easily adapt existing technology to CAT's
requirements; it already deals with the CAT Data; and it already
regulates broker-dealers and ATSs that will submit data to the
CAT.\2959\ The Participants responded that completing the competitive
process is most likely to promote an innovative and efficient CAT
solution.\2960\
---------------------------------------------------------------------------

    \2959\ Anonymous Letter I at 1, 19-20.
    \2960\ Response Letter I at 52.
---------------------------------------------------------------------------

    In the Commission's view, a competitive process for the selection
of the Plan Processor is most likely to lead to the best outcome for
the CAT. The commenter has raised a number of reasons why FINRA's bid
may be the most persuasive. However, different approaches embodied in
different bids would be expected to embody different tradeoffs. These
tradeoffs can be considered as part of a competitive bidding process,
with the best bid chosen in the end. The Commission believes that
completing the competitive bidding process is most likely to result in
a CAT system that best balances cost, benefits, and efficiencies.
(2) Competitive Incentives of the Selected Plan Processor
    In the Notice, the Commission discussed how the Plan could create
competitive incentives for the selected Plan Processor by detailing
strong requirements for the Plan Processor and providing an efficient
mechanism to remove the selected Plan Processor and introduce an
alternative Plan Processor in the event of underperformance. Here, the
Commission stated its preliminary belief that the Plan provides the
selected Plan Processor with competitive incentives because the Plan
contains defined procedures for monitoring and removing the Plan
Processor for failure to perform functions or otherwise. While removal
for performance that is not ``reasonably acceptable'' is by Majority
Vote of the Operating Committee, assessing the Plan Processor's
performance and demonstrating failings may be difficult; if that
standard is not met, then removal is by Supermajority Vote, which may
be more challenging to attain. The degree of difficulty of removal thus
could limit the Plan Processor's competitive incentives. Similarly, the
potentially extensive costs of switching to another Plan Processor
(including selection of a new Plan Processor, which could potentially
require rebuilding the Central Repository and implementation of new
Technical Specifications) could limit competitive incentives.\2961\
---------------------------------------------------------------------------

    \2961\ See Notice, supra note 5, at 30752-53. Specifically, with
regard to removal, the Commission noted that ``[t]he Plan contains
several provisions that would allow the Operating Committee to
remove the Plan Processor''--including in specified circumstances by
``only a Majority Vote'' which ``incentivizes the Plan Processor to
perform well enough to avoid being removed'' but that it ``depend[s]
significantly on strong oversight by the Operating Committee.'' Id.
at 30753. However, the Commission also noted that it ``recognizes
that the effort required to remove a Plan Processor could be
significant'' and that ``significant switching costs could influence
whether removing a Plan Processor despite poor performance makes
economic sense''--such that ``the Plan Processor may only need to
perform well enough to keep the inefficiencies associated with their
performance from exceeding the cost to switch to another Plan
Processor.'' Id.

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

    One commenter expressed a view that the continuing incentives of
the Plan Processor are a legitimate concern, and that the contract with
the Plan Processor should be rebid every 5 years, because it would
``prevent the stagnation of the CAT system and encourage innovation''
and ``force the SEC to re-evaluate the performance of the system and
the Plan Processor at least periodically, with the benefit of public
input.'' \2962\ The Participants responded by asserting that the
Operating Committee will be reviewing Plan Processor performance, and
may remove the Plan Processor by Supermajority Vote at any time, or by
a Majority Vote where the Plan Processor has failed to reasonably
perform its obligations.\2963\
---------------------------------------------------------------------------

    \2962\ Better Markets Letter at 7.
    \2963\ Response Letter I at 52.
---------------------------------------------------------------------------

    The Commission has considered the views of the commenter on the
competitive incentives of the Plan Processor and continues to believe
that the Plan provides competitive incentives to control costs and
promote the performance of the Plan. The commenter did not provide any
additional information or analysis that the Commission believes would
warrant changes to its analysis, nor does the Commission believe that
the modifications to the Plan warrant changes to this aspect of the
economic analysis. With respect to the comment that suggested rebidding
every 5 years, the Commission agrees that a rebidding process after
some period of time could provide a focal point for determining whether
other technologies or other entities could be preferable to the
incumbent Plan Processor. However, the existing provisions for removing
a Plan Processor in the event of underperformance, and the existing
authority of the Commission to oversee the CAT NMS Plan, already
provide some incentives for continuous CAT innovation and cost
reductions. Moreover, a bidding process is not a costless exercise; it
requires hundreds or thousands of hours of work on the part of bidders
to prepare and submit bids, and Plan Participants to review bids.
Additionally, it is not clear whether the rebidding process sought by
the commenter would consider the costs to switch as part of the
incumbent's bid (in which case it would significantly advantage the
incumbent), or would consider bids without reference to incumbency
(which could result in the imposition of inefficient costs if the
benefits of the new Plan Processor do not exceed the costs to switch).

H. Alternatives

    As part of its economic analysis, the Commission has considered the
likely economic effects of a number of alternatives to the approaches
taken in the CAT NMS Plan as amended. In the Notice, the Commission
analyzed alternatives that could have a direct and significant impact
on costs or benefits deriving from at least one of the four data
qualities discussed above: Accuracy, completeness, accessibility, and
timeliness.\2964\
---------------------------------------------------------------------------

    \2964\ See Notice, supra note 5, at 30754-76.
---------------------------------------------------------------------------

    The Commission has considered the comments received on the
alternatives discussed in the Notice, and continues to believe that the
likely economic effects of the alternatives will be consistent with the
preliminary conclusions set out therein, except where noted
below.\2965\ In several instances, the Commission did not receive any
comments that disagreed with its analysis of the likely costs and
benefits of a particular alternative, and the approach taken in the
Plan with respect to these alternatives is consistent with the
Commission's analysis. Where that is the case, the Commission has not
discussed the alternative in this Order, and instead relies on the
analysis in the Notice. These alternatives include: Requiring both
Options Market Makers and Options Exchanges to report Options Market
Maker quotations to the Central Repository; requiring CAT Reporters to
report a unique Customer-ID for each Customer upon the original receipt
or origination of an order; requiring CAT Reporters to report a
universal CAT-Reporter-ID to the Central Repository for orders and
certain Reportable Events; excluding the requirement to report
Customer-IDs; excluding the requirement to report CAT-Reporter-IDs when
a routed order is received; alternative intake capacity levels; data
accessibility standards, and the exclusion of OTC Equity Securities.
---------------------------------------------------------------------------

    \2965\ Id.
---------------------------------------------------------------------------

    Where commenters disagreed with Commission with respect to its
analysis of an alternative approach, the Commission discusses the
comments below and considers whether any changes are warranted to the
Commission's analysis and conclusions. Where commenters agreed with the
Commission's analysis, but the Plan's approach differs in some respect
from the approach discussed by the Commission and the commenters, the
Commission summarizes its analysis and the comments received, below.
Where a Plan modification supersedes the alternatives discussed in the
Notice, the Commission considers comments on those alternatives in the
discussion of the costs and benefits of the Plan, above.
    The Commission notes that some commenters also raised reasonable
potential alternatives not discussed by the Commission in the Notice.
If the Plan modifications do not incorporate the suggestions and the
comment does not provide sufficient information for a fulsome economic
analysis, the Commission responds to those comments above in the
Discussion Section. If Plan modifications incorporate those
suggestions, the Commission discusses the updates to its economic
analysis to recognize the modification in the discussion of the costs
and benefits of the Plan, above, and considers the points made by
commenters therein.\2966\ If the Plan modifications do not incorporate
the suggestions and the comment does provide sufficient information for
an analysis of the economic effects of the alternative, the Commission
discusses the alternative below.
---------------------------------------------------------------------------

    \2966\ See Section IV., supra.
---------------------------------------------------------------------------

1. Timestamp Granularity
    In the Notice, the Commission solicited comment on the benefits and
costs of an alternative timestamp granularity requirement of less than
one millisecond.\2967\ The Commission's preliminary analysis of
alternative clock offset tolerance requirements suggested that
millisecond timestamps may be inadequate to allow sequencing of the
majority of unrelated Reportable Events across markets.\2968\ In
addition, the Commission recognized that sub-millisecond timestamp
reporting would bring certain benefits, but the benefits would be
limited unless the Plan were to require a clock offset tolerance far
lower than is proposed in the Plan. The Commission also recognized that
implementation costs of sub-millisecond timestamps would likely vary
across CAT Reporters, but such a requirement is unlikely to create
significant additional costs for CAT Reporters.
---------------------------------------------------------------------------

    \2967\ See Notice, supra note 5, at 30764-65.
    \2968\ See Notice, supra note 5, at Section IV.E.1.b(2)B.
---------------------------------------------------------------------------

    Four commenters addressed this alternative. Three were supportive
of the Plan, and one was supportive of the

alternative.\2969\ The commenters that supported the Plan generally
indicated that one millisecond timestamps should be sufficient to
sequence events.\2970\ One of these commenters added that it would be
very difficult, costly, and disruptive to change the timestamp
granularity for broker-dealers and would involve expanding database
fields, expanding application interfaces, logging files and managing to
a clock offset lower than 50 milliseconds.\2971\ This commenter focused
primarily on broker-dealers while noting that exchanges already have
more granular timestamps.\2972\ Another commenter that supported the
millisecond standard in the Plan stated it was ``okay'' to require this
standard, but added, ``if certain categories of market participants can
originate, modify, cancel, route, execute[,] trade, and/or allocate an
order in substantially less than one millisecond, then they should
record and report the time of each reportable event using timestamps
reflecting their sub-millisecond or microsecond processing
capability.'' \2973\ The final commenter that supported the millisecond
standard disagreed that CAT Reporters should be required to report more
granular timestamps when the Reporter captures that level of detail in
its normal practice. The commenter stated that such reporting would
require changes to all layers of servers, software and databases
between the point of timestamp capture to the final CAT reporting
layer, and would be unnecessarily expensive.\2974\ The commenter
supporting more granular timestamps stated that there would be benefits
in certain circumstances, stating that the Plan's timestamp resolution
``will be insufficient to show the precise time of the reportable
activities'' and ``[f]or some practices, such as cancellations,
stuffing, and other ``noisy'' behaviors . . . the Commission should
require a more precise granularity to more comprehensibly and
accurately capture the frequency and scale of such practices.'' \2975\
---------------------------------------------------------------------------

    \2969\ FIF Letter at 112; SIFMA Letter at 34-35; Better Markets
Letter at 8; Data Boiler Letter at 21.
    \2970\ FIF Letter at 112; SIFMA Letter at 34-35; Data Boiler
Letter at 21. FIF provided additional insight into event sequencing
possibilities.
    \2971\ FIF Letter at 112.
    \2972\ FIF Letter at 112.
    \2973\ Data Boiler Letter at 21.
    \2974\ SIFMA Letter at 35.
    \2975\ Better Markets Letter at 8.
---------------------------------------------------------------------------

    In their response to the comment on the costs of requiring more
granular timestamps when the Reporter captures that level of detail in
its normal practice, the Participants stated their belief that as
additional CAT Reporters capture timestamps that are more granular than
that required by the Plan, the quality of data reported to the CAT will
increase correspondingly.\2976\
---------------------------------------------------------------------------

    \2976\ Response Letter I at 28-29.
---------------------------------------------------------------------------

    The Commission considered these comments and the Participants'
response and now believes that the costs of requiring sub-millisecond
timestamps could be significant for some broker-dealers, and also
across broker-dealers, because the broker-dealer industry does not
broadly apply sub-millisecond timestamps. In response to the commenters
that stated that exchanges and certain other categories of market
participants already may be capable of sub-millisecond
timestamps,\2977\ the Commission notes that if a CAT Reporter uses
timestamps in increments finer than milliseconds, that CAT Reporter
must use those finer increments when reporting to the Central
Repository.\2978\ Therefore, the Central Repository will capture finer
timestamps in those cases. In response to the commenter who stated that
the reporting of finer timestamps would be unnecessarily expensive for
those Reporters who choose to capture finer timestamps, the Commission
agrees that some Reporters may need to update their reporting systems
to report these finer timestamps and therefore may incur additional
costs. However, it is unclear to the Commission, and it was left
unspecified by the commenter, how many CAT Reporters would need to
update their systems and furthermore whether these Reporters would
already be updating their systems in response to the Plan's millisecond
reporting standard, so that only incremental costs above this standard
should be considered. Finally, the Commission agrees with the
Participants' stated view that the Plan provides for the quality of CAT
Data to improve as CAT Reporters use more granular timestamps.\2979\
However, because the broker-dealer industry does not broadly apply sub-
millisecond timestamps, many CAT Reporters will use timestamps to the
millisecond, and the Commission continues to believe that millisecond
timestamps may be inadequate to allow sequencing of the majority of
unrelated Reportable Events. The commenters supporting the Plan either
state that one millisecond is ``okay'' or state that it is not possible
to sequence ``all'' events regardless of timestamp granularity. The
Commission acknowledges that seeking to sequence ``all'' unrelated
Reportable Events may not be possible, but maintains, as discussed in
the Notice,\2980\ that a sub-millisecond timestamp could improve the
ability to sequence the majority of orders, subject to limitations from
the clock synchronization standard. However, the Commission is
approving the Plan without modifying the requirements for timestamp
granularity for the reasons discussed in Section IV.D.13, above.
---------------------------------------------------------------------------

    \2977\ FIF Letter at 112; Data Boiler Letter at 21.
    \2978\ See CAT NMS Plan, supra note 5, at Appendix C, Section
A.3(c).
    \2979\ Response Letter I at 29.
    \2980\ See Notice supra note 5, at 30684-85.
---------------------------------------------------------------------------

2. Error Rate
    In the Notice, the Commission solicited comments on the benefits
and costs of alternative maximum Error Rates.\2981\ While the
Commission believed that most regulatory uses would involve data after
T+5, the Commission noted that regulators also have essential needs for
uncorrected data prior to T+5. Therefore, a lower Error Rate in data
available before T+5 could, in certain regulatory contexts, be
meaningful. Additionally, because OATS currently has a lower observed
error rate than the rate in the CAT NMS Plan, a reduction in CAT Error
Rates may accelerate the retirement of OATS. Further, the Commission
noted that reducing Error Rates could increase the implementation and
ongoing costs incurred by CAT Reporters and the Central Repository as
compared to costs estimated in the Plan.
---------------------------------------------------------------------------

    \2981\ Id. at 30765-66.
---------------------------------------------------------------------------

    The Commission received five comments on the level of the error
rates.\2982\ Two commenters supported the CAT NMS Plan's initial
maximum Error Rate of 5% for CAT Data reported to the Central
Repository.\2983\ One of these commenters stated, ``the proposed
initial maximum error rate provides the appropriate level [of]
flexibility while ensuring the data will be capable of being used to
conduct market reconstruction.'' \2984\ One of the commenters that
supported the Plan's error rates conditioned the support on measuring
the error rate using post-correction errors, but provided no
explanation for the condition.\2985\ Another commenter that supported
measuring the error rate post-correction stated the alignment of
interests--the reporters would have an interest in the quality of the
data most important to regulatory activities--but supported a ``de
minimis'' error rate goal over time, indicating that uncertainty
prevents the

ability to predict when the Plan could achieve that goal.\2986\ This
commenter further stated that there are cost tradeoffs that CAT
Reporters face when attempting to reduce their error rates. The
commenter mentioned several methods that would increase the cost of
implementation but that should decrease the overall yearly reporting
cost for a Reporter and stated that Reporters will choose different
approaches for correcting errors.\2987\
---------------------------------------------------------------------------

    \2982\ FSR Letter at 9; UnaVista Letter at 3-4; SIFMA Letter at
6; FIF Letter at 50; Better Markets Letter at 9.
    \2983\ FSR Letter at 9; UnaVista Letter at 3-4.
    \2984\ UnaVista Letter at 3.
    \2985\ FSR Letter at 9.
    \2986\ FIF Letter at 51-52.
    \2987\ FIF Letter at 55-56.
---------------------------------------------------------------------------

    One commenter opposed the error rates in the Plan, arguing that
they are too high,\2988\ while the other two commenters expressed
significant uncertainty associated with assessing the appropriate error
rates.\2989\ The commenter opposing the error rates in the Plan cited
the industry's experience with OATS, while the commenters expressing
uncertainty cited a lack of experience with reporting certain types of
data (options, market making, customer information, and allocations)
\2990\ or by certain types of reporters (those with no regulatory
reporting experience),\2991\ steep learning curves to new
reporting,\2992\ and a lack of information in the Plan about the
definition of an error and how it will be corrected.\2993\
---------------------------------------------------------------------------

    \2988\ Better Markets Letter at 9.
    \2989\ SIFMA Letter at 6; FIF Letter at 50.
    \2990\ FIF Letter at 50.
    \2991\ FIF Letter at 50.
    \2992\ SIFMA Letter at 6.
    \2993\ SIFMA Letter at 6; FIF Letter at 50.
---------------------------------------------------------------------------

    Several commenters seemed to agree with the Commission that the
error rates are important to retirement of duplicative systems, but
that the specific error rate that could accelerate retirement is
unknown.\2994\ However, another commenter did not think that error
rates should have a direct impact on system retirement.\2995\
---------------------------------------------------------------------------

    \2994\ SIFMA Letter at 6; FIF Letter at 50.
    \2995\ UnaVista Letter at 3.
---------------------------------------------------------------------------

    Finally, one commenter opposed having different error rates for
different types of CAT Reporters, stating that the Notice provided no
compelling reason for excusing Small Industry Members from error rate
requirements for the first two years while expressing an expectation
that these reporters will account for a ``massive amount of data.''
\2996\
---------------------------------------------------------------------------

    \2996\ Better Markets Letter at 9.
---------------------------------------------------------------------------

    The Commission has considered these comments and acknowledges the
significant uncertainty associated with the determination of an
appropriate Maximum Error Rate, as identified by commenters.\2997\ This
uncertainty arises from the fact that the Plan requires the reporting
of certain types of data that are not currently reported, the Plan
requires reporting by certain participants that do not have experience
with such reporting requirements, and the Plan has a lack of
information about the definition of an error and how it will be
corrected. The Commission notes, however, that provisions of the Plan
could allow adjustment of error rates as more information becomes
available, particularly during testing, and that adjustments could be
up or down depending on the results of this testing.
---------------------------------------------------------------------------

    \2997\ SIFMA Letter at 6; FIF Letter at 50.
---------------------------------------------------------------------------

    In response to the commenter that suggested that the maximum error
rate in the Plan should be lower and cited the industry's experience
with OATS,\2998\ the Commission reiterates what was mentioned in other
comment letters and discussed above, that CAT reporting involves
reporting certain types of data not currently reported and requires
reporting by certain market participants that do not have experience
with such reporting requirements, so that experience with OATS may not
be applicable for CAT reporting. Therefore, the Commission continues to
believe that reducing Error Rates in the Plan could increase the
implementation and ongoing costs incurred by CAT Reporters and the
Central Repository as compared to costs estimated in the Plan.
---------------------------------------------------------------------------

    \2998\ Better Markets Letter at 9.
---------------------------------------------------------------------------

    The Commission agrees with commenters who indicated the need to tie
error rates to retirement of duplicative systems. The Commission
believes that regulators may find it advantageous to retain other
systems until CAT Data is at least as accurate as those systems, and
therefore continues to believe that reducing the maximum error rate
could accelerate their retirement. However, the CAT NMS Plan does not
require a particular target Error Rate before other systems can be
retired, so the Commission continues to be unable to assess the
benefits of specific maximum error rates as they relate to system
retirement.
    In response to the comments suggesting that the Plan focus only on
post-correction error rates, the Commission agrees that the post-
correction error rates, which the Plan states will be de minimis, are
most important to data quality, but retains the belief that lower pre-
correction error rates could be meaningful. This is because, as
discussed in the Notice, regulators also have essential needs for
uncorrected data prior to T+5, although the Commission believes that
most regulatory uses would involve data after T+5.
    With respect to the comment that expressed concern that if small
broker-dealers voluntarily report to CAT during the first two years of
CAT operations, then the utility of CAT will be diminished because they
would be permitted to report with limitless errors,\2999\ the
Commission disagrees with this interpretation of the CAT NMS Plan, as
discussed above because the Maximum Error Rate would apply to anyone
reporting to CAT, whether mandated to do so in accordance with the CAT
NMS Plan or voluntarily.\3000\
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    \2999\ Better Markets Letter at 9.
    \3000\ See Section IV.D.10., supra.
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3. Error Correction Timeline
    In the Notice, the Commission solicited comment on an alternative
error correction timeline to that proposed in the CAT NMS Plan.\3001\
The CAT NMS Plan includes a deadline of T+3 for submission of corrected
data to the Central Repository.\3002\ The CAT NMS Plan also discusses
recommendations from Financial Information Forum and SIFMA to impose an
alternative T+5 deadline.\3003\ The Participants state in the CAT NMS
Plan that they believe it is important to retain the T+3 deadline in
order to make data available to regulators as soon as possible.\3004\
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    \3001\ See Notice, supra note 5, at 30766.
    \3002\ See CAT NMS Plan, supra note 5, at Appendix C, Section
A.1(a)(iv).
    \3003\ Id. In earlier comment letters submitted to the
Participants, FIF and SIFMA maintained that the T+3 deadline may not
be feasible and would prove costly to market participants. See
Letter from Manisha Kimmel, Managing Director, FIF, to the
Participants, dated November 19, 2014, available at http://www.catnmsplan.com/industryfeedback/p601972.pdf; Industry
Recommendations for the Creation of a Consolidated Audit Trail
(CAT), SIFMA, March 28, 2013, available at http://www.catnmsplan.com/industryfeedback/p242319.pdf.
    \3004\ See CAT NMS Plan, supra note 5, at Appendix C, Section
A.1(a)(iv).
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    In the Notice, the Commission solicited comment on whether the CAT
NMS Plan should impose a T+5 deadline for the submission of corrected
data rather than the T+3 deadline. The Commission preliminarily
believed that the delays in regulatory access from a T+5 deadline would
reduce regulators' ability to conduct surveillance and slow the
response to market events relative to the CAT NMS Plan. At the same
time, the Commission also believed that T+5 error correction might
reduce costs to industry relative to the CAT NMS Plan, although the
Commission was not aware of any existing cost estimates.\3005\
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    \3005\ See Notice, supra note 5, at 30766.
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    Two commenters disagreed with the T+3 error correction deadline
proposed

in the Plan.\3006\ One of the commenters noted that the T+3 deadline
``appears too aggressive at this time,'' because ``the fact that roll-
out of the CAT will include a sharp learning curve for broker-dealers
and regulators as they understand and absorb the intricacies of [a] new
and complex system such as the CAT.'' The commenter further stated that
``the CAT NMS Plan should be amended to maintain current error
correction timeframes until CAT reporting errors are analyzed and
better understood by broker-dealers and exchanges, and regulators.''
\3007\
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    \3006\ FIF Letter at 3, 9, 52-53; KCG Letter at 9.
    \3007\ KCG Letter at 9.
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    Likewise, the second commenter maintained that the T+3 deadline may
not be achievable until ``the CAT system and its support infrastructure
can be proven stable, . . . a body of supporting documentation . . .
can be developed and absorbed by the CAT Reporters'', and CAT reporting
errors are analyzed and better understood.\3008\ The commenter
suggested that the current OATS approach, under which firms have five
days from the date they receive notice of the error to submit a
correction, should be kept in place for the first year of CAT reporting
for each group of CAT Reporters. The commenter noted that ``a less
aggressive, measured approach towards reduction in the error correction
timeframe over time will produce better quality results, with less
overall cost to the industry than the proposed approach.'' \3009\ Under
this commenter's suggested approach, the deadline for the submission of
corrected data would be 8:00 a.m. on T+6, with corrected data available
to regulators by 8:00 a.m. on T+8, consistent with the current OATS
approach.\3010\ One commenter stated that the current approach was
``feasible.'' \3011\
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    \3008\ FIF Letter at 52.
    \3009\ FIF Letter at 53.
    \3010\ FIF Letter at 59-60.
    \3011\ UnaVista Letter at 4.
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    In their response, the Participants stated that they believe that
the prompt availability of corrected data is ``imperative to the
utility of the Central Repository,'' and that the three-day error
correction period ``appropriately balances the need for regulators to
access corrected data in a timely manner while taking into
consideration the industry's concerns.'' \3012\ The Participants
acknowledged that a five-day window for error correction is used for
OATS reporting currently, but stated their belief that the window in
the Plan would allow for better regulatory surveillance and market
oversight.\3013\ The Participants also stated that, based on a review
of OATS data from August 2016, most errors reported to OATS were
corrected within six business days of submission (approximately 91.26%
of error corrections), with 26.46% of error corrections occurring one
day after submission, and 59.45% of error corrections occurring six
days after submission (i.e., on the rejection repair deadline).\3014\
Additionally, approximately 0.48% of error corrections were made on the
day of submission, approximately 4.86% of error corrections were made
two to five days after submission, and the remaining approximately
8.75% of error corrections were made seven to 36 days after
submission.\3015\
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    \3012\ Response Letter I at 30.
    \3013\ Response Letter I at 30.
    \3014\ Response Letter III at 13. The letter states that the
percentages were determined by FINRA based on a review of OATS data
from August 2016.
    \3015\ Response Letter III at 13.
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    The Commission has considered the comments it received on whether
the CAT NMS Plan should impose a T+5 deadline for the submission of
corrected data, rather than the T+3 deadline, as well as the
Participants' response.
    The Commission recognizes that broker-dealers and regulators may
face a learning curve as they adjust from the current OATS approach,
under which firms have five days from the date they receive notice of
the error to submit a correction, to the T+3 error correction deadline
imposed by the Plan, which will allow firms approximately two days from
the date they receive notice of the error to submit the
correction.\3016\ The Commission also recognizes that a T+5 deadline
may be easier to achieve than the T+3 deadline, and therefore may be
less costly. The Commission notes that, while the data provided by the
Participants indicates that approximately 26% of error corrections
currently are made on T+1, approximately 59% of OATS error corrections
are currently made on T+6, the last day of the OATS error correction
period, indicating that many OATS reporters will likely be required to
change their error correction practices to achieve the T+3 deadline in
the Plan. The Commission also recognizes that keeping a deadline of T+5
for the first year of CAT reporting for each group of CAT Reporters may
potentially improve the quality of CAT Data during that year. However,
the Commission believes that a T+5 deadline would reduce the timeliness
benefits of the Plan by delaying regulatory access to CAT Data during
that year. The Commission continues to believe that the delays in
regulatory access from a T+5 deadline would reduce regulators' ability
to conduct surveillance and slow the response to market events relative
to the CAT NMS Plan, and would largely negate the timeliness benefits
discussed above in connection with the error correction timeline.\3017\
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    \3016\ Under the Plan's approach, the deadline for the Plan
Processor to validate customer data and generate error reports is
5:00 p.m. on T+1, and the deadline for the submission of corrected
data is 8:00 a.m. ET on T+3. See Appendix C, Section A.1(a)(iv).
    \3017\ See Section V.E.1.d, supra (noting that corrected OATS
data is currently available to FINRA by T+8, and that under the
Plan, regulators will be able to access corrected CAT Data three
days earlier).
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4. Requiring Listing Exchange Symbology
    In the Notice, the Commission solicited comment on an alternative
to the CAT NMS Plan that would allow CAT Reporters to report using
their existing symbologies, rather than listing exchange
symbology.\3018\ The Commission discussed its preliminary belief that,
in light of the requirement for the Plan Processor to maintain a
complete symbology database, the requirement that CAT Reporters report
using listing exchange symbology may result in unnecessary costs to CAT
Reporters. Therefore, the Commission preliminarily believed that the
alternative of allowing CAT Reporters to use their existing symbologies
for reporting purposes could significantly reduce the costs for
exchanges and broker-dealers to report order events to the Central